Reserves and Movement of Reserves in Corporate Accounting and Reporting

This article explains the creation and types of reserves, including open, capital, revenue, and secret reserves. It also covers the movement of reserves, dividend payments, and allocation of impairment loss on the basis of carrying value. The journal entries for impairment loss are also provided. The subject is corporate accounting and reporting, and the course code and college/university are not mentioned.

CORPORATE ACCOUNTING AND REPORTING

PART A
A reserve is that part of profits that has been set aside for a purpose. Such purposes can be
purchase of some fixed assets, payment of an expected legalized settlement, bonus payments,
provisions for debt payments or repairs and maintenance or loan installment payments and so on.
Such creation is made so as to prevent the amount of profits used for some other purposes such
as dividend payments or buy back of shares. This is simply prioritizing the purposes and
accordingly using the profits in the reserve account. The board of directors has the authorization
for the creation of reserves (Atkinson, 2012).
Reserve is something we can say that is the respective amount is free of any legal restrictions and
an entity can use it in any way provided the required disclosures are made in the notes to
accounts. Reserves are created out of profits which can also be referred to as retained earnings.
The accounting for the creation of retained earnings is simply debiting of retained earnings
account and crediting the reserve account for the same value. When the required purpose is being
fulfilled, the previous entry is being reversed (Girard, 2014). For example, an entity wants to
reserve the funds for a future hotel construction project and therefore, credits a Project Reserve
Fund for $5 million with a debiting entry in the retained earnings account. Now, the construction
costed $4.9 million which is later accounted as a credit to cash and debit to fixed assets account.
Once the project is fulfilled, a reverse entry is being made in the books where the project reserve
fund is debited with $5 million and the same is credited to the retained earnings account.
There can be two main types of reserves that needs to be explained :
 Open Reserves: Such reserves can be defined as the reserves that are presented in the
balance sheet through every stakeholder depending on such reports can have their
required information (Piper, 2015). For example, it is really important for shareholders to
keep a record of the amounts transferred by the company to reserves, purpose of such
reserves is justified or not and whether having low or no dividends is justifiable or not.
This can be further explained in two sub parts :
1. Capital Reserve : They are the open reserves not created out of company’s profits. Also,
such reserves are not used for shareholders dividend. Such reserves are created through
sources like profit prior to incorporation, profit arising in case of forfeiture of shares,

securities premium, profit on sale of undertaking or surplus on revaluation of assets or
liabilities, etc.
2. Revenue Reserve: Such reserves are created out of company’s profits. It is presented in
the P/L appropriation account and can even be used for dividend distribution. The
company can also used revenue reserves for expansion purposes, setting off of business
losses, for creating financial strength or maintaining a stable dividend rate. Such reserves
are either in the nature of general reserve or specific reserve. Where general reserve is
just setting aside of a specific amount so as to use it for general purposes arising in the
normal operations of the business, specific reserves includes taxation reserve, debenture
redemption reserve, staff reserve and contingency reserves (Rivenbark, Vogt, &
Marlowe, 2009).
 Secret Reserves: As the name implies, such reserves are not shown in the financial
reports. Such reserves are created by showing more liabilities and less assets value in
balance sheet. Such secret reserves are created for the benefits of the company like
strengthening its financial position (Taillard, 2013). The creation of secret reserves are
through showing of high depreciation value, less goodwill value, showing capital
expenditure as revenue expenditure, fake current liabilities or current assets. However, a
company is not allowed to create secret reserves. Companies like banking companies,
insurance companies are allowed to create such hidden reserves which are duly audited
by an independent auditor.
 Other Reserves include foreign currency transactions reserves.
Movement Of Reserve Including Dividend :
As the name implies the transfer of profit amount in a reserve is termed as the 'movement'.
Movement in reserves is shown in the financial statements as “Statement Of Changes In Equity”.
Such a statement shall account for the following:
 Profit or loss for the period ;
 Income or expense items, as required by Australian Accounting Standards which is
recognized directly in equity ;
 The distribution of the sum of the above two stated amounts to shareholders of parent
company and minority interest ;

 Accounting of changes in accounting policies and error correction (AASB 108) for each
component of equity ;
 Amounts held with equity holders shown as separate distributions to equity shareholders ;
 The retained earnings balances, that is, accumulated profits/losses at the start and end of
the period disclosing every change it is undergoing such as transfers made to other
reserves, etc.
Dividend on equity shares or preference shares, dividend is paid only when the company has
profits otherwise it is not payable. Since it is attributable to the owners, it is not considered as an
expense. The statement of changes in equity shows the deduction of dividend declared and paid
or is payable for the previous year (Seal, 2012). In terms of accounting, scrip dividends also
known as bonus issues, are not to be considered as dividend since they aren't leading to any asset
distribution to the shareholders. The articles of association of an entity requires dividend
payments to be made proportionately in relation to the amount paid up on shares, the dividend
amount recognized should be allocated on a pro-rata basis on shares that are not fully paid up.
In accounting entries, when a dividend is declared, an account called dividend payable is created
where the amount of dividend is credited and retained earnings account is debited. Such dividend
payable is shown as a liability on the balance sheet and is removed as soon as the dividend is
actually paid (Shapiro, 2007).
Thus, in the nutshell, we can say that movement of reserves or the statement of changes in equity
is the payment of dividend, or transfer of one reserve to another for some specific purpose, etc. It
simply reflects the amount owned by the equity holders or the owners of the company
(Siciliano, 2015).

PART B
The total impairment loss for the cash generating unit is 42000 (402700-360700). Out of the total
impairment loss, 14000 is written off against goodwill and the remaining is distributed on the
basis of the carrying amount of all the assets. The allocation of impairment loss on the basis of
carrying value is shown in the below table:
Particulars Carrying Amount Ratio Impairment Loss
Trademark 62000 0.53 9,355
Vehicle 39000 0.33 5,884
Inventory 17000 0.14 2,565
1,18,000 17,804
Journal entries for impairment loss are as follows:
Particulars Dr Amt Cr Amt
Accumulated Impairment Loss ...…..Dr 42,000.00
To Land 10,196.00
To Equipment 9,354.64
To Building 5,884.37
To Inventory 2,564.98
To Goodwill 14,000.00
(Being impairment on assets realised)
Impairment loss……Dr 42,000.00
To accumulated impairment loss 42,000.00

Bibliography
Atkinson, A. A. (2012). Management accounting. Upper Saddle River, N.J.: Paerson.
Girard, S. L. (2014). Business finance basics. Pompton Plains, NJ: Career Press.
Piper, M. (2015). Accounting made simple. United States: CreateSpace Pub.
Rivenbark, W. C., Vogt, J., & Marlowe, J. (2009). Capital Budgeting and Finance: A Guide for
Local Governments. Washington, D.C.: ICMA Press.
Seal, W. (2012). Management accounting. Maidenhead: McGraw-Hill Higher Education.
Shapiro, A. C. (2007). Capital Budgeting and Investment Analysis. New Jersey: Wiley.
Siciliano, G. (2015). Finance for Nonfinancial Managers. New York: McGraw-Hill.
Taillard, M. (2013). Corporate finance for dummies. Hoboken, N.J.: Wiley.