What is a current ratio?
A current ratio is an accounting ratio calculated to assist in determining the financial viability of a business.
The minimum current ratio for a licensee is 1:1. This means the licensee must have at least $1 in current assets for each $1 of current liabilities.
A more detailed description is contained in the Financial Requirements for Licensing.
What is the formula for calculating the current ratio?
Total Current Assets / Total Current Liabilities for example:
= $52,000 / $30,000
= 1.73 : 1
How will the ratio be expressed if I have no liabilities?
The ratio must still be provided even if there are no current liabilities. It must be expressed as a numerical ratio e.g. 1.73:1 OR 1.73:0 on the report prior to the certification by the accountant.
Please note BSA cannot accept reports that do not have the ratio stated correctly. The report will be considered to be incomplete, and will require rectification by the certifying accountant.
Do I include the amount of any Deeds in the ratio?
No - The amount being assured under a Deed of Covenant and Assurance is not included in the ratio calculation.
Are there any amounts which are deducted or excluded from the calculation?
There may be in some instances where amounts which may be excluded, but they will only be assets. All current liabilities must always be taken into account.
Some assets which may be deducted or excluded in determining the current ratio are intangible assets. Related Entity Loans or Investment Assets which have been excluded in determining the Net Tangible Asset calculation must also be excluded from the Current Ratio calculation.
What if a Licensee does not meet the ratio calculation?
If the Licensee does not meet this minimum requirement the licensee’s licence will be suspended -investigate to see if it can be met at a later point in time and prepare a report based on the accounts at that date.
The Licensee is a trustee of a trust. Are the trust amounts included in the current ratio calculations?
Yes, the current assets and current liabilities of the trust are included to determine the current ratio.
Example: The licensee has $2 current assets and no current liabilities. The trust has $100 current assets and $80 current liabilities. The calculation is determined by the total of all current assets, divided by the total of current liabilities. $102/$80=1.27:1
The Licensee is a trustee of a trust. In calculating the ratio for the trust do amounts owing by the trust to beneficiaries have to be included as current liabilities?
The amounts owing by the trust to beneficiaries are certainly liabilities of the trust. Whether those liabilities are current liabilities or non-current liabilities should be determined by an accountant. In making this determination the accountant must apply applicable accounting principles, practices and policies.
If the liabilities are properly classified as current rather than non-current liabilities then those liabilities would be taken into account in calculating the licensee’s ratio.
