Differences between GAPSME and GAPSE regulations – Part 2
This is the second 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 in relation to its scope, applicability, presentation of financial statements and specific accounting and disclosure requirements.
The scope and applicability requirements of GAPSME regulations were discussed in Part 1 of this series, as well as specific accounting and disclosure requirements in relation to a number of line items. The following paragraphs will continue to discuss the prerequisites for applicability and give an outline of the key changes in the measurement, recognition and disclosure requirements for income taxes, provisions and contingencies, foreign currency translation and post balance sheet events.
Applicability of GAPSME
In Part 1 we stated that GAPSME applies to financial reporting periods commencing on or after 1 January 2016, for small- and medium-sized entities excluding public interest entities, as long as they satisfy at least two out of three of the specific size criteria.
An entity qualifies as either small or medium in relation to its first financial year if the criteria are met in that year. One must note however that with reference to subsequent financial years the entity can qualify as either small or medium if the applicable criteria are met in two consecutive years.
In determining two consecutive years therefore, the criteria should hold for two consecutive balance sheet dates without interruption, such that the criteria should be met:
- In that year (i.e. the current year) and the preceding financial year; or
- In the current year and it qualifies as small or medium, as applicable, in relation to the preceding year; or
- It qualifies as small or medium in the preceding financial year and the company qualified as small or medium in relation to that year, as applicable.
When an entity that has been preparing accounts under a financial reporting framework other than GAPSME is assessing whether it qualifies as a small or medium entity under GAPSME, that entity must restate the figures of the current and preceding year following the measurement and recognition criteria of GAPSME, and then perform the revenue and total assets test based on the restated figures.
Once the criteria are met then GAPSME has to be adopted, unless opted out by the directors or governing body, and its rules and regulations for the different line items become applicable.
As in the case of the previous GAPSE regulations, GAPSME prescribe the accounting treatment and disclosure requirements of income taxes, wherein income tax expense comprises current tax and deferred tax.
The general rules of measurement have not changed, GAPSME prescribe that current tax is measured using tax rates (and tax laws) that have been enacted or substantively enacted by the reporting date. Likewise deferred tax is measured at tax rates that are expected to apply when the asset is realised or the liability is settled, using tax rates (and tax laws) enacted or substantively enacted by the reporting date. The measurement of deferred tax shall reflect the tax consequences that would follow from the manner in which the entity recovers or settles the asset or liability, which may affect the tax rate that is applicable and the tax base of the asset or liability. The regulations continue to specify that deferred tax assets and liabilities are not discounted and that the entity has to review the carrying amount of a deferred tax asset at each reporting date.
GAPSME regulations also detail the accounting treatment of deferred tax arising from a business combination and the resulting effect on goodwill. In a business combination, the identifiable assets acquired and liabilities assumed are generally recognised at their fair values at acquisition date. Temporary differences therefore arise when the tax bases of the assets and liabilities are not affected by the business combination (or are affected differently), and the resulting deferred tax affects goodwill. Although GAPSME (as well as IAS 12 Income Taxes) prohibit the recognition of the resulting deferred tax liability on initial recognition of goodwill. A new rule introduced in the new framework refers to the potential benefit of the acquiree’s income tax loss carryforwards or other deferred tax assets which might not satisfy the criteria for separate recognition when a business combination is initially accounted for but might be realised subsequently. GAPSME rules include a time period of twelve months for the recognition of acquired deferred tax benefits after acquisition date, previously not given by GAPSE.
The presentation of deferred tax assets and liabilities has not changed. The most significant change from GAPSE to GAPSME is on the other hand in the disclosure requirements. Small entities do not have any specific disclosure requirements, whereas the previously required disclosure requirements under GAPSE are now applicable to medium-sized entities.
Income Taxes – Disclosures for medium-sized entities
A medium-sized entity shall disclose:
- The major components of tax expense/ income separately;
- The aggregate current and deferred tax relating to items that are charged or credited to equity disclosed separately;
- A numerical reconciliation between the tax expense and accounting profit multiplied by the tax rate;
In respect of each type of temporary difference, and in respect of each type of unused tax losses and tax credits:
- The amount of deferred tax assets/ liabilities; and
- The amount of deferred tax income/ expenses;
- Certain disclosure with respect to discontinued operations;
- The amount of temporary differences, unused tax losses/ credits for which no deferred tax asset is recognised in the balance sheet; and
The amount of deferred tax asset and the nature of the evidence supporting its recognition when:
- It is dependent on future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences; and
- The entity has suffered as loss in the current or preceding period in the tax jurisdiction to which the deferred tax asset relates.
Provisions and contingencies
The key principles of accounting for provisions, contingent liabilities and contingent assets are included in Section 17 of the GAPSME rules, which aims to ensure that only genuine obligations are dealt with in the financial statements.
As in the previous GAPSE regulations, GAPSME state that a provision is a liability of uncertain timing or amount and is only recognised when: the entity has a present obligation as a result of a past event; it is probable (i.e. more likely than not) that the entity will be required to transfer economic benefits in settlement; and the amount of the obligation can be estimated reliably. However GAPSME includes a further clarification that provisions shall not be used to adjust the value of assets.
No changes were introduced in accounting for contingent liabilities and contingent assets, and therefore cannot be recognised. Nonetheless Section 21 Business Combinations of the GAPSME rules requires a contingent liability assumed in a business combination to be recognised if its fair value can be measured reliably.
Most of the disclosure requirements required by GAPSE are still applicable to medium-sized entities, whereas the disclosure requirements for small entities have been kept to a minimum. However GAPSME introduced a new requirement for medium- sized entities to disclose the financial impact of the entity’s arrangements that are not included in the balance sheet (in so far as material and necessary for assessing the financial position of the entity).
Provisions and contingencies – Disclosures for all entities
All entities are required to disclose:
- The aggregate amount of contingent liabilities (disclosing guarantees) and the nature and form of any valuable security provided;
- The aggregate amount of financial commitments that are relevant to assessing the entity’s financial position, including commitments concerning pensions and group entities or associates shall be disclosed separately
- The nature and business purpose of the entity’s arrangements that are not included in the balance sheet shall be disclosed (so far as material and necessary for assessing the financial position of the entity);
- The existence of any restrictions on title and the carrying amount of any assets pledged as collateral for liabilities or contingent liabilities; and
- The aggregate amount, or estimated amount, of capital expenditure contracted but not provided for or contracted.
Provisions and contingencies – Additional disclosures for medium-sized entities
A medium-sized entity shall also disclose:
- A brief description of the nature of the obligation and the expected timing of any resulting outflows of economic benefits;
- An indication of the uncertainties about the amount and timing of those outflows;
- a reconciliation of the carrying amount at the beginning and the end of the financial reporting period;
Unless the possibility of any outflow is remote:
- Brief description of the nature of the contingent liability; and
- Where practicable an estimate of its financial effect and an indication of the uncertainties relating to the amount or timing of any outflow;
- Where an inflow of economic benefits is probable, a brief description of the nature of the contingent assets at the balance sheet date, and, where practicable, an estimate of their financial effect; and
- A new requirement that the financial impact of the entity’s arrangements that are not included in the balance sheet (so far as material and necessary for assessing the financial position of the entity).
Foreign Currency translation
No material accounting changes were introduced in the GAPSME regulations. A key concept also emphasised by IAS 21 The Effects of Changes in Foreign Exchange Rates and GAPSME, is the distinction between functional and presentation currency which ultimately determines the foreign currency translation.
The functional currency is the currency of the primary economic environment in which the entity operates and generates net cash flows. GAPSME provides a number of indicators which need to be considered in determining the functional currency. Once decided upon, the functional currency does not change unless there is a change in the underlying nature of the transactions and relevant conditions and events. When there is a change in an entity’s functional currency, the entity shall account for the effect of the change in functional currency prospectively from the date of the change. Consequently an entity has to translate all the items into the new functional currency at the exchange rate at the date of change.
An entity’s presentation currency is the currency in which its financial statements are presented. According to Article 187(1) of the Maltese Companies Act, a company has to present its annual accounts in the same currency as that of its share capital.
No additional disclosures have been introduced in the new GAPSME rules, although a distinction has been made between the requirements for small and medium-sized entities.
Foreign Currency Translation – Disclosures for all entities
All entities are required to disclose:
- For items denominated in a foreign currency, an entity shall disclose the bases of conversion used to express them in the functional currency;
- The currency in which the FSs are presented. When the presentation currency is different from the functional currency, state that fact and disclose the functional currency and the reason for using a different presentation currency; and
- For a change in the functional currency the entity shall disclose that fact and the reason for the change.
Foreign Currency Translation – Additional disclosures for medium-sized entities
A medium-sized entity shall also disclose:
- The amount of exchange differences recognised in profit or loss; and
- Net exchange differences classified in a separate component of equity, and a reconciliation of the amount of such exchange differences at the beginning and end of the period.
Post Balance Sheet Events
Section 19 of the GAPSME regulations specify the accounting treatment to be adopted (including the disclosures to be provided) by entities for events occurring between the balance sheet date and the date when the financial statements are authorised for issue. The rules clearly distinguish between adjusting and non-adjusting events, wherein the former have to be recognised in the financial statements, whereas the latter are to be disclosed if material. This distinction is dependent on whether the conditions existed at balance sheet date.
There are no salient accounting or disclosure differences between GAPSE and GAPSME regulations. Furthermore no distinction is made between the disclosure requirements for small and medium sized entities.
Post Balance Sheet Events – Disclosures for all entities
For each material category of non-adjusting event after the balance sheet date, all entities are required to disclose:
- The nature of the event; and
- An estimate of its financial effect, or a statement that such an estimate cannot be made.
All entities shall disclose the date on which the financial statements were authorised for issue and who gave that authorisation.
This article gives a few details of the new GAPSME regulations with particular emphasis on the changes in the disclosure requirements which merit to be highlighted.
The article in the next issue will continue the analysis of the different line items describing changes between GAPSE and GAPSME, focusing on investments, related party disclosures, business combinations and goodwill, and consolidated financial statements.
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.