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General Accounting Principles for Small and Medium-Sized Entities (GAPSME)

General Accounting Principles for Small and Medium-Sized Entities (GAPSME)

The E.U. Single Accounting Directive 2013/34/EU has brought about a new set of financial requirements which repeal the 4th and 7th Accounting Derivatives on individual and consolidated accounts. The aim for this new change is to simplify the preparation of the statutory financial statements for those small and medium entities (SMEs) who qualify under these rules in order to ensure that the administrative burdens are proportionate to the benefits that these bring.

Relevance to the Maltese Economy
Since most of the Maltese companies qualify as small or medium size entities, it is expected that this Directive will have a huge impact on most entities.

The E.U. Directive was transposed into Maltese law through Legal Notice 289 of 2015, whereby the GAPSME were introduced and became the default accounting framework for qualifying companies. This new financial reporting regime applies for final reporting period commencing on or after 1st January 2016 and will replace the current accounting framework called General Accounting Principles for Smaller Entities (GAPSE). SMEs are required to prepare financial statements in accordance with GAPSME unless the Board of Directors of the company has resolved to prepare the financial statements in accordance with IFRSs as adopted by the E.U.

Applicability
Entities must satisfy two out of following three criteria to enable them to prepare financial statements in accordance with GAPSME rules.

Small Medium
Balance sheet total ≤ € 4 million ≤ € 20 million
Total revenue ≤ € 8 million ≤ € 40 million
Average number of employees ≤ 50 ≤ 250

Where a company initially qualifies to apply GAPSME because it satisfies the size criteria, it must move to GAPSME Medium / IFRSs as adopted by the EU if it exceeds any two out of three criteria for two consecutive financial years. GAPSME may be re-applied when thresholds are not exceeded in the immediately preceding two consecutive financial years.

GAPSME cannot be used by large companies and Public Interest Entities.

Main Changes of GAPSME when compared with GAPSE

  • Small Entities are now required to prepare a set of financial statements comprising only of a balance sheet, income statement and notes to the financial statements. Medium Entities are required also to present the statement of changes in equity and statement of cash flows as currently required under GAPSE.
  • Although the main measurement model under GAPSME is the cost model, the accounting framework also allows companies (in certain cases it is mandatory) to use the fair value model and the revaluation model for certain assets and liabilities.
  • The new rules also provide for small groups to be exempt from preparing consolidated financial statements. For a small group to be considered as a small group, the group shall not exceed any two of the three threshold set out below:
Net Gross
Balance sheet total ≤ € 4 million ≤ € 4.8 million
Total revenue ≤ € 8 million ≤ € 9.6 million
Average number of employees ≤ 50 ≤ 50

Changes to Companies Act
The introduction of GAPSME had also led to changes in the Companies Act (Chapter 386 of the laws of Malta). These changes include:

  • The withdrawal of the option of preparing abridged accounts. Under GAPSME, companies would only be required to determine whether they fall under the small/medium classification.
  • The introduction of the exemption for small companies from preparing the director’s report. Furthermore, where the company which qualifies as a small company is a private company having the status of an exempt company, it need not deliver to the Registrar the directors’ report and the income statement.
  • The removal of the exemption from the requirement to prepare consolidated financial statements applicable to financial holding companies.
  • The removal of the option to extend the filing deadline of the accounts to eighteen months for those companies carrying on business for more than 90% outside Malta.
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