Making more sense of accounts

The recent press conference, at which the Minister of Finance officially launched the General Accounting Principles for Smaller Entities (Gapse, pronounced gaps), marked a milestone not only for the accounting profession in Malta but also for the business community and for local financial reporting in general.

One may wonder why a change in financial reporting regulations should arouse interest beyond the accounting profession. The answer is simple. Proper financial reporting enables readers to make informed judgments on a company's financial position and, consequently, to take decisions that are often of commercial significance. It is imperative, therefore, that financial statements are prepared and presented in a transparent manner that is relevant and understandable to their readers. It is also important that they are prepared in accordance with a recognised accounting framework that is consistently applied in a manner that enhances year on year as well as cross-company comparability.

Users of financial statements typically include shareholders, directors, banks, tax authorities, potential investors, customers, creditors, employees and analysts and, therefore, go well beyond the accounting profession.

The recognised accounting framework in Malta is IFRS (International Financial Reporting Standards) as adopted by the EU. The profession in Malta was one of the first to adopt IFRS and to develop a level of expertise in their application which, today, many countries envy. I believe that this has contributed significantly towards Malta's growth in the financial services sector and has certainly helped our profession to attain the international dimension it enjoys today.

IFRS is the accounting framework adopted by the EU and towards which the financial reporting world is converging. As Maltese accountants, we would be foolish not to continue to sharpen our IFRS skills to service our clients that require this work.

The IFRS framework has not, however, stood still over the past few years. On the contrary, it has been aggressively developed particularly to better cater for the needs of investors in listed companies. This has led to onerous increases in measurement, presentation and disclosure requirements that attempt to address complex accounting issues such as, for example, the fair valuation of assets and liabilities, accounting for complex financial instruments and disclosing copious information about a company's exposure to risk.

For less complex entities that also tend to be smaller companies, there has however been a growing feeling that IFRS requirements are leading to financial statements that are somewhat over-engineered for the needs of their users, including the very owners of a business who many times find it difficult to read, let alone understand, their own accounts. The idea of developing a set of local accounting principles more suitable for smaller and less complex local entities was mainly fuelled by the above considerations.

The Malta Institute of Accountants is proud to have been entrusted with the brief of bringing this task to fruition. Without attempting to reinvent the wheel, and drawing also from the more relevant parts of IFRS, a set of principles was developed to better suit the financial reporting requirements of the typical Maltese company and of the users of its accounts. The result of two long years of work is Gapse.

Gapse can be applied by entities that satisfy certain quantitative and qualitative characteristics. The thresholds set for a company to be eligible to adopt Gapse are not low. A company can elect to apply these principles for accounting periods ending after January 1, 2009 provided that its revenue is less than €35 million, its assets are lower than €17.5 million and it engages fewer than 250 employees.

There are some exceptions: Gapse cannot, for example, be applied by certain regulated entities or by listed companies and there are lower thresholds for state-controlled entities.

The bottom line, however, is that many Maltese companies are now able to apply Gapse. Since Gapse is itself a stand-alone, robust and comprehensive product, the Malta Institute of Accountants welcomes this opportunity to make financial reporting more user-friendly and believes that this will enhance the importance that companies will give to their financial statements. It is very important to remember that Gapse financial statements are not a set of abridged or limited disclosure financial statements.

They are, on the contrary, financial statements that are pitched to give an appropriate but not excessive or over complicated level of information to their users. For example, financial statements prepared under Gapse will allow the measurement of all assets and liabilities at historical cost without the need to enter into subjective judgments on fair values that are of little use to smaller, less complex entities.

Accounts prepared under Gapse will still benefit from the requirement of being subject to an audit. Certain recent reports in the media interchangeably used the words "accounting" and "auditing". The processes of preparing a set of financial statements and that of auditing them are separate and need to be distinguished accordingly.

The audit profession is itself going through challenging times following the adoption of the Statutory Audit Directive. Over recent years we have seen the introduction of rigorous independent quality assurance processes on all audit practitioners. Meanwhile, every accountant remains subjected to mandatory continuing professional education in line with international practice.

No doubt, all this puts increased pressure on the accountant, also from a cost perspective. It is equally undeniable, however, that this also leads to a stronger profession that is well placed to face the challenges and to seize the opportunities of the future.

The author is the president of the Malta Institute of Accountants.