Noncurrent assets are a company’s long-term investments or assets that have a useful life of more than one year. Typically, noncurrent assets last many years and are considered illiquid, meaning they can't be easily liquidated into cash.
Noncurrent assets are the opposite of current assets. Current assets are assets used in the short-term. Current assets on the balance sheet contain all of the assets that are likely to be converted into cash within one year.
Current assets are separated from other resources because a company relies on its current assets to fund ongoing operations and pay current expenses. Current assets include cash, inventory, and accounts receivables.
Examples of Noncurrent Assets
Property, plant, and equipment are tangible or fixed assets, meaning they are physical in nature or can be touched. A company cannot easily liquidate property, plant, and equipment. For example, a car manufacturer would list its manufacturing plant and machinery within the plant as noncurrent assets. Property, such as real estate, is also considered a noncurrent asset because it usually takes more than one fiscal year to sell.
Intangible assets are very often noncurrent assets. An intangible asset could be intellectual property, such as a patent. A patent is considered a noncurrent asset because it has a useful life of more than one fiscal year and is not likely to be liquidated within a year. Instead, a patent experiences amortization, which allocates the cost of the patent over its useful life.
Long-term investments are also noncurrent assets since a company would likely hold its long-term investments for more than a year. A company might invest in bonds for its portfolio, for example.
Noncurrent Assets and Depreciation
Depreciation is an accounting method that spreads the cost of a tangible asset over its useful life. Noncurrent assets are typically depreciated for accounting purposes. Under the International Accounting Standards Board, the depreciation of a noncurrent asset is considered an expense on a company's financial statements because it spreads out the cost of the asset over its useful life.
Since noncurrent assets are a company's long-term resources, or investments, where their full value is not realized within one year, so too are their costs depreciated over the years or their useful lives. Depreciation helps companies, so they don't have to allocate the entire upfront cost of an asset when it's purchased.
Noncurrent assets can be depreciated using the straight-line depreciation method by subtracting the asset's salvage value from its cost basis and dividing it by the total number of years in its useful life. Thus, the depreciation expense under the straight-line basis is the same for every year of its useful life.
For example, a car manufacturer purchases a machine that will produce doors for its cars. The cost basis of this machine is $5 million, and the machine's expected useful life is 15 years. The company believes that after 15 years, it will be able to sell the machine for $500,000. Therefore, the depreciation expense for the machine is $300,000 (($5 million - $500,000)/15) per year, and at the end of the asset's useful life, the machine will be accounted for using its salvage value of $500,000.
- Noncurrent assets for a company are important to investors because the assets might be long-term investments used for expansion or the launch of a new product line. Depreciating noncurrent assets helps a company, so the costs of acquiring the asset are spread out over the long-term. Depreciating an asset can be a huge benefit to a company by simultaneously managing its expenses while getting output from the asset.
- Non-current assets can be considered anything not classified as a current asset.
- Noncurrent assets have a useful life for a very long time. Both fixed assets, like plant and equipment, and intangible assets, like trademarks, fall under noncurrent assets.
For more on this topic, please read "How the Income Statement and Balance Sheet Differ?"