What is a Long-Term Liability?
A long-term liability is a liability due in more than one year.
How Does a Long-Term Liability Work?
A liability is a claim on a company’s assets. Technically, a liability is a required transfer of assets or services that must occur on or by a specified date as a result of some other event that has already occurred.
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. (Accounting 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 Accounting Standards Board, the Securities and Exchange Commission, and other regulatory bodies define how and when a company’s liabilities are reported, and although liabilities make up a significant portion of the balance sheet, 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.
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