The EU Single Accounting Directive
The EU Single Accounting Directive 2013/34/EU (the Directive) brought about a new set of financial reporting requirements replacing the 4th and 7th Directives which covers the financial reporting requirements for both separate and consolidated financial statements. The aim of the Directive is to simplify the preparation of statutory financial statements for qualifying micro, small and medium sized entities. This development in accounting legislation was a reaction to the common perception that compliance with IFRSs as adopted by the EU (EUIFRS) was too complicated and costly for such entities to adhere to. Furthermore, the Directive acknowledges the fact that the needs of users of financial statements vary with the size of entity.
Relevance to Malta
Small and medium-sized entities (SMEs) are the backbone of the Maltese economy and therefore it is expected that this Directive will impact most local entities as well as their financial services providers.
The technical accounting aspects of the Directive were transposed into Maltese law through Legal Notice 289 of 2015 which introduced the General Accounting Principles for Small and Medium-Sized Entities (GAPSME). GAPSME did not adopt the micro class because it was deemed superfluous within the local context and it merely recognised the distinction between small and medium entities.
GAPSME has become the default accounting framework for SMEs for financial reporting periods starting on or after 1 January 2016, superseding the prior accounting framework called 'General Accounting Principles for Smaller Entities' (GAPSE). Nevertheless, SMEs may still opt to prepare their financial statements in accordance with IFRSs as adopted by the EU (EUIFRS) through a board resolution.
Applicability of GAPSME
GAPSME has widened the thresholds of applicability over GAPSE and therefore more entities can now adopt this framework. Besides, GAPSME allows for greater eligibility than GAPSE since entities need only satisfy two of the three eligibility criteria listed below.
Large and Public Interest Entities fall outside the scope of GAPSME and therefore they must prepare a full set of financial statements in accordance with EUIFRS.
GAPSME is effective for financial reporting periods commencing on or after 1st January 2016.
The Impact of GAPSME – key changes from GAPSE
1. Changes in recognition and measurement criteria
The pervasive initial recognition and subsequent measurement model under GAPSME is the cost model.
However, GAPSME allows for the use of the fair value model and the revaluation model as alternative measurement methods for certain assets and liabilities, such as investment property and property, plant and equipment. Indeed, the fair value model is mandatory upon the initial recognition of financial assets and liabilities and for the subsequent measurement of derivative instruments.
One major change to the recognition and measurement criteria set out under GAPSE is found in Section 9: Financial Assets, Financial Liabilities and Equity which was thoroughly revised and practically rewritten. This deviation from GAPSE arose from the need to have a more faithful representation of the intrinsic value of financial instruments. Furthermore, GAPSME addressed certain matters which were either absent or no longer adequate in GAPSE such as the definition of amortised cost, new hedge accounting rules and the revocation of the option not to recognise derivatives on the entity's balance sheet.
2. Changes in presentation and disclosure requirements
Major changes to the accounting framework took place in presentation and disclosure requirements particularly in the content of the financial statements of small entities as illustrated in the table hereunder:
GAPSME is structured in such a way that it first outlines the minimum disclosure requirements and it subsequently lists any additional disclosures required to be made by medium entities. Small entities are required to prepare a limited number of disclosures in the notes to the financial statements when compared to medium entities. They need only disclose enough information for users to get a better understanding of the figures making up the financial statements.
3. Consolidation exemption for small groups
Small groups are exempt from preparing consolidated financial statements under GAPSME. For a group of companies to be classified as small, the group shall not exceed any two of the three thresholds set out below.
Amendments to the Companies Act
Concurrent to the introduction of GAPSME, the Companies Act (Chapter 386 of the laws of Malta) was also amended to be in line with the requirements of the Single Accounting Directive. Amendments to the Companies Act include, amongst others:
- The revocation of the option for small companies to prepare abridged accounts. In order to prepare simplified financial statements, companies now need to check their classification to determine whether they fall within the small or medium classification;
- The revision of the thresholds for small companies to be deemed as such so that these thresholds now match the ones in GAPSME;
- The exemption for small companies from the requirement to prepare a directors' report;
- The removal of the exemption from the requirement to prepare consolidated financial statements applicable to financial holding companies; and
- The elimination of the option to extend the filing deadline of accounts with the Registry of Companies to eighteen months. This option was available to companies carrying on business, or have business interests to the extent of more than ninety percent outside Malta.
In light of the above changes, GAPSME is expected to be better endorsed by the accounting community when compared to the GAPSE which was introduced back in 2009. Despite the various member state options allowed by the Directive, GAPSME is expected to bring about a higher level of harmonization across the EU, resulting in greater comparability.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.