Updated for the 2026-2027 CFA® Level I curriculum.
Long-term liabilities and share-based compensation both show up on the balance sheet and income statement, but the rules for presenting and disclosing them are different. This note covers where each one appears in the financial statements, what disclosures companies must provide, and why those disclosures matter to an analyst. On the exam, expect short scenarios that give you a footnote excerpt and ask you to classify an amount correctly or identify what a disclosure tells you about risk.
Quick Answer
Long-term liabilities appear in the noncurrent liabilities section of the balance sheet, with any portion due within 12 months reclassified as current. Required disclosures include maturity schedules, interest rates, and collateral terms. Share-based compensation expense appears on the income statement every period. The offsetting entry depends on settlement type: equity-settled awards credit additional paid-in capital, while cash-settled awards create a liability that is remeasured each period.
Key Takeaways
Long-term liabilities are reported net of the portion due within the next 12 months, which moves to current liabilities.
Footnotes disclose maturity schedules, interest rates, covenants, and collateral for long-term debt.
Equity-settled share-based awards credit additional paid-in capital, not a liability.
Cash-settled share-based awards create a liability that is remeasured to fair value each reporting period.
Compensation expense is recognized over the vesting period regardless of settlement type.
Disclosure quality affects leverage ratios, refinancing risk assessment, and dilution estimates for EPS.
What You Need to Know for CFA Level I
The LOS verb is "describe." Expect conceptual questions about where items appear and what disclosures reveal, not heavy computation.
Know the balance sheet location for long-term liabilities and the trigger for reclassifying a portion to current.
Know the classification difference between equity-settled and cash-settled share-based compensation.
This note owns presentation and disclosure. It does not own the mechanics of defined benefit obligations or option valuation models, which belong to the Employee Compensation Plans note.
The main trap is treating all share-based compensation the same way on the balance sheet when settlement type changes the accounting.
Where Long-Term Liabilities Appear on the Financial Statements
Balance Sheet Classification
Long-term liabilities, such as bonds payable and long-term notes, appear in the noncurrent liabilities section of the balance sheet. The carrying amount usually reflects amortized cost, adjusted for any premium or discount using the effective interest method.
A portion of a long-term liability often comes due within the next 12 months. That portion gets reclassified as a current liability, even though the original obligation was long-term. This reclassification affects the current ratio and other liquidity measures, so it matters for analysis, not just presentation.
Required Disclosures for Long-Term Debt
Companies disclose several items in the footnotes beyond the balance sheet total:
A maturity schedule showing principal due in each of the next several years.
Interest rates, including whether debt is fixed-rate or variable-rate.
Covenants attached to the debt, such as leverage limits or minimum liquidity requirements.
Collateral or security pledged against the debt.
Fair value of the debt, when it differs materially from the carrying amount.
These disclosures let an analyst assess refinancing risk, interest rate exposure, and covenant compliance risk. A company with a large maturity concentrated in one year faces more refinancing risk than one with maturities spread evenly across several years, even if the total debt balance is identical.
How Share-Based Compensation Is Presented and Disclosed
Income Statement and Balance Sheet Effects
Share-based compensation expense is recognized on the income statement over the vesting period of the award. The offsetting entry depends on how the award will be settled.
Settlement Type | Offsetting Entry | Remeasured Each Period? |
|---|---|---|
Equity-settled | Additional paid-in capital (equity) | No, measured once at grant date |
Cash-settled | Compensation liability | Yes, remeasured to fair value each period |
Equity-settled awards, such as many employee stock options and restricted stock units, credit equity as employee service is recognized. The date shares are issued depends on the terms: options normally require exercise, while restricted awards follow their vesting and settlement conditions. Cash-settled awards create a liability that is remeasured until settlement, which can add volatility to expense.
Disclosures Analysts Should Expect
Share-based compensation disclosures typically include:
A description of the plan, including vesting conditions and award type.
The number of awards outstanding and exercisable, along with the weighted-average exercise price.
The valuation model used and the key assumptions behind it.
Total compensation expense recognized during the period.
Unrecognized compensation cost remaining, and the period over which it will be recognized.
The unrecognized cost figure is useful for forecasting. It tells you how much expense is still coming in future periods, which helps when projecting earnings.
Why Presentation and Disclosure Quality Matter for Analysis
Long-term debt disclosures help an analyst judge whether a company can meet upcoming obligations without straining liquidity or breaching covenants. A company refinancing at a much higher interest rate than its existing debt faces rising interest expense even if the principal balance stays flat.
Share-based compensation disclosures help an analyst judge future dilution and future expense. Options may dilute EPS when their exercise price is below the period's average market price. Apply the treasury stock method and the relevant award and antidilution conditions. Unrecognized compensation cost signals expense that has not yet hit the income statement but will in future periods.
Working Example: Reading Long-Term Liability and Share-Based Compensation Disclosures
Example Co. reports $300 million in long-term notes payable on its balance sheet. The debt footnote discloses the following maturity schedule:
Year 1: $40 million
Year 2: $40 million
Year 3 and beyond: $220 million
The compensation footnote discloses an equity-settled stock option plan with 5 million options outstanding, a weighted-average exercise price of $18, and unrecognized compensation cost of $6 million to be recognized over the next two years. The current stock price is $24.
Step 1: Classify the debt.
The $40 million due in Year 1 should be reclassified as a current liability. The remaining $260 million stays in noncurrent liabilities.
Step 2: Classify the options.
Because the plan is equity-settled, no liability is created for the options. The offsetting entry to past compensation expense sits in additional paid-in capital.
Step 3: Assess dilution risk.
The exercise price of $18 is below the current stock price of $24. The options are currently in the money, which signals potential dilution. Calculating diluted EPS requires the period's average market price and applicable award conditions.
Only part of the total debt matures next year, but assess the $40 million payment against available cash, expected operating cash flow, and refinancing access before judging it manageable. The stock option plan does not add a liability to the balance sheet, but it does create ongoing dilution risk and $6 million of future compensation expense that will reduce earnings as it is recognized.
Turn the Disclosures Into an Analytical Check
Continue Example Co.'s case. Suppose unrestricted cash is $15 million, expected CFO before debt repayment is $30 million, and necessary cash capital expenditure is $20 million over the coming year. Ignore other cash flows for this sensitivity.
Cash available before debt repayment = $15 million + $30 million - $20 million = $25 million.
Funding gap against Year 1 maturity = $40 milion - $25 million = $15 million.
The company needs an additional funding source, lower cash spending, or a different repayment arrangement under these assumptions. A $300 million total debt figure alone would not reveal the timing of that need. Check committed borrowing facilities, covenant headroom, restrictions on cash, and refinancing terms.
The compensation disclosure also has a forecasting use. If the $6 million of unrecognized cost is recognized evenly over two remaining years, it contributes $3 million of annual expense. This is a simplifying assumption; use the actual vesting schedule where available. New grants, forfeitures, or modifications can change the eventual expense.
Neither disclosure is a complete forecast. Each supplies an input that must be combined with cash needs, contract terms, and other expected costs.
Common Exam Traps
Assuming all share-based compensation creates a liability
Only cash-settled awards create a liability. Equity-settled awards credit additional paid-in capital, not a liability account.
Forgetting to reclassify the current portion of long-term debt
A long-term note does not stay fully noncurrent once part of it is due within 12 months. Leaving the full balance in noncurrent liabilities overstates long-term solvency and understates near-term obligations.
Confusing this page's disclosure focus with the sibling note's valuation mechanics
This note tests what the disclosures show you, not how to build a Black-Scholes fair value estimate from assumptions. That calculation belongs to the Employee Compensation Plans note.
Ignoring the maturity schedule when assessing refinancing risk
Two companies can report the same total long-term debt balance but face very different refinancing risk depending on how that debt is spread across future years.
Practice Question
Orion Technologies grants restricted stock units (RSUs) to employees. The RSUs will be settled in company shares upon vesting. Orion recognizes compensation expense related to the RSUs on its income statement each period. Which of the following best describes the offsetting entry to this expense?
An increase in additional paid-in capital
An increase in a compensation liability
A decrease in retained earnings only, with no other account affected
Correct Answer: A
Because the RSUs are settled in shares, they are equity-settled awards. The offsetting entry to compensation expense is a credit to additional paid-in capital within equity. No liability is created.
Option B: This describes cash-settled awards, which create a liability remeasured each period. Orion's RSUs settle in shares, not cash.
Option C: This is incomplete. Recognizing expense does reduce net income and eventually retained earnings, but the journal entry requires an offsetting account. Equity-settled awards affect additional paid-in capital, not just retained earnings in isolation.
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FAQs About Long-Term Liabilities and Share-Based Compensation Disclosures
Do all share-based compensation plans create a liability on the balance sheet?
No. Only cash-settled awards create a liability. Equity-settled awards, which are more common, credit additional paid-in capital instead.
How does the current portion of long-term debt affect the balance sheet?
The portion of a long-term liability due within the next 12 months is reclassified as a current liability. This changes current ratio and other liquidity calculations even though the total debt balance stays the same.
What disclosures should I expect in a long-term debt footnote?
Expect a maturity schedule, interest rate details, covenant terms, and collateral information. Some companies also disclose the fair value of their debt if it differs materially from the carrying amount.
Why does unrecognized compensation cost matter for analysts?
It tells you how much share-based compensation expense is still coming in future periods and over what timeframe, which helps with earnings forecasts.
Is share-based compensation expense a cash expense?
Equity-settled award expense is non-cash when recognized. Cash-settled awards create a liability and ultimately require cash settlement. Separate the expense-recognition entry from the settlement cash flow.