Long-term liabilities, also called noncurrent liabilities, are the obligations left on the liability side of a balance sheet once current liabilities have been separated out. A liability is current if settling it is reasonably expected to use current assets or create other current liabilities within one year of the balance sheet date, or within the operating cycle where that cycle is longer, if it is due or becomes due on demand inside that window, or if a covenant violation has made it callable by the creditor. Everything else on that side of the sheet is long-term, so the class is defined by the current test rather than by a test of its own. Classification is a presentation question, and nothing about how an obligation is measured changes because it sits here.
Where the Rule Comes From
The line is drawn from the current side. The term current liabilities is used principally to designate obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other current liabilities, and the classification also takes in obligations that by their terms are due on demand, or become due on demand within one year or the operating cycle if longer, even where liquidation is not expected in that period (ARB No. 43, Chapter 3A, paragraph 7).
The operating cycle the rule leans on is a measured span rather than a figure of speech. The average time intervening between the acquisition of materials or services and the final cash realization constitutes an operating cycle, a one-year time period is to be used as a basis for the segregation of current assets where several operating cycles occur within a year, the longer period should be used where the period of the cycle is more than twelve months, as in the tobacco, distillery and lumber businesses, and the one-year rule should govern a business with no clearly defined operating cycle (ARB No. 43, Chapter 3A, paragraph 5). For a client that bills monthly the phrase changes nothing. For a distiller it decides the split.
That bulletin was superseded. On the effective date of Statement No. 168 all then-existing non-SEC accounting and reporting standards were superseded, except for a short list of named Statements that stayed authoritative until each was integrated into the Codification, and the Codification became the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities (FASB Statement of Financial Accounting Standards No. 168, paragraph 15). The same change is set out in accruals.
What the Class Holds on a Filed Balance Sheet
On a balance sheet filed under Regulation S-X the noncurrent side runs through several captions rather than one. Bonds, mortgages and other long-term debt, including capitalized leases, is caption 22, with each issue or type of obligation stated separately in the balance sheet or in a note thereto. Indebtedness to related parties on a noncurrent basis is caption 23, and other liabilities is caption 24, where any item above 5 percent of total liabilities that fits no preceding liability caption is stated separately in the balance sheet or in a note thereto. Commitments and contingent liabilities is caption 25, and deferred credits, including deferred income taxes, is caption 26, which the rule requires stated separately in the balance sheet itself rather than allowing it in a note (17 CFR 210.5-02). The heading over that block reads Long-Term Debt, and the rule gives the block no total of its own, unlike Total current liabilities at caption 21.
Familiar balances sit under those captions. Bonds payable is the issuer’s liability for bonds it has issued. A lease liability is another, put there by the standard covered in lease accounting. A deferred tax liability belongs here by rule rather than by timing, because deferred tax liabilities and assets are classified as noncurrent in a classified statement of financial position (FASB Accounting Standards Update 2015-17), and Regulation S-X carries deferred income taxes under deferred credits at caption 26 (17 CFR 210.5-02). The asset side turns noncurrent under the same amendment but sits on the asset side of the sheet, which deferred tax assets works through. An asset retirement obligation is one more, owed on the retirement of a long-lived asset rather than on a scheduled date.
The Current Portion Moves at Every Close
Leaving a whole balance in the class is the common close error on this line. Serial maturities of long-term obligations are named among the items intended for inclusion in current liabilities (ARB No. 43, Chapter 3A, paragraph 7), and Regulation S-X names the current portion of long-term debt among the items that may sit under other current liabilities (17 CFR 210.5-02). The obligation is not split in two, it is presented on two lines, and the boundary is redrawn at every balance sheet date. What that looks like on a debt instrument is worked through in bonds payable.
Say a client is carrying a term note at year end with a fixed principal schedule.
Note outstanding at the balance sheet date 600,000
Principal scheduled for the next 12 months 120,000
Current liabilities, current portion 120,000
Long-term liabilities, remainder 480,000
Total note reported 600,000Nothing is paid down and nothing is remeasured by that reclassification. At the next close another slice crosses the line.
A Covenant Breach Moves the Whole Balance
A broken covenant moves the whole balance instead of a slice. Long-term obligations that are or will be callable by the creditor, either because the debtor’s violation of a provision of the debt agreement at the balance sheet date makes the obligation callable or because the violation will make it callable if it is not cured within a specified grace period, are classified as current liabilities (ARB No. 43, Chapter 3A, paragraph 7).
Two conditions keep a callable obligation out of current. One is that the creditor has waived or subsequently lost the right to demand repayment for more than one year, or the operating cycle if longer, from the balance sheet date. The other is that the obligation carries a grace period within which the debtor may cure the violation and it is probable the violation will be cured within that period, which prevents the obligation from becoming callable. Where that second condition is what keeps the obligation long-term, the circumstances are disclosed (the same paragraph).
So a term note breached at year end does not stay where its principal schedule puts it, and the entire remaining balance is presented as current unless one of those two conditions is met.
What It Is Not
It is not long-term debt. Debt is the borrowing subset, the bonds, mortgages and notes at caption 22, while the class also carries the other liabilities, commitments and deferred credits captions that follow it (17 CFR 210.5-02).
It is not an unrecognized contingency either. A contingency is an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss that will ultimately be resolved when one or more future events occur or fail to occur (FASB Statement No. 5, paragraph 1), a Statement superseded on the effective date of FASB Statement No. 168 as well. Until the accrual test is met, the probable and reasonably estimable condition set out in accruals, there is no recognized obligation to classify either way. Once a loss contingency is accrued and is not current, it sits in this class, and Regulation S-X keeps a commitments and contingent liabilities caption at 25 inside the same block (17 CFR 210.5-02).
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can put a block of its own debt schedules and current-portion reclassifications through a trial task before anything client facing depends on it.
