What are Non-Current Assets?

Types of Non-Current Assets

Non-Current Assets are usually classified into three parts:

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Non Current Assets (wallstreetmojo.com)

#1 – Tangible Assets

Assets that physically exist, i.e., which can be touched. Tangible Assets are usually valued at Cost Less Depreciation. Tangible Assets ExamplesTangible Assets ExamplesTangible assets are assets with significant value and are available in physical form. It means any asset that can be touched and felt could be labeled a tangible one with a long-term valuation.read more include Land, Property, Machinery, Vehicles, etc. However, it is worth noting that not all Tangible Assets depreciate. For example, the land is often revalued over a period in the Balance Sheet of the Company. Also, have a look at Net Tangible AssetsNet Tangible AssetsNet Tangible Assets is the value derived from the company’s total assets minus all intangible assets. Net Tangible Assets per share is calculated by dividing the net assets by the outstanding number of equity shares.read more

#2 – Natural Resources:

These assets have an economic value derived from Earth and are used up over time. Examples include Oil fields, mines, etc.

#3 – Intangible Assets

Assets that do not physically exist but have economic value fall under this category. For an asset to be categorized as Intangible, the following criteria must be satisfied:

  • It must be Identifiable.The organization must have the means to obtain economic benefits from such an asset.

An intangible asset can be generated internally by the business or acquired through separate purchases (through mergers vs. AcquisitionsMergers Vs. AcquisitionsMerger refers to the consolidation of two or more business entities into one single joint entity with a new management structure, ownership, and name that capitalizes on its competitive advantage and synergies, whereas acquisition is the case where one financially strong entity takes over or acquires a less financially strong business entity by acquiring all shares or shares worth more than 50% of the total value of its shares.read more, etc.). Intangible Assets Examples include Goodwill, Patent Trademark, etc. Intangible AssetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can’t touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. read more are recorded in the Balance Sheet according to the cost or Revaluation Model (Discussed in detail below). However, it is pertinent to note that Goodwill is not amortizedNot AmortizedGoodwill amortization refers to the process in which the cost of the goodwill of the company is expensed over a specific period of the time i.e., there is a reduction in the value of the goodwill of the company by the way of recording of the periodic amortization charge in the books of accounts.read more but tested for impairment at least annually. An impairment loss is recognized in cases where the carrying value exceeds the intangible asset’s fair value.

List of Non-Current Assets (Examples)

#1 – Property Plan and Equipment

Property, Plant, and Equipment (PP&E) are long-lived non-current assets used to produce or sell other assets.

The cost of PP&E includes all expenditures (transportation, insurance, installation, broker cost, search cost, legal cost) that are necessary to acquire and ready for use. In addition, if the plant is constructed, all the material, labor costLabor CostCost of labor is the remuneration paid in the form of wages and salaries to the employees. The allowances are sub-divided broadly into two categories- direct labor involved in the manufacturing process and indirect labor pertaining to all other processes.read more, overheads, and interest costs during construction are included in the Cost of PP&E.

#2 – Natural Resources

These include natural resources like Oil and Gas, Metals like Gold, Silver, Bronze, Copper, and more.

source: bp.com

“Other intangible assets” examples primarily include corporate intellectual property such as patents, trademarks, copyrights & business methodologies. Intangible Assets on the balance sheetThe Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more are recognized only when bought from an external entity, not if they are developed internally. Note that “other intangible assets” are amortized.

source: Alphabet SEC Filings

As noted above, Google’s assets example includes intangible assets worth $3847 million and $3307 million in 2015 and 2016, respectively.

#4 – Goodwill

When one company buys another company, it buys more than just assets on a balance sheet. It’s also buying some intangibles, like the quality of the employees and client base, reputation, or brand name. Therefore, it implies that the firm purchasing another business pays more than the fair market value of the business assets. If the excess purchase price cannot be attributed to patents, brands, copyrights, or other intangible assets, it is recorded as Goodwill.

#5 – Long Term Investments

When an investor buys securities in the financial markets, they purchase with the hope that they will appreciate and pay a return.

source: Alphabet SEC Filings

Alphabet’s non-current asset example of long-term investments includes non-marketable investments of $5,183 million and $ 5,878 million in 2015 and 2016.

Purchase of Debt Securities like loans or bonds

  • The company records the purchase as an investment on its balance sheet

Purchase of Stock / Shares

  • If shares of another company are purchased and have controlling interest (usually owning more than 50%), then the company needs to consolidate (combine) its accounts with the other company.If the company does not own a controlling interest, it must include the shares as investments on its balance sheet.

#6 – Other Long-Term Assets

You will find this item in many financial statements, whose explanation is entirely missing. For example, you may need to know the “Other Assets” proportion to “Total Assets.” If it is significant, an analyst may want to clarify the same with the management.

Reporting of Non-Current Assets in the Balance Sheet

Cost Model Approach

Under this model, a non-current asset is reported at amortized cost. Amortized Cost is computed by subtracting Accumulated DepreciationAccumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date. It is a contra-account, the difference between the asset’s purchase price and its carrying value on the balance sheet.read more, and amortization from the Asset’s Historical Cost. Historical cost is the total cost of the asset, including purchase price and any other cost incurred to get the asset ready for use, such as installation.

Let’s understand the same with an example:

  • ABC purchased Plant and Machinery on 01.4.2017 for $100000 and spent Rs 5000 on installing the same. Depreciation for the year is $9500. Under Cost Model, Plant and Machinery will be reported for $95500 (100000+5000-9500) on 31.03.2018.

Revaluation Model Approach

Under this approach, an asset is reported at the Fair to value less any accumulated depreciation. If initial Revaluation results in a loss, the initial loss is recognized in the Income Statement. Any subsequent Revaluation gain would be recognized in the Income Statement to the extent of the previously reported loss. Surplus revaluation gain beyond the initial loss is recognized in the Shareholder’s Equity as Revaluation Surplus.

ABC purchased Plant and Machinery on 01.4.2016 for Rs 800000. As of 31.03.2017, the machinery had a fair value of Rs 720000. As of 31.03.2018, machinery had a fair value of Rs 810000. In such a case, as per the Revaluation Model, Revaluation gain will be reported as follows:

Conclusion

Non-Current Assets are an integral part of any business. They act as the wheels for the smooth running of the business. However, the portion of the asset base comprising long-term assets varies industry-wise. Usually, Capital Intensive IndustriesCapital Intensive IndustriesCapital intensive refers to those industries or companies that require significant upfront capital investments in machinery, plant & equipment to produce goods or services in high volumes and maintain higher levels of profit margins and return on investments. Examples include oil & gas, automobiles, real estate, metals & mining.read more, such as Oil Production, Telecommunication, Automotive, etc., will have a higher composition of their asset base of long-term assets than companies in the financial sector.

Video on Non-Current Assets

This article is a guide to Non-Current Assets and their definition. Here, we discuss the types and list of non-current assets (property, plant, equipment, natural resources, Goodwill, intangible, long-term investments, and other assets). We also discuss its reporting on the balance sheet using the cost model and the revaluation model. You may also have a look at the following articles to learn more about basic accounting –

  • Is Inventory a Current Asset?Non-Current Liabilities ExamplesLiabilities in Accounting