International Financial Reporting Standards in Kazakhstan

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Table of Contents

Introduction
Overview of Adoption of IFRS
The Adoption of International Financial Reporting Standards by Kazakhstan
Obstacles in Adoption of IFRS
Prospects that may Accrue in the Adoption of IFRS by Kazakhstan
Public Sector Accounting System in Kazakhstan
Conclusion
References

Introduction

Global literature on accounting supplies evidence of the economic implications of accounting quality such as costs of capital (Leuz & Verrecchia 2000) as well as international capital mobility (Guenther & Young 2002). According to Land and Lang, the quality of accounting systems has improved significantly throughout the world since the 1990’s (2002). This improvement can be attributed to globalization and expectations of international accounting synchronization. Most countries are discovering the benefits that come with standardized accounting and financial reporting systems.

International Financial Reporting Standards (IFRS) refers to a collection of accounting standards established by an autonomous, non-profit body called the International Accounting Standards Board (IASB) (International Monetary Fund 2001). Kazakhstan joins the list of the countries that recently adopted the IFRS (Ministry of Finance of the Republic of Kazakhstan 2010). Though Kazakhstan has had much success with the adoption, there have been significant hurdles in the process.

The purpose of this essay is to evaluate the adoption of IFRS by Kazakhstan and plans for IPSAS (International Public Sector Accounting Standards) set to be introduced in 2013 (Ministry of Finance of the Republic of Kazakhstan 2010). To accomplish this goal, this essay is divided into several sections. The paper begins with a brief overview of the adoption of IFRS and the progress made so far in the adoption process. This is followed by an analysis of the adoption process of IFRS by Kazakhstan.

This analysis is done by comparing the gains made so far, the obstacles encountered in the adoption process as well as the prospects that may accrue due to the adoption. In the subsequent section, the paper analyzes the planned public sector accounting system reform in Kazakhstan.

Overview of Adoption of IFRS

IFRS are occasionally mistaken for their older versions IAS (International Accounting Standards). The worldwide implementation of IFRS is happening speedily to generate quality enhancement in accounting by establishing a standardized platform for financial reporting (Elliot & Elliot 2011). This trend is due to the notion that the reporting system provides quality accounting and reporting system.

However, the quality of accounting is largely dependent on a company’s general institutional background. These include the political and legal environment of the country where the company is located. Approximately one hundred and twenty countries sanction or compel the use of IFRS by public companies. Due to the upward trend witnessed in their application, a significant increase in the number of countries that adopt IFRS is expected by 2015 (IASB 2011). Advocates of IFRS as an international standard for accounting argue that the price of executing IFRS can be countered with capacity for improved credit ratings offered by the international standards (Barth, Landsman & Lang 2006).

The body that oversees the formulation and adoption of IFRS is an autonomous accounting standard-setting organization that is centered in London and is known as IASB (IASB 2011). It started working in 2001 after succeeding the International Accounting Standards Committee (IASC). ISAB is mandated with formulating and updating IFRS to match current accounting expectations. Though the AICPA is an instituting member of the IASC, it is not connected to the IASB.

The next issue to assess is the adoption of IFRS in various countries to establish the challenges they encounter as they attempt to integrate their national financial reporting systems with the relatively new IFRS. Looking at the challenges faced by major economies provides an indication of what to expect in developing economies.

To guarantee the regularization of financial reporting, the accounting industries of individual countries implement GAAPs that oversee the presentation of financial information (Ding, Jeanjean & Stolowy 2005). Consistent with IASB, the process of merging the U.S. Generally Accepted Accounting Principles (U.S. GAAP) and IFRS should have been completed by June 2011 (Elliot & Elliot 2011).

According to Miller and Becker, this convergence has been the collaborative efforts of the Financial Accounting Standards Board and the IASB to upgrade IFRS and reduce the disparities between IFRS and U.S. GAAP (2010). They argue that standards of instruction on accounting and financial reporting have to be changed if this convergence is to be successful.

If convergence faces these kinds of challenges in an established economy like the United States, who are among the countries that established IASB, how much more challenging can the adoption of IFRS be in a developing economy like Kazakhstan? This question is answered in the subsequent sections.

The Adoption of International Financial Reporting Standards by Kazakhstan

IFRS were established in developed economies, but are gradually being adopted in developing economies possibly overlooking deliberations in the implications of adopting IFRS on economies like Kazakhstan.

When a business functions within its national boundaries, the GAAP of that country is a suitable standard for financial reporting. However, owing to globalization of business, many multinational corporations experience difficulties in providing standardized information that corresponds to the GAAP of one nation without breaching the GAAP of another (Ball 2001). To facilitate uniformity in financial reporting (in the international arena), IASB endorses the implementation of IFAS.

Kazakhstan, a former constituent of the Soviet Union, has a fast-growing economy with a projected annual growth rate 7% in 2010 (Ministry of Finance of the Republic of Kazakhstan 2010). It has a robust service and manufacturing industry. Agriculture only supplies 5.4% of its per capita GDP, which is $12,800 US (Ministry of Finance of the Republic of Kazakhstan 2010).

According to Tyrrall, Woodward & Rakhimbekova, Kazakhstan’s economic environment is very ideal for the adoption of IFRS, but the adoption process is expected to gain relevance gradually (2007). In accordance with the laws of Kazakhstan on financial reporting, the use of IFRS was to commence in financial institutions by 2003 while government institutions were to adopt these standards from 2013 (Ministry of Finance of the Republic of Kazakhstan 2007).

Obstacles in Adoption of IFRS

This unitary set of standards contained in IFRS resolves many difficulties in financial reporting while creating other challenges. In a developing country like Kazakhstan, the adoption of these standards faces many challenges.

According to the IMF, translation of IFRS principles from English to Kazakh and Russian present the greatest challenge to the adoption of IFRS in Kazakhstan (2004). IMF reports that there is no officially approved translation from English to Kazakh. In addition, though IFRS has been translated to Kazakh from English, new changes in IFRS are yet to be introduced in the translations.

A USAID consultant with experience working in developing countries, Robert McGee, outlines the examples of challenges presented by the adoption of IFRS in developing countries (2006). McGee believes that since most developing countries possess a top-down approach in decision making, most governments in these countries are likely to adopt these standards, but this does not mean the standards are going to be implemented.

In this top-down approach to decision making, the government officials and business executives who ratify these reforms may have little or no knowledge of the implications of their application. McGee also considers the problem caused by difficulty in interpretation of IFRS into local languages (2006).

Though there are numerous translators who can interpret English documents into local languages like Kazakh, there is a shortage of such translators with an in-depth understanding of Western accounting. Another major obstacle for IFRS involves the cost of execution. The accounting sector in every nation that embraces the standards has to cater for the cost of re-education and instruction on their principles (Miller & Becker 2010).

Companies are also required to dedicate time and funds to the re-education of staff. If universally applied and if companies are forced to abide by the requirements of IFRS, the adoption can present a burden of high cost to companies that only operate within national borders and who have no interest in international harmonization. The cost to these companies in adjusting to IFRS overshadows any gains they might expect.

Prospects that may Accrue in the Adoption of IFRS by Kazakhstan

An increasing number of firms in Kazakhstan are embracing International Financial Reporting Standards. IFRS enables improved comparability and openness of financial reporting (Barth, Landsman & Lang 2006). This comparability is important in guaranteeing the release of standardized financial information, which is compulsory for lessening information asymmetry and resolving agency predicaments in the commercial sector.

Firms that apply uniform standards in the preparation of their financial statements are easily comparable. Standardization is particularly essential in the comparison of the performance of companies situated in different countries. This increase in comparability aids international investors in the decision-making process regarding where to put their money. Comparably, accounting diversity is an obstacle to international investment (Bradshaw, Bushe & Miller 2004). Therefore eliminating cross-border diversities in accounting standards helps in accelerating international amalgamation of capital markets (Covrig, Defond & Hung 2007).

Bushman and Piotroski demonstrate that companies in nations with well-timed financial-statement detection of losses are not as prone to undertaking negative Net Present Value investments as those without these standards (2006). The improved transparency and loss detection timeliness guaranteed by IFRS can increase profitability by reducing agency costs. No agency is required since transparency ensures that company executives operate in the best interest of company shareholders.

Public Sector Accounting System in Kazakhstan

Public sector accounting is a technique of accounting used largely by non-profit bodies in the public sector whose profit margins are too low to allow for performance evaluation. There is a significant contrast between accounting in the private sector and public sector accounting.

The core causes of this variance are in the setting of the accounting system. In the governmental setting, public sector bodies have diverse goals in contrast to their private counterparts whose main drive is profitability. Moreover, in public sector accounting, the government body has the obligation of financial answerability for the use of public funds in the budgetary environment.

One strangeness of accounting in the public sector lies in the authority of the government in acquiring resources for the bodies (Jorge 2008). In ideal economics, all economic bodies are presumed to perform reasonably and on an even position on the market to increase profitability.

However, the reality in the public sector is that a hierarchical arrangement occurs between the government and other governmental bodies during the circulation of resources. The governments are tasked with the responsibility of collecting taxes and issuing currency. This permits the aggressive obtaining of resources by a government and reluctant surrender of resources by other bodies. The central governments have the power to issue money and oversee taxation and do not have any external supervision on their procurement of economic resources.

Goods and services manufactured and delivered by economic bodies in the public sector are not exposed to the normal market procedure where prices are governed by supply and demand (Coombs & Jenkins 2002). Therefore, there is a need for the enforcement of a standardized public system that ensures accountability of governments in the use of public resources.

Accounting theory asserts that the fundamental rationale for financial reporting is to lessen information unevenness between company executives and parties contracting with their firms (Ball 2001). Financial reporting moderates information unevenness by releasing appropriate information in a timely manner (Frankel & Li 2004). International accounting systems present an appealing platform for the examination of the economic outcomes of financial reporting. This is specifically important, considering the differences that exist in the quality of accounting across different countries.

The International Public Sector Accounting Standards Board (IPSASB) concentrates on accounting, financial reporting, assessment requirements of government administrations and their agencies. IPSAB meets these requirements using a standard system for guidance, carrying out training, conducting research, and promoting a platform for sharing of information amongst professional accountants (Benston et al. 2006). These standards apply universally and offer uniformity for all nations irrespective of their economic status.

Intended for use in formulating multi-purpose financial statements, the International Public Sector Accounting Standards establish the criteria for recognizing, measuring and disclosing transactions by governments, and tax remittance records. The objective of IPSAB is to establish universally applicable accounting standards for governments. This enables governments and public sector organizations to compare information and raise the level of transparency.

In Kazakhstan, for example, application of these standards can aid in eliminating the fear of corruption that constantly plagues the country’s economy. This can improve investor confidence and in turn, improve the overall economy. The Government of the Republic of Kazakhstan is expected to prepare and present public sector financial statements that conform to the accrual basis of International Public Sector Accounting Standards (IPSAS) by the end of 2013 (International Monetary Fund 2004).

Existing financial reporting procedures used in Kazakhstan are founded on several decrees delivered by the government. The proposal currently being contemplated is how to transition from this system of public financial reporting to IPSAS. The transition is instigated by the Ministry of Finance of the Republic of Kazakhstan with contributions from the National Bank (Ministry of Finance of the Republic of Kazakhstan 2010). The process of adoption of IFRS in Kazakhstan began with its selection from various models that served as foundations of financial accounting (Ministry of Finance of the Republic of Kazakhstan 2007).

The next stage in the introduction of internationally conforming accounting standards by the Kazakhstan government is the planned introduction of IPSAS, which is aimed at improving reliability and openness in financial reporting. The leadership of the government of Kazakhstan outlines the responsibility of the government in creating an open and consistent model for the management of state assets (Nazarbev 2008).

The main targets of public sector accounting reform are formation of inclusive information on the functions and the condition of the public sector and ensuring open and uniform financial reporting. It also focuses on objective contemplation on information on assets, outcomes, and liabilities of public sector financial activity.

The current public accounting system in Kazakhstan is founded on a cash model that does not allow for scrutiny of budget policy. This is ineffective since it does not provide room for measuring the impact of budget policy on the Kazakhstan economy.

In the world today, there is increasing demand for transparency of public institutions and accountability of public officials (Covrig, Defond & Hung 2007). This demand has seen national and international focus shift from management of costs to the management of results. In response, the Kazakhstan government has set up a three-year plan for the implementation of public accounting and financial reform.

The chief benefit of accounting on the cash basis is that it can depict the flows of revenue expenses as well as the capital flows for infrastructure creation (Jorge 2008). Cash-based accounting, therefore, presents a good system that favors decision making.

The government is expected to complete the implementation of financial reporting systems in line with the standards stipulated by IPSAS by 2013 (Ministry of Finance of the Republic of Kazakhstan 2010). These reforms are necessary since the cash-based budgetary accounting has several weaknesses. According to the Ministry of Finance, the current public accounting system is not founded on firm principles that can withstand the test of time (2010).

The system used does not conform to international standards since not all public assets are incorporated in the financial statements. The cash method of accounting does not have provisions for distinct costs of operations of the government or lasting and dependent liabilities (International Monetary Fund 2001). A budget using this method can only be presented in three parts containing revenue, expenditure and source of funds. It merely records cash flows in terms of inflows and outflows without balancing assets and liabilities.

Given this state of affairs, it is essential to operate liabilities and assets accurately on a stock basis. In a country like Kazakhstan, the stock basis guarantees improved balance in sharing economic burdens by different generations. This is one reason why accounting and reporting of public assets and liabilities on an accrual basis is important.

The desire of the Government of the Republic of Kazakhstan to transition from cash accounting to accrual accounting can be explained by several reasons. One of the reasons is the need to have balanced accounts when requesting for international funding.

Taxes are a principal source of funding for the government and ought to be acknowledged and evaluated as growth in taxpayers’ equity (Jorge 2008). When the government requires a loan from the international community, it is requested to produce a connection of its assets and liabilities.

The planned transition by the Kazakhstan government to transition to IPSAS is expected to be overseen by professionals in the accounting sector (Ministry of Finance of the Republic of Kazakhstan 2010). Incorporating the services of professionals in such an intricate process helps in laying strong foundations that can stand the test of time. For this purpose, the professionals need to have sufficient knowledge that corresponds to current international standards on IFRS and IPSAS.

Conclusion

Recent trends show that there is a steady spread of the application of IFRS throughout the world. Consequently, a time might come when there will be a global transition by all countries from their respective national systems of accounting to international systems.

Irrespective of the international standard these countries choose to adopt, and this transition seems eminent. However, for any country, the process of transition from the national system is not smooth. It is even more difficult for developing countries such as Kazakhstan.

In Kazakhstan, the adoption of IFRS depicts some of the difficulties that exist especially in translation and interpretation of the terminologies therein into local languages. The shortage of professionals and instructors is also depicted as a drawback in the adoption process.

The adoption of IFRS in Kazakhstan is even more problematic when the standards are to be applied by all companies (big or small). Some companies, especially those that operate within the national borders of Kazakhstan may not benefit from the uniformity and comparability offered by IFRS. The cost of transition to these new standards may be too high for small companies, and this might decelerate the overall economic growth of Kazakhstan’s economy.

However, it is not all gloom concerning the adoption of IFRS standards in developing countries like Kazakhstan. Some of the benefits of comparability and transparency can encourage cross-border investment. This can certainly be a big boost to the Kazakhstani economy. Application of international standards puts these companies on the international economic radar and makes it easy for investors to follow their progress and choose where to invest.

The foundations laid by the Ministry of Finance for the transition to IPSAS based standards seem robust. The deadline set by the government for the adoption of IFRS by all institutions in Kazakhstan is gradually approaching. The concern that most economists and accountants have is whether the government will contemplate on the problems witnessed so far in the implementation process by the private sector so that the application of these standards in the public sector will be easier and less costly.

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