- A relaxation from disclosing related party transactions between members of certain groups
The general rule under GAPSME legislation, just like IFRS, is that related party transactions need to be disclosed. This is explained in further detail in paragraph 20.7.
However, as paragraph 20.8 states, if a transaction is carried out between members of a group that is wholly-owned (in other words, there isn’t a non-controlling interest in any of any subsidiaries party to the transactions), it is not required to disclose such transaction.
- When determining whether an entity or group is GAPSME small, GAPSME medium or large, revenue sometimes includes investment income.
It is well known that revenue is one of the three criteria that determines the size of an entity or group, alongside balance sheet total and average number of employees during the financial year. Total revenue is defined in article 5(2)(b) as “the amounts derived from the sale of products and the provision of services after deducting sales rebates and VAT and other taxes directly linked to revenue”.
However, article 5(3) of GAPSME regulations also states that if an entity does not have revenue, the total revenue is required to include income from other sources, such as investment income (interest income and dividend income).
This applies also for the determination of the size of groups, as stated in paragraph 22.3.
- When determining whether a group can avail itself of the exemption from consolidating in terms of size, it’s important to consider both the aggregate trial balance of the group and the consolidated trial balance of the group
The aggregate trial balance of the group is obtained by summing up all the figures of the group companies. The result is gross total revenue and a gross balance sheet total.
The consolidated trial balance of the group is obtained by summing up all the figures of the group companies, and then adjusting for consolidation adjustments, where applicable. The result is net total revenue and a net balance sheet total.
Paragraph 22.2 states that a parent need not consolidate if it does not exceed the limits of at least two of the balance sheet total, total revenue and number of employees. However, in the case of the balance sheet total and total revenue, GAPSME law distinguishes between gross thresholds and net thresholds. An entity does not exceed the criteria if it is below the threshold for either the gross, or the net figures.
Therefore, for instance, the total revenue threshold is either €8m net or €9.6m gross. A group with a €10m aggregate of revenue is exceeding the gross threshold, but if that figure includes €3m revenue to a group company, the net revenue at group level would be €7m, which means that, on a net basis, the revenue criteria is not exceeded.
- Certain comparatives need not be disclosed in the notes to the financial statements.
In the case of property, plant and equipment, investment property, intangible assets, investments classified as non-current assets, investments in subsidiaries, associates and jointly controlled entities, goodwill and provisions, it isn’t necessary to include comparative amounts in the notes to the financial statements. This is mentioned clearly in paragraph 4.8.
For instance, if an entity has property, plant and equipment, the grid for the previous year need not be presented.
- Only one type of financial instrument needs to be shown at fair value at each period-end subsequent to initial recognition
Fair value measurement subsequent to initial recognition is mandated only on derivatives. Derivatives must be held at fair value, in line with paragraph 9.17. This is the only case that fair value is imposed on a financial instrument, and it is also the only case that fair value is imposed across the whole legislation.
- After initial recognition, shares that meet five criteria have to be measured at cost by the holder.
If an entity holds an equity instrument that meets the following criteria, it must always be measured at cost after initial recognition. This is stated in paragraph 9.17:
- The investor does not control the investee.
- The investor does not have joint control over the investee.
- The investor does not have significant influence over the investee.
- The instrument does not have a quoted market price in an active market.
- The instrument’s fair value cannot be reliably measured.
- At initial recognition, all financial instruments held without the enjoyment of control, joint control or significant influence over the investee are measured at fair value.
Financial instruments that include the enjoyment of control, joint control or significant influence over the investee are equity instruments that are tackled under section 10.
All other financial instruments are mainly tackled under section 9. From the holders’ point of view, these include all equity instruments outside the scope of section 10, and all debt instruments.
At initial recognition, fair value is mandatory (this contrasts with fact 5 above, which discusses measurement subsequent to initial recognition). The question is, what is fair value?
In the case of equity instruments, more often that not the consideration paid would be reflective of the market value. Hence, the cost is equal to the fair value. However, should the consideration paid not be equal to the fair value, the instrument should be recognised initially at its market value.
In the case of debt instruments, the fair value is the present value of future cash flows. GAPSME framework, in paragraph 9.17, requires the use of the amortised cost using the effective interest method for debt instruments classified as loans and receivables, or as held to maturity investments. In essence, it is not allowed to leave such instruments at their cost, since the cost could be different from the fair value, due to the time value of money.
- When GAPSME accounting does not lead to a true and fair view, departure from GAPSME may be required.
There are rare instances in which GAPSME legislation does not lead to a true and fair view. This is the case for instance for cryptocurrencies. If these are held for the long term, under IFRS they are classified as intangible assets. IFRS allows a revaluation of intangible assets, whilst GAPSME regulations prohibit revaluations and imposes amortisation. It is clearly awkward to amortise cryptocurrencies, since they don’t have a useful life. In this case, it is useful to depart from GAPSME accounting. This stems from paragraph 3.19, which also includes disclosure requirements for preparers that apply this way out.
- Rental income or rental expense is still charged to the income statement during rent-free periods, in the case of operating leases.
GAPSME legal notice paragraphs 14.10 and 14.17 mention that rent from operating leases is recognised on a straight-line (or suitable) basis regardless of the pattern of the payments.
As a result, rent-free periods still include a charge for rental income or rental expense. If a three-year rental agreement states that the first twelve months are free from rent, the rental payments over the remaining two years are apportioned over all three years.
- Deferred tax still needs to be computed under GAPSME!
Even though the idea behind GAPSME rules is to simplify life, it does not mean that deferred tax can be ignored. Deferred tax is covered in Section 16 and is required to fulfil the matching concept, and could be just as tricky as IFRS. Deferred tax computations may involve charging temporary differences at 35%, 15%, 10% or 8%, or any other rate prescribed by local or foreign tax legislation. No relaxation there!
We are here to help you
If you think that there are other things that you may not know about GAPSME subsidiary legislation, please contact us on ifrshelpdesk@zampadebattista.com.
We can assist with GAPSME queries that you may have in multiple forms, such as a written advisory, a brief email response, a verbal conversation, the provision of tailor-made GAPSME training courses, the review and drafting of GAPSME financial statements, as well as the application of GAPSME requirements.
We will be happy to assist you in any of the below areas of application of GAPSME:
- GAPSME thresholds, GAPSME criteria etc.
- GAPSME to IFRS
- IFRS to GAPSME
- GAPSME vs IFRS
- GAPSME disclosures
- GAPSME investment in subsidiaries, associates and joint ventures
- GAPSME consolidation
- GAPSME investment property
- GAPSME intangible assets
- GAPSME inventory
- GAPSME revenue
- GAPSME financial instruments
- GAPSME leases