SEC Rules on Deposit for Future Subscription in the Philippines

By: Garry S. Pagaspas, CPA

Fore registration of a corporation in the Philippines, capitalization is regulated as to minimum amount and is affected by nature of operations, extent of foreign ownership, targeted export market, and other factors. On top of the minimum amount, corporation should be aware of the funding for the operational needs of the company in order to set the healthy level of capitalization that would support the pre-operational financial requirements.

At times, the minimum capitalization requirements of the Securities and Exchange Commission (SEC) may not be sufficient to cover operational financing requirements. Corporations then, ends up securing financing from the stockholders and related parties to meet the financing needs. Such amounts secured is sometimes recorded in the books of accounts as follows:

• Advances from stockholders;
• Advances from officers;
• Advances from affiliates;
• Deposit for future stock subscriptions; or
• Any other similar account

The choice of account titles in the Philippines for recording purposes may relate to the intention of the parties manifested by documentations –

Is it a temporary financing provision that is intended to the repaid sooner or later? or

Is it something permanent  that the parties would intend to use borrower corporation’s shares of stock as consideration?

Documentation may depend on which way the parties are leading to and has to be properly executed. Under the tax rules, issues could arise on documentary stamp tax of P1.00 per P200 or fractional part thereof and/or interest income on the part of the lending party – stockholder, officer, or related party.

To clear-up the financial statements side on deposit for future stock subscription in the Philippines, the Securities and Exchange Commission (SEC) has initially issued Financial Reporting Bulletin No. 6 dated April 3, 2012 with revision dated January 24, 2013 (amended FRB No. 6-2012.) inter-relating PAS 32 on equity investment and the provisions of the Corporation Code of the Philippines on the power of the corporation to issue shares of stock to subscribers.

Requirements for Deposit for Future Subscription in Philippines

Under FRB No. 6-2012,as amended, the corporation should not consider a “deposit for future subscription” in the Philippines as an “equity instrument” unless all of the following elements are present:

• The unissued authorized capital stock of the entity is insufficient to cover the amount of shares indicated in the contract;
• There is Board of Director’s approval on the proposed increase in authorized capital stock (for which a deposit was received by the corporation)
• There is stockholder’s approval of said proposed increase; and,
• The application for the approval of the proposed increase has been filed with the Commission.

A subscription agreement stating among other things that it is not contractually obliged to return the consideration received and that the corporation is obliged to deliver own shares of stock for fixed amount of cash or property.  On personal note, a company shall not have deposit for future stock subscription on its audited financial statements in the Philippines if there is sufficient unissued capital stock and issuance of unissued shares would require SEC confirmation on the SRC exemption under SRC Rule No. 10.  Likewise, with the increase of authorized capitalization filing requirement, corporations should consider booking “deposit for future stock subscription” in the Philippines as early as possible.

Disclosure Requirements on Deposit for Future Stock Subscription in Philippines

FRB No. 6-2012,as amended, further requires that in the financial statements for the reporting period, the corporation shall disclose the following minimum information:

• The value received and the nature of such consideration (whether cash or non-cash and basis of measurement, if non-cash)
• The relationship with the contracting party (i.e. stockholder, investor, or other related party)
• The treatment used in the recognition of the transaction (whether as an equity or a liability) and the reason for such recognition;
• If the transaction has been recognized as an equity, the fact that the corporation has met all the conditions required for such recognition as at the end of the reporting period (disclose relevant dates of approvals and filing)
• Information about the increase in the authorized capital stock (i.e. old and new authorized capital stock, number of shares, par value per share, etc.)
• If the approval is obtained subsequently before the issuance of the financial statements, the date of the SEC approval.

Garry is a Certified Public Accountant (CPA) and a law degree holder in tax practice for about ten (10) years now helping out taxpayers on tax compliance, tax savings, tax assessments, tax refunds, financial statements audit, and other related professional accounting services. He is presently a frequent speaker of Tax and Accounting Center, Inc. and you may send him mail at garry.pagaspas(@)taxacctgcenter.ph.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances.