What are long-term liabilities?

Liabilities that do not have to be settled within the next 12 months are referred to as long-term liabilities.

Definition of Long-term Liabilities

The most important criterion for classifying liabilities is their maturity. With long-term liabilities, the obligation is not due within the next 12 months. This means that the liability can be settled no earlier than one year after the balance sheet date. However, it could also be a significantly longer period.

Long-term liabilities are valued at nominal value. Depending on the type of business, the ratio of debt to equity varies greatly. Banks, for example, have a lot of debt capital. They primarily generate profits from granting loans and the interest to be paid on them. Banks typically have a low equity ratio. Thus, the level of indebtedness can provide an indication of the industry in which a company operates.

If the interest costs of long-term debt capital are lower than the total return of the company, then the return on equity increases.

Bonds are typical long-term liabilities. Different bonds can be distinguished by the nature of their interest payments.

Disclosure

Disclosure is relevant for a stakeholder of a company. Of particular interest are the maturity structure, the costs of debt financing, and the securing of liabilities through assets and other restrictions on the borrower. Such information is usually provided in the appendix.

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