What is a Long-term Liability?

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A long-term liability is a company’s financial obligation that is not due within the next 12 months or the current operating cycle (if it is more than 12 months). It is also known as long-term debts or noncurrent liabilities.

Businesses need to generate funds as capital to cover their various activities, expenses, and investments. Loans are one way for business managers to get an immediate cash supply and is an example of long-term liabilities.

All business assets and liabilities are reflected in the company books or balance sheet. Long-term liabilities are also included, with the current portion of the debt listed separately to reflect the business’s current liquidity accurately.

It may also list refinanced current liabilities under long-term liabilities after refinancing, and they are no longer due within 12 months. Moreover, liabilities with corresponding long-term investments that are intended as payment for the debt (must be sufficient to cover the debt) also fall under the same category.

Examples and uses of long-term liabilities

Long term liabilities are one type of liability. The other types are current liabilities and contingent liabilities. Some examples of long-term liabilities include:

  • Long-term debts

Aside from bank loans, long-term debts include bonds, debentures, and notes payables. These debts may either be secured (backed by collateral) or unsecured.

Bonds are usually secured and issued by corporations, hospitals, and governments. This is less costly than common stocks, and the bondholders are not owners, so the ownership interest of stockholders is undiluted.

On the other hand, Debentures are not secured by any collateral and are generally issued for specific purposes. For example, debenture capital issued for a particular project is paid by revenues generated by that project. These debts are high risk and usually depends on the financial strength and creditworthiness of the issuer.

Lastly, notes are similar to bonds. Their main difference is the shorter maturity of the treasury.

  • Deferred tax liabilities

These are temporary differential amounts the company expects to pay the authorities. Tax accounting is done on an accrual basis, while tax computation is a cash basis accounting. Therefore, there are some discrepancies between the pre-tax earnings reflected in the company’s income statement and the taxable income tax return. The realized income tax expense reduces the deferred tax liability. 

  • Capital leases

A capital or finance lease is a contract that transfers ownership of the leased asset to the lessee after the specified period or term. The term is at least 75% or the asset’s useful life and allows the lessee to purchase the asset at a price lower than the market value.

In recording this in your balance sheet, you have to note both the present value of lease obligations under liabilities and the fixed asset of equivalent value.

  • Mortgages and others

Long-term liabilities also include mortgages, car payments, and loans for machinery, equipment, and lands, except the current portion due within the year.

These are all important in the company’s long-term financing and are crucial in determining its long-term solvency. Long-term liabilities are useful tools for management analysis and application of financial ratios. Investors and creditors also consider these ratios, and the company’s cash flow, to gauge how a company manages its finances, to analyze the risk level of investing in or lending it money.

If you have questions about how this applies to your business, feel free to get in touch with Annette & Co.! You can also follow us on Instagram.

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Annette Ferguson

Annette Ferguson

Owner of Annette & Co. - Chartered Accountants & Certifed Profit First Professionals. Helping Online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.