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6 Feb 2020

Accounting For Leases After 2018 – GAPSME Versus IFRS

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Up to 31 December 2018, accounting for leases under GAPSME and IFRS was very similar. Companies applying IFRS applied IAS 17 ‘Leases’, whilst companies applying GAPSME (the Maltese default accounting framework as from 1 January 2016) applied Section 14 of the framework, which relates to leases. IAS 17 and GAPSME are very similar in concept. However, since GAPSME is far briefer, preparers under GAPSME between 2016 and 2018 would naturally refer to IAS 17 in instances of lack of guidance under GAPSME.

As from 1 January 2019, IAS 17 is no longer applicable, as the application of IFRS 16 ‘leases’ became mandatory for IFRS preparers. GAPSME was not updated to reflect the changes brought about by IFRS 16. Moreover, a comparison between IAS 17 and IFRS 16 can be seen as very similar to an assessment of the differences between GAPSME and IFRS 16.

IFRS 16 has largely revolutionised the accounting of operating leases by lessees.

Under IFRS 16, a single lessee accounting model is to be followed by the lessee. It is unnecessary for lessees to distinguish between finance leases and operating leases.

The lessee is obliged to capitalise lease transactions, unless the lease term is determined to be short (12 months or less), or the asset leased is of low value (this includes assets below USD5,000, as a rule of thumb).

An example shall better illustrate the accounting implications of applying IFRS 16 rather than GAPSME:

ABC Limited owns and rents a warehouse to DEF Limited for a two-year term (01/01/2019 to 31/12/2020) with interest rate of 5% and lease payments at year-end of €10,000 per year.

In this example, DEF Limited is the lessee. The accounting entries in DEF Limited would depend on whether the Company is applying GAPSME or IFRS.

Situation 1: DEF is preparing the accounts under GAPSME

31/12/2019    

Debit               Rent                                                                             10,000

Credit              Cash                                                                            10,000

31/12/2020    

Debit               Rent                                                                             10,000

Credit              Cash                                                                            10,000

Situation 2: DEF is preparing the accounts under IFRS

The first step is to estimate, at 1 January 2019, the lease liability, which is the present value of future cash flows from the lease term, which in this case appears to be a two-year lease term, discounted at the interest rate.

YEAR CASH FLOWS DISCOUNT RATE 5% DISCOUNTED CASH FLOWS
1 (31/12/2019) 10,000 0.9524 9,524
2 (31/12/2020) 10,000 0.9070 9,070
Lease Liability to be recognised at
1 January 2019
18,594

The initial lease liability is amortised over the contract period – the following schedule illustrates how to determine the annual closing lease liability balance, and the annual finance cost.

YEAR BALANCE B/D 5% Interest Cash Flow Balance C/D
2019 18,594 930 (10,000) 9,524
2020 9,524 476 (10,000)

Journal entries are as follows:

01/01/2019

DebitRight-of-use Asset 18,594
CreditLease Liability18,594

Being recognition of right-of-use asset and lease liability.

31/12/2019

DebitFinance Cost930
CreditLease Liability930

Being finance cost for 2019.

DebitLease Liability 10,000
CreditCash10,000

Being payment of first lease instalment.

DebitDepreciation (P/L) 9,297
CreditRight-Of-Use-Asset9,297

Being depreciation for year 1 (€18,594/2 years)

31/12/2020

DebitFinance Cost476
CreditLease Liability476

Being finance cost for 2020.

DebitLease Liability 10,000
CreditCash10,000

Being payment of second lease instalment.

DebitDepreciation (P/L) 9,297
CreditRight-Of-Use Asset9,297

Being depreciation for year 2.

The above example shows that IFRS 16 will increase the balance sheet figures in terms of both assets and liabilities, for many lessees who were accounting for leases under operating leases before applying IFRS 16.

However, the example doesn’t cover all situations. For instance, the right-of-use asset initially recognised might be greater than the lease liability initially recognised. This is because, the amount of right-of-use asset initially recognised should include not only the initial measurement of the lease liability, but also any cash payments made at the start or before the start of the lease, any incremental direct costs attributable to the lease, and the estimate of any costs of removing the asset at the end of the lease term.

Upcoming articles about the subject will tackle the following:

  • Article 2/5: Determining the lease term
  • Article 3/5: Measurement of right-of-use asset and lease liability
  • Article 4/5: Special situations
  • Article 5/5: Transition

In the meantime, should you require any assistance or advice on the subject, please contact:

John Debattista – Partner  

Paul Zammit – Technical assistant manager 

Rebecca Marie Bezzina – Technical assistant

For any assistance on IFRS or GAPSME-related matters, please email

DISCLAIMER: Please note that this article is being published for information purposes only. As such it does not constitute or is to be interpreted or construed as legal advice or guidance. Zampa Debattista does not accept responsibility for or be liable to any damages arising as a result of using this information as legal advice or guidance.