financial reporting in transitional and emerging

8/11/2019 Financial Reporting in Transitional and Emerging

1/47

Financial Reporting in Transitional and EmergingEconomies : the Case of Kazakhstan

Researchers

Dr. Monirul Alam HossainDepartment of Accounting and MISUniversity of HailP.O. Box 2440Hail, Kingdom of Saudi Arabia.Tel: +966568533567FAX: +966-6-531-0500

E-mail: [email protected] [email protected]

.

Professor Dr. Asheq RahmanSchool of Accountancy,Private Bag 102-904,Massey University,Auckland, New Zealand.Direct Dial +64 9 414-0800 ext 9587,Fax +64 9 441-8133E-mail: [email protected]

Draft: November, 2009
http://us.f328.mail.yahoo.com/ym/[email protected]&YY=23949&order=down&sort=date&pos=0&view=a&head=bhttp://us.f328.mail.yahoo.com/ym/[email protected]&YY=23949&order=down&sort=date&pos=0&view=a&head=bhttp://us.f328.mail.yahoo.com/ym/[email protected]&YY=23949&order=down&sort=date&pos=0&view=a&head=bhttp://us.f328.mail.yahoo.com/ym/[email protected]&YY=23949&order=down&sort=date&pos=0&view=a&head=bhttp://us.f328.mail.yahoo.com/ym/[email protected]&YY=23949&order=down&sort=date&pos=0&view=a&head=bhttp://us.f567.mail.yahoo.com/ym/[email protected]&YY=93923&y5beta=yes&y5beta=yes&order=down&sort=date&pos=0&view=a&head=bhttp://us.f567.mail.yahoo.com/ym/[email protected]&YY=93923&y5beta=yes&y5beta=yes&order=down&sort=date&pos=0&view=a&head=bhttp://us.f328.mail.yahoo.com/ym/[email protected]&YY=23949&order=down&sort=date&pos=0&view=a&head=bhttp://us.f328.mail.yahoo.com/ym/[email protected]&YY=23949&order=down&sort=date&pos=0&view=a&head=b


2/47

1

Financial Reporting in Transitional and Emerging Economies : theCase of Kazakhstan*

Abst rac t

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 : Emerg ing Economy , Financial Reporting, International Accountingstandards, IFRS, Transitional Economy, Kzakhstan

*Corresponding Author :

Dr. Monirul Alam Hossain, Department of Accounting and MIS, University ofHail, P.O. Box 2440, Hail, Kingdom of Saudi Arabia., Tel: +966568533567, FAX: +966-6-531-0500, E-mail: [email protected]
http://us.f328.mail.yahoo.com/ym/[email protected]&YY=23949&order=down&sort=date&pos=0&view=a&head=bhttp://us.f328.mail.yahoo.com/ym/[email protected]&YY=23949&order=down&sort=date&pos=0&view=a&head=bhttp://us.f328.mail.yahoo.com/ym/[email protected]&YY=23949&order=down&sort=date&pos=0&view=a&head=bhttp://us.f328.mail.yahoo.com/ym/[email protected]&YY=23949&order=down&sort=date&pos=0&view=a&head=b


3/47

2

Financial Reporting in Transitional and Emerging Economies : theCase 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 ofInternational 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 theaccounting 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


4/47

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).


5/47

4

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


6/47

5

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


7/47

6

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 financ ial 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


8/47

7

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


9/47

8

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


10/47

9

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


11/47

10

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. Imp lementatio n 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.


12/47

11

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


13/47

12

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 Inf luencing the Financial Report ing Pract ices in K azakhstan

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


14/47

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 ofKazakhstan 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 Audit ing 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.


15/47

14

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 Mult inat ional Corpo rat ions: 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 Sto ck Exc hang e (KA SE): 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).


16/47


17/47

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.

Understandabi l i ty. 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.

Comparabi l i ty. 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.

Cons is tency. Accounting policy elected by the entity is applied on a consistent basis

from one period to the other.

True and fair presentat ion. Financial statements must show a true and fair view of

the financial position, performance, changes in Cash Flows of the entities.


18/47

17

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 Valuat ion of Fixed A ssets

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).


19/47

18

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 s um of the years digits method (cumulative method).

3.4.2. Revaluat ion of Fixed A ssets

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 oftangible 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.


20/47

19

3.4.3 Valuation o f Intangibl e 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 assetcan 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 Acco unting 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 t ransact ions

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.


21/47

20

4.4.6 Acco unting 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 anexpense 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. Accoun ting f or L eases

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


22/47

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 theBalance 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. Acco unting for Good wil l

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 e arnings 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.


23/47

22

3.4.9. Research an d Develop men t

Research and Development should include all expenditures that are directly connected to

realization these works. Research and Development expenditures are not capitalized andconsidered 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


24/47

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


25/47


26/47

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.


27/47

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 Supp ly 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


28/47

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 areason 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 Issu es:

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


29/47

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


30/47


31/47

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 s ignificant 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 gen eral 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


32/47

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
http://www.worldbank.org/ifa/rosc_aa.htmlhttp://www.worldbank.org/ifa/rosc_aa.htmlhttp://www.worldbank.org/ifa/rosc_aa.html


33/47

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


34/47

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


35/47

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 principlesseems to face many obstacles for the successful implementation ofIFRSs as promulgated by IASB>

Like Lesko (2007) it can be argued that a full understanding of thedevelopment of modern financial reporting principles, especially in thetransition/emerging economies, is not possible without soundknowledge of the socio-economic context of their formationKazakhstan as a transition country like P oland is not an exception tothis.

(Alp and Ustundag, 2009)

Alp and Ustundag (2009)

Alp and Ustundag (2009) attempted to explain the developmentprocess of accounting standards around the world and its

practical results in an emerging economy : Turkey. From theviewpoint of an emerging economy which is in need of foreigncapital and foreign investments to finance its economic growth,the need for high quality financial information has vitalimportance (Alp and Ustundag, 2009). The need for IFRS inKazakhstan can be argued has brought up by the same reasons asa developing country and as an emerging market like Turkey andChina. Alp and Ustundag (2009) argues that with theinternationalization of capital markets and the increased volumeof international investments, companies functioning in emerging

economies like Turkey needed to provide high quality financialinformation to access financial resources. Furthermore,internationally accepted and reliable financial information is alsoneeded for the overseas customers of the domestic companies(Alp and Ustundag, 2009). Like Turkey, another reason facilitatingthe need for IFRS is Kazakhstans candidacy for European Unionmembership in future.

During this adoption process, Turkey encounters severalcomplications such as complex structure of the international


36/47

35

standards, potential knowledge shortfalls, and difficulties inapplication and enforcement issues (Alp and Ustundag, 2009).

Alp, A., and Ustundag, S (2009). Financial Reporting Transformation: TheExperience of Turkey. The Critical Perspectives on Accounting: Special Issue

Accounting for the Gobal and the Local : Vol. 20, Issue 5, pp. 680-699.


37/47

36

Bibliography

Al-Rai, Z. and Dahmash, N. [1998] The effects of applying international accounting andauditing standards to the accounting profession in Jordan, Advances in International

Accounting, Supplement 1, pp. 179-193.

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

Asian Development Bank (ADB) 2001. Kazakhstan: Economic Performance, Annual Report.

Azizuddin, A.B.M (1991), Status of Accounting and Audit Standards in SAFA Countries, apaper presented in the Sixth SAFA Conference, the Institute of Chartered Accountants ofBangladesh (ICAB) and the Institute of Cost and Management Accountants ofBangladesh (ICMAB), Dhaka, Bangladesh.

Banerjee, B., Martens, S. and McEnroe, J. (1998]) Accounting standard -setting: acomparison of India and the United States, Advances in International Accounting ,Supplement 1, pp. 239-251.

Belkaoui, A and Jones, S. (1996), Accounting Theory ( Harcourt Brace and Company: Australia).

Brackney, K, S and Witmer, P, R. (2005). The European Union's Role in InternationalStandards Setting. The CPA Journal, Vol. 75, Issue 11, 18-27.

Brown, P and Tarca, A (2005). A Commentary on Issues Relating to The Enforcement ofInternational Financial Reporting Standards in the EU. European AccountingReview, Vol. 14, Issue 1, pp.181-212.

Carlson, P. (1997) Advancing the harmonisation of international accounting standards:exploring an alternative path, The International Journal of Accounting , 32(3), pp. 357-378.

CIA (2007) Kazakhstan, The World Factbook 2007 (Washington DC: CIA).

David, C (1996). When East meets West. Accountancy, August. Vol. 118 No. 1236, pp. 53-55.

Delonis, Robert P. (2007) International Financial Standards and Codes: MandatoryRegulation Without Representation, International Law And Politics, 36, pp. 563-634.

Ash, E. and Strittmatter R. (1992). Accounting in the Soviet Union (New York: PraegerPublishers).

Enthoven, A. J .H. (1973) Accountancy and Economic Development ( Amsterdam).

Financial Accounting Standards Board (1978) Objectives of Financial Reporting byBusiness Enterprises (AFAC No. 1, FASB, Stamford).


38/47

37

Government of Kazakhstan (1999) Memorandum on Economic Policies of the Governmentof Kazakhstan and The National Bank of Kazakhstan Through December 31, 2002 ,

Astana: Government of Kazakhstan.

Hassan, N. (1998) The Impact of socio -economic and political environment on accounting

system preferences in developing economies, Advances in International Accounting,Supplement 1, pp. 43-88.

Hossain, M. A (1999) Disclosure of Information in Corporate Annual Reports of Listed Non-financial Companies in Developing Countries: A comparative Study of India, Pakistanand Bangladesh , Unpublished Ph.D. Thesis (School of Accounting and Finance, TheManchester University).

Hossain, M. A and P.J. Taylor 1998. Extent of Disclosure in Corporate Annual Reports inDeveloping Countries: A comparative Study of India, Pakistan and Bangladesh, CardiffSchool Business School Conference in Financial Reporting held in 6-7 July, 1998.

Hossain, M. A and Taylor, P. J 1998. The Relationship Between Disclosure and FormCharacteristics in Developing Countries: A Comparative Study of Bangladesh, India andPakistan, A paper presented at the British Accounting Association Annual Conference(1-3 April 1998) Manchester, UK.

Hossai n, M. A, Cooper, K, and Islam, K. S (2006). Compliance with IASs: The Case ofBangladesh , A paper presented at the Seventh Asian Accounting AssociationConference (17-19 September), Sydney, Australia.

Hossain, M. A (2007a ). Accounting Standards in Pakistan. Conference Proceedings:Academic Asian Accounting Association Annual Conference, (11-14 November,

2007).

Hossain, M. A (2007b ) Enforcement and Compliance of Accounting Standards inBangladesh : A Framework. Paper presented at the Nineteenth Asian -PacificConference on International Accounting Issues in Kuala Lumpur, Malaysia (11-14

November, 2007)

Hove, M. [1990] "The Anglo-American influence on international accountingstandards: The case of the disclosure standards of the International AccountingStandards Committee", Research in Third World Accounting , 1, pp. 55-66.

IASPlus 2004. Financial Reporting Framework in Kazakhstan (October 2004 Update),http://www.iasplus.com/country/kazakhst.htm , Downloaded 1/1/2007.

Jaggi B. L. 1973. Accounting Studies of Developing Countries: An Assessment, TheInternational Journal of Accounting Education and Research , 9 (1), pp.159-170.

Jermakowicz, E K and Gornik-Tomaszewski , S (2006). ). IFRS and You. StrategicFinance . 87 (9), pp. 42-77.

Kazakhstan Stock Exchange (KASE) (2003). Listing Requirements for foreign securities and

Kazakhstan depository receipts (The Kazakhstan Stock Exchange).
http://www.iasplus.com/country/kazakhst.htmhttp://www.iasplus.com/country/kazakhst.htmhttp://proquest.umi.com/pqdweb?index=176&did=1004375971&CSP=10927&SrchMode=1&sid=19&Fmt=4&VInst=PROD&VType=PQD&RQT=590&VName=PQD&TS=1259470104&clientId=85560http://proquest.umi.com/pqdweb?index=176&did=1004375971&CSP=28591&SrchMode=1&sid=19&Fmt=4&VInst=PROD&VType=PQD&RQT=590&VName=PQD&TS=1259470104&clientId=85560http://proquest.umi.com/pqdweb?index=176&did=1004375971&CSP=28591&SrchMode=1&sid=19&Fmt=4&VInst=PROD&VType=PQD&RQT=590&VName=PQD&TS=1259470104&clientId=85560http://proquest.umi.com/pqdweb?RQT=318&pmid=20024&TS=1259470104&clientId=85560&VInst=PROD&VName=PQD&VType=PQDhttp://proquest.umi.com/pqdweb?RQT=318&pmid=20024&TS=1259470104&clientId=85560&VInst=PROD&VName=PQD&VType=PQDhttp://proquest.umi.com/pqdweb?RQT=318&pmid=20024&TS=1259470104&clientId=85560&VInst=PROD&VName=PQD&VType=PQDhttp://proquest.umi.com/pqdweb?RQT=318&pmid=20024&TS=1259470104&clientId=85560&VInst=PROD&VName=PQD&VType=PQDhttp://proquest.umi.com/pqdweb?RQT=318&pmid=20024&TS=1259470104&clientId=85560&VInst=PROD&VName=PQD&VType=PQDhttp://proquest.umi.com/pqdweb?RQT=318&pmid=20024&TS=1259470104&clientId=85560&VInst=PROD&VName=PQD&VType=PQDhttp://proquest.umi.com/pqdweb?index=176&did=1004375971&CSP=28591&SrchMode=1&sid=19&Fmt=4&VInst=PROD&VType=PQD&RQT=590&VName=PQD&TS=1259470104&clientId=85560http://proquest.umi.com/pqdweb?index=176&did=1004375971&CSP=10927&SrchMode=1&sid=19&Fmt=4&VInst=PROD&VType=PQD&RQT=590&VName=PQD&TS=1259470104&clientId=85560http://www.iasplus.com/country/kazakhst.htm


39/47

38

Larson, R. (1993) International acco unting standards and economic growth: an empiricalinvestigation of their relationship in Africa, Research in Third World Accounting, Vol. 2,pp. 27-43.

Larson, R. and Kenny, S. (1996) Accounting standard -setting strategies and theories of

economic development: implications for the adoption of international accountingstandards, Advances in International Accounting, Vol. 9, pp. 1 -20.

Larson, R. and Kenny, S. [1998] Developing countries involvement in the IASCs standard -setting process, Advances in International Accounting , Supplement 1, pp. 17-41.

Lawrence, S (1996), International Accounting (First Edition. London: ITP).

Lesko, D. (2007). Polish Financial Reporting Principles in Transition. Baltic Journal ofManagement, Vol. 2, No 1, pp.55-66.

McGee, R.W. 2005. International accounting education and certification in the former SovietUnion, Int. J. Accounting, Auditing and Performance Evaluation , Vol. 2, (1/2), pp.19-36.

Mirghani, M. (1998) The development of accounting standards in the kingd om of Saudi Arabia: an international accounting standards perspective, Advances in International Accounting , Supplement 1, pp. 195-206.

Mueller, G and Kelly, M (1991). Introductory Financial Accounting , Third Edition. PrenticeHall: New Jersey.

Perera, M. (1989) "Accounting in developing countries: A case for localised uniformity", TheBritish Accounting Review , 21 (2), pp. 141-158.

Ray, H (1996, January). Standard Progress, Accountancy, Vol. 117, Issue 1229, p.57.

Shamenova, A. 2006. Accounting policy in IFRS conditions , Bulletin of Accountant #7 datedFebruary 2006, Deloitte LLP and Deloitte TCF LLP Kazakhstan.

Susela, S. (1999) "Interests" and accounting standard setting in Malaysia", Accounting, Auditing and Accountability Journal , 12(3), pp. 358-387.

Susela, S.D. (1996), "Accounting standard setting in Malaysia", PhD Dissertation (Universityof Waikato, Waikato).

Tyrrall, D, Woodward, D and Rakhimbekova, A.. (2007). The Relevance of InternationalFinancial Reporting Standards to a Developing Country: Evidence from Kazakhstan. TheInternational Journal of Accounting , 42(1), 82.

Wallace, R. S. O. (1993) "Development of Accounting Standards for Developing and Newlyindustrialised Countries", In R. S. O. Wallace, John M. Samuels and Richard J. Briston(eds.), Research in Third World Accounting" , 2: 121-165.

Wallace, R. and Briston, R. (1993) Improving the accounting infrastructure in developingcountries, Research in Third World Accounting, Vol. 2, pp. 201 -224.


40/47

39

Watty, K. and Carlson, P. (1998) Demand for international accounting standards: acustomer quality perspective, Advances in International Accoun ting, Vol. 11, pp. 133-154.

World Bank (2006). Kazakhstan Country Brief 2006 (Washington DC: World Bank)

http://www.worldbank.org.kz , Downloaded 31/1/07.World Bank (2006a). Worldwide Governance Indicators: 1996-2005 (Washington DC: World

Bank) http://www.worldbank.org.kz , Downloaded 31/1/07.

World Bank (2007). Report On The Observance Of Standards And Codes (ROSC) -Republic Of Kazakhstan, Accounting And Auditing (Financial Management Unit, WorldBank) http://www.worldbank.org/ifa/rosc_aa_kaz_eng.pdf , Downloaded 31/1/07

.
http://www.worldbank.org.kz/http://www.worldbank.org.kz/http://www.worldbank.org.kz/http://www.worldbank.org.kz/http://www.worldbank.org.kz/http://www.worldbank.org/ifa/rosc_aa_kaz_eng.pdfhttp://www.worldbank.org/ifa/rosc_aa_kaz_eng.pdfhttp://www.worldbank.org/ifa/rosc_aa_kaz_eng.pdfhttp://www.worldbank.org/ifa/rosc_aa_kaz_eng.pdfhttp://www.worldbank.org.kz/http://www.worldbank.org.kz/


41/47

40

Figure 1

Source: World Bank (2006)

Figure 2

Source: World Bank (2006)


42/47

41

Table 1: Market Capitalization

Kazakhstan NYSEUSD 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 NYSETotal Domestic Foreign Investment

Funds

Growth % of Mkt

Cap

Total % of Mkt

CapUSDmillions

USDmillions

USDmillions

USDmillions

USDmillions

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 Growth2005 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 TotalUSD millions USD millions USD millions

2005 62.9 970.6 1,033.52004 25.4 991.0 1,016.42003 0.0 165.7 165.72002 NA NA NASource: World Federation of Exchanges (http://www.world-exchanges.org)
http://www.world-exchanges.org/http://www.world-exchanges.org/http://www.world-exchanges.org/http://www.world-exchanges.org/


43/47

42

Table 5: Value of Bond Trading

Total Domestic, Private Domestic, Public Foreign GrowthUS

financial reporting in transitional and emerging

Documents