Question

What criteria distinguish current liabilities from non-current liabilities? Give an example.

Answer 1

Answer

Current liabilities are liabilities which are expected to be settled within the greater of a year or one business operating cycle, after the reporting period. To be classified as ‘current’, a liability must satisfy at least one of the following criteria:

• The liability is expected to be settled during the entity’s normal operating cycle;
• The liability is held primarily for trading purposes;
• The liability is due to be settled within a year after the balance sheet date; or
• There is no unconditional right for deferral of settlement of the liability for at least a year after the balance sheet date.

Examples of current liabilities include trade payables, financial liabilities, accrued expenses, and deferred income.

IFRS specifies that certain current liabilities, namely trade payables and some accruals, should be considered part of the working capital used in an entity’s normal operating cycle. As such, these operating items are classified as current liabilities irrespective of when they will be settled.

Non-current liabilities or long-term liabilities refers to all other liabilities, including financial liabilities which provide financing on a long-term basis.Two common examples of non-current liabilities are long-term financial liabilities and deferred tax liabilities.

(Normally, companies utilize one year in classifying assets as current or non-current because the operating cycle of such companies is shorter than a year. However, there are companies whose operating cycle is more than a year. For example, a cruise ship manufacturer may have an operating cycle longer than a year because it takes more time to build a ship (cash expenditures) and sell it (cash receipt). In such cases, the current versus non-current classification will be based on a period longer than a year after the balance sheet date.)

Examples of Current Liabilities:

Accounts Payable--Accounts payables are obligations of a company to vendors, suppliers, etc. Such obligations are normally settled with current assets (e.g. cash), and thus, they are considered current liabilities.

Accrued Expenses--Accrued expenses may include accrued (i.e. incurred but not paid) utility charges, insurance payments, and others. Such accrued expenses are usually paid within a year after the balance sheet date, and therefore, they are considered current liabilities.

Examples of Non-current Liabilities:

Bank Loan--A bank loan that has a maturity date after one year from the balance sheet date is not going to be paid with current assets, and therefore, it is considered a non-current liability. However, if a portion of the loan is due within one year after the balance sheet date, that portion is classified as current liability on the balance sheet and is excluded from the non-current portion of the loan.