4.8 Non-Current (Long-term) Liabilities - 4.8 Non-Current (Long-term) Liabilities Explained
Key Concepts
- Non-Current Liabilities
- Long-term Debt
- Deferred Tax Liabilities
- Pension Obligations
- Lease Obligations
Non-Current Liabilities
Non-Current Liabilities, also known as Long-term Liabilities, are obligations that are not due to be paid within the next 12 months. These liabilities are typically associated with financing activities and are expected to be settled over a longer period, often through the use of future cash flows or the sale of assets.
Example: A company takes out a 10-year loan to finance the purchase of a new factory. The loan repayment schedule extends beyond one year, making it a non-current liability.
Long-term Debt
Long-term Debt refers to loans and financial obligations that are due more than one year in the future. This includes bonds, mortgages, and long-term loans. Long-term debt is a critical component of a company's capital structure and can provide the necessary funds for significant investments.
Example: A corporation issues corporate bonds with a maturity date of 5 years. The bondholders lend the corporation money, which the corporation repays over the next five years, along with interest.
Deferred Tax Liabilities
Deferred Tax Liabilities arise when a company's taxable income is less than its accounting income, resulting in a tax payment that is deferred to future periods. This occurs due to differences in the timing of revenue and expense recognition between financial accounting and tax accounting.
Example: A company capitalizes an asset and depreciates it over five years for financial reporting purposes but deducts it immediately for tax purposes. The difference in depreciation creates a deferred tax liability that will be settled in future tax returns.
Pension Obligations
Pension Obligations are long-term liabilities that represent the company's commitment to provide retirement benefits to its employees. These obligations are typically funded through pension plans and are recorded based on actuarial assumptions about future employee retirement and mortality rates.
Example: A company has a defined benefit pension plan that promises to pay retired employees a fixed monthly amount. The present value of these future payments is recorded as a pension obligation on the balance sheet.
Lease Obligations
Lease Obligations are long-term liabilities that arise from leasing assets, such as equipment or real estate, for extended periods. Under the new lease accounting standards (IFRS 16 and ASC 842), most leases are recognized on the balance sheet as both an asset (right-of-use asset) and a corresponding liability.
Example: A company leases a warehouse for 10 years. The lease payments are recognized as a lease obligation on the balance sheet, reflecting the company's long-term commitment to the lease agreement.