Silent Reserves - 3 Different Types

In business economics, a distinction is made between three types of hidden reserves - compulsory reserves, discretionary reserves, and arbitrary reserves. The following article will detail the characteristics of each type.

Compulsory reserves: Compulsory reserves are hidden reserves that arise due to legal maximum valuation regulations. For example, a GmbH may not record a property at more than its acquisition cost in its balance sheet, even if its actual value is higher. Thus, hidden reserves are formed without any action on the part of the company.

‍Discretionary reserves: This type of hidden reserve is also called estimation reserves. They arise because, for instance, overly cautious depreciation has been applied. They are also due, for example, to excessively high provisions.

‍Arbitrary reserves: These reserves, also known as intentional reserves, are deliberately created by the management to influence the disclosed profits. The main problem with hidden intentional reserves is that they distort the earnings situation of the company for outsiders. This is mitigated by the obligation under OR 663b paragraph 8 to disclose significant hidden reserves in the appendices.