The business’s financial statement contains two types of assets; these assets include current assets and non-current assets. Current assets are expected to bring economic benefits for the next twelve months. On the other hand, non-current assets are expected to bring economic benefits for more than one year.
So, the assets that are not considered as current assets are non-current assets. Here is the list of balances that are classified as non-current assets in the business’s financial statement.
1) Fixed assets
Fixed assets include property, plant, equipment, furniture, fixtures, machinery, vehicles, land, building, leasehold land, and other capital assets with a life of more than a year. These assets are presented in the financial statement net of accumulated depreciation and impairment charges.
Period-wise depreciation is charged in the income statement to reflect usage, and credit balance is accumulated with time to calculate net book value. Further, depreciation can be charged in the accounting record using different methods including straight line and reducing balance method.
Mostly, businesses use fixed assets in the normal run of operations. However, suppose the business intends to sell the assets. In that case, their balance is classified as a current asset under a line item called ”assets held for sale,” and no depreciation is charged subsequently.
2) Long term investment
The long-term investment is recorded as an asset in the balance sheet of the business. This account balance contains investments made in equity and debt instruments. Traditionally, equity investments have been classified as long-term investments under AFS – Available for sale. Similarly, in the case of debt instruments, the contractual cash flow test is performed.
In other words, if an entity intends to collect the cash flow after a year, it’s classified as a long-term investment. Similarly, long-term investment in the debt instrument is classified as amortized cost.
Further, it’s important to note that the return generated on the long-term investment is recorded in the income statement. If a return is received, the cash is recorded in the balance sheet. On the other hand, if the return is accumulated, it’s added to the investment amount and received on maturity.
3) Goodwill
Goodwill is an intangible asset acquired by businesses against consideration, and it’s calculated by deducting net assets from consideration paid to acquire the business. It’s important to note that the business cannot internally generate goodwill.
Further, goodwill needs to be tested for the impairment to assess if there is some reduction in the brand’s value.
4) Deferred taxes
If the business calculates that they have paid more tax in advance, these are expected to be adjusted in future return, the excess amount is classified as long-term assets.
Deferred tax arises due to differences in the accounting base and tax base of the balances. However, deferred tax is only due to the difference of timing and adjusted in the future same as advance.
5) Natural resources
Natural resources are also classified as non-current assets in the business balance sheet. Although, specific companies sectors like oil-producing and other companies dealing with natural resources use these assets.
These are the resources supplied by nature. For instance, mineral deposits, oil reserves, fossil fuels, and timbers, etc. Depletion is charged when resources are removed from the reserves; that’s like charging depreciation in the fixed assets of the business.
6) Other long term assets
These are the assets that are not included in fixed assets, long-term investments, and intangible categories. The break-up of other long-term assets usually includes a prepaid balance that is to be adjusted in a time more than a year. However, as prepaid assets are utilized, the balance is reduced.
Qualities/characteristics of the non-current assets
Let’s discuss the main qualities/characteristics of non-current assets.
Here are the characteristics of the non-current assets.
1) Useful life is more than one year.
Non-current assets have a useful life of more than one year, and it means the business intends to use an asset for more than one year. It’s important to note that the intention of the business is important in determining the status of the business as current or non-current. Suppose the business has some machine with remaining useful life of ten years.
However, the business does not intend to drive cash from the sale of the machine rather use it. Hence, it needs to be classified as a current asset under the line item called asset held for sale.
So, the business must intend to use the asset and drive cash flow with the usage for more than a year to classify it as a non-current asset.
2) Recording
Non-current assets are recorded at net book value, and this value is calculated by deducting accumulated depreciation from the cost of the asset. Further, impairment and other adjustments are made in the netbook value to reflect the true value of the assets.
3) Capital gain tax
On the sale of the non-current assets, capital gain/loss is calculated, which is usually less than a tax on the trading activity. Further, the asset’s net book value is used to calculate gain/loss and subsequent capital gain tax.
It’s important to note that capital gain tax is only applicable on non-current assets.
4) Revaluation
Non-current assets are revalued to the market price; this is done to reflect the true value of the business. The revaluation is carried to internally restructure the business and reflect true financial status. Any gain/loss is calculated by comparing carrying value and fair value, which is recorded in the other comprehensive income.
Conversion of non-current assets to current assets
Sometimes, the business makes a long-term investment. However, a certain portion is receivable within twelve months. So, the business needs to calculate the current portion of the long investment and show it in a different section.
Suppose the business disburses a loan amounting to $20,000, half is receivable within twelve months and the second half is receivable after the completion of five years. In such a situation, the business needs to closely analyze the non-current and current portions.
Since half amount is receivable within twelve months, it’s to be classified as current assets and the other half receivable in five years needs to be classified as a non-current asset. This can be presented as follows.
Loan receivable (non-current assets) $10,000
Loan receivable (current asset) $10,000
Conclusion
There are two types of assets in the balance sheet of the business. These assets include current assets and non-current assets. Non-current assets are the assets that are not classified as current assets.
Examples of non-current assets include fixed assets, long-term investments, goodwill, intangibles, deferred tax, natural resources, and other long-term assets.
Fixed assets are stated in the books net of accumulated depreciation and impairment. Depreciation is applied in line with the usage and when the asset is brought in the usable condition.
Further, fixed assets can be revalued to reflect present market value. Further, long-term investment is another type of non-current asset. The long-term investment may include the equity and debt instrument the business has invested. Likewise, goodwill, natural resources, and other long-term assets are classified as non-assets.
Frequently asked questions
What’s the relation between fluctuation in the current assets and cash flow?
Fluctuation in current assets inversely impacts the cash in-inflow. For instance, if business funds are tied in the accounts receivables, the cash gets stuck in, and we need to show outflow for the same. Although, it will be recovered in the future.
Why do non-current assets decrease?
Non-current assets decrease mainly due to depreciation and disposal of the assets. The business needs to charge depreciation once an asset is brought in usable condition. So, the business keeps charging depreciation that reduces the net book value of the assets.
When do we need to apply depreciation on the non-current assets?
The business needs to apply depreciation once an asset is brought in the usable condition. It’s not relevant whether the business has started to utilize an asset in the business operations.
What’d the difference between current and non-current assets?
The main difference between current and non-current assets is that current assets are expected to be realized within a year. On the other hand, non-current assets are realized in a time more than a year.
