Non-current assets: your guide to the key info

Every business has assets that help it operate and generate income. While some assets are turned into income quickly, others stay with the company throughout the years. These long-term assets are called non-current assets and are essential for keeping the business operating in the long run.

In this article, we’ll discuss what non-current assets are and how they help keep a business going. We’ll also explore how it differs from current assets, and why non-current assets are an essential part of a company’s financial health.

What are non-current assets?

Non-current assets are long-term resources your business owns and uses to generate revenue over time. There are three different types of non-current assets:

• Tangible assets are physical assets that your business owns, such as machinery
• Intangible assets are non-physical properties, such as your brand logo, patents, and registered trademarks
• Natural resources are extracted from the earth, such as oil and timber.
• Natural resources are only considered non-current if the business is directly involved in extracting and processing the material into something usable. Raw materials like wood purchased as part of the manufacturing process are considered current assets. (More on this differentiation later)

A good way to determine whether an asset is current or non-current is to ask: Is this asset going to be used, sold, or converted into cash within a year?

If the answer is yes, then it’s a current asset. Otherwise, it’s a non-current asset.

What’s the difference between current and non-current assets?

Unlike non-current assets, which stay with the company for a long time, current assets generate revenue within a company’s standard operating cycle — usually a year. They’re meant to help a business meet its financial obligations quickly.

Current assets are sometimes called liquid assets because the business can easily convert them into cash. Your company’s inventory, accounts receivable, and cash are all examples of current assets.

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What are the different types of non-current assets?

Businesses can own three different types of non-current assets: tangible, intangible, and natural resources. Let’s explore each type in detail.

Tangible Assets

Assets that have a physical form are called tangible assets. Non-current tangible assets usually have one or more of the following characteristics:

• It’s used to generate long-term economic value for the business (i.e., its value is realised over a period of time instead of immediately)
• Its value depreciates over time as it gets older and its condition deteriorates
• It can be used as collateral against loans and can be seized by a creditor
• It’s not as easy to sell and isn’t usually sold as part of a company’s daily operations
• It may have residual value at the end of its useful life (e.g., old machinery being sold for parts or scrap)

Non-current tangible assets are sometimes referred to as fixed assets, and they’re reported on a company’s balance sheet as “Property, Plant, and Equipment (PP&E)”.

Examples of tangible assets

• Land:
  • Real estate properties (developed land)
  • Undeveloped land held for future use

• Buildings (including any improvements added to the property)
  • Factories
  • Storage buildings and warehouses
  • Office buildings
  • Retail spaces
  • Other business-related facilities

• Machinery and equipment
  • Heavy machinery used for manufacturing and production
  • Equipment used to aid in production, such as handheld tools
  • Company vehicles, such as delivery trucks and forklifts
  • IT hardware, such as servers and office computers

• Furniture and fixtures
  • Office furniture, such as desks, chairs, cabinets, and cubicle walls
  • Store fixtures, such as shelving units and display cases

Intangible Assets

When an asset has no physical form, it’s called an intangible asset. These assets help a company maintain its competitive advantage while providing long-term economic value.

There are two types of intangible assets:

• Definite intangible assets owned by the company have a limited timeframe. Examples include legal agreements, operating permits, and software licenses.

• Indefinite intangible assets are owned by the company for as long as it’s in business. Company goodwill (brand recognition and customer loyalty) and intellectual property (as long as they’re regularly renewed) are considered indefinite intangible assets.

Determining an intangible asset’s value (and whether it can be included on the balance sheet) can be challenging because it doesn’t always have identifiable costs. Consider the following examples:

• Example 1: Nike’s goodwill (brand name recognition) is an intangible asset with no identifiable costs. People prefer them over other bands because they know and trust Nike. However, you can’t put a monetary figure on customer loyalty, so brand name recognition can’t be reported on their balance sheet.
• Example 2: Nintendo’s patent on the GameCube controller is an intangible asset with identifiable costs. The patent’s identifiable costs include the controller’s design research, development, and patent applications. The controller patent also had a perceived useful life (the number of years it was in production and officially sold on the market), so it can be reported on the balance sheet.

Examples of intangible assets

• Company goodwill, which includes:
  • Brand name and recognition
  • Customer loyalty
  • Company reputation
• Intellectual property
  • Patents
  • Trademarks
  • Copyrights
  • Franchises
  • Trade secrets
• Computer software
  • Software and applications developed for internal use
  • Software and applications purchased externally, whether licensed periodically or indefinitely
• Operating licenses and permits
• Customer lists
• Website domains
• Long-term investments
  • Equity investments
  • Bonds and debt securities
  • Investment properties
  • Joint venture agreements

Natural Resources

Resources extracted from the earth are also considered intangible assets, and they’re simply referred to as natural resources. These assets are sometimes called wasting assets because they can’t be replaced once extracted and are wasted if left unused.

Your business must be the one extracting the natural resource for it to qualify as an intangible asset. That means you’re involved in the exploration and development of the land, along with the actual extraction process.

On the other hand, if your business buys natural resources like timber as raw material from another supplier, these resources are no longer considered non-current assets. Natural resources processed as raw materials and purchased as part of the production process are considered current assets.

When a company acquires property with natural resources, its balance sheet will show the acquisition cost, exploration cost, and development cost. The depletion cost — the estimated cost of the resource extracted during that period — is reported in the following accounting years.

Examples of natural resources

• Ore deposits
• Mineral deposits
• Oil reserves
• Gas deposits
• Timber stands

Why are non-current assets important?

Non-current assets focus on providing economic benefits over time, so it’s important for the long-term outlook and growth of the business. Here are some of the reasons why:

• They support day-to-day operations by providing employees with a place and equipment to do their work.
• Tangible assets can be used as collateral should the business need a loan for expansion plans. The quality of a company’s tangible assets can also be used as a gauge of how well the business is doing.
• Long-term investments, whether in stocks, bonds, or real estate, enable businesses to establish future cash flow for growth and expansion.
• A diverse portfolio of non-current assets reflects the company’s long-term financial stability and operational efficiency.
• Intellectual properties demonstrate a company’s plan to stay relevant in the market and keep its products updated.

Are non-current assets better than current assets?

Non-current and current assets work together to keep a business afloat; one isn’t more important or better than the other. A business can’t operate properly unless it has both types of assets.

Non-current assets support your company’s future cash flow, while current assets generate immediate revenue to keep daily operations running.

Quickfire summary: what are non-current assets

Non-current assets are long-term resources that a company owns, providing revenue and economic benefits over time. Examples include office equipment, factories, company vehicles, intellectual property, and computer software. In contrast, current assets — like inventory and accounts receivable — are resources that are meant to be used, sold, or converted into cash within a company’s operating cycle or a year.

There are three different types of non-current assets:

• Tangible assets, such as buildings and machinery
• Intangible assets, such as brand logo and patents
• Natural resources, such as oil and timber

Most businesses own tangible and intangible non-current assets, while a few have natural resources. 

For natural resources to qualify as a non-current asset, the business must be directly involved in extracting the resource from the earth. If it’s purchased from another company as raw material for production, it’s considered a current asset.