Law Summary
Key Definitions
- Retained Earnings: Accumulated profits from normal business operations after deductions for distributions to stockholders and transfers to capital or other accounts, as shown in audited financial statements of the parent company (if applicable)
- Unrestricted Retained Earnings: Accumulated profits not appropriated for corporate expansion, not restricted by loan agreements, and not required for special reserves
- Outstanding Capital Stock: Total shares issued to stockholders, excluding treasury shares
- Board: Board of Directors
- Dividend: Lawfully declared corporate profits paid to stockholders
- Delinquent Subscription: Unsettled subscription beyond 30 days after due date
- Paid-In Capital: Outstanding capital stock plus additional paid-in capital or premium
Items Affecting Unrestricted Retained Earnings
- Closing of nominal or temporary income accounts
- Effects of accounting policy changes
- Foreign exchange gains and losses
- Actuarial gains or losses
- Share in net income of associates/joint ventures under equity method
- Dividend declarations
- Appropriations and reversals thereof
- Prior period adjustments
- Treasury shares
Restriction on Retention of Profits Beyond Paid-In Capital
- Stock corporations may not retain surplus profits exceeding 100% of paid-in capital except:
- For board-approved corporate expansion projects
- When loan agreements restrict dividend declaration without creditor consent
- When special circumstances necessitate special reserves for contingencies
Retained Earnings Available for Dividend Declaration
- Dividends must come from unrestricted retained earnings
- Dividend declaration prohibited when retained earnings are zero or negative
- Surplus profits must be bona fide and based on actual earnings
- Unrealized items disallowed for dividend declaration include:
- Equity in net income of associates/joint ventures (until dividends are declared by investee)
- Unrealized foreign exchange gains (except on cash equivalents)
- Unrealized actuarial gains
- Fair value adjustments from mark-to-market valuations
- Recognized deferred tax assets until realized
- Gains from deviations from PFRS/GAAP
- Other unrealized gains such as accretion income, Day 1 gains on financial instruments, reversal of revaluation increments, negative goodwill
- Additional Paid-In Capital cannot be declared as dividends or reclassified except through approved restructuring
Reconciliation Requirements for Retained Earnings
- Listed companies, those with registered securities, and public companies must present reconciliation as schedule in audited financial statements with auditor's report
- Other corporations need not provide reconciliation unless:
- Unrestricted retained earnings exceed 100% of paid-in capital, requiring reconciliation and disclosure of compliance plan
- Application for dividend approval or confirmation requires accompanied reconciliation and auditor certification
Repeal and Amendment of Conflicting Guidelines
- Existing SEC guidelines conflicting with these provisions are repealed, modified, or amended accordingly
Effectivity and Transitional Provisions
- Effective immediately upon publication except specified transitional rules
- Reconciliation requirements apply to audited financial statements from December 31, 2008 onward for certain corporations
- Dividend applications from December 15, 2008 require compliance
- Sanctions apply for dividend declarations out of insufficient retained earnings as defined