Equity reserves are the type of bank capital representing funds set aside for contingencies such as losses on assets, legal action against the bank, and other extraordinary events, as well as providing a reserve for dividends expected to be paid out to stockholders but not yet declared and a sinking fund to be used to retire stock or debt capital instruments in the future.
“Equity reserves are part of owner’s equity, Equity is defined as follows: The residual interest in the assets of the enterprise after deducting all of its liabilities.”
Equity reserves are generated from different possible sources:
- Reserves generated from the contributions of the shareholders such as
- Legal reserve fund – Many legal legislations require it and businesses must pay it as the share capital’s percentage.
- Share premium – Shareholders pay this amount for shares in excess of the shares’ nominal value.
- Reserves generated from profit, specifically retained earnings or accumulated accounting profits, or if there is no profit, operating surpluses. Profits can also be distributed to other kinds of reserves, for instance:
- Legal reserve fund from profit - Many legislations need the generation of this fund as the profit’s percentage.
- Remuneration reserve – The business will use this reserve later for paying bonuses to its employees or management.
- Translation reserve – This reserve is created during the entities’ consolidation with various reporting currencies.
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