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:
- Cash dividend;
- Property dividend; and,
- Stock dividend.
The Reconciliation of Retained Earnings under Annex "A" of this Circular shall apply to the following:
- Issuers of securities to the public;
- Stock corporation with unappropriated/ unrestricted retained earnings in excess of 100% of its paid-in capital; or
- 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:
- Updates in Philippine Financial Reporting Standards (PFRS), particularly PAS 19, Employee Benefits and PFRS 16, Leases; and,
- 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 2023and onwards, and, if applicable, for audited interim financial statements starting thefirst quarter of 2024,and thereafter.
See attached Memorandum Circular for further details.
FAQs
For stock dividend declaration: 1. Board of Directors approval of the stock dividend declaration; 2. Stockholders' approval representing at least two-thirds (2/3) of the outstanding capital and sufficient portion of the present authorized capital; and 3.
What is the SEC rule on retained earnings? ›
(5) This Reconciliation of Retained Earnings Available for Dividend Declaration is pursuant to Sec. 42 of the Revised Corporation Code, which prohibits stock corporations to retain surplus profits in excess of one hundred (100%) percent of their paid-in capital and their power to declare dividends.
Who determines when and what amount of retained earnings a corporation will distribute as dividends? ›
Dividends are usually declared by a company's board of directors and are paid out on a per-share basis to all shareholders who own the stock. The decision to pay dividends is influenced by the company's profitability, cash flow, financial health, and growth prospects.
Are retained earnings available for dividends? ›
Retained earnings are the portion of a company's cumulative profit that is held or retained and saved for future use. Retained earnings could be used for funding an expansion or paying dividends to shareholders at a later date.
What is the procedure for declaration of dividend? ›
PROCEDURE OF DECLARATION AND PAYMENT OF DIVIDEND
- Issue atleast 7 clear days notice of the meeting of Board of directors. ( ...
- Hold Board meeting and pass resolution for recommending the final amount of dividend. ...
- Close the register of members and the share transfer register of the company.
There are several factors which affect dividend policy, the most important of which are the following: (a) legal rules, (b) liquidity position, (c) the need to pay off debt, (d) restrictions in debt contract, (e) rate of expansion of assets, (f) profit rate, (g) stability of earnings, (h) access to capital markets, (i) ...
Can you declare dividends with negative retained earnings? ›
If a company has accumulated losses, it cannot pay dividends even if the group (including its own subsidiaries) is profitable.
What is SEC appropriation of retained earnings? ›
Appropriations of Retained Earnings - An enterprise may be required under law or contractual arrangements to set aside a portion of its retained earnings for specified purposes or the Board of Directors of an enterprise may voluntarily designate a portion of retained earnings for future expenses, contingencies or other ...
How much can you keep in retained earnings? ›
As a general rule, the ideal retained earnings to assets ratio is 1:1, meaning a company should strive to have an amount of retained earnings that's equal to its total assets. That being said, because each company is different, most businesses won't have that exact ratio.
How to determine retained earnings? ›
Retained Earnings are listed on a balance sheet under the shareholder's equity section at the end of each accounting period. To calculate Retained Earnings, the beginning Retained Earnings balance is added to the net income or loss and then dividend payouts are subtracted.
To reconcile retained earnings, you will need to start with beginning retained earnings and then take the net income (loss) for the period into consideration. Dividends will also affect retained earnings along with any prior period adjustments.
Do distributions come out of retained earnings? ›
Distributions are made to business owners by taking cash out of the business from retained profits or cash that investors put into the business. You'll see it show up on a cash flow statement or a balance sheet, but not a profit and loss statement.
Can you pay a dividend if you have no retained earnings? ›
ASIC governs these requirements as a way to protect a company's stakeholders. First, for a dividend to be paid, there must be profits. A general law principle states that dividends can only be paid out of retained profits. In itself, this is a rather simple test to apply.
How to calculate dividends declared from retained earnings? ›
Here is the formula for calculating dividends: Annual net income minus net change in retained earnings = dividends paid.
Can dividends be declared out of retained earnings? ›
The net income left after paying the dividends is the retained income. It can be assumed that the company pays dividends from retained earnings. This is possible if we assume that all earnings are retained, and any dividend paid is given out from retained earnings. Therefore, dividends are not retained earnings.
What are the requirements when declaring dividends? ›
(1) The company may by ordinary resolution declare dividends, and the directors may decide to pay interim dividends. (2) A dividend must not be declared unless the directors have made a recommendation as to its amount.
What are the rules for declaring dividends? ›
Final dividends require shareholder approval; interim dividends do not. The company has sufficient funds to pay the dividends. Before paying dividends, the company must have enough cash or liquid assets to cover the payments, and the directors must judge that the payment will not cause cash flow problems.
What is the SEC disclosure requirement? ›
A registrant is required to describe the nature of the material physical risks to which it is exposed, including whether each risk is acute or chronic. Required disclosures include the geographic location and nature of the properties, processes, or operations subject to the material risk.
What are the requirements for issuing dividends? ›
When declaring a cash dividend, the board of directors generally must:
- calculate the cash amount to be paid to the shareholders, both individually and in the aggregate.
- fix a record date for determining the stockholders who will be entitled to receive the dividend (based on the laws of your state)
