The Balance Sheet Insolvency Test is a procedure to ascertain whether the assets of a business are higher than the liabilities. Balance sheet insolvency occurs where the value of a company’s assets is less than the value of its liabilities, taking into account both contingent liabilities. The term “liabilities” goes beyond debts and includes liquidated and unliquidated liabilities arising from contracts, tort, restitution, etc. The solvency test is normally used to check the difference between the market value of the assets of a business and the sum of the market value of the firm’s debt plus the market value of the firm’s equity. This test requires that all the assets, liabilities and debts are valued to reflect fair market value even though some such as contingent liabilities are difficult to value. The balance sheet insolvency test relies extensively on the valuation of assets and liabilities at fair market value at the time of the valuation for effective analytical results. The balance sheet insolvency test is sometimes referred to as Balance Sheet Test.