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015 – Appropriation of Retained Earnings for Business Expansion

Bulletin No.


Subject Matter



24 January 2013

Appropriation of Retained Earnings for Business Expansion


PAS 1 prescribes that the notes to financial statements of corporations shall disclose among others, information that is relevant to an understanding of the financial statements.


For corporations with excess retained earnings, their financial statements must contain relevant information in connection with Section 43 of the Corporation Code (the “Code”) which provides in part:


“Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except:


a.      when justified by definite corporate expansion projects or programs approved by the board of directors; or


b.      when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its consent, and such consent has not yet been secured; or


c.      when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies.” (emphasis, ours)


The above provisions indicate that the retention for expansion projects must be definite and approved by the Board of Directors.


Pursuant to PAS 1, the following disclosures are relevant to provide an understanding on the impact of the retention of earnings on the financial statements and thus, must be provided therein:


1.    Details of the expansion (e.g., description of the project, timeline) to render the project definite;


2.    The date of the approval by the Board of Directors of the project.