Financial Reporting in Transitional and Emerging

Economies: the Case of Kazakhstan

Researchers

Dr. Monirul Alam Hossain
Department of Accounting and MIS
University of Hail
P.O. Box 2440
Hail, Kingdom of Saudi Arabia.
Tel: +966568533567
FAX: +966-6-531-0500
E-mail: monirulhossain@yahoo.com or
mahossain108@hotmail.com

.


Professor Dr. Asheq Rahman
School of Accountancy,
Private Bag 102-904,
Massey University,
Auckland, New Zealand.
Direct Dial +64 9 414-0800 ext 9587,
Fax +64 9 441-8133
E-mail: a.r.rahman@massey.ac.nz






Draft: November, 2009

1







Financial Reporting in Transitional and Emerging Economies: the
Case of Kazakhstan*

Abstract
Kazakhstan is a new market economy. Only about a decade and a half back it had a
centrally planed economic system. The purpose of this paper is to demonstrate that the
adoption of market and accounting regulations of the developed economies of the world in
the short time since the countys change form central planning may be premature and can
have little consequence for market transparency and efficiency in the foreseeable future. We
make our observations based on accounting rules market data and socio-economic profile of
Kazakhstan of recent years. The findings of this study have implications for policy makers in
emerging countries who are implementing IFRS at the behest of international financial
agencies and multinationals.

Key words: Emerging Economy, Financial Reporting, International Accounting
standards, IFRS, Transitional Economy, Kzakhstan

*Corresponding Author:
Dr. Monirul Alam Hossain, Department of Accounting and MIS, University of
Hail, P.O. Box 2440, Hail, Kingdom of Saudi Arabia., Tel: +966568533567, FAX: +966-6-
531-0500, E-mail: monirulhossain@yahoo.com









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Financial Reporting in Transitional and Emerging Economies: the
Case of Kazakhstan

1. Introduction
International Financial Reporting Standards (IFRS) were developed in advanced economies,
but are increasingly being applied in emergent economies, potentially ignoring
considerations of whether IFRS are appropriate or relevant to such economies (Tyrrall,
Woodward, and Rakhimbekova, 2007). There are a growing number of studies in the area of
International Accounting Standards (IASs) to developing and emerging economies (Hossain
et al, 2006; Susela, 1999; Banerjee et al.; 1998, Larson and Kenny 1998, 1996; Watty and
Carlson, 1998; Hassan, 1998; Al-Rai and Dahmash, 1998; Mirghani, 1998; Carlson, 1997;
Wallace and Briston, 1993; Larson, 1993; Wallace, 1993; Hove, 1990 and Perera, 1989).
However, there is a shortage of existing literature which has investigated the roles of the
IASs/IFRSs in the context of emerging and transitional economies like Kazakhstan.

Accounting standards are the norms of accounting policies and practices issued by the
accounting bodies, national and international, for the guidance of their members regarding
the treatment of the items which made the financial statements and their disclosure therein
(Azizuddin, 1991). These accounting standards are intended to describe methods of
accounting or disclosure for the application to all adopted accounting statements expected to
give a true and fair view of financial position and results (Hossain, 2007b). The
establishment and enforcement of standards is an important issue for the accounting
profession and its interested users. Determining the best mechanism to employ in
establishment uniform accounting standards may be essential to the acceptability and
usefulness of accounting standards (Belkaoui and Jones, 1996).
The stated objective of establishing the IASC was to pronounce a set of accounting
standards for the member countries with a view to facilitating relevant, reliable, adequate
and uniform disclosure of accounting information in the financial statements of the
enterprises under its global umbrella (Hossain, Cooper and Islam, 2006). Since its inception
in 1973, IASC has subsequently taken the name, spell this out IASB. As the IASB made the
transition to adulthood, its focus has become harmonisation of financial reporting irrespective
3
of geographical boundaries. This change in focus is due to globalisation, or the multi-
nationalisation of companies, has increased the volume of economic exchanges across
nations (Hossain, Cooper and Islam, 2006). The most recent spate of corporate collapses
has thus place an increased mantle of responsibility on the shoulders of the IASB.
International Accounting Standards (IASs) are commonly known now as International
Financial Reporting Standards (IFRSs).
In 2001, supported by industry and governments throughout the world, and modeled after
the Financial Accounting Standards Board (FASB) in the U.S., the IASB was created with a
mandate to produce a single set of high-quality, understandable, and enforceable
International Financial Reporting Standards (Jermakowicz and Gornik-Tomaszewski, 2006).
The IFRS include existing IASs issued by the IASC as well as Standards the IASB issued. In
2002, the Financial Accounting Standards Board (FASB) and the International Accounting
Standards Board (IASB) co-signed the Norwalk Agreement, pledging to work toward a single
set of high-quality global accounting standards. Since that time, the two organizations have
joined forces in drafting several new and updated standards (Gupta, Linthicum, and Noland,
2007) In 2005, the Securities & Exchange Commission's (SEC) in the USA published a
roadmap for the possible elimination of the reconciliation of International Financial Reporting
Standards (IFRS) to US Generally Accepted Accounting Principles.
The World Bank observed that Kazakhstan was among the first in the region to promulgate
national accounting standards. Due to Kazakhstan's early initiatives, the World Bank
acknowledged that "accounting and auditing is more advanced in Kazakhstan than in most
other CIS [Commonwealth for Independent States] countries" (World Bank (p. ii), 2007).
International financial accounting standards (IFRS) and codes were being given mandatory
status around the world even though many of the countries accepting these standards have
no representation or at best weak representation in the body setting these standards (the
IASB) and the bodies compelling them to do so (e.g., the IMF) (Delonis 2004). In some
cases, countries had initially accepted the path to international convergence, but after some
reconsideration reversed their initial decision and deferred their adoption of IFRS till they
were better prepared to do so. One such country which made such a reversal and more
gradual process to accept IFRS was Kazakhstan (IASPlus 2004).
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According to IASPlus (IASPlus 2004) in 2002 the Law on Accounting and Financial
Reporting of Kazakhstan required transition to IAS/IFRS from 1 January 2004 for Joint Stock
Companies and 1 January 2005 for all other companies except for very small businesses.
This law was amended to delay the dates for transition to 1 January 2005 for joint stock
companies and 1 January 2006 for others except for very small firms. Starting from 1
January 2006, enterprises of the Republic of Kazakhstan shall present financial reporting
prepared in accordance with IFRS. This is the requirement of the Law On Accounting and
Financial Reporting (Shamenova 2006, World Bank 2007).
Some banks and financial institutions in Kazakhstan were required to implement IFRS
beginning in 2003. Further, banks in Kazakhstan that chose to participate in that country's
deposit insurance fund have been required to prepare financial statements using IFRS as
well as Kazakh reporting standards. Starting in 2004, all banks were required to participate
in the deposit insurance program. Therefore, all Kazakh banks began preparing IFRS
financial statements for 2004.
Therefore, the current state of IFRS adoption in Kazakhstan is that large companies other
than banks did not have to use IFRS for financial accounting purposes until very recently. In
the case of banks, the imposition has also been through indirect means, i.e., through a
regulation that safeguards the interests of depositors rather than a regulation intended to
implement IFRS. The move to adopt IFRS was initiated due to Kazakhstans moves to seek
development assistance from the IMF and the World Bank (Government of Kazakhstan
1999). Furthermore, most of the impositions to follow international rules have been imposed
through decree rather than through a process of choosing standards by the constituent
organizations in Kazakhstan (World, Bank, 2007).
Kazakhstan is certainly finding it challenging to adopt and implement IFRS. The purpose of
this paper is to review the state of accounting regulation and practice and the stock market in
Kazakhstan and demonstrate that for countries at very early stages of establishing market
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economies, implementation of IFRS could be a premature act. This judgment is made by
examining both the supply and demand aspects of financial reporting and some key
parameters of good governance that support a conducive environment for the adoption of
IFRS in Kazakhstan.
This research is important for the policy makers in Kazakhstan and in countries where
conditions are similar to the conditions in Kazakhstan. These countries may include those in
the European Union (EU) which under the EU directives had to start adopting IFRS in 2005
and other emerging economies of the world. Research into accounting practices in emerging
economies has received some attention by the researchers in recent times (Hossain and
Taylor, 1998), but there is a paucity of research in the context of CIS countries. The purpose
of this paper is to deal with the evolution of Kazkh financial reporting principles in its
historical context, providing the reader with basic understanding of what has been
influencing the shape of Kazakh accounting rules and how they evolved from the communist
times til to date as a transition country having emerging economy. This research helps fill
voids in both of these areas. The rest of this paper is organized as follows. The second
section describes the market environment of Kazakhstan. The third section describes the
regulatory setting of accounting and the common accounting practices in Kazakhstan. The
fourth section explains the impediments to adopting IFRS in Kazakhstan. The final chapter
provides the conclusions, implications and limitations of this study and identifies issues for
future research.
2. The Market Environment of Kazakhstan
Kazakhstan is the largest of the former Soviet republics by area outside Russia. It possesses
enormous fossil fuel reserves and plentiful supplies of other minerals and metals. It also has
a large agricultural sector featuring livestock and grain. Kazakhstan's industrial sector rests
on the extraction and processing of these natural resources and also on a growing machine-
building sector specializing in construction equipment, tractors, agricultural machinery, and
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some defense items. The breakup of the USSR in December 1991 and the collapse in
demand for Kazakhstan's traditional heavy industry products resulted in a short-term
contraction of the economy, with the steepest annual decline occurring in 1994. In 1995-97,
the pace of the government program of economic reform and privatization quickened,
resulting in a substantial shifting of assets into the private sector. The growth in 2001in the
industry sector was 13.5% and in the agricultural sector by 16.9%. In 2001, the revenues of
the Government of Kazakhstan continued to increase reaching 24.2% of GDP and the
inflation by the end of 2001 was 6.4% which seems to be quite reasonable (ADB, 2001).
Kazakhstan enjoyed double-digit growth or more per year in 2002-06 (Figure 1). It was
largely due to its booming energy sector, but also to economic reform, good harvests, and
foreign investment. The country has also embarked upon an industrial policy designed to
diversify the economy away from overdependence on the oil sector by developing light
industry. The policy aims to reduce the influence of foreign investment and foreign
personnel. Upward pressure on the local currency continued in 2006 due to massive oil-
related foreign-exchange inflows (CIA, 2007).
Each emerging market country is different in terms of GNP, population, culture, degree of
literacy, economic and political systems- factors which invariably have an impact on the
nature and extent of financial reporting (Wallace, 1993, 3-4). There is a considerable
diversity in the stage of development achieved by developing countries (as classified by the
United Nations) and a considerable difference in the amount of development, particularly
industrial development, that can be realistically achieved by each of them (Lawrence, 1996).
Authorities in China have long realized that developing a sound financial infrastructure is as
important as building the ports and roads most often associated with economic development
(Ray, 2006). An examination of the annual reports of 18 Chinese companies listed on the
Hong Kong stock exchange reveals how much China's accounting requirements have
changed. China is in the process of implementing a major accounting reform that reflects the
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country's change from a planned to a market economy (David, 1996). David argued that as
China is very interested to attract foreign investment, the government has recognized the
need for accounting requirements that are familiar to, and understandable by, foreign
investors. In 1993, the MOF, with funding from the World Bank, contracted with Deloitte
Touche Tohmatsu International for consultation on the development of some 30 accounting
standards appropriate to China's developing socialist market economy(Ray, 2006). I think
Kazakhstan should share of China for the implementation of IASs/IFRSs.
Among the CIS countries Kazakhstan has achieved outstanding success in restructuring its
economy from central planning to market based system. Important economic reforms have
been made by the Government of Kazakhstan that essentially needs to develop its
accounting system in order to meet the requirements of new market based economy. The
process of economic and political reform in Kazakhstan over the past 15 years or so has
resulted in dramatic steps away from a socialist society towards democracy and a market
economy. Open elections of government officials, the emergence of legitimate private
businesses, the establishment of stock and commodity exchanges, and modest, foreign
investment in the economy of Kazakhstan are important among others. It is very important to
note that the end of the cold war has provided a basis for having an increased cooperation
between Kazakhstan and the West. Among the changes required to move in the direction of
a market economy is, of course, the development of accounting practices and formation of
an accounting profession are important in that they can provide the financial information
necessary in an emerging economy in Central Asia, Kazakhstan.
The securities market of the Republic of Kazakhstan commenced operation in 1993 as a
currency exchange. On November 17, 1993 the National Bank of Kazakhstan and twenty
three other leading commercial banks in Kazakhstan had made the decision to found a
currency exchange, Currency Exchange of Kazakhstan (CEK). At that time it was a
structural division of the National Bank. The main task of the new currency exchange was to
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develop a domestic currency market on the basis of the new national currency called Tenge.
The Exchange was registered as a separate entity on December 30 of 1993 under the name
Kazakhstan Stock Exchange (KASE) as a joint stock company. Although the KASE is only
about 15 years since foundation it played the significant role in the development of whole
Kazakhstan economy. KASE is registered for conducting activities with organization of
trades in securities and other financial instruments at securities market dated February 2 of
2004. KASE has 450 issued shares and 437 shares have floated ordinary shares as of
September 1, 2006 with 59 shareholders. At present the KASE is a universal financial
market having four major sectors (a) the foreign currency market, (b) the government
securities market (including supranational securities of Kazakhstan), (c) the market of shares
and corporate bonds and (the derivatives market. Today, the KASE listing includes the
largest part of Kazakhstans stocks major enterprises. A lot of International organizations are
now incorporated with KASE. The KASE now is attempting to follow the rules and
procedures which are widely accepted in the world especially such practices that are
applicable and used in the United States.
3. Regulatory Setting of Accounting and Accounting Practices in Kazakhstan
It is difficult to ignore the need for suitable financial accounting systems in the emerging
nations in which two-thirds of the world's population are living. Developing countries cannot
afford to wait for accounting to evolve as it has in developed countries because the
influences that shaped accounting in developed countries are most unlikely to occur in the
developing countries by the same degree. For the attainment of higher level of economic
development, developing countries are trying to adopt foreign accounting rules (Hossain,
1999) and Kazakhstan is no exception to this. It has been argued that there is a linkage
between accounting and economic development (Enthoven, 1967). Equally, it has been
argued that the accounting systems of developing countries most conform to their historical,
political, economic and social conditions (Belkaoui, 1985). Although Kazakhstan belonged to
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former Soviet Union before 1988, the level of development has changed with the passage of
time its embrace of market economics has created demands for Western accounting
practices.
The accounting principles in Kazakhstan were developed by the "Statute Concerning
Accounting and reporting in the Republic of Kazakhstan" where the Russian influence on
accounting practices in Kazakhstan is important. The balance sheet is presented into
accounts with liabilities composed of constant capital and debts, because a distinction is
made between long and short-term debts. The profit and loss statement gives priority to the
repository of the global production and lets the choice of the cost - classification by function.
The law concerning companies in the Republic of Kazakhstan forces companies to keep up
to date operational accounts. Accounts must be established in the national currency in
accordance with the Russian accounting plan introduced in January, 1992. Accounting must
be kept in accordance with the current standards but companies have no obligations
concerning annual reports, only for fiscal purposes. Back in 1995, the national accounting
standard-setting body started to develop the Kazakh Accounting Standards (KASs), which
were said to be based on the international standards in existence at that time.
In March 1998, the question of just what type of accounting standards should be adopted
was answered when the Government of Kazakhstan by issuing an official decree approving
international accounting standards towards the accounting reform in Kazakhstan that has
addressed the information needs of two important and primary users of accounting
information- investors and creditors. This seems to be a milestone in the history of
Kazakhstan with regard to its accounting system as to moving towards the capital markets
from a socialist market economy. This was indeed a very important step that was vital to
achieve the ultimate goal of attracting foreign investment in Kazakhstan. However, while
much attention has been given to the information needs of outside shareholders and
creditors, until very recently there has been no official attention given to developing sound
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management accounting practices and techniques for the companies in Kazakhstan. The
Accounting Standards in Kazakhstan were approved by the Resolution of the National
Accounting Commission of the Republic of Kazakhstan as of November 13, 1996. Most of
the standards effective date is January 1, 1997. .
3.1. Implementation of IFRS:
Accounting harmonization centers around the accounting standards (IFRSs) being
developed by the International Accounting Standards Board (IASB) (Brackney and Witmer
2005). The adoption of International Financial Reporting Standards (IFRS) is supported in
many countries because it may improve the quality and international comparability of
financial reporting however, these goals are less likely to be achieved without regulatory
oversight that promotes rigorous and consistent use of IFRS (Brown and Tarca, 2005).
In November 1999, to receive continued support of IMF the Government of Kazakhstan
entered into a memorandum of understanding with the IMF assuring the latter that its banks
and certain other entities would adopt the IFRS (Government of Kazakhstan 1999). In
December 1999, at a meeting of the Joint U.S. and Kazakhstan Commission, the
Government of Kazakhstan promised to bring the national accounting practice into full
compliance with international standards. Later on Kazakhstan businessman, bankers,
accountants, auditors and banking regulators firmly recommended the Government to fulfill
its promise and adopt International Accounting Standards (IAS) quickly. At that time the
international experts both in CIS and other countries also supported the adoption of
accounting standards that would conform to IAS. The globalization of capital markets and
the diversity of accounting standards and reporting practices have accelerated the debate on
harmonization of accounting and reporting rules. Users of financial and accounting
information need a framework of accounting standards by which performance of companies
(including multinational companies) can be evaluated to make investment decisions.
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In 2002 the Law on Accounting and Financial Reporting required transition to IASs/IFRSs
beginning 1 January 2004 for Joint Stock Companies and 1 January 2005 for all other
companies except for very small businesses. This law was amended to delay the dates for
transition to 1 January 2005 (joint stock companies) and 1 January 2006 others (except very
small), respectively. Some banks and financial institutions in Kazakhstan were required to
implement IFRS beginning in 2003, especially those that chose to participate in that
country's deposit insurance fund have been required to prepare financial statements using
IFRS as well as Kazakh reporting standards. Starting in 2004, all banks are required to
participate in the deposit insurance program. Therefore, all Kazakh banks began preparing
IFRS financial statements for 2004 (IASPlus 2004).
Kazakhstan has switched to International Accounting Standards (IAS) starting from January,
2005. According to the law on bookkeeping, the Kazakhstan Government made a list of
companies which were supposed to switch to IAS starting January 1, 2003, joint stock
companies, which are to switch to IAS starting January 1, 2005, and other institutions, which
are obligated to use IAS starting January 1, 2006. According to the October 2007 IAS Plus
update, the current Kazakh situation with regard to mandatory application of IFRSs includes
the following entities: (1) beginning January 2005 all joint stock companies, including listed
companies; (2) financial institutions including banks and insurance companies; and finally,
(3) beginning January 2006, companies defined as public interest entities (PIEs), including
extractive industry companies and companies with governmental ownership. These
requirements are mainly based on a size criterion and, as explained in the World Bank
report, micro-enterprises would continue to apply simplified tax-based rules, whereas small
and medium-sized enterprises (SMEs) will apply KASs.
With capital markets becoming more global, momentum is building for a single set of high-
quality global accounting standards International Financial Reporting Standards (IFRS).
Kazakhstan already requires all companies listed on the Kazakhstan Stock Exchange, joint
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stock companies and financial services companies to prepare their financial statements in
accordance with IFRS. Ultimately the goal will be for all Kazakh companies to follow the
IFRS when preparing financial statements. Kazakhstan's accounting and reporting
environment has significantly progressed since IFRSs have been required by law as the
standards to be used for preparing financial statements. IFRSs are used for reporting to
government agencies, the Kazakhstan Stock Exchange, the Agency for Financial
Regulation, the National Bank, as well as by potential investors and other users.
3.2. Factors Influencing the Financial Reporting Practices in Kazakhstan
There remain significant differences in the financial results presented using Kazakhstan
accounting practices from those using internationally recognized accounting frameworks, for
example International Financial Reporting Standards (IFRS) or US Generally Accepted
Accounting Principles (US GAAP). Local companies seeking to attract foreign investment
are required to be able to present their financial results in accordance with an internationally
recognized accounting framework. The process of compiling international financial
statements requires both a thorough understanding of Kazakhstan accounting standards
combined with an in depth understanding of international accounting and reporting.
The case study of Tyrrall, Woodward, and Rakhimbekova (2007) is worth to discuss here.
These researchers examine the relevance and implementation of IFRS to the emerging
economy of Kazakhstan from independence in 1991 to 2006. They argued that although a
strong case for IFRS relevance cannot be made, even by 2006, Kazakhstan had little choice
but to proceed with IFRS, and that IFRS relevance is likely to increase as Kazakh economic
development continues. Further they observed that implementation of IFRS is proving
problematic, but is taking place slowly which in turn, has implications for the theoretical
status of the IFRS relevance argument and the pathways that nations might follow in
implementing a national accounting system (Tyrrall, Woodward, and Rakhimbekova, 2007).
Finally, they opine that if the only choice of accounting system is IFRS, then the IFRS
13
relevance debate is effectively closed and the real issue is the pathway of change that
nations might follow as they implement IFRS.
The Department of Accounting and Audit Methodology of Ministry of Finance of Republic of
Kazakhstan generally develops the accounting standards, and has developed 32 accounting
standards, recommendations for standards, General Chart of Accounts and the guidance to
prepare and disclose financial information up until now. However there are other influences
that affect the setting and implementation of accounting standards. These are discussed
below:
3.2.1 The Role of the Government: According to the legislation of Kazakhstan, non-
governmental accounting and audit bodies do not have enough power to set national
accounting standards. Moreover, one of the purposes of current reforms, taken by the
Government of Kazakhstan is to create favorable investment environment. As one of the
features of favorable investment climate is the preparation of financial reports based on the
adopted accounting standards, the Government itself has taken the responsibility for the
development, implementation, and supervision of accounting practices.
3.2.2 The Role of Accounting and Auditing Bodies: There are four professional
accountancy bodies in Kazakhstan: Chamber of Auditors of the Republic of Kazakhstan
(CoA), Chamber of Professional Accountants and Auditors (CPAA), Collegium of Audirors,
and Union of Accountants and Auditors of Kazakhstan. As it was mentioned earlier, non-
governmental organizations do not have enough power to set accounting standards,
however, they participate actively in the development of these standards by making their
professional recommendations. The Ministry of Finance is the national accounting standard-
setter. As explained in the 2007 Chamber of Auditors of the Republic of Kazakhstan (CoA)
self-assessment, as a member party of the Consultative Board to the Ministry of Finance, the
CoA assists in development of national standards and other authoritative pronouncements.
According to the World Bank report, the CoA is the main professional body in Kazakhstan.
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Empowered by the 2006 Audit Law, "the CoA has the authority to apply to the Ministry of
Finance to withdraw, suspend or revoke audit licenses, and it is required, and has the
authority under the new Audit Law, to undertake the external quality control of its members"
(World Bank, 2007; p. 7). Despite these steps to ensure quality, the World Bank observed
that the "Kazakh accounting and audit profession suffers from a number of weaknesses,
which results in a chronic lack of qualified professionals" (World Bank, 2007; p. iii). The
report also pointed to inadequacies in practical experience of accounting and auditing
professionals and lack of trained instructors.
3.2.3 The Role of Multinational Corporations: After the independence of Kazakhstan,
multinational companies have discovered many successful opportunities for conducting
business in Kazakhstan. However, an increasing number MNEs in Kazakhstan are from
countries where national accounting standards are based on IFRS. In order to attract foreign
investments of MNEs, the Government of Kazakhstan has taken into account this factor
while developing and setting accounting standards. Thus, it can be seen that multinational
companies are a factor in Kazakhstan adopting IFRS.
3.2.4 The Role of Kazakhstan Stock Exchange (KASE): KASE is not so developed as
compared with the stock exchanges of the Western countries. However, KASE have
significant influence on accounting standards in that it requires providing financial
information in accordance with the adopted accounting standards in Kazakhstan. KASE
supports the use of internationally acceptable standards. According to the listing
requirements of the KASE Securities are considered to conform to the listing requirements
with regard to their issuer adhering to accounting standards if the issuers presents the Stock
exchange with a financial statement that has been prepared in compliance with international
accounting standards (IAS) or in compliance with accounting standards effective in the USA
(USA GAAP) (KASE 2003 Section 16). The requirements to publish financial statements for
listed companies are contained in the listing rules of the Kazakh Stock Exchange (KASE).
15
Issuers are required to submit quarterly and annual reports to the stock exchange. However,
the KASE conducted very little monitoring of reporting requirements. The World Bank (2007)
suggested that disclosure of information by listed companies on the stock exchange website
be timely and accurate, and that the KASE strengthen its oversight in this regard.
3.2.5 The Role of the International Regional Federation of Accountants and Auditors
EURASIA (IRFAA EURASIA): IRFAA EURASIA is an association of accountants and
auditors from the former USSR countries that was established in 1999 with a view to assist
and support to the national organizational of accountants and auditors. This organization has
brought together 17 professional organizations of accountants and auditors from 9 countries
in CIS. In doing so, it has made a significant contribution to the economic development of
the Eastern European and former USSR countries. IRFAA is actively participating in the
translation of International Accounting Standards and International Standards on Auditing.
IRFAA maintains co-operation with international, regional and national institutions of other
countries. These institutions include the International Federation of Accountants (IFAC) and
the International Accounting Standards Committee (IASC).
3.3. Accounting Principles and Practices
In accordance with the Edict # 2732 of the President of the Republic of Kazakhstan which
has the effect of law Concerning Accounting, as of December 26, 1995 the acts regulating
the accounting system and financial reporting in Kazakhstan and establishing the main
principles and general accounting rules, requirements on internal controls and external audit
for the entities include: The Edict on Accounting, the Accounting Standards, and methodical
recommendations and instructions to the standards. In the formulation and application of its
policy it is required that firms comply with the following principles of accounting:
Accrual. Revenues and expenses are recognized and recorded in the financial statements
as they are received or incurred (and not on the basis of when cash is received or paid).
16
Going Concern. The entity is considered to be a going concern, i.e. it will continue to
operate in the foreseeable future. It is assumed that the entity has neither the
intention nor the need to liquidate or curtail materially the scale of its operation.
Understandability. The information provided in the financial statements is
understandable to users.
Relevance. To be useful, information must be relevant to the decision-making and
event evaluating needs of users.
Materiality. Accounting policy should be aimed at disclosure of the information in the
financial statements which is material if its omission or misstatement could influence
the economic decisions of the users of financial statements.
Reliability. Information is reliable when it is free from material error or bias and can
be dependent upon by users.
Neutrality. To be reliable, the information presented in the financial statements must
be free from bias.
Prudence. Inclusion of a degree of caution in the exercise of the judgments needed
in making the estimates required under conditions of uncertainty, such that assets or
income are not overstated and liabilities or expenses are not understated.
Completeness. To be reliable, the information in the financial statements must be
complete.
Comparability. To be useful and meaningful, financial, information should be
comparable from period to period. Users need to be informed of the accounting
policies employed by the entities in the preparation of the financial statements, any
changes in those policies and the effects of such changes.
Consistency. Accounting policy elected by the entity is applied on a consistent basis
from one period to the other.
True and fair presentation. Financial statements must show a true and fair view of
the financial position, performance, changes in Cash Flows of the entities.
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A typical annual report of a company in Kazakhstan comprises a balance sheet, a statement
of profit and loss, a cash flow statement, explanatory notes to these statements and other
additional information, including schedules, and diagrams. Financial statements prepared by
a typical Kazakhstan company should contain information on the name of the legal entity,
the location, the reporting date and the accounting period. In addition, a brief description of
the nature of the activities of the organization, its legal form and the currency in terms of
which the financial statements are presented, should also be given.
3.4. Measurement Practices
Kazakhstan was hyperinflationary for a number of years following the collapse of the Soviet
Union in 1991 (World Bank, 2007), yet its accounting practices are primarily based on
historical cost principles. The following explain the nature of the key measurement practices
in Kazakhstan:
3.4.1 Valuation of Fixed Assets
In Kazakhstan, fixed assets are valued at their original cost and are subject to revaluation.
As a result of revaluation fixed assets are carried at current cost. The amount revaluation is
allocated to retained earnings while the asset is used in operations. In case of the disposal
of fixed asset the total amount of revaluation can be allocated to retained earnings,
regardless of the reasons.
Material assets, which are intended as tangible assets, are valued at their initial value. The
value of tangible assets, which have been purchased as a result of exchange transactions,
are measured at the current value of the tangible assets received, which is equal to the
current value of transferred assets, with an adjustment of the sum of money received
(transferred).
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Depreciation can be calculated by using different methods: straight-line method of
depreciation, production method of depreciation (the cost is written down proportionally to
the percentage of works completed), accelerated depreciation, declining balance method,
and the sum of the years digits method (cumulative method).
3.4.2. Revaluation of Fixed Assets
Tangible assets, as a result of a revaluation, are recorded in accounting records at their
current value. The wear and tear of fixed assets, which is accrued on the date a revaluation
is made, is adjusted in proportion to the change in the value of the tangible assets. The sum
of a revaluation of tangible assets is recorded in the section of the accounting balance sheet
Shareholder capital. The sum of a revaluation during the use of assets is recorded in
undistributed income. The total sum of a revaluation may be recorded in undistributed
income only at the moment an object is disposed, irrespective of the reason.
The selected method of depreciation is determined by the accounting policy and applied
consistently from one period to another. Most companies in Kazakhstan use 1C: Enterprise
Accounting (a universal software system for automation of accounting operations, it can
support various systems of book-keeping, various accounting methodology, and can be used
in enterprises with various types of activity) it supports only straight-line method of fixed
assets depreciation, that is why this method is most widely applicable.
The various methods for the accrual of depreciation may be applied to various types of
tangible assets. However, no more than one method may be applied to one type of tangible
asset. The chosen method for the accrual of depreciation is determined in accordance with
accounting policy and applied consecutively from one reporting year to another. In the event
of a change to the method for accruing depreciation, the reasons for the changes is
disclosed.
19
3.4.3 Valuation of Intangible Assets
Intangible assets are recognized as assets when it is probable that the future economic
benefits that are attributable to the asset will flow to the company and the cost of the asset
can be measured reliably. Intangible assets are initially measured at cost. Subsequently,
intangible asset should be amortized over the best estimate of its useful life.
3.4.4 Accounting for Inventories
Inventories should be measured at the lower of cost and net realizable value. Net realizable
value is used when the cost cannot be recoverable on the reason that they have been
damaged or they have become wholly or partially obsolete or their selling prices have
declined. Net realizable value of inventories equals estimated cost of sale in the course of
ordinary business activities less costs of completion and selling expenses. The cost of
inventories includes: costs of acquisition, transportation and handling costs related to
bringing inventories to their present location and to appropriate condition, costs of
conversion of products (works and services). Valuation of the cost of inventories is done by
means of one of the following methods: Weighted average; FIFO; LIFO; Specific
identification. Weighted average method of fixed assets depreciation is popular in Kazhstan,
and that is why this method is most widely applicable to inventories as well.
3.4.5. Foreign currency transactions
At each balance sheet date monetary items, including receivables and payables in foreign
currency, are recorded in tenge by using the closing exchange rate; and non-monetary
items, including shareholder capital, tangible assets, inventory, intangible assets, which are
initially valued in foreign currency, are recorded in tenge by using the exchange rate valid on
the date of the transaction. Foreign currency transactions should be recorded on initial
recognition of Kazakh tenge by applying the exchange rate at the date of the transactions.
Most companies follow KAS 9 Foreign Currency Transactions.
20
4.4.6 Accounting for taxes
Tax expense for a reporting period is determined on the basis of tax effect accounting using
the liability method. Under the liability method, taxes on income are considered to be an
expense incurred by the legal entity in earning income and are accrued in the same period
as the income to which they relate. The resulting tax effects of timing differences are
included in the tax expense and are in deferred tax item of the Balance Sheet. The deferred
tax may be a debit or a credit balance, while a debit balance presents prepaid future taxes
and a credit balance is the tax liability payable in future.
A tax payment for a reporting period is determined on the basis of recording the tax effect
using the liability method. Tax legislation allows for losses from entrepreneurial activities to
be carried forward for a certain length of time in order to write them off at the expense of
taxable income of future periods. A loss incurred ensures the receipt of a potential saving
due to a decrease in a tax payment as a result of a credit for the loss. The reporting period in
which this saving is included in a calculation of net income, may be changed.
Savings on tax payments are included in a calculation of net income (loss) for the period in
which this loss was incurred, if on the basis of the principle of prudence a legal entity is
totally convinced that future taxable income is sufficient in order to cover this loss. In this
respect, the following circumstances serve as an assurance whereby the loss results from
extraordinary items, and the stable profitability of the enterprise, during a long period of time,
gives rise to an assurance that the legal entity will be profitable in the future.
3.4.7. Accounting for Leases
Leased assets are recorded in the accounting records of a lessee as an asset, and lease
payments due are recorded as liabilities. At the inception of a lease, liabilities on lease
payments are recorded at the sale value or at the discounted value of lease payments, if
they are lower than the sale price. When calculating the discounted value of lease payments
21
the coefficient for the discount is the interest rate implicit in the lease. If it is impossible to
determine the rate, the lessees incremental borrowing rate of interest is used.
In the financial statement of a Kazakh company, a finance lease should be reflected on the
Balance Sheet of the lessee by recording at the inception of the lease, the leased property
as an asset and lease payments as a liability. At the inception of the lease the obligations on
lease payments are recorded at the Realizable Value or the present value of the lease
payments, if it lowers than the Realizable Value. Realizable value is the amount an asset
could be exchanged for between knowledgeable, willing parties in an arms length
transaction. The rental expense for an operating lease should be recognized each
accounting period of the lease term on a systematic basis. An asset leased under financial
lease agreement should be recorded in the Balance Sheet as a receivable in the Balance
Sheet at an amount equal to the net investment in the lease. Lease payments are
recognized by the lessor as income from capital investments in every reporting period.
Assets held for operating leases should be recorded as fixed assets in the Balance Sheet of
the lessor.
3.4.8. Accounting for Goodwill
Goodwill is the excess of the purchase price for the company as a whole over the current
price of the net assets acquired by the bidding company. This is commonly referred to as
purchased goodwill and is, in effect, a premium paid to reflect the future earnings capacity
of the acquisition. Purchased goodwill should be capitalized and systematically amortized
against future earnings. Internal generated goodwill is not considered as an asset. Goodwill,
created within an entity is not acknowledged as an asset. Goodwill is capitalized if it was
purchased and amortized during its useful life. The term of useful life of goodwill should not
exceed the entitys term of activity from the moment goodwill is ready to be utilized, unless
otherwise provided for by Kazakh law or an agreement.
22
3.4.9. Research and Development
Research and Development should include all expenditures that are directly connected to
realization these works. Research and Development expenditures are not capitalized and
considered as expenses for that accounting period. However, development costs can be
capitalized only after technical and commercial feasibility of the asset for sale or use have
been established. This means that the company must intend and be able to complete the
intangible asset and either uses it or sells and be able to demonstrate how the asset will
generate future economic benefit. Research costs are recognized as expenditure in the
same reporting period as they were incurred and as assets in subsequent reporting periods.
Development costs are recognized as expenditure in the same reporting period as they were
incurred, only if they do not meet the criteria for passing as an asset as (a) the sum of
development costs can be defined accurately; (b)the technical feasibility of the development
product may be demonstrated; (c) the entity intends to produce and market the product, or to
use it itself; (d) a market for the development product exists, or that usefulness can be
demonstrated if it is planned to use the product within the entity; and (e) the existence of
appropriate resources of access to them for completing, marketing or using the development
product can be demonstrated.
3.4.10. Consolidation Principles and Practices
In Kazakhstan a parent company should present consolidated financial statements. In
preparing consolidated financial statements, the financial statements of the parent
partnership and its subsidiary partnerships are combined on a line basis by adding together
like items of assets, liabilities, equity, income and expenses. In is important that the
consolidated financial statements present financial information about the group as that of a
single enterprise. Financial statements of the main organization and its subsidiary
organizations are joined by item and on a line-by-line basis by means of accumulating
information concerning assets, liabilities, shareholder capital, income and expenses. In order
23
that consolidated financial statements present financial information concerning a group or a
single organization, a Kazakh company needs to exclude (1) the balance sheet value of
investments of the main organization in each subsidiary and the share of the main
organization in the shareholder capital of each subsidiary; the balance of accounts for
mutual settlements between main and subsidiary organizations; inter-group operations in
relation to income, expenses and dividends, and also undistributed income or losses that
arise as a result of these operations, apart from those losses that cannot be recovered; and
(2) to determine the minority share in the net assets of a subsidiary organization and
disclose this share in the consolidated balance sheet separately from liabilities and the
shareholder capital of the main organization; to identify the minority share in net income of a
subsidiary organization, which decreases the income of a group when determining the sum
of net income belonging to the main organization.
A parent partnership which issues consolidated financial statements should consolidate all
subsidiary partnerships, foreign and domestic, other than those cases when: (a) control is
intended to be temporary because the subsidiary partnership a acquired and held
exclusively with a view to its subsequent disposal in the near future; and (b) it operates
under severe long-term restrictions which restrictions which significantly impair its ability to
transfer funds to the parent partnership. In a parents separate financial statements
investments in subsidiaries that are included in the consolidated financial statements should
be either (a) accounted for using the equity method; or (b) accounted for using the method
under the parents accounting policy for long-term investments. Investments in subsidiaries
that are excluded from consolidation should be accounted for in the parents separate
financial statements as if they are investments. In Kazakhstan two methods are followed
while preparing the consolidated balance sheet the equity method and the cost method.
An investor preparing consolidated financial statements accounts for investments associated
partnerships by using the equity method, except when (a) investments are acquired for the
24
purpose of their sale in the nearest future and (b) an associated partnership operates under
severe long-term restrictions that significantly impair its ability to transfer funds to the
investor. In these cases they should be accounted for by using the cost method.
4. The Impediments to Implementing New Accounting System in Kazakhstan
The GDP of Kazakhstan has been improving considerably over the last decade. Figure 1
shows that after several years of decline in the years prior to and after its independence in
1991, Kazakhstans economy started to recover in 1999. The recovery has continued up
until the current times. A major impetus for the recovery came from the World Bank. Figure 2
shows that in the years prior to 1999 Kazakhstan received ample support from the World
Bank. However, the USAID, the World Bank, the IMF and other development agencies have
been pressuring private sector accounting and auditing associations in emerging market
economies to follow international accounting and auditing standards to qualify for their
financial assistance (Delonis 2004; McGee 2005). Although the intentions of these initiatives
should be beneficial in the long run, in many of the emerging countries the benefits in the
foreseeable future are seem to non-existent. In this section we attempt to show that this
initiative to adopt international standards could be highly premature and may require the
development agencies and other users of accounting information to lower their expectations
about. For this purpose we analyze Kazakhstans situation and show that Kazakhstan has
both supply side and demand side impediments for the adoption of IFRS.
The reversal in the decision to adopt IFRS for non-banking entities (IASPlus 2004) and to
adopt them on a more graduated time table is not unexpected. Kazakhstan although has
achieved outstanding success in restructuring its economy from central planning to market
based system, it is still in its infancy as a market driven economy. Most of the market rules
and institutions, including the accounting regulations, have been put in place in a matter of a
decade. Similar developments took place over a century or more in the developed market
economies of the world. Furthermore, most of these rules have been put in place by decree
25
rather than by market choice to satisfy the immediate needs of donor agencies rather the
needs of investors in the capital markets. This method of adopting the rules is reminiscent of
the methods of rule setting of the Soviet era, but this time the rules evolved in a democratic
setting, but with no representation of the constituents of Kazakhstan.
The Accounting Standards in Kazakhstan were approved by the resolution of a government
body the National Accounting Commission of the Republic of Kazakhstan as of November
13, 1996 those were effective in just over a month from January 1 1997. The 32 accounting
standards of Kazakhstan were developed by the Department of Accounting and Audit
Methodology of Ministry of Finance of Republic of Kazakhstan. The same ministry provided
the General Chart of Accounts, the guidance to prepare and disclose financial information.
According to the legislation of Kazakhstan, non-governmental accounting and audit bodies
do not have enough power to set national accounting standards. In order to attract foreign
investments of MNEs, the Government of Kazakhstan has taken into account this factor
while developing and setting accounting standards. The Stock Market in Kazakhstan (KASE)
is not so developed and but it has significant influence on accounting standards. KASE
requires providing financial information in accordance with the adopted accounting standards
in Kazakhstan. The Edict of the President of the Republic of Kazakhstan gave the effect of
law to current and subsequent accounting rules on December 26, 1995 # 2732. This edict
governs the acts regulating the accounting system and financial reporting in the Republic of
Kazakhstan and establishes the main principles and general accounting rules, requirements
on internal controls and external audit for the entities include the accounting standards and
methodical recommendations and instructions to the standards. Eventually, as mentioned
earlier, the adoption of IFRS was also at the behest of external agencies and multinational
entities. Although, due to globalization pressures there was some support from those
interested in opening up the Kazakhstan market, not many knew much about the road ahead
for the implementation of IFRS in a setting which just beginning to adopt the basic tenets of
capitalism.
26
We analyze the impediments to the adoption of IFRS by examining the supply and demand
side issues of financial reporting, and some general societal setting issues that affect both
the supply and demand issues of financial reporting.
4.1. The Supply Issues:
McGee (2005) identified a critical problem in the adoption of IFRS and international auditing
standards and associated initiative of IFAC in the former Soviet Union countries/ CIS
countries. This critical problem is that of supply of qualified accountants. While expanding
economies have always face the shortage of professionals such as accountants, the case of
CIS countries is more acute. Prior to their independence after the break up of the Soviet
Union, these countries were part of a centrally planned economic system that had no need
for an investor oriented accounting system. Accounting mainly for the production needs of
the planned economy (Ash and Strittmatter 1992).
As per McGee (2005), one of the keys to attracting FDI is having financial statements that
international investors can trust. However, he argues that merely adopting IFRS is not
enough. International investors have to feel confident that the accountants who prepare the
financial statements and the auditors who audit them are fully conversant in the international
standards that they use. MacGee (2005) examines the certification procedures for
accountants in CIS countries and its success and expresses the difficult obstacles that lie
ahead in producing sufficient qualified accountants in these countries. He provides quite
dismal statistics in terms of the number of graduating students. He shows that for
Kazakhstan there were only 294 candidates for a qualification Certified International
Professional Accountant (CIPA) in 2004 and only 16.3% of them passed the examinations.
For another qualification Certified Accounting Practitioner (CAP) there were 1,431
candidates and 43.4% passed. This suggests that the number qualified accountants coming
into the profession is a mere trickle. The small number of qualified accountants entering the
27
profession in Kazakhstan will certainly stifle the adoption of more sophisticated accounting
rules such as IFRS.
The lack of experience in exercising accounting standards and practices has become a
reason for the resistance by several companies in Kazakhstan with regard to the adaptation
of accounting standards in Kazakhstan as it requires necessary and adequate explanation
and guidance for the preparation of Corporate Annual Reports (CAR). The professional
accountants seem to have a general lack of confidence in preparing the CAR based on the
adopted accounting standards. The practicing accountants in Kazakhstan believe that the
CAR does not reflect economic reality and they found it very difficult to understand and apply
the new standards. In addition, inconsistencies among different rules and regulations add to
the confusion. Further, the disinclination to learn and apply new standards and practices is
accentuated by the priority of tax requirements and a less than vigorous demand for
reporting based on the new accounting standards. It is well known that the accountants first
priority today is to satisfy the tax authorities and the chief accountant is legally liable for any
material mistake in the tax accounts. The researcher(s) feel that the company managers and
accountants do not engage in a close working relationship in the development of accounting
practices in Kazakhstan. The researchers strongly believe that accountants do not maintain
appropriate contact with management. This means that in resolving accounting treatments,
the accountants do not have a clear cut idea about how to deal with the various elements of
the financial statements based on the adopted accounting standards. Not only that the
company management considers the role of the accountants as a buffer to keep away the
tax authorities and to minimize penalties and fines.
4.2. The Demand Issues:
On the demand side also the picture is far from being positive. Although the initial
implementation of IFRS was due to the needs of international financial agencies, the main
basis of IFRS is its use in private capital markets. In this regard, IFRS does not seem to
28
have an immediate future Kazakhstan. The stock market in Kazakhstan is relatively young
and small. Relative to the developed capital markets the Kazak stock market grew rapidly in
recent years, but its size yet to give an impression of a market. Furthermore, its meteoric
growth of the early years is now slowing down and there are signs of shrinking appearing in
the key statistics.
Financial statement information assists users to forecast the future cash flow of an
organization, in particular, the timing and the certainty of the generation of money and its
equivalent. It has been argued that the objective of financial statements is to provide users
with useful, relevant and reliable information on the financial position of the legal entity, its
performance and changes in the financial position during the reporting period (Mueller and
Kelly, 1991). According to Table 1 the market capitalization of the KASE has seen double to
triple digit growth each year since 2002 (83.6% in 2003; 62.5% in 2004; 1671.1% in 2005).
This is much higher than the comparable statistics for NYSE in the same years (25.66% in
2003; 12.17% in 2004; 4.75% in 2005). Therefore, this should signify a growing number of
users of financial statements in Kazakhstan.
However, as shown in Table 2, the actual trading in KSE is somewhat irregular. Its growth
has been erratic (27.9% in 2003; 132.1% in 2004; 1.7% in 2005). It is only a small fraction of
the total market capitalization (0.03% in 2002; 18.07% in 2003; 25.79% in 2004; 9.82% in
2005). The comparable ratios of value of shares traded to market capitalization at NYSE are
much higher (87.44% in 2002; 116.90% in 2003; 109.38% in 2004; 94.23% in 2005). Further
evidence in Tables 4 and 5 shows that the increase in the number of firms and new public
offerings is slowing down after a spectacular initial increase. Also, the number of firms in the
exchange remains far too small of a viable exchange. Firms of foreign origin have also not
shown little interest in directly listing in KSE. Another indicator goes against the immediate
popularity of IFRS in the equity side of the stock market. Table 5 shows that bond trading
seems to be the more popular than equity trading in recent years. However, it has taken a
29
dip in 2005. Furthermore, most of the trading is in public sector bonds whereas the use of
IFRS is for private sector investments.
4.3. General Impediments:
Table 6 provides some governance indicators for Kazakhstan form 1996 to 2005 compiled
by its largest foreign financial assistance provider, the World Bank. The indicators show a
difficult road ahead for Kazakhstan for the adoption of Western oriented regulations in the
near to medium term future. The governance indicators cover a range of areas of concern to
everyday running of government and the conduct of business activities. Except for political
stability in 2002 and 2003, for all of these indicators Kazakhstan has percentile rank ratings
lower than 0.50, meaning that the countrys governance systems rank in the lower half of the
list of countries in the world when evaluated for governance. Moreover, many of the ranks
even lower than 0.25, suggesting that the country has very weak governance settings.
Perhaps, the rank rating for political satiability is closer to or at times above 0.50 than the
other indicators because of the weak democracy that still dominates the country. Although
the country is progressing towards democracy, it is far from having a change in government
through democratic means.
The reason to feel skeptical about the medium term change towards better governance is
the fact that none of the indicators of governance in Table 6 had a steady improvement in
the last ten years. One, Voice and Accountability, which has direct implications for financial
reporting, even became weaker over time. Two others that have implications of how
effectively accounting rules will be implemented, Regulatory Quality and Rule of Law, had
improved only marginally and remained very weak.
To sum up, the statistics of Tables 1 to 5 suggest that the setting for the use of IFRS is far
from being that of a buoyant capital market. Since IFRS are mainly for private equity
transactions it is unlikely that its adoption has any significance for the Kazakhstan private
30
sector flows in recent years. Furthermore, Kazakhstan has seen little improvement in its
overall quality of governance to suggest that IFRS will have a meaningful implementation
and will have implications for the wider improvement of governance of companies. The
capital inflows show sign of other factors that are playing a role in the flow of capital into
Kazakhstan. Perhaps it is mainly driven by the vast natural resources that Kazakhstan has
and not the quality and transparency of its stock exchange.
More specifically for accounting, World Bank (2007) is highly skeptical about capabilities of
Kazakhstan to embrace the requirements of IFRS. Its states that much remains to be done
if Kazakhstan wishes to raise the quality of accounting and auditing practices to a level in
line with more-developed economies. (p. ii). It finds significant differences between the
accounting policies used and disclosures made under KAS and those which are required
under IFRS. While World Bank (2007) found the quality of bookkeeping for cash and similar
transactions high, it found companies struggling with accrual accounting and disclosures,
leading to significant non-compliance with KAS and IFRS rules.
One obvious reason for the lack of good quality accruals accounting is the newness of such
a practice to a country that was until recently under a completely centrally planned system.
As per World Bank (2007), the country suffers from an acute shortage of qualified experts in
accounting, auditing and valuation to support the kind of accrual accounting demanded by
IFRS. While standards and practices were found to be lacking by World Bank (2007), this
problem was exacerbated by the fact that general purpose financial statements are not
generally perceived as useful by the significant users of financial information .. (p. 22). This
last finding is worth reflecting on.
A further examination of World Bank (2007) indicates that the experts at World Bank have
not given much thought to the importance of user needs in Kazakhstan. Most the
recommendations of this document is focused on implementation of accounting principles
and standards that are foreign to the context of Kazakhstan. Some recommendations are
31
more towards creating a market for external interests rather looking at the needs of the
market within Kazakhstan. For example, the educational needs of the professionals
recommended by World Bank (2007) are tuned towards implementation of standards and
practices which in the document itself found to be completely ignored by the users of
financial reporting in Kazakhstan. This leads to our question, in the current setting
Kazakhstan, whose interest would IFRS and their associated rules serve. This a question
which begs an answer for many of the developing countries that are being recommended to
adopt IFRS by institutions such as the World bank (see the World Ban website
http://www.worldbank.org/ifa/rosc_aa.html on Reports on the Observance of Standards and
Codes). Our current observation is that the current means of implementation through edicts
is not focused on serving the needs of the users of financial statements in the developing
countries. It is an externally driven initiative to meet the needs of meeting the needs of
external financiers and those interested in exploiting the resources in these developing
countries. If there is to be a sustainable improvement established in the accounting
practices, a much more user initiated or user involved initiative needed. Furthermore, such
an initiative should be allowed to evolve as per the needs of each country context.
5.0. Conclusion
Kazakhstan has achieved outstanding success in restructuring its economy from central
planning to market based system. The purpose of this paper is to review the state of
accounting regulation and practice and the stock market in Kazakhstan and demonstrate
that for countries at very early stages of establishing market economies, implementation of
IFRS could be a premature act. This judgment is made by examining both the supply and
demand aspects of financial reporting and certain key parameters of good governance that
may affect the adoption of IFRS in Kazakhstan. In doing so we argue that the approach to
adopting IFRS is by decree and at the behest of external entities such as international
financial agencies and multinationals and without much attention to the actual circumstances
32
and needs of Kazakhstans accounting, regulatory and socio-economic setting. This has led
to a somewhat erratic start by the regulators to establish IFRS as the financial reporting
standards of Kazakhstan.
Although Kazakhstan is determined to adopt IFRS, our findings suggest that emerging
market economies like Kazakhstan have a tough road ahead. World Bank (2007) explained
that KASs, although said to be based on IFRSs, differ significantly from their international
equivalents. Differences arise largely from fact that KASs were developed in 1995, and,
therefore, do not take into account any subsequent revisions made to the international
standards. Thus, certain areas covered by IFRSs are not addressed by an equivalent KAS.
Additionally, the assessment identified differences in disclosure requirements and
accounting policies under the two frameworks. According to the World Bank, "there are
differences between the accounting policies used and disclosures made under KAS and
those which would be required under IFRS. This suggests that the differences between KAS
and IFRS are greater than claimed" (World Bank, 2007; p. v). However, at the time of the
World Bank assessment there were 27 KASs. World Bank (2007) noted that the quality of
the KAS-based financial statements was very poor and non-compliance issues were
rampant. The report added that "this could generally be attributed to the lack of capacity to
comply and enforce KAS on the part of preparers, auditors, and regulators" [World Bank,
2007; (p. vi)].
The World Bank made detailed recommendations with regard to Kazakh accounting
practices and suggested establishing an Accounting Standards Committee or an Advisory
Council representing various stakeholders, with the goal of developing a simplified financial
reporting system for companies that do not fit the PIE criteria. The report also recommended
establishing "a working group consisting of standard setters and tax administration officials
to consider how to minimize the barriers to accounting reform currently resulting from the
Tax Code and its administration" (p. 24). Additionally, the assessment suggested that "the
33
existing translation process be enhanced in order to achieve a sustainable translation
process in Russian and/or Kazakh language whereby the official translation of IFRS is
readily available and affordable across the country" (World Bank, 2007; p. 24).
The Kazakh accounting framework is primarily governed by the provisions of the Law on
Accounting and Financial Reporting of 1995 and its subsequent amendments of 2007. In
addition to stipulating accounting standards, the Law on Accounting and Financial Reporting
also establishes certification and competency standards for professional accountants. As for
the Law on Joint Stock Companies, the report noted that "this Law also requires that a
company must publish in mass media a balance sheet, income statement, cash flow
statement and a statement of changes in equity" (World Bank, 2007; p. 3). Additionally, "the
Law on Securities Market requires any company making an Initial Public Offering (IPO) to
disclose information included in financial statements to any interested party" (World Bank,
2007; pp. 3-4).
Implementing IFRS will not be easy, for a variety of reasons as all international standards
have not been translated into Russian language. Many Kazakh accountants are not
sufficiently familiar with international standards to implement them. Some universities in
Kazakhstan have only recently started teaching international standards. The accounting
Profession in Kazakhstan is not yet prepared to offer comprehensive courses on
international standards. Current Kazakh Accounting Standards conflict with international
standards in several important ways and these conflicts will not be resolved in the near
future.
We find serious gaps between the means to adopt IFRS and the needs of users of financial
reports. At this stage of research on these economies our conclusion is that the adoption of
IFRS is a pre-mature action by the policymakers and is likely to carry little benefits for these
economies in the foreseeable future. An implication of this finding is that accounting
34
policymakers should adopt a more planned and graduated approach to adopting IFRS in
emerging economies such that these economies are able to meaningfully adopt IFRS.
Throughout the transition period Kazakh financial reporting principles
seems to face many obstacles for the successful implementation of
IFRSs as promulgated by IASB>

Like Lesko (2007) it can be argued that a full understanding of the
development of modern financial reporting principles, especially in the
transition/emerging economies, is not possible without sound
knowledge of the socio-economic context of their formation
Kazakhstan as a transition country like Poland is not an exception to
this.

(Alp and Ustundag, 2009)

Alp and Ustundag (2009)

Alp and Ustundag (2009) attempted to explain the development
process of accounting standards around the world and its
practical results in an emerging economy: Turkey. From the
viewpoint of an emerging economy which is in need of foreign
capital and foreign investments to finance its economic growth,
the need for high quality financial information has vital
importance (Alp and Ustundag, 2009). The need for IFRS in
Kazakhstan can be argued has brought up by the same reasons as
a developing country and as an emerging market like Turkey and
China. Alp and Ustundag (2009) argues that with the
internationalization of capital markets and the increased volume
of international investments, companies functioning in emerging
economies like Turkey needed to provide high quality financial
information to access financial resources. Furthermore,
internationally accepted and reliable financial information is also
needed for the overseas customers of the domestic companies
(Alp and Ustundag, 2009). Like Turkey, another reason facilitating
the need for IFRS is Kazakhstans candidacy for European Union
membership in future.


During this adoption process, Turkey encounters several
complications such as complex structure of the international
35
standards, potential knowledge shortfalls, and difficulties in
application and enforcement issues (Alp and Ustundag, 2009).



Alp, A., and Ustundag, S (2009). Financial Reporting Transformation: The
Experience of Turkey. The Critical Perspectives on Accounting: Special Issue
Accounting for the Gobal and the Local: Vol. 20, Issue 5, pp. 680-699.

36
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40
Figure 1

Source: World Bank (2006)
Figure 2

Source: World Bank (2006)
41
Table 1: Market Capitalization
Kazakhstan NYSE
USD millions Growth USD millions Growth
2005 10,528.7 167.1% 13,310,591.6 4.75%
2004 3,941.9 62.5% 12,707,578.3 12.17%
2003 2,425.9 83.6% 11,328,953.1 25.66%
2002 1,296.1 9,015,270.5
Source: World Federation of Exchanges (http://www.world-exchanges.org)

Table 2: Value of Share Trading
Kazakhstan NYSE
Total Domestic Foreign Investment
Funds
Growth % of Mkt
Cap
Total % of Mkt
Cap
USD
millions
USD
millions
USD
millions
USD
millions
USD
millions

2005 1,033.5 1,033.5 0.0 0.0 1.7% 9.82% 14,125,292 94.23%
2004 1,016.4 1,016.4 0.0 0.0 132.1% 25.79% 11,618,151 109.38
%
2003 438.4 438.4 0.0 0.0 27.9% 18.07% 9,691,335.3 116.90
%
2002 0.3 0.3 NA NA 0.03% 10,310,055 87.44%
Source: World Federation of Exchanges (http://www.world-exchanges.org)

Table 3: No. Companies
Total Local Foreign Growth
2005 94 90 4 18.99%
2004 79 75 4 16.18%
2003 68 68 0 36.00%
2002 50 50 0
Source: World Federation of Exchanges (http://www.world-exchanges.org)

Table 4 Public Offerings
Initial Secondary Total
USD millions USD millions USD millions
2005 62.9 970.6 1,033.5
2004 25.4 991.0 1,016.4
2003 0.0 165.7 165.7
2002 NA NA NA
Source: World Federation of Exchanges (http://www.world-exchanges.org)


42
Table 5: Value of Bond Trading
Total Domestic, Private Domestic, Public Foreign Growth
USD millions USD millions USD millions USD millions
2005 6,437.3 1,710.4 4,726.0 0.8 -3.72%
2004 6,685.8 884.1 5,794.9 6.8 118.08%
2003 3,065.8 627.5 2,438.3 0.0 Very Large
2002 0.3 NA 0.3 NA

Table 6 Governance Indicators of Kazakhstan
Voice and Accountability 2005 2004 2003 2002 2000 1998 1996
Estimate (-2.5 to + 2.5) -1.19 -1.21 -1.15 -1.17 -0.99 -0.8 -1.08
Percentile Rank (0-100) 15 14 15.5 14 19.3 26.6 19.2
Standard Error 0.11 0.1 0.12 0.13 0.17 0.19 0.19
Number of surveys/polls 10 11 9 9 8 6 4
Political Stability/No Violence
Estimate (-2.5 to + 2.5) 0.03 -0.01 0.24 0.25 0.09 0.1 -0.28
Percentile Rank (0-100) 46.7 44.8 52.4 52.4 48.6 48.1 34.9
Standard Error 0.21 0.21 0.23 0.21 0.26 0.26 0.32
Number of surveys/polls 9 9 8 8 8 6 4
Government Effectiveness
Estimate (-2.5 to + 2.5) -0.71 -0.8 -0.75 -0.88 -0.62 -0.77 -1.03
Percentile Rank (0-100) 29.2 24.4 23.4 17.7 30.1 20.6 12.4
Standard Error 0.13 0.13 0.14 0.14 0.19 0.25 0.18
Number of surveys/polls 12 12 11 11 9 7 5
Regulatory Quality
Estimate (-2.5 to + 2.5) -0.47 -0.7 -0.71 -0.74 -0.54 -0.39 -0.32
Percentile Rank (0-100) 35.1 24.6 23.2 23.2 26.1 31 31.9
Standard Error 0.17 0.17 0.18 0.18 0.37 0.3 0.31
Number of surveys/polls 11 10 9 9 6 6 4
Rule of Law
Estimate (-2.5 to + 2.5) -0.79 -0.98 -0.99 -0.98 -0.89 -0.91 -0.79
Percentile Rank (0-100) 26.6 17.3 18.8 17.3 21.6 20.2 23
Standard Error 0.12 0.12 0.13 0.13 0.15 0.18 0.17
Number of surveys/polls 15 16 14 14 13 10 6
Control of Corruption
Estimate (-2.5 to + 2.5) -0.94 -1.16 -1.08 -1.08 -0.92 -0.93 -0.9
Percentile Rank (0-100) 18.2 9.3 10.8 8.8 17.2 12.3 18
Standard Error 0.13 0.13 0.13 0.14 0.17 0.2 0.28
Number of surveys/polls 11 12 11 11 10 8 4
Source: World Bank (2006a).
43
Appendix A
Accounting Standards in Kazakhstan

IFRS 1: First-time Adoption of International Financial Reporting
Standards (revised 2009)
There is insufficient publicly available information that directly addresses this principle.
IFRS 2: Share-based Payment (revised 2009)
There is insufficient publicly available information that directly addresses this principle.
IFRS 3: Business Combinations (revised 2009)
There is insufficient publicly available information that directly addresses this principle.
IFRS 4: Insurance Contracts (effective 2006)
There is insufficient publicly available information that directly addresses this principle
IFRS 5: Non-current Assets Held for Sale and Discontinued Operations
(revised 2009)
There is insufficient publicly available information that directly addresses this principle
IFRS 6: Exploration for and Evaluation of Mineral Resources (effective
2006)
There is insufficient publicly available information that directly addresses this principle.
IFRS 7: Financial Instruments: Disclosures (effective 2007)
There is insufficient publicly available information that directly addresses this principle.
IFRS 8: Operating Segments (effective 2009)
There is insufficient publicly available information that directly addresses this principle.
IAS 1: Presentation of Financial Statements (revised 2009)
There is insufficient publicly available information that directly addresses this principle.
IAS 2: Inventories (effective 2005)
There is insufficient publicly available information that directly addresses this principle.
44
IAS 7: Cash Flow Statements (effective 1994)
There is insufficient publicly available information that directly addresses this principle.
IAS 8: Accounting Policies, Changes in Accounting Estimates and
Errors (effective 2005)
There is insufficient publicly available information that directly addresses this principle.
IAS 10: Events after the Reporting Period (effective 2005)
There is insufficient publicly available information that directly addresses this principle.
IAS 11: Construction Contracts (effective 1995)
There is insufficient publicly available information that directly addresses this principle.
IAS 12: Income Taxes (effective 2001)
There is insufficient publicly available information that directly addresses this principle.
IAS 16: Property, Plant and Equipment (revised 2009)
There is insufficient publicly available information that directly addresses this principle.
IAS 17: Leases (effective 2005)
There is insufficient publicly available information that directly addresses this principle.
IAS 18: Revenue (effective 1995)
There is insufficient publicly available information that directly addresses this principle.
IAS 19: Employee Benefits (revised 2009)
There is insufficient publicly available information that directly addresses this principle.
IAS 20: Accounting for Government Grants and Disclosure of
Government Assistance (revised 2009)
There is insufficient publicly available information that directly addresses this principle.
IAS 21: The Effects of Changes in Foreign Exchange Rates (effective
2005)
There is insufficient publicly available information that directly addresses this principle.
45
IAS 23: Borrowing Costs (revised 2009)
There is insufficient publicly available information that directly addresses this principle.
IAS 24: Related Party Disclosures (effective 2005)
There is insufficient publicly available information that directly addresses this principle.
IAS 26: Accounting and Reporting by Retirement Benefit Plans (effective
1998)
There is insufficient publicly available information that directly addresses this principle.
IAS 27: Consolidated and Separate Financial Statements (revised 2009)
There is insufficient publicly available information that directly addresses this principle.
IAS 28: Investments in Associates (revised 2009)
There is insufficient publicly available information that directly addresses this principle.
IAS 29: Financial Reporting in Hyperinflationary Economies (revised
2009)
There is insufficient publicly available information that directly addresses this principle.
IAS 31: Interests in Joint Ventures (revised 2009)
There is insufficient publicly available information that directly addresses this principle.
IAS 32: Financial Instruments: Disclosure and Presentation (revised
2009)
There is insufficient publicly available information that directly addresses this principle.
IAS 33: Earnings per Share (effective 2005)
There is insufficient publicly available information that directly addresses this principle.
IAS 34: Interim Financial Reporting (effective 1999)
There is insufficient publicly available information that directly addresses this principle.
IAS 36: Impairment of Assets (revised 2009)
There is insufficient publicly available information that directly addresses this principle.
46
IAS 37: Provisions, Contingent Liabilities and Contingent Assets
(effective 1999)
There is insufficient publicly available information that directly addresses this principle.
IAS 38: Intangible Assets (effective 2004)
There is insufficient publicly available information that directly addresses this principle.
IAS 39: Financial Instruments: Recognition and Measurement (revised
2009)
There is insufficient publicly available information that directly addresses this principle.
IAS 40: Investment Property (revised 2009)
There is insufficient publicly available information that directly addresses this principle.
IAS 41: Agriculture (revised 2009)
There is insufficient publicly available information that directly addresses this principle.