For accounting periods ending on or after January 1, 2016, small entities have to prepare their annual financial statements in accordance with the accounting rules laid out in the recent legal notice on the General Accounting Principles for Small and Medium Enterprises (GAPSME).

Previously, under the version known as GAPSE, small entities still had a choice whether to draw up their annual financial statements in accordance with the simplified GAPSE framework or in accordance with IFRS as adopted by the EU.

Since these entities account for the larger part of the companies registered in Malta – 97 per cent or circa 19,000 of the companies registered in Malta – it is only to be expected that the take-up of GAPSME will be larger than the disappointing take-up of GAPSE.

Medium-sized entities (that have two of the three following criteria: balance sheet: €20,000,000; net turnover: €40,000,000; average employees: 250); are still allowed to choose between the GAPSME reporting framework and IFRS. Large entities and public interest entities are required to adhere with IFRS as adopted by the EU.

GAPSME presents a simplified financial reporting framework with limited disclosures to reflect what is required by the accounting directive. Consequently, the financial statements of these entities will be shorter. Among other things, small entities will not be required to prepare a statement of changes in equity or a cash flow statement and are exempted from the preparation of the management report or directors’ report. Small groups are also exempt from the preparation of consolidated financial statements.

In many cases, GAPSME will also avoid the fair value measurement issues that often arise with IFRS, Anthony Doublet, the assurance leader at EY Malta, pointed out.

GAPSE was enacted in 2009 under the Accountancy Profession Act, but had to be updated to reflect the requirements of new EC Directive 2013/34/EU, which foresees maximum harmonisation as far as thresholds and accounting obligations of small companies are concerned. The directive also contains requirements applicable to medium and large entities.

The GAPSME legal notice is the result of decisions taken during the transposition process by representatives of the government, the accountancy profession (the Accountancy Board and the Malta Institute of Accountants) and a wide range of stakeholders from the private and the public sectors. The institute was a key contributor in the design phase of the legal notice.

The MIA is aware that GAPSME may have an impact on creditors who are already finding it hard to assess risk and manage credit.

“Small entities are no longer required to present a cash flow statement. This could be detrimental to creditors if they base their risk and credit assessment on this statement.

“The notes to the financial statements of small entities have also been shortened and cannot exceed those disclosures that are set out in the accounting directive – with the exception of certain medium-sized entity disclosures that can also be applied to small entities if the member state so chooses,” MIA chief executive officer Mark Abela said.

“Malta has decided to take up this member state option. In our view, assessment of risk should not be carried out solely on the basis of historical statutory financial statements.”

The MIA will publish official guidance and other explanatory information on its portal and in its publications, supplemented by a concerted training initiative. It is also teaming up with the Malta Chamber of Commerce, Enterprise and Industry to organise an information session on the subject.

The chamber acknowledged that the take-up of GAPSE had been very low “for a number of reasons”, but said that this should now change.

“First of all, GAPSE was optional when introduced and resulted in a general reluctance on the part of businesses to change their accounting systems. This may have been the result of banks and the Inland Revenue Department still preferring more disclosure of information.

“The Malta Chamber sounds a note of caution that in spite of these developments, smaller companies will still need to have their accounting house in order for the purposes of bank lending, tax inspections and to protect the interests of minority shareholders,” a chamber spokesman said.

What is a small entity?

To qualify as a small entity, you must meet at least two of the three following criteria:

Balance sheet total: €4,000,000
Net turnover: €8,000,000
Average number of employees: 50