Specific Reserves

A specific reserve is created for some definite purpose out of the profits of the company. The purpose may be any thing connected with the business which the Article of Association or the directors want to be provided for, such as dividend equalisation, replacement of fixed assets, expansion of the organisation, income-tax liability of the future, etc. Though the concerned amounts are carried under earmarked heads, these are available for distribution as dividend on the recommendation of the directors but subject to the approval of shareholders, since these are created by appropriation of profits. There may be slight confusion since some of the objects for which specified reserves are created, may also appear to be covered by a charge against revenue, for example, provision for bad and doubtful debts as well as reserve for bad and doubtful debts or a provision for repairs and renewals running along with a reserve for an identical purpose. The only distinction between the two is based on whether it is a charge against revenue or an appropriation of profits. To create any specific reserve existence of profit is essential. Any amount which the directors desire to retain or the Articles require the company to retain over and above provision, necessary for a true and fair disclosure of profit, is specific reserve unless the same is retained for a general purpose, when it would become a general reserve. Normally, specific reserves are created to comply with the terms of the Articles of Association or in accordance with a decision of the Board to meet a particular situation which may arise in the future. Also some of the specific reserves may be required under contractual obligations or legal compulsion. An example of the former would be the fund for redemption of debentures; that of the latter would be the development rebate reserve which is compulsory if the advantage of the development rebate is to be enjoyed in respect of income-tax. Such specific reserves take on the character of capital reserves.