January 26, 2022

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Non-Current Liabilities Meaning and Key Explanations

Non-Current Liabilities: Meaning and Key Explanations
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We explained current liabilities in the last lesson.  In this read, you will learn more about noncurrent assets. As you may have noticed, noncurrent means more than a year.

Definition of Noncurrent Liabilities

A type of liabilities payable by an entity in more than one reporting period.

A company’s economic obligations that require the outflow of cash for more than one accounting period.

Key Explanations

It is a type of liabilities. It is simply a type of liabilities. The other type of liabilities in a firm’s statement of financial position is current liabilities.

It is an economic obligation. Just as in the other type of liabilities, noncurrent liabilities are economic obligations. The entity will pay the debt as soon as it falls due. This obligation can affect companies stability. It also requires collateral on the company’s noncurrent assets. This is so, in the case of default in payment of the debt by the company.

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It involves cash outflow. For an entity to repay the debt cash must move out of the company. The cash outflow usually involves payment of interest and repayment of the principal amount. Others may involve payment of a sum of money for trade credits. More to these, is payment of tax liabilities due for more than one year.

Payment is for more than one reporting year. The cash outflow required for noncurrent liabilities is for more than one financial year. The number of years to repay the obligation is based on the agreement between the company and the debtholder. Certain obligations may be paid for 2 years, others for 3 or 5 years. Some obligations might be for 10 years.

If a firm has a five-year debt. And has been paid for four years, at the end of the fourth year reporting period, such debt will be reclassified as current liabilities.

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For example, a debt was collected in January 2016 to be repaid in 5 years ending 2020. The company has paid up the debt from 2016 to 2019. In the 2019 financial report, specifically, its statement of financial position, this debt will be reclassified as current liabilities.

Examples of noncurrent liabilities. Long-term debts, derivatives, secured and unsecured bonds, deferred revenue, differed tax liabilities and provisions.

Conclusion

To wrap it up, noncurrent liabilities are economic obligations which repayments is for more than one financial reporting year. The obligation requires economic resources that are available for more than one year.

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