What is an example of specific reserve?

The reserves created for specific purposes in business are called specific reserves. According to the Companies Act, 2013, these reserves cannot be used for any other purposes. However, if the Article of Association of a company allows, these reserves can be used for other purposes as well.

Amount to any specific reserve is generally transferred from Profit and Loss Appropriation Account.

Various specific reserves are:

• Debenture Redemption Reserve

Debentures are debt instruments of a company and they have to be redeemed, that is, paid back after the expiry of the specified period. According to Accounting Standards, companies are required to set aside a specific amount in Debenture Redemption Reserve, when they are due for redemption.

• Securities Premium Reserve

When share or debentures are issued at a price higher than its book value / face value, the difference between the market value and book value is called Securities Premium. The amount of Securities Premium is transferred to Securities Premium Account. This amount is utilized to issue fully paid bonus share, write off preliminary expenses, to write off commissions discounts etc., to provide premium on redemption of debentures.

• Investment Fluctuation Reserve

The investments made by a company are subject to fluctuations in their market value. Company Law and Accounting Standards require companies to provide for such fluctuations by creating a reserve called Investment Fluctuation Reserve.

• Dividend Equalisation Reserve

Companies are required to pay dividend to its shareholders. It is often difficult for a company to maintain a consistent rate of dividend as dividend paid is equivalent to the profit made by a company during the financial year which is not consistent. So, Dividend Equaliastion Reserve is created to maintain consistent rate of dividend on shares over time, in the event of both high and low profits.