ICAI releases Exposure Draft of Guidance Note on Transfer of Capital Reserve



Quick Summary
The Institute of Chartered Accountants of India (ICAI) has issued an Exposure Draft for a Guidance Note concerning the transfer of capital reserves. This new guidance aims to provide clarity on how capital reserves, created under Ind AS for unrealised profits, can be subsequently transferred to retained earnings or other free reserves. It outlines specific conditions and timing for such transfers, particularly after the underlying amount has been realised and becomes available for distribution under law.

Executive summary 1

1. Certain Ind AS require capital reserve to be created toward unrealised profits arising from certain transactions or other events. However, currently, there is no specific guidance on their subsequent transfer to retained earnings or other free reserve.

2. The Guidance Note sets out principles for transfer of capital reserve to free reserve, including the timing when such transfer can be made.

3. Any reserve created as per the requirements of the Companies Act or other applicable law cannot be transferred to other reserve except as per the requirements of the applicable law. Few other reserves, which are purely capital in nature, e.g., capital profit on reissuance of forfeited shares, cannot be transferred to free reserves/ retained earnings as underlying transaction is completed.

ICAI Guidance Note on Transfer of Capital Reserve Released

4. For capital reserves created as per the requirements of Ind AS or erstwhile Accounting Standards, the amount can be transferred to retained earnings or other free reserves when the following two conditions are met:

(i) The company has realised the underlying amount.

(ii) The amount has become available for distribution under the law.

5. The amount may be transferred either proportionately each or at end on sale of the asset.

6. Specific disclosures are required in the year of transfer.

7. This Guidance Note would come into effect in respect of Capital Reserve appearing in the books of accounts retrospectively.

Click here to view / download the complete Exposure Draft

FAQ :

The Exposure Draft provides guidance on the subsequent transfer of capital reserves, which are created towards unrealised profits, to retained earnings or other free reserves.

Capital reserves created under Ind AS can be transferred to retained earnings or other free reserves when the company has realised the underlying amount and the amount is available for distribution under the law.

Reserves created as per the Companies Act or other applicable law cannot be transferred except as per that law. Purely capital reserves, like those from reissuing forfeited shares, cannot be transferred as the underlying transaction is complete.

The amount may be transferred either proportionately over time or at the end, such as upon the sale of an asset.

Yes, specific disclosures are required in the year of transfer.

This Guidance Note will come into effect retrospectively for Capital Reserves appearing in the books of accounts.




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