Assets that are not required in the normal operations of a business but can generate income in the future
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Non-operating assets are assets that are not required in the normal operations of a business but that can generate income nonetheless. The assets are recorded in the balance sheet and may be listed separately or as part of operating assets. Non-operating assets do not help in the day-to-day operations of the business, but they may be investments or assets that can be disposed of to generate income to finance the operations of the business.
Identifying non-operating assets is an important step when determining the current value of a company since such assets are often left out when calculating the net worth of a business based on its earnings potential.
Examples of Non-Operating Assets
The following are the most common non-operating assets:
1. Underutilized cash
Any excess cash and cash equivalents that are not immediately required in financing the day-to-day operations of the company are recognized as non-operating assets. The underutilized cash is the amount that exceeds the operating cash requirements of the business, and they should be added to the value of the operating assets when conducting an appraisal.
The excess cash can be used to purchase short-term investments such as commercial paper or government securities, which can be quickly converted into cash. The securities are known as near-cash investments because they can be sold to get quick cash to finance operations.
2. Marketable securities
Marketable securities are financial instruments that can be bought and sold on public exchanges or elsewhere in the secondary market. Examples of marketable securities include treasury bills, common stock, banker’s acceptances, and corporate bonds. They have maturities of less than one year and have low returns due to their high liquidity and low-risk nature.
Rather than letting cash sit idly, businesses purchase marketable securities to earn returns from them. If the business has an urgent need for cash, the securities can be quickly liquidated at a reasonable price.
3. Unutilized assets
A business may also hold assets that are no longer required in the day-to-day operations, and that do not currently generate cash flows for the business. An example of an unutilized asset is a plot of land owned, but not currently used, by the business.
Although the land may have accumulated substantial market value, it does not bring in any cash flows yet and may be excluded when estimating the value of the company on the basis of the potential cash flows.
Another example of an unutilized asset is an occupied building that was used to manufacture a specific line of products that has since been discontinued. Since the building is not used in the daily operations of the business, it is recognized as a non-operating asset.
4. Loans receivable
Loans receivables represent funds that have been lent out to borrowers that are yet to be collected. If the company is in the business of selling products and services to customers, the loans receivable is recognized as a non-operating asset since it is not part of the ordinary operations of the company.
If the company is in the business of lending out money to borrowers, the loans receivables will be a significant proportion of the company’s cash flow and will, therefore, be recorded as operating assets.
Treatment of Non-Operating Assets in Business Valuations
When conducting business valuations, non-operating assets are valued at the net realizable value. This is the value obtained from the sale of the asset after deducting any associated costs such as income taxes and disposition costs. The net realizable value is the value that counts when calculating the total net worth of the company.
For example, if the non-operating asset is a real estate property, the business can obtain an appraisal of the property by deducting the interest expense, taxes, and other expenses from the market value before adding the net realizable value to the enterprise value of the company.
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