Ma Ysabel P. Sylianteng

August 17, 2000 MA YSABEL P. SYLIANTENG Senior Vice-President Bank of the Philippine Islands BPI Building, Ayala Avenue Corner Paseo de Roxas Makati City S i r : This refers to your letter dated July 27, 2000 requesting reconsideration of the existing policy of the Commission disallowing the use of the "pooling of interests" method of accounting for mergers and consolidations. IcAaEH Please be advised that the present policy of the Commission is to recognize both the "purchase" and "pooling of interests" methods of accounting for consolidations and mergers of corporations. However, the latter method is subject to the existing conditions: 1. That no stock watering will result therefrom. Reason for the condition : In the pooling of interests method, the absorbing or consolidated corporation can issue shares on the basis of the outstanding and issued capital stock of the absorbed corporation(s). This would permit the surviving or consolidated corporation to issue shares of stock for a consideration less than their par or issued price in violation of Section 62 of the Corporation Code which requires that " shares shall not be issued for a consideration less than the par or issued price thereof ".This situation actually refers to absorbed corporation(s) with accumulated deficit which reduces the par or book value of the shares acquired by the surviving or consolidated corporation. aTHASC 2. That no cash or property dividend shall be issued out of the retained earnings inherited by the surviving or consolidated corporation. Reason for the condition : Under the pooling of interest method, the retained earnings of the absorbed corporation become the retained earnings of the surviving or consolidated corporation. This inherited retained earning might erroneously be looked upon as available for the purpose of declaring dividends, or for covering the cost of treasury shares pursuant to Sections 41 & 43 of the Corporation Code The term " unrestricted retained earnings " as used in said sections of the Corporation Code is interpreted by the Commission to refer to the corporation's own unrestricted retained earnings exclusively. Hence, when applied to the surviving of consolidated corporation, inherited retained earnings are not included for purposes of declaration of dividends. However, while it cannot be declared as cash or property dividends, it can be declared as stock dividends in the same way that additional paid-in capital can be declared as stock dividends. The above conditions were set forth by the Commission in its letter to the Accounting Standard Council dated October 10, 1990 relative to the Councils proposal to adopt the pooling of interests method of accounting for mergers and consolidation, a xerox copy of which is herewith attached for ready reference Very truly yours, (SGD.) LILIA R. BAUTISTA Chairman