Financial Explainer — long-term liabilities

As small business advisors, we meet many company owners who struggle to interpret their financial statements. To make it easier, we've created a series of blog posts that gets into the detail in a way that is clear and simple. This is to help non-financial managers when they're measuring business performance.

This blog looks at long-term (or non-current) liabilities. You'll find these below the current liabilities on your balance sheet.

Long-term liabilities are obligations a company expects to settle after 12 months from the balance sheet date

These liabilities are typically larger and more strategic financial commitments when compared with your short-term liabilities.

This is what they can comprise:

• Loans and borrowings

  • Bank loans and/or bonds (i.e. a loan from an investor).

  • These are often used for financing large projects, expansion or capital expenditure (capex).

• Lease obligations

  • Long-term leases for property, equipment and vehicles.

  • You'd record this liability as the present value of all your future lease payments, i.e. the current value of that future sum of money.

• Pension and employment benefit obligations

  • All future payments due to your retired employees (pensions) plus any other post-employment benefits.

  • The amount recorded will usually be based on actuarial estimates.

• Deferred tax liabilities

  • A future tax payment you owe because of the timing differences in how profits are reported for accounting and tax purposes.

• Provisions

  • Money you set aside for uncertain future obligations, e.g. lawsuits or warranty claims.

• Long-term payables

  • Where your suppliers or creditors have agreed to be paid beyond a year.

  • These often relate to large equipment purchases or those specifically negotiated.

Long-term liabilities are important to monitor because they're a measure of your future commitments.

Potential investors or lenders will often match them against your long-term assets to evaluate how your resources are being managed.

They will also often measure the ratio of your debt to your equity to understand your company's financial risk. Specifically, to understand the extent to which you're relying on external borrowing over internal funds.

Many will also look at any off-balance sheet liabilities you may have.

Off-balance sheet liabilities are financial obligations or potential risks that don't appear on your balance sheet but still affect your financial position.

These will be disclosed in the notes to your financial statements.

• Certain leases

  • This may only apply to short-term leases (and will depend on the accounting standards you apply)

• Guarantees

  • Where you promise to cover another party's debt or obligations, if they fail to pay.

  • For example, a parent company may guarantee the debt of a subsidiary.

• Contingent liabilities

  • Potential liabilities that depend on uncertain future events, e.g. a lawsuit or regulatory penalty.

  • If the amount is reasonably foreseeable and measurable it will be recorded as a provision on your balance sheet. Otherwise, it will be disclosed off-balance sheet.

As you can see, understanding your long-term liabilities is critical to understanding your financial risk and the stability of your company.