Shareholders' Equity

The term reserves can refer to a number of different accounts. The previously noted appropriations of retained earnings are normally described as reserves. Another type of reserve is accumulated other comprehensive income (AOCI). As discussed in other chapters, comprehensive income results from recognition of income or expense items that are not included in the calculation of net income. There are only a few items that fall into this category, the most common of which are gains resulting from the application of the revaluation method for property, plant, and equipment, and intangibles; re-measurements of defined benefit plans; and gains resulting from remeasurement of available-for-sale financial instruments. These transactions create reserves that must be reported separately on the balance sheet. However, they may not always be described as accumulated other comprehensive income. For example, the term revaluation surplus is often used instead. Regardless of the name, the reserves must clearly identify the source of the surplus, and separate reserves are required for each type of item