Bankruptcy Analysis
As CPAs, Cogence Group has experience issuing and reviewing solvency opinions in the context of bankruptcy and ensuing litigation arising out of bankruptcy.
Solvency refers to a business’s ability to meet its short-term and long-term liability, debt, and interest obligations at a specific point in time. There are three generally accepted tests to be performed when testing for solvency:
Balance Sheet Test
Cash Flow Test
Adequate Capital Test
To prepare a solvency opinion, each of these tests should be performed by an independent professional with business valuation accreditation. The independent professional questions management’s assumptions and projections inherent within the solvency analysis.
A company’s solvency may come into play in fraudulent conveyance, bankruptcy alter ego and due diligence actions.
Balance Sheet Test
The first test determines whether, at a specific time, the debtor’s asset value exceeded its liability value. Both assets and liabilities should be adjusted to reflect their fair market value. Assets like property, inventory, and equipment, can be adjusted up or down depending on their current market values compared to their historic costs on the balance sheet. Liabilities can be removed or added if a contingent liability is not probable to be paid and is reasonably estimable.
After adjustments are made, the expert determines whether assets exceed liabilities.
Cash Flow Test
The second test assesses whether the debtor can pay its liabilities as they mature. Management and the professional determine reasonable projections of the business’ future financial performance. The expert then compares the expected future cash flows to the required future liability payments.
Adequate Capital Test
The third and final test is the least well-defined test. It analyzes whether a company is likely to survive the fluctuations expected in the normal course of business. Experts consider unused lines of credit, non-operating assets which can be quickly liquidated, ratio analysis compared to historical performance or industry performance, and ability to raise additional capital through increased debt or additional equity injection.
If a business fails any one of the above tests, they are generally considered to be insolvent as of that date.
In recent cases, Cogence Group has performed solvency tests in relation to a punitive damage claim and reviewed solvency analysis of another expert’s solvency opinion in a fraudulent conveyance lawsuit.
If you are contemplating bankruptcy or involved in a litigation case hinging on the solvency of a business, let Cogence Group assist you with your matter.