topic 22 capital reserves

• Capital reserves - occur due to transactions which affect the SOFP rather than the income statement (capital rather than revenue) and unlike revenue reserves they are not available to pay the annual dividend
• Two capital reserves are:

  • share premium account
  • revaluation reserve
• Share premium account - this is a capital reserve which is credited when a company issues shares at a price that is greater than the nominal value, known as issuing shares at a premium
• Revaluation reserve:

  • nca are usually valued at cost less depreciation but land generally goes up in value and companies may revalue land to reflect the permanent increase in its value
  • this is so the SOFP gives a fair and true view of the company
  • a revaluation reserve is used to balance the increase in value of nca
  • each time land is revalued, the revaluation reserve changes and so revaluation is a change in equity and must be included in the SOCIE