Accounting for Equity Reserve
Equity reserve is the part of the equity section of the balance sheet which excludes share capital and retains earning. It presents the balance raising from other transactions such as foreign translation, fair value, and revaluation change.
Type of Equity Reserve
There are several type of reserves which raise up the balance in company balance sheet. Some reserve may increase and decrease balance from time to time. For example, the currency translation, it will change depend on the risk of foreign exchange rate. On the other hand, statutory reserve will remain in the balance for the entire business unless the change in regulation.
Foreign Currency Translation
The company may carry asset or liability in balance sheet in other currency other than domestic currency. Assume there are no transaction between these account, so their value remain the same in foreign currency. However, if we translate into local currency, it will change due to the exchange rate.
The exchange rate may increase or the decrease our assets or liability which will impact to our equity reserve.
fair value through other comprehensive income
The financial asset and financial liabilities which meet the criteria of fair value through OCI will have impact on the equity reserve. These financial instruments’ fair value will change over time, and they will impact to our balance sheet. However, before they are sold or settle, the gain will be record in equity reserve. The gain from asset will be realized after they are sold while the gain from liability will be realize after they are settle.
The company initial record the property plan & equipment at cost, subsequently we have options to record it using cost model or revaluation model.
In revaluation model, all PPE must revaluate on every reporting date. There will be a different between carry amount and revaluation amount at each closing date. All the change in PPE’s value will be recorded into revaluation surplus (equity reserve). The change will not be reflect into income statement until the actual assets are disposed or sold.
Available for sale asset
Available for sale security is the financial instrument which company purchase for the purpurse of sell back at a higher price. These assets are requie to measure at fair value in each reporting date, so all the change in fair value will be record into equity reserve unitl they are sold. The gain from AFS will be record in equity reserve, it will be reverse when AFS is sold and realize the real gain.
Benefit Plan Reserve
Benefit Plan is the retirement plan which the company provide to the employee base on a certain formula which include average salary, year of services and so on. The company have to recorginze the benefit lability in the balance sheet. There will be the different between amount recognize and paid. The different will be accumulated in the equity reserve.
It is the reserve which require by the local regulatory for the specific business type. Mostly the insurance and financial institute is require to have a certain level of reserve in order to operate their business. This type of reserve will be maintain unless the law change or company decide to change their business.