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.