Noncurrent assetsdescribe a company’slong-term investments/assets, such as real estate property holdings, manufacturing plants, and equipment. These items have useful lives that minimally span one year, and are often highly illiquid, meaning they cannot easily be converted into cash. Noncurrent assets are the opposite of current assets like inventory and accounts receivables.
Key Takeaways
- Noncurrent assets describe a company’s long-term investments/assets that have useful lives of at least one year.
- Noncurrent assets traditionally include real estate properties, manufacturing plants, equipment, and other tangible or fixed physical items that are highly illiquid because they can't be expeditiously sold for cash.
- In some cases, noncurrent assets also include intangible items, such as design patents and other intellectual properties.
Examples of Noncurrent Assets
Noncurrent assets such as real estate properties and manufacturing plants are tangible or fixed physical assets that cannot be easily liquidated. This is especially true with commercial real estate, where it typically takes longer than a fiscal year to close on the sale of a property. But noncurrent assets may likewise include intangible items, such as intellectual properties like design patents. Such items' useful lives typically exceed one fiscal year and are unlikely to be liquidated within that time frame. Instead, patents take an amortization approach, where their costs are spread out over their useful lives, which can span many years—even decades.
Noncurrent Assets and Depreciation
Like amortization, depreciationis anaccounting methodwhere the cost ofatangible assetis likewise spread out over the course of its useful life. For this reason, a rule created by theInternational Accounting Standards Board mandates that the depreciation of a noncurrent asset must be itemized as an expense on a company's financial statements. As an ancillary effect, depreciation helps companies budget their resources so that they don't have to a shell out a lump-sum of cash when they first purchase big-ticket items.
Noncurrent assets can be depreciated using the straight-line depreciation method, which subtracts the asset'ssalvage valuefrom itscost basisand divides it by the total number of years in its useful life. Thus, the depreciation expense under thestraight-line basisis effectively the same for every year it is used.
Long-term investments like bonds are also deemed noncurrent assets because companies ritually hold onto these vehicles for more than ayear.
Depreciation Example
Let’s consider an automobile manufacturer who purchases a machine that produces doors for its cars. The cost basis of this machine is $5 million, and the machine's expected useful life is 15 years, after which time, the company anticipates selling that machine for $500,000.Under this scenario, the depreciation expense for the machine is $300,000 ($5 million - $500,000/15) per year. So at the end of the asset's useful life, the machine will be accounted for using its salvage value of $500,000.
