Non Current Assets

If you are interested in the world of finance perhaps you´ve heard a few times the term Non Current Assets. If you want to expand your knowledge on this term, we encourage you to read the following article.

What are non-current assets?

 

The assets that cannot be quickly converted into cash or cash equivalents to pay for debts or short-term liabilities are known as non-current assets. These assets are not liquid by nature (i.e., they take longer to sell and realize their value into cash) and include long-term investments that cannot be used as a source of quick cash to cover current obligations. For example, investment in property and real estate, office furniture, manufacturing equipment or machines, business trademarks, and fixed financial securities. Moreover, any investment that is not expected to turn into cash within a year is also defined as a non-current asset of the company.

Examples of non-current assets

 

The mix of current and non-current assets on the balance sheet of a company will depend on several factors, including the business model, the industry in which the company operates, the economic lifecycle, the risk profile of the company, and management decisions, among others. Capital-intensive businesses have more non-current assets as compared to current assets and as a result, they are less liquid in relative terms; on the other hand, labor-intensive / services businesses tend to have more current assets and the asset side of their balance sheets tends to be more liquid. . Let’s discuss some examples of non-current assets.

1. Real estate and manufacturing plants

The investments in real estate, property, and equipment for manufacturing products tend to have longer economic life and they are described as non-current assets because they cannot be easily converted into cash for the payment of short-term obligations. The less preferred course of action for a company would be selling its machines or manufacturing plants to pay for example inventory suppliers or wages, because it usually takes a lot of time to liquidate those assets and a lot of value could be lost trying to sell them fast.

2. Company trademarks, copyrights, and patents

Copyrights, business trademarks, and patents are included in the intangible assets of a company. They are also defined as the intellectual property of the business. A trademark of a company cannot be converted into cash in a short period of time in most cases. Intangible assets are written as non-current assets on the balance sheet and they get recognition at the time of their purchase. As well, often it is the patents, copyrights, intellectual property of the company that allows it to generate its revenues, so if sold, they will most likely go out of business.

3. Long-term investments in bonds and stocks

Mostly, bonds and stocks are considered current assets as they can be converted into cash relatively quickly (depending on the nature of the security). However, for example, often a company buys bonds orstocks with the intent to hold them for more than a year, specific securities do not mature for 1 + years, and are defined as non-current assets of the company. Similarly, when the shares of other businesses are purchased as a long-term investment they are also included in non-current assets.

4. Excess purchase price or Goodwill

When a company buys another business, it can pay an amount that could be more than the value of the assets on the balance sheet of that business. It means that the company is buying the intangible assets, like the client base, the brand reputation in the market, and the work force.. This excess amount between what was paid and total assets on the balance sheet is recorded as Goodwill on the new balance sheet and the goodwill is also considered a non-current asset of the company.

 

How current assets are different from non-current assets?

All the financial resources available for a company can be divided into two groups: non-current assets and current assets. The major difference between this two terms is their ability to be transformed into cash. In simple words, current assets are a source of quick cash in a short period (within a year) whereas non-current assets are long-term investments that cannot easily provide cash. Current assets include accounts receivable, inventory stock, money market investments, marketable securities, and prepaid expenses. On the other hand, non-current assets include long-term investments in real estate, investments in stocks or shares with controlling interest, goodwill, property and equipment.

 

List of non-current assets on the balance sheet

 

Depending on the various accounting standards, assets will be recorded on the balance sheet at a certain value, often ‘fair value’ and updated periodically for any change in the assets’ value.

  • Intangibles, brand trademarks, patents, copyrights
  • Goodwill
  • Real estate, warehouses, investment properties, head offices
  • Long term investments of bonds and stocks
  • Plant & Equipment, machinery, production units, technologies, tools etc.

 

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