What are 'Noncurrent Liabilities'
Noncurrent liabilities are long-term financial obligations listed on a company’s balance sheet that are not due within the present accounting year, such as long-term borrowing, bonds payable and long-term lease obligations. Investors are interested in a company's noncurrent liabilities because they want to see that it does not have too much debt relative to its cash flow. Current liabilities, which is the other major classification of liabilities, are those due within the present accounting year, such as accounts payable, customer advances, taxes payable and any payments due that year on a long-term loan.
BREAKING DOWN 'Noncurrent Liabilities'
Noncurrent liabilities, also called long-term liabilities, are debts not anticipated to be extinguished within the 12 months following the date of the balance sheet. If an entity’s operating cycle is longer than 12 months, a noncurrent liability is an obligation not expected to be extinguished in one operating cycle.
Debt that is due within the 12 months following the balance sheet may still be reported as a noncurrent liability. There must be an intent to refinance this debt, with a financial arrangement in process to restructure the obligation to a noncurrent nature.
Examples of Noncurrent Liabilities
The portion of a bond liability that will not be paid within the upcoming year is classified as a noncurrent liability. When reporting a capital lease as an asset on the balance sheet , as opposed to an operating lease on the income statement, payments due after one year are noncurrent liabilities. This is also true for any rent scenario. Warranties covering more than a one-year period should be reflected in this section as well. Other examples include pension liabilities, deferred compensation, deferred revenue, derivatives and certain health care liabilities.
Purpose of Current Liabilities and Noncurrent Liabilities
Classified balance sheets segregate current and noncurrent liabilities. Lenders primarily concern themselves with the short-term liquidity and the amount of current liabilities. Meanwhile, long-term investors deal with the noncurrent liability aspect of an entity to gauge the company’s foundation for the future.
In addition, there are numerous financial ratios that assist in managing business operations and cash flow considerations. These ratios – such as the current ratio and working capital ratio – utilize current liabilities. Because current liabilities are broken out, noncurrent liabilities are often calculated, as they represent all remaining debts.
Companies incur noncurrent liabilities for numerous reasons. First, noncurrent liabilities often represent large dollar amounts that would take substantial amounts of time for a company to accumulate on their own. Incurring this debt allows for growth in innovation, research or expansion. Because long-term debt is usually secured by an asset, interest rates are generally lower than with short-term debt. Finally, noncurrent liabilities allow for equity maintenance and an avoidance of stock dilution.