Non-Current Assets – Meaning and Examples
In financial terms, an asset is any valuable resource that a business entity owns and that generates economic value for the said business. These assets can be tangible or intangible and are classified into three wide categories — resources, physical assets, and convertibility.
Based on ease of convertibility into cash, business assets can be further classified into current and non-current assets. In this article, we talk about non-current assets, their types, how to calculate them, and a few examples to help you understand better.
What are Non-current Assets?
A company’s non-current assets are long-term investments that won't be realized during the current accounting year. This makes these assets illiquid, which means these assets cannot be quickly converted into cash. Investments, intellectual property, real estate, and equipment are a few examples of non-current assets. These are not the same as current assets, like inventory and accounts receivable, which can be easily sold, consumed, or exhausted through routine business operations within a year.
Non-current assets are classified into three types – tangible assets, intangible assets, and natural resources. These assets, regardless of the type, serve the company for more than a year.
The balance sheet's assets section is divided into categories based on the assets' types. Current assets, or short-term assets that can be converted into cash within a year, such as cash and inventory, make up most of the section.
Contrarily, non-current assets are always listed on the balance sheet under one of the following categories – investments, intangible assets, property, plant and equipment, or other assets.
Non-current assets are treated as capital rather than as an expense. By doing this, the company spreads out the asset’s cost over the period it is used. Rather than allocating the total cost to the financial year in which the asset was bought. These are also depleted, amortized, or depreciated accordingly.
Calculation of Non-Current Assets
Non-current assets can be calculated in two ways – the cost model approach and the revaluation model approach.
Cost Model Approach
Using the cost model approach, a non-current asset is reported at its amortized cost. The asset's amortized historical cost is subtracted from the depreciation to determine its amortized cost. The historical cost of an asset includes the asset's purchase price and any additional costs, such as installation costs.
For example, a company bought machinery on April 2021 for Rs 1 lakh, spent Rs 5,000 on installing it. Let’s assume the machinery depreciated by Rs 9,500 in the year.
Now, using the cost model approach, the machinery will be reported for Rs 95,500 (=1,00,000 + 5,000 - 9,500) on March 31, 2022.
Revaluation Model Approach
Under the revaluation model approach, an asset is reported at its fair value less any accumulated depreciation. If initial revaluation results in a loss, it is recorded in the income statement, whereas any future revaluation gain is recorded in the income statement to the same extent as the loss that was previously disclosed. Revaluation surplus, or additional revaluation gain over and above the initial loss, is recorded in the shareholder's equity.
For example, a company purchased Machinery in April 2020 for Rs 7,00,000. As of March 31, 2021, the machinery’s fair value was Rs 6,20,000, and as of March 31, 2022, it had a fair value of Rs 7,10,000.
Using the revaluation model, the total revaluation gain on March 31, 2022, will be Rs 90,000 (7,10,000 – 6,20,000). Of this, the revaluation gains recognised in the Income statement will be Rs 80,000 and the revaluation surplus of Rs 10,000 will be recognised in shareholder’s equity.
Types of Non-Current Assets
Non-current assets can be divided into three types:
A company's tangible assets are its property or assets with a physical form that is essential to its core business operations. A tangible asset's recorded value equals its initial acquisition cost minus any accumulated depreciation. Not all physical assets, though, are subject to depreciation. Assets like land tend to appreciate, yet they are held at cost. Depreciation is a non-cash label that gradually lowers an asset's value.
Intangible assets are those that do not have a physical form but still provide economic value to a company. Intellectual property such as patents, trademarks, and copyrights are examples of intangible assets. A company can acquire intangible assets from another organization or create them internally. Intangible assets can be either definite, with a set lifespan, or indefinite, where they could last for an indefinite period. Additionally, because of the unpredictability of their future, intangible assets are generally quite difficult to value accurately.
These specific resources are easily available and essentially sourced from the earth. They are also referred to as exhaustible or wasting assets. Natural resources are generally reported on a company's balance sheet at the cost of acquisition. As a result, the costs of exploration, development, and accumulated depletion are taken into account when recording them. Minerals, oil fields, and fossil fuels are some of the most common examples of natural resources.
Examples of Non-Current Assets
All assets that stay with the company for more than twelve months are considered non-current assets. A few examples are:
Long-term investments are assets such as bonds, stocks, and notes that investors purchase in the financial markets believing that their value will rise and they will earn a good return. These assets are also recorded on the balance sheet of the company.
Property, Plant, and Equipment (PP&E):
PP&E are long-term non-current assets that are crucial to a business's core operations and are utilized in the manufacture or sale of other assets. These assets are physical and cannot be easily liquidated or converted into cash.
Intellectual properties are one type of asset that does not have a physical form and are classified as a non-current asset because they cannot be converted to cash within a year of investment. For instance, copyright, trademarks, and patents.
When one business acquires another, it doesn't just purchase the assets listed on the balance sheet. Instead, it also purchases intangibles like reputation, brand name, brand value, the calibre of the workforce, and clientele. It implies that the company buying another business is paying more than the assets' fair market value. The excess purchase price that cannot be linked to trademarks, brands, copyrights, or other intangible assets, is recorded as goodwill.
Capital-intensive industries, such as oil refineries, frequently have a sizable portion of their asset base made up of non-current assets. Non-current assets also include some deferred income taxes and unamortized bond issue costs. The cash surrender value of life insurance is among other non-current assets.
Non-current assets are an essential component of any business. They serve as the gears that keep the enterprise moving smoothly. But depending on the industry, varying quantities of long-term assets make up the asset base. When compared to businesses in the financial sector, capital-intensive industries like oil production, telecommunication, automotive, etc. typically have a higher asset base composition of long-term non-current assets.
Q. Is cash a non-current asset?
No. All cash, cash equivalent, short-term investments, accounts receivables, inventories, and prepaid revenue fall under the category of current assets.
Q. Is a car a non-current asset?
Yes. All motor vehicles, including a car, are fixed non-current assets, as the business will be utilizing them for more than a year.
Q. Is land a non-current asset?
Yes. The land is a long-term non-current asset because it is intended to be used by the firm for the long term.
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