Question

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

Short answer

A company should not include short-term obligations under current liabilities if it plans to refinance the obligation on a long-term basis. It indicates the ability to consummate the refinancing.

Step-by-step solution

Definition of Current liabilities

Current liabilities are the liabilities payable within an accounting year. These are created out of realization from current assets or by creating fresh current liability (obligation).

Conditions under which a short-term obligation be excluded from current liabilities

A firm is required to exclude a short-term obligation from current liabilities if it aims to refinance the obligation on a long-term basis and:

1. The firm can show the ability to consummate the refinancing.
2. The obligation is not considered as a part of normal operations.
3. It can demonstrate that there will be a negative effect on working capital if it is not further classified.
4. The interest rate on the long-term obligation is below the prime rate.

Thus, these are conditions that suggest that the short-term be excluded from current liabilities.