Capital Reserve Definition
A capital reserve refers to a specific fund or amount set aside to cater for future or unpredictable expenses or losses of a company. It is an account on a company’s balance sheet put aside to settle financial emergencies or capital losses that the company might face. A capital reserve is set aside for unpredictable expenses or long-term investment projects of a company.
A capital reserve is not useful when a company needs to pay dividends, they are permanently separated from other accounts, usually through investment. An accumulated capital surplus such as profit and appreciation of the current market value of a company’s asset make up a capital reserve.
A Little More on What is Capital Reserve
Capital reserves are amounts or funds put aside for settlement of contingencies. They are accounts on a company’s balance sheet that are marked for other specific purposes such as long-term projects or offset of capital losses. Capital reserve is often regarded as misdated or dislocated concept, this is because “reserve” as a term is not captured in the Generally Accepted Accounting Principles (GAAP). Capital reserves do not play any role when measuring the overall wellness of any business, they do not indicate the trading or operational techniques employed by an organization.
References for Capital Reserves
Academic Research on Capital Reserve
Unbounded liabilities, capital reserve requirements and the taxpayer put option, Eberlein, E., & Madan, D. B. (2012). Quantitative Finance, 12(5), 709-724.
The Effect of Stochastic Capital Reserve on Actuarial Risk Analysis via an Integrodifferential equation, Edeki, S. O., & Ugbebor, O. O. (2014). IAENG International Journal of Applied Mathematics, 44(2), 83-90.
Unlimited liabilities, reserve capital requirements and the taxpayer put option, Eberlein, E., & Madan, D. B. (2010).
Methodological Aspects of Reserve Funds Accounting, Based on the Concept of Capital Maintenance in Joint Stock Companies, Kulikova, L. I., Khamidullina, G. I., Goshunova, A. V., & Aletkin, P. A. (2017). The Social Sciences, 12(2), 208-214.
VALUE AT RISK FOR CAPITAL RESERVE REQUIREMENT REGULATION IN UKRAINIAN BANKS, Kravets, I. (2006). Kiev: NaUKMA.
Liquidity and Solvency Shocks in a Network Model of Systemic Risk: The Impact of Minimum Capital and Reserve Requirements, Krause, A., & Giansante, S. (2012).
Identifying the Characteristics of Chinese Accounting from the Change in Detailed Account of Capital Reserve [J], Xiaoqiang, Z. (2006). Journal of Beijing Technology and Business University (Social Science), 2, 011.
CAPITAL RESERVE, Chacey, M. E.
Assessment of Human Capital Reserve in China, Fengyun, H., Yubo, F., & Guoliang, S. (2005).
Capital reserve policy, regulation and credibility in insurance, Bourlès, R., & Henriet, D. (2009).
Optimal bank and regulatory capital reserve strategies under loan-loss uncertainty, Evatt, G., Johnson, P., Cheng, M., & Glover, K. (2012). In The 25th Australasian Finance and Banking Conference 2012. University of NSW.
Corporate Governance, Capital Reserve, Non-Performing Loan, and Bank Risk Taking, Lestari, D. (2018). International Journal of Economics and Financial Issues, 8(2), 25-32.