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1.8 Analysis of Financial Statements—CBSE XII

Capital Reserve
A reserve created out of the capital profit is known as Capital Reserve. It is created
out of the profit earned from transactions of capital nature and is not available for the
distribution to the shareholders as dividend. The examples of capital profit from which
capital reserve is created are:
• Gain (Profit) on sale of fixed assets; • Gain (Profit) on sale of investment;
• Gain (Profit) on reissue of forfeited shares; and
• Gain (Profit) on purchase of an existing business.
Capital Redemption Reserve
Capital Redemption Reserve is a reserve set aside when a company buys its owns shares
out of free reserves or Securities Premium. Section 69(1) of the Companies Act, 2013,
requires that a sum equal to nominal value of shares so purchased shall be transferred
to Capital Redemption Reserve. The reserve may be used by the company to issue
fully-paid bonus shares.
Section 55 of the Companies Act, 2013, requires that where preference shares are
redeemed out of profits which would be otherwise available for declaration of dividend
a sum equal to Nominal (face) Value of the shares redeemed must be transferred to
‘Capital Redemption Reserve’.
Securities Premium
Securities Premium is the amount received over and above the nominal (face) value
of securities (shares, debentures, etc.) is credited. The amount so received is credited
to Securities Premium and shown under Reserves and Surplus in the Balance Sheet. It
can be used by a company for the purposes stated in Section 52(2) of the Companies
Act, 2013.
Debentures Redemption Reserve (DRR)
Debentures Redemption Reserve is a reserve credited by the amount prescribed under
Section 71(4) of the Companies Act, 2013 and Rule 18(7)(b) of the Companies (Share
Capital and Debentures) Rules, 2014 by a company before redemption of debentures
commences. In respect of partly convertible debentures, DRR is created only for
non-convertible portion of debentures.
Revaluation Reserve
Revaluation Reserve is a reserve which is credited by the upward revision of the book
value of an asset. It is debited when the value of that asset is revised downward or the
asset is sold or discarded. The amount standing to the credit of Revaluation Reserve
Account cannot be used for payment of dividend or issuing bonus shares.
Shares Options Outstanding Account
Shares Options Outstanding Account is a reserve to which difference between the market
value and issue price of shares issued to employees is credited over the vesting period.
For example, the market price of the share is ` 75 and is to be issued to employees at
` 50. The difference, ` 25 (i.e., ` 75 – ` 50) should be credited to this reserve.