Non Current Assets

Non-current assets are assets that will not be converted to cash within one year and that will generate economic benefit in future periods.
Non-current assets
3 min
22-June-2024

Non-current assets are not just substantial capital investments for a company but are central to sustaining operations and fuelling growth over time. These assets are generally highly illiquid, making them difficult to convert into cash quickly.

This article will help you understand all the basics of non-current assets, their types, significance, and how they differ from current assets.

What are non-current assets?

Non-current assets, also known as fixed assets, are a company’s long-term investments. They are not expected to be turned into cash within the upcoming fiscal year.

These assets are crucial for the long-term sustainability of a business, as they typically include major capital assets that provide value for more than one year.

Non-current assets are recorded on the balance sheet and can include property, plant and equipment, intangible assets, and long-term investments. Their valuation is critical for assessing a company's overall health and investment potential.

Non-current assets are typically purchased for a longer duration. They require significant capital investment and are generally brought to carry out day-to-day operations for a sustained period.

From an accounting standpoint, these assets can be either amortised, depreciated or depleted based on their nature, use, and classification.

Components of non-current assets

Non-current assets can be majorly divided into three main types:

1. Tangible assets

Tangible assets are physical and can be seen and felt. Everything you see in an office or industry starting from land, furniture, machinery, and vehicles all are a part of tangible assets. It is through these assets that economic activities like manufacturing, production, logistics, research, and development can take place.

To determine the cost of a tangible asset, you need to subtract the depreciation of the asset for the given year from its cost. This depreciation accounts for the asset’s deterioration over time, influencing its book value and the company’s financial position.

However, the value of all tangible assets cannot be determined in the same manner. For example, land as a tangible asset does not depreciate but often appreciates.

2. Intangible assets

These non-current assets as the name suggests lack physical form but are equally important for a company. For example, consider a pharmaceutical company that develops a new highly effective formula for a medicine and claims it as a patent. Now the company can make money on this patent by licensing and selling it to other companies in the market.

Other examples of tangible assets include: trademarks, copyrights, and goodwill, all of which despite having no physical form, contribute significantly to a company’s balance sheet

3. Natural resources

Also known as wasting or exhaustible assets, these are assets a company derives from the earth. For example, a mining company capitalises on these resources by extracting and selling them. Other examples include oil, natural gas, minerals, and timber.

These assets are recorded in the balance sheet at the cost at which they are bought. They are accounted for using the depletion method - which spreads out the cost of the resource over its useful life, based on how much of it is extracted.

Also read about - Difference between assets and liabilities

How to calculate non-current assets?

Let’s look at a balance sheet to understand how to place and treat non-current assets in an organisation’s financial reports.

Current assets in a balance sheet are placed at the top since they can be easily encashed within the next 12 months while non-current assets being long-term are placed below.

Assets Amount
Current assets  
Cash and cash equivalents 50,000
Short-term investments 30,000
Accounts receivables 40,000
Inventory 20,000
Non-current assets  
Long-term investments 80,000
Property, Plant, and Equipment (PP&E) 200,000
Goodwill 50,000
Accumulated Depreciation -50,000
Total Assets 420,000

 

Significance of non-current assets

Non-current assets are important for any organisation for several reasons:

  • Long-term financial health: They represent a company’s investment in assets that will generate revenue over multiple years.
  • Operational capacity: These assets are essential for the day-to-day operations and overall production capacity of a company.
  • Investment valuation: Investors look at non-current assets to assess the potential future earnings and growth capacity of a business.
  • Credit ratings: Higher value in non-current assets might affect a company's borrowing capacity and credit rating.

Also read about - Difference between equity and assets

Financial ratios using non-current assets

Insight into a company’s operational and financial stability can be derived by studying the financial ratios that involve non-current assets.

Let’s take a look at some non-current assets formula:

1. Non-current asset turnover ratio

This ratio is a measure of the efficiency with which the fixed assets of a company are used to generate sales i.e. it helps us understand where a company’s net sales revenue stands with respect to the net book value of its total non-current assets.

This non-current assets formula can be calculated as follows:

Non-current asset turnover ratio = Total Sales Revenue / Net Book Value of Non-current Assets

If the non-current asset turnover ratio is low it is an indication that the non-current assets of the company are not being used optimally. A higher turnover ratio on the other hand indicates better utilisation of assets.

2. Non-current assets to net worth

This ratio is useful for understanding how much equity of a company is invested or used up in its long-term assets. Simply put, it shows the amount of shareholders’ equity which is being used to finance the company’s business operation.

This Non-current assets formula can be calculated as follows:

Non-current Assets to Net Worth = Non-current Assets / Total Net Worth

A higher ratio may indicate that a considerable portion of a company's long-term investments are financed through debt. For a more detailed analysis, it is essential to examine the balance sheet closely to identify which assets predominantly influence this calculation.

Difference between current and non current assets

Here are some of the most fundamental ways in which non-current assets differ from current assets.

Current assets Non-current assets
Are meant to be converted into cash within a year Are held onto for the longer run, hence are not converted into cash
Current assets take care of the day-to-day or immediate liquidity requirements Non-current assets are bought for the long term or in anticipation of future needs
Their value is determined at the current market price Their value is determined by subtracting depreciation from cost
All current assets except inventories do not require to be re-evaluated These assets require regular evaluation
Examples are cash, inventory, accounts receivable Examples include property, plant, equipment, patents, IP, goodwill


Also read about - What is net worth?

Conclusion

Non-current assets are important to gauge the overall efficiency and profitability of any given business. Learning how to calculate their value and their impact on a business can help determine the financial stability and future growth potential of an organisation.

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Frequently asked questions

What is the meaning of non-current?
The term non-current refers to assets or liabilities on a company's balance sheet that are not expected to be converted into cash, resolved, or consumed within one fiscal year.
What are non-current assets examples?
Non-current assets include items such as property, plant, and equipment (PP&E), long-term investments, intangible assets like patents and copyrights, goodwill, and deferred tax assets.
Is goodwill a non-current asset?
Yes, goodwill is considered a non-current asset. It is recorded on the balance sheet and is not expected to be converted into cash. it is an intangible asset that provides long-term value to the acquiring company.
Are non-current assets liabilities?
No, non-current assets are not liabilities. Non-current assets are long-term resources owned by a company that provide value over multiple years, such as property, equipment, or intellectual property.
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Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.