Corporate Insolvency: The Balance Sheet Test

by Martin on June 4, 2012

Paired with the cash flow test is the balance sheet test.  Both are applied to protect creditors who have supplied goods and services to an organisation beyond the point at which the organisation is insolvent.  If the balance sheet test were not applied, newer creditors would lose out because of a significant imbalance between the organisation’s assets and liabilities, indicating that the organisation could not only not meet current liabilities, but would have problems meeting future liabilities as well.  For the organisation to be deemed viable, it would have to be in a position to cover both liabilities outstanding as at the date of the test, and those likely to be incurred in the near future.  If the courts believed the future liabilities could not be met, the organisation would be deemed insolvent.

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