Let's Talk Tax
Edward L. Roguel. BusinessWorld. Manila: Dec 23, 2008.
Abstract (Summary)
The said guidelines effectively limit the amount of R/Es that may be declared as dividends to income actually realized by a corporation. SEC MC No. 11 specifically provides that the amount available for dividends distribution shall be equal to the unrestricted R/Es based on the audited financial statements, adjusted by the following unrealized items: * share in net income of the associate or joint venture accounted for under equity method ; * unrealized foreign exchange gains, except those attributable to cash and cash equivalent; * unrealized actuarial gains resulting from the option of recognizing actuarial gains or losses directly to profit and loss statement; * fair value adjustment (marked-to-market gains); * the amount of recognized deferred tax asset; * adjustment due to deviation from Philippine Financial Reporting Standards (PFRS)/ Generally Accepted Accounting Principle (GAAP) of the audited financial statements which resulted to gain; * other unrealized gains or adjustments to the retained earnings brought about by the transactions accounted for under the PFRS
The life of an accountant was relatively easier before 2005. However, when the Philippines adopted the International Accounting Standards in the said year, the work of accountants has become more challenging. The new accounting standards brought a lot of changes in financial reporting. Among these changes are recognition of unrealized actuarial gains, fair value adjustments and recognition of unrealized gains or adjustments to the retained earnings on certain transactions.
The changes in financial reporting prompted the Securities and Exchange Commission (SEC) to issue guidelines on the determination of retained earnings (R/E) available for dividends distribution, may it be cash, property or stock dividends. Last Dec. 2, the commission issued SEC Memorandum Circular No. 11, Series of 2008, (SEC MC No. 11) to set out these guidelines.
The said guidelines effectively limit the amount of R/Es that may be declared as dividends to income actually realized by a corporation. SEC MC No. 11 specifically provides that the amount available for dividends distribution shall be equal to the unrestricted R/Es based on the audited financial statements, adjusted by the following unrealized items: * share in net income of the associate or joint venture accounted for under equity method ; * unrealized foreign exchange gains, except those attributable to cash and cash equivalent; * unrealized actuarial gains resulting from the option of recognizing actuarial gains or losses directly to profit and loss statement; * fair value adjustment (marked-to-market gains); * the amount of recognized deferred tax asset; * adjustment due to deviation from Philippine Financial Reporting Standards (PFRS)/ Generally Accepted Accounting Principle (GAAP) of the audited financial statements which resulted to gain; * other unrealized gains or adjustments to the retained earnings brought about by the transactions accounted for under the PFRS
The foregoing items shall be available for dividends distribution on the year that these are realized. For example, in number 1 above, shareholders shall consider the income realized and available for dividends distribution only when the investee company declares cash or property dividends to the former. Also, in the case of foreign exchange gains (number 2 above), the related foreign currency exchange will be considered in the computation of R/E available for dividend distribution only when there is collection and payment of foreign currency denominated receivable and payable, respectively.
In other words, SEC MC No. 11 may restrict the ability of an entity to declare dividends since it can declare earnings or profits when actually realized. This departs from the accrual basis of accounting prescribed under the PFRS. In PFRS, the distinction between "realized" and "unrealized" income and expense is not relevant. An item that qualifies for recognition as accounting income or expense is required to be recognized whether it is realized or unrealized.
Moreover, under SEC MC No. 11, the unrealized gains enumerated above are deducted from the amount available for dividends distribution. The unrealized losses, however, are not added back. For example, the unrealized foreign exchange gains and fair value losses are not allowed to be added back but the corresponding income are required to be deducted.
However, the Annex A (reconciliation retained earnings) attached to SEC MC No. 11 outlines three unrealized losses that may be added back. These are depreciation on revaluation increment, loss brought about by the adjustment due to deviation from PFRS/ GAAP, and loss on fair value adjustment of investment property.
Does this mean that only these three items shall be added back to the amount that may be declared as dividends? Or does this mean that other unrealized losses not included in the enumeration shall also be added back in the computation?
While the SEC MC. No. 11 clarified the rules for the guidance of companies, investors and other financial statements users, we hope that the SEC - cognizant of the items that may not have been noted during the drafting of the circular - is still open for additional clarifications or amendments.
The said guidelines effectively limit the amount of R/Es that may be declared as dividends to income actually realized by a corporation. SEC MC No. 11 specifically provides that the amount available for dividends distribution shall be equal to the unrestricted R/Es based on the audited financial statements, adjusted by the following unrealized items: * share in net income of the associate or joint venture accounted for under equity method ; * unrealized foreign exchange gains, except those attributable to cash and cash equivalent; * unrealized actuarial gains resulting from the option of recognizing actuarial gains or losses directly to profit and loss statement; * fair value adjustment (marked-to-market gains); * the amount of recognized deferred tax asset; * adjustment due to deviation from Philippine Financial Reporting Standards (PFRS)/ Generally Accepted Accounting Principle (GAAP) of the audited financial statements which resulted to gain; * other unrealized gains or adjustments to the retained earnings brought about by the transactions accounted for under the PFRS
The life of an accountant was relatively easier before 2005. However, when the Philippines adopted the International Accounting Standards in the said year, the work of accountants has become more challenging. The new accounting standards brought a lot of changes in financial reporting. Among these changes are recognition of unrealized actuarial gains, fair value adjustments and recognition of unrealized gains or adjustments to the retained earnings on certain transactions.
The changes in financial reporting prompted the Securities and Exchange Commission (SEC) to issue guidelines on the determination of retained earnings (R/E) available for dividends distribution, may it be cash, property or stock dividends. Last Dec. 2, the commission issued SEC Memorandum Circular No. 11, Series of 2008, (SEC MC No. 11) to set out these guidelines.
The said guidelines effectively limit the amount of R/Es that may be declared as dividends to income actually realized by a corporation. SEC MC No. 11 specifically provides that the amount available for dividends distribution shall be equal to the unrestricted R/Es based on the audited financial statements, adjusted by the following unrealized items: * share in net income of the associate or joint venture accounted for under equity method ; * unrealized foreign exchange gains, except those attributable to cash and cash equivalent; * unrealized actuarial gains resulting from the option of recognizing actuarial gains or losses directly to profit and loss statement; * fair value adjustment (marked-to-market gains); * the amount of recognized deferred tax asset; * adjustment due to deviation from Philippine Financial Reporting Standards (PFRS)/ Generally Accepted Accounting Principle (GAAP) of the audited financial statements which resulted to gain; * other unrealized gains or adjustments to the retained earnings brought about by the transactions accounted for under the PFRS
The foregoing items shall be available for dividends distribution on the year that these are realized. For example, in number 1 above, shareholders shall consider the income realized and available for dividends distribution only when the investee company declares cash or property dividends to the former. Also, in the case of foreign exchange gains (number 2 above), the related foreign currency exchange will be considered in the computation of R/E available for dividend distribution only when there is collection and payment of foreign currency denominated receivable and payable, respectively.
In other words, SEC MC No. 11 may restrict the ability of an entity to declare dividends since it can declare earnings or profits when actually realized. This departs from the accrual basis of accounting prescribed under the PFRS. In PFRS, the distinction between "realized" and "unrealized" income and expense is not relevant. An item that qualifies for recognition as accounting income or expense is required to be recognized whether it is realized or unrealized.
Moreover, under SEC MC No. 11, the unrealized gains enumerated above are deducted from the amount available for dividends distribution. The unrealized losses, however, are not added back. For example, the unrealized foreign exchange gains and fair value losses are not allowed to be added back but the corresponding income are required to be deducted.
However, the Annex A (reconciliation retained earnings) attached to SEC MC No. 11 outlines three unrealized losses that may be added back. These are depreciation on revaluation increment, loss brought about by the adjustment due to deviation from PFRS/ GAAP, and loss on fair value adjustment of investment property.
Does this mean that only these three items shall be added back to the amount that may be declared as dividends? Or does this mean that other unrealized losses not included in the enumeration shall also be added back in the computation?
While the SEC MC. No. 11 clarified the rules for the guidance of companies, investors and other financial statements users, we hope that the SEC - cognizant of the items that may not have been noted during the drafting of the circular - is still open for additional clarifications or amendments.
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