What are Noncurrent Assets?
Noncurrent assets are a company's long-term investments for which the full value will not be realized within the accounting year. Examples of noncurrent assets include investments in other companies, intellectual property (e.g. patents), and property, plant and equipment. Noncurrent assets appear on a company's balance sheet.
Breaking Down Noncurrent Assets
Noncurrent assets are also referred to as long-term assets. Noncurrent assets are capitalized rather than expensed, meaning that the company allocates the cost of the asset over the number of years for which the asset will be in use instead of allocating the entire cost to the accounting year in which the asset was purchased. Depending on the type of asset, it may be depreciated, amortized, or depleted.
Balance Sheet Classification
The assets section of the balance sheet is segmented according to the type of asset quantified (current assets, PP&E, other assets, etc.). The leading section is "current assets," which are short-term assets that can be converted into cash within one year or one operating cycle. Current assets include items such as cash, accounts receivable, and inventory. Noncurrent assets are always classified on the balance sheet under one of the following headings: investment; property, plant, and equipment; intangible assets; or other assets. Investments are classified as noncurrent only if they are not expected to turn into unrestricted cash within the next 12 months of the balance sheet date. Property, plant, and equipment - which may also be called fixed assets - encompass land, buildings, and machinery including vehicles. Finally, intangible assets are goods that have no physical presence. Although they may be created, such as a patent, intangible assets may also arise from the sale or purchase of business units.
Other Noncurrent Assets
Other noncurrent assets include the cash surrender value of life insurance. A bond sinking fund established for the future repayment of debt is classified as a noncurrent asset. Some deferred income taxes, goodwill, trademarks, and unamortized bond issue costs are noncurrent assets as well.
Prepaid assets may be classified as noncurrent assets if the future benefit is not to be received within one year. For example, if rent is prepaid for the next 24 months, 12 months is considered a current asset as the benefit will be used within the year. The other 12 months are considered noncurrent as the benefit will not be received until the following year.
Noncurrent Assets Between Industries
It is not uncommon for capital-intensive industries to have a large portion of their asset base composed of noncurrent assets. An example of such a company is an oil refinery. Conversely, service businesses may require minimal to no use of fixed assets. Therefore, while a high proportion of noncurrent assets to current assets may indicate poor liquidity, this may also simply be a function of the respective company’s industry.