Current liabilities are expected to be paid within the year, but how are non-current liabilities treated in accounting? We’ll take a closer look at the non-current liabilities definition below, as well as the different types of financial obligations that might fall under this category.
What are non-current liabilities?
They’re important enough to earn their own entry on the company balance sheet, but what are non-current liabilities exactly? The non-current liabilities definition refers to any debts or other financial obligations that can be paid after a year. Typical examples could include everything from pension benefits to long-term property rentals and deferred tax payments.
By comparing non-current liabilities to cash flow, a business can analyse how well it will be able to meet long-term financial obligations. With stable cash flows, a business can manage a higher debt load over the long term. It’s also important to track these long-term liabilities in order to plan ahead for future investments and asset purchases.
Types of non-current liabilities
Here are the main types of long-term financial obligations that fall under this category, along with a few non-current liabilities examples.
1. Long-term borrowings
Some of the most common non-current liabilities examples are long-term borrowings. These include lines of credit with repayment periods lasting for longer than one year. Businesses typically utilise long-term borrowings to meet their capital expense obligations or fund specific operations. For example, a business might have access to a prespecified line of credit to purchase machinery.
2. Long-term lease
Another example of a common non-current liability is a lease payment. Businesses typically sign commercial leases for periods over one year, with prespecified monthly repayments due throughout the duration of this contract. Lease payments might apply to office space or other forms of property, as well as rented equipment including industrial machinery and motor vehicles. Any property purchased using the lease would then be recorded as an asset on the company balance sheet.
A third type of non-current liability is for provisions, which refers to entries made in the books for unforeseen liabilities. These are likely to occur, although the exact terms may not be known just yet. A few examples of provisions could include things like guarantees, losses, pensions, and severance costs. These might be incurred during the current year but won’t be realised on the balance sheet until next year.
4. Deferred tax liabilities
There’s often a lag between a tax liability and its eventual payment. As a result, deferred tax liabilities often fall under the category of non-current. Using a deferred tax liability lets your business show on record that you’ve reported less income in the current accounting period and will offset this amount in the future.
5. Loans (secured and unsecured)
While loans might seem identical to long-term borrowings, there are a few differences. You can borrow from any entity, but when you take out a secured or unsecured loan from a financial institution this falls under a different category for accounting purposes. Loans are usually longer term in nature, which makes them a prime example of non-current liabilities.
Additional non-current liabilities examples include things like derivative liabilities, bonds, deferred compensation, or product warranties.
The importance of non-current liabilities in accounting
Both current and non-current liabilities provide useful information when assessing a company’s financial health. However, there are distinct advantages to taking a closer look at non-current liabilities in accounting. For example, long-term liabilities help measure whether a new venture makes sense for your business. If your cash flow is insufficient to cover future debts, it may not be a good time to take on additional financial obligations.
Business owners, creditors, and investors alike use non-current liabilities when looking at financial ratios. Examples include the debt ratio, interest coverage ratio, and debt to equity ratio. These compare liabilities to assets or equity, giving a quick overview of liquidity.
The bottom line
While lenders are more concerned with current liabilities, investors will often look to non-current liabilities to analyse risk. If a business uses the bulk of its primary resources simply to meet its financial obligations, investors will be wary because this indicates it won’t have anything left over for growth. Be sure to track all types of liabilities to keep your financial obligations in check.
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