Long-Term Liabilities: Definition, Examples, and Uses

What Are Long-Term Liabilities?

Long-term liabilities are a company's financial obligations that are due more than one year in the future. These debts are listed separately on the balance sheet to provide a more accurate view of a company's current liquidity and ability to pay current liabilities as they become due. Long-term liabilities are also called long-term debt or noncurrent liabilities.

Understanding Long-Term Liabilities

A liability is something a person or company owes and is categorized as either current or long-term. Current liabilities are liabilities due within 12 months. Long-term liabilities, on the other hand, 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 to turn its inventory into cash.

A company's liabilities appear on its balance sheet. Long-term liabilities are listed after more current liabilities, in a section that may include debentures, loans, deferred tax liabilities, and pension obligations. Often they will be labeled as non-current liabilities.

Long-Term and Current Liability Crossover

Sometimes it is easy to distinguish between long-term and current liabilities. Other times, it can be trickier. For example, a long-term debt such as a mortgage would be treated as a long-term liability and recorded as such. However, a portion of that same loan will be due in the current year. That particular portion is categorized separately on the balance sheet as a current portion of long-term debt.

There are also cases where a current liability could be classified as a long-term liability. For example. if a company has current liabilities that are being refinanced into long-term liabilities, the intent to refinance is present, and there is evidence that the refinancing has begun, then it may report current liabilities as long-term liabilities because, after the refinancing, the obligations are no longer due within 12 months.

Additionally, a liability that is coming due may be reported as a long-term liability if it has a corresponding long-term investment intended to be used as payment for the debt. However, the long-term investment must have sufficient funds to cover the debt.

Examples of Long-Term Liabilities

Various types of liabilities can be categorized as long term. Examples include:

• The long-term portion of a bond payable is reported as a long-term liability. Because a bond typically covers many years, the majority of a bond payable is long term.
• The present value of a lease payment that extends past one year.
• Deferred tax liabilities typically extend to future tax years, in which case they are considered a long-term liability.
• Mortgages, car payments, or other loans for machinery, equipment, or land are long-term liabilities, except for the payments to be made in the coming 12 months.

How Long-Term Liabilities are Used

Liabilities are key for businesses. They are used to finance operations and fund expansion.

Managers regularly use debt to purchase assets, fund research and development (R&D), and generate working capital as it is often the cheapest and most effective way to raise funds. Raising money from investors by issuing new shares is another option, although that can be more expensive and dilutes ownership.

Long-term liabilities generally involve spreading payments out over time. Such arrangements free up funds to be used now to grow for the future.

However, long-term liabilities can also be dangerous. Companies want to capitalize on leverage but need to be careful not to overstretch themselves. Taking on too many long-term liabilities could cripple the company financially, impact credit scores and borrowing costs, and cause investors to panic and dump the shares.

Analyzing Long-Term Liabilities

As mentioned above, debt can be a good thing if used wisely. Investors will want to determine that this is the case and that the company isn’t going overboard. Too much debt can impact the ability of a company to operate normally and lead to defaults and potentially bankruptcy as well as being forced to sell off assets at discounted prices.

Financial ratios are used to examine a company’s long-term liabilities, use of leverage, and ability to pay its debts. These ratios are carefully watched by both investors and company management.

When analyzing long-term liabilities, it's important that the current portion of long-term debt is separated out because it needs to be covered by liquid assets, such as cash. Also, bear in mind that long-term debt can be covered by various activities such as a company's primary business net income, future investment income, or cash from new debt agreements.

Debt ratios (such as solvency 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. Alternatives include comparing long-term debt to total equity, which provides insight relating to a company’s financing structure and financial leverage, or long-term debt to current liabilities.

The Bottom Line

Long-term liabilities or debt are those obligations on a company's books that are not due within the next 12 months. Loans for machinery, equipment, or land are examples of long-term liabilities, whereas rent, for example, is a short-term liability that must be paid within the year. A company's long-term debt can be compared to other economic measures to analyze its debt structure and financial leverage.