What is Long-Term Debt?

Long-Term Debt refers to borrowings and financial obligations that are due more than twelve months after the balance sheet date. Common examples include:

• Bonds Payable: Debt securities issued to investors with fixed interest payments and set maturities.
• Notes Payable (Long-Term): Loans from banks or other lenders with repayment terms extending beyond one year.
• Finance and Capital Leases: Lease obligations for assets where the company assumes substantially all risks and benefits of ownership.

Why is Long-Term Debt Important?

Long-Term Debt is important because it:

• Funds Growth and Expansion: Provides capital for large investments, acquisitions, or infrastructure projects.
• Impacts Financial Leverage: Affects debt-to-equity ratios and overall risk profile.
• Influences Interest Costs: Fixed or variable interest payments on long-term debt impact future cash flows and profitability.

How is Long-Term Debt Calculated?

On the balance sheet, Long-Term Debt is reported at the principal amount outstanding after current portions are reclassified as short-term debt:

1Long-Term Debt = Total Debt Outstanding − Current Portion of Long-Term Debt

Where:

• Total Debt Outstanding includes all borrowings (bonds, notes, leases).
• Current Portion of Long-Term Debt is the amount due within the next twelve months, reclassified under current liabilities.

Additional Considerations

• Maturity Profile: Reviewing the schedule of debt maturities helps manage refinancing and liquidity risks.
• Interest Rate Terms: Fixed-rate versus floating-rate debt affects sensitivity to market interest rate changes.
• Covenants and Restrictions: Debt agreements may include covenants that restrict dividends, additional borrowing, or asset disposals.