Long-term liabilities, in accounting, form part of 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. Long-term liabilities are also called long-term debt or noncurrent liabilities.

BREAKING DOWN ‘Long-Term 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 for the reasoning that 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 restricted 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 next payments to be made in the subsequent 12 months.

Long-Term Liabilities in Ratios

Long-term liabilities are a useful total for management analysis in the application of financial ratios. The debt ratio compares the total liabilities to total assets, although the ratio may be modified to compare the total assets to long-term liabilities only. This ratio is 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.

Source: Investopedia