Long-Term Debt: How Companies Borrow Beyond One Year

Key Takeaways

• Long-term debt is the noncurrent portion of borrowings due beyond one year, reported at amortized cost under US GAAP.
• The current portion (due within 12 months) is split out separately, so the total obligation lives on two lines.
• A covenant breach can flip noncurrent debt to current overnight, distorting working capital and liquidity ratios.
• Watch the maturity schedule in the 10-K footnote, not just the headline number, to spot refinancing walls.

What It Is

Long-term debt covers term loans, notes, bonds, debentures, and any other borrowing whose scheduled payment date is more than one year (or one operating cycle, if longer) after the balance sheet date. It sits in the noncurrent liabilities section, usually right after deferred revenue and before lease liabilities.

The companion line is current portion of long-term debt, which captures principal payments coming due in the next twelve months. Together the two lines equal the total face value plus or minus any unamortized premium, discount, or issuance cost.

The Intuition

Investors care about long-term debt because it tells you two things at once. First, how much fixed-cost interest the company has locked in. Second, how much principal will eventually need to be either repaid from cash flow or refinanced at whatever rate the market offers later.

A company that funds itself with ten-year fixed bonds has very different risk than one that rolls over short-term paper every ninety days. The balance sheet line lets you measure the gap between when debt comes due and when the business actually generates the cash to pay it.

How It Works

Under ASC 470, debt is classified as current if it matures or can be called by the creditor within twelve months. Everything else goes to long-term. The classification is taken at the balance sheet date, so a five-year loan with two years remaining is fully long-term until it crosses the one-year line.

Initial recognition is at the cash proceeds received. Subsequent measurement is at amortized cost using the effective interest method. The carrying amount you see on the balance sheet equals:

Carrying value = Face value + Unamortized premium - Unamortized discount - Unamortized issuance costs

Debt issuance costs are presented as a direct deduction from the carrying amount of the related debt, not as a separate asset. This was changed by ASU 2015-03 and matches the treatment of bond discounts.

Covenant breaches are the most common trap. Under ASC 470-10, if a creditor can demand repayment because of a covenant violation at the balance sheet date, the debt becomes current unless the lender grants a waiver of at least twelve months before the financial statements are issued.

Worked Example

A manufacturer issues 500 million dollars of seven-year notes at 98 with a 4% coupon. Issuance costs are 3 million dollars. At day one the balance sheet shows:

• Cash received: 487 million dollars (500 x 0.98 - 3)
• Carrying value of notes: 487 million dollars
• Unamortized discount and issuance costs: 13 million dollars

Each year the company accretes the discount to interest expense using the effective rate (roughly 4.4% in this case), so the carrying value climbs toward 500 million dollars by maturity. Five years in, after most of the discount has accreted, the carrying value might sit at 496 million. Of that, none is current until year six. At year six, the full 496 million flips to current portion of long-term debt and disappears from the noncurrent line.

Common Mistakes

1. Ignoring the current portion. Many investors quote "long-term debt to EBITDA" using only the noncurrent line. That understates leverage by whatever amount is rolling within twelve months. Use total debt for ratio work.
2. Treating face value as carrying value. Discounts, premiums, and issuance costs can move the reported number 1-3% away from face. For modeling, both numbers matter but for different purposes.
3. Missing covenant triggers. A leverage covenant breach can reclassify five-year debt as current. The footnote will disclose this; the headline line will not.
4. Forgetting operating leases are not here. Under ASC 842, operating lease liabilities sit on a separate line and are not part of long-term debt for most ratio definitions, even though they are noncurrent obligations.
5. Comparing across borders without IFRS adjustments. IFRS 9 measurement is similar, but classification rules around refinancing intent (IAS 1) differ from ASC 470, which can shift the same debt between current and noncurrent.

Frequently Asked Questions

What is long-term debt in simple terms? Long-term debt is money a company has borrowed that it does not have to pay back for more than a year. It usually takes the form of bonds, term loans, or notes.

How does long-term debt affect investment decisions? The size and maturity profile drive credit ratings, interest expense, and refinancing risk. Investors compare long-term debt to EBITDA or to equity to gauge solvency, and they study the maturity table to see how much debt comes due in any single year.

What is a real-world example of long-term debt? A utility issuing 30-year first-mortgage bonds to fund a new power plant records the full proceeds as long-term debt at issuance. Over the next 29 years it stays noncurrent, then moves to current portion in the final year.

How can investors use long-term debt effectively? Read the debt footnote in the 10-K. It lists every instrument, coupon, maturity, and covenant. A 10% jump in average coupon on refinanced debt is a faster signal than waiting for interest expense to creep up.

How is long-term debt different from total debt? Long-term debt is just the portion due beyond one year. Total debt adds the current portion of long-term debt plus any short-term notes or commercial paper. Always use total debt for leverage ratios.

Sources

1. Deloitte DART. ASC 470-10 Roadmap, Chapter 13 Balance Sheet Classification. https://dart.deloitte.com/USDART/home/codification/liabilities/asc470-10/roadmap-debt/chapter-13-balance-sheet-classification/13-3-general
2. FASB. Proposed Accounting Standards Update Debt (Topic 470). https://storage.fasb.org/Prop_ASU_(Rev)-Debt_(Topic_470)-Simplifying_the_Classification_of_Debt_in_a_Classified_Balance_Sheet_(Current_versus_Noncurrent).pdf
3. Deloitte DART. 13.5 Credit-Related Covenant Violations That Cause Debt to Become Repayable. https://dart.deloitte.com/USDART/home/codification/liabilities/asc470-10/roadmap-debt/chapter-13-balance-sheet-classification/13-5-credit-related-covenant-violations
4. FinQuery. Debt Accounting for ASC 470 and GASB 34 Explained. https://finquery.com/blog/debt-accounting-asc-470-gasb-34/

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.