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2023 (7) TMI 832 - NFRA - Companies LawSeeking expeditious disposal of complaint - Accounting and auditing irregularities in the functioning of the MHRIL - one-time (or in instalments) Membership Fees (MF) and recurring Annual Subscription Fee (ASF) - MHRIL raises substantial revenues through the ASF but does not report it as a separate Operating Segment, as required by Ind AS 108 - promised obligation of providing the assured one week's vacation to the members, on the ground of non-availability of rooms, even though the rooms for the same duration could be booked through other channels as non-members, not met up. Implementation of Ind AS 108 Operating Segments - HELD THAT - The Ind AS 108 places an onerous responsibility on the Company to not only determine the operating segments, and their reportability or otherwise after applying the prescribed aggregation measures, but also to make necessary disclosures, including the profit and loss and revenues and expenses for the reportable segments. It follows that the determination of Operating Segments cannot be an arbitrary process depending on the whims and fancies of the Company but has to follow a process because once an Operating Segment has been determined it is obligatory to report it, subject to it meeting the reportability threshold. It is in this light that we proceed to examine the position obtaining in the MHRIL. MHRL has stated that it follows a mixed- use business model wherein both Members and FITs have access to its facilities. MHRIL has referred to its membership rules stating that the members specifically agree to such mixed-business model. We have perused the said rules. Rule 13.4 states that certain Club Mahindra Notified Resorts (CMNR) may have some rooms (FIT rooms) earmarked exclusively for FITs and Member agrees to the same. It further says that the FIT rooms will generally not have the same amenities and facilities as the rooms provided to the members such as kitchenette, sofa cum bed etc.; that FIT rooms may be made available by MHRIL to Members opting for it depending on availability; that the Member agrees not to make any claim whatsoever against MHRIL on the ground that such rooms do not have similar amenities and facilities as the rooms provided to members. It is quite clear from this that the room types and the associated amenities and facilities provided to the Members and the FITs are different and are distinguishable from each other, as are their payment obligations. Recognition of revenue from contracts - HELD THAT - Presentation of a true and fair view requires faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework. The application of Ind ASs, with additional disclosure, when necessary, is presumed to result in financial statements that present a true and fair view. Regulation 4 (2) of SEBI LODR requires that a listed entity shall implement the prescribed accounting standards in letter and spirit in the presentation of financial statements taking into consideration the interest of all stakeholders and shall also ensure that the annual audit is conducted by an independent, competent and qualified auditor. The preceding discussion shows that there are many lingering questions in respect of the accounting policies and practices followed by MHRIL, especially as they relate to Ind AS 108 and Ind AS 115, resulting in representation by its Members to various forums (including NFRA) and filing of court cases. MHRIL will be well advised to address these questions in a convincing manner and adhere to the accounting standards in true spirit. Conclusion - The current accounting policies and practices of MHRIL need review in application of the Ind AS 108- Segment Reporting. The internal controls, disclosures and policies with respect to Ind AS 115- Recognition of Revenue from Contracts also require review. To recapitulate, MHRIL's Consolidated Financial Statements do not provide disaggregated segment reporting for the one distinct category at the customer type level i.e Members - Following directions given to the MHRIL and its auditor 1. MHRIL shall, going forward, thoroughly and proactively review its accounting policies and practices in respect of segment reporting, as they relate to application of Ind AS 108; and also Ind AS 115, keeping in mind our above findings relating to deficiencies in accounting disclosures. Following such a review, MHRIL shall take necessary measures to address the deficiencies pointed out in the foregoing paragraphs and effect changes in the disclosures in its financial statements in the letter and spirit of the disclosure as required under the Companies Act and the SEBI LODR. MHRIL shall complete this process by 30th June 2023. 2. MHRIL's review and the changes brought in its accounting practices and reporting should be properly documented, especially with respect to the CODM's exercise of monitoring and control, both at the aggregated and dis-aggregated, granular level, and such documentation shall be verified by MHRIL's statutory auditor who shall complete this process by 31st July 2023. 3. MHRIL and its statutory auditor shall report separately to NFRA the results of their review and the changes effected in the MHRIL's accounting policies and practices. Based on its own review of the reports of MHRIL and its statutory auditor, NFRA will take further course of action as provided under the existing provisions of the CA-2013 and the NFRA Rules.
Issues Involved:
1. Implementation of Ind AS 108: Operating Segments 2. Recognition of revenue from contracts Summary: I. Implementation of Ind AS 108: Operating Segments The complainant, a member of MHRIL, raised issues regarding the lack of transparency in the reporting of Annual Subscription Fees (ASF) as a separate Operating Segment, as required by Ind AS 108. MHRIL argued that ASF is not a distinct business activity and does not meet the criteria set out in paragraph 5 of Ind AS 108. NFRA noted that MHRIL had consistently disclosed ASF as a principal business activity in its statutory filings, which should have been considered for segment reporting. MHRIL's failure to produce evidence of any analysis by the Chief Operating Decision Maker (CODM) regarding the qualification of these activities as operating segments was highlighted. NFRA found that MHRIL's accounting systems and disclosures were deficient, particularly in capturing unit-level information on revenues and expenses, and recommended a review of MHRIL's segment reporting practices. II. Recognition of revenue from contracts The complainant also raised concerns about MHRIL's failure to meet its commitment to provide assured vacation accommodation to members, impacting the recognition of revenue from contracts. Ind AS 115 provides the framework for recognizing revenue from contracts, requiring entities to assess performance obligations and recognize revenue when these obligations are satisfied. NFRA found that MHRIL's practices potentially breached the Members First policy, as members were sometimes denied accommodation while FITs (Free Inward Travelers) were accommodated. This raised questions about MHRIL's compliance with Ind AS 115, particularly regarding the control criterion for recognizing revenue. NFRA recommended that MHRIL demonstrate controls to ensure revenue recognition aligns with performance obligations. Conclusion and Directions NFRA concluded that MHRIL's accounting policies and practices need review concerning Ind AS 108 and Ind AS 115. MHRIL was directed to review and address deficiencies in segment reporting and revenue recognition by 30th June 2023, with documentation verified by the statutory auditor by 31st July 2023. MHRIL and its auditor were instructed to report the results to NFRA for further action. The complaint was disposed of accordingly.
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