What Are Long-Term Liabilities?
Long-term liabilities are a company's financial obligations that are due more than one year in the future. The current portion of long-term debt is listed separately on the balance sheet to provide a more accurate view of a company's current liquidity and the company’s ability to pay current liabilities as they become due. Long-term liabilities are also called long-term debt or noncurrent liabilities.
Key Takeaways
- Long-term liabilities are due more than one year in the future.
- They are separately identified on the balance sheet.
- While short-term liabilities must be paid with current assets, long-term liabilities can be repaid through a variety of current and future business activities.
Long-Term Liability
Understanding Long-Term Liabilities
Long-term liabilities are listed in the balance sheet after more current liabilities, in a section that may include debentures, loans, deferred tax liabilities, and pension obligations. Long-term liabilities are obligations not due within the next 12 months or within the company’s operating cycle if it is longer than one year. A company’s operating cycle is the time it takes to turn its inventory into cash.
However, there are some exceptions to this general rule. If a company has current liabilities that are being refinanced into long-term liabilities, the intent to refinance is present, and there is evidence that the refinancing has begun, then it may report current liabilities as long-term liabilities because after the refinancing, the obligations are no longer due within 12 months. Additionally, a liability that is coming due may be reported as a long-term liability if it has a corresponding long-term investment intended to be used as payment for the debt . However, the long-term investment must have sufficient funds to cover the debt.
Examples of Long-Term Liabilities
The long-term portion of a bond payable is reported as a long-term liability. Because a bond typically covers many years, the majority of a bond payable is long term. The present value of a lease payment that extends past one year is a long-term liability. Deferred tax liabilities typically extend to future tax years, in which case they are considered a long-term liability. Mortgages, car payments, or other loans for machinery, equipment, or land are long-term liabilities, except for the payments to be made in the coming 12 months.
How Long-Term Liabilities are Used
Long-term liabilities are a useful tool for management analysis in the application of financial ratios. The current portion of long-term debt is separated out because it needs to be covered by liquid assets, such as cash. Long-term debt can be covered by various activities such as a company's primary business net income, future investment income, or cash from new debt agreements.
Debt ratios [such as solvency ratios] compare liabilities to assets. The ratios may be modified to compare the total assets to long-term liabilities only. This ratio is called long-term debt to assets. Long-term debt compared to total equity provides insight relating to a company’s financing structure and financial leverage. Long-term debt compared to current liabilities also provides insight regarding the debt structure of an organization.
What Are Long-Term and Short-Term Liabilities?
Long-term liabilities are typically due more than a year in the future. Examples of long-term liabilities include mortgage loans, bonds payable, and other long-term leases or loans, except the portion due in the current year. Short-term liabilities are due within the current year. Examples of short-term liabilities include accounts payable, accrued expenses, and the current portion of long-term debt.
What Is the Current Portion of Long-Term Debt?
The current portion of long-term debt is the portion of a long-term liability that is due in the current year. For example, a mortgage is long-term debt because it is typically due over 15 to 30 years. However, your mortgage payments that are due in the current year are the current portion of long-term debt. They should be listed separately on the balance sheet because these liabilities must be covered with current assets.
Where Are Long-Term Liabilities Listed on the Balance Sheet?
A balance sheet presents a company's assets, liabilities, and equity at a given date in time. The company's assets are listed first, liabilities second, and equity third. Long-term liabilities are presented after current liabilities in the liability section.
The Bottom Line
Long-term liabilities or debt are those obligations on a company's books that are not due without the next 12 months. Loans for machinery, equipment, or land are examples of
long-term liabilities, whereas rent, for example, is a short-term liability that must be paid within the year. A company's long-term debt can be compared to other economic measures to analyze its debt structure and financial leverage.