ESSAR ENERGY: INDIAN GAAP, U.S.

GAAP
OR IFRS?
GROUP 9
ANUJ JAIN (19PGPIM066)
SHUBHAM AUNDHEKAR (19PGPIM071)
AJINKYA CHOPADE (19PGPIM075)
RISHABH GARG (19PGPIM093)
VARUN MODI (19PGPIM105)
VAIBHAV GOYAL (19PGPIM110)
 DIFFICULTIES IN ADOPTING U.S. GAAP
• Essar is already reporting its financial statement in Indian GAAP. To use the U.S. financial markets, they have to
prepare statements under U.S. GAAP. To raise capital in London, they would be required to use IFRS. They can use
this IFRS report in the U.S. with some reconciliation

• India is moving towards IFRS adoption along with discussions on converging Indian GAAP with IFRS which is being
called as Ind AS. Indian GAAP which will be very similar to IFRS, so it will be easy to prepare IFRS report using our
Indian GAAP reports.

• Indian GAAP is very similar to IFRS as well, therefore, it’s easy to convert to as per London IFRS standards.

• Profits generated under U.S. GAAP are generally lower, therefore it is less attractive for investors.

• The Indian market has high volatility and will be more risky for Essar Energy, while in U.S. market, there are
already many oil and gas companies listed so the addition of Essar Energy would not add much diversification. In
the London market, the planned size of Essar IPO would immediately catapult into top 100 companies and will
attract extensive scrutiny but still less risky.
 RAISING EQUITY CAPITAL
Parameter BSE LSE NYSE

IPO Raised $4.5 billion $31 billion $54 billion

Secondary Offering $9.6 billion $21 billion $76 billion

Listed Companies in Average Very low High

Energy Sector
Volatility High Low Average

Capacity of raising Equity No Yes Yes

Familiarity High Low Low

Risk High Volatility Large size of company will Many listed companies,
attract extensive scrutiny so value creation is less
 U.S. GAAP VS IFRS
• Locally vs. Globally - IFRS is a globally accepted accounting standard for accounting, used in more than 110 countries, whereas, GAAP
is exclusively used within the United States and has a different set of rules for accounting than most of the world which makes it more
complicated when doing business internationally.

• Rules vs. Principles - GAAP focuses on research and is rule-based, whereas IFRS looks at the overall patterns and is based on principle.
With GAAP accounting, there’s little room for exceptions or interpretation, as all transactions must abide by a specific set of rules, but
with IFRS, a principle-based accounting method, there’s potential for different interpretations of the same tax-related situations.

• Inventory Methods – A company is allowed to use the LIFO method for inventory estimates in GAAP, whereas under IFRS, the LIFO
method for inventory is not allowed. The LIFO valuation for inventory does not reflect an accurate flow of inventory in most cases
which results in reports of unusually low income levels.

• Inventory Reversal - GAAP specifies that if the market value of the asset increases, the amount of the write-down cannot be
reversed, whereas, under IFRS the amount of the write-down can be reversed. GAAP is overly cautious of inventory reversal and does
not reflect any positive changes in the marketplace.

• Development Costs – Development costs can be capitalized under IFRS, as long as certain criteria are met which allows a business to
leverage depreciation on fixed assets, whereas with GAAP, development costs must be expensed the year they occur and are not
allowed to be capitalized.
 U.S. GAAP VS IFRS
• Intangible Assets - Intangible assets, such as research and development or advertising costs, IFRS accounting really shines as a
principle-based method which takes into account whether an asset will have a future economic benefit as a way of assessing the
value. Intangible assets measured under GAAP are recognized at the fair market value and nothing more.

• Income Statements - Under IFRS, extraordinary or unusual items are included in the income statement and not segregated,
whereas, under GAAP, they are separated and shown below the net income portion of the income statement.

• Classification of Liabilities - The classification of debts under GAAP is split between current liabilities, where a company expects to
settle a debt within 12 months, and noncurrent liabilities, which are debts that will not be repaid within 12 months, whereas, in IFRS,
there is no differentiation made between the classification of liabilities, as all debts are considered noncurrent on the balance sheet.

• Fixed Assets - When it comes to fixed assets, such as property, furniture and equipment, companies using GAAP accounting must
value these assets using the cost model which takes into account the historical value of an asset minus any accumulated
depreciation, whereas, IFRS allows a different model for fixed assets called the revaluation model, which is based on the fair value at
the current date minus any accumulated depreciation and impairment losses.

• Quality Characteristics - GAAP works within a hierarchy of characteristics, such as relevance, reliability, comparability and
understandability, to make informed decisions based on user-specific circumstances, whereas, IFRS also works with the same
characteristics, with the exception that decisions cannot be made on the specific circumstances of an individual.
CONSOLIDATED INDIAN GAAP STATEMENT
 RECOMMENDATION
• The first step to achieve the
vision of Essar Group is to
report financial statements in
one language which is
understandable to all
investors around the world.
• Therefore, London will be the
most feasible market to raise
equity which follows IFRS
standards.
THANK YOU!