What is a Long-Term Liability?
How Does a Long-Term Liability Work?
For example, let’s assume that XYZ Company borrows $10 million from Bank ABC. Because the loan is not due for five years, Company XYZ records the portion of the loan that is not due in the next 12 months as a long-term liability. ( liabilities due within one year are generally classified as current liabilities on a company’s balance sheet.)
It is important to note here that although debt commonly comes to mind when one considers liabilities, not all liabilities are debt. Companies may incur several other types of liabilities, including (but not limited to) upcoming payroll, bonuses, legal settlements, payments to vendors, certain derivatives, contracts, certain types of leases and required stock redemptions.
Why Does a Long-Term Liability Matter?
Information about a company’s long-term liabilities is a key component of accurate financial reporting and a crucial part of thorough financial analysis. Although the Financial Standards Board, the Securities and Exchange , and other regulatory bodies define how and when a company’s liabilities are reported, and although liabilities make up a significant portion of the , not all liabilities are required to appear on the balance sheet, which is why analysts must also carefully study the notes to a company’s financial statements.