Financial Accounting · Statement of financial position

Non-Current Liabilities and Finance Costs in the Statement of Financial Position

Updated 11 October 2026 · Fact-checked

Non-current liabilities are amounts the entity must pay more than 12 months after the reporting date. Split each loan into the part due within 12 months (current liability) and the rest (non-current). Add any unpaid interest as a current accrual. Charge the finance cost to profit or loss.

Understand Non-Current Liabilities and Finance Costs

A non-current liability is an obligation the entity does not have to settle within 12 months of the reporting date. Typical examples are bank loans, loan notes, debentures and redeemable preference shares. They sit in the statement of financial position below equity and above current liabilities, or in the liabilities section after current assets, depending on the layout.

A loan note or debenture is a form of borrowing. The holder is a lender, not an owner. The entity pays interest at a fixed rate (the coupon) on the nominal value, and repays the nominal value on a set date. Interest is an expense in profit or loss, whether or not it has been paid.

Redeemable preference shares look like shares but have a fixed redemption date. Under IAS 32 they are a financial liability because the entity must pay cash back. So the dividend on them is a finance cost in profit or loss, not a deduction from equity. By contrast, irredeemable preference shares with discretionary dividends are equity.

The key presentation point is the split. At each year end, look at when the cash must be paid. Any capital repayable within 12 months moves to current liabilities. The remaining capital stays in non-current liabilities. The total never changes, only the classification.

Finally, interest. If interest is paid part-way through the year, the unpaid part at the year end is an accrued finance cost. It is a current liability, shown separately from the loan capital. Do not add it to the loan balance.

Key formulas to remember

Annual finance cost: Finance cost = Nominal value × Coupon rate × Time fraction; Use the nominal value, not the market value. For part-year borrowing, use months outstanding ÷ 12.
Accrued interest: Accrued interest = Finance cost for the year − Interest paid in the year; Assumes no accrual at the start of the year. Show in current liabilities.
Current portion: Current portion = Capital repayable within 12 months of the reporting date; The balance is non-current: Non-current portion = Total loan − Current portion.
Redeemable preference shares: Redeemable preference share dividends = finance cost in profit or loss; Classified as a liability under IAS 32 because redemption is compulsory.
Debenture versus preference share: Debenture: interest, liability. Redeemable preference share: dividend treated as finance cost, liability. Irredeemable preference share: dividend, equity.; Classify by obligation to pay cash, not by the name.

How to solve Non-Current Liabilities and Finance Costs questions

Use this method for any question on loans, loan notes, debentures or redeemable preference shares.

1Identify the instrument. Is it a loan, loan note, debenture or preference share? Decide if there is a compulsory repayment (liability) or not (equity).
2Find the nominal value, the coupon rate, the repayment date and the reporting date.
3Calculate the finance cost for the year: nominal value × rate × time fraction.
4Compare with the interest paid. The difference is accrued interest, a current liability.
5Work out how much capital is repayable within 12 months of the reporting date. That is the current portion.
6Put the rest of the capital in non-current liabilities. Check that current plus non-current equals the total owed.
7Show the accrued interest under current liabilities and the finance cost in profit or loss.
8Re-read the question to confirm what it asks for: one balance, a total, or a profit figure.

Quickest way: Three-number check

When to use it: Use this in Section A objective questions where you need one figure fast.

Write three numbers: capital owed, interest for the year, interest paid.
Capital due within 12 months goes current; all other capital goes non-current.
Interest for the year minus interest paid gives the accrual.
Eliminate options that put accrued interest into the loan balance or use the wrong time fraction.

Common mistakes in Non-Current Liabilities and Finance Costs

Showing the whole loan as non-current when part is repayable within 12 months.
Students look at the original loan term and ignore the reporting date.
Fix: Always ask what is due within 12 months of the year end and move that amount to current liabilities.
Adding accrued interest to the loan balance.
Both are amounts owed to the lender, so they feel like one figure.
Fix: Keep capital and interest separate. Interest payable goes in current liabilities.
Treating redeemable preference share dividends as a distribution in equity.
The word 'share' suggests equity.
Fix: If redemption is compulsory, the shares are a liability and the dividend is a finance cost in profit or loss.
Calculating interest on the wrong base or for a full year.
Students rush and skip the issue date or use market value.
Fix: Use nominal value × coupon rate, and multiply by months outstanding ÷ 12 for part years.
Treating the loan repayment as an expense.
Cash leaves the business, so it feels like a cost.
Fix: Repaying capital reduces the liability. Only the interest is an expense.

Worked examples

Example 1

At 31 December 20X5 a company has a 6% loan note with a nominal value of $400,000. Interest is paid on 30 June each year. The company must repay $100,000 of capital on 31 March 20X6, with the rest due in 20X9. Calculate the current and non-current liabilities relating to the loan note, including accrued interest, at 31 December 20X5. Assume the interest due on 30 June 20X5 was paid and none was paid after.

Show the solution

Annual interest = $400,000 × 6% = $24,000.
Interest is paid on 30 June, so interest from 1 July to 31 December (6 months) is unpaid: $24,000 × 6 ÷ 12 = $12,000 accrued.
Capital due within 12 months of 31 December 20X5 (repayment on 31 March 20X6) = $100,000, which is current.
Non-current portion = $400,000 − $100,000 = $300,000.
Current liabilities relating to the loan note = $100,000 + $12,000 = $112,000.

Answer: Non-current liability $300,000; current liabilities $112,000 (current portion $100,000 plus accrued interest $12,000).

Example 2

On 1 October 20X5 a company issued 50,000 redeemable $1 preference shares at par. They carry a 8% dividend and are redeemable in 20X9. The year end is 31 December 20X5. No dividend has been paid. Calculate the finance cost and the liability in the statement of financial position.

Show the solution

Redeemable preference shares must be repaid in cash, so they are a financial liability under IAS 32.
Nominal value = 50,000 × $1 = $50,000.
Finance cost for 3 months = $50,000 × 8% × 3 ÷ 12 = $1,000.
Dividend unpaid at year end = $1,000, so accrued finance cost of $1,000 is a current liability.
Preference share capital of $50,000 is non-current because redemption is in 20X9.

Answer: Finance cost in profit or loss $1,000; non-current liability $50,000; current accrued dividend $1,000.

Exam tips

Look at the reporting date first. Many objective questions hinge on which repayments fall within 12 months of it.
In multiple response questions, check each statement for the words 'redeemable' or 'irredeemable'. They decide liability or equity.
In number entry questions, give the figure asked for only. Do not include accrued interest unless the question says total liabilities.
Check whether interest is on nominal value. The market value or issue price is a common distractor.
For part-year questions, write months ÷ 12 beside each calculation to avoid slips.

Practice questions from Statement of financial position

Non-Current Liabilities and Finance Costs in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CMA IntermediateBalance Sheet: Current and Non-Current Classification

Non-Current Liabilities and Finance Costs: frequently asked questions

What is the difference between debentures and preference shares?

A debenture is a loan. The holder is a creditor and receives interest, which is an expense. A preference share is part of share capital, but if it is redeemable it is treated as a liability and its dividend as a finance cost. Irredeemable preference shares are equity.

How do I show the current portion of a long-term loan?

Find the capital repayable within 12 months of the reporting date and show it in current liabilities. Show the remaining capital in non-current liabilities. The two parts add back to the total loan.

Where does accrued loan interest go in the statement of financial position?

It goes in current liabilities as interest payable or accruals. It is not added to the loan capital. The matching expense appears as a finance cost in profit or loss.

Are finance costs part of operating expenses?

No. Finance costs are shown as a separate line in profit or loss, after operating profit. They include loan interest and dividends on redeemable preference shares.