Non-Current Assets

Updated July 14, 2023

Introduction of Non-Current Assets

Non-current assets are the backbone assets of the entity which the enterprise retains with the basic intention of using them for business so that the benefits (i.e., the main revenue) will accrue over a longer period.

These are not retained to just earn profits by selling them like the inventory in the ordinary course of business.

Explanation

• The balance sheet of any entity is divided into two parts, namely, non-current assets & current assets. Non-current assets are assets of the entity which are usually held for the long term. Current assets are to be settled within one year from the close of the fiscal year.
• They are used to generate revenue. These are normally not sold in the short term. Even if they are sold in the short term, the basic intention is not to earn profit but for other reasons like shifting premises or business mergers.
• Since they are used for the long term, this help accrues revenue for the entity. Thus, the efficiency of many non-current assets is measured regarding revenue generated or cost-saving.
• Broadly, the non-current assets there are different non-current assets. The broad categories include tangible assets, intangible assets, capital work in progress, long-term investments, deferred tax assets, and long-term advances.
• These are presented on the assets side of the balance sheet. Suppose the entity’s operating expenses increased substantially compared to last year. In that case, there is a possible chance that the company has errored in treating capital expense as operating expense & hence, the operating may have increased in the current year.
• Few of the non-current assets are amortized or depreciated over the life of non-current assets. Few non-current assets are remeasured at the end of every year & a differential effect is given to the statement of profit & loss.

Formula

The formula depends on the type of non-current assets. Thus, various formulae for non-current assets are as follows:

Type	Formula
Tangible fixed assets	At the end of the year, Cost – Accumulated Depreciation
Intangible fixed assets	At the end of the year, Cost – Accumulated Amortisation
Long term investments	Investment + (Income due but not received) – (Pre-acquisition income)
Deferred Tax Assets (Net)	Gross deferred tax asset – gross deferred tax liabilities
Capital Work in progress	Opening Balance of Capital WIP + development expenses incurred during the year – amount capitalized during the year

Each formula is further explained in the examples heading below.

Examples of Non-Current Assets

Different types of non-current assets are considered in the below example:

Particulars	As of December 31, 2019
Non-current assets
Fixed assets
Tangible assets	70,39,50,881
Intangible assets	8,72,15,218
Capital work in progress	1,92,73,142
Deferred tax assets (net)	11,84,07,951
Long-term loans and advances	33,90,81,547
	1,26,79,28,739

Explanation

The company’s tangible fixed assets include a list of physical assets of the entity. The details include the net total cost of the assets & the net total accumulated depreciation of that asset. The details are as below:

Tangible Fixed Assets	Cost	Accumulated Depreciation	Written Down Value
Freehold land	1,80,45,120	–	1,80,45,120
Leasehold Land	5,76,16,724	–	5,76,16,724
Leasehold Improvements	1,63,82,551	–	1,63,82,551
Building	22,01,28,656	2,20,12,866	19,81,15,790
Plant and Machinery	28,32,32,359	4,24,84,854	24,07,47,505
Electrical Installations	2,57,93,960	38,69,094	2,19,24,866
Computers	5,34,40,616	1,06,88,123	4,27,52,493
Furniture and fixtures	1,29,94,747	12,99,475	1,16,95,273
Refrigerators & Air conditioners	4,95,70,873	4,21,35,242	74,35,631
Office equipment	1,35,77,660	13,57,766	1,22,19,894
Tools	6,89,66,751	5,86,21,738	1,03,45,013
Non – Perishable Tools	7,67,54,049	1,53,50,810	6,14,03,239
Vehicles	58,51,979	5,85,198	52,66,782
Total of tangible assets	90,23,56,046	19,84,05,166	70,39,50,881

The intangible assets are non-physical assets which the company develops within it or acquires it. These are the company’s know-how. The details of the figures are derived below:

Intangible Fixed Assets	Cost	Accumulated Amortisation	WDV
Computer Software	1,14,70,237	28,67,559	86,02,677
Drawings	62,71,774	15,67,943	47,03,830
Goodwill	9,85,44,947	2,46,36,237	7,39,08,711
Total of Intangible assets	11,62,86,958	2,90,71,739	8,72,15,218

Capital work in progress means the entity is independently building a few fixed assets. Thus, certain capital expenses are incurred for the same. The details are as follows:

Particulars	Amt
Opening Capital Work in Progress	8,54,65,132
Add: Capital Expenses	1,31,71,588
Less: Expenses capitalized during the year	7,93,63,577
Net Capital WIP	1,92,73,143

Long term loans & advances are advances provided by the company for a period of more than one year. The value is derived as below:

Long-term loans and advances	Amount	Income Accrued	Total Amt
Unsecured considered good (Unless otherwise stated):
Deposits	3,86,13,520	32,82,149	4,18,95,669
Capital Advances	98,30,786	–	98,30,786
Balance with government authorities	26,88,56,895	–	26,88,56,895
Advance income tax	1,84,98,196	–	1,84,98,196
Total	33,57,99,398	32,82,149	33,90,81,547

Types of Non-Current Assets

Types	Explanation
Property, Plant & Equipment (PPE)	These are tangible fixed assets of the entity, and these are the core to the company’s operations. i.e., without them, the production process will seize. These are used in producing finished goods with which the company deals. Investment in PPE gives shareholders confidence about the entity’s bright future prospects.
Intangible Assets	These include goodwill, patents, copyrights, trademarks, customer base, etc. We cannot see intangible assets with the naked eye & hence their fair valuation is always critical. Intangible also reflects the reputation & status of the company.
Long Term Investments	These financial instruments provide investor income over the long term. The weighted average return is calculated over the period of holding to justify the investment horizon.
Long Term Advances	Sometimes companies keep long term advances with group companies for internal reasons. It also includes advances given to vendors from whom plant & machinery will be procured in the future.
Deferred Tax Assets	These are temporary differences in the allowability of expenses for the purpose of tax between the company accounting standards and the tax laws. The differences are temporary & hence, deferred tax assets or liabilities are recorded annually.

Non-Current Assets vs Fixed Assets

Non-Current Assets	Fixed Assets
These include fixed assets, intangible assets, capital work in progress, long term investments, deferred tax, etc.	These include only the core assets of the company used for production.
All non-current assets are not used for production.	All fixed assets are used for production.
Capital WIP is transferred to fixed assets; hence, the overall value of non-current assets remains unchanged due to internal transfer.	It only includes the capitalized portion of capital WIP.
All its components are reported on the face of the balance sheet.	All its components are reported in the schedules attached to the balance sheet & not on its face.
The values of a few non-current do not deplete over time.	Fixed assets deplete over time.
Different reporting standards apply for each type of non-current asset.	Only one reporting standard is applicable for fixed assets.

Disadvantages

Some of the disadvantages are given below:

• The value declines substantially over a longer period of time.
• The scrap value is not always attractive & hence it is difficult to obtain easy cash on their sale.
• Lumpsum sale of non-current assets (such as fixed assets) gives wrong indications to the company’s investors.
• Easy replacements are not always available.
• Fair valuation of a few non-current is critical, as is the human resource valuation of the company.
• Some non-current assets cannot be seen with the naked eye & hence their existence requires fair valuation from experts.

Conclusion

It is the wheels of the business run by the company. However, the quantum of it is not linked to the company’s efficiency. It is the quality of a few non-current assets which drives the business. The extent of investment in non-current assets varies from industry to industry. Capital-intensive industries will observe a higher amount of investment in non-current assets & a higher amount of turnover in the values compared to non-capital-intensive industries. Manufacturing companies usually have higher non-current assets than service-oriented companies.

Recommended Articles

This is a guide to Non-Current Assets. Here we also discuss the introduction and types of non-current assets, examples, and disadvantages. You may also have a look at the following articles to learn more –

1. Accounts Payable vs Notes Payable
2. Accounts Payable Credit or Debit
3. Account Payable vs Accrued Expense
4. Accounts Payable Cycle