USEFULNESS OF IMPLEMENTING IFRS FOR
STAKEHOLDERS IN KAZAKHSTAN:
THE CASE OF REPORTING
This report discusses the relevance of international financial
reporting standards (IFRS) to emerging economies in general and
Kazakhstan in particular. It uses evidence from interviews conducted
with senior auditors from two Big Four accountancy firms in Kazakhstan
and prior studies exploring IFRS implementation in emerging economies
to shed light on how complex institutional and cultural factors
influence accounting. The findings suggest that accounting practices in
Kazakhstan are dominated by the historically inherited institutionalised
accounting system of the Soviet Union era, when corporate reporting
was primarily geared towards meeting the needs of government agencies
such as Statistics Committee and tax authorities. The main problems of
implementing IFRS in Kazakhstan were pressures to comply with tax
codes and the early stage of development of the accounting profession
with the consequent lack of IFRS expertise and deficient IFRS enforcement
mechanisms.
Keywords: international financial reporting standards, IFRS,
implementation, accounting, emerging economies, Kazakhstan.
INTRODUCTION
Recently, the adoption of international financial reporting standards (IFRS)
has been at the forefront of the agenda of a number of countries worldwide. This is
partly attributable to the globalisation of capital markets, increased international
trade and cooperation, and the desire to improve the transparency, quality and
comparability of financial statements prepared under different generally accepted
accounting principles (GAAP).
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However, a number of researchers have suggested that financial statements
prepared on the basis of national GAAP may not meet the accounting information
needs of international investors and creditors whose decisions are international
in scope. While a number of studies have suggested that accounting systems
should reflect differences in culture, economic systems and institutional settings
few studies have explored the influence of institutional and cultural factors in the
context of emerging economies. This paper addresses this gap in the literature by
examining key institutional and cultural factors that may affect IFRS adoption
in emerging economies in general and Kazakhstan in particular. It specifically
examines the following research question: how relevant are IFRS to the emerging
economy of Kazakhstan?
Kazakhstan is an emerging economy which is undergoing rapid economic
liberalisation and development. It has embraced privatisation and market forces by
moving away from central bureaucratic planning under the former Soviet Union,
removing trade barriers, reducing the number of government-owned enterprises,
and creating a financial sector to facilitate growth and the movement of private
capital. The dramatic increase in foreign direct investment inflows from USD
2 billion in 2005 to USD 14 billion in 2008, has resulted in a corresponding
need to discharge accountability to international investors (OECD, 2012), and
has brought IFRS to the forefront of the agenda of corporations and regulators.
However, implementing IFRS is a challenging process, especially to Soviet
Union and ex-communist bloc countries of Europe, and China because it requires
changes not only to political institutions but also to socio-cultural values and
established ways of doing things.
This study uses data collected from interviews conducted with senior
auditors from two Big Four accountancy firms in Kazakhstan and prior studies
exploring IFRS implementation of IFRS in emerging economies. The rationale
for interviewing auditors is because of their expertise and knowledge regarding
the implementation of IFRS by Kazakh companies in various industries.
MAIN PART
A number of studies have explored the influence of institutional factors on
accounting practices. Institutional theorists argue that legitimacy is conferred
upon organisations that deliver according to society’s cultural norms and values.
However, if societal expectations regarding the legitimacy of a government or an
organisation are not met then its ‘contract’ for existence is effectively revoked
by society. Carpenter and Feroz state that successful governments are those that
gain support and legitimacy by conforming to social pressures and resorting ‘to
legitimacy rituals to demonstrate social and economic fitness’ in order to obtain
resources and increase their survival capabilities.
Gray and Perera argue that international differences in accounting practices
are attributable to differences in socio-economic, historical, cultural and political
contexts. Ashraf and Ghani suggest that accounting practices in different parts
of the world are shaped by the stage of economic development, structure of
corporate ownership, financial system, legislation (code law vs. common
law), tax legislation, and education, among others. Indeed, during the Soviet
era accounting system (more specifically, uniform book-keeping) was a key
administrative tool used by state enterprises for planning, target setting and
controlling government departments and agencies. However, after the collapse
of the Socialist regime of the Soviet Union and Eastern bloc countries, ex-
communist countries started to move towards free market economy by radically
reforming their institutional structures, economic systems and accounting
systems and following established Western/capitalist models and systems.
In short, reforms to accounting systems and institutional structures were the
result of systemic turbulences and to gain societal legitimacy by conforming to
accepted norms and practices.
Accounting regulators play an important role in international accounting
convergence or harmonisation have pointed out that under the coercive power
of international investors and regulators «domestic listed firms are forced to
play the accounting game by global rules». For example, the International
Accounting Standards Board (IASB) and the US Financial Accounting Standards
Board (FASB) have been working together since 2002 to harmonise IFRSs
and US GAAP. Although a standard set of high quality global is desirable to
achieve consistency, the focus of standard setters is on achieving convergence
or harmony. Self-preservation and political motives are apparent in the IASB’s
policy pronouncements, which may arguably offset the benefits of convergence.
However, in the light of the progress achieved by the two major accounting
standard setters, in 2007 the US Securities and Exchange Commission (SEC)
the requirement for non-US companies registered in the USA to reconcile their
financial reports with US GAAP if their accounts complied with IFRSs.
Many researchers have expressed concerns regarding the appropriateness
of Anglo-American accounting standards in less developed countries. They
suggest that developing countries should develop their own accounting
standards to reflect differences in their local environment. The IASB tends to
promulgate accounting standards that are relevant to developed countries with
dominant private sector and developed capital markets, where the major users
of accounting information are analysts, dispersed shareholders and creditors so
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that the conceptual framework for developing IFRS is oriented towards these
major accounting information users. However, in emerging countries’ capital
markets are relatively underdeveloped and the public sector is relatively more
influential than private sectors, and the needs of users may be different.
Samuels and Oliga argue that imposing international accounting standards
that have been developed in an environment with a different set of economic,
cultural, religious and social conditions may not only be irrelevant or dysfunctional
for developing countries but could also be harmful and counterproductive. De jure
or mandatory adoption of IFRS would probably not lead to de facto improvement
at the micro level, as actual practices are shaped by complex economic, political,
legal and institutional factors. In this respect, Ball argues that China’s adoption
of IFRS for foreign-owned entities has neither significantly changed the actual
financial reporting practices nor improved the quality of financial statements.
In the case of Pakistan, Ashraf and Ghani claim that the quality of accounting
information has not improved as IFRS adoption was hampered by corruption,
deficient judicial and legal systems which were incapable of protecting interests
of shareholders and enforcing laws and regulations.
Perera states that accounting standards should mirror the dynamic and
ever-changing social, economic, legal and cultural circumstances prevailing in
those countries and cater for the ever-changing needs of users of accounting
information. Whittington criticises the current conceptual framework of decision-
usefulness used to develop IFRS on the grounds that its main purpose is to provide
forward-looking information to predict future cash flows and is concerned with
buy or hold or sell decisions of investors, whereas the stewardship functions
of accounting are inadequately covered. The notion of stewardship is based
on the agency theory and concerned with monitoring the actions of the agent
and implies a more prudent and conservative approach to accounting such that
financial statements show how the current situation had arisen due to past events
and actions of the agent. Thus IFRS may not be appropriate to many countries
with underdeveloped capital markets, where the owners of private enterprises are
not dispersed and are primarily concerned with monitoring of the actions of the
agents as opposed to making buy or sell or hold decisions. In these countries a
set of accounting standards developed on the basis of the stewardship conceptual
framework would probably be more relevant. This is because, as Whittington
suggests, the idea of stewardship advances «accountability by the management
board of an entity to its proprietors». Similarly, state that the decision usefulness
paradigm, which currently dominates accounting theory, does not enable
management to simultaneously discharge its primary stewardship responsibility
to society and its secondary stewardship responsibility to shareholders.
Sucher and Jindrichovska argue that in the emerging economy of Czech
Republic where accounting system is regulated by the Ministry of Finance, there
could potentially be problems with IFRS implementation since the Ministry
of Finance has a vested interest in the information needs of tax authorities.
Similarly, in the emerging economy of Kazakhstan, the Ministry of Finance
which has significant influence over accounting standard setting and adoption
may place greater emphasis on legal form rather than on economic substance in
financial reporting practices oriented particularly to the needs of tax authorities.
Thus identifying the primary users of financial statement users is an important
step towards ensuring that accounting standards meet their varied and often
conflicting needs.
Based on 35 responses from a survey of companies which have implemented
IFRS, identified a number of issues which have hindered IFRS implementation
in Kazakhstan. Some of these were: contradictions with the Tax Code,
underdeveloped capital markets, differences in financial system where banks
are primary users of financial statements, inappropriate software programs
which are unable to generate proper accounting information needed for more
extensive IFRS-based disclosures and lack of expertise to implement IFRS report
on accounting codes in Kazakhstan.
The availability of qualified accountants together with the stage of
development of the accounting professions in emerging economies would
determine how IFRS is implemented. Although Kazakhtan has a very embryonic
accounting profession, it has adopted IFRS due to the country’s desire to
increase and stimulate foreign investments. In the case of Poland, found a lack of
educational support and infrastructure for implementing IFRS. Lack of expertise
to implement and lack of capacity and consistency in enforcement are, perhaps
reasons against adoption of IFRS.
Sucher and Jindrichovska identified that in the emerging economy of
Czech Republic, where the Ministry of Finance has considerable power over
accounting and tax matters, accounting practices were more form over substance
and tax-oriented since primary financial statement users were tax inspectorates.
IFRS implementation problems were compounded by underdeveloped stock
markets distorting fair values used under IFRS. Despite the claimed orientation
towards investors and substance over form accounting, in practice the local
accounting practices were primarily form over substance with an emphasis on
rigid compliance with tax and accounting legislation of tax authorities, rather
than focusing on showing economic reality implying that in emerging economies
tax authorities are powerful and influential. In this respect, Sucher and Bychkova
suggest that in Russia «tax inspectorate still exercise a strong influence over
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enterprise’s preparation of financial statements» and local audit firms view the
primary objective of audit as ensuring compliance with tax rules.
Legal system exerts substantial influence on accounting practices and
may hinder IFRS implementation. In Common law Anglo-American countries,
developed equity markets are major sources of finance, legislation system is
oriented on protecting the interest of dispersed shareholders, and accounting
reports are oriented towards showing economic reality (substance over form)
in a transparent and reliable manner. However, in code law countries funding
primarily comes from governments and banks so that financial reporting practices
are less transparent, more creditor-oriented, more form over substance and
aligned with tax rules. Indeed, in Common law countries tax legislations do not
have major influence on accounting systems/practices such that tax accounting
and financial accounting are considered as separate functions, whereas in
Code-law countries the influence of Tax Legislation is so pervasive that tax
accounting and financial accounting are aligned as organic whole. In Germany tax
accounting and financial accounting were mirror image of each other and called
Massgeblichkeitsprinzip, but ceased under the fourth directive of the European
Union mandating IFRS compliant consolidated financial reporting to be prepared
for all publicly traded companies. However, in European Union countries where
tax system and accounting system are interdependent, disclosures concerning
tax are allowed implying that tax legislation may have a substantial influence
on accounting. Variations in financial reporting were primarily explained by
different levels of interdependence between taxation and accounting Kazakhstan
exhibits features similar to other code law countries and follows Continental
model of accounting of form over substance, suggesting that tax issues may
dominate accounting issues.
The interviewees indicated that there was a general improvement in the quality
of financial reporting since IFRS implementation, primarily because cash-based
accounting standards (e.g., KAS) were unable to effectively meet the information
needs of investors which have gained importance over the years in Kazakhstan.
The global financial crisis also played a role in reshaping financial reporting in
Kazakhstan, as banks started to demand IFRS compliant financial information
when previously the decisions to grant credit were primarily based on collateral
and relationships. As one of the interviewees pointed out: “With the financial crisis
we are getting away from collateral and relationship based lending by the banking
organizations to really looking at the operations of an entity. I think this is where
IFRS comes in as it enables better understanding what the real economics of the
business is and that’s not lending you $ 1,000,000 based on a plant or land you
have. Banks want to see a business plan, financial statements, cash flows and debt
service plans, in addition to collaterals to assess creditworthiness».
The shift towards providing loans based on reliable IFRS financials was
explained by high volume of bad loans arising from relationship-based lending,
and the fall in the value of collaterals during the financial crisis. It was also noted
that IFRS provide a wealth of information, coving gaps in both the Tax Code
and KAS which are unable to keep pace with the rapidly growing economy and
address complex business transactions. As noted by an interviewee: «There are
a lot of details in IFRS regarding how you treat and how you determine certain
derivatives or how you treat reserves or provisions for employee pensions,
etc. But we have nothing in tax law governing these. Kazakhstan is a very
quickly developing market and so are the financial instruments relating to oil
and gas accounting. We see hedging transactions, puts and calls, and a lot of
pretty sophisticated transactions that the tax law doesn’t address, so having that
underlying blanket of IFRS that does address those types of things is good».
Interviewees generally concurred that IFRS can better show economic reality
and is more comprehensive compared with KAS. For example, Interviewee J2
explained the limitations of KAS vis a vis IFRS as follows: «KAS compliant
financial statements do not disclose and recognize all the future liabilities
(e.g., Asset retirement obligation related to subsoil-use contracts and social
obligations). There is no guidance in KAS concerning allowances/provisions
on bad debts. Indeed, there are substantial gaps in KAS which comprise of a
total number of 209 pages compared with IFRS which comprise of more than
2000 pages. KAS are cash-based accounting standards as compared to IFRS».
CONCLUSIONS
Whilst undoubtedly the adoption of IFRS brings the benefit of improved
transparency and accountability, the literature and the preliminary findings
presented in this paper casts doubt on its suitability to Kazakhstan. The key
argument is that a ‘one-fits all approach’ would be dysfunctional, due to
differences in institutional structure and cultural context of Kazakhstan.
The adoption of IFRS has the potential to contribute to the development
of the capital market of Kazakhstan by reducing the cost of capital through
providing information enabling foreign investors to better assess the risk profile
of business entities. High quality accounting information may also lead to more
efficient allocation of financial resources by enabling managers to make informed
decisions. IFRS’s appeal has also increased due to globalisation and fluidity
of capital flows across borders. However, the adoption and diffusion of IFRS
may be politically influenced by powerful international financial institutions
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required IFRS adoption in financially distressed countries in exchange for
rescue packages. In Kazakhstan, the support of IFRS by political organisations
such as the Ministry of Finance and professional accountancy bodies may be
instrumental to the successful adoption of IFRS. Whilst IFRS adoption may
better portray economic reality of an enterprise in a comparable manner to suit
the needs of international investors, local GAAP may better serve the purpose
of meeting the information and stewardship needs of tax authorities, small
investors and the community.
Whilst from a cultural and institutional perspective IFRS may not be
appropriate to Kazakhstan, due to institutional arrangements (enforcement
mechanisms, taxation, legislation), mentality of local accountants (e.g., most of
them were trained during Soviet times), high power distance (fear of government
authorities) and low individualism, the economic arguments may in the long
run outweigh and alleviate these concerns. Although rules-based/uniform
accounting standards may be currently more suitable given their compatibility
with the current structures in place, principles-based IFRS better fit with the
new capitalist and free market ideals embraced by Kazakhstan. Changes in the
institutional and cultural environments are required to ease the implementation
of new accounting technologies for greater compatibility and success.
The findings of this study may be relevant to emerging ex-communist
countries where tax authorities and other government agencies are considered
the prime users of financial statements and legal form over substance prevail.
However, additional research is required to shed light on whether, similar to
Kazakhstan, these countries are characterised by: the communist-mentality
of accountants preferring prescriptive and more uniform rules as opposed to
using professional judgment, insufficient IFRS education, historical legacy of
tax-driven accounting regime and culture, code-law system and coercive power
of government agencies marginalising the needs of other stakeholders. Prior to
adopting a set of financial reporting standards in ex-communist bloc countries,
more thought is required regarding the purpose of corporate reporting, for
example, whether corporate reporting should reflect the legal form of transactions
or the economic substance of transactions, or alternatively, whether it should
be tailored to meet the needs and expectations of specific stakeholder groups.
REFERENCES
1 Transformation of financial statements from the Local GAAP in IFRS
[Electronic resource]. – msfo.buh-nauka.com.
2 The concept of development of the accounting and auditing system in the
Republic of Kazakhstan for 2012–2014. – P. 39–42.
3 Zhakupov, G. S. Zulgarina, I. A. «Problems of transition to
internationalfinancial reporting standards».
4 Kalieva, D. The situation with IFRS in the Republic of Kazakhstan. – IFRS
2 (38). – 2007. – P.7.
5 Radostovets, V. K. Financial and management accounting at the enterprise.
– Almaty : NASU «Centeraudit», 1997.
6 Glushkov, I. V. Accounting in a modern enterprise. – Moscow : «Knorus»,
Novosibirsk : «Ekor», 2001. – 225 р.
7 Erzhanov, M. S., Erzhanova, S. Accounting policy. – Almaty : Karazhat
karzhat, 1997. – 220 р.
Material received on 11.12.17.
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