How Long-Term Debt Is Presented on the Balance Sheet

Graziano Stefanelli
11 hours ago
3 min read

Long-term debt represents borrowings and financial obligations that are due more than twelve months after the reporting date. It includes bonds payable, long-term bank loans, lease obligations, and other financing instruments with extended maturities. On the balance sheet, long-term debt is reported under non-current liabilities, with the portion due within the next year reclassified as current. Proper reporting of long-term debt provides stakeholders with a clear view of an organization’s financial commitments and capital structure.

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How long-term debt arises

Companies issue long-term debt to finance major investments, expansion, or acquisitions. It is a critical source of capital when equity financing is limited or when management prefers to maintain shareholder control without dilution. Common examples include:

Corporate bonds: Debt securities issued to investors, often with maturities of five to thirty years.
Bank term loans: Loans extended by financial institutions with structured repayment schedules.
Debentures: Unsecured bonds backed by creditworthiness rather than collateral.
Lease obligations: Recognized under IFRS 16 and ASC 842 as long-term liabilities.

For example, if a company issues bonds worth 5,000,000 with a ten-year maturity and a 5 percent annual coupon, it records a long-term debt obligation that requires regular interest payments and repayment of principal at maturity.

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Presentation on the balance sheet

Long-term debt is split into two parts: the current portion due within twelve months and the non-current portion.

Example:

Long-Term Debt (non-current): 4,500,000
Current Portion of Long-Term Debt: 500,000
Total Long-Term Debt: 5,000,000

This classification ensures transparency about short-term repayment obligations and long-term commitments.

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Journal entries for long-term debt

At issuance:

Debit: Cash 5,000,000
Credit: Bonds Payable 5,000,000

To accrue annual interest:

Debit: Interest Expense 250,000
Credit: Interest Payable 250,000

To record repayment of principal at maturity:

Debit: Bonds Payable 5,000,000
Credit: Cash 5,000,000

If issued at a discount or premium, effective interest method amortization is applied over the life of the debt.

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Standards under IFRS and US GAAP

IFRS (IAS 1, IFRS 9): Long-term debt is measured at amortized cost using the effective interest method, unless designated at fair value through profit or loss.
US GAAP (ASC 470, ASC 835): Requires similar measurement, with disclosure of repayment terms, interest rates, covenants, and collateral.

Both frameworks require reclassification of the portion of long-term debt due within one year into current liabilities.

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Impact on financial performance and ratios

Long-term debt increases financial leverage, which can boost returns on equity if capital is deployed effectively but also raises financial risk. Interest expense reduces profitability and coverage ratios such as times interest earned.

For example, if EBIT is 1,200,000 and interest expense is 250,000, the interest coverage ratio is 4.8, showing sufficient capacity to service debt. However, if earnings decline, the burden of fixed obligations can quickly erode financial flexibility.

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Disclosures required for long-term debt

Companies must disclose:

Maturity schedules for principal repayments.
Effective interest rates.
Covenants and restrictions attached to borrowings.
Collateral pledged.
Breakdown by type of instrument (bonds, bank loans, leases).

These disclosures help creditors and investors assess liquidity, solvency, and refinancing risk.

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Operational considerations

Long-term debt is a powerful financing tool that enables companies to pursue strategic investments, but it requires careful management of cash flows and adherence to covenant restrictions. Transparent classification between current and non-current portions provides clarity on repayment timing. For investors, the analysis of long-term debt is central to evaluating a company’s risk profile, capital structure, and ability to sustain growth while meeting financial obligations.

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DATA STUDIOS

.....[datastudios.org]