Other current liabilities are types of categorization of liabilities. These are residual current liabilities that have not been specified by the company or regulations or do not meet the criteria of being classified separately.
They are referred to as they are uncommon and insignificant like the major accounts of current liabilities as trade payables, accounts payable, income taxes payable. Other current liabilities are listed under the liabilities side of a firm’s balance sheet.
Other current liabilities are characterized as uncommon or insignificant. Other current liabilities are rarely recorded in the financial statements, hence, the net balance in other current liabilities accounts is typically small.
Understanding Other current liabilities (OCL)
Depending on the industry and industry practices, the explanations on other current liabilities can be found on the quarterly and annual filings by the company. To simplify miscellaneous current liabilities of the big companies, the term “other current liabilities” has been established to represent all the small items of current liabilities.
The major components of liabilities are either long-term liabilities or current liabilities. Long-term liabilities are non-current liabilities such as bank loans, debentures, and long-term notes payable. These liabilities have a span of more than 1 year and are payable in more than 1 year.
On the other hand, current liabilities are short-term liabilities that have to be paid within 12 months. They are the liabilities that can be easily paid with liquidating current assets in the process of daily operations. Current liabilities include trade payables, accounts payable, income taxes payable.
Current liabilities that are not specified or uncommon won’t be categorized under current liabilities. Instead, they will be thrown into the residual heading of other current liabilities. Instead, these liabilities will be taken to a generic “other” category and would be recognized as other current liabilities (OCL) on the balance sheet.
Examples of other current liabilities shall include:
- advances from customers
- unpaid services and materials for previously invoiced projects
- accrued distributor
- Expenses payable
Special Considerations in case of other current liabilities
For publicly listed companies, they have to give a clear breakdown of other current liabilities in their quarterly and annual filings. However, they represent no so significant amount of money. Hence, the companies may choose to ignore showing other current liabilities separately.
However, OCL would be placed under footnotes to financial statements. Rarely explanations are needed for OCL.
However, when needed, the company shall offer the explanations in notes to accounts. Other current liabilities are generally assumed to be disposed of within an accounting cycle that would be 12 months.
The nature of each OCL needs to be determined. It is important for the management to know about the liquidity of OCL.
If accounts in other current liabilities in the past year become material in the current year, they may need to be disclosed into major defined current liabilities accounts. This would slowly create insightful information in the minds of investors.
The simple calculation for OCL would be by subtracting from current liabilities, the current asset accounts as cash & cash equivalents, accounts receivable, marketable securities, inventory, and prepaid expenses.
it is represented as,
OCL = Total Current Liabilities – Accounts Payable – Short term debt – Income taxes payable – current maturities of long-term debt
Let’s take the example of Sinra Ltd that had recently filed its annual financial statements. The following details about current liabilities were available
Accounts Payable – $ 100,000
Short term debt – $ 200,000
Income taxes payable – $ 30,000
current maturities of long term debt – $ 160,000
Total Current Liabilities – $ 600,000
The Calculation of OCL can be done as :
|Total current liabilities||600,000|
|Short term debt||200,000|
|Income taxes payable||30,000|
|current maturities of long-term debt||160,000|
|Other current liabilities||110,000|
When to disclose other current liabilities separately?
Management must evaluate this question carefully before any disclosure is being made. Most of the time company regulations are clear on what amount of threshold based on percentages, account needs to cross in order to be separately disclosed on the balance sheet.
It is industry practice however that if other current liabilities are more than 10% of current liabilities, they need to be shown separately. Note to financial statements needs to be attached to the balance sheet explaining the breakup of other current liabilities if possible. Hence, management has to be careful in doing so.
Further, the audit concept of materiality may be imposed in this scenario whether they need to be identifiable. This would depend on the nature and size of liabilities under other current liabilities.