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As from 1 January 2019, IAS 17 is no longer applicable, as the application of IFRS 16 ‘leases’ became mandatory for IFRS preparers.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
Debit Rent 10,000
Credit Cash 10,000
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|
| Lease Liability to be recognised at |
1 January 2019
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|
Journal entries are as follows:
Being recognition of right-of-use asset and lease liability.
Being finance cost for 2019.
Being payment of first lease instalment.
Being depreciation for year 1 (€18,594/2 years)
Being finance cost for 2020.
Being payment of second lease instalment.
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.