A reserve is an account that represents appropriation of profits (earnings and/ or retained earnings) for a specific purpose. It is a component of equity (belonging to shareholders and maybe also to non-controlling interest) that is set aside as appropriation from respective earnings or retained earnings as well as value adjustments relating to respective categories of stakeholders. Reserves in general are designed to address specific risk management requirements. In accounting parlance, “reserve” always has a credit balance and can have many connotations depending on source and intended use: it might be a part of shareholders’ equity, a liability for estimated claims, or contra-asset for uncollectible accounts.
The main types of reserves an entity can create or set up for various purposes include:
- Capital reserves.
- Revenue reserves.
- Special reserves.
- Statutory reserves (legal reserves).
- Foreign currency translation reserves.
- Fair value reserves/ revaluation reserves.
- Free reserves (general reserves): such as contingencies (contingency reserves), dividend equalization reserves (dividend equalization accounts), investment fluctuation reserves, sinking funds, among others.
