Question & AnswerQ&A (SEC MEMORANDUM CIRCULAR NO. 11, S. OF 2008)
The guidelines cover the determination of retained earnings available for dividend declarations by stock corporations organized under the Corporation Code of the Philippines, including cash dividends, property dividends, and stock dividends.
Retained Earnings refer to accumulated profits from normal and continuous business operations after deducting distributions to stockholders and transfers to capital stock or other accounts as shown in the company's audited financial statements, not based on consolidated statements but the parent company’s statements if applicable.
Unrestricted Retained Earnings are accumulated profits not appropriated for expansion, not restricted by loan agreements, and not required to be retained under special corporation circumstances such as reserves for contingencies.
Outstanding Capital Stock includes all shares issued to stockholders or subscribers, whether fully or partially paid, excluding treasury shares, and is used as a basis for determining restrictions on retained earnings and dividend declarations.
Stock corporations are prohibited from retaining profits exceeding 100% of their paid-in capital except when justified by approved expansion projects, loan agreement restrictions, or special circumstances such as need for contingency reserves.
Dividends must be declared out of unrestricted retained earnings. Corporations cannot declare dividends if they have zero or negative retained earnings (deficit).
Items not available for dividend include share in net income of associates or joint ventures accounted by equity method until dividends are declared, unrealized foreign exchange gains except those on cash, unrealized actuarial gains, fair value adjustments, recognized deferred tax assets until realized, and other PFRS-related unrealized gains.
Listed companies and companies with registered securities must present reconciliation of retained earnings as per Annex aAa of the guidelines in their audited financial statements, covered by an auditor’s report, and describe any appropriations or restrictions on retained earnings.
Any corporation found declaring dividends out of insufficient retained earnings as per these guidelines is subject to appropriate sanctions by the Securities and Exchange Commission.
The reconciliation requirements apply to audited financial statements for periods ending December 31, 2008 and onwards for companies mentioned in Section 6(a) and (b)(1), and to applications for dividend approvals or confirmations filed from December 15, 2008 for companies under Section 6(b)(2).