Long-term assets, also known as non-current assets, are resources that a company expects to use over a period longer than one year. They are part of a company’s balance sheet and represent investments that will be converted into cash or used in the business over a long period. The usage period usually extends beyond the company’s current operating cycle or fiscal year.
Long-term assets can be divided into several categories:
- Fixed Assets (or Property, Plant, and Equipment – PP&E): These are tangible assets used in the operation of a business that are not expected to be consumed or converted into cash in the short term. Examples include buildings, land, machinery, vehicles, and furniture. These assets are typically subject to depreciation, which is the allocation of the cost of the asset over its useful life.
- Intangible Assets: These are non-physical assets that provide future economic benefits to the company. Examples include patents, copyrights, trademarks, goodwill, and brand recognition. Unlike tangible assets, intangible assets are typically amortized over their useful lives.
- Long-Term investments: These are investments that a company intends to hold for several years. They may include stocks or bonds of other companies, real estate, or cash set aside for special projects.
- Deferred Charges (or Deferred Assets): These are costs that have been incurred but will not be charged to expense until a later accounting period because they are expected to provide economic benefits beyond the current period. An example could be deferred tax assets.
The exact categorization and valuation of long-term assets can vary depending on the accounting standards being used (such as GAAP or IFRS) and the specific policies of the company. They represent a crucial part of a company’s financial health, as they are often key to the company’s operation and represent a significant portion of the company’s investment of capital.
Example of Long-Term Assets
Let’s consider a fictional company named “RailCo,” which operates a railway transport service.
Fixed Assets (Property, Plant, and Equipment – PP&E): RailCo owns several long-term tangible assets crucial for its operations. These include the railway tracks, trains, maintenance equipment, and the land on which their railway stations are built. RailCo expects these assets to benefit the company for many years, even though their value will depreciate over time due to wear and tear and obsolescence.
Intangible Assets: RailCo has a registered trademark on its brand name and logo. The brand recognition that comes with this trademark is a valuable intangible asset that provides economic benefits to RailCo. It’s an asset that can’t physically be touched, but it helps RailCo attract customers and build customer loyalty.
Long-term Investments: Suppose RailCo invests in corporate bonds issued by other companies or municipalities with maturity dates more than one year away. These investments are considered long-term assets, as RailCo plans to hold onto them for several years to earn interest.
Deferred Charges (Deferred Assets): Suppose RailCo paid a significant amount in advance for multi-year insurance policies on its equipment. This prepayment will be recorded as a deferred charge or deferred asset on RailCo’s balance sheet and will be gradually expensed over the policy’s effective period.
All these assets would be classified as long-term assets on RailCo’s balance sheet, indicating that they will provide the company with value over a period of more than one year.