184 Accounting: Business Reporting for Decision Making
equation, increasing the asset value requires a corresponding entry to keep the equation in balance.
The corresponding entry is made to the revaluation surplus. This reserve will exist only if the entity
revalues any of its property, plant and equipment.- General reserve — this reserve is created by management transferring funds from retained earnings
to a general reserve. The transfer out of retained earnings reduces the equity balance, but the transfer
to the general reserve increases equity. Therefore, the accounting equation remains in balance. The
purpose of creating a general reserve is to indicate to owners that funds (not cash) have been set aside
for a purpose to be determined in the future, and will not be available for distribution as dividends.- Foreign currency translation reserve — this reserve will appear only if the entity has an overseas sub-
sidiary. As previously discussed, consolidated accounts are prepared for the reporting entity, which
comprises the parent entity and the entities that the parent controls. It is not possible to consolidate
financial statements prepared in a domestic currency (e.g. A$) with non-domestic currency financial
statements (e.g. yen). The accounts of the overseas entity must be converted into domestic currency
before consolidation occurs. As different elements of the balance sheet and statement of profit or
loss are required by accounting standards to be converted at different exchange rates, the accounting
equation no longer balances. The foreign currency translation reserve is effectively an equity account
that is used to ensure that the accounting equation holds after the translation of the overseas currency
financial statements into the domestic currency.- Share-based payment reserve (equity-settled benefits reserve) — this reserve account records the fair value
at grant date of shares/options granted to employees and directors as a component of their remuneration.
Amounts are transferred out of the reserve and into issued capital when the options are exercised.- Hedging reserve — this reserve recognises gains or losses associated with derivative instruments that
qualify as hedges. The cumulative deferred gain or loss on the hedging instruments is recognised in
the profit or loss in the same period, as when the hedged transaction impacts the profit or loss.
It is important not to equate reserves with the availability of money. They do not reflect monies avail-able to distribute to owners.
Non-controlling interests
In addition to paid-up capital, retained earnings and reserves, the other equity item that can appear on
the balance sheet is non-controlling interests. This item is presented in the consolidated accounts only
if the parent entity does not own 100 per cent of the subsidiary entity. Non-controlling interests represent
the claim on the net assets of the reporting entity that belongs to shareholders of an entity other than
parent entity shareholders. JB Hi-Fi Ltd had no non-controlling interests as at 30 June 2015.
VALUE TO BUSINESS• Assets and liabilities should be presented in a current or non-current format unless an alternative
presentation — such as listing the assets and liabilities in order of their liquidity — provides
information that is more relevant and reliable. The distinction between current and non-current
assets (liabilities) is based on the timing of the expected future economic benefits (future
sacrifices) — current if expected within the next 12 months, and non-current if expected beyond
the next 12 months.
• For the purpose of reporting on the balance sheet, assets, liabilities and equity are usually
aggregated and listed by class. Details of the assets, liabilities and equity within the various classes
may be found in the notes to the accounts.
• The typical asset classes are cash; receivables; investments; financial assets; property, plant and
equipment; intangible assets; tax assets; and other assets.
• The liability classes typically found on the balance sheet are payables, borrowings, tax liabilities, and
provisions.
• The four equity classes that may appear in the equity section of the balance sheet are share capital
(contributed equity), reserves, retained earnings (retained profits), and non-controlling interests.