When analyzing a company’s balance sheet, one major area investors and accountants pay attention to is non-current liabilities. These represent obligations a company must settle in the future, usually more than one year from the reporting date. Understanding how they are reported and disclosed helps in evaluating a firm’s long-term financial health.
In this article, we’ll explore what non-current liabilities are, how they are reported in financial statements, and the two key categories—long-term financial liabilities and deferred tax liabilities.
What are Non-Current Liabilities?
Non-current liabilities are financial obligations a company owes that are not due within the next 12 months. These often include:
- Bank loans
- Notes payable
- Bonds payable
- Certain derivatives
They show how much a company relies on long-term borrowing and financing strategies to operate and expand.
Long-Term Financial Liabilities
Long-term financial liabilities can be reported in two main ways:
1. At Amortized Cost
If financial liabilities are not issued at face value, they are reported at amortized cost.
- Amortized cost = issue price – repayments + amortized premium/discount – impairment.
- Premiums or discounts are gradually adjusted through interest expense until maturity.
Example:
A company issues bonds at 950,000 dollars (below the face value of $1,000,000). The 50,000-dollar discount is amortized over the bond’s life as interest expense, gradually moving the liability toward 1,000,000 dollars at maturity.
2. At Fair Value
Some liabilities are reported at fair value, particularly those linked to market fluctuations. Examples include:
- Held-for-trading liabilities (e.g., short position in a stock)
- Derivative liabilities (e.g., futures contracts)
- Non-derivative liabilities hedged by derivatives
This approach better reflects real-time changes in value but can increase earnings volatility.
Deferred Tax Liabilities
Another major type of non-current liability is Deferred Tax Liabilities (DTLs).
- These arise when there are timing differences between financial accounting (reported in the income statement) and tax accounting (reported for tax authorities).
- A DTL means the company owes more taxes in the future, even though they haven’t been paid yet.
How Deferred Tax Liabilities are Created:
- Different Depreciation Methods
- A company uses accelerated depreciation for tax purposes but straight-line depreciation for financial reporting.
- Result → Lower taxable income today (less tax paid now), but higher taxes due later.
- Recognition of Revenues/Gains Early
- A firm records income in financial reporting before it is taxable under tax rules.
- Example: recording earnings of a subsidiary before dividends are paid.
Eventually, deferred tax liabilities reverse when taxes are actually paid.
Why Non-Current Liabilities Matter
Understanding non-current liabilities is critical because:
- They reveal long-term borrowing strategies of a company.
- Deferred tax liabilities show how taxes will impact future cash flows.
- The reporting method (amortized cost vs fair value) affects how stable or volatile financial results look.
Analysts often evaluate leverage ratios, interest coverage, and tax liabilities to assess whether a company can comfortably meet its long-term obligations.
Final Thoughts
Non-current liabilities represent a company’s future obligations and play a key role in understanding financial stability.
- Long-term financial liabilities are reported at either amortized cost or fair value.
- Deferred tax liabilities reflect future tax obligations due to timing differences between accounting and tax reporting.
- Transparent reporting ensures investors and analysts can judge whether a company’s future financial commitments are manageable.
By carefully studying non-current liabilities, you gain valuable insights into a company’s debt structure, tax position, and long-term financial health.