Understanding how non-current liabilities work in business
While non-current liabilities (also known as long-term liabilities or debts) aren’t immediately pressing, understanding how they work can play a pivotal role in your business’s long-term financial planning and overall financial health.
What are non-current liabilities?
Non-current liabilities represent a business’s financial obligations or debts that it does not expect to settle within 12 months.
What are the different types of non-current liabilities?
The five different types of non-current liabilities included on a balance sheet are:
1. Long-term lease
Long-term commercial leases typically exceed one year. The pre-specified lease repayments are treated as non-current liabilities.
2. Long-term loans
Long-term loans are one of the most common types of non-current liability, as repayment terms typically exceed one year. Long-term loans are lump-sum payments often used to finance a project or fund something specific, like purchasing machinery.
3. Credit lines
Also known as revolving debt, credit lines are lending agreements with specific funds available to draw down when needed. The pre-set amount can be used, repaid and used again. When a business draws funds to purchase something, it’s classified as a non-current liability – provided the term exceeds 12 months.
4. Provisions
Provisions are reserves set aside to cover anticipated future losses. The exact timing and amount required are uncertain, and while it might be incurred in the current year, it won’t be realised on a balance sheet until the following year. Examples of this include warranties, restructuring costs and severance costs.
5. Deferred tax liabilities
Deferred tax liabilities refer to a lag between liability and payment, where tax is owed within a specific period but is not due to be paid until later. This often occurs due to differences in depreciation calculations or when a product is purchased in instalments. For example, the total purchase price is recorded in financial records, but tax records will reflect instalment payments made.
Examples of non-current liabilities
Long-term leases
Office space or commercial equipment
Long-term loans
Fund projects, upgrades or purchases such as machinery
Credit lines
Used to cover operating costs
Provisions
Warranties, restructuring costs, severance costs
Deferred tax
Depreciation calculation variances or purchases made on an instalment payment plan
What is the importance of non-current liability in accounting?
Non-current liabilities are crucial balance sheet items used to assess a business’s financial health. They’re employed by investors, financial analysts and creditors to look at a company’s stability and solvency. By comparing non-current liabilities to cash flow, a clear picture can be formed about how easily a business can meet its long-term financial obligations.
Tracking long-term liabilities helps businesses understand and plan future investments:
If the available cash flow is tight, it indicates that taking on any additional financial obligations will be difficult
If cash flow is stable, it means more debt can be supported, and long-term investors and creditors are more likely to be interested in engaging
What do non-current liabilities look like on a balance sheet?
On the balance sheet, non-current liabilities are generally listed in order of maturity (shortest to longest term) and grouped by type, with an additional all-encompassing ‘other non-current liabilities’ category.
How do you calculate non-current liability?
Non-current liability is calculated by adding up a business’s non-current liability entries, giving a total.
What’s the difference between non-current liability and current liability?
The main difference between a non-current liability and a current liability is the time frame in which the obligation is due.
Non-current liabilities are not due within the current year while current liabilities are due within the current year.
Current liabilities typically only appear on a balance sheet for one period while non-current liabilities are carried over from year to year.
Non-current liabilities = Long-term obligations that are not due within 12 months
E.g: Deferred tax, long-term loans and leases, provisions, credit lines
Current liabilities = Short-term obligations that are due within 12 months
E.g: Short-term loans, accrued expenses, taxes, accounts payable
Many current liabilities are connected to non-current liabilities, such as portions of loans or leases payable within 12 months.
Examples of current liabilities
Some common examples of current liabilities are:
Accounts payable
Any short-term (within 12 months) debt that must be paid to creditors or suppliers
Income and sales taxes payable
Taxes owed to the government but yet to be paid
Accrued expenses
For example, purchases that you are yet to receive an invoice for, warranties yet to be fully paid, interest payments on loans due in the short term and wages accumulated by employees that are yet to be paid
Dividends payable
Dividends declared but not yet paid out to shareholders
Non-current liabilities FAQs
Is accounts payable a non-current liability?
Accounts payable is generally considered a current liability as it is typically due within 12 months. If it’s due outside of this, it’s regarded as a non-current liability.
What is an interest coverage ratio?
This interest coverage ratio is a financial metric that determines whether a business generates enough income for interest payments. It’s calculated by taking earnings before interest and taxes (EBIT) and dividing them by interest expenses for a given period.
The ratio shows how often the company can cover its interest expenses with earnings. A higher ratio means the company has a good handle on current payments and may be able to take on additional debt.
What is a debt-to-assets ratio?
This ratio compares the total debt and assets of a business, showing what proportion of assets are funded by debt as opposed to equity. It’s calculated by dividing total debt by total assets. A lower percentage signifies a stronger equity position, whereas a higher percentage shows assets are financed by debt and a greater financial risk.
What is a debt-to-capital ratio?
The debt-to-capital ratio measures financial leverage – how much debt compared to capital a company uses to finance operations and functional costs. It’s calculated by dividing a company’s total debt by its total capital (debt + shareholder equity). A higher ratio generally means the company is funded more by debt than equity, making it a riskier proposition to investors or lenders.
What is the difference between assets and liabilities?
The key difference is that assets are resources with economic value, whereas liabilities are obligations or debts owed to external parties.
Non-current liability tracking – essential for long-term financial fitness
While longer-term financial obligations can easily slip off your immediate radar, it’s crucial to keep these in check to maintain the future financial health of your business. They’ll provide a clear picture of what future investments are achievable and invaluable assurance to investors and creditors when seeking funds to grow your business.
MYOB’s accounting software allows you to easily track non-current liabilities – populating a balance sheet with the click of a button. Get started today!
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.