Current Portion of Long-Term Debt is defined as the long term liability that is due within a time frame of 12 months. When the company takes on long term loan, it is classified as a Non-Current Liability because of the reason that it is due at a period that is more than one year.
However, in the year when this long-term debt needs to be repaid, it is important to consider the fact that these portions need to be repaid at a certain interval.
In that case, it needs to be duly noted that in the year where the part (or whole) of the long-term debt needs to be repaid, it is classified as a current liability in the balance sheet.
The rationale behind the current portion of the long-term debt being separated from the company’s balance sheet is primarily based on the fact that it needs to be paid using highly liquid assets, including cash.
This tends to be an important tool for the creditors, as well as investors in terms of gauging the liquidity position of the company, as well as their ability to meet their day to day expenses.
They can reasonably estimate their liquidity position in the short term, as well as their ability to pay these relevant.
Example of Current Portion of Long-Term Debt
The concept of Current Position of Long-Term Debt is explained using the following example:
Grey Co. has obtained a long term loan of $200,000 during the year ended 31st December 2018. They are required to repay 20% of that loan on 31st October 2019. They balance sheet excerpts for Grey Co. as at 31st December 2018 are as follows:
|Balance Sheet Extract||For the Year Ended 31st December 2018|
|Cash and Cash Equivalents||$30,000|
|Current Portion of Long-Term Debt||$20,000|
In the example above, it can be seen that the current portion of the long-term debt is classified as a Current Liability, because 10% of the total loan amount is supposed to be payable in the coming year. Therefore, it is classified as a Current Liability for the company.
In the same manner, it can also be seen that the remainder portion of the liability (90% of the long-term loan that is drawn) is classified as a Non-Current Liability. This is because it is supposed to be paid later on by the company.
How to Calculate Current Portion of Long Term Debt?
Current Portion of Long-Term Debt can simply be calculated using the information that is present regarding the company’s debt schedule.
In this regard, it is important to consider the fact that the debt schedule outlines the major pieces of the debt, which a company obliges under, and further lays it out based on maturity, periodic payments, as well as the outstanding balance.
Normally financial analysts utilize the current portion of the long term debt using the debt schedule, because that has all the relevant information present regarding assessing the portion of debt that the company owes.
Current vs Non-Current Portion of Long-Term Debt
Current and Non-Current Portion of Long Term debt are both equally important for the stakeholders when they go through the financial statements. However, they both have different implications in terms of what they mean for the respective company.
Current Portion of the Long Term Debt mainly shows the real liquidity positon of the company, and if the company would be able to meet its operating expenses in the coming year.
In the same manner, current position of the Long Term Debt is also important because it helps investors, as well as creditors assess the short-term risks associated with the company.
In the case where current portion of long term debt is higher than, or marginally equal to the cash and cash equivalents present within the company, then the risk profile is considered to be high. Hence, creditors and other miscellaneous investors might be reluctant to invest on those grounds.
Implications of Classifying Obligations as Current Portion of Long-Term Debt
Regardless of the fact that the current portion of the long term debt does not have repercussions from the cash flow perspective (since both, Current and Non-Current Liabilities are treated in the same manner), yet the classification has numerous takeaways from the perspective of investors.
In this regard, it is also important to ensure how the Current Portion of Long-Term Debt is classified correctly so that the users of financial statements can have a clear understanding of the cash flow position of the company.