What Are Non-Current Assets: Definition, Types, and Significance

As an e-commerce business in the Philippines, acquiring big purchases is practically a milestone.

Storage places, expensive equipment, maybe even some property – all of these long-term investments seriously improve your operations and even make you feel more legitimate. These are all examples of non-current assets, a financial designation often appearing on your financial statements.

In the following headings, we’ll discuss why this asset class is important and give you long-term success points.

Introduction to Non-Current Assets: Definition and Role

Non-current assets are things a business owns that will take more than a year to be converted to cash. They are considered illiquid – challenging to turn to cash and move around, compared to other assets – which is why they are also called fixed assets or long-term assets.

This is in direct contrast to the current asset: property that can be easily liquidated to cash within one year. Understanding non-current assets is important because they directly impact operational sustainability and long-term planning.

For example, these assets tend to be very expensive. You need to plan around them and ensure they deliver value for the intended lifetime. You also need to minimize risk and maximize gain for every dollar spent.

That all begins with understanding this asset class in your balance sheet.

Differentiating Non-Current Assets from Current Assets

Current and noncurrent assets are the primary two categories of valuable possessions a company owns. They are equally important in maintaining a healthy financial state for your business.

Non-current assets are assets with a useful life extending beyond one year. These could be tangible assets like a warehouse or intangible assets like patents.

Meanwhile, current assets are expected to be easily converted into cash or used up within the same accounting year. This is why these types of assets are also called short-term assets. For e-commerce businesses like yours, current assets include your inventory and accounts receivable in your system. An insurance’s cash surrender value is also classified as a current asset.

Aside from this main difference, there are also two other important variations:

• Liquidity: Current assets are more liquid and readily accessible. This means that current assets are often involved in the business’s day-to-day operations. On the other hand, noncurrent assets accounted are less accessible and more of a long-term investment.

• Nature: Non-current assets are often more fixed, such as the company’s property or equipment. Meanwhile, current assets are typically more variable and change hands often, such as business inventory.

Understanding the differences between the two is important for better financial decision-making. It helps businesses like yours take better financial steps because they know what an asset is classified as.

Non-current assets are long-term investments that require carefully considered, time-spanning plans, while current assets are critical for short-term investments and day-to-day operational efficiency.

Types of Non-current Assets

If you look into your business, you will find that your company’s long-term investments will differ from another company’s investments. Just like your business is unique, you will also have different business assets to support your business operations.

Nevertheless, there are also common non-current assets that most businesses share. These common assets can be best categorized into three major categories – tangible, intangible, and natural resources (such as fossil fuels). Since e-commerce businesses deal more with the first two types, you must understand them.

Tangible Non-Current Assets: Property, Plant, and Equipment (PP&E)

Tangible non-current assets are physical assets with a finite lifespan. Some examples are commonly called property, plant, and equipment or PP&E.

They are the following ones:

• Property: This includes real estate owned by the business, such as warehouses, offices, or land. In e-commerce, having a dedicated space for inventory storage or a well-situated office is often crucial.

• Plant: This refers to manufacturing facilities or operational plants; this could involve the infrastructure required to manufacture products or store inventory. For an e-commerce business, this might include fulfillment centers or distribution hubs.

• Equipment (PP&E): This covers machinery, vehicles, or any equipment essential for day-to-day operations. For e-commerce businesses like yours, this could be the servers hosting the website, delivery vehicles, or specialized machinery for product customization.

These non-current assets examples are more directly involved in your daily operations. Since it will likely be a physical property, you can more directly observe the asset’s impacts over time. Maintenance and safekeeping also play a larger role in preserving a tangible asset’s value over time.

Intangible Non-Current Assets: Intellectual Property, Patents and Trademarks

Intangible non-current assets don’t have a physical form but hold significant value for a business. Nowadays, there are now more types of intangible non-current assets that businesses can have.

Let’s see them below:

• Intellectual Property: This involves creations of the mind, which are things like copyrights, trade secrets, and proprietary algorithms. In the digital age, the unique algorithms powering an e-commerce platform or exclusive content on a website are examples of intellectual property.
• Patents: Patents provide a competitive edge by protecting inventions and processes. In e-commerce, a patented technology or a unique process for order fulfillment can be a substantial non-current asset.
• Trademarks: Representing brand development, trademarks are crucial for brand recognition. E-essential non-current asset. E-commerce businesses heavily rely on their brand reputation.

While you can’t touch them and interact with them physically, they have a significant impact on your business. Online businesses, specifically, require many more intangible non-current assets compared to brick-and-mortar establishments.

Thus, e-commerce businesses need to pay careful attention to these types of assets.

Key Concepts Involving Non-Current Assets

There are many different ways that a non-current asset can affect a company’s balance sheet. 

In the following sections, we’ll examine several key concepts involving non-current assets.

Non-Current Assets Held for Sale

Examples of non-current assets are often big and difficult to sell, companies usually follow a special procedure when they want to liquidate non-current assets. For this, they use disposal groups and mark them as discontinued operations.

Disposal groups refer to a batch of assets and liabilities expected to be disposed of as a group in a single transaction. This makes a non-current asset easier to sell and streamlines the process of selling that part of the business. Because what’s being sold is a significant part of the business, it often includes non-current assets like manufacturing plants, delivery vehicles, patents, and buildings.

When the process begins, the disposal group sold will be marked under the discontinued operations of the financial statement.

Financing Strategies and Non-Current Assets

Because non-current assets are expensive and time-consuming to acquire, most businesses need financing strategies to get them.

You must know how to manage your business’s assets, know their fair value, and ensure sustainable growth and long-term economic benefits. Debt and equity are the main financing ways for non-current assets.

Let’s discuss each one in more detail:

• Debt: This involves borrowing funds, typically through loans, with an obligation to repay over time and often with substantial interest. If you buy through debt, you can acquire big assets without giving over parts of your ownership.

• Equity: Acquiring through equity means selling a portion of your business to investors in exchange for money. Buying long-term investments through equity means you won’t repay debt and interest over time but give up a part of your business.

Understanding financing strategies for non-current assets enables you to make informed decisions about how you will fund big business purchases of tangible assets. It’s critical to strike the right balance, as financing will affect your business’s financial data, risk profile, and ownership dynamics.

Assessing Non-Current Asset Efficiency

How do you know that your non-current asset is worth it? You measure asset turnover ratios.

Asset turnover ratios show how well your long-term investments contribute to your overall business performance.

Businesses can calculate the asset turnover ratio by dividing generated revenue by the average book value of non-current assets or as follows:

Asset Turnover Ratio = Net Sales / Average Total Assets

To calculate the average total assets, add the beginning and ending asset values and divide by two. A higher ratio indicates that the company is using its assets more efficiently, while a lower ratio suggests that it needs to use its assets more efficiently. Learning how all your assets perform here lets you identify areas for improving asset utilization and increasing efficiency.

The ideal asset turnover ratio can be very industry-specific. To use this metric better, it’s better to compare your balance to similar companies in the same sector or group as you.

Disclosure and Reporting Requirements for Non-Current Assets

Whether you’re in the Philippines or beyond, owning long-term investments with a high purchase price, like physical property, marketable securities, and proprietary software, is a big deal.

Thus, accounting standards have strict disclosure and reporting requirements for these types of assets. This involves providing a comprehensive breakdown of the types, values, and any significant changes in the assets you own.

As you generate revenue, your income statement will often have to disclose acquisition cost, depreciation methods, deferred income taxes, accumulated depreciation, and anything that might affect the economic value of these assets.

To comply with these requirements, you should adopt robust accounting practices and adhere to relevant accounting standards like the Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).

Final Thoughts

Noncurrent assets are a critical part of any business. Whether you’re a modern e-commerce business or a traditionally powered brick-and-mortar store in the Philippines, you’ll need long-term investments to grow sustainably and stay profitable for a long time.

Learning about non-current assets helps you make informed financial decisions that balance risk and maximize returns for as long as you need them to. Luckily for you, you learned all that here.