Co-authored by Michelle Spiteri Bailey

This is the third in a series of articles outlining the main differences between General Accounting Principles for Smaller Entities (GAPSE) and General Accounting Principles for Small and Medium-Sized Entities (GAPSME) regulations in relation to its scope, applicability, presentation of financial statements and specific accounting and disclosure requirements. Part three will focus on the requirements of Section nine of GAPSME which deals with financial assets, financial liabilities and equity.

Financial assets, financial liabilities and equity

Whereas one can generally comment that the changes in recognition and measurement requirements for most balance sheet items brought about by GAPSME when compared with GAPSE were quite minimal, this is not the case when it comes to financial assets and liabilities. Section nine of GAPSME was completely rewritten and the recognition and measurement principles of the new regulations bear closer comparison to IAS39 – Financial instruments: recognition and measurement, than to GAPSE.

Under Sections nine and 18 of GAPSE one had the option of measuring certain types of financial instruments at fair value (FV) or at amortised cost, although cost accounting was always an option for all types of financial assets and liabilities. This is no longer the case under GAPSME because the new regulations saw the introduction of a number of categories of financial instruments, and the basis of subsequent measurement depends on the classification of the particular instrument.

Classification of financial instruments

In a similar manner to IAS 39, GAPSME classified financial instruments in the following four categories:

  • Financial instruments held for trading
  • Held-to-maturity investments
  • Loans and receivables
  • Available-for-sale financial assets

A financial asset or financial liability is classified as held for trading if:

  1. it is acquired or incurred principally for selling or repurchasing in the near termon initial recognition
  2. it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent pattern of short-term profit-taking
  3. it is a derivative (except for a derivative that is a designated and effective hedging instrument).

Held-to-maturity investments are non derivative financial assets with fixed or determinable payments and fixed maturity that an entity has the positive intention and ability to hold to maturity other than those designated as other than investments designated as available-for-sale or as loans and receivables.

GAPSME features a tainting provision that prohibits an entity from classifying any financial assets as held to maturity if the entity has, during the current financial year or during the two preceding financial years, sold or reclassified more than an insignificant amount of held-to-maturity investments before maturity. The regulation provides for three particular instances where the tainting provision does not come into play, such as when the premature sale happened as a result of an isolated event that was beyond the entity's control, is nonrecurring and could not have been reasonably anticipated by the entity.

Loans and receivables are non derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those classified as held for trading or as available-for-sale.

Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified as loans and receivables, held-to-maturity investments or held for trading financial assets.

Initial recognition and measurement

Under both GAPSE and GAPSME regulations, an entity shall recognise a financial asset or a financial liability in its balance sheet when the entity becomes a party to the contractual provisions of the instrument.

As for initial measurement, under GAPSE, upon initial recognition, financial assets and liabilities were measured at cost (purchase price plus transaction costs). This is no longer the case under the new regulations which require financial assets and liabilities to be initially measured at FV (and not at face or nominal value). For financial assets or liabilities not classified as held for trading, initial measurement should be at fair value plus transaction costs. Transaction costs must be directly attributable to the acquisition or issue of the financial asset or financial liability.

Subsequent Measurement

Under GAPSE, quoted and held for trading investments were measured at cost less impairment or at fair value. Unquoted investments were measured at cost and for other types of long term loans and investments at amortised cost was encouraged but not mandatory.

Under GAPSME, subsequent measurement rules for the different classes of financial instruments are as follows:

Originally published by The Accountant.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.