Non current liability

Non current liability
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Non-current liabilities, also known as long term liabilities are a part of a company’s balance sheet. What differs them from the current liabilities is the payment period of the debt. The settlement period for non-current liability is longer than a year. If the time is shorter or equal to one year, then a liability should be classified as a current liability. As most of the non-current liabilities are connected with an interest, the accumulation of the interest itself should be classified as current liability[1]. The debt can be also paid in installments. At the beginning of each year, the payment for upcoming year should be transferred from the section of non-current to current liabilities. As a good example it can be mentioned bonds, mortgages or notes payable, which maturity date is longer than one year. One of the most common way to gain additional source of funds for a company are long-term debts, which classify as non-current liability. It is so, because for this kind of financing the cost – interest – is often fixed which eliminates the risk of changing payment for the financing. Moreover, long-term debt can be used as a leverage. The cost doesn’t change depending on the company’s income, which allows to achieve greater earnings in a high-revenue year than it would be with variable-cost financing. Additionally, the long-term debt cost (interest) can be classified as a business cost and deducted from the company’s income which reduces the amount of income tax payable by the company. There are two the most common non-current liabilities mentioned below[2]:

  • Mortgage payable
  • Bonds payable

Mortgage payable[edit]

This type of non-current liability is created, when a natural person decides to secure its loan with owned real estate. In case of insolvency from the creditor’s side, the lender has the right to sell the property and the proceeds obtained from the transaction are used to cover the debt. If the value of sold property is higher than the value of remaining debt, then the lender becomes a general creditor for the disparity and has to pay this amount back to the creditor (natural person)[3].

Bonds payable[edit]

Bonds payable are obligations towards the buyer, where a company (or the government of a country) promises to buy the paper back for a certain amount in a certain time. Along with those promises, the issuer also declares to pay an interest periodically on the remaining principal. There are several types of bonds which will be described below. Debenture bonds – In this type of bonds, the buyer is protected only by the credit rating of the issuing company. However, there may be some requirements which additionally protect the buyer. These may include the requirement to maintain specific level of working capital ratio or immediate process of buy-back if the company will not be able to pay the interest to the buyer. Income bonds – Those bonds characterize with the rules of interest payment. If the issuing company records low level of earnings, then the payment of interest may be cancelled or postponed. If the payment of the interest is postponed to a future date, then such bond is called cumulative[4]:

Footnotes[edit]

  1. NCERT,(2013),Accountancy: Company Accounts & Analysis of financial Statements, New Delhi, p. 203
  2. M. P. Griffin,(2015), How to Read and Interpret Financial Statements: A Guide to Understanding What the Numbers Mean to You, AMA Self-Study
  3. R. J. Rosen, (2011), Competition in mortgage markets: The effect of lender type on loan characteristics, p. 3
  4. M. P. Griffin,(2015), How to Read and Interpret Financial Statements: A Guide to Understanding What the Numbers Mean to You, AMA Self-Study

References[edit]

Author: Justyna Piekorz