What are long-term liabilities?

2. Operational long-term liabilities

Examples of long-term liabilities relating to operational obligations include (non-exhaustive list): deferred taxes, pension obligations, postretirement benefit, warranties, capital leases, etc.

Deferred Taxes

Many companies report long-term liability called deferred taxes.

Deferred taxes are assets and liabilities that arise from the temporary differences between the amounts reported for tax purposes and those reported for financial accounting purposes.

In other words, deferred taxes arise due to the differences between revenues or expenses reported in financial statements (i.e., income statement) in accordance with GAAP and those reported in tax returns in accordance with the Internal Revenue Code (for the USA). Such differences result in taxable (i.e., payable) or deductible (i.e., refundable) amounts in the future. Taxable amounts in the future represent deferred tax liabilities while deducible amounts represent deferred tax assets.

Deferred tax liabilities are deferred tax expenses. That is, deferred tax liabilities will results in the increase in taxes payable in the future. When a deferred tax liability reverses in the future, a company will pay more taxes to the IRS than the amount of income taxes reported on the income statement. Deferred tax liabilities can be related to accounts receivable, depreciation, etc.

Pension and Postretirement Obligations

Pension and postretirement liabilities represent deferred compensation obligations to employees for the services provided in accordance with a pension and postretirement plan.

For example, postretirement liabilities arise when a postretirement plan is underfunded: that is, when the fair value of plan assets is below the accumulated postretirement benefit obligation.

Warranties

Warranty is assurance by the seller of goods or services that the goods or services will not have deficiencies in their performance or quality for a stated period of time. Warranties usually provide for repair or replacement.

Under accrual basis accounting in the year of sale, an entity should record estimated warranty expense and warranty payable (i.e., liability).

Warranty liabilities are obligations that arise out of product warranties.

Capital Lease

Capital lease liabilities are obligations that arise out of capital leases.

Capital lease is a long-term lease of an asset. To be considered a capital lease, a lease must meet any of the following four (4) criteria:

  • Lease term is 75% or more of the assetís expected useful life
  • Asset ownership is transferred to the lessee at the end of the lease term
  • The lessee can purchase the asset at a price lower than its fair market value
  • When the lease is signed, the present value of the lease payments is 90% or more of the fair market value of the asset
Not a member?
See why people join our
online accounting course:
Lecture Contents:
Free Study Notes
Download free accounting study notes by signing up for our free newsletter (example):
First Name:
E-mail:
We never share or sell your e-mail to third parties.