Abstract:

The paper addresses the methodological issues of debtor solvency assessment. The results of this process have extremely high importance in the case of corporate bankruptcy. If solvency can be recovered, turnaround management is advisable. Otherwise, it does not make sense to continue the business: a legal entity should be liquidated. The Russian legislation contains such provisions but there has been no methodological support provided. Therefore, the purpose of the study was to develop the methodology, which let evaluate the possibility of solvency recovery. The authors discuss a ‘static’ solvency model contained in the Draft Federal Financial Analysis Standard and propose an alternative ‘dynamic’ model. The idea of the original approach is to predict debtor solvency considering cash flows from operating, investing and financing activities of the company. It is assumed that the forecast period generally corresponds to the period of recovery procedures and debt repayment, cash flows reflect crisis financial condition of the debtor, and the discount rate is based on the ACAPM. The proposed model is tested on the example of an extracting company. The choice of this industry reasoned by its importance for the Russian economy. We suggest that even common guidelines on the debtor solvency assessment will strengthen bankruptcy framework in Russia. However, corresponding methodology should be adapted to the conditions of financial insolvency, requiring further empirical research.