A current ratio shows the amount of current assets of a business in relation to its current liabilities and it helps determine its financial viability. If your revenue is more than $600,000, your Accepted Independent Accountant will need to calculate this ratio as part of your MFR Report (PDF).
If your revenue is up to $600,000 you don’t need to provide the current ratio with your Declaration but if requested, you must show us that you meet the current ratio. The minimum current ratio for a licensee is 1:1. You must have at least $1 in current assets for each $1 of current liabilities.
You'll need to provide an MFR Report that shows that you meet the current ratio on the perid ended date that the report is based on (e.g. 30 June).
Calculating the current ratio
Current ratio = Current assets / Current liabilities
Example: Current ratio = Current assets / Current liabilities = $52,000 / $30,000 = 1.73:1
- You must not round up a current ratio to meet the required ratio, e.g. 0.9987:1 must not be rounded up to 1:1
- You must meet the minimum current ratio level at all times
- Any amounts being assured by way of a Deed of Covenant and Assurance are not to be included in the current ratio calculations.
The current ratio calculation depends on your business structure:
- For Individuals – personal current assets and current liabilities
- For Partnerships – a combination of the partnership’s and the licensed partner’s personal current assets and current liabilities
- For Trusts – a combination of the trust’s and the trustee’s personal current assets and current liabilities
- For Companies – the current assets and current liabilities of the company
- For Consolidated Group of Companies – the current assets and current liabilities (whichever is being relied upon) from either the:
- Consolidated Group, or
- Closed Group.
Example: The licensee has $2 current assets and no current liabilities. The trust or partnership has $10,000 current assets and $8,000 current liabilities. The calculation is determined by the total of all current assets, divided by the total of all current liabilities: $10,002 / $8,000 = 1.25:1
You must still provide the current ratio on your financial report even if you have no current liabilities. For example:
- 1.73:1 or
Note: we cannot accept reports that do not have the ratio stated correctly.
Deductions and exclusions
Some assets won’t be included when determining the current ratio. They include but are not limited to:
- right of indemnity
- intellectual property
- formation expenses
- value of Trademarks
- borrowing expenses
- uncollectible debts or receivables
- contingent assets
- Related Entity Loans or Investment Assets that have been excluded in determining the net tangible asset (NTA) calculation must also be excluded from the current ratio calculation, where they are a current asset.
You must always take into account, all current liabilities.