Ms. Sylvia A. Paderanga

October 6, 1995 Ms. Sylvia A. Paderanga Aboitiz and Company 110 Legaspi St., Legaspi Village Makati, Metro Manila M a d a m : This refers to your letter dated October 2, 1995, requesting opinion on whether a corporation can declare dividends out of equity in net earnings of a subsidiary or another corporation of which it is a stockholder. As stated, Company A owns more than 20% of the voting common shares of Company B. Under the Equity Methods of Accounting, Company A is required to book its share in the net earnings or loss of Company B. Your query is: Can Company A declare stock or cash dividend or both from its recorded equity earnings in Company B which are not yet received in cash? The Commission had previously opined that the retained earnings or surplus profits referred to under Section 43 of the Corporation Code, from which dividend can be legally declared do not include participation or share of a corporation in the profits of its subsidiaries and affiliates, unless and until such profits are actually received in the form of cash or property dividends ( SEC Opinion dated April 23, 1995 ). Thus, while for purposes of management accounting, Company A can recognize as income its equity in net earnings in Company B, the same cannot be declared as dividends since it is not yet actually realized as income inasmuch as Company B has not yet declared the same as dividends. Please be advised accordingly. (SGD.) PERFECTO R. YASAY, JR. Acting Chairman