Assets are vital for an individual as well as any kind of business to maintain good financial health. These assets allow a business to make a profit and increase its value. Business owners should be well-acquainted with the different types of assets and their purposes. In fact, the value of an asset may increase or decrease based on the market environment.
The two categories of assets are current and non-current assets.
Let us discuss non-current assets meaning and non-current assets examples in detail.
What is a Non-Current Asset?
A non-current asset, recorded on the balance sheet after current assets, is a company’s long-term investment whose value will not be realized within a period of one year and cannot be converted into cash easily. Such assets are acquired with the motive of deriving benefits and revenues in the long run.
How do Non-Current Assets differ from Current Assets?
Non-current assets are classified as capital. When they are sold once all benefits have been derived from them, the company has to pay capital gains tax. At the same time, current assets are classified as revenue, and during their sale, the company has to pay corporate income tax. Current assets are short-term investments that can be converted to cash within a year. Accounts receivable, inventories, and prepaid expenses come under this type of asset. While current assets are liquid in nature, non-current assets lack this particular feature. They cannot be easily converted to cash in a short period of time. This is because they are purchased with the purpose to generate long term revenues and expansion plans for a business.
How are Non-Current Assets Classified?
Non-current assets are generally classified as:
1. Fixed Assets:
- Tangible Assets: These are physical assets or property owned by a company. Real estate, machinery, land and equipment are some examples of tangible assets.
- Intangible Assets: Intangible assets have no physical presence but can be created. Any creation of the mind like a business idea, brand name, logo, etc, which do not have any physical form can be termed as intangible assets. Patents, trademarks, and copyrights are some examples of intangible assets.
2. Natural Resources:
These are resources supplied by nature. Ore deposits, mineral deposits, oil reserves, gas deposits, fossil fuels, and timber are some examples of natural resources.
3. Other Non-Current Assets:
Assets that do not come under current assets or fixed assets or investment assets are categorized as ‘other non-current assets’. Some ‘other non-current assets’ are receivables (outstanding payments beyond one year), advances or loans extended to staff, advances made for the acquisition of fixed assets, security deposits, etc.
Examples of Non-Current Assets
Now we can intensely discuss some common examples of non-current assets.
1. Property, Plant, and Equipment (PP&E)
Property, plant, and equipment are physical, tangible, and long-term assets that typically have a life of more than one year.
Some examples of PPE are:
- Undeveloped land
- Vehicles
- Company furniture
- Machinery
- Buildings
PPE comes under fixed assets. Most of the capital-intensive industries have a significant amount of fixed assets. For example, oil companies, automobile manufacturers, steel companies, etc need heavy-duty equipment to carry out their operations. Companies need to list their net PPE on financial statements. In fact, potential investors and financial analysts frequently review a company’s PPE to determine the capital expenditures and know how the company is increasing its profits.
2. Goodwill
Goodwill, an intangible asset, is a term that arises when a buyer acquires an existing business. In some cases, a buyer pays a price that is higher than the net fair value of all the assets of the company. It means, here the buyer considers the reputation, solid customers, client base, brand identity and recognition, talented workforce, and proprietary technology of that company as valuable assets. Those terms are represented as goodwill. It is located in the assets section of the company’s balance sheet.
How to Calculate Goodwill for a Small Business?
Goodwill = [C + FV + NCI ] − NA
Where,
- C = Consideration Paid
- NCI = Total of Non-Controlling Interest
- FV = the fair value of equity interests which is the percentage of ownership rights an individual or another company holds in this particular company.
- NA = the net value of identifiable assets.
We can see this calculation with the help of a simple example.
Let us consider, that Company A acquires company B for 100 rupees. Company B has assets of 70 rupees and liabilities of 5 rupees. Here, the net identifiable assets of the business equal 65 rupees (70-5). Hence, goodwill equals 35 rupees. So, Company A will pay 35 rupees more to acquire company B’s unidentifiable assets.
3. Intellectual Property
Intellectual properties are intangible assets that include patents, trademarks (brands), franchises, designs, copyrights, trade secrets, and confidential information. These intangible assets are non-physical assets that indicate the potential for future economic benefits.
In the case of patents, there are 2 types: internally generated patents and externally generated patents. If company A acquires a patent for technology through their labour, time, and expense, it will be considered as an internally generated intangible asset. If company B licenses its patent to company A, it will be considered an externally acquired intangible asset.
4. Other Long-Term Investments
When an investor buys long-term securities in the financial markets, they believe that their value will increase and pay them a profit. These long-term investments may include stocks, long-term bonds, and treasury bonds.
If a bond’s maturity period is less than one year, it will be considered a short-term investment and will be classified as a current asset.
Conclusion
Non-current assets play an integral part in any business. They serve as the cogs in the machine that runs the business smoothly. During the balance sheet preparation process, it is necessary to know how to place the data correctly under the right subhead. Long-term achievable, PP&E, and other intangible assets should be placed under non-current assets.