As the name suggests, it is a type of reserve which is not shown on the balance sheet and is actually created by too much depreciation or by excessive provision for doubtful debt. The purpose of creating this Secret Reserve is to meet the sudden heavy losses or any other unusual situation.
However, the creation of this type of hidden reserve is against the principle of full disclosure and the management is not allowed to hide any thing from shareholders and stakeholders. As financial statements are used by investors to assess the financial performance and position of the entity, the presence of this secret reserve may cause their decision making process badly. That is why, there is no excuse of creating this type of reserve.