What is the Current Portion of Long Term Debt?
- There is a statutory requirement to disclose this figure on all published Financial Statements. It is the total amount that needs to be paid back by a company on its loans in the next 12 months
- The reason why there is an emphasis on companies to disclose this figure is that it’s useful for those who trade with a company (suppliers, for example) and who analyze a company’s performance to be able to calculate the near-term liabilities of a business.
- A company can be profitable and can have adequate long-term funding, but if they suffer a deterioration of their short term cashflow and cannot meet its short-term liabilities, the company can be declared bankrupt. In such a situation many creditors of the company end up not getting paid. A situation creditors would wish to avoid before it takes place and investors may not want to invest in a company whose near-term liabilities are escalating.
How Long Term Debt figure calculated?
It’s a simple figure to calculate. Most loans will have a repayment schedule agreed with their lender. The payments that the company is required to make in the 12 months after the company’s Financial Statements calculated as the ‘current portion of long term debt
Such payments contractually required under the loan agreement and the total figure disclosed on the face of the company Balance Sheet
Why is the figure important to disclose?
Revealing the amount to be repaid over the next 12 months gives readers of the accounts a clearer picture of the short-term indebtedness of the company. The figure can be added to the company’s overdraft and even Directors Loans, if they are immediately repayable, to get a realistic picture of how much the company might have to repay in the short term.
Suppliers and other credit providers can perform specific calculations to see how affordable a company’s long term debt profile is. One of the most popular measures of debt affordability is the company’s ‘interest cover.’ Companies with interest cover of 1 or less are considered risky by lenders or creditors.
Similarly, if the business is approaching a ratio of 1 between its Current Assets and Current Liabilities (the current portion of long term debt included in current liabilities) it’s considered risky too. This is usually a sign that the business is struggling to meet its short-term obligations
It’s by no means the only way to consider a company’s short term financial position, but the current portion of long term debt is part of such calculations.
Its primary significance to both the reader and the preparer of accounts is that the figure accurately calculated and revealed in the published financial statements.