RESERVES

The equity of a company consists of share capital, share premium (in case of par
value shares) and reserves. Reserves are divided into distributable reserves
(reserves distributable as a dividend) and non-distributable reserves (reserves
not distributable as a dividend).
The main distributable reserve is retained earnings which is the cumulative
balance of undistributed profits. The term reserve is commonly misunderstood as
it create the image of a pile of cash stored somewhere. It is not. It is simply a
claim which the shareholders have against the assets of the company.
Non-distributable reserves are created to reflect amounts by which the assets of
a company have increased, but which are not distributable as a dividend in terms
of legislation or the articles of the company. One of the reasons to create non-
distributable reserve is to protect the interest of the creditors.
Distributable reserves:
❑ Are retained profits which, at the discretion of the directors, may be
declared as a dividend to shareholders. They are however, retained to
finance future growth of the company. All of the distributable reserves
of a company are known as the retained earnings.
❑ When the directors declare a dividend to shareholders, a dividends
payable account is used to record the liability to shareholders.

Non-distributable reserves

❑ Is one which is not available to be declared as a dividend to

shareholders.
❑ A non- distributable reserve can be created from unrealised surplus
on revaluation of a non-current asset.
❑ The asset account is dr and the revaluation surplus is cr with the
upward movement in the value of the asset.

ANNUAL FINANCIAL STATEMENTS OF COMPANIES

Introduction
The annual financial statements of a company provide valuable information not
only to the management of the company, but also to shareholders, investors,
creditors, bankers and other interested parties. For example, to shareholders,
these financial statements project the accountability of the board of directors for
the resources entrusted to them and enable the shareholders to assess the
quality of the management. On the grounds of the information in these
statements, the shareholders can decide whether or not to replace or re-appoint
the management and whether or not to retain or sell their investment.
The annual financial statements must first be approved by the board of directors.
After approval, debentures and to the Companies and Intellectual Property
Commission (CIPC). These statements must also be presented at the annual
general meeting of shareholders.
The actual preparation of the company annual financial statements falls outside
the scope of this chapter. The purpose of this discussion is to introduce you to an
early understanding of how the content of financial statements of companies is
influenced by IFRS and the Companies Act.

Content of the annual financial statements

Regulations 28 and 29 respectively indicate those companies that must be
audited and those companies that must have an independent review instead of a
formal audit. Regulations 27 of the Companies Regulations prescribes the
financial reporting standards of companies (refer to paragraph 1.3.2).
As indicated earlier IAS 1 (refer to chapter 1 paragraph 1.4) explains the
preparation of annual financial statements and tries to achieve uniformity in
presentation. In this regard, IAS1 fulfils an important role in making financial
statements understandable to shareholders.
IAS1.8, stipulates that the financial statements of a company should consist of:
❖ A statement of financial position as at the end of the period
❖ A statement of profit or loss and other comprehensive income for the
period
❖ A statement of changes in equity for the period
❖ A statement of cash flows for the period
❖ Notes to the financial statements
Although the actual preparation of the annual financial statements falls outside
the scope of this chapter, the general content and format thereof are similar to
the financial statements of a sole proprietors, partnerships and close
corporations.