Non-current assets are such assets that expected to provide economic benefit to entity for more than one period i.e. longer than one year. Non-current assets are also known as fixed assets, long-term assets, long-lived assets etc.
Understanding the Control of Asset
An important that must be cleared right in the beginning is that for entity to recognize an asset, it does not need to own or have the possession of asset. Main condition is that economic benefits must flow to the entity even if its not owned or not under the possession of entity. In short, entity needs to have the control of asset only to write it in its books
There are many ways to classify assets i.e. current and non-current, tangible and intangible, monetary and non-monetary, liquid and not-so-liquid etc. Classification of assets in such manner helps understanding the entity’s financial position better.
However, for pure reporting purposes to general public, almost all the applicable standards or rules require asset to be classified on current and non-current basis which can have further sub-classifications on the face of statement of financial position (balance sheet).
This classification is preferred over others as users can clearly understand which assets are short lived or are meant to be consumed within a year’s time and which assets are to stay for a longer period. This can help them understand the extent of benefits entity might be able to extract or generate from such assets in the future.
Non-current assets can be classified further as follows:
- Property plant and equipment
- Investment property
- Intangible assets
- Financial assets / Long term investments
- Deferred expenditures
Property, plant and Equipment
As the name suggest this class of non-current asset includes but not limited to:
- property like land, building or other kind of premises etc
- plant like production plant, machinery etc
- equipment like office equipment etc
These non-current assets are tangible in nature and are usually fixed in nature thus the name fixed asset. However, some of the assets are not immobile e.g. vehicles.
International Accounting Standard (IAS) 16 defines property, plant and equipment defines it as:
Property Plant and Equipment are tangible items that are held for:
- use in the production or supply of goods or services
- rental to others
- for administrative purposes
- are expected to be used during more than one period
From some assets entity derives economic benefit in a different than actually using them. For example building that can be used as an office or given out on rent to someone else to earn rentals. If it is given on rental basis then it is an investment property and not just a simple property.
Similarly, some assets are held by entity not for use but for rather earning benefit from their increasing prices, more technically called capital appreciation. For example a land acquired few years back on low rate is now a commercial property in center of city with value increased many folds.
Intangible assets are such non-current assets that do not have physical existence. For example patents, licences, formulas etc.
IAS 38 defines intangible assets as:
An Identifiable, non-monetary asset without physical existence.
Two key concepts are:
- they are separately identifiable assets meaning entity can sell purchase these assets without trading the whole business itself. For example entity can sell or purchase its patents etc.
- they are non-monetary assets which means they are not cash or cash equivalents. Many students wrongly take cash as an example of intangible asset which is wrong as per International Accounting Standards
Long term financial assets
In simple words financial assets include:
- agreements that will result in cash inflow e.g. shares receive dividend and capital gains
- agreement that will render another financial asset e.g. convertible bonds that can be exchanged for shares.
If financial assets are difficult to understand at the moment, you can think of long-term investments that entity holds that may be in the form of money lent to general public, shares of another company etc.
Sometimes entity make expenditures that benefit them for a period longer than one year. For example entity spent 1,000,000 towards marketing of one product in the year of launch. However, it is estimated that product will remain in market for 10 years as a result of this marketing campaign.
Instead of charging whole 1,000,000 of marketing expenditure in the first year, its recognition will be deferred over 10 years and only 1/10th of whole amount will be charged every year. Basic reason is to spread the expenditure over the same period in which entity expects to extract benefits.