Audit findings for FY 2016 Consolidated Group and Agrokor d.d

Agrokor's Extraordinary Administration Publishes Audited Financial Statements of Agrokor d.d. and Consolidated Financial Statements of the Agrokor Group for the Year 2016

At the press conference held today, Agrokor's Extraordinary trustee Ante Ramljak presented the key highlights from the audited financial statements of Agrokor d.d. on a standalone basis and the consolidated financial statements of the Agrokor Group for the year 2016.

In May 2017 PricewaterhouseCoopers d.o.o. (PwC) was appointed as statutory auditor for Agrokor's Croatia-based companies with the audit encompassing 27 companies subject to statutory audit in Croatia and three companies each in Serbia and Bosnia and Herzegovina. The scope of the consolidation for the year 2016 comprises a total of 80 companies, 42 of which in Croatia.

Ante Ramljak reported today that the audit results contained significant adjustments to Agrokor's statements from previous periods and presented those adjustments in detail.

He thus reported that the total equity decrease (impairment) of the Agrokor Group for the period from December 31, 2014 to December 31, 2016 amounted to HRK 21.7bn, with the loss in 2016 amounting to HRK -11bn and the loss in 2015 after all restatements have been made amounting to HRK -3.6bn, as against HRK 1.2bn of profits stated by the previous Management Board for the year 2015.

In producing and auditing the financial statements of the Agrokor Group for the year 2016 the following key accounting irregularities were found: undisclosed liabilities in the amount of HRK 3.9bn, undisclosed operating and financial expenses for the period from 2010 to 2015 in the amount of HRK 2.2bn and inappropriate classification of HRK 2.1bn of cash and cash equivalents.

All the aforesaid irregularities were adjusted in the report for the year 2015.

The third key finding presented today refers to the inadequate usage of the so-called equity method at Agrokor d.d. in the period from 2006 to 2011, resulting in a equity value adjustment in the amount of HRK 3.5bn, i.e. overstated revenues in previous periods.

During the presentation it was explained in detail that the key factors driving such a significant consolidated equity adjustment – with the restated equity of the Agrokor Group including the loss from 2016 being lower by HRK 22bn at the end of 2016 as against the position repored earlier in 2015 – were the following:

-non-disclosure of operating and financial expenses in the Profit&Loss Account,
-inappropriate classification of borrowings as equity,
-inappropriate classification of receivables from loans as cash and cash equivalents
-non-consolidation of AdriaticaNet,
-value adjustments: intangible and tangible assets and inventories and
-other effects on equity in 2015 and 2016 resulting from the reclassification of operating leases into financial leases and the increase of costs and drop in revenues in 2016.

With regards to accounting irregularities, it was said today that the result-improving transactions in the form of concealing various operating and financial expenses, non-disclosure or inappropriate classification of liabilities from borrowings and inappropriate classification of loans given as cash and cash equivalents were all recorded in the accounting records but not stated in the financial statements.

Within the scope of the audit of the 2016 financial statements it was found that, together with the non-consolidation of the company AdriaticaNet, the aforesaid irregularities resulted in liabilities being higher by HRK 3.9bn, operating and financial expenses being HRK 2.3bn higher, the amount of cash being lower by HRK 2.1bn and undisclosed loans given and receivables in the amount of HRK 2bn.

In terms of result improvements by way of non-disclosure of operating and financial expenses in the financial statements for the previous years it was presented that in the period from 2010 to 2015 a total of HRK 2.265bn of such expenses were not disclosed. It was explained that the owner Ivica Todorić had entered an agreement with Agrokor d.d. providing for the costs related to an initial public offering (IPO) of the company and/or parts of the company Agrokor, such costs according to this agreement pertaining to various advisors' and other expenses related to the aforesaid transaction. This agreement stipulated that Ivica Todorić would indemnify the aforesaid costs in case an IPO should happen and otherwise such costs would be born by Agrokor. The Agreement on terminating the Agreement on bearing possible negative effects of the Agrokor d.d. IPO, the deadline for its realization being December 30, 2018, closed between Ivica Todorić and Agrokor d.d. on December 14, 2016, states that „pursuant to an analysis of all available data and facts the execution of the project in question has not happened nor shall it happen (....) and the parties terminate the Agreement as at December 14, 2016.“ This Termination Agreement explicitly confirms that Agrokor d.d. and Ivica Todorić on December 14, 2016 reached the agreement that the Agrokor IPO „has not happened nor shall it happen“ and all expenses allegedly related to this project, which had not been stated nor recorded from 2010 to 2015, have become an expense in 2016. Within the scope of the audit it was found that only part of those costs were actually related to the IPO.

With regards to the non-disclosure or inappropriate classification it was found that total undisclosed borrowings amounted to HRK 2.3bn and inappropriately classified liabilities (arising from the borrowing received from Adris) to HRK 1bn, resulting in non-disclosed and/or inappropriately classified credit liabilities in the amount of HRK 3.9bn.

The inappropriate classification of loans given and deposits as cash or cash equivalents resulted in stated cash in the amount of HRK 2.6bn instead of HRK 573m, i.e. an overstatement of HRK 2.1bn.

The following value adjustments have also been made:

-on intangible assets in the amount of HRK 1.5bn in 2015 (relating to Konzum Sarajevo) and HRK 2.1bn in 2016 (mainly the Mercator brand)
-on inventories in the amount of HRK 2.8bn in 2015 and HRK 2.1bn in 2016
-on loans and receivables in the amount of HRK 0.4bn in 2015 and HRK 1.9bn in 2016.

At the press conference it was said that at this point the loss exceeding equity value amounted to HRK 14bn and – subject to the reports having been prepared on a going-concern basis, the only way for the Agrokor Group to continue doing business was by way of closing a settlement.

The Extraordinary Trustee Ante Ramljak pointed out that the findings presented today have had no direct impact on the operations of Agrokor Group companies in 2017, which were stabilized by the Extraordinary Administration over the period from April to June this year and that after a successful season the operating businesses of these companies were stable.

Today's presentation was closed by stating that PwC had informed the Extraordinary Administration in writing of the accounting irregularities found during the course of the audit which may point at potential illegal activities and that the Extraordinary trustee has taken steps as stipulated by the law.

It was as well stated that the Extraordinary Administration has engaged a respectable international firm specializing in forensics to investigate the irregularities found. 

Presentation of Audited Financial Statements for 2016