In accordance with HSFI 13 (Croatian standards of financial reporting), entrepreneurs record in their accounting books liabilities when it is probable that an outflow of resources will occur due to the settlement of the obligation and when the amount to be settled can be reliably determined. By carrying out the mandatory annual inventory of assets and liabilities (Inventory), entrepreneurs should revise whether the above conditions are still met in order to correctly express the actual state of their liabilities, taking care of the due dates and their limitation periods.

In accordance with the above, entrepreneurs most often write off liabilities due to:

• Statute of limitations
• Whether it’s a question of debt being discharged or
• There was an impossibility of fulfillment – e.g. The creditor’s company ceased to exist (it was deleted from the Register of Companies at the Commercial court)

The Law of obligatory relations (Official Gazette No. 35/05 – 155/23) defines the limitation periods, of which we highlight:

• General limitation period – 5 years (for all claims for which no special limitation period is expressly prescribed)
• Receivables from commercial contracts – 3 years (sale of goods and services)
• Claims for reimbursement of overhead costs – 1 year (electricity, water, gas, telephone, etc.)
• Claims established by final decisions/settlements of court, notary and other competent bodies – 10 years
• Obligations for tax duties – 6 years (right of determination and tax collection – including interest, penalties and enforcement costs)

Important note – the statute of limitations can be interrupted if the debtor acknowledges the debt to the creditor (e.g. by paying part of the debt, certifying the IOS (Open items balance) or some other certificate signed by a person authorized for company /debtor representation, etc.)

Write-off of liabilities – statute of limitations

The write-off of liabilities is determined by the company – bringing a decision, in such a way that the liability to the creditor is closed and income is recognized for the amount of the write-off (i.e. for the entrepreneur who makes the write-off – this write-off is taxable with profit tax).

The same principle applies to the write-off of obsolete liabilities based on loans or credits received.

Termination of recognition of a liability for the discharge of debt

This situation is when the creditor informs his debtor that he will not ask for the fulfillment of the obligation, and the debtor himself declares that he agrees with the discharge of the debt (which is a kind of form of agreement – because the consent of both parties is required).

Debt relief is also recorded by closing the obligation and is placed in the income account that is taxable.

Write-off of liabilities – creditor company does not exist/deleted from the Commercial Court

The write-off of liabilities on this basis most often occurs due to the deletion of the creditor company for bankruptcy, liquidation, etc. and when there is no legal successor and in the event that the same claim was not transferred to a new creditor before the deletion itself (e.g. by assignment, etc.).

This write-off of liabilities is also recorded in the taxable income account.

Write-off of liabilities to company members/owners

In principle, the write-off of liabilities to the members/owners of the company is treated in the same way as the write-off of all other liabilities, whether to legal or natural persons – to the taxable income account.

However, the members/owners of the company have an additional option – converting liabilities into capital reserves, which significantly improves the financial picture of the company (reducing the liability with a simultaneous increase in capital)

Write-off of tax liabilities

Tax liabilities are treated in the same way as other liabilities. In principle, it is based on the reconciliation with the Tax Accounting Cards (PKK), which can be accessed via ePorezna by reviewing the balance of the PKK on the day of the list of liabilities is being determined by conducting inventory procedure.

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