Understanding Company Financial Reserves

Understanding Financial Reserves: Classification and Types

Financial reserves, depending on their nature and purpose, can be broadly classified into two main categories:

Free Reserves

• Free Reserves: These reserves do not have a specific established purpose and can be used as deemed appropriate by the company.

Unavailable Reserves

• Unavailable Reserves: These reserves are earmarked for a particular purpose and cannot be used for other objectives.

Specific Types of Reserves:

Share Premium Reserve (Account 110)

This reserve collects the excess contributions from partners on the RCV at the time of creation or extension. It should be integrated and disbursed. It is an unrestricted reserve.

Equity Instrument Reserves (Account 111)

This is a component of equity that arises from the issuance of composite financial instruments, such as convertible bonds.

Article 214: Legal Reserve (Account 112)

It is mandatory to allocate at least 10% of annual profits to the legal reserve each year until it reaches 20% of the equity. Its origin is the annual profit. As for its destination, it can be used for:

• Offsetting losses.
• Funding capital increases; specifically, the portion exceeding 10% of the increased capital stock can be utilized for this purpose.

Voluntary Reserve (Account 113)

This reserve originates from the company's profits and is allocated freely each year. Its destination is agreed upon, and these reserves are completely available for use.

Special Reserves (Account 114)

These are reserves established with a compulsory nature due to other specific legal arrangements.

Sub-categories of Special Reserves:

• Reserves for Shares of the Acquiring Company (Account 1140): These reserves are unavailable.
• Statutory Reserves (Account 1141): Their endowment, extent, and usage are defined in the company's Articles of Association.
• Reserve for Amortized Capital (Account 1142): This reserve is unavailable. It is established during certain capital increases to prevent creditors from opposing capital reductions.
• Reserve for Goodwill (Account 1143): It is required to allocate 5% of the goodwill amount to this reserve each year.
• Reserves for Treasury Stock Accepted as Guarantees (Account 1144): These reserves will remain unavailable as long as the treasury shares received as collateral are held.

Actuarial & Other Adjustments Reserve (Account 115)

These reserves are used to recognize differences arising from valuation adjustments to provisions/funds.

Contributions from Partners or Owners (Account 118)

This account includes contributions made by partners to offset losses.

Capital Adjustment Differences (Account 119)

This account records differences arising from capital adjustments.