SEC Bulletin No. 15: Disclosures on Appropriation of Retained Earnings for Business Expansion

Recently, the Securities and Exchange Commission released an update on the Financial Reporting Bulletin, entries, Bulletin No. 13, 14, 15 and 16 dated January 24, 2013.  Among these is SEC Financial Reporting Bulletin No. 15, which deals with the appropriation of retained earnings for business expansion.

SEC Bulletin No. 15 clarifies the requirement for corporation to validly appropriate its earnings for future expansion and making it restricted for dividend declaration, i.e., it should be definite and approved by the board of directors (BOD).  

As a result, SEC required disclosures on the details of the expansion (description of the project, timeline, etc.) and the date of approval of the BOD to be included in the notes to the financial statements.

Needless to say, financial statements not disclosing these matters may be fined of incomplete disclosures and may be at exposure of being questioned whether there is really definite plan for expansion.  Being there no definite plan for expansion, the retained earnings appropriated should be freed and should be made available for dividend declaration.

Again, needless to say, the retained earnings of a company, including those appropriated for future expansion which are not definite and not approved by the BOD, are subject to improperly accumulated earnings tax on the excess over 100% of the paid up capital.

Below are the texts of SEC Financial Reporting Bulletin No. 15:

PAS 1 prescribes that the notes to financial statements of corporations shall disclose among others, information that is relevant to an understanding of the financial statements.

For corporations with excess retained earnings, their financial statements must contain relevant information in connection with Section 43 of the Corporation Code (the “Code”) which provides in part:

“Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except:

  1. when justified by definite corporate expansion projects or programs approved by the board of directors; or
  2. when the 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 yet been secured; or
  3. when it can be 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.” (emphasis, ours)

The above provisions indicate that the retention for expansion projects must be definite and approved by the Board of Directors.

Pursuant to PAS 1, the following disclosures are relevant to provide an understanding on the impact of the retention of earnings on the financial statements and thus, must be provided therein:

  1. Details of the expansion (e.g., description of the project, timeline) to render the project definite;
  2. The date of the approval by the Board of Directors of the project.

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