Non-Current Assets: Types and Examples

A company’s resources can be understood by examining its assets. Non-current assets are a specific class of resources that a business intends to hold for more than one year. Unlike current assets, such as cash or inventory, these are not easily converted into cash and are fundamental to a company’s long-term operational capabilities. These long-term assets generate revenue and profits over multiple accounting periods. Understanding the nature and value of these assets provides insight into a company’s strategic investments and its foundation for future growth, and they are a factor in assessing its overall financial health and stability.

Tangible Non-Current Assets

Tangible non-current assets are the physical resources a company owns and uses in its operations, known as Property, Plant, and Equipment (PP&E). These assets have a useful life of more than one year and are not held for resale but are used to produce goods, supply services, or for administrative purposes. The value of PP&E can vary significantly by industry; a manufacturing company, for instance, will have a much larger investment in these assets than a software development firm.

A primary example is land. From an accounting perspective, land is unique because it is considered to have an unlimited useful life and is not subject to depreciation. When a company acquires property, the cost of the land is recorded separately from any buildings on it for accurate financial reporting.

Buildings, such as factories, warehouses, and corporate offices, are another component of PP&E that house a company’s core operations. Machinery and equipment encompass a wide range of items, including manufacturing apparatus and company vehicles. Furniture and fixtures represent another class of tangible assets, including items like office desks and shelving that support daily administrative functions. All of these tangible assets, with the exception of land, are subject to depreciation, which is the systematic allocation of their cost over their estimated useful lives.

Intangible Non-Current Assets

Distinct from physical items, intangible non-current assets are resources that lack physical substance but provide long-term value to a company. These assets often represent legal rights, competitive advantages, or intellectual creations that are instrumental to a company’s success.

• Goodwill is a unique asset that arises during a business acquisition. It is recorded when one company purchases another for a price that exceeds the fair market value of the identifiable net assets. This premium represents attributes such as brand reputation or a loyal customer base. Public companies do not amortize goodwill but must test it for impairment at least annually, while private companies may choose to amortize it over a period of up to 10 years.
• Patents provide a company with exclusive rights to an invention, preventing others from making, using, or selling it for a specific period, typically 20 years. This legal protection allows a company to capitalize on its research and development.
• Copyrights grant legal protection for original works of authorship, such as software code, books, and marketing materials. This right protects the expression of an idea, not the idea itself.
• Trademarks are symbols, names, or phrases that distinguish a company’s products or services from those of others, such as a recognizable logo or brand name.

For intangible assets with a finite useful life, such as patents and copyrights, their cost is allocated over that period through a process called amortization, which is analogous to depreciation for tangible assets.

Long-Term Investments

Long-term investments are assets held for more than a year that are not used in the primary operations of the business. This category consists of financial assets acquired with the intention of generating income or capital appreciation. These investments are reported on the balance sheet separately from operational assets like PP&E and intangibles.

A common example is the ownership of stocks and bonds in other companies. When a business purchases equity or debt securities and plans to hold them for an extended period, these are classified as non-current assets. The goal is to benefit from dividend payments, interest income, or an increase in the securities’ market value over time.

Real estate held for investment purposes is another form. This is different from a building used as a factory or office, as investment property is acquired to earn rental income or to profit from a rise in property value. A company may also hold long-term notes receivable, representing money owed to the company that is not expected to be collected within the next twelve months.

Balance Sheet Presentation and Valuation

The balance sheet provides a structured overview of a company’s financial position, with assets listed in order of liquidity. Non-current assets are presented after current assets, reflecting their long-term nature and the fact they are not expected to be converted to cash within one year. This arrangement helps users of financial statements distinguish between a company’s short-term resources and its long-term operational and investment base.

The value of a non-current asset reported on the balance sheet is its carrying value or book value. This figure is calculated by taking the asset’s original historical cost and subtracting any accumulated depreciation for tangible assets or accumulated amortization for intangible assets. For example, if a company buys a machine for $100,000 and it has accumulated $30,000 in depreciation, its carrying value is $70,000.

This book value may differ significantly from the asset’s fair value, which is the price it could be sold for in the current market. The balance sheet is not intended to reflect the current liquidation value of a company’s assets. Rather, it presents them at their cost, adjusted for their use, adhering to the historical cost principle of accounting. This approach ensures consistency and comparability in financial reporting.