What Are Noncurrent Assets?
Noncurrent assets are a company's long-term investments for which the full value will not be realized within the accounting year. They are typically highly illiquid, meaning these assets cannot easily be converted into cash. Examples of noncurrent assets include investments, intellectual property, real estate, and equipment. Noncurrent assets appear on a company's balance sheet.
Key Takeaways
- Noncurrent assets are a company's long-term investments that are not easily converted to cash or are not expected to become cash within an accounting year.
- Also known as long-term assets, their costs are allocated over the number of years the asset is used and appear on a company’s balance sheet.
- Noncurrent assets fall under three major categories: tangible assets, intangible assets, and natural resources.
- Examples of noncurrent assets include investments, intellectual property, real estate, and equipment.
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Understanding Noncurrent Assets
A company's assets are divided into two categories: noncurrent and current assets, which appear on a company's balance sheet. Noncurrent assets, also referred to as long-term assets, are capitalized rather than expensed. This means that the company allocates the cost of the asset over the number of years for which the asset will be in use instead of allocating the entire cost to the accounting year in which the asset was purchased. Depending on the type of asset, it may be depreciated, amortized, or depleted.
The assetssection of the balance sheet is segmented according to the type of asset.The leading section is "current assets,"which are short-term assets that can be converted into cash within one year or one operating cycle.Current assets include items such as cash, accounts receivable, and inventory.Noncurrent assets are always classified on the balance sheet under one of the following headings:
- Investments
- Property, plant, and equipment
- Intangible assets
- Other assets
Property, plant, and equipment—which may also be called fixed assets—encompass land, buildings, and machinery (including vehicles).
Investments are classified as noncurrent only if they are not expected to turn into unrestricted cash within the next 12 months of the balance sheet date.
Noncurrent assets fall under three major categories: tangible assets, intangible assets, and natural resources. Noncurrent assets, whether tangible, non-tangible, or natural resources, will benefit the company for more than one year. They differ from current assets, which can be conveniently sold, used, or exhausted through standard business operations within a year, such as inventory and accounts receivable.
- Tangible Assets: Tangible assets are typically physical assets or property owned by a company, such as real estate and equipment. They are the main type of assets that companies use to produce their products and services.
- Intangible Assets: Intangible assets are goods that have no physical presence. Although they may be created, such as a patent, intangible assets can also arise from the sale or purchase of business units.
- Natural Resources: Natural resources are assets that come from the earth. Examples of natural resources include fossil fuels and timber.
Examples of Noncurrent Assets
Examples of noncurrent assets include fixed assets like property and equipment. Long-term investments such as bonds or real estate, or investments made in other companies are also common noncurrent assets. Trademarks, client lists, and the goodwill acquired in a merger or acquisition, are all considered intangible long-term assets.
It is not uncommon for capital-intensive industries to have a large portion of their asset base composed of noncurrent assets. An example of such a company is an oil refinery. Conversely, service businesses may require minimal to no use of fixed assets. While a high proportion of noncurrent assets to current assets may indicate poor liquidity, this may also simply be a function of the respective company’s industry.
Other noncurrent assets include the cash surrender value of life insurance. A bond sinking fund established for the future repayment of debt is classified as a noncurrent asset. Some deferred income taxes, and unamortized bond issue costs are noncurrent assetsas well.
Prepaid assets may be classified as noncurrent assets if the future benefit is not to be received within one year. For example, if rent is prepaid for the next 24 months, 12 months is considered a current asset as the benefit will be used within the year. The other 12 months are considered noncurrent as the benefit will not be received until the following year.
What Are the Different Types of Noncurrent Assets?
Noncurrent assets fall under three major categories: tangible assets, intangible assets, and natural resources. Tangible assets are typically physical assets or property owned by a company, such as real estate and equipment. Intangible assets are goods that have no physical presence, like patents. Natural resources are assets that come from the earth, such as fossil fuels and timber.
How Are Noncurrent Assets Accounted For?
Noncurrent assets are capitalized rather than expensed. This means that the company allocates the cost of the asset over the number of years for which the asset will be in use instead of allocating the entire cost to the accounting year in which the asset was purchased. Depending on the type of asset, it may be depreciated, amortized, or depleted. They appear on a company's balance sheet under the following categories: investment; property, plant, and equipment (PP&E); intangible assets; or other assets.
What Is the Difference Between Current and Noncurrent Assets?
Current assets are considered short-term assets because they generally are convertible to cash within a firm's fiscal year, and are the resources that a company needs to run its day-to-day operations. Typically, they are reported on the balance sheet at their current or market price. Noncurrent assets can be viewed as investments required for the long-term needs of a business for which the full value will not be realized within the accounting year. They are typically highly illiquid, meaning these assets cannot easily be converted into cash and are capitalized for accounting purposes.
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In the context of noncurrent assets, there are several key concepts that are essential to understand:
Noncurrent Assets:
Noncurrent assets are a crucial part of a company's long-term investments. They encompass assets that won't be converted into cash within the current accounting year. They're categorized into tangible, intangible, and natural resources, and are usually highly illiquid, making their conversion into cash challenging.
Types of Noncurrent Assets:
- Tangible Assets: These are physical properties or assets owned by a company, like real estate and equipment. They're essential for production and service delivery.
- Intangible Assets: Intangible assets lack physical presence but hold immense value. This category includes patents, trademarks, and goodwill acquired through mergers or acquisitions.
- Natural Resources: These assets are derived from the earth, such as fossil fuels and timber.
Classification on Balance Sheets:
Noncurrent assets find their place on a company's balance sheet under specific headings, such as investments, property, plant, and equipment (PP&E), intangible assets, or other assets. They are capitalized over the asset's useful life rather than expensed immediately.
Accounting Treatment:
The accounting treatment of noncurrent assets involves allocating the asset's cost over the years it will be in use. Depending on the type of asset, this can involve depreciation, amortization, or depletion.
Difference from Current Assets:
Noncurrent assets differ from current assets primarily in their timeframe for conversion into cash. Current assets are short-term resources, convertible within a year, while noncurrent assets are long-term investments unlikely to be realized within the accounting year.
Understanding these distinctions is crucial for assessing a company's financial health and strategic planning. The balance between current and noncurrent assets impacts liquidity and long-term stability, influencing investor perceptions and financial strategies.
This understanding enables companies to make informed decisions regarding asset allocation, investment planning, and financial risk management.
