Updated for the 2026-2027 CFA® Level I curriculum.
Non-current liabilities are debts a company does not expect to settle within one year. Bonds payable provide a useful example of long-term borrowing. Exam questions focus on how bonds are measured at issuance, how interest expense is calculated using the effective interest method, and what happens on the income statement when debt is retired early. This note covers the reporting treatment and disclosures examiners expect you to know.
Quick Answer
Non-current liabilities are obligations due in more than one year, including bonds payable, long-term notes, and lease liabilities. Bonds payable are initially measured at the present value of future cash flows discounted at the market rate. The effective interest method then calculates interest expense each period using the bond's carrying value and market rate at issuance, not the stated coupon rate.
Key Takeaways
Non-current liabilities are obligations due beyond one year, including bonds payable, long-term notes payable, and lease liabilities.
Bonds are initially measured at fair value, equal to the present value of future cash flows discounted at the market rate at issuance.
The effective interest method ties interest expense to the bond's carrying value and the market rate at issuance, not the coupon rate.
Discount bonds show rising interest expense over time. Premium bonds show falling interest expense over time.
Derecognition of debt before maturity creates a gain or loss equal to the difference between carrying value and the reacquisition price.
Required disclosures include maturity schedules, interest rates, fair value of debt, and restrictive covenants.
What You Need to Know for CFA Level I
The LOS asks you to explain the reporting and disclosures for non-current liabilities, not to prepare full bond amortization schedules from scratch.
Know how bonds payable are measured at issuance using present value of coupon payments and face value.
Be able to calculate interest expense and carrying value in any period using the effective interest method.
Understand that a gain or loss on debt extinguishment flows through the income statement.
Separate this topic from financial instruments measured at fair value through profit or loss, which is a sibling note.
Watch for the common trap of using face value instead of carrying value when calculating a gain or loss on retirement.
What Are Non-Current Liabilities?
Non-current liabilities are amounts a company owes that are due more than 12 months after the balance sheet date, or beyond the company's operating cycle if longer. They sit below current liabilities on the balance sheet.
Common non-current liabilities examples tested at Level I include:
Bonds payable
Long-term notes payable
Long-term bank loans
Finance lease liabilities
Other long-term debt obligations
The portion of a long-term obligation due within the next 12 months gets reclassified as a current liability. This matters for liquidity analysis, which the next study note covers in more depth.
Initial Measurement of Bonds Payable
A bond's issue price equals the present value of its future cash flows (coupon payments plus face value at maturity), discounted at the market interest rate on the issuance date. The relationship between the coupon rate and the market rate determines whether the bond is issued at par, a discount, or a premium.
Relationship | Issue Price vs. Face Value | Result |
|---|---|---|
Coupon rate = market rate | Issue price = face value | Bond issued at par |
Coupon rate < market rate | Issue price < face value | Bond issued at a discount |
Coupon rate > market rate | Issue price > face value | Bond issued at a premium |
The market rate at issuance is locked in for amortization purposes. It does not change even if market rates move after the bond is issued.
Effective Interest Method of Amortization
How the Calculation Works
Under the effective interest method, interest expense each period equals the bond's carrying value at the start of the period multiplied by the market rate at issuance. The difference between interest expense and the cash coupon payment is the amortization amount that adjusts the carrying value.
Interest expenset = Carrying valuet-1 × Market rate at issuance.
Amortizationt = Interest expenset - Coupon payment.
where:
Carrying valuet-1: the bond's book value at the start of the period,
Market rate at issuance: the yield used to price the bond at issuance, fixed for the bond's life, and
Coupon Payment: cash interest paid, based on the stated coupon rate and face value.
Discount Bonds vs. Premium Bonds
Feature | Discount Bond | Premium Bond |
|---|---|---|
Coupon rate vs. market rate | Coupon < market rate | Coupon > market rate |
Interest expense vs. coupon payment | Interest expense > coupon payment | Interest expense < coupon payment |
Carrying value over time | Increases toward face value | Decreases toward face value |
Interest expense trend | Rises each period | Falls each period |
This is the detail candidates mix up most. Interest expense is not constant under the effective interest method, even though the cash coupon payment is fixed every period.
Derecognition of Debt
A company derecognizes debt when it is extinguished, either by paying it off at maturity or by repurchasing it early. When debt is retired before maturity, the company compares the bond's carrying value to the cash paid to reacquire it.
Gain or loss on retirement = Carrying value at retirement - Reacquisition price.
If carrying value exceeds the reacquisition price, the company records a gain. If the reacquisition price exceeds carrying value, it records a loss. Either way, the amount flows through the income statement in the period of retirement.
Presentation and Disclosure Requirements
On the balance sheet, non-current liabilities appear below current liabilities, with any portion due within 12 months reclassified as current. In the notes to the financial statements, companies disclose:
A schedule of maturities for long-term debt, typically for each of the next five years
Stated interest rates and effective interest rates on outstanding debt
The fair value of debt, which analysts compare to carrying value to judge market risk
Collateral pledged and restrictive covenants, such as limits on additional borrowing or required financial ratios
Analysts use these disclosures to judge refinancing risk, debt capacity, and whether reported carrying values understate or overstate a company's actual debt burden.
Working Example
Setup
A company issues a three-year bond with a $1,000,000 face value and a 5% annual coupon, paid once a year. At issuance, the market rate for bonds of similar risk is 6%. Because the coupon rate is below the market rate, the bond is issued at a discount.
Step 1: Find the issue price.
Present value of coupons: $50,000 × 2.67301195 ≈ $133,650.60.
Present value of face value: $1,000,000 × 0.83961928 ≈ $839,619.28.
Issue price: approximately $973,270.
The bond is issued at a discount of $26,730 ($1,000,000 - $973,270).
Step 2: Apply the effective interest method.
Year | Beginning Carrying Value | Interest Expense (6%) | Coupon Paid | Discount Amortized | Ending Carrying Value |
|---|---|---|---|---|---|
1 | $973,270 | $58,396 | $50,000 | $8,396 | $981,666 |
2 | $981,666 | $58,900 | $50,000 | $8,900 | $990,566 |
Interest expense rises each year, from $58,396 in Year 1 to $58,900 in Year 2, even though the cash coupon payment stays at $50,000. The carrying value climbs each year toward the $1,000,000 face value it will reach at maturity. An analyst reading the income statement should expect this upward drift in interest expense for any bond issued at a discount, not treat it as a sign of deteriorating credit quality.
Common Exam Traps
Using face value instead of carrying value on retirement
When a bond is retired early, the gain or loss uses carrying value, not face value. Candidates who default to face value misstate the gain or loss.
Assuming interest expense is constant
The cash coupon payment is fixed, but interest expense under the effective interest method changes every period because it is based on a changing carrying value.
Mixing up discount and premium direction
Discount bonds have carrying values that rise toward face value, with rising interest expense. Premium bonds move the opposite way. Reversing this direction is a frequent error under time pressure.
Confusing this note with financial instruments at fair value
Bonds payable reported at amortized cost follow the effective interest method covered here. Financial instruments measured at fair value through profit or loss, covered in the sibling note, do not use this amortization approach.
Overlooking disclosure requirements
Some candidates focus only on the carrying value calculation and forget that maturity schedules, interest rate disclosures, and covenant details are also testable under this LOS.
Practice Question
A company's bonds payable have a carrying value of $981,666 at the start of a period. The company repurchases the entire bond issue for $970,000 cash to retire the debt early. What amount and type of gain or loss should the company report on the income statement?
$11,666 gain
$11,666 loss
$30,000 loss
Correct Answer: A
Gain or loss on retirement equals carrying value minus the reacquisition price. $981,666 - $970,000 = $11,666. Because carrying value exceeds the cash paid to retire the debt, the company reports a gain.
Option B: This reverses the formula, treating the retirement as a loss when the company actually paid less than carrying value.
Option C: This incorrectly uses the $1,000,000 face value instead of the $981,666 carrying value, producing a $30,000 difference that does not reflect the bond's actual book value at retirement.
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FAQs About Non-Current Liabilities: Reporting and Disclosures
What are non-current liabilities?
Non-current liabilities are obligations a company does not expect to pay within one year of the balance sheet date. Bonds payable, long-term notes payable, and long-term lease liabilities are common examples.
What are some non-current liabilities examples tested at Level I?
Bonds payable are one example used to study measurement and disclosure. Others include long-term bank loans, finance lease liabilities, and other long-term debt obligations reported at amortized cost.
What is the effective interest method of amortization?
It is the required approach for amortizing bond discounts and premiums. Interest expense each period equals the bond's carrying value multiplied by the market rate at issuance, with the difference from the coupon payment adjusting the carrying value.
How does bond discount amortization affect interest expense?
For a bond issued at a discount, amortization increases the carrying value each period, which increases interest expense over time, even though the cash coupon payment stays the same.
What happens when a company retires debt before maturity?
The company compares the bond's carrying value to the price paid to reacquire it. Any difference is recognized as a gain or loss on the income statement in the period of retirement.