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.
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.
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