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Subject 4. Non-Current Liabilities PDF Download

Long-Term Liabilities

These are obligations that are not reasonably expected to be liquidated within the normal operating cycle but instead at some date beyond that time. Bonds payable, notes payable, deferred income taxes, lease obligations, and pension obligations are the most common long-term liabilities. Generally they are of three types:

  • Obligations arising from specific financing situations, such as issuance of bonds, long-term lease obligations, and long-term notes payable.
  • Obligations arising from the ordinary operations of the enterprise, such as pension obligations and deferred income tax liabilities.
  • Obligations that are dependent upon the occurrence or non-occurrence of one or more future events to confirm the amount payable, or the payee, or the date payable, such as services or product warranties and other contingencies.

Deferred Tax Liabilities

They generally arise when tax relief is provided in advance of an accounting expense, or when income is accrued but not taxed until received. Deferred tax liabilities on an individual transaction are expected to be reversed when these liabilities are settled, causing future cash outflows.

A typical example is depreciation: a company uses the Accelerated Cost Recovery System for tax reporting but uses straight-line depreciation for financial reporting.

  • Recall that taxes payable is calculated based on taxable income, and tax expense is calculated based on accounting profit.
  • Lower depreciation expense in financial reporting results in accounting profit that is higher than taxable income, and tax expense that is higher than taxes payable.
  • Deferred tax liabilities are thus created.

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