Equalisation reserve
A reserve to spread costs that fall irregularly over the years (such as major maintenance) evenly. Under Title 9 Book 2 DCC often treated as a provision for major maintenance.
What does equalisation reserve mean?
A reserve to spread costs that fall irregularly over the years (such as major maintenance) evenly. Under Title 9 Book 2 DCC often treated as a provision for major maintenance.
In everyday usage an equalisation reserve is a buffer to absorb fluctuations, but the legal classification depends on the nature. For major maintenance a provision may be appropriate under conditions; a free reserve is equity.
How does it work?
The word covers three different items. In the commercial annual accounts, equalising costs is only possible through a provision: art. 2:374(1) DCC allows provisions for expenditure in a following financial year that originates in part before the end of the financial year, if the provision spreads costs evenly over a number of financial years. The best-known example is the provision for major maintenance. From financial year 2019, major maintenance may no longer be charged to the result in one go; you choose between this provision and treatment within the carrying amount of the asset, per component (RJ 212).
For tax purposes the equalisation reserve does exist under that name: when determining profit, a reserve can be set up to spread costs and charges evenly (art. 3.53(1)(a) Income Tax Act 2001, also for corporate income tax). The third meaning comes from subsidy law. A subsidised institution forms an equalisation reserve if a statutory rule or the subsidy decision so provides; the difference between the determined subsidy and the actual costs runs through that reserve (art. 4:72 General Administrative Law Act).
Example
A BV owns a business premises whose roof is expected to be replaced in ten years for € 80.000. It opts for a provision for major maintenance and adds € 8.000 per year: maintenance costs € 8.000 debit, provision for major maintenance € 8.000 credit. After ten years there is € 80.000. The roofer charges € 86.000: € 80.000 is charged to the provision and € 6.000 is an expense of that year. With the component approach the BV builds up nothing in advance; it capitalises the € 86.000 and depreciates it over the next ten years.
In the annual accounts
Equity for a true reserve; provision on the liabilities side for an applicable obligation or the chosen maintenance method.
Difference from a provision
A reserve is equity: retained profit at the disposal of the general meeting. A provision is outside capital: an obligation or a future expenditure attributable to earlier years. What entrepreneurs call an equalisation reserve for maintenance is therefore a provision in the commercial annual accounts.
Common mistakes
- Equating reserve and provision
- Recognising future costs as a liability without support
What to watch for
- Support the addition with a multi-year maintenance plan per building or installation: what, when and for what amount.
- Use the provision only for the maintenance for which it was formed; minor maintenance does not belong in it.
- Micro and small entities that apply tax-based policies carry the tax equalisation reserve over into the annual accounts (art. 2:396(6) DCC). Medium-sized and large entities follow RJ 212.
Legal basis and source
art. 2:374 DCC; RJ 212
Frequently asked questions
May a BV set up an equalisation reserve for leaner years?
Not at the expense of the result. A reserve for general risks can only come from the appropriation of profit: the general meeting retains profit. The result for the year does not change as a result.
Is the tax equalisation reserve the same as the provision for major maintenance?
They serve the same purpose, spreading irregular costs, but have their own basis: the reserve follows the tax law, the provision follows Book 2 DCC and RJ 212. The amounts can therefore differ.
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