Definitions governing dividend eligibility
- The Circular defines Retained earnings as accumulated profits from normal and continuous operations after deducting distributions to stockholders and transfers to capital stock or other accounts, based on the company’s audited financial statements by an independent auditor.
- The Circular defines Retained earnings to refer to the parent company retained earnings where applicable, but not the consolidated financial statements.
- The Circular defines Unrestricted Retained Earnings as accumulated profits and gains that are:
- Not appropriated by the Board of Directors for corporate expansion projects or programs.
- Not covered by a restriction for dividend declaration under a loan agreement.
- Not required to be retained under special circumstances such as special reserves for probable contingencies.
- The Circular defines Outstanding capital stock as total shares issued to subscribers or stockholders, whether or not fully or partially paid (with a binding subscription agreement), except treasury shares.
- The Circular defines Board as the Board of Directors.
- The Circular defines Dividend as corporate profits allocated, lawfully declared, and ordered by the Directors to be paid to stockholders on demand or at a fixed time.
- The Circular defines Delinquent subscription as a subscription declared delinquent by the Board after failure to settle within 30 days from the due date under the subscription contract or board call.
- The Circular defines Paid-In Capital as the amount of outstanding capital stock and additional paid-in capital/premium over par value.
Limits on retained profits beyond capital
- Section 4 prohibits stock corporations from retaining surplus profits in excess of 100% of their paid-in capital stock.
- The 100% retention limit admits these exceptions:
- Retention is justified by definite corporate expansion projects or programs approved by the Board of Directors.
- Retention is required because a loan agreement with a financial institution or creditor (local or foreign) prohibits dividend declaration without consent, and consent has not yet been secured.
- Retention is clearly necessary under special circumstances such as the need for a special reserve for probable contingencies.
What retained earnings may be used
- Dividends (cash, property, or stock) must be declared out of Unrestricted Retained Earnings of the corporation.
- A corporation cannot declare dividends when it has zero or negative retained earnings, which is treated as a Retained Earnings deficit.
- Surplus profits or income must be bona fide income founded upon actual earnings or profits; actual earnings/profits are a condition precedent to dividend declaration.
- Section 5 defines “actual earnings or profits” for these Guidelines as net income for the year based on the audited financial statements, adjusted for the specific unrealized items that are treated as not available for dividend declaration.
- The following items are treated as not available for dividend declaration (unrealized items and similar adjustments):
- Equity in net income of an associate/joint venture accounted under the equity method until actually earned/realized; only after the investee declares a dividend does the investor’s income become realized/available, and only cash or property dividends declared by the investee are earnings declarable by the investor.
- Unrealized foreign exchange gains, except those attributable to cash and cash equivalents, while not yet actual income prior to realization.
- Unrealized actuarial gains when actuarial gains or losses are recognized directly to profit or loss.
- Fair value adjustments and gains arising only from marked-to-market valuation that are not yet realized.
- The amount of recognized deferred tax asset that reduced income tax expense and increased net income and retained earnings until realized.
- Gains resulting from deviation from PFRS/GAAP in the audited financial statements that results to gain.
- Other unrealized gains or adjustments brought about by PFRS transactions, including:
- Accretion income under IAS 39
- Day 1 gains on initial recognition of financial instruments
- Reversal of revaluation increment to retained earnings
- Negative goodwill on investments in associate
- Other adjustments that the Commission may prescribe by amending the Annex “A” (as referenced in the Circular) of these Guidelines.
- Additional Paid-In Capital is prohibited as a dividend source: it shall neither be declared as dividend nor reclassified to absorb deficiency, except through organizational restructuring duly approved by the Commission.
Accounting items that affect retained earnings
- Section 3 identifies accounting items affecting the Unrestricted Retained Earnings account from an accounting purview, including:
- Nominal/temporary/income statement accounts closed to Income and Expense Summary at the end of the period and further closed to Retained Earnings Account.
- Effects of changes in accounting policy.
- Foreign exchange gains and losses.
- Actuarial gains or losses.
- Share in net income of associates/joint venture accounted under equity method.
- Dividend declarations during the period.
- Appropriations of retained earnings during the period.
- Reversals of appropriations.
- Effects of prior period adjustments.
- Treasury shares.
Reconciliation and required financial statement schedules
- For listed companies, corporations with registered securities under the Securities Regulation Code, and public companies, Section 6(a) requires that reconciliation of retained earnings under Annex “A” be presented as one of the schedules in the audited financial statements, covered by an auditor’s report similar to that provided for Schedules A-I under SRC Rule 68.1.
- Section 6(a) also requires these entities to provide in their financial statements a description of any appropriation or restriction on their retained earnings.
- For all other corporations not covered by Section 6(a), Section 6(b) generally provides that the reconciliation under Annex “A” is not required, except in two situations where the Circular does impose reconciliation:
- If unrestricted retained earnings in the audited financial statements exceeds 100% of paid-in capital as of the balance sheet:
- The company must attach a reconciliation as prescribed under Annex “A”.
- If adjusted retained earnings still exceeds paid-in capital, the financial statements must include a description of the company’s concrete plan to comply with Section 43 of the Corporation Code.
- If the company applies for Commission approval of proposed cash and/or property dividends for confirmation of stock dividends:
- The company must submit the latest audited financial statements accompanied by reconciliation under Annex “A”, covered by an auditor’s report, as part of the supporting documents.
- If unrestricted retained earnings in the audited financial statements exceeds 100% of paid-in capital as of the balance sheet:
Defined public company threshold
- The Circular treats a company as a public company if it has at least PHP 50 Million in total assets, or such other amount that the Commission shall prescribe, and has 200 or more holders each holding at least 100 shares of a class of equity securities.
Repeal, sanctions, and effectivity rules
- Section 7 repeals, modifies, or amends all existing Commission guidelines currently in force and effect that may conflict with the Circular’s guidelines on determining unrestricted retained earnings available for dividend declaration.
- Section 8(a) provides that the Guidelines take effect immediately after publication in a newspaper of general circulation, except for transitory rules on annex reconciliation timing.
- Section 8(b)(i) provides a transitory application for submissions of reconciliation under Annex “A”:
- For corporations under Section 6(a) and for those under Section 6(b)(1), the requirements apply to audited financial statements for the period ended December 31, 2008 and onwards.
- Section 8(b)(ii) provides another transitory application:
- For corporations under Section 6(b)(2), the requirements apply to Commission applications for approval of cash and/or property dividends or for confirmation of stock dividends filed starting December 15, 2008.
- Section 8(c) requires Commission sanctions where a review of a corporation’s audited financial statements shows a declaration of dividends out of insufficient retained earnings as described in the Circular.