Accounting for leases under GAPSME and IFRS

Among the major updates in recent years is the introduction of IFRS 16 – Leases, which aims to enhance transparency and comparability of financial statements by requiring lessees to recognize almost all leases on their balance sheets. The application of IFRS 16 significantly impacts entities by changing how leases are accounted for, particularly for lessees.

In Malta, under the local GAPSME (Generally Accepted Accounting Principles in Malta for Small and Medium-Sized Entities) framework, businesses also apply a specific set of national regulations, which integrate IFRS standards while addressing local legal and economic nuances.

This article explores the application of IFRS 16 under both the IFRS framework and the GAPSME framework, highlighting the similarities and differences between the two, specifically those outlining the treatment of operating and finance leases from the perspective of the lessee and the lessor.

Overview of IFRS 16

IFRS 16 was introduced by the International Accounting Standards Board (IASB) to replace the previous lease accounting standard, IAS 17, with the primary aim of improving transparency and accuracy in lease reporting. The key impact of IFRS 16 is on the lessee’s balance sheet, as leases that were previously classified as operating leases, and thus expensed to the profit and loss account, are now required to be recognized as both a right-of-use asset and a lease liability. The primary features of IFRS 16 are as follows:

1. Lessee Accounting:
   • Lessees must recognize almost all leases on their balance sheet, including a right-of-use asset and a corresponding lease liability.
   • The only exceptions are for short-term leases (12 months or less) and leases for low-value assets. In such instances, the lease can be expensed to the profit and loss account.
   • Since the date of transition to IFRS 16, the distinction between operating leases and finance leases no longer applies for lessees; all leases are required to be recognised on the balance sheet, save for the exceptions identified above.

2. Lessor Accounting:
   • Contrary to lessee accounting, lessors must classify leases as either finance leases or operating leases, depending on factors such as the transfer of risks and rewards of ownership, among other factors as stipulated in the standard.

In summary, the key feature of IFRS 16 is the requirement for lessees to recognize almost all leases on their balance sheet, thereby enhancing transparency and comparability of financial statements.

Application of IFRS 16 under GAPMSE

While the GAPSME framework aligns with IFRS, it offers simplified approaches and some deviations to reduce the compliance burden for smaller entities. GAPSME adapts IFRS 16 in ways that make compliance more manageable for Small and Medium-Sized Entities (SMEs), particularly in terms of lease recognition, measurement, and classification.

Accounting for lessees

For lessees, the treatment of operating leases under GAPSME is more simplified compared to IFRS 16. SMEs are not required to capitalize operating leases on the balance sheet. Instead, operating lease payments are expensed in the income statement on a straight-line basis over the lease term.

When it comes to finance leases, GAPSME still requires SMEs to recognize both the lease liability and the right-of-use asset on the balance sheet, aligning with the principles of IFRS 16. However, GAPSME offers greater flexibility in how these amounts are measured and recognized.

Accounting for lessors

For lessors, the treatment of leases under GAPSME is largely consistent with IFRS 16. The accounting for finance leases under GAPSME mirrors that under IFRS 16, where the lessor recognizes a receivable for the present value of future lease payments. Similarly, operating leases are recognised in the profit and loss account for the lessor, with lease income recognized as it is earned over the lease term.

Thus, while the GAPSME framework maintains the basic structure of IFRS 16, it introduces flexibility for SMEs, particularly in terms of simplified accounting treatments for operating leases and more lenient measurement assumptions for finance leases.

 

Key Differences in the Application of IFRS 16 Between the IFRS framework and the GAPSME framework 

1. Exemptions for Low-Value and Short-Term Leases:
   • IFRS: The standard applies universally to all entities, including SMEs, and mandates that lessees recognize almost all leases on the balance sheet except for short-term leases (12 months or less) and leases of low-value assets.
   • GAPSME: GAPSME generally aligns with IFRS 16 in allowing exemptions for low-value and short-term leases but offers more flexibility in terms of the criteria for what qualifies as low-value or short-term, giving SMEs more leeway in classifying leases.
2. Classification and recognition:
   • IFRS: The standard requires lessees to recognize right-of-use assets and lease liabilities for nearly all leases. The distinction between operating leases and finance leases does not apply to lessees, as all leases are capitalized, except for those leases which satisfy the exemptions above.
   • GAPSME: The GAPSME framework simplifies lease classification for SMEs. For operating leases, GAPSME does not require recognition on the balance sheet, and these leases are instead expensed as incurred.
3. Measurement of Lease Liabilities and Right-of-Use Assets:
   • IFRS: Lease liabilities are measured at the present value of future lease payments, using a discount rate. The discount rate used is either the interest rate implicit in the lease or the lessee’s incremental borrowing rate. The right-of-use asset is recognized at the same value as the lease liability, adjusted for any incentives, initial direct costs, and other costs.
   • GAPSME: GAPSME requires lessees to recognise leases as assets and liabilities on the balance sheet at equal amounts to the fair value of the lease asset, or if lower, the present value of the minimum lease payments. The discount rate if the interest rate implicit in the lease.
4. Disclosure Requirements: 
   • IFRS: Requires extensive disclosure requirements, including the presentation of lease liabilities, right-of-use assets, lease-related expenses, and maturity analysis of lease liabilities.
   • GAPSME: Reduces the disclosure burden for SMEs, simplifying or eliminating certain disclosure requirements related to lease liabilities and future lease commitments.

Conclusion

While both IFRS and GAPSME aim to improve transparency in lease accounting, GAPSME provides a simplified and flexible approach for SMEs in Malta. As mentioned in this article, the primary differences lie in how leases are recognized and measured, the treatment of operating and finance leases, and the disclosure requirements.

For larger, listed, or regulated entities, compliance with full IFRS 16 standards is required. However, for SMEs reporting under the GAPSME framework, the flexibility offered ensures that the financial reporting burden remains manageable while still maintaining transparency.

Understanding these distinctions allows businesses operating in Malta to better navigate the requirements of lease accounting under both IFRS and GAPSME, ensuring compliance, while optimizing their financial reporting processes.

Sources

• Accountancy profession (General Accounting Principles For Small and Medium-Sized Entities) Regulations
• IFRS 16 – Leases