What Are Other Long-Term Liabilities? Types and Examples Explained
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- What Are Other Long-Term Liabilities? Types and Examples Explained
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Companies often have financial obligations extending beyond a year, categorized as long-term liabilities. These commitments help assess financial stability and future cash flow needs. Even without this additional borrowing, the annual budget deficit will reach 7.3 percent of GDP in FY 2055 – higher than at any point outside of World War II, the Great Recession, and the COVID-19 pandemic. Interest costs will also explode, reaching a record 5.4 percent of GDP by 2055 and consuming 28 percent of revenue.
However, such liabilities are commonly met using the profits, investment income, or liquidity obtained from new loan agreements. This amount is usually listed separately on a company’s balance sheet, along with other short-term liabilities. This ensures a clearer view of the company’s current liquidity and its ability to pay current liabilities as they come due. Regulatory frameworks such as SEC Regulation S-X (for publicly traded U.S. companies) mandate firms disclose debt covenants, interest rates, and maturity profiles. Under IFRS, IAS 1 requires entities to distinguish between secured and unsecured liabilities and disclose any breaches of loan agreements that could trigger early repayment.
You usually repay long-term liabilities over a period of several years. For example, a company can buy credit default swaps, which are insurance contracts that pay out if the borrower defaults on their debt. This type of hedging strategy can protect the company if the borrower is unable to make their required payments. In financial statements, companies use the term “other” to refer to anything extra that is not significant enough to identify separately.
Such a difference leads to the creation of deferred tax liability on the company’s balance sheet. A company may choose to finance its operations with long-term debt if it believes that it will be able to generate enough cash flow to make the required payments. However, this type of financing is often more expensive than other forms of debt, such as short-term loans.
Due to a combination of high debt and rising interest rates, interest costs have doubled as a share of GDP from 1.6 of GDP in 2020 to a record 3.2 percent projected for 2025. The federal government now spends more on interest than defense or Medicare. Bonds or Debentures have a debt or loan that is borrowed from the market at a fixed rate of interest. Bond holders are only other long term liabilities concerned with the repayment of interest; they are not at all concerned with the company profits or loss. Bondholders are bound to be paid till the company is declared as insolvent. Is able to raise money in the form of issuing of shares or through issuing of debt which needs repayment along with interest.
This classification reflects cash outflow timing and a company’s ability to meet obligations without disrupting liquidity. Lumping together a group of debts without identifying the nature of the debt might sound like a potential red flag. In reality, this practice is normal and shouldn’t raise concern, provided that the obligations in question are relatively small compared to the company’s total liabilities. They should also be comparable to how the company has operated in the past—sometimes, year-to-year comparisons of other long-term liabilities are provided in financial statement footnotes. Long-term liabilities are those types of financial obligations that will take a minimum of one year to be settled. It’s important to note that there are several types of long-term liabilities.
Some companies disclose the composition of these liabilities in their footnotes to the financial statements if they believe they are material. The projected long-term growth in spending is mostly driven by rising health, Social Security and net interest costs. CBO expects spending on these three areas to grow from 14.2 percent of GDP in FY 2025 to 19.6 percent by 2055. In particular, health care spending will grow from 5.8 to 8.1 percent of GDP, Social Security from 5.2 to 6.1 percent, and interest from 3.2 to 5.4 percent. Rising deficits and debt are driven by a continued disconnect between spending and revenue. Spending has already grown from 20.7 percent of GDP in FY 2016 to 23.3 percent of GDP in 2025; CBO projects it will further rise to 24.4 percent of GDP by 2035 and 26.6 percent of GDP by 2055.
Companies with poor creditworthiness may struggle to secure favorable long-term financing, forcing reliance on short-term borrowing, which can create refinancing risk if credit markets tighten. For example, if a company’s PBO is $10 million and plan assets total $8 million, the $2 million shortfall is recorded as a liability. Changes in actuarial assumptions, such as a lower discount rate, can increase liabilities, affecting financial ratios. Companies must disclose pension expense components, funding status, and actuarial gains or losses. Some jurisdictions impose minimum funding requirements, affecting cash flow planning. Other long-term liabilities can include long-term leases, deferred tax liabilities, pension obligations, post-employment benefits, and other long-term provisions.
Social Security – the nation’s largest retirement program and the government’s largest spending program – is only eight years from insolvency, according to CBO projections. CBO’s long-term projections are incredibly troubling, but reality could prove even more unsustainable. If policymakers extend provisions in the 2017 Tax Cuts and Jobs Act (TCJA), it could boost debt by $40 trillion over 30 years, to above 200 percent of GDP. Long-term solvency of a company is determined by its ability to pay the long-term liabilities.
Thus, when a company pays a lesser tax on a particular financial year, the amount should be repaid in the next financial year. Till then, the liability is treated as the deferred tax, which is repayable within the next financial year. Long-term liabilities are obligations that are not due for payment for at least one year. These debts are usually in the form of bonds and loans from financial institutions. Non-current liabilities, on the other hand, are not due within the next 12 months and are typically paid with long-term financing or equity. Equity is the portion of ownership that shareholders have in a company.
Interest rate risk is the risk that changes in interest rates will negatively impact the payments required on the debt. Credit risk is the risk that the borrower will not be able to make the required payments. The Social Security Disability Insurance (SSDI) trust fund is in better shape and projected to remain solvent through at least 2055.
However, too much Non-Current Liabilities will have the opposite effect. It strains the company’s cash flow and compromises the long-term corporate financial health. Long-term liabilities are an important part of a company’s financial operations. They provide financing for operations and growth, but they also create risk. Hedging strategies can manage this risk and protect against potential losses.
These liabilities depend on actuarial assumptions, including discount rates, employee turnover, and life expectancy. Under ASC 715 (U.S. GAAP) and IAS 19 (IFRS), companies must recognize the present value of projected benefit obligations (PBO) and compare it to plan assets to determine net pension liability or surplus. Deferred tax liabilities emerge when a company’s taxable income is greater than its pre-tax accounting income, leading to taxes payable in the future.
A fixed asset of equivalent value is also recorded in the lessee’s balance sheet. Long-Term Liabilities are very common in business, especially among large corporations. Nearly all publicly-traded companies have Long-Term Liabilities of some sort.
