Accounting Alert

This Accounting Alert is issued to circulate Securities and Exchange Commission (SEC) Memorandum Circular (MC) No. 16-2023 dated September 19, 2023.

The Securities and Exchange Commission (SEC) issued revised guidelines on the determination of Retained Earnings Available for Dividend Declaration which updates the guidelines set forth in MC No. 11-2008, Guidelines on the Determination of Retained Earnings Available for Dividend Declaration.

Scope and applicability

These guidelines shall cover the determination of availability of retained earnings for the following dividend declarations of stock corporations pursuant to the Revised Corporation Code of the Philippines, to wit:

1. Cash dividend;
2. Property dividend; and,
3. Stock dividend.

The Reconciliation of Retained Earnings under Annex "A" of this Circular shall apply to the following:

1. Issuers of securities to the public;
2. Stock corporation with unappropriated/ unrestricted retained earnings in excess of 100% of its paid-in capital; or
3. A company that applies for an acknowledgement from the Commission of its dividend declaration, i.e., cash, stock or property dividends.

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 cash dividends.

Additional Paid-in Capital shall neither be declared as a dividend nor shall it be reclassified to absorb deficiency except through an organizational restructuring duly approved by the Commission.

Furthermore, the Reconciliation of Retained Earnings in accordance with this Circular shall not be used by the Real Estate Investment Trust (REIT) companies in determining the distributable income available for its shareholders.  The determination of the distributable income must be in accordance with the REIT Act and its Implementing Rules and Regulations.

Amendments to the Reconciliation of Retained Earnings Available for Dividend Declaration

The Reconciliation of Retained Earnings Available for Dividend Declaration is amended to account for the following items:

1. Updates in Philippine Financial Reporting Standards (PFRS), particularly PAS 19, Employee Benefits and PFRS 16, Leases; and,
2. Financial reporting relief related to COVID-19 provided by the SEC and BSP.

For purposes of this Circular, the reconciling items are presented into the following categories: (a) unrealized income recognized in the Profit or loss in the current reporting period; (b) unrealized income recognized in the Profit or Loss in prior reporting periods but realized in the current reporting period; and (c) unrealized income recognized in the Profit or Loss in prior reporting periods but reversed in the current reporting period.

The revised Reconciliation of Retained Earnings Available for Dividend Declaration following the format as prescribed under Annex "A" of this Circular shall become effective for audited financial statements covering periods ending 31 December 2023 and onwards, and, if applicable, for audited interim financial statements starting the first quarter of 2024, and thereafter.

See attached Memorandum Circular for further details.