A non-current asset is a vital component of a balance sheet. It helps the management of a company along with investors to determine the proficiency of a firm to use resources and generate earnings. Unlike other assets, non-current assets tend to project revenues for the long-term.
What are Non-current Assets?
Non-current assets can be best defined as those long term investments or assets whose value is not usually realised within an accounting year. It is mostly because such assets lack the liquidity of being readily converted into cash or cash equivalent.
It must be noted that non-current assets are generally capitalised and not expended. To elaborate, a firm tends to allocate the cost of assets throughout their use instead of concentrating them to the year they were purchased.
Furthermore, such assets are reported in the company’s balance sheet and are generally placed under the header of PP&E, intellectual property, investment, intangible assets or other long-term assets.
Typically, business entities purchase non-current assets to use them in their daily operations with the belief that they will last longer than a year. Also, depending on the type and nature of a non-current asset, it can be – depleted, depreciated or amortised.
Components of Non-Current Assets
These following pointers highlight the most significant types of non-current assets–
As the name suggests, these types of asset have a distinct physical form and tend to have a finite monetary value. One can easily determine the actual value of anything tangible by simply subtracting the depreciation amount of the asset from its current value.
It must be noted that all tangible assets may not depreciate over time. For instance, assets like land may appreciate over time. Also, tangible assets are often central to the core functioning of a firm and are factored in while computing its net worth.
These assets do not have any physical form but are considered to be of economic value to a company. Such assets can be either definite, i.e. they come with a limited shelf-life or indefinite, i.e. they remain as long as a business remains active.
Intellectual property, goodwill, patents, copyrights, trademarks, etc. are some of the most common intangible non-current assets examples.
These particular assets are readily available and are essentially derived from the earth. They are also known as wasting or exhaustible assets. Usually, natural resources are reported on a company’s balance sheet at the cost at which they are acquired. Subsequently, the cost of exploration, development and accumulated depletion are factored in a while recording them. The most common examples of natural resources include minerals, oil fields, fossil fuels, etc.
Calculation of Non-Current Assets
Four key elements are factored in to compute the value of non-current assets. These are – original worth, depreciation amount, revaluation and disposable value of assets in question.
Take a look at this balance sheet excerpt below to understand the placement and treatment of non-current assets in financial reporting.
|Property, plant and equipment|
|Gross property, plant and equipment||5,88,61,70,000|
|Net property, plant and equipment||4,52,29,30,000|
|Other long-term assets||8,47,70,000|
|Total non-current assets||7,71,65,10,000|
Significance of Non-Current Assets
A quick summation of all the factors on the non-current assets list will help to ascertain the total value of the same for a company in a given period.
The significance of non-current assets in a company are given below –
- These assets are vital for conducting a thorough financial analysis.
- With the help of financial ratios and a quick analysis of non-current assets, one can easily ascertain the profits generated by a particular company in an accounting period.
- Prompt analysis of these assets also facilitates an effective comparison between different companies.
- Such assets also enable business owners to determine whether they are generating enough income from the assets that are tied up in their venture.
All this information comes in handy for a company’s management and helps them to plan their investment in company assets more effectively.
Financial Ratios using Non-Current Assets
These are some of the most common financial ratios –
Non-current asset turnover ratio
It shows the relation between a company’s net sales revenue to the net book value of its total non-current assets.
It is expressed as –
Non-current assets turnover = Net Sales Revenue / Net Book Value of Non-current Assets
The said ratio helps to determine the proficiency with which a company utilises all its non-current assets. It also proves useful in determining how such assets are used optimally to generate earnings.
Typically, a low non-current turnover ratio indicates that a company is not utilising its non-current assets optimally. On the other hand, a high ratio signifies optimum utilisation of the said assets.
It must be noted that factors like a variation in the age and condition of non-current assets among different businesses tend to impact the interpretation of this turnover ratio. For instance, regardless of the level of sales, a firm with old and depreciated non-current assets will possess a higher fixed asset turnover ratio when compared to a firm with new assets.
Non-current assets to net worth
It serves as a measure of a company’s investment into non-current assets with low liquidity. The said ratio comes in handy for comparison as it does not rely entirely on the structure of company assets.
It is expressed as –
Non-current assets to Net Worth = Non-current assets / Net worth
Other than these, debt to equity ratio and debt ratio also use non-current assets to assess and analyse a firm’s proficiency. However, they also factor in current assets to project an accurate report and tend to produce a very industry-specific ratio.
Difference between Current and Non-current Assets
Take a quick look at the fundamental differences between current and non-current assets.
|Parameters||Current Assets||Non-current assets|
|Definition||Current asset is an asset category whose components are consumed, sold or exhausted in a business venture in an accounting period.||Non-current asset is an asset category whose components cannot be consumed, sold or exhausted in a business venture within a year.|
|Components||They comprise – cash and cash equivalents like inventories, short-term investments, accounts receivable, etc.||They comprise – non-cash equivalents like PP&E, depreciation and amortisation, goodwill, long-term deferred taxes, etc.|
|Liquidity||These assets can be readily converted into cash and cash equivalents within a year.||These assets cannot be easily converted into cash or cash equivalents within a year.|
|Valuation||Current assets are valued at market price.||Non-current assets are valued at cost minus depreciation amount.|
|Use||They allow business entities to fund their immediate requirements.||They come in handy for meeting long-term requirements or future obligations.|
|Revaluation||Besides inventories, current assets are usually not subjected to revaluation.||Non-currents assets are evaluated regularly.|
Since non-current assets are a vital component of a profitable firm, business entities must find ways to use them optimally. Furthermore, such assets should be valued frequently to gain a better idea about their worth and contribution to an active business venture.