Definition of Non-Current Liabilities
Non-current liabilities are long term. the obligation to settle the liability is beyond 12 months. so if there is any liability that needs to be fulfilled not recently is called non-current liability. Non-current liability examples are long term loans payable, long term bonds issued, defined pension benefit obligation, life insurance sold, deferred tax liability, long term lease payment, etc.
Explanation
Non-Current liabilities example shows the burden that the company needs to repay in long term. The examples help an analyst to understand the liquidity of the company and also the requirement of cash in future. non-current liabilities are mentioned in the non-current segment of the liability side in the balance sheet.
Examples of Non-Current Liabilities
Following are the examples are given below:
Example #1 – Long Term Loans Payable
Company XYZ expanded its business last year. The total estimated cost of the expansion was $500,000. The expansion process lead to an increase in sales for the company. Before the expansion, the company was not so profitable. Company XYZ managed to get a long term loan from the State Bank and offered to pay off $700,000 after 5 years. So the obligation is to pay off $700,000, which will be triggered after 5 years. As 1 year has already passed, so 4 more years are left to the loan payment. The loan amount will be reflected as a long term loan under the company’s Non-Current Liability segment.
Example #2 – Long Term Bonds Issued
Petrochad is an oil drilling company. Oil drilling setup requires huge capital investment in order to extract oil, transport etc. Capital requirements are often met by issuing bonds in market. Bonds are legal contracts, where the issuer is obligated to pay a predetermined sum of money at a future date in return for a price now. Say that the company petrochad issued long term bonds for 10 years. The Bond value is $1,000,000. So at the end of 10th Year, petrochad needs to arrange $1,000,000 and pay off the bondholders. So the liability is fixed, but it is not current. Petrochad will show the liability in the Non-Current Liability portion of the balance sheet.
Example #3 – Defined Benefit Pension Obligation
Edward runs a medium sized private company where 500 employees work. The company follows defined benefit pension scheme. Under this scheme, the employees will be paid fixed pension after retirement for the rest of their lives. The fixed pension amount will depend on the last drawn salary during retirement time. So the defined benefit pension plan is a liability for the company. The liability will be triggered once the employees start to retire. The present value of the future liability is the actual pension liability that reflects in the books today. As this is not a current liability, so the amount is reflected under Non-Current Segment.
Example #4 – Life Insurance Sold
ABC ltd is an insurance provider. They provide insurance cover for life, houses, cars, etc. Life Insurance is protection that pay a lump sum money when the protection buyer dies. So the claim that can be triggered due to death needs to be paid by the company. The average life expectancy varies from country to country. The liability that may arise due to death is a futuristic event. This is an example of Non-Current liability, where the liability will arise in the future. ABC ltd will make an estimation of the probable insurance claims and show it under the non-current segment of the Liability side.
Example #5 – Deferred Tax Liability
Deferred Tax occurs when the tax calculated as per tax authority is different than tax calculated as per the company. PFG is a manufacturing company and they hired an accounting firm to calculate the tax for the company. The accounting firm followed accounting standards and calculated the tax amount. When the tax authority calculated the amount, the tax amount was different than what was calculated by the accounting firm. The difference leads to Deferred Tax Liability. The liability will not be paid within 12 years, the discrepancy will reverse slowly. So as the liability is long term, the amount will reflect under the Non-Current side of the Liability.
Example #6 – Long Term Lease Payment
UFG shipping company is engaged in transportation. They have a business model in which they don’t buy ships. All the ships that operate are leased by the company. The leases are of long term use. The company typically leases ship for 20 years. As the leases are capital lease, so the liability to pay the lease payment is also long term. In the books of UFG shipping, the lease amount will reflect under Non-Current Liability. Leases are generally for very long periods.
Conclusion
Non-Current liabilities are shown under the liability section of balance sheet. If an analyst is reading the books of a company, then the analyst should be extremely careful while evaluating the Non-Current Liabilities. If a Non-Current liability is huge, then the company should plan ways to pay it when it arises. Non-Current liability analysis help in judging the liquidity of a company. Too much Non-Current liability will disrupt the smooth functioning of the business in the future. It is seen on several occasions that a company has got bankrupted due to Non-Current liability pressure.
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