Ms. Yolanda B. Padilla

March 6, 1991 Ms. Yolanda B. Padilla La Union Tobacco Redrying Corporation Bo. San Eugenio Aringay, La Union M a d a m : This refers to your letter of January 5, 1991 requesting opinion on the queries posed therein. As stated, La Union Tobacco Redrying Corporation (LUTORCO) contemplates to invest its real estate properties exchanging it with shares of stock of another corporation. The appraisal value of the properties acceptable to the issuing corporation is ten (10) times greater than the book value of LUTORCO. Your queries are: 1. Is the Company allowed to pursue said proposed investment? 2. How will the difference in value be treated in the accounting books? LexLib The pertinent provisions of the Corporation Code provide: "SECTION 36. Corporate, powers and capacity . Every Corporation incorporated under this Code has the power and capacity: xxx xxx xxx 7. To purchase, take or grant, hold ,convey, sell, lease, pledge, mortgage, and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessary require ,subject to the limitations prescribed by law and the constitution." (Emphasis supplied) "SECTION 62. Consideration for stocks . .... Consideration for the issuance of stock may be any or a combination of any two or more of the following: xxx xxx xxx 2. Property ,tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock. Accordingly, your first query may be answered in the affirmative subject to the above underlined conditions. Relative to your second query, under existing policy, the SEC allows the use of "Fair Market Value" in the valuation of property used in exchange for shares of stocks. This practice is in conformity with generally accepted accounting principles which provide that: "In an exchange transaction, the securities received should be recorded at the following values in the order mentioned: a) Fair Market Value of the asset given up in exchange ; b) Fair Market Value of the securities received; and c) Cost or book value of the asset given up." (Valix and Peralta; Financial Accounting, Vol. I; 1980 Edition) Paragraph Five (5) of Statement of Financial Accounting Standards No. 6 also states that the cost of the property acquired in exchange for assets other than cash is determined as follows: a) When property is acquired in exchange for another asset, its cost is usually determined by reference to the fair value of the asset surrendered to obtain it. It may be appropriate to consider also the fair value of the property acquired, if it is more clearly evident than the fair value of the asset parted with. b) If neither the fair value of a non-monetary asset transferred nor the fair value of a non-monetary asset received in exchange is determinable within reasonable limits the recorded amount of the non-monetary asset transferred from the enterprise may be the only available measure of the transaction. c) Property acquired in exchange for shares or other securities in the enterprise should be recorded at its fair value, or the fair value of the securities issued, whichever is more clearly evident. Provided that no shares of stock shall be issued for properties received therein with a fair market value less than the par value or stated value of the stock. In an ordinary sale of asset, any excess of the selling price over the cost or book value should be treated as a "gain".The same rule shall apply in an exchange transaction. This practice is likewise in conformity with generally accepted accounting principles. Paragraph Twenty Four (24) of Statement of Financial Accounting Standards No. 6 states that "when a unit of property is retired or disposed of by sale, trade, scrapping and removal or abandonment, its cost is credited to the appropriate property account; the related accumulated depreciation is charged to the accumulated depreciation account and any gain or loss, adjusted for salvage value and cost of disposition, is reported in the income statement." Please be advised accordingly. Very truly yours, (SGD.) ARMANDO Z. GONZALES Associate Commissioner