Long-term liabilities definition
/What are Long-Term Liabilities?
Long-term liabilities are those obligations of a business that are not due for payment within the next twelve months. This information is separately reported, so that investors, creditors, and lenders can gain a better understanding of the obligations that a business has taken on. These obligations are usually some form of debt; if so, the terms of the debt agreements are typically included in the disclosures that accompany the financial statements. Deferred tax liabilities, deferred compensation, and pension obligations may also be included in this classification.
Presentation of Long-Term Liabilities
All line items pertaining to long-term liabilities are stated in the middle of an organization’s balance sheet. Current liabilities are stated above it, and equity items are stated below it. Several examples of long-term liabilities appear in the following balance sheet exhibit.
Types of Long-Term Liabilities
There are several types of liabilities that may be classified as long-term liabilities on the balance sheet. The most common types are as follows:
Long-term loans payable. These are loans from banks or other financial institutions that are not due within the next 12 months. They typically include structured repayment schedules with interest and principal components spread over several years.
Bonds payable. Bonds payable represent debt securities issued by a company to raise capital, usually with fixed interest payments and a maturity date beyond one year. They may be secured or unsecured and often include covenants and redemption terms.
Lease liabilities. Under accounting standards like IFRS 16 or ASC 842, finance leases are treated as long-term liabilities when the lease term covers most of the asset’s useful life. These liabilities represent the present value of future lease payments due after 12 months.
Deferred tax liabilities. These arise when taxable income is less than accounting income due to timing differences in recognizing revenue or expenses. They represent taxes that will be payable in the future and often result from depreciation or revenue recognition differences.
Pension and post-retirement benefit obligations. Companies that provide defined benefit pension plans or other retirement benefits accrue long-term liabilities for the future payments owed to employees. These are actuarially calculated and can significantly impact the company’s financial health.
Notes payable (long-term). These are formal written promises to pay a specific amount of money on a future date beyond one year. They may arise from borrowing, asset purchases, or settlement agreements and typically bear interest.
Convertible debt. This is debt that can be converted into equity shares of the issuing company, usually at the holder’s option. While it begins as a liability, it may later impact ownership and dilution when converted.
Contingent liabilities (long-term portion). These are potential obligations that may arise based on future events, such as lawsuits, guarantees, or environmental remediation. If the likelihood of payment is probable and estimable, they are disclosed or recorded as long-term liabilities.
Terms Similar to Long-Term Liabilities
Long-term liabilities are also known as noncurrent liabilities and long-term debt.