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Non-Core Assets
September 30, 2020
What are Non-core Assets?
Non-core assets (sometimes known as non-operating assets) are assets that are no longer considered core to a business’s operation or are no longer in use. This could include property, plant and equipment, an associate, or equity method investments, among other assets.
Key Learning Points
- Non-core assets are types of assets which are no longer recognized as part of the everyday running of the business
- An asset is a resource controlled by the entity with the expectation of producing probable economic benefits
- A business may own investments in other companies (known as associates or equity method investments) which may generate income but this income is not part of the ongoing business
- Non-core assets are not considered part of the operations and are removed from the Enterprise Value calculation
- It is important to exclude non-core assets from the EV calculation as their associated income is not included in the value driver (EBIT or EBITDA)
Types of Non-core Assets
Any type of asset that is not considered necessary to a business’s core operation can be a non-core asset. This could even be an entire subsidiary company or an investment in another company. A company may sell or spin-off a subsidiary entity to raise funds or to make it more efficient.
Non-core assets are particularly common in manufacturing when product lines change or there is a variation in the type of item being produced, and equipment that was previously used is now sitting idle. Natural resources bought for manufacture that is no longer required would also be considered non-core.
Real estate and land that is no longer being used are also good examples of non-core assets. If a housing developer owns a site for which they cannot get planning permission, it would no longer be considered necessary to the operation of the business and could be considered non-core.
Even assets that are producing returns for a company could be considered non-core if it is not necessary for the operation of the core business. For example, a company that manufactures white goods may own marketable securities that generate income, but as those securities are not critical in the manufacture of washing machines, they would be considered non-core.
It is subjective to the company whether they consider an asset to be core or non-core. An asset that is core for one company may well be non-core for another. An agribusiness may sell some scrubland that it considers non-core to a housing developer that purchases it with the goal of developing it into a housing estate, who would then consider the land to be core.
Understanding Non-core Assets in Valuation
Non-core assets impact the enterprise value in the EV to equity bridge calculation. The calculation includes all sources of funds at fair value to give a valuation of the underlying assets (total enterprise value). This value includes both core and non-core assets. Financial assets are the most common type of non-core asset and income generated is often disclosed in the financial section of the income statement below operating profit. EBIT and EBITDA figures are free of financial income and therefore do not include associated income from this type of asset. Non-core assets must therefore be removed from “total enterprise value” to arrive at the enterprise value.
This can be summarized as follows:
