Accounting Business Reporting for Decision Making

CHAPTER 5 Balance sheet 183

TA BLE 5.1 Concept of retained earnings

Statement of

profit or loss Distribution of profits Equity section of balance sheet

Year

Profit or

loss Dividends

Transfer

to general

reserve

Retained

earnings at end

of period

Contributed

capital

Retained

earnings

General

reserve

1 $(40 000 ) $(40 000 ) $ 100 000 $(40 000 )

2 10 000 (30 000 ) 100 000 (30 000 )

3 50 000 20 000 100 000 20 000

4 80 000 $ 20 000 80 000 100 000 80 000

5 110 000 30 000 $20 000 140 000 100 000 140 000 $20 000

JB Hi-Fi Ltd has $269 322 000 of retained earnings as at 30 June 2015. Figure 5.12 provides an extract

from the 2015 Statement of Changes in Equity for JB Hi-Fi Ltd. The company commenced the financial

year with $219 985 000 of retained earnings. The profit for the financial year ended 30 June 2015 was

$136 511 000 and the directors elected to distribute $87 174 000 of dividends. Thus, as at 30 June 2015,

the company had $269 322 000 of retained earnings.
Consolidated
2015
$’000

2014

$’000

Retained earnings

Balance 1 July

Net profit for the year

Dividends provided for or paid

219 985

136 511

(87 174 )

168 809

128 359

(77 183 )

Balance 30 June 269 322 219 985

FIGU R E 5.12 Extract of JB Hi-Fi Ltd 2015 Statement of Changes in Equity — retained earnings

Source: JB Hi-Fi Ltd 2015, preliminary final report, p. 59.

Reserves

Equity consists of various categories of items — capital contributions, retained earnings and reserves.

Reserves are a component of equity that is difficult to define because they are accounts that can be created in

a number of ways. Fundamentally, reserves represent the funds that are retained in the entity, in addition to

retained profits. Examples of ‘reserves’ that an entity may have include, but are not limited to, asset revalu-

ation surplus, capital reserve, and foreign currency translation reserve. A revaluation surplus will arise if an

entity is using fair value rather than cost to measure its long-term assets such as property. The reserve reflects

the increase in the fair value of the long-term assets. This increase is not a revenue item, hence it is not part of

retained earnings. Rather, the transaction involves increasing the asset and increasing the reserve account in

recognition that additional funds are available to the owners as a result of this valuation adjustment. A capital

reserve can be created by transferring funds from retained earnings to the capital reserve. This is signalling

that the entity is isolating funds for the purpose of future capital investment.

A simple way of thinking about reserves is that they represent changes to an entity’s assets and liabil-

ities, other than through what is captured in the capital contribution and retained earnings components of

the balance sheet. A small business such as ATC will typically not have reserve accounts; however, large

companies do have reserve accounts. JB Hi-Fi Ltd has an equity-settled benefits reserve, a foreign cur-

rency translation reserve, a hedging reserve and other reserves. Descriptions of these reserve accounts, as

well as other reserve accounts that could appear on a balance sheet, are as follows.

• Revaluation surplus — as we will discuss later in this chapter, subsequent to acquisition entities

can elect to revalue classes of property, plant and equipment to fair value. Recalling the accounting