Long Term Liabilities

What are Long Term Liabilities on the Balance Sheet?

Long Term Liabilities, often referred to as Non-Current Liabilities, arise due to a liabilities not due within the next 12 months from the Balance Sheet Date or the Operating Cycle of the company and mostly consists of Long term Debt.

The term ‘Liabilities’ in a company’s Balance sheet means a particular amount which a company owes to someone (individual, institutions, or Companies). Or in other words, if a company borrows a certain amount or takes credit for Business Operations, then the company has an obligation to repay it within a stipulated time-frame. Based on the time-frame, the term Long-term and Short-term liabilities are determined. Long-term liabilities that need to repay for more than one year (twelve months) and anything which is less than one year is called Short-term liabilities.

Long Term Liabilities

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For eg:
Source: Long Term Liabilities (wallstreetmojo.com)

For example – if Company X Ltd. borrows $5 million from a bank with an interest rate of 5% per annum for 8 months, then the debt would be treated as short-term liabilities. If the tenure becomes more than one year, then it would come under ‘Long-Term Liabilities’ on the Balance Sheet.

List of Long-Term Liabilities on Balance Sheet

Based on the nature of the Liabilities taken by a Company, here is the list of Long-term liabilities on the Balance Sheet:

List of Long-Term Liabilities on Balance Sheet

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Source: Long Term Liabilities (wallstreetmojo.com)

#1 – Shareholders Capital

Shareholders are the real owner of a Company and can be classified into two categories, like Preference shareholders and Equity shareholders. Preference Shareholders are given preference during the time of distribution of profits (gets the dividendDividendDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company.read more if there is also a loss). In contrast, Equity shareholders get dividends only when there is a profit. On the other hand, Equity shareholders have voting right, unlike Preference shareholders. The initial capital or the ‘Seed Financing’ required for the business basically comes from the Shareholder’s pocket, and the total capital amount can be dived into the total number of shareholders based upon their contributions to the capital. The risk-to-reward ratio is allocated as per the capital contribution. For example- Suppose Company A has been funded by three investors X, Y & Z with the capital contributionCapital ContributionContributed capital is the amount that shareholders have given to the company for buying their stake and is recorded in the books of accounts as the common stock and additional paid-in capital under the equity section of the company’s balance sheet.read more of $2000, $3000 and $5000, and then the profit would be shared based on 2:3:5.

Reserves& Surplus is another part of the Shareholders’ equity, which deals with the Reserves part. If a Company makes constant profits, then the pile of profits at a given point of time would be termed as ‘Reserves and Surplus.’ For example, if a Business unit delivers Net profits after tax (after dividend distributed to shareholders) for the first three years @ $11,000, $80,000 and $95,000. Then the total reserves would be $(11000+80000+95000) or $285,000 after the third Financial Year.

Thus, we can say

Long Term Liabilities

#2 – Long-Term Borrowings

Below is the long term liability example of Starbucks Debt.

Starbucks Long Term Liabilites Example

source: Starbucks SEC Filings

Borrowings are an integral part of a business; the entire capital cannot be funded only from Shareholder’s capital. Generally, high-capital intensive requires funds at different stages. Thus, to ensure smooth operations, a Business unit takes a loan from a financial institution or any bank or any individual or group of individuals. A loan that is repayable after 12 months, along with interest, is known as Long-term borrowings. Types of long-term borrowings are –

Debt - Grades

#3 – Deferred-Tax Liabilities

Tax liabilities can be terms as the tax which a company is obliged to pay in case of profits made. Thus, when a company pays a lesser tax on a particular financial year, the amount should be repaid in the next financial year. Till then, the liability is treated as the deferred tax, which is repayable with the next financial year.

For example, Company HR Ltd. made a profit of $20,000 in FY17-18 and paid a tax of $5000 (assuming 25% tax rate), but later the company realized that the tax-slab is 28%. Then, in this case, $600 has to be paid along with next year’s tax payment.

#4 – Long-Term Provision

Provisioning a certain amount generally means the allocation of a certain expense or loss or bad-debt in respect to the future course of action by the Company. The item is treated as a loss until the loss is accounted for by the company. For example, – Pharmaceutical companies assume certain losses regarding patent rights as all the Research & Development part is related to the approval of the patent of medicines. Similarly, lawsuit charges & Fines from pending investigations come under the same heads in the Balance-sheet. For example, if a Bank expects a certain amount of Loan, which is most unlikely to recover, then the Loan amount would be treated as ‘Bad Debts.’

Hindalco Example

Hindalco

The above example shows that the company Hindalco Industries is doing business in Aluminium extracting, and the manufacturing of Aluminium finished products has raised its equity base from INR 204.89 Cr. in FY16 to INR 222.72 Cr. In FY17. The above equity inflow results of a higher equity base, which is an outcome of the newly issued Equity shareIssued Equity ShareShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner's equity on the Company's balance sheet.read more.
Because of the profitability of the Company, the Reserves amount shoot up from INR 40401.69 Cr to INR 45836 Cr. However, the Long-term Debt ratio has reduced from INR 57928.93 Cr. to INR 51855.29 Cr. which is almost 10.5 % from the previous year, and it’s a healthy sign.

Deferred Tax, Other Liabilities on the balance sheet, and Long-term Provision have, however, decreased by 2.4%, 2.23%, and 5.03%, which suggests the operations have improved on a YoY basis.

The risk to Investors vs. Long Term Liabilities

The below graph provides us with the details of how risky these long term liabilities are to the investors.

Long Term Liabilities risk profile
  • We note that the common stock is the riskiest to the investor, whereas short-term bonds are the least risky.
  • In between comes the others like senior secured facility, senior secured notes, senior unsecured notes, subordinated note, discount note, and preferred stocks.

Importance of Long-Term Liabilities on the Balance Sheet

Long-Term Liabilities Video

This has been a guide to what is Long-Term Liabilities on the Balance Sheet and its definition. Here we discuss the list of long-term liabilities, including the long-term debt, shareholders equity, long-term provision, and deferred tax liabilities along with practical examples. You may also have a look at these articles below to learn more about accounting –

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