Non-Current Assets

Non-current assets are assets other than the current assets. While current assets are
assets which are expected to be converted to cash within the next 12 months or within
normal operating cycle of a business. In other words, these are assets which are expected
to generate economic benefits over more than one year.

Classification of assets into current and non-current is important because non-current

assets are illiquid, i.e. they cannot be easily converted to cash or cash equivalents.
Information about how quickly assets can be converted to cash is important for useful
liquidity analysis. Secondly, since non-current assets are expected to generate economic
benefits over multiple periods, they must be depreciated over their useful lives.

A classified balance sheet shows non-current assets separately from current assets.

Types
Following is a list of typical non-current assets:

 Intangible assets
 Property, plant and equipment
 Long-term investments
 Long-term notes receivable
 Long-term deposits/advances, etc.

Non-current assets are also called long-term assets, long-lived assets, etc.

Property, Plant and Equipment

Property, plant and equipment (also called tangible fixed assets) is a class of assets which
have physical existence, which are held for a company’s internal use and which are
expected to generate economic benefits for the company over more than one year.

There is hardly any business that do not require physical assets such as land, building,
computers, vehicles, furniture, etc. Some require more physical assets and some require
less. Industries or businesses requiring more fixed assets are called capital intensive, such
as an oil refinery, a milk processing plant, etc. Those requiring less fixed assets but more
labor are called labor intensive, such as an accounting firm, an event arrangement
company, a bank, etc.
Expenditure incurred on purchase or construction of property, plant and equipment is
called capital expenditure. Such an expenditure is capitalized which means that it is
recorded on the balance sheet and written off as expense over the useful life of the fixed
asset through a process called depreciation. This reduces the asset’s carrying amount on
balance sheet.

Cost
Fixed assets are recognized by a company when it gains control over economic benefits
generated from the assets. All fixed assets are recognized at their historical cost which is
the reliable estimate of all costs that are necessary to bring it to its intended use. The
capitalized cost of a fixed asset has different components depending on the class of asset:

 Cost of land includes: purchase price, transaction fees i.e. all legal fees,
commissions, registration fees, etc. related to the purchase of land, cost of
demolishing old buildings, etc.
 Cost of buildings includes: architect’s fee, building permit fee, construction
contract price, excavation cost, etc.
 Cost of plant: purchase price, labor cost, inspection cost, test run cost (less any
profit on test run), etc.

Depreciation expense
Since a fixed asset is expected to generate economic benefits over more than one period,
the depreciable amount of the asset is written off over the useful life of the asset through
a process called depreciation.

Depreciation expense is the amount subtracted from revenue in an accounting period on

account of wear and tear, obsolescence, etc. of the asset.

Depreciation expenses = depreciable amount/useful life

Accumulated depreciation
Accumulated depreciation is a contra-asset account which accumulates total depreciation
expense charged on a fixed asset over its useful life. It is subtracted from the cost of the
asset to arrive at carrying value of the asset on the balance sheet.
Accumulated impairment losses
Sometimes a fixed asset may lose value which is not captured by the process of
depreciation. For example in case of a fire or flood, a factory building may loose more
than half of its value, which will result in recognition of impairment loss on the factory
building. Such impairment losses are accumulated in ‘accumulated impairment loss
account’ and subtracted from the cost of the asset.

Carrying value
Carrying value is the amount at which a fixed asset is presented on a balance sheet.

Carrying value = cost - accumulated depreciation - accumulated impairment losses

Example
ASD, Inc. recently purchased a milk-processing plant at a cost of $28 million. The cost
included shipment to port of Gwadar. Freight for delivery of the plant components to the
installation site amounted to $0.2 million. The installation contractor was paid an amount
of $2 million which included all the costs related to installation, i.e. locally manufactured
assembly components, labor, etc. The installation was completed on 10 April 2015. An
independent firm carried out inspection at a cost of $0.5 million. Test run was conducted
from 11 April 2015 to 30 April 2015 at a cost of $0.2 million. The test run production
generated $0.1 million profit.

Calculate the amount at which the plant shall be capitalized on 1 May 2015.

The company charges depreciation on straight-line basis. The plant has a useful life of 10
years and salvage value of $3 million. Calculate the accumulated depreciation and carrying
value at 30 April 2016 and 30 April 2017.

Solution

The cost at which the plant shall be recognized is calculated below:

$ in million
Purchase price 28.0
Freight 0.2
Installation cost 2.0
Inspection cost 0.5
Test run cost 0.2
Test run profit (0.1)
30.8
The recognition shall be made through the following journal entry:

30.8
Plant
million
30.8
Accounts Payable
million
Depreciable amount = cost – salvage value = 30.8 million – 3 million = $27.8 million

Depreciation for the first year = depreciable amount/useful life = $27.8 million/10 = $2.78
million

Accumulated depreciation at 30 April 2016 = $2.78 million

Carrying value at 30 April 2016 = $30.8 million - $2.78 million = 28.02 million

Depreciation for second year = $2.78 million

Accumulated depreciation at 30 April 2017 = $2.78 million + $2.78 million = $5.56 million

Carrying value at 30 April 2017 = $30.8 million - $5.56 million = $25.24 million