Differences between GAPSME and GAPSE Regulations – Part Four

This is the fourth and last in a series of articles outlining the main differences between General Accounting Principles for Smaller Entities (GAPSE) and General Accounting Principles for Small and Medium-Sized Entities (GAPSME) regulations.

The following paragraphs will focus on some of the salient changes with reference to the sections mentioned below:

Investments in subsidiaries, associates and joint ventures

Section 10 of the GAPSME regulations applies to an investor in accounting for investments in subsidiaries, associates and joint ventures in its individual financial statements. The section gives extensive details of what constitutes a subsidiary, associate and joint venture and also provides additional guidance about what needs to be considered when assessing whether an entity has control or significant influence.

Subsequent to initial recognition, an investor shall account for all its investments in subsidiaries, associates and jointly controlled entities, using the cost method or the equity method. However an amendment introduced by the GAPSME regulations specifies that where an investee draws up consolidated financial statements, the equity method shall be based on the consolidated financial statements of the investee. They also include additional guidance on the accounting treatment of the difference between the cost of an investment and the corresponding investor’s share of capital and reserves at inception, under the equity method.

When compared to GAPSE, GAPSME rules require much less disclosures for small entities, but include certain additional disclosures for medium-sized entities. The table below gives further insight into some of these requirements:

Investments in subsidiaries, associates and joint ventures – Disclosures for all entities

All entities are required to disclose:

  • The accounting policy for its investments;
  • The gross carrying amount and the accumulated impairment losses at the beginning and end of the period;
  • A reconciliation of the carrying amount at the beginning and end of the period; and
  • When accounted for under the equity method: disclosure of the share of the profit or loss of the investees separately on the face of the income statement.

Investments in subsidiaries, associates and joint ventures – Additional disclosures for medium-sized entities

A medium-sized entity preparing financial statements under GAPSME regulations requires all previous disclosures under GAPSE and further disclosure requirements, such as:

  • In the case of non-current investments in subsidiaries, associates and jointly controlled entities under the cost model, the carrying amount of which is in excess of their fair value:

    • the book value and the fair value of either the individual assets or appropriate groupings of those individual assets; and
    • the reasons for not reducing the book value, including the nature of the evidence underlying the assumption that the book value will be recovered;
  • For each significant subsidiary, associate and jointly controlled entity, specific details shall be disclosed including the registered office or the place of business of the entity

Related party disclosures

As in the case of IAS 24 Related Party Disclosures, the ultimate scope of section 20 of the GAPSME regulations is to ensure that all the required disclosures are included in the financial statements to draw attention to the possibility that the financial position and profit and loss of the entity might have been affected by transactions and balances with related parties.

The changes when comparing the new GAPSME to the previous GAPSE concern an amplification of the definition of what constitutes a related party and the changes in the required disclosures as detailed below. Notably the disclosure of the identity of the ultimate controlling party is still not required.

Related parties – Disclosures for all entities

All entities are required to disclose:

  • The name and registered office of that entity which draws up the consolidated financial statements of the smallest body of entities of which it forms part as a subsidiary;
  • Certain disclosures in relation to members of the entity’s board of directors and other members of its administrative, managerial and supervisory bodies;
  • If an entity enters into transactions with specific categories of related parties, the entity shall disclose the amount of the transactions, the nature of the related party relationships and other information about the transactions and outstanding balances necessary for an understanding of the financial position of the entity; and
  • An entity is exempt from disclosing related party transactions between members of a group, provided that subsidiaries which are party to the transactions are wholly owned by a member of the group.

Related parties – Additional disclosures for medium-sized entities

A medium-sized entity shall also disclose:

  • Where applicable, the name and registered office of the ultimate parent, if different from the immediate parent, together with the name and registered office of the entity which draws up the consolidated financial statements of the largest body of entities of which it forms part as a subsidiary entity;
  • The place where copies of the consolidated financial statements may be obtained, provided that they are available;
  • Further disclosures in relation to members of the entity’s board of directors and other members of its administrative, managerial and supervisory bodies; and
  • With reference to disclosure requirements for transactions entered into with related parties referred to above, a medium-sized entity shall disclose such transactions in respect of all related parties.

Business combinations and goodwill

The initial paragraphs of section 21, of the GAPSME regulations, give a brief background of what constitutes a business combination. No changes have been effected in the method of accounting and the recognition and measurement of goodwill at recognition, however a notable specification has been included in the GAPSME regulations with respect to situations when the useful life of goodwill cannot be estimated reliably. GAPSME regulations reflect the transposition of article 12 (11) of the Accounting Directive (2013/34/EU) which requires that in exceptional cases where the useful life of goodwill cannot be reliably estimated, such assets shall be written off within a maximum period not exceeding 10 years.

GAPSME rules give further guidance on the procedure relative to a business combination within a group which was not previously included under GAPSE rules. Specifically requiring that the book values of shares held in the capital of an entity included in the consolidation may be set off against the corresponding percentage of capital only, provided that the entities in the business combination are ultimately controlled by the same party both before and after the business combination, and that control is not transitory. Any difference arising therefrom shall be added to or deducted from consolidated reserves, as appropriate.

This section does not differentiate between disclosure requirements for small and medium sized entities.

Business Combinations – Disclosures for all entities

GAPSME include further disclosure requirements when compared to GAPSE regulations, such as:

  • For each business combination (or group of individually immaterial business combinations) effected during the period, and for each business combination effected after the end of the reporting period but before the financial statements are authorised for issue:

    • any significant changes in the value of goodwill in relation to the preceding financial year; and
    • an explanation of the period over which goodwill is amortised.
  • The application of the method described in 21.18 (under common control), the resulting movement in reserves and the names and registered offices of the entities concerned shall be disclosed in the notes to the consolidated financial statements

Consolidated Financial Statements

Section 22 of the GAPSME regulations specifies that an entity which controls one or more entities is required to prepare consolidated financial statements, provided that a group may apply GAPSME if it does not exceed the thresholds for medium-sized groups and provided that a small group is exempt from preparing consolidated financial statements.

A prominent change introduced in the new regulations is an increase in the thresholds to determine whether a group can consolidate under GAPSME regulations, and a change in the criteria from ‘not exceeding any’ to ‘not exceeding the limits of at least two of the three criteria’. GAPSME regulations also specify that in determining whether a group is medium-sized or small in subsequent financial years, as in the case of individual entities, the applicable criteria must be met in two consecutive years. Further guidance is provided in the determination of size criteria under the new GAPSME rules, previously not given under GAPSE rules. No major changes have been included in the consolidation procedures.

Consolidated Financial Statements – Disclosures for all entities

An entity’s consolidated financial statements shall include all the relevant disclosures required by the respective sections of the GAPSME principles:

  • In disclosing transactions between related parties, transactions between related parties included in a consolidation that are eliminated on consolidation shall not be included.
  • In disclosing the amounts of emoluments and advances and credits granted to members of the board, only amounts granted by the parent and its subsidiaries to members of the board of the parent shall be disclosed.

Where an entity included in a consolidation has an associate, that associate shall be shown in the consolidated balance sheet as a separate item.

Discontinued Operations and Assets Held for Sale

A discontinued operation is a component of an entity that either has been disposed of or is classified as held for resale, and:

  • Represents a separate major line of business or geographical area of operations;
  • Is part of a single coordinated plan to dispose of a major line of business or geographical area of operations; or
  • Is a subsidiary acquired exclusively with a view to resale.

A non-current asset is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. It is measured at the lower of carrying amount or fair value less costs to sell, and depreciation or amortization are not applicable.

This section of the previous GAPSE regulations and the new GAPSME regulations mainly refer to the presentation and disclosure requirements. The major change noted is that most presentation and disclosure requirements are now applicable to medium-sized entities, limiting specific disclosure requirements for small entities to the primary financial statements, namely the income statement and the balance sheet.

Discontinued operations- Disclosures for all entities

All entities are required to disclose:

  • A single amount on the face of the income statement comprising the total of:

    • the post-tax profit or loss of discontinued operations; and
    • the post-tax gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the assets or group(s) of assets and liabilities constituting the discontinued operation.

Discontinued operations – Additional disclosures for medium-sized entities

A medium-sized entity shall also disclose:

  • An analysis of the above mentioned single amount;
  • The net cash flows attributable to the operating, investing and financing activities of discontinued operations: and
  • Certain disclosures are also required in relation to prior periods.

Non-current Assets Held for Sale – Disclosures for all entities

All entities are required to disclose:

  • A separate presentation of assets held-for-sale and any corresponding liabilities in the balance sheet (comparatives are not to be restated).

Non-current Assets Held for Sale – Additional disclosures for medium-sized entities

A medium-sized entity shall also disclose:

  • Separate presentation of the major classes of assets held-for-sale;
  • Separate presentation of any cumulative income or expense recognised directly in equity relating to a non-current asset (or disposal group) classified as held for sale; and
  • A description of the asset or disposal group; a description of the facts and circumstances of the sale, and the expected manner and timing of that disposal; and the gain or loss recognised, if not separately presented on the face of the income statement.

Adoption of GAPSME

The requirements of this section are to be applied when the entity is adopting GAPSME for the first time or when the entity applied GAPSME in previous financial reporting periods but presented its most recent previous financial statements in conformity with a financial reporting framework other than GAPSME. Typically the latter situation would occur when the entity is disqualified from applying GAPSME regulations but becomes subsequently eligible. No changes were included in this section.

Adoption of GAPSME – Disclosures for all entities

All entities are required to disclose:

  • The date of the transition to GAPSME and explanation of whether it is a case of first-time or subsequent adoption. If subsequent adoption, there shall be a disclosure of the date of the end of the latest financial reporting period for which the entity prepared its financial statements under GAPSME
  • An explanation of how the transition from the previous financial reporting framework to GAPSME affected its financial position and financial performance, including:

    • A reconciliation of its equity reported under its previous financial reporting framework to its equity under GAPSME for the date of transition to GAPSME and the end of the latest period presented in the entity’s most recent financial statements under its previous financial reporting framework; and
    • A reconciliation of the profit or loss reported under its previous financial reporting framework for the latest period in the entity’s most recent financial statements to its profit or loss under GAPSME.

Clarification – With reference to section 9, when pursuant to the entity’s accounting policy choice, financial assets classified as held for trading and available-for-sale financial assets are not subsequently measured at fair value, each category shall be measured at cost or amortised cost using the effective interest method, whichever is applicable taking cognisance of the debt or equity nature of the instrument. For avoidance of doubt, the application of cost or amortised cost using the effective interest method is not an accounting policy choice.

Conclusion

The scope of the articles in this series was to focus on a number of salient points emanating from the change from GAPSE to GAPSME regulations, with particular emphasis on the changes in the disclosure requirements.

We trust you found the information within useful however they were not intended to be a comprehensive review of the new 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.

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