What are long-term liabilities?
3. Financing long-term liabilities
Examples of long-term liabilities relating to financing agreements include (non-exhaustive list): notes payable, bonds, credit agreements, etc.
Note Payable
Note payable is an obligation in the form of a written promissory note signed by the borrower.
Notes payable represent private placements: that is, the long-term debt is raised from one creditor (e.g., bank, insurance company, pension plan). Notes include information about the rate of interest, term of maturity, and collateral pledged to secure the loan.
Bonds Payable
Bonds payable are somewhat similar to notes payable. Bonds payable represent a long-term publicly traded debt raised from multiple creditors.
Bond is a formal contract according to which the debtor promises to repay the creditor the bond's maturity value and interest at fixed intervals (usually semi-annually).
The key bond types include:
- Debenture (i.e., unsecured bond)
- Secured bond
- Convertible bond
- Callable bond
Legal provisions of a bond are specified in a bond contract called bond indenture. Indentures usually have such provisions as the maturity date, interest rate, interest payment dates, conversion privileges, and covenants (e.g., limitation of new debt, limitation on payment of dividends). To learn more about debt covenants, refer to the article on What are debt covenants?
Credit Agreement
Credit agreement is a contract with a creditor (e.g., bank) to provide a loan, extend credit, or delay loan payments for a specified amount of time.
- What is the meaning of accrued in accounting?
- What are International Financial Reporting Standards (IFRS)?
- What are Generally Accepted Accounting Principles (GAAP)?
- Why isn't variable costing used for financial reporting?
- What is the difference between financial and managerial accounting?
- Significant accounting policies in financial statements
- Accounting for deferred financing costs
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