Ms. Lourdes M. Romero

October 2, 1981 Ms. Lourdes M. Romero Araneta Subdivision 177 Kapiligan Quezon City Madam: This is related to your letter dated July 7, 1981, wherein you presented the following queries: 1. Can a corporation be allowed to increase its capitalization through appraisal increments of its real properties? 2. Can a corporation declare stock dividends out of appraisal increment? The provision of law pertinent to your query is Section 43 of the Corporation Code of the Philippines, which provides in part: "SECTION 43. Power to declare dividends . The Board of Directors of stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property or in stock ..." Although the foregoing provision does not specifically states that the retained earnings from which the dividends may be declared should arise from its business ,sound accounting principles dictate that dividends may be declared only out of actual earnings or profits .The term "retained earnings" as defined under the generally accepted accounting principle is understood to mean as the accumulated profits realized out of normal and continuous operations of the business after deducting therefrom distributions to stockholders and transfers to capital stock or other accounts. (Minutes of the 31st meeting of the Committee on Revision of Laws and Codes and Constitutional Amendments, March 10, 1980, p. 5).Retained earnings definitely would not include increase in the value of fixed assets as a result of revaluation thereof because the same is not earned out of the business of the corporation. Such reappraisal, however apparently justified and accurate for the time being are conjectural and are subject to market fluctuations and therefore are mere anticipatory of future profits and may never be actually realized as an asset of the company. (Fletcher, Cyc. Corp. Vol. 11, p. 680). Thus, on the basis of the foregoing discussion, appraisal increments on real properties cannot be a basis for the declaration of stock dividend in payment to the increase of capital stock. Such ruling, however, is not absolute as the Securities and Exchange Commission allows certain exceptions when it made a ruling in the past making revaluation increment or appraisal surplus available for cash and stock dividend. ( SEC Ruling dated April 14, 1975 ) Where a fixed asset is being depreciated based on its appraisal value, the depreciation on the appraisal increment is charged against operations, the earnings from operations in that period are diminished by the amount of such depreciation. This amount of depreciation, therefore, is actual income shifted to and lodged in another account. Whether such amount is restituted to retained earnings or not is of no consequence. In such event, the portion of increase in the value of fixed assets as a result of revaluation thereof may be declared as dividends, provided the following conditions exist: 1. That the company has sufficient income from operations from which the depreciation on the appraisal increase was charged. 2. That the company has no deficit at the time the depreciation on the appraisal increase was charged to operations; and 3. That such depreciation on appraisal increase previously charged to operations has not been erased or impaired by subsequent losses, otherwise, only that portion not impaired by subsequent losses is available for dividend. Please be advised accordingly. prcd Very truly yours, (SGD.) ROSARIO N. LOPEZ Associate Commissioner