In my opinion
In my opinion, it is possible to build up secret reserves. A secret reserve means that an amount which the assets are understated or the liabilities are exaggerated. The presence of the secret reserve is to show the actual financial position of the business is better than shown in the balance sheet. There are a few purposes behind creating a secret reserve in the income statement.
For instance, the secret reserves make the financials of a company more solid. At the point when the company is in the period of depression, secret reserves empower the company to keep up dividends and company’s shares will stay stable. Furthermore, secret reserves play a very important role in winning the confidence of the people. In cases when there is no profit in the business, the secret reserves can be used for the declaration of bonus. It will help to increase the confidence of the people.
Nevertheless, the secret reserve shows that the financial information provided to shareholders is false and deluding. The creation of secret reserve is against the principle of full disclosure. It is not right to hide anything from shareholders and stakeholders. The financial statement cannot show the true and fair position of the business. Besides that, when the assets are not shown in the balance sheet, some greedy people may steal it to use for their private purpose. It will be the loss of the business.