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 a long-term loan, it is classified as a Non-Current Liability because it is due for 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 on 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 and 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. obtained a long-term loan of $200,000 on the 31st of December 2018. They are required to repay 20% of that loan on 31st October 2019.
The balance sheet excerpts for Grey Co. as of 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|
The example above shows 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 remaining portion of the liability (90% of the long-term loan 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 the Current Portion of Long-Term Debt?
Current Portion of Long-Term Debt can simply be calculated using the information about the company’s debt schedule.
In this regard, it is important to consider that the debt schedule outlines the major pieces of the debt, to which a company obliges, and further lays it out based on maturity, periodic payments, and 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 about assessing the portion of the debt the company owes.
Current vs Non-Current Portion of Long-Term Debt
Current and Non-Current Portion of Long Term debt is equally important for the stakeholders when they go through the financial statements.
However, they both have different implications regarding what they mean for the respective company.
The current portion of the long-term debt mainly shows the real liquidity position of the company, and if the company would be able to meet its operating expenses in the coming year.
In the same manner, the 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.
If the 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 high.
Hence, creditors and miscellaneous investors might be reluctant to invest on those grounds.
Implications of Classifying Obligations as Current Portion of Long-Term Debt
Even though 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), the classification has numerous takeaways from the investors’ perspective.
In this regard, it is also important to ensure that the Current Portion of Long-Term Debt is classified correctly so that the users of financial statements can clearly understand the company’s cash flow position.