What are Long-Term Liabilities
Long-term liabilities are financial obligations of a company that become due more than one year. In accounting, they form a section of the balance sheet that lists liabilities not due within the next 12 months including debentures, loans, deferred tax liabilities and pension obligations. The current portion of long-term debt is excluded 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.
BREAKING DOWN Long-Term Liabilities
Long-term liabilities are also called long-term debt or noncurrent liabilities. 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 an entity to turn inventory into cash.
Exceptions of Long-Term Liability Reporting
An exception to the above two options relates to current liabilities being refinanced into long-term liabilities. If the intent to refinance is present and there is evidence the refinancing has begun, a company may report current liabilities as long-term liabilities because after the refinancing, the obligations are no longer due within 12 months. In addition, a long-term liability that is coming due but has a corresponding long-term investment intended for the payment of the debt is reported as a long-term liability. 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 payable typically covers a long period of time, 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, and if this is the case, the tax liabilities are considered a long-term liability. Mortgages, car payments or other loans for machinery, equipment or land are long term, except for the payments to be made in the coming 12 months.
Long-Term Liabilities in Ratios
Long-term liabilities are a useful total for management analysis in the application of financial ratios. Debt 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.