PRESENTATION OF MONTENEGRO Negotiating Team for the Accession of Montenegro to the European Union Working Group for Chapter 6 – Company Law Bilateral screening: Chapter 6 PRESENTATION OF MONTENEGRO Brussels, 22 November 2012

Working Group for Chapter 6 – Company Law MONTENEGRO Negotiating Team for the Accession of Montenegro to the European Union Working Group for Chapter 6 – Company Law Bilateral screening: Chapter 6 Presentation of Montenegro Brussels, 22 November 2012 Chapter 6: Company Law

IV EU Directive (78/660/EEC) Igor Pavicevic Chapter 6: Company Law IV EU Directive (78/660/EEC) Igor Pavicevic Secretary General Institute of Certified Accountants of Montenegro – IFAC member igor.pavicevic@isrcg.org MONTENEGRO Negotiating Team for the Accession of Montenegro to the European Union Chapter 6: Company Law

Directive 78/660/EEC vs relevant laws in Montenegro Chapter 6: Company Law Directive 78/660/EEC vs relevant laws in Montenegro I REGULATION - Law on Accounting and Auditing (Official Gazzette of MNE No.32/11) Secondary legislation: Decree on Entrusting of Affairs of Public Administration Bodies Competent for Accounting and Auditing (Official Gazzette of MNE No.44/07) Rulebook on financial statements (Official Gazzette of MNE No.05/11) II HARMONISATION WITH DIRECTIVE III EXPECTATIONS FOR FUTURE AMENDMENDS TO LAW MONTENEGRO Negotiating Team for the Accession of Montenegro to the European Union Chapter 6: Company Law

II HARMONISATION WITH DIRECTIVE Chapter 6: Company Law II HARMONISATION WITH DIRECTIVE Out of 51 Articles of the Directive (excluding final provisions), the Law on Accounting and Auditing is: Fully harmonised with 49 Articles Partly harmonised with 2 Articles Non harmonised – not exist Partial harmonisation relates to: Article 46 of the Directive, under which financial statements are required to provide information on the going concern principle, as well as research and development activities. In our law, this is not explicitly stated, but the law refers to ISA, IAS/IFRS, and the Law (Article 6, paragraph 3) states that Statistical Annex shall be submitted as well, where issues relating to investment in research and development are discussed. Article 47 of the Directive, according to which transparent disclosure of financial statements and audit reports is required. The Directive also allows reports not to be published, but in this case interested users shall be provided with, without charge, a copy of part or entire report. Such an explicit attitude does not exist in our law. However, the Law on NGOs (Article 37) implies that NGOs whose annual income is > 10,000 must publish financial statements on their website. MONTENEGRO Negotiating Team for the Accession of Montenegro to the European Union Chapter 6: Company Law

Full harmonisation Chapter 6: Company Law Article 2 of the Directive requires the true and fair presentation of financial reports, which shall include: Balance Sheet, Income Statement and Notes, as well as additional information. The Law on Accounting and Auditing, in Article 2, refers to the full application of IAS/IFRS, and IAS-1 meets the requirement of this Directive. Article 3 of the Directive requires that the form of patterns of financial statements must not be changed each year, except in exceptional circumstances. Given that IAS/IFRS were amended in 2009, to which the Law refers, the Institute of Certified Accountants has, in accordance with the public authorizations (according to the Decree) proposed, and Ministry of Finance adopted, new Rulebook on financial statements, harmonized with amendments to the IAS/IFRS. Article 4 of the Directive requires respect for the principles of transparency, comparability of data, sequence of items, introduction of column for the previous year, etc. The Rulebook of financial statements meets these requirements. MONTENEGRO Negotiating Team for the Accession of Montenegro to the European Union Chapter 6: Company Law

Full harmonisation Chapter 6: Company Law Article 5 of the Directive requires specific forms for investment companies and financial holding companies. The Commission for Securities, together with the Institute of Certified Accountants, have proposed, and Ministry of Finance adopted, the Rulebook on financial statements of investment funds. Articles 6-8 of the Directive require adherence to the basic accounting principles, distribution of profit and loss coverage, as well as a model of one or two forms of balance. Our Law on Accounting and Auditing implies the full application of IAS/IFRS and the Company Law provides clear guidance on the allocation of the profit or loss coverage. The Rulebook on financial statements prescribed a model of forms of financial statements. Article 9 of the Directive requires that the item "Unpaid registered capital" to be seen in two ways, as short- and long-term. The Rulebook on the financial statements specifically singles out this item because of its two-sided treatment. MONTENEGRO Negotiating Team for the Accession of Montenegro to the European Union Chapter 6: Company Law

Full harmonisation Chapter 6: Company Law Articles 11 -12 of the Directive request existence of possibility that small legal entities (assets up to €1,000,000, revenue up to 2,000,000, employed up to 50) have summarized financial statements. The Rulebook on financial statements prescribed only one form of patterns, because the Directive is not explicit in this regard. Articles 13 – 26 of the Directive relate to the content of Notes, Balance Sheet and Income Statement. IAS/IFRS define the content, and Law on Accounting and Auditing requires their full implementation, so the Rulebook on financial statements is harmonized with that. Article 27 of the Directive requires that medium-size legal entities that have revenue up to 4000000, incomes up to 8000000, and employees up to 250, can make different patterns. The Rulebook of financial statements prescribed only one form of pattern, because the MONTENEGRO Negotiating Team for the Accession of Montenegro to the European Union Chapter 6: Company Law

Full harmonisation Chapter 6: Company Law Articles 28-42 of the Directive require proper positioning of revenue and results, as well as assessment of balance sheet positions. IAS/IFRS define content, and the Law on Accounting and Auditing requires their full application, so the Rulebook on financial statements is harmonized with that. Articles 43-45 of the Directive require content of Notes. IAS/IFRS define content, and the Law on Accounting and Auditing requires their full application. Articles 48-51 of the Directive require that audit reports, whether they relate to full or partial financial reports, shall contain the auditor’s opinion, as well as an indication if that are full or partial reports. Annual financial statements must show proposed distribution of profit or treatment of loss, if these items are not covered by the financial statements. The Law on Accounting and Auditing (Article 3) refers to the full implementation of the International Auditing Standards and, according to the Rulebook, distribution of profit and treatment of loss shall be stated in financial statements. MONTENEGRO Negotiating Team for the Accession of Montenegro to the European Union Chapter 6: Company Law

III EXPECTATIONS FOR FUTURE AMENDMENDS TO LAW Chapter 6: Company Law III EXPECTATIONS FOR FUTURE AMENDMENDS TO LAW that medium-size legal entities are subject to compulsory audit, that classification of legal entities (according to the current Law, Article 3, paragraphs 1-3) shall be harmonized with this Directive, as current classification is not harmonized with the EU, according to our Law, medium-size legal entities shall meet 2 of 3 listed criteria: 1) that average number of employees during the year for which annual financial report is submitted amounts from 50 to 250 employees; 2) that total revenue at annual level amounts from €10000000 to € 50000000; 3) that total assets amount from €10000000 to €43000000 We request these positions to be harmonized with the Directive and to meet the following criteria: 1) that average number of employees during the year for which annual financial report is submitted amounts from 50 to 250 employees; 2) that total revenue at annual level amounts from €2000000 to €8000000; 3) that total assets amount from €1000000 to €4000000 that signatories of financial statements shall possess a certificate in accordance with the National Education Accounting Standard (CORS-1) and IFAC International Education Standards (IES). In the opinion of the EU, is this a business barrier? If so, what is more important for the EU: the truth, objectivity and quality of the financial statements or business barriers? MONTENEGRO Negotiating Team for the Accession of Montenegro to the European Union Chapter 6: Company Law

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