The Cost of Long-Term Assets

What are long-term assets?

Meaning of Long-term assets: – Long-term assets are also known as non-current assets or long-lived assets, that are expected to provide economic benefits over a future period, typically longer than one year. Long-term assets can be tangible, intangible or financial assets.

Long-Term Assets
  • Long-term assets are investments in a company that will benefit the company for many years.
  • Long-term assets can include fixed assets such as a company’s property, plant, and equipment, but can also include intangible assets, which can’t be physically touched such as long-term investments or a company’s trademark.
  • Changes in long-term assets can be a sign of capital investment or liquidation.

Examples of above mentioned three assets are as follows: –

  • Long-term Tangible assets, commonly and sometimes referred to as fixed assets, include land, buildings, furniture, machinery and equipment, and vehicles;
  • Long-term Intangible assets (property lacking a physical substance) include patents and trademarks;
  • Long-term Financial assets include investments in equity or debt securities issued by other entities.

What is an asset?

Meaning of an asset: – An asset is anything of value or a resource of value that can be converted into cash. Individuals, companies, and governments own assets. Assets are economic resources. For a company, an asset might generate revenue, or a company might benefit in some way from owning or using the asset. It is anything tangible or intangible that is capable of being owned or controlled to produce value and that is considered to have positive economic value as an asset. Simply put, assets represent the value of ownership that can be converted into cash.

  • An asset is something containing economic value and/or future benefit.
  • An asset can often generate cash flows in the future, such as a piece of machinery, a financial security, or a patent.
  • Personal assets may include a house, car, investments, artwork, or home goods.
  • For corporations, assets are listed on the balance sheet and netted against liabilities and equity.

What are the types of long-term assets?

Types of long-term assets are as follows: –

  1. Tangible long-term asset: –
    • Tangible long-term asset is an asset that has physical presence and it is an asset that the firm will acquire for more than one year. Examples of long-term tangible assets in a business include computer equipment, furniture, machinery, buildings, and land.
    • The cost of a tangible long-term asset is measured as the cost of purchasing the product and any expenses involved in preparing it for its intended use. Let’s say the owner paid $120,000 to buy a piece of equipment for his factory and $5,000 in installation costs. The owner would record the $125,000 cost for his equipment on the financial statements.
    • Long-term tangible assets tend to lose their value when used over time and this is known as depreciation (a reduction in the value of an asset over time, due in particular to wear and tear). A business will record the depreciation or cost of using the asset per year over the same time period that the asset’s income benefited the company. This means that the owner will record depreciation separately for each of his tangible long-term assets.
  2. Intangible long-term asset: –
    • These are intangibles that are of great importance to the business. Intangible assets can be created internally or can be easily purchased. One of the cardinal important intangibles created internally is goodwill, it is the brand name and goodwill created by the business over the years in the market. Other intangible items include copyrights, patents, trademarks, brand names, etc.
    • Some intangible assets have a limited life, and others have an infinite life, such as goodwill. Finite-living intangible assets are amortized (reduce or pay off (a debt) with regular payments) throughout their lifetime, and an amortization expense is recorded on the income statement. In comparison, an indefinite intangible asset is checked for loss at least annually, and the cost of impairment, if any, is recorded in the income statement during the loss period.
    • Often, intangible assets are understood to be identifiable or unknown. An identifiable asset under IFRS is one which is;
      • Can be separated from the firm or arises out of legal or contractual right
      • controlled by the firm
    • On the other hand, an undisclosed asset is one that cannot be separated from the company. It can also have an uncertain life.

De-recognition of long-term assets

Derecognition of an asset occurs whenever an asset is disposed of or is not expected to provide any future benefits from either its use or disposal. As a result, the asset is removed from the financial statements. Disposal of a long-term operating asset is affected by selling it, exchanging it, or abandoning it.

Long-term assets are de-recognized (withdraw official recognition from an organization or country) until they are lost, replaced or abandoned. If an asset is sold, it is removed from the balance sheet. In the income statement, profit or loss is recorded to the degree of difference between the sale proceeds and the carrying value of the asset.

If an asset is exchanged for another asset, the gain or loss is calculated by comparing the old asset’s carrying value to the old asset’s fair value (or the new asset’s fair value, if that’s easier to determine). goes. The carrying value of the old asset is taken out of the balance sheet and the new asset is recorded at its fair value. When an asset is omitted, it is excluded from the balance sheet and the loss to that extent is recognized on the income statement.

What are the limitations of long-term assets?

The limitations of long-term assets are: –

  1. Long-term assets can be expensive and require large amounts of capital to maintain them that can drain a company’s cash or increase its debt.
  1. One limitation of analyzing a company’s long-term assets is that investors often won’t be able to see their gains for long, perhaps years to come.
  1. Investors are left to rely on the management team’s ability to map the company’s future and allocate capital effectively.

“Important- Not all long-term assets drive earnings. Pharmaceutical companies invest billions of dollars in R&D to research new drugs, but few come to market and are profitable.”

Like analyzing any financial metric, investors should take a holistic view of a company’s long-term assets. It is best to use several financial ratios and metrics when conducting a financial analysis of a company.

Depreciation of Long-term asset

  1. Depreciation is an accounting convention that allows companies to spend a portion of their long-lived operating assets to be used in the current year. It is a non-cash expense that increases net income but also helps to match revenue with expenses in the period in which they are incurred.
  2. Capital assets, such as plant, and equipment (PP&E), are included in long-lived assets, excluding the portion specified for depreciation (expenses) in the current year.
  3. Long-lived assets can be depreciated on a linear or accelerated schedule basis, and can provide a tax deduction for the company. Analysts will often consider a company’s earnings before asset depreciation (such as EBITDA) as an important factor in understanding its financial position, because depreciation can obscure the true value of long-term assets on their impact on a company’s profitability.

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