Equity is defined as follows: The residual interest in the assets of the enterprise after deducting all of its liabilities.
Equity consists of several components such as Share capital, Treasury shares (issued shares held by the entity in a buyback), Share premium account (or Additional paid-in capital), Retained earnings and Non-controlling interest. But there is more…. Equity reserves – separated equity components
- Translation reserve (foreign currency translation reserve), that arises from the change in FX rates from translation of foreign operating entities (in other than the consolidation currency) from reporting period to reporting period, When realised the result is reclassified from OCI (and translation reserve) to profit or loss,
- Cash flow hedge reserve (hedging reserve). Hedging reserves arise as a result of hedges an entity has taken on to protect itself against volatility in certain financial risks in assets, liabilities, firm commitments or forecasted transactions,
- Financial assets at FVOCI reserve and Equity investments through OCI reserve (fair value reserve). Fair value reserves are separated from other reserves as assets are valued at fair value (higher than their original costs), these unrealised gains are include in other comprehensive income and classified into the fair value reserve. When realised the result is reclassified from OCI (and fair value reserve) to profit or loss,
- Revaluation reserve. When a entity revalues property, plant and equipment the unrealised gains are recorded in equity as a revaluation reserve through other comprehensive income. When realised the result is reclassified from OCI (and revaluation reserve) to profit or loss,
- Remeasurement of defined benefit plans reserve. IAS 19 specifies service cost (including curtailments) and interest cost as changes in the net defined benefit liability (asset), all other changes are classified as a remeasurement. The remeasurements are directly recognised in OCI but are not subject to recycling through profit or loss. The accumulated remeasurements may be maintained in a separate reserve in equity, and
- Statutory and other reserves, that are reserves that an entity is required to maintain by law, regulation or articles of incorporation and any other (business) specific purpose (for example reinvestment reserve or purchasing power compensation reserve). Insurance companies often maintain statutory reserves mandated by law or insurance regulation.
Allocation amounts to such capital reserves means these amounts are ‘permanently’ available to the entity and will not be available to be paid as dividends.