Key Takeaways
- Noncurrent assets are long-term investments that are not easily converted to cash within an accounting year.
- Also known as long-term assets, their costs are spread across their useful life and are featured on a company’s balance sheet.
- Major categories of noncurrent assets include tangible assets, intangible assets, and natural resources.
- Examples of noncurrent assets encompass investments, intellectual property, real estate, and equipment.
Understanding Noncurrent Assets
A company’s assets are divided into two categories: noncurrent and current, with both presented on the balance sheet. Noncurrent assets, or long-term assets, are capitalized rather than expensed. This implies that their costs are allocated over their useful life rather than the year of purchase. These assets might be depreciated, amortized, or depleted based on their type.
The balance sheet lists assets in two segments - ‘current assets’ like cash, accounts receivable, and inventory (convertible to cash within a year), and ‘noncurrent assets’ such as investments, property, plant, and equipment, intangible assets, and other assets.
Types of Noncurrent Assets
- Tangible Assets: These are physical assets such as real estate, machinery, and equipment. They are fundamental in the production of goods and services.
- Intangible Assets: These assets have no physical form but hold significant value. Examples include patents, trademarks, and goodwill.
- Natural Resources: These are resources derived from the earth, like fossil fuels and timber.
Examples of Noncurrent Assets
Examples of noncurrent assets include fixed assets such as property and equipment, long-term investments like bonds or real estate, and intangible assets including trademarks and client lists. Additionally, assets like the cash surrender value of life insurance or a bond sinking fund established for future debt repayments are also categorized under noncurrent assets.
Capital-intensive industries often have a substantial portion of their asset base as noncurrent assets. For instance, an oil refinery typically has extensive long-term physical assets. On the contrary, service-based businesses might have fewer fixed assets and more intangible assets.
Deferred assets, prepaid for beyond a year like multi-year rent payments, too fall into the category of noncurrent assets based on their realization timeline.
Accounting for Noncurrent Assets
Noncurrent assets are capitalized, meaning their purchase cost is spread over their useful life. Depending on the asset type, the costs can be depreciated, amortized, or depleted. These assets appear across different sections of the balance sheet, including investments, property, plant, and equipment (PP&E), intangible assets, or other assets.
Key Differences Between Current and Noncurrent Assets
Current assets are short-term resources convertible to cash within a fiscal year to meet day-to-day operational needs. They are usually reported at their market value. In contrast, noncurrent assets are deployed for long-term business requirements, realizing their full value over multiple periods. They are characterized by illiquidity and capitalized costs.
Related Terms: Depreciation, Amortization, Depletion, Tangible Assets, Intangible Assets.
References
- Corporate Finance Institute. “Non-Current Assets”.
- Internal Revenue Service. “Publication 544, Sales and Other Dispositions of Assets”.
