Non-Operating Assets

What Are Non-Operating Assets?

Non-Operating Assets are assets held by businesses that barely have any use in daily operations. Also known as reluctant assets, the main purpose of these assets is to act as an excess or alternative asset that may generate revenue for the firm.

They mostly have a supporting role in business operations. They act as a metric or tool to determine the company's valuation. Plus, they help in predicting the future potential of the business. Besides, non-operating income is derived from the non-operating assets. However, these assets might not produce any income.

• Non-operating assets, or redundant assets, are a subset of asset categories not used in daily operations but still held by the business.
• These assets have no role in revenue contribution to the firm. However, they can sell these assets and increase the cash balance if there are any cash crunches.
• Some examples of these assets include vacant land, excess cash, outdated or spare equipment, and marketable instruments like stocks, bonds, and treasury bills.
• It also contributes to the business valuation model. They are calculated separately and later added to the present values to derive the net realizable value.

Non-Operating Assets Explained

Non-operating assets in the balance sheet refer to the asset category that allows companies to hold some assets having no primary use in the business. However, they might add an alternative source to the gross income. For example, a vacant property is a part of such an asset as it is rarely used by the business. However, these non-operating assets can provide instant liquidity if the latter faces cash crunches.

A few examples of these assets include unutilized cash and assets, marketable instruments like stocks, bonds, spare parts, vacant land, excess cash, loan receivables, and others. Besides, excess cash or ownership stakes in other companies also act as non-operating assets in the balance sheet.

The non-operating assets and liabilities are also listed along with others on the balance sheet. However, they have different valuation treatments in the books. Although they have no purpose, their potential use might arise in the future. Many businesses also hold these assets, intending to sell them later. Such assets include marketable securities like stocks, bonds, and treasury bills. Vacant land is viewed as a source of liability due to the taxes and charges associated with the asset. Firms will purchase on the current date, leave them ideal, and sell in the future.

In contrast, they might need these assets for a future project. However, at present, it generates no cash flow for the business. Therefore, there is no purpose left to the business. Plus, there is no fixed guarantee of generating non-operating income from them.

Valuation

Although these assets and liabilities are a part of the balance sheet, they have different valuation procedures. Since these assets do not contribute to the existing cash flow, they require separate accounting treatment. So, let us look at the procedure for non-operating assets valuation:

To value a company, analysts and investors might use the Discounted Cash Flow (DCF) model to determine enterprise value. However, the non-operating assets are valued at a net realizable value. Following are the steps to derive the non-operating asset value:

• Identify the non-operating assets in the books.
• Forecast the future cash flows from the operating activities (reduce non-operating assets).
• Deduct the capital expenditures incurred on the existing assets.
• Calculate the present value of the future cash flows.
• Add the non-operating assets and derive the net realizable value. Likewise, adjust for taxes, charges, disposal, and other costs.

Two principal factors are crucial to include in the valuation: the standard of value and the level of value. The former will determine the asset value type from fair value, fair market value, and investment value. However, the latter states the controllable interest of stakeholders. For example, an investor with less than 50% stake holding cannot direct the liquidation of non-operating assets.

Examples

Let us look at some examples of non-operating assets for a better understanding of the concept:

Example #1

Suppose Lendson Ltd is a firm operating in the food industry. In recent years, they have achieved a good growth rate. So, the management decided to invest the amount by acquiring a stake in some firms. In addition, they invested 20% in real estate, and the rest is kept as excess idle cash. In a decade, Lendson Ltd faced no limit on capital until the 11th year. Therefore, they sold the vacant land and rose from cash crunches. 

Until the end of the decade, the firm had treated its assets non-operatively. Although they held land, cash, and stocks, they served no purpose to the ultimate revenues. 

Example #2

According to the news published on March 7, 2023, the United States-based energy firm Crescent Energy Company invested 15% of its investment in non-operating assets. A major investment belongs to oil-based firms like Eagle Ford, Permian and DJ basins. And the rest of the investment, which is around 85%, resides in operating assets like Eagle Ford and Uinta. Likewise, the firm has also carried forward around $25 million of capital expenditures (capex) from the last quarter of 2022.

Non-Operating Assets vs Operating Assets

Although both are crucial for the business, they have distinct characteristics. So, let us look at the differences between them:

Basis	Non-Operating Assets	Operating Assets
Meaning	It refers to those assets that do not generate profits for the business.	Operating assets, in contrast, are assets that contribute to the daily operations of the business.
Objective	To act as an excess asset to the firm that has no usage to the business.	To help in rolling revenue and increasing turnover for the firm.
Revenue Generation	These assets do not generate any revenue. However, firms can sell them to raise capital.	Their main purpose is to generate profits by contributing to business operations.
Accountability	They are managed by an expert for their optimum utilization.	The management is solely responsible for managing and handling the operating assets.
Decision Making	Such assets have no role in business decisions.	Operating assets are vital to consider before deciding on matters as they form a major part of daily operations.
Types of income	These assets do sometimes generate "non-operating revenue." However, not all non-operating revenue is derived from these assets.	Operating income is derived from operating assets.
Examples	Examples include vacant land, loan receivables, excess cash, marketable securities, outdated equipment, and more.	Occupied property, plant, machinery, cash, equipment and tools, intellectual rights, and others.

Frequently Asked Questions (FAQs)

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