What is Liability? Current Liability and Long Term Liability

What is a Liability?

What is a Liability?

Liabilities are obligations to pay money, render future services, or convey specified assets. They are claims against the company’s present and future assets and resources.

Example

When a firm raises its fund by the sale of deposits, securities, etc. or when an individual or institution takes a loan from the financial institution.

Current Liability / Short Term Debt

Current liabilities are usually obligations for goods and services acquired, and taxes owed, and other accruals of expenses. They include deposits received, advance payments, trade acceptances, notes payable, short-term bank loans, as well as the current portion of long­term debt.

According to L.J. Gitman, “Short-term financing is debt that matures in one year or less and is used to fulfill seasonal and current asset needs.”

According to J. Freed and Eugene, “Short-term credit is defined as any liability originally scheduled for payment with’ in one year.”

So current liability is usually obligations for goods and services which are carried during one year.

What are the major disclosure requirements in SEC FRR No. 1, section 203, regarding the terms of short-term debt?

The SEC in Financial Reporting Releases (FRR) No. 1, section 203, has significantly expanded the disclosure requirements in SEC filings (not necessarily in annual reports) regarding the terms of short-term debt:

  1. Footnote disclosure of compensating balance arrangements, including those not reduced to writing.
  2. Balance sheet segregation of;
    1. Legally restricted compensating balances and
    2. compensating balances relating to long-term borrowing arrangements if the compensating balance can be computed at a fixed amount at the balance sheet date.
  3. Disclosure of short-term bank and commercial paper borrowings:
    1. Commercial paper borrowings separately stated in the balance sheet.
    2. The average interest rate and terms separately stated for short-term bank and commercial paper borrowings at the balance sheet date.
    3. Average interest rate, average outstanding borrowings, and maximum month-end outstanding borrowings for short-term bank debt and commercial paper combined for the period.
  4. Disclosure of amounts and terms of unused lines of credit for short-term borrowings arrangements (with amounts supposing commercial paper separately stated) and unused commitments for long-term financing arrangements.

Long Term Liability

Long-term liabilities are liabilities with a future benefit over one year, such as notes payable that mature longer than one year.

In accounting, the long-term liabilities are shown on the right side of the balance sheet representing the sources of funds, which are generally bounded in the form of capital assets.

Discuss required disclosure of long term liabilities

The note disclosures should contain information about long-term liabilities, including long-term debt instruments such as bonds, notes, loans, and leases payable, as well as other long-term liabilities such as compensated absences, claims, and judgments, as follows:

  • Beginning- and end-of-year balances
  • Increases
  • Decreases
  • The portions of each item that are due within one year of the statement date
  • Information on the governmental funds typically used to liquidate long-term .liabilities in prior years. The disclosure should also indicate whether the government has decided to depart from the historical trend and use other funds to liquidate liabilities. The purpose of this disclosure is to give readers additional information about future claims against financial resources to help them assess the fund balances of specific funds

Information about net pension obligations is required to be disclosed in a separate pension note using the requirements of GASB Statement 27, Accounting for Pensions by State and Local Governmental Employers.

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