What are Non-Current Liabilities?
Non-Current Liabilities Definition
Non-current liabilities are debts or obligations that a company owes but does not have to pay off within the next year.
Instead, they are expected to be paid off after a longer period, typically more than 12 months from the reporting date.
Although they don’t demand immediate attention like current liabilities, non-current liabilities are important because they represent long-term financial commitments that the company must eventually settle.
Non-current liabilities are also known as long-term liabilities.
Non-Current Liabilities Examples
Some examples of non-current liabilities could include:
Long-Term Loans
Loans that are due for repayment over a period longer than one year, such as mortgages or long-term bank loans.
Bonds Payable
Bonds are long-term debt securities issued by a company that require the company to pay back the bondholders over a specified period, typically several years.
Deferred Tax Liabilities
These arise when a company’s taxable income is lower than its accounting income, leading to taxes being deferred to future periods.
Lease Obligations
If a company leases property or equipment under long-term lease agreements extending beyond the next year, the future lease payments would be classified as non-current liabilities.
Pension Liabilities
Companies may have obligations to provide retirement benefits to their employees, and the portion of these benefits expected to be paid beyond the next year is classified as a non-current liability.
Current vs Non-Current Liabilities
There are a few differences between current and non-current liabilities:
Timing
The main difference between current liabilities and non-current liabilities is that:
- Current liabilities are expected to be settled within one year
- Non-current liabilities are expected to be settled beyond one year
Type
Current liabilities often represent short-term obligations from day-to-day operations, such as accounts payable, salary payments and short-term loans.
In contrast, non-current liabilities often represent long-term financial commitments.
Liquidity
Current liabilities directly affect a company’s liquidity and cash flow as they are payable in the short term.
On the other hand, non-current liabilities involve longer-term planning and management, to ensure that sufficient funds are available when these payments fall due.
Non-Current Liabilities Ratios
Non-current liabilities are used in financial ratios to evaluate the leverage and liquidity risk of a company.
Some of those ratios include:
Debt-to-Equity Ratio
This ratio measures the proportion of debt financing relative to equity financing in a company’s capital structure.
It is calculated by dividing total debt (both current and non-current liabilities) by total equity.
A high debt-to-equity ratio indicates that a company has been aggressively financing its growth with debt, which could lead to higher financial risk.
Debt Ratio
The debt ratio compares a company’s total debt to its total assets, indicating the proportion of a company’s assets that are financed by debt.
It reflects the company’s ability to pay off their debts if necessary.
A lower ratio means the company uses less debt and has a solid equity base.
A higher ratio indicates more debt, raising the risk of not being able to pay it back.
If the ratio is 1.0, the company owes more than its worth, and is at a higher risk of default.
Interest Coverage Ratio
This ratio measures a company’s ability to cover its interest payments on outstanding debt with its operating income.
A higher ratio indicates that the company is more capable of meeting its interest obligations, potentially reducing the risk associated with non-current liabilities.
Non-Current Liabilities in Financial Statements
Liabilities are held on a company’s balance sheet, and are split into two main groups:
- Current liabilities
- Non-current liabilities
Non-current liabilities are typically presented on the balance sheet below current liabilities and are separated from them to distinguish between short-term and long-term obligations.
Companies usually provide detailed disclosures regarding their non-current liabilities in the ‘notes to the financial statements’.
These disclosures often include information about the nature of the liabilities, maturity dates, interest rates and any other significant terms and conditions.
Importance of Non-Current Liabilities
Non-current liabilities are important for both internal and external stakeholder for several reasons:
Financial Stability
Non-current liabilities are important for internal stakeholders as they provide a clear view of the total long-term financial obligations that the business must manage.
This can help them to plan for future investments and support growth initiatives, while maintaining financial health over the long term.
Strategic Decision Making
Understanding non-current liabilities is crucial for strategic decision making.
For example, if a business plans to expand over time, they should assess their non-current liabilities to ensure they have enough capital and liquidity to handle both future growth opportunities and current financial obligations.
Investor Confidence
Investors will analyse financial reports and evaluate non-current liabilities to try and determine the company’s ability to manage its debt.
This insight will also help investors to establish whether the company can generate enough cash flow to meet their obligations over the long term.
Creditworthiness
Lenders and creditors use information about non-current liabilities to evaluate the company’s creditworthiness when looking to provide or extend long-term financing or credit lines.