Fundamentals of Long-Term Liabilities

The following outlines some fundamentals on long-term liabilities. The essential distinction between short-term and long-term is the maturity of the obligation.

Liabilities

Besides categorization based on maturity, another distinction is made between interest-bearing and non-interest-bearing liabilities. Interest-bearing liabilities are called financial debts. The amount of indebtedness and the ratio of external to equity capital provide an indication of the industry in which a company operates.

Long-term external capital has a maturity of over one year. Obligations that are due within a period of 12 months are called short-term external capital.

The most important long-term financial liabilities include bonds and mortgage or grundschuld secured loans.

Assessment and Disclosure of Long-term Financial Liabilities

If it is unclear how high a financial liability will exactly be, provisions must be made. Valuation problems can occur when the interest rate changes over time. Therefore, a change in interest rate may need to be considered in the accounting.

Disclosure is another important aspect. The recipients are primarily interested in the maturity structure, the costs of external financing, and the securing through assets. Such information is typically found in the notes.