Long-term liabilities, also called noncurrent liabilities, are obligations that a business expects to settle more than one year after the balance sheet date, or beyond its normal operating cycle if that is longer. Common examples are bonds payable, bank term loans, mortgages, lease liabilities, pension and other post-retirement obligations, and deferred tax liabilities. They are reported after current liabilities on a classified balance sheet.
Long-term liabilities are the main way companies finance assets that will produce income over many years, such as factories, aircraft and networks. Borrowing for long periods matches the life of the financing to the life of those assets and avoids the need to refinance every year. The level of long-term debt is also one of the first things lenders, rating agencies and investors examine when judging a company's leverage and solvency.
Main types of long-term liabilities
- Bonds and notes: debt securities issued to investors, often with fixed interest and a single repayment at maturity, and governed by a bond indenture.
- Term loans and mortgages: borrowing from banks, often repaid in installments and secured on property or other assets.
- Lease liabilities: the present value of future lease payments, which lessees must record under ASC 842 and IFRS 16 for most leases.
- Pension and post-retirement benefit obligations: amounts owed to employees under a defined benefit pension plan in excess of plan assets.
- Deferred tax liabilities: taxes that will become payable in future because taxable income has so far been lower than book income.
- Long-term provisions: estimated obligations such as asset retirement costs, environmental cleanup and some warranty and legal claims.
Classification and measurement
A loan is not entirely long-term just because its final maturity is several years away. Any principal due within twelve months is moved to current liabilities as the current portion of long-term debt. Debt that has gone into default, allowing the lender to demand immediate repayment, generally must be shown as current unless a waiver is obtained. IFRS, after amendments to IAS 1 that took effect in 2024, bases classification on whether the company has a right at the reporting date to defer settlement for at least twelve months.
Most long-term debt is measured at amortized cost. If bonds are issued below or above face value, the difference is spread over their life as a discount or premium, using the effective interest rate method.
Worked example
At year end, a retailer has a $10,000,000 bank loan repayable in equal installments of $1,000,000 a year, a $25,000,000 bond maturing in seven years and a lease liability of $8,000,000, of which $1,200,000 falls due next year. Its balance sheet shows current liabilities of $2,200,000 for these items: $1,000,000 of the loan and $1,200,000 of the lease. Long-term liabilities total $9,000,000 for the loan, $25,000,000 for the bond and $6,800,000 for the lease, a total of $40,800,000.
If total equity is $34,000,000, the long-term debt to equity ratio is:
Here the numerator is noncurrent debt and similar obligations and the denominator is shareholders' equity. The ratio is $40,800,000 divided by $34,000,000, or 1.2. Analysts also use the debt to equity ratio, which includes current debt, and coverage measures such as the interest coverage ratio.
Disclosure and analysis
The notes to the financial statements list each borrowing with its interest rate, maturity, security and covenants, and give a schedule of repayments for each of the next five years. Readers use this maturity profile to judge refinancing risk: a large amount of debt falling due in a single year can be a problem if credit markets tighten. Some obligations, such as certain guarantees and purchase commitments, do not appear as liabilities at all and are found only in the notes. Long-term borrowing costs are recorded as interest expense each period, and new borrowing and repayment appear as cash from financing activities.