Long term debt is any amount due to a lender or creditor in more than a year. It includes obligations such as loans, mortgages, and other forms of debt that have a maturity date beyond the next twelve months.
In This Section
What is Long Term Debt?
Long-term debt on a farm’s balance sheet represents the portion of the farm’s liabilities that is due for repayment over a period longer than one year from the date of the balance sheet. It includes obligations such as loans, mortgages, and other forms of debt that have a maturity date beyond the next twelve months.
Long-term debt is classified as a long-term liability on the farm’s balance sheet, distinguishing it from current liabilities, which are due within the next twelve months. It appears under the long-term liabilities section.
Please Note: Long-term debt only includes the amounts owed to a creditor or lender in a period greater than 12 months in the future. Any debt obligations associated with a long-term debt that are being paid in the coming 12 months are classified as a current liability under Current Portion Long Term Debt.
Types & Examples of Long Term Debt
Long term debt can stem from multiple different sources and is very common to see on any balance sheet. Any obligation for payment more than a year our will create an amount which should be categorized as long term debt.
Examples of long-term debte on a farm balance sheet may include:
- Equipment Financing – Loans taken out to purchase farm machinery, vehicles, or other equipment necessary for farm operations. These loans may have varying repayment terms depending on the type of equipment and its expected lifespan.
- Land Loans – Loans used to purchase additional land for farming expansion or to refinance existing land debt. These loans often have longer repayment terms, extending over several years or even decades.
- Livestock Financing – Loans acquired to purchase livestock or to cover expenses related to raising and maintaining livestock, such as feed, veterinary care, and transportation costs.
- Infrastructure Loans – Loans used to finance the construction or repair of farm infrastructure such as barns, irrigation systems, fencing, or storage facilities.
- Input Financing – Loans obtained to purchase inputs necessary for specific crops or livestock production, such as specialized equipment, seeds, pesticides, or fertilizers.
- Agribusiness Loans – Loans taken out for investment in related agribusiness ventures, such as processing facilities, distribution networks, or value-added product development.
Long Term Debt on the Balance Sheet
Long term debt is any obligation due out to a lender or creditor in more than a year. Long term debt is always considered a long-term liability.
It is important to remember that any part of the debt obligation due in the coming year will be listed under Current Portion of Long-Term Debt. This includes any upcoming principal and interest payments which are a part of a long-term debt, such a farm mortgage, equipment loans, and others that will be due within the next twelve months.
Purpose of Long-Term Debt on the Balance Sheet
Comprehending long-term debt on a farm’s balance sheet provides valuable insights into its financial condition, risk profile, and strategic direction, enabling informed decision-making by management, investors, lenders, and other stakeholders. Understanding long-term debt on a farm’s balance sheet is crucial for several reasons:
Financial Health Assessment
Long-term debt is an indicator of the farm’s leverage and financial health. High levels of long-term debt relative to assets or equity can indicate financial risk, as it may signal that the farm is heavily reliant on borrowing to finance its operations or expansion.
Liquidity and Solvency Analysis
Long-term debt obligations represent significant financial commitments that the farm must fulfill over an extended period. Understanding these obligations helps assess the farm’s ability to generate sufficient cash flows to meet its debt service requirements, ensuring liquidity and solvency.
Investment Decisions
Investors, lenders, and stakeholders use information about long-term debt to evaluate the farm’s creditworthiness and investment potential. A farm with manageable long-term debt levels and a solid repayment capacity may be more attractive to investors and lenders.
Risk Management
Long-term debt exposes the farm to various risks, including interest rate risk, refinancing risk, and credit risk. Monitoring and understanding long-term debt allow the farm to proactively manage these risks by, for example, implementing hedging strategies or maintaining appropriate debt levels.
Strategic Planning
Long-term debt plays a crucial role in the farm’s strategic planning and capital budgeting decisions. It helps determine the farm’s capacity to undertake long-term investments, such as purchasing land, acquiring equipment, or expanding operations.
Compliance and Reporting
Understanding long-term debt is essential for compliance with loan covenants and regulatory requirements. It ensures that the farm meets its obligations under loan agreements and accurately reports its financial position and performance to stakeholders and regulatory authorities.
How to Record Long Term Debt on Balance Sheet
Long-term debt on a farm’s balance sheet is valued at the principal amount owed, which represents the original amount borrowed. Here’s how the valuation of long-term debt is typically handled:
- Principal Amount – The principal amount of the long-term debt is determined based on the original amount borrowed by the farm. This is the initial sum that the farm received from the lender.
- Unamortized Discounts or Premiums – If the long-term debt was issued at a discount or premium to its face value, the unamortized portion of these discounts or premiums may be adjusted. This adjustment reflects any difference between the face value of the debt and the amount actually received by the farm at the time of issuance. Discounts or premiums are typically amortized over the term of the debt.
- Accrued Interest – Any accrued interest on the long-term debt that has not yet been paid is added to the principal amount to determine the total amount owed. Accrued interest represents interest that has been incurred but not yet paid as of the balance sheet date.
- Valuation Date – The valuation of long-term debt is as of the balance sheet date. This means that any subsequent changes in the fair value of the debt do not affect its valuation on the balance sheet unless there are specific circumstances requiring adjustment, such as impairment.
Overall, the valuation of long-term debt on a farm’s balance sheet reflects the principal amount owed by the farm to its creditors, adjusted for any unamortized discounts or premiums and accrued interest, providing insight into the farm’s long-term financial obligations.
Exclusions from Long-Term Debt on the Balance Sheet
Common exclusions from long-term debt on a farm balance sheet ensure that only obligations genuinely classified as long-term debt are included. Long-term debt refers to financial obligations that are due for repayment in periods longer than one year.
Here are the typical exclusions from long-term debt:
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Current Portion of Long-Term Debt (CPLTD): The amount of long-term debt that is due within the next 12 months is reclassified as a current liability under CPLTD. Including CPLTD is the most common mistake when preparing a farm balance sheet, but easy to resolve by taking any portion of the debt due in the coming year and including it in the CPLTD account.
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Short-Term Debt: Any borrowings or loans that are due within one year are listed under current liabilities as short-term debt or short-term borrowings, not under long-term debt.
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Accounts Payable: Obligations to suppliers for goods and services received but not yet paid for are classified under accounts payable, a current liability.
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Accrued Expenses: Expenses incurred but not yet paid, such as wages, utilities, and interest, are listed under accrued expenses or other current liabilities.
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Operating Lease Liabilities: Obligations under operating leases (or short-term leases) are excluded from long-term debt and recorded separately under lease liabilities, typically categorized by their short-term and long-term portions.
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Contingent Liabilities: Potential obligations that depend on future events, such as lawsuits or guarantees, are disclosed in the notes to the financial statements rather than included in long-term debt.
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Deferred Tax Liabilities: Future tax obligations due to temporary differences between accounting and tax treatment of assets and liabilities are listed separately under non-current liabilities.
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Notes Payable (short-term): Short-term notes or promissory notes that are due within one year are recorded under current liabilities as notes payable, not under long-term debt.
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Capital Lease Obligations: Payments due under finance (capital) leases are categorized separately, often divided into current and non-current portions, rather than being included in long-term debt.
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Deferred Revenue: Payments received in advance for goods or services to be delivered in the future are recorded under current liabilities as deferred revenue.
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Income Taxes Payable: Tax liabilities due within one year are listed under current liabilities as income taxes payable, not under long-term debt.
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Provisions and Accruals: Provisions for future expenses, such as repair and maintenance costs, are recorded separately under provisions or accrued liabilities.
By excluding these items, the long-term debt section of the balance sheet accurately reflects only those financial obligations that are due beyond one year. This clarity is crucial for providing stakeholders with a precise understanding of the farm’s long-term financial commitments and for making informed financial planning and investment decisions.
Frequently Asked Questions
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