Accounting for Equity Reserve
Equity reserve is the part of the equity section of the balance sheet which excludes share capital and retains earnings. It presents the balance raising from other transactions such as foreign translation, fair value, and revaluation change.
Type of Equity Reserve
There are several types of reserves which raise in company balance sheet. Some reserves may increase and decrease balance from time to time. For example, the currency translation will change depending on the risk of the foreign exchange rate. On the other hand, statutory reserve will remain the same for the entire business unless the change in regulation.
Foreign Currency Translation
The company may carry assets or liabilities on balance sheet in foreign currencies other than functional currency. When there are no transactions related these accounts, their value remains 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 decrease our assets or liabilities which will impact our equity reserve.
Fair Value Through Other Comprehensive Income
The financial assets and financial liabilities which meet the criteria of fair value through OCI will have an impact on the equity reserve. These financial instruments’ fair value will change over time, and they will impact our balance sheet. However, before they are sold or settle, the gain will be recorded in the equity reserve. The gain from assets will be realized after they are sold while the gain from liability will be realized after settlement.
The company initially records 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 difference between carry amount and revaluation amount at each closing date. All the changes in PPE’s value will be recorded into revaluation surplus (equity reserve). The change will not reflect in income statement until the actual assets are disposed or sold.
Available for Sale Assets
Available for sale security is the financial instrument which company purchase for the purpose of sell back at a higher price. These assets require to measure at fair value on each reporting date, so all the change in fair value will record into equity reserve until they are sold. The gain from AFS will be recorded in equity reserve, it will be reversed 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 has to recognize the benefit liability in the balance sheet. There will be a difference between amount recognize and paid. The difference will be accumulated in the equity reserve.
It is the reserve which requires by the local regulations for the specific business type. Mostly the insurance and financial institute require to have a certain level of reserve in order to operate their business. This type of reserve will maintain unless the law change or company decide to change their business.