Definitions

legal-reserve

Reserve (accounting)

In financial accounting, the term reserve is most commonly used to describe any part of shareholders' equity, except for basic share capital. Sometimes, the term is used instead of the term provision; such a use, however, is inconsistent with the terminology suggested by International Accounting Standards Board. For more information about provisions, see provision (accounting).

Equity reserves are created from several possible sources:

  • Reserves created from shareholders' contributions, the most common examples of which are:

*legal reserve fund - it is required in many legislations and it must be paid as a percentage of share capital

*share premium - amount paid by shareholders for shares in excess of their nominal value

  • Reserves created from profit, especially retained earnings, i.e. accumulated accounting profits. However, profits may be distributed also to other types of reserves, for example:

*legal reserve fund from profit - many legislations require creation of the fund as a percentage of profits

*remuneration reserve - will be used later to pay bonuses to employees or management

*translation reserve - arises during consolidation of entities with different reporting currencies

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