President's Address

Mind the GAPSE

Simon Flynn

What’s in a name?  Sometimes quite a bit as all those involved in drawing up local accounting principles discovered over the past few months.  The final name chosen for the standard is “GAPSE” (General Accounting Principles for Smaller Entities).  And, to get it right at the outset, it’s pronounced “gaps” not “gapsy”.   

Of course, drawing up GAPSE entailed much more than choosing a name.  The product that we handed over to the Accountancy Board last December is one of which we are extremely proud. We feel that we have developed a comprehensive, robust and standalone set of accounting principles that will make the financial statements of a large proportion of Maltese companies more straightforward to prepare, simpler to understand and more relevant to their users.  This is indeed a milestone for our relatively young but very vibrant profession. 

The profession in Malta was one of the first in the world to adopt IFRS and to develop a level of expertise in their application that, today, many countries envy.  I believe that this has, for example, helped grow Malta’s international business and has certainly given an international dimension to our profession.  It is indeed one of the reasons why young accountants are today being presented with, and are taking up, a world of opportunities even overseas.  We would be foolish not to continue to build on this knowledge and GAPSE is in no way suggesting doing away with IFRS.
 
As we all know the IFRS framework has not stood still over the past few years.  On the contrary it has developed to better cater for the market’s demands to ensure that financial statements are as transparent and detailed as possible to enable the investor to make proper decisions based on relevant financial information.  This has led to onerous increases in measurement, presentation and disclosure requirements that attempt to address complex accounting issues.  For smaller and less complex entities there is no doubt the risk that IFRS accounts are becoming less and less relevant to their users.  These include the very owners of a business who many times find it difficult to read, let alone understand, their own accounts.  In addition the cost of preparing these accounts is becoming more and more significant.  To make matters worse this cost is many times borne by the professional accountant who does not always manage to charge a client for the preparation of accounts in which the client does not see much value.  All this is happening at a time where there are also other pressures on costs coming from sources such as increased regulation and quality assurance.  The introduction of QA is certainly a step that the Institute fully supports but whilst we are convinced that the benefits from this process far outweigh its costs it is undeniable that these costs do exist.

From the outset, the MIA fully endorsed the idea of developing local accounting principles suitable for smaller and less complex entities in Malta.  After receiving a formal brief from the Accountancy Board in May 2006 we worked very hard, and enthusiastically, to bring this idea to fruition.  At the time there was a lot of debate about the possibility of relaxing the audit requirement for small entities, possibly by replacing it with an engagement that provides more limited assurance.  The feeling that prevailed then was to first look at the issue of over complex accounting rules for these companies and to park the audit exemption debate until the accounting one was resolved.  I feel that the benefit of hindsight has proven that this was a correct decision. 

Back in May 2006 the MIA had set up a task force to take this project forward and we had looked in detail at the UK Financial Reporting Standard for Smaller Entities (FRSSE), which was the closest SME framework available at the time and which has been applied in the UK since 1997.  We also considered the staff draft of the IFRS for SME’s, which was issued in September 2006.  We were particularly eager to focus on the IFRS for SME’s given that Malta had already been implementing the IFRS framework, in its widest sense.  Unfortunately, our conclusions were that we did not feel that the IFRS for SME's achieved the objective of simplified accounting for our local small and less complex entities.  We also felt that simpler measurement rules would have better served the purpose of accounting in an SME environment and that the disclosure requirements in the IFRS for SME’s were still considered to be too onerous for our local smaller entities.  It later transpired that Malta was not the only country where these concerns were voiced.

After considering the best way to proceed we submitted a final position paper to Government in February 2007 and expressed the view that a standalone local accounting standard for use by our smaller and less complex entities needed to be drawn up.  We recommended that FRSSE should be used as a model in the drafting of the local standard as it would probably bear a closer resemblance to what we wanted to achieve.  FRSSE has a tried and tested track record in the UK, is regularly updated and offers considerable simplifications in the preparation of financial statements.  We also drew significantly on our knowledge and experience with IFRS.  But our plan was to develop, for the first time, a locally applicable set of financial reporting principles.

What followed was a long and arduous task made up of a lot of hard work, many animated debates and innumerable drafts and versions of the final product which slowly but surely started to form.  I have to publicly thank all those who voluntarily gave up their time and put in a tremendous amount of effort, together with our Technical Officer, to put GAPSE together.  Our task force was made up of people across the profession to ensure as wide a range of views and perspectives as possible.  The MIA feels that the end product that we delivered to the Accountancy Board is a standalone set of accounting principles that includes major simplifications in measurement and disclosures contained in financial statements of smaller and less complex entities.  I reiterate that this will make financial statements easier to prepare, more straightforward to understand and above all more relevant to the user. 

I am very anxious to see the market’s reaction to GAPSE and am very confident that this will be positive.  GAPSE is a robust product that is aimed at entities that satisfy certain quantitative and qualitative characteristics.   Apart from smaller entities we are also recommending that the principles are applied, subject to some upper size restrictions, to subsidiaries within a Group of companies where full IFRS accounts are prepared and filed in Malta by the Group’s parent company.  This will ensure that a larger amount of companies will fall within the scope of GAPSE and benefit from the simplification process without impacting the quality and extent of financial information presented by the Group to which they belong.  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.

I strongly urge all MIA members to critically go through GAPSE and to constructively communicate their feedback and reactions to the Accountancy Board during the exposure period.  This is a unique opportunity for the profession to shape a tool which will become an integral part of our work over the next few years.  I sincerely look forward to the successful implementation of GAPSE in 2008.

I would like to conclude by thanking those members who sent me e-mails with comments, queries and observations over the past three months.  Unfortunately, there was some delay in me answering a small number of e-mails due to some technical difficulties that have now been overcome.  I truly encourage any member who wishes to get in touch with me on any issue concerning the Institute to come forward.  Communicating directly with the Institute is a great way for members to feel a stronger sense of belonging to the MIA.  Meanwhile, over the next couple of months, the Institute will be communicating with some members and students more directly as we will be carrying out a members /students’ survey similar to that performed a few years ago.  I urge those randomly selected for this exercise to make honest, candid and constructive comments that will help us make this an even better Institute for all. 

Simon

sflynn@miamalta.org