What is Non-Current Liabilities?
Non-Current Liabilities are the company’s obligations that are expected to get paid after one year, and examples of which include long-term loans and advances, lease obligations, deferred revenue, and bonds payable. Multiple ratios in relation to the total non-current liabilities examples are used to gauge the company’s leverage such as the debt-to-asset ratio or debt-to-capital ratio.
These liabilities are observed and analyzed to understand if the company would be in a position to meet its long-term financial obligations. It helps investors understand the degree of leverage the company is using. Therefore, a stable cash flow would indicate a lesser risk of default from the company’s end. Moreover, it also helps in the assessment of the solvency of the company.
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Non-Current Liabilities Examples Explained
Non-Current liabilities show the real burden on the company, and default may lead to the closure of the business. Hence, it is always necessary to verify the factors that can meet such obligations and hedge themselves from bankruptcy. Also, disclosing all the non-current liabilities is necessary for the prescribed format, and the standard gives valuation per the guidelines.
For investors, stakeholders, and analysts, want to ensure that the company they are investing in is clear of any suspicious activity and that the revenue generated through the primary revenue-generating activity suffices the debt obligations and other such commitments. However, in the real world with stiff competition and constant technological advancements, it might not be as easy to do so.
Therefore, companies often take up short and long-term loans to fund their projects and growth plans. It becomes important for the top management to ensure that the ratio of debt and the projected growth of the company are not lopsided. There have been multiple companies that have built an empire through debt funding and repaid them in a timely manner. However, the number of companies that do not fulfill their debt obligations is numerous too.
The reason behind discussing the factor of taking up loans to grow a company and other factors is to reiterate the fact that investors generally look at the total debt to total assets ratio to gauge the amount of leverage the company has used. The lower it is, the better cashflow management it indicates.
In a non-current liabilities example balance sheet, it is also important to show signs of active efforts to reduce the debt obligations. In an ideal scenario, any business always strives to be a debt-free company.
Current Liabilities in Video
Non-Current Liabilities are those sets of liabilities taken to undertake capexCapexCapex or Capital Expenditure is the expense of the company's total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year.. Its maturity is beyond 12 months from the reporting date
Let’s look at the complete list of non-current liabilities with Examples.
#1 – Long Term Borrowings
Long Term Borrowings are the acceptance of the funds for the need for meeting capital expenditure and making strategic decisions. Therefore, such funds need to be utilized judiciously and only for the purpose for which it was borrowed—moreover, such funds are to be disclosed at amortized cost per the requirement of IFRS 9.
#2 – Secured/Unsecured Loans
The basic difference between Long term and Secure/Unsecured loans is that borrowings can be from anyone, from a retail investorRetail InvestorA retail investor is a non-professional individual investor who tends to invest a small sum in the equities, bonds, mutual funds, exchange-traded funds, and other baskets of securities. They often take the services of online or traditional brokerage firms or advisors for investment decision-making. to NBFCs. At the same time, most of the Loans will come from financial institutions against which assets will be mortgaged based on the structure set up as per the agreed terms and conditions.
#3 – Long Term Lease Obligations
Lease payments are the most fundamental and common expenditure a corporation must bear to fulfill its asset requirement. Such lease paymentsLease PaymentsLease payments are the payments where the lessee under the lease agreement has to pay monthly fixed rental for using the asset to the lessor. The ownership of such an asset is generally taken back by the owner after the lease term expiration. needed to be structured and framed per the IFRS and locally General Acceptable accounting practices. Moreover, the disclosure must also be verified based on the applicable regulations.
#4 – Deferred Tax Liabilities
Deferred Tax Liabilities show that one has disclosed less income in the current year than books of account, and in the future, the arising tax liabilities will be set off against the same. Deferred Tax liabilitiesDeferred Tax LiabilitiesDeferred tax liabilities arise to the company due to the timing difference between the accrual of the tax and the date when the company pays the taxes to the tax authorities. This is because taxes get due in one accounting period but are not paid in that period. must be created to balance the timing differences between books of account and income tax computation. The basic intent is that one cannot claim more gain in tax calculation by adopting different accounting methodsAccounting MethodsAccounting methods define the set of rules and procedure that an organization must adhere to while recording the business revenue and expenditure. Cash accounting and accrual accounting are the two significant accounting methods. and taking less profit to disclose to the concerned department.
#5 – Provisions
As per the matching concept of the accountingMatching Concept Of The AccountingThe Matching Principle of Accounting provides accounting guidance, stating that all expenses should be recognized in the income statement of the period in which the revenue related to that expense is earned. This means that, regardless of when the actual transaction is made, the expenses that are entered into the debit side of the accounts should have a corresponding credit entry in the same period. principles, all the expenses and revenues must be recognized in the year to which it is attributed. Therefore, even though the expenditure of the 1st year is incurred in the 2nd year, the expenditure of the 1st year is needed to adequately hit the targeted profit and loss account. Hence, to meet this guideline, a concept named provision is accepted under which an amount equivalent to expense will be transferred to a clearing profit and loss accountProfit And Loss AccountThe Profit & Loss account, also known as the Income statement, is a financial statement that summarizes an organization's revenue and costs incurred during the financial period and is indicative of the company's financial performance by showing whether the company made a profit or incurred losses during that period.. Hence, to meet this guideline, a concept named provision is accepted under which amount equivalent to expense will be transferred to a clearing accountClearing AccountA clearing account or wash account is a temporary account in which the funds are kept to be smoothly transferred to the required account when the transfer cannot be done directly. It helps the clients to set aside a sum of money when the transactions are in process., which will be reversed next year as and when it will be incurred. Provisions may be for one year, five years, or even for more periods.
#6 – Derivative Liabilities
Current stock market data is highly flexible. One can create and arrange the transactions based on their needs and earn the gains based on the insights for any specific underlying assetsUnderlying AssetsUnderlying assets are the actual financial assets on which the financial derivatives rely. Thus, any change in the value of a derivative reflects the price fluctuation of its underlying asset. Such assets comprise stocks, commodities, market indices, bonds, currencies and interest rates.. The main aim of such a derivative instrument is to hedge themselves from the transaction exposure they will face in the future. Therefore, there are full chances of earning loss or profit in a derivative instrument. Derivative instrumentsDerivative InstrumentsDerivatives in finance are financial instruments that derive their value from the value of the underlying asset. The underlying asset can be bonds, stocks, currency, commodities, etc. The four types of derivatives are - Option contracts, Future derivatives contracts, Swaps, Forward derivative contracts. must be valued at fair value on every reporting date. Hence, on a fair valuation, if one is getting a mark to marketMark To MarketMark to Market Accounting means recording the value of the balance sheet assets or liabilities at current market value to provide a fair appraisal of the company's financials. The reason for marking certain market securities is to give an accurate picture, and the value is more relevant than the historical value. negative, it will be considered derivative liabilities and need to be disclosed in a balance sheet.
#7 – Other Liabilities Getting due After 12 Months
Every company has to fulfill various types of obligations as and when getting due in business. Moreover, such obligations needed to be structured and recorded in the books of account based on the applicable financial regulation.
From the above list of non-current liabilities, we can conclude that.
Non-Current Liabilities = Long term lease obligations + Long Term borrowings + Secured / Unsecured LoansUnsecured LoansAn unsecured loan is a loan extended without the need for any collateral. It is supported by a borrower’s strong creditworthiness and economic stability + Provisions +Deferred Tax Liabilities + Derivative Liabilities + Other liabilities getting due after 12 months.
Let us discuss the concept and its practicalities with the help of a few examples.
Alphabet Inc. has Long term debt of $ 3969 Mn, a Deferred RevenueDeferred RevenueDeferred Revenue, also known as Unearned Income, is the advance payment that a Company receives for goods or services that are to be provided in the future. The examples include subscription services & advance premium received by the Insurance Companies for prepaid Insurance policies etc. of $ 340 Mn, an Income Tax of $ 12812 Mn, and Deferred Tax liabilities of $ 430 Mn, Other Long term liabilities of $ 3059 Mn.
Calculation of Non-Current Liabilities Example:
Non-Current Liabilities = $ 3969 Mn + $ 340 Mn + $ 12812 Mn + $ 430 Mn $ 3059 Mn
= $ 20610 Mn.
Hence Alphabet Inc. has non-current liabilities of $ 20610 Mn as of 31st Dec 2018.
Amazon.com, Inc. has a long term debtTerm DebtLong-term debt is the debt taken by the company that gets due or is payable after one year on the date of the balance sheet. It is recorded on the liabilities side of the company's balance sheet as the non-current liability. of $ 24743 Mn, Other long-term liabilities of $ 20975 Mn as of 31st Dec 2018.
Calculation of Non-Current Liabilities Example:
Non-Current Liabilities = $ 24743 Mn + $ 20975
= $ 45718 Mn
Hence, Amazon.com, Inc has non-current liabilities of $ 45718 Mn as of 31st Dec 2018.
BP (UK group company) has Derivative Liabilities of $ 5513 Mn+ Accrued liabilities but not Met of $ 469 Mn, +Financial debts of $ 51666 Mn + Deferred Tax Liabilities of $ 7238 Mn + Provisions of $ 20412 Mn, Defined Benefit obligation plans of $ 8875 Mn + Other payables of $ 13946 Mn as on 31st Dec 2017.
Calculation of Non-Current Liabilities Example:
Non-Current Liabilities= $ 5513 Mn + $ 469 Mn + $ 51666 Mn + $ 7238 Mn + $ 20412 Mn + $ 8875 Mn + 13946 Mn
= $ 108119 Mn
Hence BP has non-current liabilities of $ 108119 Mn as of 31st Dec 2017.
Non-Current Liabilities Vs Current Liabilities
Now that we have a detailed understanding of the concept and its intricacies, you must have noticed that have compared total non-current liabilities examples with current liabilities at different parts of the articles. To ensure a deeper understanding of the concept, let us discuss the contrasting concept as well through the comparison below.
- Non-current liabilities refer to the payments a business is due to pay but need not be settled within one financial year.
- The payment terms of these liabilities exceed 12 months.
- They appear on multiple balance sheets as they are obligations that are paid over multiple years.
- They are accrued majorly due to the long-term financial needs of the company.
- The repayment of such liabilities does not have a major impact on the working capital. However, their interest payment has a significant impact on the working capital of the company.
- Since the term of the loan or debt is longer, it usually requires the company to provide collateral or security.
- Current liabilities are debt or financial obligations that must be settled within one financial year.
- The credit period of such obligations is lesser than 12 months.
- They appear only on one balance sheet as they become due for settlement before the next one is prepared.
- These obligations are accrued mainly due to the daily operations of the company.
- The repayment of such liabilities reduces the working capital.
- Since they are transacted over a short period of credit, the company usually does not put forth any collateral or security for the same.
This article has been a guide to Non-Current Liabilities Examples. Here we provide you with a complete list of Non-Current Liabilities with the help of examples (Amazon, Alphabet, BP). You may learn more about financing from the following articles –