Getting to Grips with the Balance Sheet

Solvency Under Scrutiny

New Zealand's economy has faced persistent headwinds, with insolvency figures reflecting a tough environment that began in the post-pandemic period and extended through 2025. Reports from insolvency firms indicate a 'tail' from the latest recession, with high numbers of corporate and personal insolvencies expected to persist into 2027. Factors include stagnant housing markets, elevated unemployment, inflation pressures, and cautious monetary policy from the Reserve Bank.

The balance sheet stands as a primary diagnostic tool in this context. It shows whether a business is balance-sheet insolvent—where liabilities exceed assets—distinct from cash-flow insolvency. Key warning signs include creditors outweighing debtors, high inventory levels tying up capital, or overdrawn shareholder current accounts that erode net worth. For bookkeepers and accountants working with small to medium businesses, understanding these elements helps identify distress early, potentially averting formal insolvency processes like liquidation or receivership.

Regulatory developments add complexity. A 2025 class exemption under the Financial Markets Conduct Act provides up to five years of financial reporting relief for certain entities in liquidation, receivership, or voluntary administration, easing burdens on distressed FMC reporting entities (excluding banks and insurers). Meanwhile, proposed and ongoing Companies Act reforms seek to modernise rules around capital reductions, major transactions, and unclaimed dividends, which could shift how liabilities appear on balance sheets by treating some as contingent rather than permanent.

Tensions exist between compliance relief for distressed entities and the need for transparent reporting to protect creditors and stakeholders. Directors must navigate solvency tests carefully under existing law, as misjudging balance sheet health can lead to personal liability. Non-obvious angles include how strong balance sheets bolster resilience against shocks, while weak ones amplify risks in a high-interest, low-growth setting where access to credit tightens.