Liabilities are the obligations of a business to third-parties that it must settle in the future through some form of compensation. These may include loans taken from financial institutions or credit purchases made from suppliers. Based on their life, liabilities can either be long-term, known as non-current liabilities, or short-term, known as current liabilities.
What are Long-Term Liabilities?
Long-term liabilities are obligations that a business must pay after the upcoming 12-months. For every liability that a company has, it must determine how long it will take to settle it. Based on this information, the company can then classify it as long-term or short-term. This classification is crucial when presenting liabilities on the Balance Sheet.
Long-term liabilities usually represent long-term debt obtained by a company. The reason why companies acquire long-term debt is to finance projects that take longer. Debt finance usually comes at a lower cost as compared to equity finance. Similarly, long-term debt also comes with a lower interest rate as compared to short-term debt. Therefore, companies usually prefer long-term debt as compared to other sources of finance.
What are some examples of long-term debt?
Different items comprise the long-term debt of a company. Usually, all these may not be a part of the company’s debt structure. A company may utilize any source of long-term debt based on its nature and needs. Given below are some of the examples of long-term liabilities.
Loans
The most common type of long-term debt is loans taken from financial institutions. These represent monetary obligations that the company must repay. However, companies may also issue debt instruments in the form of bonds, debentures, or notes payable. In exchange for these instruments, the company can obtain a loan.
In exchange for loans, companies usually pay interest based on predetermined rates. Similarly, companies may also get loans against an asset offered as collateral. Loans also come with a maturity date, which is the time the company has to repay the principal amount of the loan. There are also other more complex types of loans that companies can obtain.
Finance Lease
Finance lease is a type of lease that lasts more than 12 months. Since it represents a liability that a company must repay, it is a part of long-term liabilities. Financial leases represent payments against an asset that the company usually gets ownership of at the end of the lease period. Accounting standards require companies to split finance leases into current and non-current portions.
Deferred Tax Liability
The tax laws of a particular country may be different from its accounting standards. Therefore, there might be some differences between the carrying value of items according to the accounting standards and tax laws. These differences create a deferred tax asset or liability for a company. Accounting standards require companies to classify deferred tax liabilities as long-term liabilities. However, these are not monetary liabilities, unlike the above two types of long-term liabilities.
Other long-term liabilities
Apart from the above, there are some other liabilities that companies classify as long-term. These may include mortgages payable or pension-related liabilities. However, these types are less common as compared to the types discussed above.
Conclusion
Long-term liabilities are obligations that a company must settle after a year. There are various reasons why companies prefer long-term liabilities as compared to the short-term. The most common examples of long-term liabilities are loans, finance leases, and deferred tax liability.
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