The thesis permeates the accounting effects of subsequent measurement of financial instruments on the financial position and profitability of the Croatian banking system. Depending on the classification of financial instruments into one of the four existing categories, their accounting treatment changes, which results in several different effects on the financial position and profitability of banks. After defining how financial instruments can be recognized and measured, the impact of subsequent measurement of financial instruments on the Croatian banking sector will be visible. Through the aspects of the impact on the financial position and profitability of the Croatian banking sector, the structure of assets and liabilities in the Croatian banking sector and their associated impact of subsequent measurement on financial assets, i.e. financial obligations, were analysed. The starting point of the thesis is that the accounting treatment of financial instruments significantly affects the financial position and profitability of banks. In case of an unreliable assessment of the same financial instruments, the financial position and profit of banks may be misrepresented. This paper will show how the classification and valuation of financial instruments may affect the financial position and profit of a bank, as well as the consequences that may result from such valuation. The analysis of the balance sheet and income statement of the banking sector of the Republic of Croatia determined the structure of assets of Croatian banks. The structure of assets is dominated by credit placements, while not all other categories of financial assets have a significant share in the structure of total assets, which leads to the conclusion that most financial instruments in the Croatian banking sector are subsequently measured at amortized cost and not at fair value. After defining and analysing the accounting framework for financial reporting through the International Financial Reporting Standard 9 Financial Instruments, the Expected Loss Model, i.e. the impairment model of financial instruments that has the most significant impact on the financial position and profitability of the Croatian banking system, stood out as a key model defined within the same standards sector. In addition to the prominent conclusions, the thesis also shows the first experiences arising from the application of the new International Financial Reporting Standards.