The General Accounting Principles for SMEs (GAPSME) were recently published in a legal notice and will replace the GAPSE currently in force.
GAPSE were introduced in 2009 and provided a robust set of accounting principles that made financial statements shorter but still comprehensive, more user-friendly and more relevant to their users. However, they significantly reduced the burden that was imposed by IFRS standards. They largely replaced the requirements for small companies imposed by the Fourth and Seventh European Council directives, many of which had become out of date.
With the new Single Accounting Directive, financial reporting obligations have been modernised and costs reduced, in particular for SMEs. The directive will reduce further the administrative burden for small companies. To a certain extent, it will also improve the quality and comparability of the information disclosed.
A directive for individual financial statements has been in place since 1978 (78 /660/EEC) – the Fourth Directive, and one for consolidated financial statements since 1983 (83/349/EEC) – the Seventh Directive. These two directives provide a complete set of rules for the preparation and content of statutory financial statements. They are often referred to as the ‘Accounting directives’.
The new directive merges and improves these two directives. This change, together with the ‘think small first’ approach reflected in the directive, makes this EU legislation better adapted to the present and future needs of preparers and users of financial statements.
Unnecessary and disproportionate administrative costs imposed on small companies hamper economic activity and impede growth and employment. The directive simplifies the preparation of financial statements for small companies. It introduces the obligation for each member state to distinguish small companies from larger ones. Small companies will be those with less than 50 employees, a turnover of not more than €8 million and/or a balance sheet total of not more than €4 million.
The directive reduces and limits the amount of information to be provided by small companies in the notes to the financial statements. For small companies only a balance sheet, a profit and loss account and notes need be prepared to satisfy regulatory requirements under the directive. Then, there are various member state options that can increase disclosures. Any small company remains entitled to provide more information or statements on a voluntary basis.
This directive will strengthen the cohesiveness of the Single Market. By keeping financial statements comparable, clear and easy to understand, cross-border activities are facilitated. This allows companies to find further funding outside their home member states.
The directive simplifies the preparation of financial statements for small companies
In implementing the provisions of the new Accounting directive, priority has been given to maintain the integrity of, and confidence in, Malta’s well-respected accounting and financial reporting framework. Malta’s framework will continue to provide high-quality information for users of accounts, such as creditors, shareholders and regulators. The directive does not set out to make significant changes to the fundamentals of the EU financial reporting and, as such, most of the member state options previously available have been retained.
For small companies, which make up the vast majority of Maltese companies, the change is essentially one of reducing the disclosures required by law.
In future, the note disclosures that can be required of small companies will be limited to accounting policies, effects of revaluations and fair values, prior year adjustments, commitments and contingencies and security given over assets.
They will also have to disclose liabilities due in more than five years, loans to directors, exceptional items included in profit or loss and, more generally, employee numbers. This is the so-called maximum harmonisation approach.
Malta has added a further five items covering: movements on fixed assets that the parent company may have to include the reporting company in a consolidation; off balance sheet arrangements; post balance sheet events and related party transactions.
The note disclosures that can be required of small companies will be limited to accounting policies, effects of revaluations and fair values, prior year adjustments, commitments and contingencies and security given over assets.
Any other disclosures, whether from company law or accounting standards, cannot be required of small companies. This includes those currently analysing or explaining items, such as share capital, deferred tax and stocks.
It is worth noting that some of the additional five items are disclosures that are fundamental to a true and fair view – for example, related party transactions and post balance sheet events.
So for small companies there will be reductions in the note disclosures required, but in other ways things will not change – the accounting treatment of items and the formats required for the profit and loss account and balance sheet.
However, creditors should not rely on financial statements that reflect the past but should resort to other sources to ensure the viability of their clients and keep monitoring their financial strength.
Previously, small companies had a choice of either applying GAPSE or IFRS as adopted in the EU.
Since most of the Single Accounting Directive requirements for small companies are mandatory, it is expected that this should increase its take up.
Ivan Sammut is a legal adviser to the Accountancy Board.