Differences between GAPSME and GAPSE regulations. | KPMG | Malta

Differences between GAPSME and GAPSE regulations - Part 1

Differences between GAPSME and GAPSE regulations.

Differences between GAPSME and GAPSE regulations.

1000

Director, Accounting Support Services

KPMG in Malta

Contact

Also on KPMG.com

magnifying glass

This article was written by Clifford Delia and Michelle Spiteri Bailey and was published on The Accountant.

 

The EU Single Accounting Directive 2013/34/EU (the Directive), replacing the Fourth and Seventh Directives, brought about a new set of financial reporting requirements, for both separate and consolidated financial statements. The aim of the Directive was to simplify the preparation of statutory financial statements for qualifying micro-, small- and medium-sized entities (SMEs). The technical accounting aspects of the Directive were thereafter transposed into Maltese law through the introduction of the General Accounting Principles for Small and Medium-Sized Entities (GAPSME), as well as through amendments to the Companies Act.

GAPSME regulations are different to General Accounting Principles for Smaller Entities (GAPSE) regulations in a number of ways such as in the determination of what constitutes a small or medium entity, presentation and disclosure requirements and measurement requirements in respect of financial instruments, among others. The following is the first in a series of articles, giving a brief overview of the major changes brought about by the introduction GAPSME regulations.

Scope of GAPSME

For financial reporting periods ending on or before 31 December 2015, the Board of Directors or, in the case of an entity other than a company, its governing body, have to opt for the preparation of financial statements in accordance with GAPSE regulations. On transposition of the Directive, GAPSME has now become the default accounting framework for SMEs for financial reporting periods starting on or after 1 January 2016. Nonetheless, small entities can still prepare financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, if the Board of Directors or its governing body, has passed a resolution to this effect.

Applicability of GAPSME

GAPSME applies to financial reporting periods commencing on or after 1 January 2016. It may be adopted by all small- and medium-sized entities, with the exception of Public Interest Entities (PIEs) as defined by the Accountancy Profession Act, as long as they satisfy two out of three of the following size criteria:

                              Small             Medium     
Balance sheet total   ≤ €4,000,000  ≤ €20,000,000 
Revenue ≤ €8,000,000 ≤ €40,000,000
Average number of employees  ≤ 50 ≤ 250

 

On the other hand, GAPSE regulations limit its applicability to entities at lower thresholds and also include other limitations on its applicability such as entities in possession of a licence or other authorisation issued by the MFSA.

Presentation of financial statements and additional disclosures

Financial statements prepared under GAPSE regulations comprised a balance sheet, an income statement, a statement of changes in equity (a statement of income and retained earnings), a cash flow statement and notes to the financial statement statements. Under GAPSME regulations, all SME financial statements should include as a minimum the balance sheet, an income statement and notes to the financial statements. However, the statement of changes in equity and statement of cash flows are only required in the case of medium-sized entities. Consequently, the option to prepare a statement of income and retained earnings no longer applies.

GAPSME also includes a requirement to disclose the information necessary to identify the register with which the entity is registered, the number of the company in the register, the legal form of the company, location of the registered office and, where appropriate, the fact that the company is being wound up. Incidentally this amendment has also been included in the Companies Act Art 167(1) and is therefore applicable to all entities, including entities opting to prepare financial statements under IFRS as adopted by the EU rules.

Generally, the approach adopted by the Directive, is that only a limited number of disclosures are required for small entities; stepping up the disclosure requirements for medium-sized entities. This is reflected throughout the GAPSME rules, and will be discussed in further detail in the following sections.

Revenue and construction contracts

No material changes were introduced with respect to measurement principles in the case of revenue and construction contracts. On the other hand, presentation requirements under GAPSME regulations allow a substantial reduction in the level of disclosure with respect to companies classified as small entities, when compared to GAPSE regulations. Nonetheless, no new disclosures were introduced, so much so that medium-sized entities are now required to disclose the same detail previously required for all entities opting to follow GAPSE regulations.

Revenue – Disclosures for all entities

All entities are required to disclose the accounting policies, including the methods adopted to determine:

i. The stage of completion of transactions involving the rendering of services; 

ii. The contract revenue recognised in the period; and

iii. The stage of completion of contracts in progress.

 

Revenue – Additional disclosures for medium-sized entities

A medium-sized entity shall also disclose:

• The amount of each category of revenue recognised during the period;

• The amount of contract revenue recognised as revenue in the period;

• Each of the following for contracts in progress at the balance sheet date:

    i. The aggregate amount of costs incurred and recognised profits (less recognised losses) to date;

    ii. The amount of advances received; and

    iii. The amount of retentions.

 

Property, plant and equipment

A definition of class was introduced in the new GAPSME regulations. A class of property, plant and equipment (PPE) is defined as the grouping of assets of a similar nature and use in an entity’s operations. This was previously not included in the GAPSE regulations, it is a definition drawn from IAS 16 Property, Plant and Equipment which further clarifies that an entity can opt for either the cost model or the revaluation method as its accounting policy. The adopted policy has to be applied to the whole class of PPE and not merely to the individual assets within a class.

When accounting for PPE under the revaluation method, other minor differences between GAPSE and GAPSME regulations include:

• Under GAPSME, gains and loss arising on the revaluation of assets have to be recognised in an equity reserve whereas GAPSE regulations specifically required changes to be recognised in equity under the heading of Revaluation Surplus.

• Moreover, GAPSME regulations do not require gains and losses recognised in profit or loss (which cannot be recognised in the equity reserve) to be shown separately on the face of the income statement.

PPE – Disclosures for all entities

All entities are required to disclose:

• The measurement basis used for determining the gross carrying amount;

• The depreciation methods, and the useful lives or the depreciation rates used;

• Where material, the financial effect of a change during the period in either the estimate of useful or residual lives;

• The gross carrying amount and the accumulated depreciation at the beginning and end of the period;

• A detailed reconciliation of the carrying amount at the beginning and end of the period. GAPSME rules also require the disclosure of an additional line item for the accumulated depreciation and impairment losses released on disposal and transfers – this was not required by GAPSE rules.

• Where material, the effect and reason for a change in the depreciation method;

• Where applicable, the capitalisation of finance costs;

• Where PPE have been revalued, the comparable amounts determined using the cost model. GAPSME also include a new requirement to disclose a table showing movement in the revaluation reserve and an explanation of the tax treatment of the items therein;

• The amount of PPE pledged as security for liabilities and the amount of contractual commitments for the acquisition of PPE.

PPE – Additional disclosures for medium-sized entities

A medium-sized entity shall also disclose:

• Assets classified as held for resale or included in a disposal group classified as held for sale; and

• Additions resulting from business combinations.

• The following disclosures were previously required for all entities but are now only required for medium-sized entities:

• Where items were revalued, the year in which they were revalued.

• Where an item was revalued during the financial year

    i. The effect of any revaluation;

    ii. Whether an independent valuer was involved; and

    iii. The bases of the valuation.

Investment Property

No changes were introduced with respect to measurement principles for investment property. Disclosure requirements are the same as those applicable for property, plant and equipment, including separate disclosure requirements for small- and medium-sized entities.

Intangible assets other than goodwill

Both GAPSE and GAPSME regulations clearly distinguish between an acquired and an internally generated intangible asset. The creation of an internally generated intangible asset involves a research phase and a development phase. Expenditure on research has to be recognised in the income statement. On the other hand, expenditure on development has to be recognised as an asset as long as the entity can demonstrate that it meets the defined criteria. Furthermore, GAPSME regulations also include a detailed definition of research and development costs, drawn from IAS 38 Intangible assets, previously not included in GAPSE.

A notable change is the fact that GAPSME regulations introduced a course of action, in cases when the useful life of development costs cannot be measured reliably. GAPSME regulations state that in exceptional cases when the useful life attributable to development costs cannot be estimated reliably, they shall be written off over a maximum period of 10 years. This requirement has been transposed from Article 12 of the Directive which requires that in these exceptional cases the maximum period should not be shorter than five years and not exceed 10 years.

Unlike most of the other sections, there is no distinction in the disclosure requirements between small- and medium-sized entities with respect with to intangible assets other than goodwill.

Intangible assets other than goodwill- Disclosures for all entities

• The amortisation methods, and the useful lives or the amortisation rates used;

• A detailed reconciliation of the carrying amount at the beginning and end of the period. GAPSME rules also require the disclosure of an additional line item for the accumulated depreciation and impairment losses released on disposal and transfers – this was not required by GAPSE rules.

• Where material, the nature and amount of a change in the assessment of an intangible asset’s useful life, the method of amortisation, or residual values;

• The amounts of intangible assets pledged as security for liabilities and the amount of contractual commitments for the acquisition of intangible assets.

Impairment of assets

As in the case of investment property, no changes were introduced in the measurement principles for impairment of assets. The key change noted with respect to impairment of assets is in the specific disclosure details. There are no disclosure requirements for small entities, except when the amount and nature of the individual items of income or expenditure are of exceptional size or incidence. In contrast, medium-sized entities are now required to disclose all previously applicable disclosure requirements to all entities.

Impairment of assets – Disclosures for medium-sized entities

A medium-sized entity shall disclose:

• For each class of assets:

    i. The amount of impairment losses recognised and/ or reversed in the profit or loss, during the period and the line item in the income statement in which the loss and/or reversal is included;

    ii. The amount of impairment losses on revalued assets recognised and/or reversed in the profit or loss during the period and the line item in the income statement in which the loss and/or reversal is included;

• For each material impairment loss recognised or reversed, during the period: 

    i. The events and conditions that led to the recognition or reversal of the     impairment loss;

    ii. The amount of the impairment loss recognised or reversed;

    iii. In the case of an individual asset, the nature of the asset;

    iv. For a group of assets, a description of the group; and

    v. Whether the recoverable amount was determined on 

    vi. the basis of fair values less costs to sell and value in use.

• For other (individually immaterial) impairment losses recognised or reversed, certain information needs to be disclosed in aggregate.

Government grants

The definition and recognition of government grants did not change under GAPSME regulations. On the other hand, the specific disclosure requirements of government grants for small entities have been simplified, whereas medium-sized entities are now required to disclose all previously required disclosures.

Government grants – Disclosures for all entities

All entities are required to disclose:

• The accounting policy adopted for government grants, including an explanation of how the grant is presented in the financial statements.

Government grants – Disclosures for medium-sized entities

• The nature and amounts of government grants recognised in the financial statements; and

• The nature and effect (if measurable) of other forms of government assistance received.

Leases

Accounting for leases under GAPSE and GAPSME regulations follow the requirements of IAS 17 Leases, distinguishing clearly between finance and operating leases. So much so, that no changes were brought in, on the introduction of GAPSME. Specific disclosure requirements for leases have been simplified, including the notable removal of disclosure requirements in respect of finance leases for small entities.

Leases – Disclosures for all entities

With respect to operating leases, all lessees are required to disclose amounts for future lease payments.

Leases – Additional disclosures for lessees that are medium-sized entities

A medium-sized entity shall also disclose:

• For each class of asset, the gross amounts of assets held under finance leases and the accumulated depreciation; or

• The gross amounts of assets held under finance leases and the accumulated depreciation can be integrated with owned assets, as long as the net amount of assets held under finance leases and the depreciation for the period are disclosed separately.

• The amount of the obligations related to finance leases shall be disclosed separately. Although the requirement to disclose the amount of commitments entered into by the balance sheet date, but whose inception occurs after year end is no longer required under GAPSME regulations.

• With respect to operating leases, an analysis of future minimum payments into those in which the commitment expires within that year, those expiring in the second to fifth years inclusive and those expiring over five years from the balance sheet date.

Leases – Additional disclosures for lessors that are medium-sized entities

A medium-sized entity shall also disclose:

• The gross amounts of assets held for use in operating leases and the related accumulated depreciation;

• With respect to finance leases, lessors disclose the cost of the assets, and the net investment in the lease.

Inventories

Inventories are assets that are held for sale in the ordinary course of business, or are in the process of production for such sale, or are materials or supplies to be consumed in the production process or in the rendering of services. The cost of inventory items that are not interchangeable is assigned by using specific identification of their costs. On the other hand, the cost of interchangeable items is assigned using first-in, first-out or a weighted average basis. In contrast with GAPSE regulations however, GAPSME also allows the costing of interchangeable items using any method reflecting generally accepted best practice. This new requirement is a literal transposition of a requirement included in Article 12 of the Directive, in an effort to facilitate as many options as possible.

Inventories – Disclosures for all entities

All entities are required to disclose the accounting policy adopted for inventories.

Invertories – Additional disclosures for lessees that are medium-sized entities

A medium-sized entity shall also disclose:

• The total carrying amount of inventories in appropriate classifications;

• The amount of any write-downs to net realisable value recognised as an expense in the period; and

• The amount of any reversal of any write-downs to net realisable value recognised in the period and a description of the circumstances.

The paragraphs above detail the main differences between GAPSE and GAPSME regulations in relation to its scope, applicability, presentation of financial statements, and specific accounting and disclosure The paragraphs above detail the main differences between GAPSE and GAPSME regulations in relation to its scope, applicability, presentation of financial statements, and specific accounting and disclosure requirements with respect to a number of balance sheet and income statement line items. The following articles will continue the analysis of the different line items, including a brief overview of changes with respect to financial instruments brought about by the introduction of GAPSME.

This article is not intended to be a comprehensive review of the new GAPSME regulations, but the scope is to focus on a number of salient points emanating from the change from GAPSE to GAPSME regulations. Readers are therefore kindly advised to refer to the full regulations included in subsidiary legislation S.L.281.05 Accountancy Profession (General Accounting Principles for Small- and medium-Sized Entities) Regulations.

© 2017 KPMG, a Malta civil partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Connect with us

 

Request for proposal

 

Submit