Financial Statement Series: Unlocking Hidden Value: A Deep Dive into Lesser-Known Business Assets

Rylan Kaliel
Aug 21
13 min read

Updated: Aug 28

Sunlit room under renovation, with wooden scaffolding, scattered tools, and materials. White walls, large windows, and a calm, productive vibe.

In the past blogs we have discussed what assets are and how they are presented on the Balance Sheet. We have learned about the assets that most companies come across in the normal course of business. However, we will now spend some time on the lesser-known assets and learn if they fall into current or long-term assets in the Balance Sheet. Please keep in mind that the classifications mentioned in the below sections are approximations and are subject to change depending on each business situation. It is always prudent to reach out to professionals if you need clarification on how to classify each business asset that fall outside the norm.

When considering these lesser-known business assets, it’s helpful to understand not only how they function but also where they appear on your company’s Balance Sheet. All the examples—deposits and prepaid expenses—are classified as current assets if you expect to recover or use them within one year; if they’ll remain with the business longer, they may be classified as non-current (or long-term) assets.

Deposits: Security for Both Sides

Deposits are sums of money your business puts down as a guarantee that you’ll fulfill a contract or pay for a service. While the funds are not immediately available for use, they’re still assets because you expect to get them back once conditions are met.

Utility Deposits: Let’s say your business signs up for water, gas, or electricity. The provider may require a $1,000 deposit to start service, especially if your business is new or has no payment history. This money is refundable when your account is closed or after you have shown a good track record of paying your bills by the designated time.
Rental Deposits: Many landlords ask for a security deposit—perhaps $2,500—when you rent office, warehouse, or retail space. Provided you don’t damage the property, you’ll receive this sum when your lease ends.
Equipment Deposits: If you rent specialized equipment (like a commercial oven or a construction tool), you might need to pay a deposit upfront. For example, a $500 deposit on a rented forklift ensures it’s returned in good condition.
Supplier or Vendor Deposits: Sometimes, suppliers require a deposit before fulfilling a large or custom order. If you place a $3,000 deposit for branded packaging from a manufacturer, this stays on your books as an asset until the order is completed or cancelled.

Balance Sheet Classification

Deposits can be classified as either current or long-term asset depending on the term of the contracts. If the deposits are to be recovered or used within a year, then they would be classified as a current asset if not then they will be categorized as a long-term asset.

Utility Deposits: Typically, you’ll find these listed under “Other Current Assets” if the deposit will be returned within the year. If the utility service spans longer, the deposit can be listed as a non-current asset, often under a similar “Other Assets” category.
Rental Deposits: Security deposits for property leases are often expected to be returned at the end of the lease. If your lease is shorter than a year, classify the deposit as a current asset; for longer leases, the deposit belongs in long-term assets, usually still under “Other Assets.”
Equipment Deposits: Equipment rental deposits are usually short-term and most often listed under “Other Current Assets.” If the rental is for a period exceeding one year, it can be moved to non-current assets until the deposit is due back.
Supplier or Vendor Deposits: These upfront payments are “Other Current Assets” if the purchase is expected to be completed within the operating cycle, which is typically less than a year for most businesses. For deposits that will not be settled soon, they’ll appear as non-current.

Tip: Keep good records of all deposits, including contact details and contract terms, so you can reclaim them when eligible.

Prepaid Expenses: Investments in Future Benefits

Prepaid expenses are payments made in advance for goods or services you’ll use in the future. These are assets because the benefit hasn’t been received yet—they’ll turn into expenses as time passes or services are consumed.

The prepaid assets are recorded at their original value into the prepaid asset category at inception. They will then be amortized into expenses depending on the contract terms. Below we will look at some examples of the most common prepaids and how to account for them.

Prepaid Insurance: If you pay $2,400 upfront for a one-year insurance policy, you’ll record the whole amount as a prepaid expense. Each month, ($2400 / 12 = $200) is “used up,” and will be moved from prepaids to insurance expense. At the end of the year the balance of the prepaid insurance will be zero as all has been moved to insurance expense at that time.
Prepaid Rent: Sometimes, landlords require rent for the first and last months upfront. If you pay $3,000 in advance for office rent, it’s a prepaid until you occupy the space. At that point the prepaid rent will be moved to rental expense.
Prepaid Subscriptions: Annual memberships for business software ($600/year for accounting software) or industry associations ($400/year) are prepaids. At the time of the payment the full amount will be recorded as prepaids. Each month the amount used i.e. initial amount / 12 (months in the year) will be taken out of the prepaids and recorded as an expense under professional fees.
Prepaid Advertising: Pay $1,200 to a magazine for a series of ads to run over six months. In this case the amortization period is 6 months, therefore each month, $200 ($1,200 / 6 months) transitions from a prepaid asset to marketing expense as your ads are published.
Prepaid Supplies: If you buy $5,000 worth of printing materials in bulk, then you will amortize them into expense as they are used. In this case as there is no actual amortization period designated in the contract, the usage per month would be moved from the prepaids to expenses.

Balance Sheet Classification

Prepaid Expenses: When you pay for insurance, rent, or any service in advance, the amount appears under “Prepaid Expenses” within the current assets section—since the benefit is expected within the year. For prepayments covering more than one year, the portion relating to future years moves to non-current assets at the end of each fiscal year.

Tip: Prepaids help you match costs to the periods they benefit, improving the accuracy of your Income Statement.

Investments: Growing Wealth Over Time

Investments are assets your business holds to earn extra income, diversify risk, or build relationships. These can take many forms, from traditional stocks and bonds to less obvious opportunities. We will spend some time in the future blogs discussing investments in more depth as there are a lot of nuances involved in accounting for investments. In this blog we will just become more acquainted with various investments.

Buying Stocks or Bonds: If your small business invests $10,000 in government bonds, you’ll earn interest while maintaining the principal. That bond sits as an investment asset until it matures or is sold.
Ownership in Other Companies: Purchasing a 15% share in a local supplier for $30,000 can secure your supply chain and provide dividends if the company does well.
Mutual Funds: Some businesses buy mutual funds, spreading risk over a mix of stocks and bonds. A $5,000 investment here is also an asset.
Joint Ventures: Pooling $20,000 with another company to develop a new product means you both share investment risk and possible returns.

Balance Sheet Classification

Investments: The classification depends on your intent and the asset’s liquidity:

Short-Term Investments (Current Assets): If you intend to sell government bonds or mutual funds within 12 months, they’re listed under current assets. For example, a $5,000 mutual fund expected to be sold soon is current.
Long-Term Investments (Non-Current Assets): Assets you plan to hold longer—such as a $10,000 government bond maturing in five years, a $30,000 equity stake in a supplier, or $20,000 in a joint venture—would be classified as non-current investments.

This approach applies to other assets too: always consider the period you’ll benefit from the asset or plan to hold it. Accurate classification clarifies liquidity and helps stakeholders see how your resources are allocated across the short and long term.

Tip: Investments can generate extra income but always weigh the risks—particularly with less familiar options.

Alternative Investments: Exploring New Frontiers

Investments can come in many shapes and sizes. In this section we will look at investments that are less known and talked about. The investments in this section are typically less liquid (harder to sell in the short term) but can offer unique returns or strategic advantages.

Real Estate: Buy a commercial property for $250,000 as an investment. You might rent it out for income or hold it for appreciation.
Private Equity: Invest $15,000 in a local startup or small business that’s not publicly traded. These investments are riskier but can yield high rewards if the business succeeds.
Collectibles & Art: Rare artwork, vintage wine, or collectible cars can be alternative assets, though they’re harder to value and sell quickly.
Peer-to-Peer Lending: Lend $8,000 through a peer-to-peer lending platform to entrepreneurs or individuals. You earn interest, but there’s some risk the borrower may default.
Hedge Funds & Venture Capital: If you have access, investing $50,000 in a venture capital fund exposes your business to a variety of new companies and ideas.

Balance Sheet Classification

On your Balance Sheet, alternative investments such as real estate, private equity, collectibles, peer-to-peer loans, and venture capital are usually classified as non-current assets. This is because these types of investments are generally illiquid, meaning you wouldn’t expect to convert them into cash in the next twelve months. For example, a commercial property held for rental income or appreciation, equity in a startup, or shares in a venture capital fund typically fit this long-term profile.

However, classification depends on your intent and the nature of the investment. If you plan to sell an alternative asset within the next year—for instance, flipping a property or liquidating a collectible—then it could be classified as a current asset. Most often though, businesses and investors hold these assets for strategic growth or income over several years, reinforcing their status as non-current.

Tip: Alternative investments can diversify your portfolio but always seek professional advice—they may have complex risks and regulations.

Capital Leases: Combining Ownership and Flexibility

Capital leases (or finance leases) are agreements in which you will essentially own the asset. What this means is that at least one of the following criteria is met.

The asset will be in your possession for at least 75% of its useful life. Let’s say that you are looking at leasing a truck. You know that this specific truck under normal conditions will operate for 15 years. If you will be leasing it for 12 years, or for 80% of its useful life, then it would meet the first criteria for capitalization.
The value of the lease payments over the period of the lease is equal or more than 90% of the fair market value of the asset at the time the lease is signed. Let’s say that you are going to rent a tractor for 5 years for $1,500 per month. If you were to buy the tractor instead you would have to pay $100,000. The total cost of the lease payments would be $90,000. This amount would be equal to 90% of the value of the asset so the criteria would be met.
There is a bargain purchase clause in the contract. Let’s say you are leasing a water truck for 6 years. At the end of the lease period the value of the water truck would be $300,000 but you have the option to purchase it for $100,000 which is substantially lower than its value. In this case the criteria would be met.

In the case that one of the above criteria is met then you have a capital lease you would record it as an asset in your books. We will look at some examples of the various types of capital leases you may come across.

Leasing a Company Vehicle: If you lease a delivery van for five years and the terms say you’ll own it at the end for $1, a bargain, the lease is considered a capital lease. You add the van’s value to your assets and set up a liability for the lease payments.
Machinery & Equipment: Lease a $50,000 piece of equipment for 7 years and the total lease payments over the years equal $47,000 (>=90%). You treat it as if you own it from the start, recording depreciation and the liability as you pay down the lease.
Technology: Lease a high-end server for your data needs, where the lease covers nearly the entire useful life (>=75%) of the server. This is a capital lease and accounted for like a purchase.

Balance Sheet Classification

When you enter a capital lease, both the leased asset and the associated liability must be recognized on your Balance Sheet. The asset is recorded under property, plant, and equipment at either the fair market value of the asset or the present value of the lease payments, whichever is lower.

Present Value Calculation

As mentioned above the asset would have to be recorded at the lower of the fair market value (the amount you would have to pay on the market to buy it today) or the present value of the lease payments. It would be prudent to discuss what present value is and how the present value of the lease payments is calculated here.

What is Present Value and How Do You Calculate It?

The present value (PV) of an asset is a way to figure out what a stream of future payments is worth in today’s dollars. In other words, it’s the value right now of money you expect to pay or receive in the future, adjusted for the fact that a dollar today is worth more than a dollar tomorrow due to factors like inflation or the potential to invest that money elsewhere.

Think of it like this: if someone offered you $1,000 today or $1,000 a year from now, you’d probably prefer the money today. That’s because you could invest it, earn interest, or avoid price increases over time. When it comes to leases, you make payments over several years—so to “level the playing field,” accountants calculate what those payments are worth in today’s terms.

How is Present Value Calculated?

To calculate present value, you use a formula that discounts each future payment back to its value today. The formula looks like this:

PV = PMT * [1 - (1 + r)^-n] /r

Where:

PV = Present Value
PMT = Recurring payments
r = Discount or interest rate (often the interest rate or your cost of borrowing, expressed as a decimal—so 5% is 0.05)
n = Number of periods until payment (for example, years or months)

This formula works when each payment is the same amount for every period. Be sure to adjust the interest rate to match the payment interval—for example, divide an annual rate by 12 if payments are monthly. If the payment amounts or the interest rate vary from year to year, you’ll need to calculate the present value for each individual period using the specific payment and rate for that time, and then add the results together to get the total present value.

Let’s Walk Through an Example:

Suppose you are leasing a piece of equipment for 3 years, and you’ll pay $10,000 at the end of each year. The interest rate you’d use to discount these payments (the discount rate) is 6% per year.

To calculate this, we would input the above information into our formula as follows:

PV = 10,000 * [1 - (1 + 6%)^-3] / 6%

So, the present value of your lease payments—what they’re worth in today’s dollars—is about $26,730. This is the amount you’d record as the asset’s value on your Balance Sheet.

Key Points to Remember:

The discount rate reflects either borrowing costs, expected return, or another relevant rate.
The farther in the future the payment, the less it’s worth today.
You apply this calculation to your payments, where the payments or interest rate differ, you will need to do a separate calculation of each, then total them up for the asset’s present value.

If you ever use a spreadsheet, you can use built-in functions like PV or NPV to make the calculation easier. See our Net Present Value and Present Value blog post for more details on these calculations.

The capital leases differ from other assets in one important way. They must be recorded with a corresponding liability at the inception of the agreement.

Contra Liability: Tracking Progress on Lease Payments

When you take on a capital lease, you record the total lease obligation as a liability. As you make payments, a contra liability account tracks how much you’ve paid, reducing your outstanding obligation. This helps you see at a glance how much you still owe and how much you’ve already covered.

Example: Suppose your lease obligation starts at $40,000. Each payment you make reduces this liability, while the contra liability account shows the total amount paid off. When the lease is finished, the liability is fully cleared.

The liability will be recorded under the long-term liability section of the Balance Sheet under the account capital lease obligation.

Tip: Keeping an eye on your contra liability ensures you’re not overextended and helps with cash flow planning.

Over time, the asset is depreciated like any owned equipment (see our Long-Term Assets blog post for more details), and the liability is reduced as payments are made. This dual recognition of assets and liabilities demonstrates both your increased operational capacity and your financial commitments. The clear classification underlines the substance-over-form principle in accounting, showing that even though you don’t technically own the asset until the lease ends, you essentially control it and bear the risks and rewards of ownership.

Properly classifying capital leases ensures that your financial statements provide a true and fair view of your business’s resources and obligations, enhancing transparency for lenders, investors, and other stakeholders.

Tip: Capital leases can boost your reported assets but also increase your liabilities. Make sure you can handle the obligations before signing.

Leasehold Improvements: Customizing Rented Spaces

Leasehold improvements are enhancements you make to a rented location to better suit your business operations. Even though you don’t own the property, these improvements are assets and are depreciated over your lease’s term as they are providing financial benefits to you over the course of your operations.

Office Renovations: Spend $20,000 to build conference rooms, install new lighting, and repaint walls in a leased office. These costs are leasehold improvements.
Restaurant Upgrades: If you lease a space for a restaurant and add a new kitchen, serving counters, and signage for $60,000, all these are leasehold improvements.
Retail Store Fixtures: Installing shelving, checkout counters, and security systems in a rented shop for $15,000 count as leasehold improvements.
Medical or Professional Practices: Lease a clinic suite and invest in built-in cabinetry, sinks, and specialized lighting. All these customizations are assets.

Tip: Leasehold improvements are depreciated over the shorter of the lease term or the improvement’s useful life. Make sure you know the lease details so you can plan your depreciation and tax deductions accurately.

Classification of the Lesser-Known Assets: Considerations for Year-End

At the end of each fiscal year, it's crucial to review these assets and liabilities for potential reclassification. Circumstances can change: an asset originally classified as long-term—perhaps expected to be received more than a year out—may now be scheduled for return or use within the upcoming year. For instance, a security deposit placed five years ago with a multi-year lease may need to be shifted from non-current to current assets if the lease is ending soon. For your liabilities, consider what amounts are paid next year, for example on a lease, these need to be classified as current liabilities with the amounts not paid next year classified as non-current liabilities. This annual review ensures your Balance Sheet reflects current expectations and supports accurate financial reporting.

Bringing It All Together

Understanding and properly managing these lesser-known assets can give your business a financial edge, boost your borrowing power, and help you avoid unpleasant surprises. Don’t hesitate to consult with KLV Accounting to ensure you’re making the most of every asset at your disposal. The more you know about your business’s hidden value, the more prepared you are for growth and opportunity.

In the next blog we will discuss present value and net present value calculations, how these are prepared and used in the financial statements.

KLV Accounting, a Calgary-based accounting firm, is here to help. Contact us today to enhance your financial strategy, minimize your taxes, and drive business success! For a free consultation, call us at 403-679-3772 or email us at info@klvaccounting.ca.