What Are Long-Term Liabilities?

What Are Long-Term Liabilities?

Let me explain long-term liabilities directly: these are a company's financial obligations that come due more than one year from now. You'll see them listed separately on the balance sheet, which gives you a clearer picture of the company's current liquidity and its capacity to handle short-term debts as they arise. I refer to them as long-term debt or noncurrent liabilities in my discussions.

Key Takeaways

You need to remember that long-term liabilities are those financial duties payable beyond one year. They appear apart from current liabilities on the balance sheet. Think of them including loan payments, bonds, and pension obligations not due in the next 12 months. We use financial ratios to scrutinize a company's long-term liabilities, its leverage, and debt repayment ability. While short-term debts rely on current assets for payment, long-term ones can be settled through ongoing and future business activities.

Understanding Long-Term Liabilities

A liability is simply what a person or company owes, and we categorize them as current or long-term. Current ones are due within 12 months, but long-term liabilities are those not due in the next 12 months or within the company's operating cycle if that's longer than a year. The operating cycle is the period it takes to convert inventory to cash.

On the balance sheet, you'll find a company's liabilities listed, with long-term ones coming after the current ones. This section might cover debentures, loans, deferred tax liabilities, and pension obligations, often labeled as non-current liabilities.

Long-Term and Current Liability Crossover

Distinguishing between long-term and current liabilities can be straightforward sometimes, but other times it's more complex. For instance, a mortgage is a long-term liability overall, but the part due this year gets separated as the current portion of long-term debt on the balance sheet.

There are scenarios where a current liability shifts to long-term. If you're refinancing current debts into long-term ones, and the process has started with clear intent, you can report them as long-term since they won't be due within 12 months post-refinancing.

Also, if a liability is due soon but you have a matching long-term investment set aside to pay it, and that investment has enough funds, it can be classified as long-term. Remember, classify based on facts at the balance sheet date, not future expectations.

Examples of Long-Term Liabilities

You'll encounter various long-term liabilities in practice. The long-term part of a bond payable counts as one, since bonds often span many years. The present value of lease payments extending past a year is another. Deferred tax liabilities usually apply to future years, making them long-term. Mortgages, car loans, or financing for machinery, equipment, or land qualify too, excluding the payments due in the next 12 months.

Just note that the slice of a long-term liability like a mortgage due within a year shows up as the current portion of long-term debt on the balance sheet.

How Long-Term Liabilities Are Used

Liabilities play a crucial role in business; you use them to finance operations and support expansion. Managers often turn to debt for buying assets, funding R&D, or building working capital—it's typically the most cost-effective way to raise money compared to issuing new shares, which can dilute ownership and cost more.

With long-term liabilities, payments are spread out over time, freeing up current funds for growth. But they carry risks: overcommitting can lead to financial strain, damage credit ratings, raise borrowing costs, and trigger investor sell-offs.

Analyzing Long-Term Liabilities

Debt can benefit a company if managed well, so you should check that it's not excessive. Too much can hinder operations, cause defaults, bankruptcy, or forced asset sales at low prices.

We rely on financial ratios to evaluate long-term liabilities, leverage, and debt-paying ability—these are monitored by investors and management alike. When analyzing, separate the current portion of long-term debt, as it requires liquid assets like cash for coverage. Long-term debt itself can be paid via core business income, future investments, or new debt.

Debt ratios, such as solvency ratios, compare liabilities to assets. You might focus on long-term debt to assets, or compare long-term debt to total equity for insights into financing and leverage, or to current liabilities.

What Are Long-Term and Short-Term Liabilities?

Long-term liabilities are due more than a year ahead, like mortgages, bonds payable, or long-term leases, minus the current-year portion. Short-term ones are due within the year, such as accounts payable or accrued expenses.

What Is the Current Portion of Long-Term Debt?

This is the segment of a long-term liability due in the current year. For a 15- to 30-year mortgage, the payments for this year are the current portion, listed separately on the balance sheet to be covered by current assets.

Where Are Long-Term Liabilities Listed on the Balance Sheet?

The balance sheet shows assets first, then liabilities, then equity. Long-term liabilities follow current liabilities in the liabilities section.

The Bottom Line

Long-term liabilities are obligations not due within 12 months, like loans for equipment or land, unlike short-term ones such as rent. You can compare a company's long-term debt to other metrics to assess its debt structure and leverage.