Question

Under what conditions should a short-term obligation be excluded from current liabilities?

Short answer

When it intends and has the ability to refinance the obligation on a long-term basis, the short-term obligation would be excluded from current liabilities.

Step-by-step solution

Meaning of Short-term obligation

Short-term liability is the term that means those obligations of the business which are expected to be repaid within one year, such as short-term loan accounts payable, wages, income tax payable, etc.

Conditions when Short-term obligation excluded from Current liabilities:

Short-term obligations are part of current liabilities. They are obligations that are due to be paid to creditors within one year. However, in certain cases, it would be excluded from current liabilities.

FASB Statement No 6 says that short term obligations would be excluded from current liabilities when the following conditions are met:

• It intends to refinance the obligation on a long term basis and
• It has the ability to refinance the debt on a long-term basis