Understanding Non-Current Liabilities | CFA Level I FSA
Let’s dive into non-current liabilities, which are all liabilities not classified as current or short-term. In this lesson, we’ll discuss long-term financial liabilities, how they’re reported, and deferred tax liabilities.
Long-Term Financial Liabilities
These liabilities include:
- Bank loans
- Notes payable
- Bonds payable
A company issues $100,000 of bonds at a discounted price of 98.0. The bonds are initially reported as a liability of $98,000. Over the bond’s life, the $2,000 discount is amortized, resulting in a liability of $100,000 at maturity.
Deferred Tax Liabilities
A deferred tax liability is a tax assessed for the current period but not yet paid. This deferral can arise from timing differences between tax accrual and payment, or differences in net income calculation methods for financial and tax purposes.
For instance, when a company earns income for the year and records the tax expense for that income in the current period but pays the cash in the next period, a deferred tax liability is created to balance the books.
A company uses accelerated depreciation for tax purposes and straight-line depreciation for financial statement purposes. Taxable income in earlier periods is lower than in later periods. Since less tax is paid in earlier periods, a deferred tax liability is created to account for the tax yet to be paid.
Deferred taxes can be complex, but we’ll discuss them more in a separate topic later on.