Noncurrent Assets

Noncurrent assets are a company's long-term investments for which the full value
will not be realized within the accounting year.
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. 
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.
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.

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.

The following are the key types of non-current assets:

1. Tangible Assets

Tangible assets refer to assets with a physical form and those with a finite
monetary value. The actual value of a tangible asset is obtained by taking the
current value of the asset less depreciation.

However, not all physical assets are depreciated. Assets, such as land, are
revalued after some time since they tend to appreciate in value. Depreciation is a
non-cash notation that reduces the value of an asset over time.

Tangible assets differ from intangible assets in that the latter comes in a non-
physical form, and it is difficult to assign them a value due to the uncertainty of
future benefits. Tangible assets are central to the core operations of a company
and are often considered when calculating the net worth of a company.

2. Intangible Assets

Intangible are assets that lack a physical form but offer economic value to the
company. Examples of such assets include goodwill and intellectual property,
such as trademarks, patents, and copyrights.

A company can acquire intangible assets from another entity or create them from
within the business. The assets created by the business lack a recorded book
value and are, therefore, not recorded on the balance sheet.

Intangible assets can be definite or indefinite. An example of an indefinite

intangible asset is brand recognition, which remains for as long as the company
stays afloat. On the other hand, a definite intangible asset comes with a limited
life, and it only stays with the company for the duration of a contract or
agreement.

An example of a definite intangible asset is a legal agreement to operate the

patents of another entity. The company is required to operate the patent for an
agreed period of time, and the creator of the patent remains the owner of the
patent. Even though an intangible asset lacks physical value, it can significantly
contribute to the long-term success of a company.

3. Natural Resources

Natural assets are the assets that occur naturally, and they are derived from the
earth. Examples of natural resources include timber, fossil fuels, oil fields, and
minerals. Natural resources are also called wasting assets because they are
used up when they are consumed. The assets must be consumed through
extraction from the natural setting.

For example, natural gas is an example of a natural resource that must be

consumed in order to be used. It means that the asset must be mined or pumped
out of the ground for it to be used. Natural assets are recorded on the balance
sheet at the cost of acquisition plus exploration and development costs and less
accumulated depletion.

Examples of Non-Current Assets

The following are some examples of non-current assets:

1. Property, Plant and Equipment (PP&E)

PP&E are long-term physical assets that are an important part of a company’s
core operations, and they are used in the production process or sale of other
assets. The assets come in a physical form, and they are not easily converted to
cash or liquidated.

The total value of PP&E is equal to the total value of property, plant, and
equipment recorded on the balance sheet less accumulated depreciation.
Accumulated depreciation is the total depreciation expense charged to an asset
since it was put into use. Investments in PP&E paint a positive future outlook of
the company.

2. Goodwill

Goodwill is an intangible asset that is attributed to the purchase of one company

by another entity. It is assigned where the price paid for the asset exceeds the
fair value of all identifiable assets and liabilities assumed in the transaction.
Goodwill is attributed to buying some intangibles, such as the reputation of the
company, brand name, good customer relations, solid customer base, and the
quality of the employees.

3. Long-term Investments

Long-term investments include assets such as bonds, stocks, and notes that
investors buy in the financial markets with the hope that they will appreciate in
value and earn a good return in the future. The assets are also recorded in the
company’s balance sheet.

Measures
Net PPE

= Gross PPE + Capital Expenditures – Accumulated Depreciation

Capital expenditures (CapEx) are funds used by a company to acquire, upgrade,
and maintain physical assets such as property, plants, buildings, technology, or
equipment.
Accumulated depreciation is the cumulative depreciation of an asset up to a
single point in its life.
Depreciation is an accounting method of allocating the cost of a tangible or
physical asset over its useful life or life expectancy. It represents how much of an
asset's value has been used up. 
Depreciation is an accounting convention that allows a company to write off an
asset's value over a period of time, commonly the asset's useful life. Assets such
as machinery and equipment are expensive. Instead of realizing the entire cost of
the asset in year one, depreciating the asset allows companies to spread out that
cost and generate revenue from it.
Depreciation is used to account for declines in the carrying value over time.
Carrying value represents the difference between the original cost and the
accumulated depreciation of the years.
Capex Ratio

= Capital expenditure / Sales

The capex ratio measures the investment relative to company sales. An increase
in this ratio overtime would suggest future growth. If a company continues to
invest in resources through increase in capital expenditure, then we would expect
to see an increase in sales the following year. This pattern of continuous
reinvestment of retained earnings year after year is what drives company growth
and enterprise value.

Average Age of PP&E

Accumulated depreciation / Gross PP&E

The average age ratio appraises the age of the asset (in this case PP&E) and
shows the average age of assets. By measuring accumulated depreciation
relative to the gross value of the asset, we can see how “old” the asset is as a
percentage of its total life. A high ratio would suggest that much of the asset’s life
has already been used, and the business faces an “ageing asset base”, which
will require investment. Investment will mean expenses incurred, and these
expenses will decrease future retained earnings and hence profits.

Reinvestment Ratio

= Capital expenditure / Depreciation

The reinvestment ratio (sometimes referred to as the replenishment ratio)
compares capex to depreciation and is an interesting indicator of the extent to
which enough investment is being made into assets. In other words, are
depreciating assets being replaced? Often this ratio is expressed as a multiple
and a financially healthy business should expect this multiple to be greater than
1. Due to inflation, assets purchased many years ago will cost more to replace if
purchased today. Depreciation is calculated at historical costs so should be a
cause for concern if this ratio was hovering close to exactly 1. This would
suggest that the business is not replacing old assets effectively.