Long-Term Assets

Long-term assets, also called noncurrent assets, are resources that a business expects to use, hold or convert into cash over a period longer than one year or its normal operating cycle, whichever is longer. They include buildings, machinery, land, patents, software, goodwill and investments that the company intends to keep. They are the opposite of current assets, such as cash, receivables and inventory, which are expected to be used up or turned into cash within a year.

The split between current and long-term items is the basis of the classified balance sheet. It helps readers see how much of a company's resources are tied up in productive capacity, and how much is available to pay short-term bills.

• Property, plant and equipment, sometimes called fixed assets: land, buildings, machinery, vehicles, furniture and land improvements. All except land are depreciated.
• Intangible assets: patents, trademarks, copyrights, licences, customer lists and software, which have no physical form. Those with a finite life are amortized.
• Goodwill: the excess paid in an acquisition over the fair value of identifiable net assets. It is not amortized by public companies but is tested for impairment.
• Long-term investments: bonds held to maturity, equity stakes in other companies and property held for investment.
• Natural resources: oil reserves, mineral deposits and timber, which are expensed through depletion as they are extracted.
• Other noncurrent assets: long-term receivables, deferred tax assets and right-of-use assets under leases.

Most long-term assets are first recorded at historical cost, including the purchase price and the costs needed to get the asset ready for use, such as delivery and installation. The cost of an asset with a limited life is then spread over that life through depreciation or amortization, so the balance sheet shows its carrying amount: cost less accumulated depreciation or amortization and any impairment.

Suppose a company buys a machine for $500,000, pays $20,000 for installation and expects to use it for ten years with no residual value. It records the machine at $520,000 and charges $52,000 of depreciation a year. After four years, the carrying amount is $520,000 minus $208,000, or $312,000. If a market downturn means the machine's recoverable value has fallen to $250,000, the company records an impairment of $62,000. US GAAP does not allow the impairment of assets held for use to be reversed; IFRS allows reversal (except for goodwill) and also lets companies choose to carry property, plant and equipment at revalued amounts.

Purchases of long-term assets are reported as capital expenditure in the investing section of the cash flow statement. Analysts track the ratio of capital expenditure to depreciation to see whether a company is replacing its asset base or letting it age. The asset turnover ratio and the fixed asset turnover ratio show how much revenue the business generates for each dollar invested in assets. Capital-intensive industries such as utilities, telecoms and airlines carry a high share of long-term assets, while software and service firms carry fewer, except for goodwill from acquisitions.

Deciding whether a cost should be capitalized as a long-term asset or expensed is one of the main judgment areas in accounting. Capitalizing ordinary operating costs, as WorldCom did with line costs in the early 2000s, overstates both assets and profit. Other issues include choosing realistic useful lives, identifying impairment in time, and reclassifying assets that management has decided to sell, which are moved to a separate held-for-sale category and stop being depreciated. Because long-term assets are less liquid than current assets, a company with most of its value in them may still face short-term funding pressure despite a large balance sheet.