QuestionsQuestions (SEC MEMORANDUM CIRCULAR NO. 11, S. OF 2008)
It was issued pursuant to Sections 43 and 143 of the Corporation Code of the Philippines and Section 5 of the Securities Regulation Code.
The guidelines cover cash dividends, property dividends, and stock dividends of stock corporations under the Corporation Code.
Retained earnings are the accumulated profits realized from normal and continuous operations after deducting distributions to stockholders and transfers to capital or other accounts, as shown in the company’s audited financial statements. If applicable, it refers to the parent company’s retained earnings, not the consolidated figures.
Unrestricted retained earnings are accumulated profits/gains not appropriated for corporate expansion projects, not covered by dividend-declaration restrictions under loan agreements, and not required to be retained for special circumstances such as probable contingencies.
Generally, stock corporations are prohibited from retaining surplus profits in excess of 100% of paid-in capital. Exceptions are when justified by definite expansion projects approved by the board; when a loan agreement prohibits dividends without creditor consent and consent is not yet secured; or when special circumstances require retention (e.g., special reserve for probable contingencies).
Dividends may be declared only out of unrestricted retained earnings. A corporation cannot declare dividends when it has zero or negative retained earnings (retained earnings deficit). The existence of bona fide profits from actual earnings is a condition precedent.
The “actual earnings or profits” correspond to net income for the year based on audited financial statements, adjusted for certain unrealized or non-declarable items listed in the Circular.
Examples include: unrealized foreign exchange gains (except those attributable to cash and cash equivalents); unrealized actuarial gains; fair value adjustments/marked-to-market gains not yet realized; recognized deferred tax assets until realized; and other unrealized gains/adjustments such as certain PFRS items.
Because it is not yet actually earned or realized for the investor’s purposes; only when the investee declares a cash/property dividend does the investor’s earnings become available for dividend declaration.
The amount of recognized deferred tax asset that reduced income tax expense and increased net income and retained earnings is not available for dividend declaration until realized.
No. Additional paid-in capital stock cannot be declared as dividend and cannot be reclassified to absorb deficiency except through an organizational restructuring duly approved by the Commission.
Listed companies, corporations with registered securities under the Securities Regulation Code, and public companies must present the reconciliation as part of their audited financial statements.
No, reconciliation under Annex A is generally not required for other corporations. Exceptions: (1) when unrestricted retained earnings per audited financial statements exceed 100% of paid-in capital; in that case, reconciliation must be attached and the financial statements must describe the concrete plan to comply with Section 43; and (2) when applying for Commission approval of proposed cash/property dividends for confirmation of stock dividends.
The latest audited financial statements must be accompanied by the reconciliation of retained earnings under Annex A, covered by the auditor’s report.
For corporations mentioned in Section 6(a) and 6(b)(1), the requirements apply to audited financial statements for the period ended December 31, 2008 and onwards.
It applies to applications filed starting December 15, 2008.
Any corporation may be subject to appropriate sanctions by the Commission if a review of its audited financial statements shows dividend declaration out of insufficient retained earnings as described in the guidelines.