Noncurrent Assets

Noncurrent Assets

Key takeaways
* Noncurrent (long-term) assets are resources a company expects to hold and use for more than one year.
* They are illiquid and are capitalized—costs are allocated over the asset’s useful life (via depreciation, amortization, or depletion).
* Common balance sheet groupings: investments; property, plant, and equipment (PP&E); intangible assets; and other long-term assets.

What are noncurrent assets?
Noncurrent assets are long-term resources that provide economic benefit beyond the company’s next fiscal year or operating cycle. Because they are not readily convertible to cash, companies treat them differently from current assets and record them on the balance sheet under long-term categories.

Types and examples
1. Tangible assets (physical)
* Land, buildings, machinery, vehicles, and equipment (often called fixed assets or PP&E).
2. Intangible assets (nonphysical)
* Patents, trademarks, copyrights, customer lists, software, and goodwill arising from acquisitions.
3. Natural resources
* Oil, gas, timber, minerals—assets consumed through extraction or harvesting.

Other long-term items
* Long-term investments (bonds, real estate, equity in other companies) that are not expected to become unrestricted cash within 12 months.
* Deferred tax assets, unamortized bond issuance costs, cash surrender value of life insurance, bond sinking funds.
* Prepaid expenses with benefits extending beyond one year (the portion attributable to periods after 12 months is noncurrent).

Accounting and measurement
* Capitalization: Purchase costs of noncurrent assets are capitalized on the balance sheet and expensed over time.
* Allocation methods:
* Depreciation — allocates the cost of tangible assets (except land) over useful life.
* Amortization — allocates the cost of intangible assets with finite lives.
* Depletion — allocates the cost of natural resources as they are extracted.
* Impairment: If an asset’s carrying amount exceeds recoverable value, companies recognize an impairment loss.
* Classification rule for investments: an investment is noncurrent if it’s not expected to convert to unrestricted cash within 12 months of the balance sheet date.

Balance sheet presentation
Noncurrent assets typically appear after current assets and are grouped by type:
* Investments
* Property, plant, and equipment (PP&E)
* Intangible assets (net of accumulated amortization)
* Other long-term assets

Practical considerations
* Industry differences: Capital-intensive companies (manufacturing, energy, utilities) often have large noncurrent asset bases; service firms typically have fewer fixed assets.
* Liquidity perspective: A high proportion of noncurrent to current assets can indicate lower short-term liquidity, but may be appropriate depending on the business model.
* Prepaid items and split classification: Prepaid expenses are apportioned—amounts benefiting only future periods beyond 12 months are classified as noncurrent.

Common questions
Q: How do noncurrent assets differ from current assets?
A: Current assets are expected to be converted to cash or used within one year; noncurrent assets provide benefit beyond one year and are less liquid.

Q: When is an investment classified as noncurrent?
A: When it is not expected to convert to unrestricted cash within the next 12 months.

Q: How is the cost of a noncurrent asset recognized in expenses?
A: Through systematic allocation (depreciation, amortization, or depletion) over the asset’s useful life, rather than immediate expensing.

Conclusion
Noncurrent assets represent long-term investments that support a company’s operations and growth. Proper classification, capitalization, and periodic allocation of cost are essential for accurate financial reporting and for assessing a company’s long-term resource base and liquidity.