when liability is classified as 'current' and when it is classified as 'non-current' ?
Non-Current Liabilities refer to any liabilities that qualify any of following two conditions:
(a) Liabilities expected to be paid/settled-off after 12 months from the date of Balance Sheet.
Or
(b) Liabilities that are expected to be paid/settled-off after the operating cycle period.
Operating Cycle Period mean total period considered starting from the purchase of the raw materials till the final payment has been collected from the debtors. The operating cycle has been
Current Liabilities are just the opposite of the Non-Current Liabilities i.e.
(a) Those liabilities that are expected to be paid/settled-off within 12 months from the date of Balance Sheet.
Or
(b) Those liabilities that are expected to be paid/settled-off within the operating cycle period.
If in the question no information is given about the Operating Cycle then consider only the option (a). In such cases, if any liability is settled within 12 months from the date of Balance Sheet, then it is treated as Current Liability else as Non-Current Liabilities.
Example: Identify which of the cases (a, b, c, d) can be classified as Current or Non-Current Liabilities.
Cases (Liabilities) | Operating Cycle (Months) | Expected Month of Payment from Date of Balance Sheet | Classification of Liabilities | Reason |
a | - | 8 | Current Liabilities | As paid within 12 months |
b | - | 13 | Non-Current Liabilities | As paid after 12 months |
c | 12 | 9 | Current Liabilities | As satisfying both conditions of paying in 12 months and within operating cycle |
d | 15 | 14 | Current Liabilities | As although liability is not paid within 12 months but liability is paid within operating cycle |