What Is Long-Term Debt? Definition and Common Examples

Debt plays a significant role in both personal and business finance, serving as a tool to acquire assets or fund operations. It represents borrowed funds that must be repaid over time, often with interest. Understanding the nature of debt is important for managing financial health and making informed decisions. Long-term debt is a fundamental category, allowing individuals and organizations to pursue goals that require substantial capital.

Understanding Long-Term Debt

Long-term debt refers to financial obligations that are not expected to be repaid within one year from the date of the balance sheet. This extended repayment period is the primary characteristic distinguishing it from short-term debt, which is due within a year. The maturity of long-term debt can range from several years to many decades, depending on the specific type of financing.

For individuals, long-term debt is typically used to finance major assets that require significant capital, such as a home. Businesses utilize long-term debt to fund substantial investments like property, plant, and equipment, or to finance strategic initiatives such as expansion, acquisitions, and large projects. This type of financing allows entities to acquire assets or pursue growth opportunities without depleting their immediate cash reserves. The repayment structure of long-term debt is designed to align with the useful life or projected returns of the assets or projects being financed, spreading the cost over an extended period.

Common Examples of Long-Term Debt

Mortgages are a prevalent example of long-term debt for individuals and businesses, used to finance the purchase of real estate. These loans are secured by the property itself and typically have repayment terms ranging from 15 to 30 years, though some can extend longer. The borrower makes regular payments that include both principal and interest over the loan’s duration.

Corporate bonds represent another significant form of long-term debt, issued by companies to raise capital from investors. When an investor buys a corporate bond, they are lending money to the issuing company, which promises to pay periodic interest and return the principal amount at a specified maturity date. These bonds often have maturities of 5 to 30 years or more, providing long-term funding for various corporate purposes, including operations and expansion.

Government bonds, such as U.S. Treasury bonds, are debt securities issued by federal or state governments to fund public spending or manage national debt. Treasury bonds, for instance, are long-term instruments with maturities typically ranging from 20 to 30 years, offering semi-annual interest payments. These are generally considered low-risk investments due to the backing of the issuing government.

Long-term bank loans, also known as term loans, are direct loans from financial institutions with repayment periods extending beyond one year. These loans can range from a few years to 30 years, providing businesses with capital for substantial investments or operational needs. Such loans typically involve a fixed repayment schedule and may be secured by collateral.

Finance leases, under ASC 842, are another type of long-term obligation that functions similarly to debt. While legally a lease, the accounting treatment reflects that the lessee has acquired substantially all the economic benefits and risks of ownership. This classification occurs if the lease meets specific criteria, such as transferring ownership, including a bargain purchase option, having a lease term for a major part of the asset’s economic life, or if the present value of lease payments covers substantially all the asset’s fair value. As a result, a finance lease is recorded on the balance sheet as both a right-of-use asset and a corresponding lease liability, effectively treating it as a financed purchase.

Long-Term Debt in Financial Reporting

Long-term debt is presented on a company’s balance sheet under non-current liabilities, also known as long-term liabilities. This placement clearly distinguishes obligations due in more than one year from current liabilities, which are expected to be settled within the next 12 months. The specific categorization allows stakeholders to understand the company’s long-term financial commitments.

A portion of long-term debt that becomes due within the upcoming 12-month period is reclassified and presented as the “current portion of long-term debt” (CPLTD) within current liabilities. This reclassification is important for assessing a company’s short-term liquidity, as it highlights the amount of long-term principal that will require cash payment in the near future. Principal payments related to long-term debt are generally reflected as financing activities on the cash flow statement, while interest payments are typically categorized as operating activities.

Understanding long-term debt is important for evaluating an entity’s financial health, particularly its leverage and solvency. Financial leverage refers to the extent to which a company uses borrowed money to finance its assets. Solvency, on the other hand, indicates a company’s ability to meet its long-term financial obligations. High levels of long-term debt can increase financial risk, but it can also enable significant growth and investment.

Accounting standards, such as ASC 470 for debt, provide detailed guidance on how long-term obligations are recognized, measured, and presented in financial statements. These standards ensure consistency and transparency, allowing investors and creditors to accurately assess a company’s debt structure and its capacity to manage future payments. The notes to the financial statements often provide additional details about the terms, interest rates, and maturity schedules of long-term debt, offering a comprehensive view of these obligations.