Financial Statement Analysis for Insolvency Professionals
Book value is not what a distressed company is worth. Here is how an IP reads the numbers.
An insolvency professional takes charge of a company whose numbers have usually stopped telling the truth. Reading its financial statements well is how the IP finds out what is left to sell, where cash went, and which transactions may need to be reversed. The Code and the CIRP Regulations build that work into deadlines: an information memorandum by day 95, and an opinion on avoidance transactions by day 75.
Finance and Accounts carries only 2 one-mark questions in the Limited Insolvency Examination, and forensic audit sits under General Awareness. But numbers appear throughout the 70 case-study marks: liquidation value against plan value, claims against assets, a transfer made eight months before admission. This page covers the analysis those questions assume.
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Ratios an IP Reads First
Standard definitions. What changes in insolvency is what each one tells you.
Current ratio
Formula
Current assets / current liabilities
What it signals in a distressed company
Below 1 means short-term obligations exceed liquid assets. Check whether receivables are real and collectable.
Quick ratio
Formula
(Current assets less inventory) / current liabilities
What it signals in a distressed company
Strips out stock that may be obsolete or unsaleable at book value.
Debt-equity
Formula
Total debt / shareholders' funds
What it signals in a distressed company
Negative or eroded net worth turns this meaningless; look at debt against realisable assets instead.
Interest coverage
Formula
EBIT / interest expense
What it signals in a distressed company
Below 1 means operating profit cannot service interest, the usual path to a default.
DSCR
Formula
Cash available for debt service / principal and interest due
What it signals in a distressed company
The lender's test. A sustained figure below 1 shows the business cannot carry its debt as structured.
Receivable days
Formula
Trade receivables / revenue x 365
What it signals in a distressed company
A sharp rise can mean fictitious sales or receivables from related parties that will never be paid.
| Ratio | Formula | What it signals in a distressed company |
|---|---|---|
| Current ratio | Current assets / current liabilities | Below 1 means short-term obligations exceed liquid assets. Check whether receivables are real and collectable. |
| Quick ratio | (Current assets less inventory) / current liabilities | Strips out stock that may be obsolete or unsaleable at book value. |
| Debt-equity | Total debt / shareholders' funds | Negative or eroded net worth turns this meaningless; look at debt against realisable assets instead. |
| Interest coverage | EBIT / interest expense | Below 1 means operating profit cannot service interest, the usual path to a default. |
| DSCR | Cash available for debt service / principal and interest due | The lender's test. A sustained figure below 1 shows the business cannot carry its debt as structured. |
| Receivable days | Trade receivables / revenue x 365 | A sharp rise can mean fictitious sales or receivables from related parties that will never be paid. |
Red Flags That Point to Avoidance Transactions
Patterns that justify a closer look, not conclusions in themselves.
- checkLarge payments to one creditor or a related party shortly before the insolvency commencement date, while other creditors went unpaid (possible preference).
- checkAssets sold, or written off, at well below book or market value, especially to related parties (possible undervalued transaction).
- checkLoans taken on exorbitant terms, such as very high interest or penal charges (possible extortionate credit transaction).
- checkRevenue or receivables growing while cash collections fall, or round-tripping between group companies.
- checkRelated-party balances that move between accounts at year end without commercial reason.
- checkMissing books, unexplained journal entries, or auditors' qualifications that were never resolved.
Where the Regulations Put This Work on a Clock
- 1
Day 75: form an opinion
Regulation 35A(1): the RP decides whether the corporate debtor has been subjected to transactions under sections 43, 45, 50 or 66.
- 2
Day 95: information memorandum
Regulation 36: the IM goes to each CoC member and must include the latest annual financial statements, audited financial statements for the last two financial years, provisional statements for the current year, and assets and liabilities with the detail needed to value them.
- 3
Day 115: make a determination
Regulation 35A(2): where the RP formed that opinion, he makes a determination.
- 4
Day 130: apply to the NCLT
Regulation 35A(3): the RP applies to the NCLT for relief. Creditors must hand over relevant extracts of stock, transaction or forensic audits they commissioned (regulation 35A(4)).
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Look-back Periods Changed in 2026
A preference to a related party is caught if made in the two years before the insolvency commencement date, and to anyone else in the one year before; the same one-year and two-year windows apply to undervalued transactions, and extortionate credit looks back two years. The IBC (Amendment) Act, 2026 now counts the preference and undervalued-transaction windows back from the initiation date and up to the insolvency commencement date. That change is after the exam's cut-off of 4 February 2025, so for the exam count back from the insolvency commencement date.
How the Limited Insolvency Examination Tests This
One-mark questions are short calculations or definitions: which ratio ignores inventory, or what a DSCR below 1 means. In the CIRP case studies, the numbers serve a legal question. A company paid ₹3 crore to a promoter-group company seven months before admission while trade creditors went unpaid: is it within the look-back period, and who must form an opinion on it, by when?
The trap is reading the balance sheet at book value. An IP values assets for what they will realise, and treats related-party receivables as doubtful until proven otherwise.
FAQs
How many marks does finance and accounts carry in the IBBI exam?expand_more
2 marks, as two one-mark questions covering corporate finance, financial analysis, liquidity management, and tax planning and GST. Financial facts also run through the case studies, which carry 70 marks.
When must the resolution professional identify avoidance transactions?expand_more
Under regulation 35A of the CIRP Regulations: form an opinion by day 75 of the insolvency commencement date, make a determination by day 115, and apply to the NCLT by day 130.
What financial statements go into the information memorandum?expand_more
The latest annual financial statements, audited financial statements for the last two financial years, and provisional financial statements for the current financial year, along with assets and liabilities as on the insolvency commencement date (regulation 36(2)).
Is forensic audit part of the IBBI exam syllabus?expand_more
Yes, under General Awareness, which carries 2 marks in total alongside the Constitution, labour law, economics, financial markets and valuation basics.
Next steps
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65 questions, case-study format, negative marking.