Non operating asset
|Non operating asset|
Non operating assets are not directly recognized in the balance sheet. They comprise valuable corporate assets that do not participate in the process of generating operational cash flows and are its property at the time of valuation. To asses their value, companies use income methods of enterprise valuation.
Examples of non operating assets
Examples of non operating assets(A.A. Muaaz 2012 p.3):
- holdings which can include public and private companies
- low-risk investements popular for companies with big cash balances
- equity investements for strategic or investement reasons
Nature of non operating assets
These assets can have value for example as land or pension plan but they do not generate cash flows. Because of that it is very important for companies to value their value well. Very often the main reason of investing in non operating assets is strategy. Non operating assets do not bring benefits to current operations and they may also not benefit the company in the future but a lot of companies see opportunity of using these assets in the future as a weapon in worse times. One way to use non operating assets is to buy assets from company in bankruptcy at bargain prices (A.A. Muaaz 2012 p. 3-5).
Valuation of non operating assets
We distinguish two methods of valuating assets:
- DCF method
- FCF method
DCF method estimates cash flow that is, it focuses on the value of factors which have impact on cash flow. FCF method is closely linked to management decision. This method most accurately shows the scenario of the company future. Non operatimg assets should be valuated by this method just like other assets. They are equally important for the company's strategy as well as decisions made by managers (P. Mielcarz 2011 p.2-3). The second way to value non operatin assets is using fair value method or historical cost accounting. The first one is implemented when operational results are provided at a lower cost. Historical costs accounting requires periodic checking of assets impairment. If depreciated historical costs are higher than fair value then assets whose value is close to fair value are subject to valuation. Companies can choose between these two method freely because of rules in International Financial Reporting Standards (H.B Christensen 2013 p. 734-736, 771).
- Beneda N.L. (2004) Valuing Operating Assets in Place and Computing Economic Value Added The CPA Journal, New York Volume 74, no/release 11, p.56-61.
- Christensen H.B., Nikolaev V.V. (2013) Does fair value accounting for non-financial assets pass the market test? Review of Accounting Studies, Volume 18, Issue 3 p.734-775.
- Damodaran A. (2005) Dealing with Cash, Cross Holdings and Other Non-Operating Assets: Approaches and Implications. Stern School of Business, p.1-55
- Mielcarz P., Wnuczak P. (2011) DCF Fair Value Valuation, Excessive Assetes and Hidden Inefficiencies. Kozminski University Poland Issue 4 p.44-57.
- Muaaz A.A. (2012) Idle Assets Utilization and firm value. Kuwait University - College of Business Administration, p.1-32.
Author: Angelika Orlof