What Is a Noncurrent Asset?
Noncurrent or long-term assets are those assets a company owns that are not expected to be converted into or used as cash within one year. They typically have a life of more than one year and are not intended for resale. They are recorded in the balance sheet at their acquisition cost.
In order to line up the cost of using the asset with the length of time it generates revenue, noncurrent assets are capitalized rather than expensed in the year they are acquired.
This means that their costs are spread out, either through depreciation, amortization, or depletion, over their estimated useful lives.
Examples of noncurrent assets include equipment, furniture and fixtures, real estate, patents, trademarks, and long-term investments.
Types and Examples of Noncurrent Assets
There are three main types of noncurrent assets. These are tangible assets, intangible assets, and natural resources.
Tangible assets are physical properties that a company owns. They are necessary to the core business operations and are valued at their acquisition cost less accumulated depreciation. However, tangible assets such as land may be revalued at their current market value.
Some major examples of tangible assets include:
- Machinery and equipment
- Real estate and associated improvements
- Computers and software
- Manufacturing tools
- Furniture and fixtures
Intangible assets are those without a physical form but provide economic value. They may have a definite or indefinite useful life but cannot be seen, touched, or physically measured.
Businesses can create their own intangible assets, or they can acquire them through purchase or license.
Some examples of intangible assets include patents, goodwill, intellectual property, copyright, and trademarks.
Intangible assets can be classified into definite and indefinite tangible assets.
Definite Intangible Assets
A definite intangible asset has a limited useful life and only stays with the company for the duration stipulated in agreements or contracts.
For example, a business may purchase a patent with a life of 20 years, and the original creator of the said patent will remain the owner of the said patent.
Indefinite Intangible Assets
An indefinite intangible asset does not have a finite useful life and can provide benefits to the company as long as the company continues to exist.
An example of an indefinite intangible asset is goodwill. Goodwill is not amortized, but they are assessed each year for impairment which is when its carrying value exceeds the fair value of assets.
Natural resources are assets that come from the earth, and they include timber, water, oil, and minerals.
They are also called wasting assets because they are used up or depleted when they are consumed. These assets need to be consumed through extraction from the natural environment.
For instance, a mineral deposit must be mined in order to be used. It means that these assets must be extracted out of the ground for them to be utilized.
Natural resources are listed on the balance sheet at the cost of extracting them from the ground, plus exploration and development costs, and less accumulated depletion.
Example of Noncurrent Assets
Below is a balance sheet from Microsoft Corporation for the year ended June 30, 2016.
Microsoft recorded total assets of $193,694,000.
Out of this total amount, noncurrent assets were $54,034,000. A huge part of this amount is from the company’s property and equipment which accounted for nearly 34% of the total noncurrent assets figure.
Other noncurrent assets that the company owns are equity and other investments, goodwill, intangible assets, and other long-term assets.
How to Determine the Value of Noncurrent Assets
Noncurrent assets are reported on the balance sheet of a company at the price that was paid for them, adjusted to any depreciation and amortization that has been charged against them. This is called the “net book value.”
Noncurrent assets are also subject to revaluation whenever the current market price decreases or increases compared to the book price.
Depending on the guideline used, noncurrent assets may be calculated through either the cost model approach or the revaluation model approach.
IAS 16 details the treatment for PP&E. Per US GAAP, only the cost model approach may be used in the valuation of PP&E.
As for intangible assets, IAS 38 allows for either cost or revaluation models.
A major disparity in accounting for intangible assets between the two standards is that, under IFRS, specific development costs can be capitalized. Development costs are always expensed under US GAAP, with the exception of certain situations such as accounting for a business acquisition.
Both IFRS and US GAAP provide that research costs are to be expensed.
Cost Model Approach
The carrying value of an asset under the cost model is recognized at the net book value or carrying value, which is calculated as cost less accumulated depreciation and impairment losses.
Depreciation expense is the estimated reduction in the value of a fixed asset within a fiscal year.
An impairment loss is recognized when the carrying value of an asset exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell or its value in use.
For example, a company sold its equipment for $5,000 that had been in use for 3 years. Additionally, it has the following data:
Acquisition cost: $20,000
Useful Life: 5 years
Impairment Loss: $5,000
Using the straight-line depreciation method, depreciation expense is $4,000 each year. This makes the accumulated depreciation to be $12,000 for the past three years.
Depreciation = Cost of the Asset / Useful Life of the Asset
= $20,000 / 5
Accumulated Depreciation = Yearly Depreciation x Years in Use
= $4,000 x 3
Under the cost model approach, the equipment will be reported for $3,000.
Carrying Value = Cost – Accumulated Depreciation – Accumulated Impairment Losses
= $20,000 – $12,000 – $5,000
Upon sale of equipment for $5,000, the company will report a gain on sale of $2,000.
Gain on Sale = Amount of Property Sold – Carrying Value
= $5,000 – $3,000
Revaluation Model Approach
The revaluation model carries the revalued amount of asset, which is fair value at the date of revaluation, less any subsequent accumulated depreciation and impairment losses.
Assets here shall be revalued with sufficient regularity, like 3 or 5 years, so that the carrying value of the assets will not so much differ from the fair value.
Because of this, revaluation may either result in a revaluation gain or revaluation loss.
Revaluation gain shall be recorded as other comprehensive income and will be reflected in the shareholder’s equity labeled as “revaluation surplus.”
On the other hand, revaluation loss shall be expensed in the income statement.
If the asset was previously revalued to revaluation surplus, then the decrease in carrying value shall be debited to equity to the extent of reversing such revaluation surplus. Should there be an excess in revaluation loss, the same shall be expensed in the income statement.
A company’s equipment suffered a revaluation loss of $30,000 taking its book value from $90,000 to $60,000. Below are its details:
Revalued Amount: $100,000
Accumulated Depreciation: $10,000
Net Book Value: $90,000
Revaluation Surplus: $20,000
Under the revaluation model approach, revaluation loss will be reported as follows:
- Other Comprehensive Income: $20,000
- Income Statement: $10,000
A company purchased equipment on March 25, 2019 for $20,000. The equipment’s fair market value is $16,000 as of February 28, 2020 and $21,000 as of February 28, 2021.
Under the revaluation model approach, revaluation gain will be reported as follows:
- Revaluation gain recognized in the Income Statement (up to the revaluation loss recorded in the previous year) is $4,000.
- Revaluation surplus to be recognized in Shareholder’s Equity is $1,000.
Cost Model vs. Revaluation Model
The cost model and revaluation model approach are two different methods of accounting for changes in the value of noncurrent assets.
However, the decision on which method should be used should be at the discretion of the management since they are both accepted standard accounting methods.
The revaluation model is better used when there is a reliable market estimate. This may be done by rigorously inspecting the market prices of similar noncurrent assets to arrive at a reliable value.
A company may use the cost model if they prefer a less complicated and fairly straightforward method of determining the value of its noncurrent assets.
Importance of Noncurrent Assets
Determining the value of noncurrent assets of a company is important for a number of reasons.
Keeping Track of Assets
Companies need to keep track of their noncurrent assets because they represent a significant portion of the company’s total value.
For example, goodwill and intellectual property rights are considered to be some of the most valuable assets of a company.
As such, it is important for companies to have a clear understanding of the value of their noncurrent assets so that they can make informed decisions about how to best use them.
Risk Identification and Management
Another reason why determining the value of noncurrent assets is important is that it helps companies identify and manage risks associated with these assets.
For instance, if a company’s noncurrent assets are undervalued, it may be at risk of defaulting on its loans or not being able to meet its financial obligations.
On the other hand, if a company’s noncurrent assets are overvalued, it may be paying too much tax on these assets or may be at risk of losing these assets if they are sold.
More Accurate Financial Statements
Determining the value of noncurrent assets is important because it helps create more accurate financial statements. This is because the value of these assets is used in the calculation of the net worth of a company.
As such, if the value of these assets is not accurately determined, it can lead to a false or misleading portrayal of the financial position of the company.
Further, you can also spot ghost assets, if any, such as stolen, lost, or damaged assets, which can help improve the asset management of your company. Determining your current assets also helps prevent loss and theft and makes it easier to trace any missing items.
Determining the value of noncurrent assets is important because it helps companies make better decisions about how to use these assets.
For instance, if a company knows that its noncurrent assets are undervalued, it may decide to sell these assets in order to raise capital.
On the other hand, if a company knows that its noncurrent assets are overvalued, it may decide to hold on to these assets and use them as collateral for loans.
In addition, knowing the value of noncurrent assets can also help companies make better decisions about how to invest these assets. For instance, if a company knows that its land is undervalued, it may decide to invest in this asset by developing it or improving it.
Improved Investor Relations
Finally, determining the value of noncurrent assets is important because it can help improve a company’s relationships with its investors. This is because investors often use the value of a company’s noncurrent assets when making investment decisions.
As such, if a company’s noncurrent assets are valued accurately, it can help improve the company’s relationships with its investors and potentially attract more investment.
Investors often invest in companies with strong noncurrent assets because they see these companies as being more stable and less risky. This is because noncurrent assets tend to be more durable and have a longer lifespan than current assets.
Consequently, companies with strong noncurrent assets are often seen as being better able to weather economic downturns.
Noncurrent Assets vs. Current Assets
There are a few key differences between noncurrent assets and current assets.
Noncurrent assets are long-term investments and are not easily converted into cash. They usually have a lifespan of more than one year.
Noncurrent assets include items such as land, buildings, equity investments, and patents.
Current assets are short-term investments that a company expects to convert into cash within one year.
Current assets include items such as cash, cash equivalents, marketable securities, prepaid expenses, accounts receivable, inventory, and other liquid assets.
Though they have differences, both are vital to a company. Noncurrent assets provide the foundation and long-term stability of a business, while current assets provide day-to-day liquidity.
The Bottom Line
Noncurrent assets are long-term investments that a company expects to convert into cash after more than one year. It includes assets such as land, furniture, fixtures, buildings, equipment, patents, trademarks, and long-term investments.
There are three types of noncurrent assets, which are tangible, intangible, and natural resources.
Noncurrent assets are not as liquid as current assets because they cannot be easily converted into cash. To determine the value of a noncurrent asset, companies can use the cost model or revaluation model. Management will decide which method is best based on its preference.
Noncurrent assets are important to a company because they provide the foundation and long-term stability of a business. They are also used to generate revenue and are a source of financing.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.