Non Current Assets: Types, Pros and Cons

Non-current assets are long-term investments and assets that a company intends to hold for more than one fiscal year. They include property, plant, equipment, long-term investments, and intangible assets such as patents and trademarks. Non-current assets form a critical component of a company’s overall value and strategic positioning.

Table of Contents

• Introduction
• Types
• Features
• Advantages
• Disadvantages

Introduction to Non Current Assets

Also known as fixed or long-term assets, these are either tangible assets or intangible resources that the company acquires and utilizes over an extended period to generate value. Such assets cannot be easily liquified within a year and are vital for a company’s ongoing operations, expansion, and sustainability.

Non-current assets are a crucial component of a company’s balance sheet, representing long-term investments that contribute to its operational capabilities and future growth. Such assets have a useful life of more than one year and are not intended for immediate conversion into cash. 

Types of Non Current Assets

The following are the types of non-current assets:

1. Property, Plant, and Equipment (PP&E): PP&E represents tangible assets used in business operations, such as land, buildings, machinery, vehicles, and equipment. These assets are crucial for production, service delivery, and infrastructure. Companies typically make substantial investments in PP&E, which contributes to their long-term value creation.
2. Intangible Assets: Intangible assets are not physical but possess significant value. Examples include intellectual property, such as patents, trademarks, copyrights, and licenses, which provide legal protection and competitive advantages. Other intangible assets include brand names, customer relationships, goodwill, and software.
3. Long-Term Investments: Long-term investments are non-current assets held by a company for strategic or financial purposes. These investments include equity securities of other companies, bonds, or long-term loans provided to other entities. Companies often hold long-term investments with the expectation of generating returns over an extended period.
4. Deferred Charges: Deferred charges represent costs that are not immediately expensed but are spread over multiple accounting periods. These can include costs related to research and development, advertising campaigns, or long-term contracts. Deferred charges reflect investments made to benefit the company in the long run.
5. Non-Current Financial Assets: Non-current financial assets include investments in financial instruments that are not intended for immediate conversion into cash. These assets may include long-term bonds, debentures, or other debt securities with a maturity of more than one year. Non-current financial assets are held with the expectation of earning interest income or capital appreciation.
6. Long-Term Prepaid Expenses: Prepaid expenses are payments made in advance for those goods or services that will be consumed over time. When prepaid expenses extend beyond one year, they are classified as non-current assets. Examples of long-term prepaid expenses include insurance premiums, lease payments, or subscription fees paid in advance.

Features of Non Current Assets

Non-current assets have the following features that distinguish them from other class of assets:

1. Long-Term Nature: These assets have a long-term nature. They are expected to be held by a company for more than the one period of accounting, ie. more than 12 months. These assets are not intended for immediate conversion into cash or consumption but are employed to support ongoing operations, generate revenue, or provide long-term value.
2. Capital Intensity: They often require significant initial investments and involve substantial capital expenditure. Acquiring property, plant, and equipment or developing infrastructure can involve substantial costs. The capital intensity of non-current assets reflects their long-term commitment and the financial resources required for their acquisition and maintenance.
3. Limited Liquidity: They are not readily convertible into cash in the short term. Unlike current assets, which are expected to be liquified within a year, non-current assets may require a longer time frame to convert into cash, if at all. Liquidity of non-current assets is relatively lower, as their primary purpose is to support long-term operations and value creation.
4. Long-Term Investment: Such assets represent long-term investments made by a company. They reflect the company’s commitment to future growth, expansion, and value creation. Non-current assets are part of a company’s long-term strategic planning, and their acquisition is based on careful evaluation of their potential to contribute to the company’s objectives.
5. Collateral: These assets can serve as collateral for obtaining financing or loans. Banks and lenders often accept non-current assets, such as property or equipment, as collateral, providing businesses with access to capital. The availability of collateral can help companies secure funding at more favorable terms.

Advantages

The following points highlight the advantages of non current assets to businesses:

• Revenue Generation: They play a crucial role in revenue generation. For instance, manufacturing companies rely on machinery and equipment to produce goods efficiently, whereas service-based businesses leverage software and technology. These assets enable companies to deliver products and services effectively, driving revenue growth.
• Competitive Advantage: Such assets, particularly intangible assets like brands and intellectual property, can provide a competitive advantage. A strong brand image, patents, trademarks, or proprietary technology can differentiate a company from its competitors, increase customer loyalty, and command premium pricing. These assets contribute to market positioning and market share growth.
• Cost Efficiency: These assets often offer cost efficiencies over the long term. For example, investing in energy-efficient equipment or technology can reduce operating costs, lower energy consumption, and improve overall efficiency. Non-current assets that enhance productivity or streamline processes can result in more profitability and cost savings.
• Capital Appreciation: Some non-current assets, such as real estate or valuable intellectual property, have the potential to appreciate in value over time. As demand increases or scarcity arises, the market value of these assets may rise as well. Capital appreciation can contribute to a company’s overall financial strength and increase its net worth.
• Future Economic Benefits: These assets are acquired with the expectation of generating future economic benefits. These benefits can arise through revenue generation, cost savings, or capital appreciation. For example, a company’s investment in a property may yield rental income or appreciate in value over time.
• Utilization in Operations: Such assets are utilized in the day-to-day operations of a business to facilitate production, service delivery, or support infrastructure. For instance, machinery, equipment, or technology enable manufacturing processes, while real estate properties provide office spaces or production facilities. Non-current assets play an active role in supporting a company’s core activities.
• Growth and Expansion Opportunities: These assets facilitate growth and expansion. By investing in new facilities, equipment, or technology, companies can expand their production capacity, enter new markets, or introduce innovative products. Non-current assets provide the foundation for exploring growth opportunities and positioning a company for future success.

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Disadvantages

While non-current assets offer various advantages, they also come with certain disadvantages. Here are some key disadvantages of non-current assets:

• Reduced Liquidity: Non-current assets are less liquid compared to current assets, as they are not readily convertible into cash. Selling or disposing of non-current assets can be time-consuming. It may also involve additional costs including brokerage fees or legal expenses. Limited liquidity can restrict a company’s ability to respond quickly to unforeseen financial needs or take advantage of immediate investment opportunities.
• Depreciation: This class of assets undergoes depreciation. This represents the gradual reduction in their value over time because of wear and tear or technological advancements. It can impact a company’s profitability by reducing the reported income and net worth. Additionally, certain non-current assets, such as technology or machinery, may become obsolete before their expected useful life, requiring costly upgrades or replacements.
• Capital Commitment: Investing in these assets requires a significant capital commitment. The funds allocated to acquiring and maintaining non-current assets may limit a company’s ability to invest for R&D, marketing, or expansion into new markets. The opportunity cost to tie up capital in non-current assets must be carefully considered in strategic decision-making.
• Market and Economic Risks: These are subject to market and economic risks that can affect their value. Changes in market conditions, supply and demand dynamics, or economic downturns can impact the market value of non-current assets. Fluctuations in interest rates or regulatory changes may also affect the profitability or financing of non-current assets, exposing companies to financial risks.
• Maintenance and Operating Costs: They require ongoing maintenance, repairs, and operational costs. The upkeep of property, plant, and equipment, for example, may involve expenses for maintenance personnel, utilities, insurance, and upgrades. Failure to adequately maintain non-current assets can lead to decreased efficiency, increased downtime, and potential safety risks.
• Lack of Flexibility: Such assets can limit a company’s flexibility to adapt to changing market conditions or strategic shifts. Investments in specific assets, such as property or specialized machinery, may lock a company into certain operations or restrict its ability to quickly pivot or reallocate resources. Lack of flexibility can hinder a company’s ability to respond to evolving customer demands or take advantage of new business opportunities.

Conclusion

These assets represent investments made for the long-term, contributing to revenue generation, growth, and competitive advantage. Understanding the significance of these assets is essential for stakeholders, including investors, creditors, and management, as it provides insights into a company’s long-term value creation potential. By effectively managing them, companies can strengthen their position in the market.