Accounting & Auditing Standards Report [RF 1]
After declaring independence from Yugoslavia in 1991, Croatia started moving towards a market economy. It implemented a wide range of reforms, including making attempts to set up a national system for corporate financial reporting. In 2002, Croatia published its first Accounting and Auditing Report on the Observance of Standards and Codes (A&A ROSC). Since then, Croatia has made considerable progress in developing its regulatory framework for corporate sector financial reporting and auditing.
The alignment of the revised regulatory framework with the "acquis communautaire" (accumulated legislation, legal acts, and court decisions which constitute the body of European Union law) has been significantly improved and the basis for reinforcing the organized capacity for financial reporting and auditing was established. However, not all requirements of the "acquis" (agreement) have been introduced and more work needed to be done to achieve full compliance. The reporting lay-outs required by the accounting Directives have not been implemented. There were no requirements on annual management reports; the types of audit opinions and the responsibility of a group auditor are not fully addressed; and the rules governing consolidated accounts were not fully covered. Moreover, the changes to the "acquis communautaire" on financial reporting, such as the amended Fourth, Seventh and Eighth Company Law Directives, needed to be incorporated. With all that, Croatian government was committed to achieve full compliance with the relevant portions of the acquis in a very short timeframe.
The alignment of the revised regulatory framework with the "acquis communautaire" (accumulated legislation, legal acts, and court decisions which constitute the body of European Union law) has been significantly improved and the basis for reinforcing the organized capacity for financial reporting and auditing was established. However, not all requirements of the "acquis" (agreement) have been introduced and more work needed to be done to achieve full compliance. The reporting lay-outs required by the accounting Directives have not been implemented. There were no requirements on annual management reports; the types of audit opinions and the responsibility of a group auditor are not fully addressed; and the rules governing consolidated accounts were not fully covered. Moreover, the changes to the "acquis communautaire" on financial reporting, such as the amended Fourth, Seventh and Eighth Company Law Directives, needed to be incorporated. With all that, Croatian government was committed to achieve full compliance with the relevant portions of the acquis in a very short timeframe.
Key Recommendations of the A&A ROSC 2002 and The Progress Status as of May 2007 [RF 1]
1. Establish a Croatian Financial Reporting Council - Achieved
2. Require the use of full IAS/IFRS for public interest companies only – this should include (but should not be limited to) listed companies, banks, insurance undertakings, other financial institutions/intermediaries and other significant publicly and privately owned commercial entities - Achieved
3. Require small & medium size enterprises (SMEs) to use other financial reporting standards only as part of a harmonized EU and/or international approach - In progress (Croatian FRC has begun drafting accounting standards for SMEs)
4. Make necessary arrangements for continuous translation and timely publication of International Standards on Auditing (ISA) and the Code of Ethics for Professional Accountants - In progress (New Chamber of Auditors began translating ISA and translated the Code of Ethics for Professional Accountants in July 2007)
5. Rationalize the different requirements for the publication and filing of financial statements and financial information on the basis of a common financial reporting platform - In progress (Recent regulatory amendments but no progress in practice until now)
6. Establish mechanisms within regulatory agencies to monitor the quality of audited financial statements of the entities under their supervision and to take appropriate actions against those companies, members of company management, audit firms, auditors and others who have failed to comply with accounting and auditing requirements - In progress.
2. Require the use of full IAS/IFRS for public interest companies only – this should include (but should not be limited to) listed companies, banks, insurance undertakings, other financial institutions/intermediaries and other significant publicly and privately owned commercial entities - Achieved
3. Require small & medium size enterprises (SMEs) to use other financial reporting standards only as part of a harmonized EU and/or international approach - In progress (Croatian FRC has begun drafting accounting standards for SMEs)
4. Make necessary arrangements for continuous translation and timely publication of International Standards on Auditing (ISA) and the Code of Ethics for Professional Accountants - In progress (New Chamber of Auditors began translating ISA and translated the Code of Ethics for Professional Accountants in July 2007)
5. Rationalize the different requirements for the publication and filing of financial statements and financial information on the basis of a common financial reporting platform - In progress (Recent regulatory amendments but no progress in practice until now)
6. Establish mechanisms within regulatory agencies to monitor the quality of audited financial statements of the entities under their supervision and to take appropriate actions against those companies, members of company management, audit firms, auditors and others who have failed to comply with accounting and auditing requirements - In progress.
IFRS Compliance [RF 2]
Under the Croatian National Accounting Law (updated 24 October 2007), the following categories of entities are required to use IFRS:
- All listed companies and those that are preparing to go public.
- All financial institutions
- All large enterprises. Large enterprises are those that exceed two of the following three criteria: revenue higher than HRK (Croatian Kuna) 260 million
total assets higher than HRK 130 million; the number of employees greater than 250
- Any other companies as required by financial sector supervisory authorities
- All who are composing consolidated financial statements according to IFRSs
- All other enterprises can voluntarily choose to use IFRSs, or they can use standards adopted by Financial Reporting Standards Board (currently that
means IASs as they existed in 2000).
Croatia has replaced the required use of IFRS for the financial statements of all companies with a requirement that only large, listed andfinancial sector
companies (Public Interest Entities, or PIEs) must apply IFRS.
- All listed companies and those that are preparing to go public.
- All financial institutions
- All large enterprises. Large enterprises are those that exceed two of the following three criteria: revenue higher than HRK (Croatian Kuna) 260 million
total assets higher than HRK 130 million; the number of employees greater than 250
- Any other companies as required by financial sector supervisory authorities
- All who are composing consolidated financial statements according to IFRSs
- All other enterprises can voluntarily choose to use IFRSs, or they can use standards adopted by Financial Reporting Standards Board (currently that
means IASs as they existed in 2000).
Croatia has replaced the required use of IFRS for the financial statements of all companies with a requirement that only large, listed andfinancial sector
companies (Public Interest Entities, or PIEs) must apply IFRS.
Corporate Sector Financial Reporting and Auditing in Practice [RF 1]
The limited public availability of legally mandated financial statements for companies, other than banks, seriously undermines the value added of the
financial reporting function in the Croatian market economy and partially shows the lack of user demand for financial statements. Due to the issues with
obtaining financial statements, the ROSC team was not able to review as many financial statements as intended. Even though the Accounting Act enacted in 2005 requires all joint stock public companies to publish their financial statements, the current requirements on filing and publication are not
completely in line with the requirements of the acquis communautaire (First, Fourth, and Seventh Company Law Directives and the Transparency Directive) and international best practices. The new Accounting Act does not provide sanctions for companies that do not comply with filing and publication obligations. The financial statements reviewed as part of this assessment relate to the 2005 financial reporting year and therefore do not reflect the impact of the new Accounting Act or the IFRS adopted in December 20.
The reviewed financial statements of Croatian banks were generally of good quality. This can largely be attributed to the intensive on/off-site supervision by the Croatian National Bank (HNB) and the transfer of knowledge and expertise of foreign owned private banks.
ROSC members could not evaluate the quality of financial statements of insurance undertakings because
of the difficulties in obtaining these financial statements.
The review of financial statements of real sector companies and pension and investment funds revealed a number of non-compliance issues. With exception of the banks, there is no systematic enforcement of the quality of financial statements besides the statutory audit function. The Croatian Financial Services Supervisory Agency (HANFA) currently regulates and supervises listed companies and the non-banking financial sector, including
insurance undertakings, leasing, pension fund management, and investment fund management companies. HANFA strengthened its institutional capacity and further strengthening its role to properly enforce financial reporting requirements.
Furthermore, there is no system of external quality assurance to ensure the quality of statutory audits in practice. The newly established Chamber of
Auditors is currently developing an effective system of quality assurance. The audit committees, which are required by the Audit Act for public interest
companies, are expected to positively impact the audit quality in the future. Although the new EU Eighth Company Law Directive requires a system of oversight without making fixed rules on infrastructure, it may be difficult to meet some other requirements of the Directive, such as finding a majority of non-practitioners knowledgeable in the area of statutory audit.
This assessment of accounting and auditing practices in Croatia is part of a joint initiative by the World Bank and International Monetary Fund (IMF) to
prepare Reports on the Observance of Standards and Codes (ROSC)1. The assessment focuses on the strengths and weaknesses of the accounting and auditing principles that influence the quality of corporate financial reporting, and includes a review of both statutory requirements and actual practice. It uses International Financial Reporting Standards (IFRS) and International Standards on Auditing (ISA) as benchmarks and draws on international experience and best practices.
financial reporting function in the Croatian market economy and partially shows the lack of user demand for financial statements. Due to the issues with
obtaining financial statements, the ROSC team was not able to review as many financial statements as intended. Even though the Accounting Act enacted in 2005 requires all joint stock public companies to publish their financial statements, the current requirements on filing and publication are not
completely in line with the requirements of the acquis communautaire (First, Fourth, and Seventh Company Law Directives and the Transparency Directive) and international best practices. The new Accounting Act does not provide sanctions for companies that do not comply with filing and publication obligations. The financial statements reviewed as part of this assessment relate to the 2005 financial reporting year and therefore do not reflect the impact of the new Accounting Act or the IFRS adopted in December 20.
The reviewed financial statements of Croatian banks were generally of good quality. This can largely be attributed to the intensive on/off-site supervision by the Croatian National Bank (HNB) and the transfer of knowledge and expertise of foreign owned private banks.
ROSC members could not evaluate the quality of financial statements of insurance undertakings because
of the difficulties in obtaining these financial statements.
The review of financial statements of real sector companies and pension and investment funds revealed a number of non-compliance issues. With exception of the banks, there is no systematic enforcement of the quality of financial statements besides the statutory audit function. The Croatian Financial Services Supervisory Agency (HANFA) currently regulates and supervises listed companies and the non-banking financial sector, including
insurance undertakings, leasing, pension fund management, and investment fund management companies. HANFA strengthened its institutional capacity and further strengthening its role to properly enforce financial reporting requirements.
Furthermore, there is no system of external quality assurance to ensure the quality of statutory audits in practice. The newly established Chamber of
Auditors is currently developing an effective system of quality assurance. The audit committees, which are required by the Audit Act for public interest
companies, are expected to positively impact the audit quality in the future. Although the new EU Eighth Company Law Directive requires a system of oversight without making fixed rules on infrastructure, it may be difficult to meet some other requirements of the Directive, such as finding a majority of non-practitioners knowledgeable in the area of statutory audit.
This assessment of accounting and auditing practices in Croatia is part of a joint initiative by the World Bank and International Monetary Fund (IMF) to
prepare Reports on the Observance of Standards and Codes (ROSC)1. The assessment focuses on the strengths and weaknesses of the accounting and auditing principles that influence the quality of corporate financial reporting, and includes a review of both statutory requirements and actual practice. It uses International Financial Reporting Standards (IFRS) and International Standards on Auditing (ISA) as benchmarks and draws on international experience and best practices.