Legal Definitions - noncash charge

A noncash charge is an expense or cost recorded on a company's financial statements that reduces its reported profit or asset value, but does not involve an actual outflow of cash during the period in which the charge is made. These are accounting entries that reflect the consumption of an asset's value over time, a reduction in an asset's worth, or a future obligation, without an immediate cash transaction.

Here are some examples to illustrate this concept:

• Example 1: Depreciation of Equipment

  Imagine a construction company purchases a new bulldozer for $300,000. Instead of recording the entire $300,000 as an expense in the year of purchase, accounting rules allow them to spread the cost over the bulldozer's useful life, say 10 years. Each year, the company records $30,000 as a depreciation expense. This $30,000 is a noncash charge because the company isn't actually paying out $30,000 in cash for the bulldozer that year; the cash payment for the bulldozer occurred when it was initially bought. The depreciation simply reflects the wear and tear and loss of value of the asset over time.

• Example 2: Amortization of a Patent

  A software development firm invests $5 million to acquire a patent for a unique algorithm. This patent has a legal life of 20 years. The company decides to amortize the cost of the patent over its useful life, recording $250,000 as an amortization expense each year ($5 million / 20 years). This annual $250,000 is a noncash charge. The initial $5 million cash outlay happened when the patent was acquired, but the annual amortization expense is an accounting adjustment to reflect the consumption of the patent's value over time, without any new cash leaving the company's accounts in that specific year.

• Example 3: Impairment of Goodwill

  A large retail chain acquires a smaller competitor for a price significantly higher than the fair market value of the competitor's tangible assets (like stores and inventory). The excess amount paid is recorded on the retail chain's balance sheet as "goodwill," representing the acquired company's brand reputation, customer base, etc. Years later, due to a major shift in consumer buying habits, the acquired brand's value significantly declines. The retail chain's accountants determine that the goodwill is no longer worth its recorded value and must write down its value by $10 million. This $10 million write-down is an impairment charge, which is a type of noncash charge. No cash is exchanged when this charge is made; it's an accounting adjustment to reflect the reduced value of an asset on the company's books, impacting its reported profits for that period.