Hidden reserve

A hidden reserve is an understatement of an entity's net worth. This situation arises when an organization's assets are stated too low and/or its liabilities are stated too high. The situation can arise when certain accounting conventions mandate the most conservative possible treatment of an accounting transaction. Hidden reserves may also be used when the owners of an enterprise want to reduce the amount of taxable income on its income statement, and do so by warping financial results to create the reserves. A hidden reserve will eventually be used, resulting in an increase in income in future periods.