What are Long-Term Liabilities?
Long-Term Liabilities are obligations that do not require cash payments within 12 months from the date of the Balance Sheet. This stands in contrast versus Short-Term Liabilities, which the company has to settle with cash payment within one year. Any liability that isn’t a Short-Term Liability must be a Long-Term Liability. Because Long-Term Liabilities are not due in the near future, this item is also known as “Non-Current Liabilities”. We will use these two terms interchangeably in this article.
The one year cutoff is usually the standard definition for Long-Term Liabilities (Non-Current Liabilities). That’s because most companies have an operating cycle shorter than one year. However, the classification is slightly different for companies whose operating cycles are longer than one year. An operating cycle is the average period of time it takes for the company to produce the goods, sell them, and receive cash from customers. For companies with operating cycles longer than a year, Long-Term Liabilities is defined as obligations due beyond the operating cycle. In general, most companies have an operating cycle shorter than a year. Therefore, most companies use the one year mark as the standard definition for Short-Term vs. Long-Term Liabilities.
Companies disclose all the Non-Current Liabilities they owe and their values on the Balance Sheet. The one year mark is measured as 12 months from the date of the Balance Sheet.
Long-Term Liabilities List
Below is a list of Long-Term Liabilities that commonly appear on a company’s Balance Sheets.
- Long-Term Debt. These are debt the company borrows from lenders but don’t have to repay within one year. Public companies often don’t break out “Long-Term Debt” by tranches on the Balance Sheet.
- Operating Lease. These are lease arrangements that last longer than one year. For example, a company may lease an office space or a machinery.
- Deferred Revenue (Long-Term). These are payments the company received from customers for products and services the company won’t provide within one year.
- Deferred Income Taxes (Long-Term). These are taxes that the company owes. However, the company does not expect to pay these taxes within one year. Instead it’ll pay these taxes in the future, beyond the one year mark.
- Other Long-Term Liabilities. Companies may have miscellaneous obligations that they must report but are not large enough to have their own lines. Consequently, companies group them together into “Other Long-Term Liabilities”.
Not all companies will have all the liabilities we list above. Some companies might possess some obligations and not the rest. Others might owe other obligations in addition to the above. It varies from company to company.
Financial Liabilities vs. Operating Liabilities
There are two types of Long-Term Liabilities: financial liabilities and operating liabilities. Financial liabilities are obligations related to the capital structure. Debt is the most common financial liability that companies have. In addition, some companies may also have other financial liabilities. By contrast, operating liabilities are obligations related to the business operations. Examples of operating liabilities include operating leases, pension obligations, deferred revenue, and deferred income taxes.
Long-Term Liabilities Example
Here’s a real example of Non-Current Liabilities from Bight Horizons Family Solutions’ Balance Sheet. We emphasized them in yellow highlight. You can find Bright Horizons Family Solutions’ Balance Sheet on page 54 of its annual report here.
Notice that Current Liabilities is explicitly labeled and has its own subtotal. On the contrary, Non-Current Liabilities are not explicitly labeled. There are no heading that inform readers that line items in a particular section are Non-Current Liabilities. Instead, companies merely list individual Long-Term Liabilities underneath the Current Liabilities section. The industry expects readers to know that any liabilities outside of the Current Liabilities section must be a Non-Current Liability. This is how most public companies usually present Long-Term Liabilities on the Balance Sheet.
Impact on Corporate Financial Health
Long-Term Liabilities are very common in business, especially among large corporations. Nearly all publicly-traded companies have Long-Term Liabilities of some sort. That’s because these obligations enable companies to reap immediate benefit now and pay later. For example, by borrowing debt that are due in 5-10 years, companies immediately receive the debt proceeds. They can use the proceeds to expand and grow their business. They don’t have to repay the debt until 5-10 years later.
While these obligations enable companies to accomplish their near-term objective, they do create long-term concerns. Companies eventually need to settle all liabilities with real payments. If the obligations accumulate into an overly large amount, companies risk potentially being unable to pay the obligations. This is especially the case if the future obligations are due within a short time span of one another. This could create a liquidity crisis where there’s not enough cash to pay all maturing obligations simultaneously.
Having some Non-Current Liabilities is a good thing. It allows management to optimize the company’s finances to grow faster and deliver greater returns to the shareholders. However, too much Non-Current Liabilities will have the opposite effect. It strains the company’s cash flow and compromises the long-term corporate financial health.
Relationship with Other Financial Statements
Long-Term Liabilities appears on the Balance Sheet. The Balance Sheet integrally links with the Income Statement and the Cash Flow Statement. Therefore, changes on the Income Statement and the Cash Flow Statement will trickle over to the Balance Sheet. Some examples of how the Income Statement and the Cash Flow Statement can affect long term obligations are listed below.
- Recognizing revenue (Income Statement) can decrease the value of long-term Deferred Revenue. On the other hand, receiving additional upfront payments from customers (Cash Flow Statement) for future delivery of products / services can increase long-term Deferred Revenue.
- Borrowings and repayment of debt (Cash Flow Statement) can alter the value of Long-Term Debt.
- Payment of income taxes (Cash Flow Statement) can decrease the value of long-term Deferred Income Taxes.
Long-Term Liabilities are obligations that do not require cash payments within 12 months from the date of the Balance Sheet. Another name for this is “Non-Current Liabilities”. Long-Term Liabilities are shown on the Balance Sheet.