Non-current assets are the resources a company expects to use for more than one year or beyond its normal operating cycle. They are not held to be sold in the ordinary course of business, but to help generate revenue over time.
On the balance sheet, they sit below current assets and include items like factories, vehicles, patents and long-term investments. Their value is carried forward from period to period, then reduced over time by depreciation, amortisation or impairments.
What counts as a non-current asset
The exact categories depend on accounting standards and the type of business, but they commonly include:
- Property, plant and equipment (PPE) such as land, buildings, machinery and fixtures.
- Intangible assets like software, patents, trademarks, customer lists and acquired brands. Goodwill from acquisitions also sits here.
- Right-of-use assets created by leases that put most long-term rentals on the balance sheet.
- Long-term investments in equities, bonds or joint ventures that the company does not plan to sell within a year.
- Deferred tax assets that arise from timing differences or tax losses carried forward.
- Investment property held to earn rental income or for capital appreciation.
Inventory, trade receivables and cash do not belong here because they are expected to turn into cash within a year. If management decides to sell a long-lived asset soon, it can be reclassified as held for sale and moved out of non-current assets.
How companies measure and report them
Most non-current assets are recorded initially at cost, which is the purchase price plus any directly attributable costs to get the asset ready for use. Examples include delivery, installation and site preparation. After that, the carrying amount evolves based on the chosen accounting model and any depreciation, amortisation or impairment.
Under many frameworks, PPE is kept at cost less accumulated depreciation and impairment. Some standards allow or require a revaluation model for certain asset classes, which restates them toward current values with changes taken to equity or profit depending on the rules. Policies vary by jurisdiction and can change, so always read the accounting policy notes.
Financial assets held long term can be measured at amortised cost or at fair value with gains and losses recognised in profit or equity, again depending on classification rules. The aim is to reflect both the business model for holding the asset and the nature of its cash flows.
Depreciation, amortisation and impairment
Depreciation allocates the cost of a tangible asset, such as a machine, over its useful life. The method should mirror the pattern in which the asset provides benefits. Common methods include straight line, declining balance and units of production. The depreciation charge reduces operating profit, and the accumulated amount reduces the asset's carrying value.
Amortisation is the same idea applied to finite-life intangibles such as software or licences. Intangibles with indefinite lives, and goodwill, are not amortised. They are tested for impairment regularly.
Impairment is a write-down when an asset's recoverable amount falls below its carrying amount. Triggers include technological shifts, damage, regulatory changes or worse than expected performance. An impairment flows through the income statement and reduces equity. It can be reversed for some assets if conditions improve, but goodwill reversals are normally prohibited under common standards.
These non-cash charges affect reported profit and book values. They do not change cash flows already spent, but they can reduce net income and signal that past investments are not earning as planned.
Leases and right-of-use assets
Long-term leases are typically capitalised. The lessee recognises a right-of-use asset and a matching lease liability at the present value of lease payments. The right-of-use asset is depreciated over the shorter of the lease term or useful life, while interest accrues on the liability. Short-term and low-value leases may be exempt and kept off the balance sheet.
This treatment brings many rental commitments into non-current assets and liabilities, which can change leverage metrics, asset turnover and measures that rely on total assets.
Where investors see non-current assets and what to watch
Non-current assets appear on the balance sheet and in the notes, often broken down by class, useful life ranges and movement schedules that show additions, disposals, depreciation and impairments. They also connect to the cash flow statement through capital expenditure in investing cash flows.
Things analysts often review:
- Capital intensity. A heavy asset base usually needs more upfront cash, which can mean higher barriers to entry but also higher fixed costs.
- Asset turnover. Revenue divided by average non-current assets or PPE shows how efficiently assets produce sales. Lower turnover can hint at underused capacity.
- Capex vs depreciation. If capital expenditure persistently trails depreciation, assets may be ageing. The reverse can signal investment for growth.
- Impairment history. Frequent write-downs may suggest poor capital allocation or fast-changing markets.
- Book value vs market value. Carrying amounts reflect accounting rules, not necessarily market value. Land held at cost can be worth much more. Technology equipment can be worth less than book if it is obsolete.
For valuations that rely on returns on capital, such as return on invested capital, how non-current assets are measured and grouped can move the needle. Adjustments for operating leases, construction-in-progress and acquired intangibles are common in advanced analysis.
A simple example
Imagine a manufacturer buys a machine for £500,000. It pays £20,000 for shipping and £30,000 for installation. The asset is ready to run, so the initial cost is £550,000. The firm expects a 10-year useful life and no residual value. Using straight-line depreciation, it recognises £55,000 of depreciation each year. After three years it has accumulated £165,000 of depreciation, and the carrying amount is £385,000.
Suppose new technology arrives and the expected future cash flows from the machine fall. Testing shows a recoverable amount of £320,000. The company records an impairment of £65,000 to bring the carrying value down to £320,000. The impairment appears as an expense, reduces profit, and lowers the asset balance.
Now consider a five-year warehouse lease. On day one, the present value of the lease payments is measured at £1.2 million. The company records a right-of-use asset of £1.2 million and a lease liability for the same amount. Over the lease, the asset is depreciated and interest is recognised on the liability. The building does not appear as owned PPE, but the right to use it is a non-current asset for the term of the lease.
Common points of confusion
- Current vs non-current. A 15-month trade receivable is usually non-current, even though it is a receivable. Conversely, a building earmarked for sale within months will exit non-current assets and be shown as held for sale.
- Repairs vs improvements. Routine maintenance is expensed. Upgrades that extend life or increase capacity are capitalised and added to the asset’s carrying amount.
- Intangibles created in-house. Research costs are often expensed. Some development costs can be capitalised if strict criteria are met. Rules vary by standard and industry.
- Goodwill. Goodwill only arises in acquisitions. It is tested for impairment regularly and is never amortised under common accounting frameworks.
Non-current assets tell a story about a company’s strategy and staying power. Read the footnotes alongside the headline totals to understand what the assets are, how they are measured and whether they are earning their keep.