Member, RSM International

Volume 2 Series 4

Tax View &

Compliance

SEC MEMORANDUM CIRCULAR NO. 11 SERIES OF 2008

Guidelines on the Determination of Retained Earnings
Available for Dividend Declaration
SEC MEMORANDUM CIRCULAR NO. 10 SERIES OF 2008
Amendments to PAS 39 and PFRS 7

SEC MEMORANDUM CIRCULAR NO. 11 OF 2008
GUIDELINES ON THE DETERMINATION OF
RETAINED EARNINGS AVAILABLE FOR
DIVIDEND DECLARATION
Securities and Exchange Commission issued
Memorandum Circular No. 11 as guidelines in
determining the amount of retained Earnings
available for distribution to the stockholders.
As provided in Section 5 of this memorandum, a
stock corporation is not allowed to retain its surplus
profits in excess of one hundred percent of their
paid-up capital except:
a. When justified by definite corporate
expansion projects or programs approved by
the board of directors; or
b. When corporation is prohibited under any
loan agreement with any financial institution
or creditor, whether local or foreign, from
declaring dividends without its consent, and
such consent has not been secured; or
c. When it clearly shown that such retention is
necessary under special circumstances
obtaining in the corporation, such as when
there is need for special reserve for probable
contingencies.
In determining its retained earnings available for
declaration of dividends such as cash dividends,
stock dividends and property dividends, it should
consider whether its unrestricted retained earnings
is a bona fide income founded upon actual earnings
or profits. And the existence of surplus profits
arising from operation of corporate business is a
condition precedent to the declaration of dividends
because a Corporation cannot declare dividends
when it has a zero or negative(deficit) retained
earnings.
Volume 2 Series 4
Actual earnings or profits shall be the net income
for the year based on the audited financial
statements, adjusted for any unrealized items
below, which are considered not available for
dividend declaration.
a. Share/equity in net income of the associate
or joint venture accounted for equity method
as the same is not yet actually earned or
realised.
b. Unrealized foreign exchange gains, except
those attributable to cash and cash
equivalents.
c. Unrealized actuarial gains which is the result
when a company chooses the option of
recognizing actuarial gains or losses directly
to profit or loss statement.
d. Fair value adjustments or the gains arising
only from market-to-market valuation which
are not yet realized.
e. The amount of recognized deferred tax asset
that reduced the amount of income tax
expense and increased the net income and
retained earnings, until realized.
f. Adjustments due to deviation from
PFRS/GAAP of the audited financial
statements which result to gain.
g. Other unrealized gain or adjustments to the
retained earnings brought by certain
transactions accounted for under PFRS and
such accretion under IAS 39, day 1 gains on
initial recognition of financial statements
reversal of revaluation increment to retained
earnings, and negative goodwill on
investments associate.
h. Other adjustments that Commission may
prescribed by amending Annex A of these
guidelines.
The following are required to submit reconciliation
of retained earnings for dividend declaration:
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a. For listed companies, corporation with
securities under Securities Regulation Code
and public companies, the reconciliation or
retained earnings shall be presented as one
of the schedules in the audited financial
statements and shall be covered by an
auditor s report similar to that provided for
Schedule A-1 under SRC rule 68.1. Said entities
are likewise required to provide in their
financial statements a description of any
appropriation or restrictions on their
retained earnings.
b. For all other corporations not covered by the
above-provisions, the reconciliation under
Annex A of the guidelines shall not be
required except in the following cases;
i. The amount of unrestricted retained
earnings per company s audited financial
statements is in excess of 100% of its paid-
up capital as of balance sheet. The
company shall in this case attach in its
financial statements a reconciliation as
prescribed under annex A and if the
adjusted retained earnings still exceeds the
company s paid-in capital, there must be a
description in its financial statements of
the company s concrete plan to comply
with Section 43 of the corporation Code.
ii. The company applies approval by the
commission of its proposed cash and/or
property dividends or for confirmation of
stock dividends.
Volume 2 Series 4
SEC MEMORANDUM CIRCULAR NO. 10 SERIES
OF 2008
AMENDMENTS TO PHILIPPINE ACCOUNTING
STANDARD 39 AND PHILIPPINE FINACIAL
REPORTING STANDARD 7
The Securities and Exchange Commission adopt the
amendments to Philippine Accounting Standard 39


Financial Instruments: Recognition and
Measurement and Philippine Financial Reporting
Standard 7 Financial Instruments: Disclosures by


permitting the following actions for some financial
instruments:
• Reclassification of securities out of the
trading category in rare circumstances
• Reclassification to loan category (cost basis)
if there is an intention and ability to hold the
financial instruments for the foreseeable
future (in the case of loans) or until maturity
(for debt securities).
Below are the guidelines to be observed in the
implementation of the above stated amendments:
1. All companies that intend to make the
reclassification shall strictly comply with
the conditions for the exercise of such
option and, to ensure transparency in
financial reporting, highlight in their
disclosures or Notes the following
information:
a. The financial assets reclassified into
and from each category
b. For each reporting period until
derecognition, the carrying amounts
and fair values of all financial assets
reclassified in the current reporting
period and previous reporting periods;
3

a. For financial assets reclassified in rare
circumstances, the facts that would
establish such kind of circumstances;
b. In the reporting period to which
financial assets are reclassified, the
fair value of the gains or losses of
those assets as recognized either in
profit or loss, or in equity (other
comprehensive income) in that
reporting period and previously
reporting periods;
c. For the remainder of the instruments

lives, the gains or losses that would
have been recognized in profit or loss,
or equity had they not been
reclassified, together with the gains,
losses, income and expenses now
recognized;
d. As at the date of reclassification, the
effective interest rates and estimated
amounts of cash flows the company
expects to recover.
1. No reclassification is permitted before July
1, 2008. On first application, companies can
revert to the said effective date of the
amended standard and make transfers as
of that date. Any subsequent
reclassification made in periods beginning
on or after November 15, 2008 shall be
effective from the date the reclassification
is made. Companies with cross-border
offerings or trading may use the November
1, 2008 cut-off date set by the International
Accounting Standards Board.
2. Any reclassification made under SEC
Memorandum Circular No. 10 series of 2008
should be supported by a resolution of the
company s Audit Committee, as certified by

the corporate secretary and documents
Volume 2 Series 4
showing the change of intention on the
financial assets proposed to be
reclassified. The said resolution shall
indicate a single chosen date of rare
circumstance, in the case of Held for
Trading reclassification, and the date of
change of intention, for reclassification of
Available for Sale to Held to Maturity
category.
3. For those companies required to submit
quarterly reports, it is mandatory to
reflect in their quarter report as of
September 30, 2008 any reclassification
made in accordance with the stated
Memorandum Circular and comply with the
following requirements:
a. The resolution of the company s Audit

Committee approving the
reclassification shall be attached to
the report and shall indicate among
others, the single chosen date of rare
circumstance in the case of Held of
Trading reclassification, and the date
of change of intention, for
reclassification of Available for Sale to
Held to Maturity category. The
information in the said resolution shall
cover any reclassification made as of
September 30, 2008 and from October
1 to November 14, 2008.
b. Companies that will avail of the
reclassification option under the said
standard shall have up to November
30, 2008 within which to submit the
said report to the Commission.
c. For companies that have already
submitted their quarter report as of
September 30, 2008, an amended
report that complies with the above
4
 CONTACT DETAILS
DONNIES T. ALAS
Chairman / CEO
Email Address: donniesalas@rsm-alasoplascpas.com

a. requirements should be filed on or
November 30, 2008.
5. As for pre-need companies, reclassification
of Held for Trading or Available for Sale
investments to Held to Maturity shall be
allowed only upon showing to the
Commission that their liquid assets will be
sufficient to service maturing/availing
plans within the term of the instruments
proposed to be reclassified.
MARYCRIS S. OPLAS
Managing Partner
Email Address: marycrisoplas@rsm-alasoplascpas.com
MERCY M. RODRIGUEZ
Audit & Assurance
Email Address: mercyrodriguez@rsm-alasoplascpas.com
GLESIE R. MARTINEZ
Audit & Assurance
Email Address: glesiemartinez@rsm-alasoplascpas.com
ANNA LURENE B. SENDAYDIEGO
Internal Audit & Risk Management Advisory
Email Address: annasendaydiego@rsm-alasoplascpas.com
MARY GRACE L. VELANDRES
Accounting and Outsource
Email Address: marygracevelandres@rsm-alasoplascpas.com

NESSA M. OPLAS
Branch Manager, Bacolod Office
6. Mutual funds or investment companies Email Address: nessaoplas@rsm-alasoplascpas.com
cannot avail of the reclassification option
MA. LEONIFE R. OBANIANA
provided for in this SEC Memorandum Email Address: leonifeobaniana@rsm-alasoplascpas.com
Circular because of their nature of
CINDY MADONERO
business, particularly, the redeemable Executive Assitant to Partners
Email Address: cindymadonero@rsm-alasoplascpas.com
feature of their shares and the prescribed
daily computation of net asset value per
share which are used as basis or the
computation of redemption and selling
prices of their instruments.

The information contained herein is for

general reference purposes only and should
not be used or treated as professional advice.
Readers should seek professional advice
before making any business decision or you
may call us for any questions or clarifications.

Alas, Oplas & Co., CPAs is an independent member firm

of RSM International, an affiliation of independent
accounting and consulting firms.