When categories on a financial statement are classified under "other," this serves as a sort of catch-all for items that don't neatly fit into any of the major line items. The section entitled "other liabilities" on a balance sheet is a place a company can put these unclassifiable obligations.
- "Other liabilities" on a balance sheet is a general category of debts or obligations that don't fit into the other categories listed.
- This category is used to ensure the company is listing all of its debts and obligations for shareholders and other interested parties.
- Investors might only use this list of obligations to ensure the company appears to be accounting for all of its debts so that the common solvency ratios will be accurate.
Liabilities in General
"Other" is a descriptor under the umbrella of "liabilities." The International Financial Reporting Standards (IFRS) defines a liability as an "obligation...arising from past events" and resulting in an outflow.
"Other liabilities" is where companies can consolidate their miscellaneous debts and obligations. Check the footnotes buried deep in a company's Form 10-K filing or annual report to discover what makes up the specifics of other liabilities on its balance sheet.
Common "Other Liabilities"
The other liabilities section might contain things such as intercompany borrowings if you're looking at something like a holding company, which is a form used by many corporations these days, especially those that are part of the S&P 500 or Dow Jones Industrial Average. These borrowings can arise when one of the company's divisions or subsidiaries borrows money from another.
Other liabilities can also include accrued expenses, sales taxes payable, deferred tax liabilities, servicing liabilities, or other items.
The Importance of "Other Liabilities"
The other liabilities section of the balance sheet shouldn't be of particular note most of the time, although the importance of this particular entry on a balance sheet will vary from firm to firm. Most of these obligations are self-explanatory and not as important in the overall capital structure as the other major liabilities on the balance sheet.
As long as nothing looks out of the ordinary and you feel that the notes adequately explain what the debt amounts represent and how they arose, that's usually sufficient to move on in your analysis.
When you're analyzing a balance sheet, you're trying to find something that stands out, raises red flags, or that shouldn't be there.
An Example: Johnson & Johnson
The annual report of Johnson & Johnson for the fiscal year of 2020 provides a real-world illustration of "other liabilities." Scroll down to page 41, the Consolidated Balance Sheet section. It shows "Other liabilities" of $11.94 billion for the year that ended Dec. 31, 2020, up slightly from $11.73 billion the year before.
That figure made up only around 10% of the $111.6 billion in total liabilities reported by the company for the same year, and less than 7% of the total asset base of the firm. Johnson & Johnson is an enormous holding company with a complex history, controlling 265 individual operating businesses across 60 countries.
3 Major Categories of Business
Johnson & Johnson's businesses can be segregated into three main categories:
- Consumer healthcare products, which consist of things like mouthwash, pain reliever, bandages, skincare products, disinfectants, heartburn tablets, face washes, eye drops, and contact lenses
- Medical devices, which consist of things from heart stents to blood glucose monitoring systems to products that sterilize medical tools to reduce the chance of infection during surgery or other procedures
- Pharmaceuticals, which include a world-class drug research and manufacturing operation that makes medicine to fight everything from cancer and HIV to schizophrenia and diabetes
The parent company, Johnson & Johnson itself, serves to move capital and support throughout the organization as each stand-alone individual subsidiary operates in an extraordinary, decentralized, autonomous way. It's one of the strengths of the iconic enterprise.
The other liabilities section in this example is relatively stable as a percentage of total liabilities and assets. It represents a small part of the balance sheet.
Its "other liabilities" aren't the sort of thing you'd spend a lot of time worrying about after you'd become familiar with the company, how it does business, how it's organizationally and legally structured, and with the way it moves money between subsidiaries. This lowers the cost of capital and speeds up the development of a product or drug it wants to launch.