What it is: Noncurrent assets are long-term assets, in which the full value will not be realized during the accounting period. They represent illiquid assets. Examples are property, plant, and equipment (PP&E).
Another term for noncurrent assets is long-term assets. Companies use depreciation, amortization, and depletion to gradually reduce the number of noncurrent assets on the balance sheet, depending on the asset type.
The difference with current assets
Current assets plus noncurrent assets represent the company’s total assets. The company expects to convert or receive the benefits of current assets within one year or less. Meanwhile, noncurrent assets provide benefits to the company for more than one year. The example is:
Current assets are vital sources of money to meet the liquidity needs of a company. For example, a company could pay suppliers immediately or pay off short-term debt with cash.
List of noncurrent assets
You can check the balance sheet for noncurrent assets. There, you may find the following components of noncurrent assets:
- Property investments – the property owned by the company to earn rental income or capital appreciation.
- Long -term investments – such as equity securities, bonds, long-term notes, and holdings in other companies. The company will not sell or convert them into cash within one year.
- Property, plant, and equipment (PP&E) – have physical substance. Examples are land, machinery, vehicles, factories, and equipment. The company depreciates them during its useful life, except for land because it has an unlimited useful life. The financial statements present net assets, that is, after deducting the accumulated depreciation and accumulated impairment losses.
- Intangible assets – such as goodwill, copyrights, trademarks, licenses, and patents.
Why noncurrent assets matter
Property, plant, and equipment are an essential part of the company’s core operations. Companies use them in production processes or other operations. Companies often invest heavily in these assets (known as capital expenditures).
Analysts often favor a positive increase in capital expenditure (CAPEX). If it is higher than depreciation, the company is expanding. By purchasing a new machine, for example, the company increases production capacity. Thus, an increase in capital spending is often associated with a larger business size in the future.
Intangible assets, although having no physical substance, provide benefits for the company. For example, patents support the competitiveness of a company because they can act as a barrier to entry and prevent competitors from copying.
Intangible assets may come from internal development or purchases from other parties. Apart from that, it also appears as a result of previous transactions such as goodwill.
Goodwill arises when one company acquires another company by paying a premium over its net assets. The acquirer is willing to pay more because accounting does not reflect the value of the target company. Accounting does not consider items such as reputation and brand. Also, the acquisition provides future benefits such as an increase in the acquirer’s market position, which is also not reflected in the balance sheet.
Long-term investments carry a higher risk than short-term investments such as cash equivalents or in marketable securities in current assets. Because the company holds it for a more extended period, the price could fluctuate. Thus, their values on the balance sheet may be too high or too low.