Long-term liabilities

Definition

Long-term liabilities, also known as non-current liabilities, are financial obligations and debts that a company is expected to settle over an extended period, typically longer than one year.

What are long-term liabilities?

These liabilities represent the portion of a company’s total liabilities that is not due for payment in the short term. Long-term liabilities play a key role in a company’s capital structure and financial stability.

Types of long-term liabilities:

1. Long-term debt: Such as bonds and loans with maturities extending beyond one year.
2. Deferred tax liabilities: Future tax obligations that will be paid over an extended period.
3. Lease obligations: Long-term commitments arising from lease agreements.
4. Pension liabilities: Commitments related to employee pension plans.
5. Long-term provisions: Reserves set aside for expected future expenses.

Long-term liabilities, along with equity and short-term liabilities, contribute to a company’s capital structure. The composition of a company’s capital structure influences its financial risk, cost of capital, and overall financial health.

Long-term liabilities are disclosed in a company’s financial statements, specifically in the balance sheet under the liabilities section. They are categorised separately from short-term liabilities to provide a clear picture of a company’s financial obligations over different time horizons.

Investors and analysts closely examine a company’s long-term liabilities when conducting financial analysis. The composition, terms, and conditions of long-term liabilities provide insights into a company’s financial strategy, risk tolerance, and future financial obligations.

Example of a long-term liability

ABC Company decides to expand its operations and constructs a new manufacturing facility. To finance the construction, ABC Company issues bonds with a maturity period of 10 years. The bonds have a face value of £1 million and carry an annual interest rate of 5%.

As a result of issuing these bonds, ABC Company incurs a long-term liability. The face value of the bonds, £1 million, represents the principal amount that ABC Company must repay to bondholders at the maturity date, which is 10 years from the issuance date.

Additionally, ABC Company is obligated to make periodic interest payments to bondholders throughout the term of the bonds. These interest payments, based on the 5% annual interest rate, represent the cost of borrowing for ABC Company and are considered part of the long-term liability.