What is Voluntary Reserve?
A voluntary reserve is a discretionary appropriation of retained earnings, set aside by board resolution or shareholder vote, used to finance expansion, absorb future losses, or smooth dividend distributions without any legal requirement.
How It Works
- Created by a transfer from retained earnings: debit retained earnings, credit voluntary reserve.
- Can be released back to retained earnings at any time by board resolution.
- Reduces distributable profits available for dividends in the year of appropriation.
- Disclosed as a separate column in the statement of changes in equity.
Saudi Context
Saudi joint-stock companies often create voluntary reserves alongside the mandatory legal reserve as a buffer for capital projects or in anticipation of regulatory capital requirements from SAMA or CMA. Unlike the legal reserve, voluntary reserves can be distributed as dividends whenever shareholders approve their release.
Example
A Saudi manufacturer earns SAR 20,000,000 in net profit. The board appropriates SAR 2,000,000 to the legal reserve and another SAR 5,000,000 to a voluntary expansion reserve, leaving SAR 13,000,000 in distributable retained earnings.