reserves

reserves and types of reserves

1. ACCOUNTING

2. 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.

3. Types of reserves CAPITAL RESERVES REVENUE RESERVES STATUTORY RESERVE REALIZED RESERVE UNREALIZED REVENUE

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

5. 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

6. 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

7. 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.

8. 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.

9. 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.

10. 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

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

12. Buy back of shares 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

13. Sources of buy back shares 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

14. Advantages of buy back shares Risk in stock price Prevents companies from hoarding cash Utilization of excess cash Enjoys greater share price growth

15. Disadvantages of buy back shares 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

16. Bonus shares 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

17. Types of bonus shares 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.

18. Advantages of Bonus Shares Conservation of cash More marketable indicator of good prospectus Tax benefits Indicator of higher future profits High psychological value

19. Disadvantages of Bonus Shares Rate of dividend decline Speculative dealing Forges cash equivalent Lengthy procedure

20. Stock based compensation 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.

21. Earnings per share 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.

22. Advantages of earning per share 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.

23. Disdvantages of earning per share 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.

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