Long-Term Assets

Long-Term Assets
See also

Long-term assets (non-current assets) are items expected to remain in the company's possession for more than a year[1]. Initially, long-term assets were called fixed assets, but the latter term is not entirely correct to be applied interchangeably. Long-term assets form a broader category as they take into account not only tangible assets (property, plant and equipment), but also intangible assets[2].

The characteristics of non-current assets are as follows[3]:

  • a useful life above one year (which is a crucial aspect while distinguishing them from current assets that are used up or converted to cash within one year or during the operating cycle; current assets constitute part of the operating cycle while non-current assets support the cycle in question),
  • used in the operation of a business (for example buildings that are not used in the normal course of business anymore should be categorized as long-term investments instead of long-term assets),
  • not intended for resale (if a company plans to resale an asset to a customer then it is classified as inventory).

All long-term assets should be reported on the balance sheet[4].

Examples of long-term assets

The following assets fall under the category of long-term assets[5][6]:

  • tangible assets (physical objects)
    • land,
    • buildings,
    • equipment and machinery,
    • furniture,
    • vehicles (trucks, business cars),
    • tools, dies and moulds,
    • capitalized lease (if a company leases a building with an option to purchase it in the future),
    • leasehold improvements (when a company spends money on fixing up the space leased to someone else),
    • anything else with an expected lifetime of over a year that do not meet the definition of a current asset.
  • intangible assets (items that cannot be touched)
    • patents,
    • trademarks,
    • copyrights,
    • software,
    • goodwill
    • customer lists,
    • licenses,
    • brands and franchise rights.

Initial measurement

Long-term assets shall be initially recognized at the cost of purchase which includes all costs necessary to make the asset ready to use, for instance [7]:

  • purchase price,
  • delivery and handling costs,
  • assembly and installation costs,
  • taxes, fees and insurance costs.

Expensing long-term assets

Long-term assets need to be either depreciated (tangible assets) or amortized (intangible assets). Every depreciation or amortization expense is then presented on the income statement[8].

Depreciation or amortization is carried out to demonstrate that the book value of long-term assets declines over time. The line item on the balance sheet called Accumulated Depreciation or Accumulated Amortization is dedicated to show amounts that have been written off during the lifetime of an asset[9].

However, not all assets are subjects to depreciation. The most important exception is land, which does not have a limited useful life (unlike machinery or equipment) and that is why it cannot be depreciated[10].

The impact on the cash-flow statement

Every time an enterprise acquires, writes off or sells a non-current asset, it influences the statement of cash flows. Acquiring a long-term asset is categorized as an investing activity on the cash-flow statement and therefore, the amount spent for the purchase should be deducted.

Also, the sale of non-current assets will be classified as an investing activity. In that case, the cash received from the sale would be added on the cash-flow statement. Yet, it is crucial to reflect any loss or gain on sale which was earlier indicated on the income statement as they shall be excluded from the net income accordingly.

Another type of activity occurs when a company accounts for depreciation or amortization because these two are non-cash items. Firstly, in order to calculate the net income, they are deducted from earnings. Subsequently, when using indirect method for cash-flow statement, depreciation and amortization are shown under the category of operating activities and are added back to the net income[11].

Footnotes

  1. Epstein L. 2014, pp. 235-237
  2. Needles B.E., Powers M., Crosson S.V. 2010, pp. 474-475
  3. Needles B.E., Powers M., Crosson S.V. 2010, pp. 474-475
  4. Tyler J., Godwin N.H., Alderman C.W. 2018, pp. 130-131
  5. Epstein L. 2014, pp. 235-237
  6. Keller W.D. 2011, Ch. 11
  7. Tyler J., Godwin N.H., Alderman C.W. 2018, pp. 130-131
  8. Epstein L. 2014, pp. 235-237
  9. Aylen J. 2012, pp. 349-350
  10. Tyler J., Godwin N.H., Alderman C.W. 2018, pp. 130-131
  11. Porter G., Norton C. 2008, pp. 63-64, 399

References

Author: Paulina Zachara