GUIDELINES ON THE DETERMINATION OF RETAINED EARNINGS AVAILABLE FOR DIVIDEND DECLARATION
Philippines and Section 5 of the Securities Regulation Code, the
following guidelines are set forth below and adopted in determining the
appropriate amount of Retained Earnings available for dividend
distribution taking into consideration the effective accounting
standards and rules of the Commission.
SECTION 1. These guidelines shall cover the
determination of availability of retained earnings for the following
dividend declarations of stock corporations organized and existing under
the Corporation Code of the Philippines, to wit:
a) Cash dividend;
b) Property dividend; and
c) Stock dividend.
SECTION 2. Definition of Terms
Retained earnings – the accumulated profits realized out of
normal and continuous operations of the business after deducting
therefrom distributions to stockholders and transfers to capital stock
or other accounts. The Retained Earnings shall be the amount as shown in
the financial statements audited by the company’s independent auditor.
If applicable, such amount shall refer to the retained earnings of the
parent company but not the consolidated financial statements.
Unrestricted Retained Earnings – the amount of accumulated
profits and gains realized out of the normal and continuous operations
of the company after deducting therefrom distributions to stockholders
and transfers to capital stock or other accounts, and which is: (1) not
appropriated by its Board of Directors for corporate expansion projects
or programs; (2) not covered by a restriction for dividend declaration
under a loan agreement; and (3) not required to be retained under
special circumstances obtaining in the corporation such as when there is
a need for a special reserve for probable contingencies.
Outstanding capital stock – means the total shares of stock
issued to subscribers or stockholders, whether or not fully or
partially paid (as long as there is a binding subscription agreement),
except treasury shares.
Board – Board of Directors.
Dividend – refers to corporate profits allocated, lawfully
declared and ordered by the Directors to be paid to the stockholders on
demand or at a fixed time.
Delinquent subscription – refers to a subscription that has
been declared by the Board as such after the subscriber failed to
settle the same after a period of 30 days from the date the subscription
became due as specified in the contract of subscription or in the call
made by the board of directors.
Paid-In Capital – the amount of outstanding capital stock and additional paid-in capital or premium paid over the par value of shares.
SECTION 3. Items affecting the Unrestricted Retained Earnings Account from an accounting purview:
a. Nominal or temporary or income statement accounts closed to
Income and Expense Summary at the end of the period to determine actual
results of operations during the period and further closed to Retained
Earnings Account;
b. Effects of changes in accounting policy;
c. Foreign exchange gains and losses;
d. Actuarial gains or losses;
e. Share in the net income of associates/joint venture accounted under equity method of accounting;
f. Dividend declarations during the period;
g. Appropriations of Retained Earnings during the period;
h. Reversals of appropriations;
i. Effects of prior period adjustments;
j. Treasury shares.
SECTION 4. Prohibition on retention of profits in excess of
paid-in capital. Stock corporations are prohibited from retaining
surplus profits in excess of one hundred (100%) percent of their paid-in
capital stock, except:
a. when justified by definite corporate expansion projects or programs approved by the board of directors; or
b. when the corporation is prohibited under any loan agreement
with any financial institution or creditor, whether local or foreign,
from declaring dividends without its consent, and such consent has not
yet been secured; orc. when it can be clearly shown that such retention is necessary
under special circumstances obtaining in the corporation, such as when
there is need for special reserve for probable contingencies.
SECTION 5. Retained earnings available for dividends.
Dividends, whether cash, property or stock, shall be declared out of
unrestricted retained earnings of the Corporation. Accordingly, a
corporation cannot declare dividends when it has zero or negative
retained earnings otherwise known as Retained Earnings deficit. For such
purpose, the surplus profits or income must be a bona fide income
founded upon actual earnings or profits. The existence, therefore, of
surplus profits arising from the operation of corporate business is a
condition precedent to the declaration of dividend.
For purposes of these Guidelines, the phrase “actual earnings or
profits” as mentioned above shall be the net income for the year based
on the audited financial statements, adjusted for unrealized items
discussed below, which are considered not available for dividend
declaration.
a. Share/equity in net income of the associate or joint
venture accounted for equity method as the same is not yet actually
earned or realized. It is only after the investee company declares such
income as dividend that said income is actually realized or the earnings
becomes available for dividend declaration. Due to the effect on the
investment account, only cash or property dividends declared by the
investee-company shall be considered as earnings declarable as dividends
by the investor company;b. Unrealized foreign exchange gains, except those attributable to cash and cash equivalents, for the time being that they are not yet actual income prior to realization of such foreign exchange gain;
c. Unrealized actuarial gains which is the result when the
company chooses the option of recognizing actuarial gains or losses
directly to profit or loss statement;d. Fair value adjustment or the gains arising only from marked-to-market valuation which are not yet realized;
e. The amount of recognized deferred tax asset that reduced the amount of income tax expense and increased the net income and retained earnings, until realized;
f. Adjustment due to deviation from PFRS/GAAP of the audited financial statements which results to gain;
g. Other unrealized gains or adjustments to the retained
earnings brought about by certain transactions accounted for under the
PFRS such as accretion income under IAS 39, Day 1 gains on initial
recognition of financial instruments, reversal of revaluation increment
to retained earnings, and negative goodwill on investments in associate;h. Other adjustments that the Commission may prescribe by amending the Annex “A”[*] of these Guidelines.
The items above are defined in accordance with the financial
reporting framework, i.e., Generally Accepted Accounting Principles in
the Philippines or Philippine Financial Reporting Standards (PFRS),
followed by the company.
Additional Paid-In Capital Stock shall neither be declared as
dividend nor shall it be reclassified to absorb deficiency except
through an organizational restructuring duly approved by the Commission.
SECTION 6. Reconciliation of Retained Earnings for Dividend Declaration
a. For listed companies, corporations with registered securities under the Securities Regulation Code, and public companies[1], the reconciliation of retained earnings under Annex “A”[*]
of these Guidelines shall be presented as one of the schedules in the
audited financial statements and shall be covered by an auditor’s
report similar to that provided for Schedules A-I under SRC Rule 68.1.
Said entities are likewise required to provide in their financial
statements a description of any appropriation or restriction on their
retained earnings.b. For all other corporations not covered by the above-provisions,
the reconciliation under Annex “A” of these Guidelines shall not be
required except in the following cases:(1) The amount of unrestricted retained earnings per company’s
audited financial statements is in excess of 100% of its paid-in capital
as of balance sheet. The company shall in this case attach in its
financial statements a reconciliation as prescribed under Annex “A”[*],
and if the adjusted retained earnings still exceeds the company’s
paid-in capital, there must be a description in its financial statements
of the company’s concrete plan to comply with Section 43 of the
Corporation Code;(2) The company applies for approval by the Commission of its
proposed cash and/or property dividends for confirmation of stock
dividends. As one of the supporting documents to the application or
request for confirmation, the latest audited financial statements shall
be accompanied by reconciliation of retained earnings in accordance with
Annex “A”[*] of this Circular which should be covered by an auditor’s report.
SECTION 7. All existing guidelines of the Commission
currently in force and effect that may be in conflict with these
guidelines on the determination of unrestricted retained earnings
available for dividend declaration are hereby repealed, modified or
amended accordingly.
SECTION 8. Effectivity and Transitory Provisions
a. Except as provided in item (b) below, these Guidelines shall
be effective immediately after its publication in a newspaper of
general circulation.b. Submission of a reconciliation under Annex “A”[*] of these Guidelines:
i. For corporations mentioned under section (6)(a) and (b)(1),
the requirements provided in said sections shall be applicable to
audited financial statements for the period ended December 31, 2008 and
onwards.ii. For corporations covered under section (6)(b)(2), the
requirements of these Guidelines shall be applicable on applications for
approval of cash and/ or property dividends or for confirmation of
stock dividends that will be filed starting December 15, 2008.c. Any corporation shall be subject to appropriate sanction by the
Commission if a review of its audited financial statements will show
declaration of dividends out of insufficient retained earnings as
described under these Guidelines.
Adopted: 05 Dec. 2008
FOR THE COMMISSION:
(SGD.) FE B. BARIN
Chairperson
[*] Text Available at Office of the National Administrative Register, U.P. Law Complex, Diliman, Quezon City.
[1] A
company with at least P50 Million in total assets or such other amount
that the Commission shall prescribe, and with 200 or more holders each
holding at least 100 shares of a class of equity securities.