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What is a Non-Current Asset?
A non-current asset is a long-term resource owned by a business that is not expected to be converted into cash, sold, or consumed within a single financial year. These assets support long-term operations and typically provide economic benefits over multiple accounting periods.
Definition
A non-current asset is a long-term asset that a business uses to generate value over more than one year and is not intended for immediate sale or consumption.
Key takeaways
- Long-term use: Provides economic benefits over multiple years.
- Not easily converted to cash: Unlike current assets such as inventory or receivables.
- Includes tangible and intangible assets: Property, equipment, patents, goodwill, etc.
- Subject to depreciation or amortization: Except for assets like land.
- Crucial for operations: Supports production, administration, and long-term strategy.
Types of non-current assets
1. Property, Plant, and Equipment (PPE)
- Buildings
- Machinery
- Vehicles
- Land (not depreciated)
2. Intangible Assets
- Patents
- Trademarks
- Copyrights
- Goodwill
- Software
3. Long-Term Investments
- Equity stakes in other companies
- Bonds held to maturity
- Investment properties
4. Deferred Tax Assets
- Tax benefits expected to be realized in future periods.
Importance of non-current assets
Operational importance
- Essential for production and service delivery.
- Provides the infrastructure for business longevity.
Financial importance
- Affects balance sheet strength.
- Influences borrowing capacity.
- Impacts profitability through depreciation.
Strategic importance
- Drives competitive advantage (e.g., patents, technology assets).
How non-current assets are valued
- Historical cost: Recorded at purchase price.
- Depreciation: Allocation of cost over useful life.
- Fair value (in some standards): Especially for investment properties.
Depreciation and amortization
- Depreciation: Applied to tangible assets.
- Amortization: Applied to intangible assets.
- Reflects asset consumption over time.
Non-current vs. current assets
| Feature | Non-Current Assets | Current Assets |
|---|---|---|
| Time horizon | > 1 year | < 1 year |
| Liquidity | Low | High |
| Purpose | Long-term operations | Short-term cash flow |
| Examples | Equipment, patents | Cash, inventory |
Examples
- A factory machine used for five years.
- A patent generating revenue for a decade.
- Office buildings housing employees.
- Long-term equity investments.
Related concepts
- Fixed assets
- Capital assets
- Depreciation
- Amortization
- Balance sheet
Sources
- IFRS Foundation – IAS 16 & IAS 38: https://www.ifrs.org/
- OECD – Corporate Finance Data: https://www.oecd.org/
- Investopedia – Non-Current Assets Overview: https://www.investopedia.com/
Frequently Asked Questions (FAQ)
1. Are all non-current assets depreciated?
No. Land is typically not depreciated.
2. Can non-current assets be sold?
Yes, but they are not intended for frequent sale.
3. Do non-current assets affect cash flow?
Only when purchased, sold, or through non-cash expenses like depreciation.
4. What is the difference between PPE and intangible assets?
PPE is physical; intangible assets lack physical form.
5. Are long-term investments considered non-current?
Yes, if the intention is to hold them for more than one year.
