Atty. Augusto Sunico

April 14, 1988 Atty. Augusto Sunico 123 Pioneer St.,Mandaluyong Metro Manila Sir : This refers to your letter, dated July 2, 1987, requesting the opinion of this Commission as to whether or not profits realized from the sale of treasury shares can validly be declared as stock dividends. LibLex The pertinent provision of the Corporation Code reads as follows: "SECTION 43. Power to declare dividends . The Board of Directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property or in stock to all stockholders on the basis of outstanding stocks held by them" (emphasis supplied) From the foregoing, it is evident that dividends must be declared and paid out of the unrestricted retained earnings of the corporation. The term "retained earnings" as defined under the generally accepted accounting principles is understood to mean "the accumulated profits realized out of normal and continuous operations of the business after deducting therefrom distribution to stockholders and transfers to capital stock or other accounts".( SEC letter to Carlos Uy Corporation ,citing the minutes of the 31st Meeting of the Committee on Revision of Laws and Codes and Constitutions Amendments at the VIP Lounge at Room "A",Batasan Complex, Quezon City, Metro Manila, March 10, 1980). Under the statement of Financial Accounting Standards No. 18, issued in September 1987, the Accounting Standards Council confirmed the long-standing accounting principle that gains or losses on treasury shares should not be credited or charged to income. Gains on the sales of treasury shares should be credited to additional paid-in capital, since they are not ordinary profits which would form part of retained earnings. ( Letter of Mr. Pascasio S. Banaria to the Commission, dated November 17, 1987 ) The Philippine Institute of Certified Public Accountants adopted under Section 22 of the Generally Accepted Accounting Principles (GAAP) that "Capital in excess of par value (referring to premium on capital stock) includes not only amounts contributed by stockholders in connection with the sale or subscription of capital stock but also credits from equity transactions such as gains from the sale of treasury stock." Another authority stated that "Retained earnings, do not include transactions involving treasury stock, since the purchase and sale of such stock are regarded as contractions and expansions of paid-in capital." (Campos, Campos, The Corporation Code, "Comments, Notes, & Selected Cases, 1981 ed., p. 772, citing Simmons, Smith & Kimmel, "Intermediate Accounting", 1977 ed., p. 635). "When treasury shares are sold by the corporation, it is regarded as if the shares issued to the purchaser were the old shares and as if the corporation had merely been an intermediate transferee. In reality, the old contract was extinguished and the new shares are units of interest created in their place. (Ballantine on Corporations, sec. 261 at 616, citing Morawetz, Corporations, 2d, sec. 114). In view of the foregoing, the Commission in an en banc meeting held on April 12, 1988, resolved that profits realized from the sale of treasury shares are treated as part of "capital" or "paid-in surplus" and cannot therefore be declared either as stock or cash dividends. prcd Very truly yours, (SGD.) JULIO A. SULIT, JR. Chairman