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Long-Term Financial Liabilities

Definition of Long-Term Liabilities

Long-term obligations are those scheduled to mature beyond one year (or beyond the operating cycle, if it is longer than one year) from the date of an entity's balance sheet. As a result, long-term obligations likely require that the entity sacrifices some future economic benefit. Long-term obligations are classified as "long-term liabilities" on the balance sheet and are often referred to as "long-term debt" or simply "debt". Bonds payable, long-term notes payable, mortgages payable, pension liabilities, and long-term capital lease liabilities are examples of long-term obligations. Long-term liabilities are reported on the balance sheet after current liabilities and before owners' equity

The Nature of Long-Term Liabilities 

Long-term debt is used, along with equity, to finance a firm. The amount of debt a firm has in relation to equity is called leverage. Because interest payments on long-term debt vary with the size of leverage, and cannot be avoided in a recession, leverage makes the profitability of the firm much more risky. (Often interest payments on debt are tax deductible, which makes debt-financing advantageous over equity-financing). As a result, the process of incurring long-term debt is often very formal, and the board of directors or shareholders often must approve issuing new bonds or contracting for new long-term debt. 

Measuring Long-Term Liabilities

The value of many long-term liabilities are measured based on the present value of the debt-instrument's future cash outflows. The present value represents the amount that should be invested now, given an acceptable return on investment that matches the issuer's risk characteristics, to accumulate to a future amount. The interest rate used should to discount the long-term liability is therefore the market rate, or what is often referred to as the investor's effective rate. This may differ from the actual rate of return stated on the debt instrument when issued. 

Categories within Long-Term Financial Liabilities

Mortgage Payable

Postings: 4

Mortgages are a type of secured financing, and the property they are used to finance serves as collateral for the mortgage itself.

Bonds Payable

Postings: 14

Bonds are created by a contract known as a bond indenture and represent a long-term obligation to repay both a principal amount at a future date as well as to make interest payments.

Notes Payable

Postings: 2

Notes payable represent formal written promises to pay a certain sum of money on a specified date.

Pensions

Postings: 64

A pension is an obligation to pay employees after their retirement from the company. The amount of a company’s pension obligation is usually a function of an employee’s length of service and salary at time of retirement.

Leases

Postings: 12

A lease is a contract which grants one party (the lessee) the use of certain property, plant, equipment etc. for a specified period of time usually in exchange for periodic payments to the other party who actually owns the property (the lessor).

Long-Term Liabilities: Issue Price of Bonds Payable

In reviewing the Becker materials, the lecture, and your eBook reading for this week, there are several considerations. First being the issue price of the bonds payable. Should it be at discount or at a premium? The second consideration is the method used to amortize the bonds discount/premium. The third one is the decision to i