As a director of an Australian company, it is your responsibility to ensure that the company remains solvent and can meet its financial obligations.

Insolvent trading happens when a company incurs a debt while it is insolvent or becomes insolvent by incurring that debt. Insolvency happens when a company is unable to pay its debts as they fall due. To prevent insolvent trading, directors must be aware of the company’s financial position at all times and take steps to ensure that the company remains solvent.

Directors should regularly review the company’s financial statements, cash flow projections, and budgets to identify any potential financial issues. If a director suspects that the company may be insolvent, they must take immediate action to seek professional advice and develop a plan to address the company’s financial issues. This may include restructuring the company’s operations, negotiating with creditors, or placing the company into voluntary administration.

In addition to seeking professional advice, directors should also take the following steps if they suspect that the company may be insolvent:

  1. Conduct a thorough review of the company’s financial position, including cash flow projections, budgets, and debtors and creditors.
  2. Consider whether the company has any viable options for restructuring its operations to improve its financial position.
  3. Develop a plan to address the company’s financial issues, including negotiating with creditors or seeking additional funding.
  4. If the company is unable to meet its financial obligations, consider placing the company into voluntary administration.
  5. Seek legal advice to understand the director’s duties and obligations regarding insolvent trading.

If a director fails to take appropriate action to prevent insolvent trading, they may be held personally liable for any debts incurred by the company while it was insolvent. This can include fines, disqualification from managing a company, and even imprisonment in severe cases.

In conclusion, directors must take a proactive approach to managing the company’s financial affairs and seek professional advice whenever necessary to prevent insolvent trading. By doing so, directors can ensure that the company remains solvent and can continue to operate effectively for the benefit of its stakeholders.

How we can help

We have helped many clients navigate their way through this process. As your accountant we can help you right from the very start to identify if the company is insolvent and provide you with the right steps to move forward.

A cash flow forecast is a critical tool that helps our businesses plan for their future financial stability and navigate economic downturns. It provides a comprehensive view of the inflows and outflows of cash and identifies  patterns to help make informed decisions about spending, savings, and investments.

Here are some ways preparing a cash flow forecast can help clients plan for their future and navigate a potential downturn:

  1. Identify potential cash flow shortages

One of the primary benefits of a cash flow forecast is that it can help clients identify potential cash flow shortages before they occur. By projecting future inflows and outflows, clients can see if their cash reserves are going to be sufficient to cover their expenses. This information can help them make adjustments to their spending and invest in initiatives that will increase their cash flow, allowing them to avoid financial difficulties.

  1. Plan for future expenses

A cash flow forecast can also help clients plan for future expenses, such as investments in new equipment, expansions, or upgrades to existing systems. This information can help them determine how much they need to save each month to meet their goals and avoid dipping into their emergency funds.

  1. Monitor their financial health

By regularly updating their cash flow forecast, clients can monitor the health of their finances and see how their financial situation is evolving over time. This information can be used to make necessary adjustments to their spending habits and investment strategies, ensuring they remain on track to reach their financial goals.

  1. Anticipate potential risks

A cash flow forecast can also help clients anticipate potential risks that may impact their financial stability. For example, if a client’s cash flow is heavily dependent on a single customer, a change in that customer’s financial situation could have a significant impact on their own finances. By identifying these potential risks, clients can take steps to diversify their sources of income and reduce their dependence on a single customer.

  1. Make informed decisions

Finally, a cash flow forecast allows clients to make informed decisions about their finances. By having a comprehensive view of their inflows and outflows, they can prioritize their spending, understand their cash reserves, and make informed decisions about their investments. This information can help them weather economic downturns and ensure they remain financially stable, even in uncertain times.

In conclusion, preparing a cash flow forecast is a critical step in ensuring financial stability and navigating a potential downturn. It provides individuals and businesses with a comprehensive view of their finances, helping them make informed decisions about their spending, savings, and investments.

We regularly assist our clients to understand their current and future cash position using a cashflow forecast, please reach out to us if we can be of any assistance at [email protected] or using 07 5593 6060.

As a holder of an AFSL, there are certain financial reporting requirements you must meet, including solvency, net tangible asset, and cash needs requirements, as outlined in the RG166. In this article, we look at these requirements and how to lodge your general purpose financial statement (GPFS), FS70, and FS71, in order to ensure AFSL compliance.

QC Accountants is based on Australia’s sunny Gold Coast in southeast Queensland. The company was founded in 2013 with a desire to help businesses transform into the thriving companies they have always dreamed of becoming. We can:

  • Prepare general purpose financial reports for other licensees;
  • Liaise with your auditors;
  • Assist with preparing cashflow forecast reports;
  • Report to your Board of Directors to ensure you continue to meet your RG166 (regulatory capital requirements).

Contact us and let’s start growing your business today.

AFSL net tangible assets requirements

According to ASIC and as outlined in the RG166, the solvency and positive net assets requirement is outlined as follows:

RG 166.32 The Corporations Act requires directors of a company to prevent insolvent trading by the company: see Div 3 of Pt 5.7B. It is not appropriate for any AFS licensee, including a natural person, to carry on a financial services business while insolvent. 

RG 166.33 It is also not appropriate that you carry on a financial services business with liabilities exceeding your assets. AFS licensees that trade when insolvent or while having negative net assets are unlikely to have the resources to carry on the financial services business in compliance with the licensee obligations under Ch 7 of the Corporations Act. 

RG 166.34 You should continuously monitor your solvency, but we do not require you to continuously monitor your net assets position. However, you must review it if you have some reason to doubt you have adequate net assets.

Essentially this means that in order to continue trading, you have the responsibility of being solvent as well as having positive net tangible assets. You must regularly ensure that you are solvent, and you must perform a review of your net assets if you have any suspicion that they aren’t where they need to be.

AFSL cash needs requirement

The cash needs requirement as outlined in the RG166 states:

RG 166.35 As a condition of your AFS licence, you must have sufficient resources to meet your anticipated cash flow expenses (cash needs requirement). 

Essentially this means that you need to have sufficient outgoings to cover operation of your business for a certain period of time, in order to manage any contingencies. There are 5 total cash needs options outlined in the RG166, with each having different requirements. The options are outlined as follows:

Option Description
  • Reasonable estimate projection plus cash buffer 

See RG 166.40–RG 166.44

Option 1 is designed for licensees that maintain a certain level of cash or other liquid financial resources at all times (e.g. by way of commitments by a parent company). We expect this option will be relevant for some small business licensees.
  • Contingency-based projection

See RG 166.45–RG 166.47

Option 2 is suitable for all kinds of licensees, including small business licensees that do not always maintain cash or commitments of support from others. We expect this option will be most relevant for small business licensees.
  • Financial commitment by an Australian ADI or comparable foreign institution

See RG 166.50

Option 3 is relevant to licensees that can draw on financial backing from an Australian ADI or a relevantly recognised foreign regulated deposit-taking institution. We expect this option will not be relevant for small business licensees: see Table 6 and Information release (IR 03-26) Alternative means to satisfy cash needs requirement under PS 166.
  • Expectation of support from an Australian ADI or comparable foreign institution 

See RG 166.51

Option 4 is relevant to subsidiaries of certain prudentially regulated bodies. We expect this option will not be relevant for small business licensees: see Table 6 and IR 03-26.
  • Parent entity prepares cash flow projections on a consolidated basis 

See RG 166.52

Option 5 is relevant to licensees in corporate groups that plan cash flows on a group basis. We expect this option will not be relevant for small business licensees: see Table 6 and Information release (IR 03-44) ASIC provides further options to meet cash needs requirements. There are alternatives under Option 5: Option 5A (suitable for a licensee with a commitment from a parent) and Option 5B (suitable for a licensee without a commitment from a related body corporate).

At QC Accountants, we can report directly to your board of directors in order to verify that you meet the net tangible asset requirement and the cash needs requirement for your business, as well as work with your auditor after the fact. Contact us today and we will take care of it for you, no matter which option you are subject to.

Submitting general purpose financial settlements (GPFS)

On Friday, June 3 2022 an ASIC media release outlined financial reporting changes for AFS licensees.

These changes state that any for-profit company, registered scheme or disclosing entity that submits financial reports under Chapter 2M of the Corporations Act 2001 that are not themselves reporting entities can no longer prepare special purpose financial reports (SPFRs). They must now submit general purpose financial statements (GPFS).

This allows entities that do not have public accountability to use a simplified disclosure regime (Tier 2 simplified disclosures). Entities that do have public accountability however must comply with the disclosure requirements of the full standard (Tier 1 general purpose financial statements). An entity with public accountability is defined as:

  • An entity whose debt or equity instruments are traded in a public market, or it is in the process of issuing such instruments for trading in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets); or
  • An entity that holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses (this would include AFS licensees that hold client monies).

The GPFS must be lodged online as a PDF with the ATO on or before the day that you lodge your income tax return. On top of a GPFS, you must also lodge an FS70.

Lodging an FS70 / FS71 / FS76

The form FS70 is the Australian financial services licensee profit and loss statement and balance sheet and must be lodged every year. When lodging the form FS70 you must also attach a copy of your complete financial statements, including a profit and loss statement, balance sheet, non disclosures, and an audit report. On top of this, you must also lodge a form FS71, also known as an Auditor’s report. The FS71 is essentially a review of your FS70 performed by an auditor. This form is completed by an independent auditor but must be lodged by you, the AFS licensee.

If you are a limited AFS licensee and do not deal with client money, you must lodge a Form FS70 and a Form FS76 Annual compliance certificate but not a form FS71 unless you were not a limited licensee for part of the year, in which case you must submit all three.

We can help you lodge your form FS70 and/or FS76 as well as work with your auditor in order to lodge the form FS71 on time and according to regulation, just contact us to discuss your situation. You can also find out more information on forms FS70, FS76, and FS71 on ASIC’s website.

QC Accountants can help you with AFSL compliance

AFSL compliance requirements change frequently. ASIC’s financial requirements are tightening every year and it can be difficult to ensure compliance on an ongoing basis. We can assist organisations that hold AFSLs to meet compliance requirements, including all of those detailed in this article.

If you or your business want further advice and help in regards to any AFSL compliance issues, contact us today.

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