Non-Current Liabilities

What are Non-Current Liabilities?

Non-current liabilities are obligations that a company is not expected to settle within one year. They represent long-term financial commitments.

Types of Non-Current Liabilities

1. Financial Liabilities: These arise from financial transactions such as:

   • Loans taken from banks and other lenders.
   • Lease liabilities: Instead of buying an asset, companies can lease it. Lease payments are similar to repaying interest and principal on a loan. Long-term lease liabilities are therefore considered financial liabilities.

2. Provisions: These are estimated future liabilities. Examples include:

   • Employee retirement benefits (gratuity, leave encashment, pension). Although these are paid upon retirement, the matching principle of accounting requires recognizing the estimated liability as an expense in the current year. Gratuity is often calculated as 15 days' salary for each year of service.

3. Deferred Tax Liability: This arises due to temporary differences between accounting profit and taxable profit. These differences often stem from different depreciation methods used for financial reporting and tax purposes.

   • Depreciation Methods and Deferred Tax:

     • Straight-line Depreciation: Depreciation expense is constant each year.
     • Written-down Value (WDV) Depreciation: Depreciation expense is higher in the initial years and decreases over time.
     • Companies might use straight-line depreciation for financial statements and WDV for tax purposes. This difference creates a deferred tax liability.

   • Key Points about Deferred Tax: * It's not a loss of revenue for the government but a deferral of payment. * Governments allow this to incentivize investment in new assets, which stimulates economic growth (job creation, GST payments, etc.). * Tax authorities may disallow certain provisions charged as expenses, leading to advance tax payments (creating a deferred tax asset). Companies often report a net value of deferred tax liabilities and assets. * No interest is charged on deferred tax, making it effectively an interest-free loan from the government.

For financial statement analysis, understanding the detailed accounting entries for deferred tax is not always necessary. The key takeaway is that it represents a future tax liability.

Example: Asian Paints

As of March 2020, Asian Paints had a deferred tax liability of ₹282.68 crore. A decrease from the previous year indicates that they started paying back previously deferred taxes.

Current Liabilities

What are Current Liabilities?

Current liabilities are obligations that a company expects to settle within one year. They represent short-term financial commitments.

Many items can appear under both current and non-current liabilities, depending on their maturity date. For example:

• Lease Rent Payable:
  • Lease payments due within one year are classified as current liabilities.
  • Lease payments due after one year are classified as non-current liabilities.

This distinction is crucial for understanding a company's short-term and long-term financial obligations.

Key Components of Current Liabilities

A primary component of current liabilities is Trade Payables.

• Trade Payables: These represent amounts owed to suppliers for goods and services purchased on credit. They are a crucial aspect of a company's working capital.
• Disclosure Requirements: Companies are often required to disclose amounts due to micro-enterprises separately within trade payables. This is important for transparency and supporting smaller businesses.

Example: Asian Paints' Capital Structure

The provided information about Asian Paints' capital structure offers insight into how the company is financed:

• Total Capital: ₹13,587.68 crore
• Sources of Capital:
  • Shareholders' Contribution (Equity): ₹9,453.29 crore
  • Long-Term Lenders (Non-Current Liabilities): ₹939.28 crore
  • Short-Term Lenders and Suppliers (Current Liabilities): ₹3,195.05 crore

This breakdown shows the proportion of funding from different sources: equity, long-term debt, and short-term debt (including trade payables).

Analysis of Asian Paints' Funding

The data reveals that Asian Paints relies heavily on equity financing (shareholders' contributions). Short-term funding from lenders and suppliers also plays a significant role. The proportion of long-term debt is relatively smaller. This capital structure gives an insight into the company's risk profile and financial strategy.

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