reserves

RESERVES
• In financial accounting, reserve is any part of shareholders equity,
except for basic share capital.
• A reserve is profits that have been appropriated for a particular
purpose
• Reserves are sometimes setup to purchase fixed assets pay an
expected legal settlement, pay bonuses ,pay off debt, pay for repays
and maintenance, and so forth.

Types of reserves
◦ CAPITAL RESERVES
◦ REVENUE RESERVES
◦ STATUTORY RESERVE
◦ REALIZED RESERVE
◦ UNREALIZED REVENUE

1. CAPITAL RESERVES
•It is one that is not available for distribution to shareholders as
dividends
•Ex: Share Premium ,Capital Redemption Reserve

1.1 CAPITAL REDEMPTION RESERVE
•This is capital reserve that is created when shares are redeemed and
the redemption not financed or partly financed from fresh issue of
shared

1.2 DEBENTURE REDEMPTION RESERVE
The debentures trust deed may require the company to transferan
amount equal to the annual sinking fund deposit to a reserve titled
debenture redemption reserve account

1.3 Investment Allowance Reserve :The company must transfer a
specified percentage of the amount of the allowances to a reserve called investment allowances
reserve.
The income tax act allows as a special allowances investment in plant and machinery.

2. REVENUE RESERVES
•It is also called Free reserves
•It arise from the business operations of a company and can be
distributed to shareholders as dividends
•Ex: Accounting titles such as Profit and Loss Account, Profit and Loss
Appropriation Account and General Reserves.

3. STATUTORY RESERVE
•Are those that must be created to comply with the requirements of
a Law such as the Income Tax Act.
•Investment allowance reserve and export profit reserves are
examples of reserves required to be created to avail of certain
benefits under the Income Tax Law.

4. REALIZED RESERVE
•Are those that represent cash or other assets received by a
company in an exchange transaction.
Ex: Profit and Sale on a equipment

5. UNREALIZED REVENUE
•Are the result of Accounting Entries without any underlying
exchange transactions
Ex: Revaluation Reserve

Buybackofshares
Buyback of shares is processes where a company seeks to
repurchase its own securities from its existing shareholders
Buy back of equity shares is an important mode of capital restricting

Sourcesofbuybackshares
Free reserve : A company may buy back out of its free reserves but
a sum equal to the nominal value of the shares so purchased must
be deposited in the capital redemption reserves account
Securities premium Account : though section 78 of companies Act
1956 does not mention buy back of securities as one of purpose.
Proceeds of Fresh issue : No buy back of any shares or securities
shall be made out of the proceeds of an earlier issue of the same
kind of shares or same kind of securities

Advantagesofbuybackshares
Risk in stock price
Prevents companies from hoarding cash
Utilization of excess cash
Enjoys greater share price growth

Disadvantagesofbuybackshares
Lack of future growth
Company do not have to abide by buyback announcements
Manipulation of share prices
lack of relation with investors
Buyback of shares put companies at risk

Bonusshares
Bonus shares are additional shares of the company’s share capital distributed to its
shareholders without having to pay for them. Bonus shares are allotted in proportion to
the shareholder’s current holding of shares in the company
These are the company’s accumulated earnings which are not given out in the form of
dividends, but are converted into free shares.
An issue of bonus shares is referred to as a bonus issue. Bonus shares are distributed
in a fixed ratio to the shareholders.
The issuance of bonus share does not affect the company’s assets or total shareholders
equity. Its effect is a transfer of retained earnings or other items in reserves and surplus
to share capital

Typesofbonusshares
 Fully Paid Bonus Shares:
When bonus shares are distributed free of cost in proportion of
holding, it is called Fully Paid Bonus Shares.
Partly Paid Bonus Shares:
A partly paid shares in a company is one where only a partial
payment have been made with the expectation that the company
requires more funds, calls are made on a time until the share are fully
paid and the calls cease.

AdvantagesofBonusShares
Conservation of cash
More marketable indicator of good prospectus
Tax benefits
Indicator of higher future profits
High psychological value

DisadvantagesofBonusShares
Rate of dividend decline
Speculative dealing
Forges cash equivalent
Lengthy procedure

Stockbasedcompensation
 A stock based compensation plan is an arrangement under which
an employee receives shares of stock or stock option or the
employer incurs a liability to the employee in amounts based on the
price of the employers stock
A stock option plan gives employee the right to acquire shares in
the future.

Earningspershare
A portion of company’s profit allocated to each outstanding share of
common stock.
In other words, EPS serves as an indicator of a company’s
profitability.

Advantagesofearningpershare
It applies to listed companies in India which is mandatory.
It should be applied by enterprises whose equity shares or
potential equity shares are listed on a recognized stock exchange in
India.
EPS to be presented in case of parent companies in the
consolidated statements.

Disdvantagesofearningpershare
As EPS is a measure of profitability of firm it doesn’t recognize the
effect of increase in equity capital as a result of retention earnings.
It doesn’t reveal how much is paid to the owners as dividend or how
much of the earnings is retained in the business.

reserves

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