How Long-Term Debt Is Presented on the Balance Sheet

Graziano Stefanelli
Sep 25
3 min read

Long-term debt represents financial obligations that are due beyond one year or one operating cycle, whichever is longer. It is a critical component of the balance sheet because it reflects a company’s reliance on external financing to fund operations, investments, and growth. The reporting of long-term debt provides stakeholders with insight into solvency, capital structure, and future repayment obligations. Both IFRS and US GAAP prescribe recognition, measurement, and disclosure requirements to ensure that long-term debt is presented transparently and comparably across entities.

Long-term debt arises from borrowing agreements exceeding one year.

Common forms of long-term debt include bank loans, corporate bonds, debentures, lease liabilities, and mortgage obligations. These financing arrangements typically involve repayment of principal over time or at maturity, along with interest charges.

For example, if a company issues 1,000,000 in bonds with a maturity of five years, it records a liability for the bond principal, while interest payments are recognized periodically as expenses in the income statement.

Presentation on the balance sheet distinguishes current and non-current portions.

Long-term debt is classified under non-current liabilities on the balance sheet. However, the portion of long-term debt due within the next 12 months must be reclassified as a current liability. This distinction helps users assess both short-term liquidity and long-term solvency.

For example:

Current Portion of Long-Term Debt: 200,000
Long-Term Debt (Non-Current): 800,000
Total Long-Term Debt: 1,000,000

This presentation clarifies the timing of obligations and highlights upcoming repayment pressures.

Journal entries illustrate recognition and repayment of debt.

When a company issues bonds for 1,000,000 at par:

Debit: Cash 1,000,000
Credit: Bonds Payable 1,000,000

To record annual interest of 50,000:

Debit: Interest Expense 50,000
Credit: Cash 50,000

At maturity, when repaying principal:

Debit: Bonds Payable 1,000,000
Credit: Cash 1,000,000

These entries show how long-term debt creates ongoing interest costs and eventual settlement obligations.

Standards require measurement using the effective interest method.

Under IFRS 9: Financial Instruments and US GAAP (ASC 835: Interest), long-term debt is initially recognized at fair value, net of transaction costs, and subsequently measured at amortized cost using the effective interest method. This method spreads the cost of borrowing over the life of the instrument, ensuring that interest expense reflects both stated coupon payments and amortization of premiums, discounts, or fees.

For example, if bonds are issued at 980,000 with a face value of 1,000,000, the 20,000 discount is amortized over the bond’s life as additional interest expense.

Long-term debt impacts solvency and leverage ratios.

Because long-term debt increases total liabilities, it directly influences key ratios used by analysts and creditors:

Debt-to-equity ratio: Long-term debt ÷ Equity.
Debt ratio: Total debt ÷ Total assets.
Interest coverage ratio: EBIT ÷ Interest expense.

For instance, if a company has long-term debt of 1,000,000 and equity of 500,000, the debt-to-equity ratio is 2.0, signaling high leverage and financial risk. Such ratios influence credit ratings, borrowing costs, and investor perception.

Disclosures provide transparency about obligations and risks.

Both IFRS and US GAAP require extensive disclosures about long-term debt, including:

Maturity dates and repayment schedules.
Interest rates and effective yields.
Security or collateral pledged.
Covenants or restrictions attached to debt agreements.
Fair value of outstanding debt.

These disclosures allow investors and creditors to evaluate repayment risk, refinancing needs, and the impact of debt covenants on operations.

Long-term debt reflects financial strategy and sustainability.

The presence of long-term debt on the balance sheet communicates how a company finances its growth and manages capital structure. While moderate debt can enhance returns through leverage, excessive long-term debt may threaten solvency if cash flows are insufficient to service obligations. Transparent reporting of long-term debt ensures that stakeholders can assess whether a company’s financing strategy supports sustainable growth or creates financial vulnerability.

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