Financial debt: what to include and how to calculate it

The financial debt formula adds the borrowing balances included by your reporting policy at a stated date. For a gross interest-bearing debt measure, that normally means drawn loans, notes and bonds, plus the lease liabilities your policy includes. It is a balance in dollars, before any cash deduction or leverage ratio.

The formula: add balances that do not overlap

Financial debt = Short-term borrowings + Current maturities of long-term borrowings + Noncurrent borrowings + Included lease liabilities

Each category must be mutually exclusive. If the long-term borrowing figure already includes its current maturities, split it first or use its full balance without adding those maturities again. Likewise, remove finance leases from the borrowing categories if you show them separately in the final term.

This article uses outstanding borrowing principal plus recorded finance lease liabilities. It includes interest-bearing shareholder loans and excludes operating lease liabilities. Those boundaries describe the example's management measure; a loan agreement or another reporting purpose can require a different definition.

The SEC's small-business glossary defines debt as borrowed money, typically with interest and an agreed maturity. That is a useful starting point for separating financing from ordinary supplier invoices. A broad liabilities total also contains payroll, taxes and other obligations that are not borrowing balances in this calculation.

Set the inclusion policy before adding the rows

Use the legal and economic terms of each instrument, rather than the ledger account's name alone. Include a drawn revolving facility; keep an unused commitment outside outstanding debt. Include an interest-bearing related-party loan if it falls within the defined group perimeter. Review supplier-finance arrangements and other unusual balances on their terms instead of automatically treating every payable as trade credit.

Leases need a written choice. FASB's Topic 842 update describes recognition of lease liabilities for both operating and finance leases while retaining the distinction between them. A policy that includes only finance leases should therefore identify operating lease liabilities as an explicit exclusion. Use the recorded lease liability, not the sum of undiscounted future rental payments.

Decide whether your borrowing measure uses outstanding principal or accounting carrying amounts. This example uses principal for loans and notes. Unamortized issuance costs deducted in the accounts then become reconciling items, rather than unexplained differences.

The export to request from treasury and accounting

Start with one row per instrument and these fields:

A consolidated group must also eliminate intragroup loans so a loan between two included entities does not become external borrowing. Preserve the elimination rows and their reason. Blank instrument IDs, missing currencies and unmatched ledger accounts should be resolved before the total is accepted.

A worked example: a US manufacturer

A hypothetical manufacturer closes its books at September 30, 2026. All amounts below are USD, with no currency conversion needed. Its gross financial debt policy includes finance leases and interest-bearing shareholder loans, and excludes operating leases.

The manufacturer also has $900,000 of operating lease liabilities, outside the stated measure. A broader measure including that balance would be $8,000,000 + $900,000 = $8,900,000. Labeling that broader figure clearly makes the policy effect visible without suggesting the underlying obligations disappeared.

The calculation proceeds in these steps:

All amounts are whole dollars; no rounding adjustment is needed. The instrument total and the formula's category total agree. The current maturities of $600,000 are already inside the $4,000,000 bank term loan and must not be added to that full balance again.

Reconcile the answer to the balance sheet

The accounting carrying amounts are lower because issuance costs have been deducted. Treasury's schedule uses principal, so the reconciliation restores those deductions. Finance lease carrying amounts require no adjustment in this example.

The SEC balance-sheet presentation rule separately addresses current borrowing, the current portion of long-term debt and long-term debt disclosures. Use those account classifications as a reconciliation map, while preserving the calculation's stated measurement basis.

Then prove the movement since the previous close:

This example has no new lease liabilities, foreign exchange movements or other noncash changes. In an actual schedule, add separate rows for those movements when they occur. A debt model extends this reconciliation across periods; do not plug a difference into repayments just to make the closing balance fit.

Where it goes wrong

• Current maturities appear twice. Add current and noncurrent portions, or use a complete instrument balance. Do not combine both methods.
• Credit limits replace drawn balances. Available facility size does not establish the amount owed at the measurement date.
• Lease policies change silently. A larger total may reflect newly included operating leases rather than additional borrowing. Show the policy bridge.
• Principal is compared directly with net carrying value. Explain issuance costs, discounts and premiums rather than changing the schedule to match an unrelated basis.
• Interest expense becomes debt principal. Interest is a period cost; principal is a closing balance. Capitalized or accrued interest needs explicit treatment under the stated definition.

For earnings-based leverage, use the calculated balance in debt to EBITDA. Subtracting eligible cash belongs in net debt to EBITDA, while scheduled principal and interest payments belong in debt service.

Reconcile your borrowing file in Covirage

Bring your borrowing schedule, lease classifications and balance-sheet account export; Covirage maps the columns, and its tools compute and check the defined balances while the external AI model explains the reconciliation with every figure traced to its rows. Create a free Covirage account and bring a sample of your own data.

See Covirage for finance teams for the finance reporting context.