Current liability

An obligation the company expects to settle within twelve months or within its normal operating cycle, or one it has no right to defer beyond twelve months. Trade payables, short-term borrowings, the portion of long-term debt repayable within the year, accrued expenses, and tax payable belong here.

Take the distributor owing ₹540 crore to suppliers, ₹300 crore of working capital loans and ₹165 crore of accruals has ₹1,005 crore of current liabilities.

One item repays attention. When a term loan has quietly come due, it appears in the current maturities of long-term debt line, and that line is the difference between a company with comfortable long-dated funding and a company with a refinancing to arrange in eight months.

Indian accounts also separate financial liabilities from other current liabilities, which is more useful than it first appears. Borrowings and trade payables go in the first group. The second holds statutory dues and advances from customers, along with provisions for employee benefits. Advances from customers are worth noticing because the company settles that liability by delivering goods. So a company with a large advance balance has already been paid for work it still has to do, and its future revenue is more certain than its order book alone would suggest.

Set current liabilities against current assets and you have working capital. Set them against cash generation and you have a solvency question.

Twelve months is the usual test, not the only one. A property developer's customer advances can be current even when the project runs three years, because its operating cycle is longer than a year. And a long-term loan whose covenant is breached by the year end can become repayable on demand, which moves the whole loan into current liabilities unless the lender waives the breach; Ind AS accepts a waiver obtained after the year end but before the accounts are approved, while IFRS needs it by the year end.

Give the provisions inside current liabilities one look each year. Employee benefit and warranty provisions are found here, along with provisions for disputed claims. Each carries a movement schedule. It shows what was created and what was used, and also what was written back. A company whose current provisions balance has grown while its business hasn't is either becoming more prudent or preparing for something, and the note names which provisions moved. Written-back provisions in a weak year are the reverse case, and they support that year's profit without any trading behind them.