This case discusses the concept of Earnings Management from the big bath and restructuring method perspective. It analyzes how the management of Essar steel Ltd., used Corporate Debt Restructuring as a tool for increasing promoters interest in the company. It narrates the process of restructuring in detail over the period of four financial years and how Essar Steel promoters were able to increase their stake in the company

Earnings management occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports, to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers.

Earnings management includes making operational decisions, timing the recognition of non-operational transactions, or choosing accounting methods so as to manipulate reported earnings.” Earnings can be managed in different ways. Since companies follow accrual accounting, which calls for making estimates for various items like bad debts, depreciation, etc., there is plenty of opportunity for firms to make estimates based on their judgments and to manipulate these estimates to present the kind of picture they want to present. Earnings management can range from a little manipulation in financial statements, called ‘aggressive earnings management’, which incidentally may fall within the boundaries of GAAP, to outright fraudulent representation of financial statements with deliberate intention of hoodwinking the investing public. The latter is a criminal offence which may lead to litigations and finally to closure of a firm. ‘Big Bath & Restructuring’ is one of the methods of earnings management whereby the stock is beaten down by making financial results dismal by all possible write-offs to build up cookie jar reserves for the future. The stock price is first beaten down by write offs which allow options to be issued at lower prices and then future growth is promised to make the options appreciate. This article analyzes how Essar Steel Ltd., made use of the restructuring process to increase the promoters’ stake in the Company.

Accounting World Magazine, Earnings Management, Essar Steel Ltd., Goods and Services, Financial Reporting, Industrial Development Bank of India, IDBI, Corporate Debt Restructuring Group, CDR, Corporate Debt Restructuring Package, CDRP, Working Capital Term Loan, WCTL, Essar Power Limited, EPL, Steel Corporation of Gujarat Limited , SCGL.