A non-current asset is an asset that cannot be easily converted into cash, and whose full value can only be realized after one year.
Asset simply refers to a resource that a business needs to help it run day-to-day functions. Non-current assets include long term assets such as equipment, property, and intangible assets like intellectual property.
Outside of non-current assets, a business’ balance sheet must show current assets, as well. Current and non-current assets combined create a company’s total assets.
Examples of non-current assets
Businesses do not purchase non-current items expecting to sell them. Non-current assets that a company might have include:
- Equipment and machinery
- Investments or holdings such as land
- Digital or intangible assets such as patents
The amount of money an insurance company pays out to a policyholder is considered a non-current asset. You may have a bond sinking fund for the repayment of future business debt; this is viewed as part of your business’s non-current assets, as well.
Other non-current assets can include trademarks, deferred income, goodwill, unamortized bond issues, or taxes.
If the expected value of a prepaid asset is not realized within the year, you shall classify it as a non-current asset. An example of a prepaid asset is premises rental costs over two years, as 12-month rent is considered a current asset. This is because the benefit of prepaying rent for a year will be expended within that year. The following 12 months of 2 years are thus accepted as non-current assets since your business will benefit from these costs in the coming year.
Natural resources from which a company sources or conducts business are considered non-current assets. These include fossil fuels, timber, minerals, and other power generation mediums like wind, solar, or water.
Since the assets can only be consumed through extraction and processing, such a business can also account for them as wasting assets. Natural assets will be recorded at the exploration, acquisition, and developmental costs with less accumulated depletion.
Classifying non-current assets on your balance sheet
While a current asset can be something short term or easily turned into cash, non-current assets can’t be immediately expensed with. Essential for business revenue generation, operation, and growth, non-current assets are given a value equal to the period of time they are in use. After a year, their value can reduce, or depreciate and amortize.
The cost of non-current assets is spread over several years. Their usefulness is expected to last over a more extended period of time. Spreading non-current asset costs helps avoid losses for your business, as the initial investment may cost a lot of money.
On your company’s balance sheet, the assets section has sections that include current assets, PP&E, and other assets. You will find non-current assets classified as PP&E, investments, or other assets.
While PP&E is considered mostly fixed assets, non-current investments include intangible assets and those that won’t realize value within the next 12 balance sheet months.
What’s the deprecation of non-current assets?
Non-current assets that your business holds can depreciate, with the exception of certain things like property holdings. Deprecation means that the value after purchase for a piece of machinery, vehicle, or building will reduce after each year.
It’s essential that such non-current assets deprecated since they are expensive and are considered capital costs. These are costs that would offset your company’s profit margin in a drastic way should they be accounted for as income expenses for that purchase year.
As a capital expenditure, the expense of non-current assets is accounted for by spreading portions over a number of years. If your cracker business, for instance, distributes products all over the country, you might purchase an expensive machine to help speed up production. Such a machine will automate the cracker packaging process to reduce factory floor time exponentially.
Your machine costs $400,000, and the businesses’ financial statements show that your profits for a year are $500,000. If you calculate the machine’s entire cost for that year, your margins will read $100,000 in profits for anyone perusing your books.
As you try to woo investors to your business, such a profit margin will not seem appealing. On the other hand, filing corporate taxes for one year with the total machine cost included will be less expensive.
To give investors a brighter indication of your company’s actual performance and potential, you need to show that you capitalize on the machine’s costs. Therefore, depreciation of non-current assets counts as a company’s expense on their financial statement, listed under accumulated depreciation.
When are non-current assets said to be amortized?
The concept of amortization is closely related to asset depreciation. In most areas where the term is used, amortizing means a pre-determined schedule of payment for debts.
Amortized payments are calculated in interest and principal, which will differ from one repayment period to the next, usually month to month.
However, when it comes to assets, amortization is the depreciation of non-current and intangible assets, as accounted for in a company’s finances. The decrease in value of non-physical assets and tangible or fixed assets like buildings and machinery is marked as amortized in your account books.
Equipment that is purchased for say, $30,000 for use in your business, will not be worth that much in five or ten years. Since these non-current assets must be accounted for in your balance sheet, their amortized value for that respective year is shown.
Your equipment will, therefore, be depreciating as its usefulness continues, and the value derived from the number of years it’s expected to be in operation.
Non-current assets in a nutshell
Your non-current assets are those you can’t convert into cash or make liquid within a financial year. Non-current assets are used for future prospects or the long-term plan of your business.
Long-term deferred tax assets, PP&E, goodwill, and investments whose value won’t be realized within 12 months, are all listed as non-current assets. The value of your non-current assets is deemed as their actual cost minus depreciation.
Selling non-current assets will result in capital gains which means you will have to pay capital gain tax.
You can re-evaluate your business’ non-current assets, such as with PP&E. This is common. When the market value of your tangible asset depreciates compared to its book value, you must re-value the asset.