TMI Blog2023 (7) TMI 832X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 MHRI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - (Praveen Kumar Tiwari) Member, NFRA , (Dr Ajay Bhushan Prasad Pandey) Chairperson, NFRA And (Smita Jhingran) Mem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the auditors appointed under section 139 of CA-2013. The auditor has to comply with auditing standards prescribed by the Central Government under section 143 (10) of CA-2013. The SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015, (LODR hereafter), require the listed companies like MHRIL to prepare and disclose information in accordance with applicable standards of accounting and financial disclosure. The relevant accounting standards, known as Indian Accounting Standards or Ind AS, have been notified by the Central Government in 2015. All listed companies including MHRIL are required by law to follow the Ind AS in preparing their accounts. The management of a company is responsible for preparing the accounts and certifying that they present a True and Fair view of the operations of the entity. According to Ind AS 1, the application of Ind AS, with additional disclosures when necessary, is presumed to result in financial statements that present a True and Fair view (para 15) and an entity shall not describe financial statements as complying with Ind AS unless they comply with all the requirements of Ind ASs. The statutory auditors appointed under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not report it as a separate Operating Segment, as required by Ind AS 108. Because of this, there is a lack of transparency in the operation of the ASF, especially the basis of determining the ASF charges and its utilization. (b) MHRIL does not meet its 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. In our view, both these issues impact the implementation of accounting standards (Ind AS), and therefore we proceed to deal with these in the following paragraphs. I. Implementation of Ind AS 108: Operating Segments 6. Briefly, the contention of the complainant is that the MHRIL does not report the ASF as a separate segment in its financial statements, even though the ASF constitutes a significant portion of MHRIL's revenues. The position of the MHRIL has been that the ASF is not a separate or distinct business activity and it does not meet the conditions set out for being treated as an Operating Segment in paragraph 5 of the Ind AS 108, the applicable standard on Operating Segments. MHRIL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te operating segment unless it meets the criteria of an operating segment laid down in paragraph 5 of Ind AS 108 (quoted in paragraph 8 of this Order above). 11. In this regard, while responding to the issues raised by VKC on the ASF being a separate Operating and Reportable segment, M/s BSR Co. LLP, the Statutory Auditor of MHRIL, had stated in their letter dated 30th October 2021 addressed to the Assistant Registrar of Companies that ASF is not a business activity in itself, but is a revenue arising from a business activity. However, it was seen that neither BSR nor the MHRIL has analysed further whether the business activity underlying the ASF can qualify as an operating segment on the criteria prescribed in paragraph 5 of Ind AS 108. During the in-person meeting, VKC clarified that what he actually meant was that the activities connected with ASF be reported separately, as the ASF was being charged exclusively from the business activities related to the Members, as distinct from the FITs who do not have to pay ASF. 12. MHRIL stated that it follows a mixed use model which provides non-members access to the unutilized apartments on a per-night-tariff basis. This enables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FITs; the operating results of FITs are not regularly reviewed by the Board; and no discrete information pertaining to expenses of FITs is available) appear extraordinary, raising questions about the accounting systems put in place by MHRL, which should ideally be geared to capture basic unit level information on revenues and expenses, especially in a business where the revenues and expenses can be traced back to each discrete traveller, be it a Member or FIT, and which in turn also provides a valid basis for pro-rating common expenses like the maintenance, security etc. It is also difficult to understand why a listed company like MHRIL, which is expected to proactively disclose information to improve the transparency of its accounts, should be consistently resisting requests of its Members for additional disclosures. It is also noteworthy that while MHRIL's arguments primarily focus on the non-applicability of the Operating Segment criteria in case of FIT, the applicability of these criteria on Members as a separate Operating Segment has never been discussed by MHRIL. This is important as under Ind AS 108, the reportability of an operating segment that meets the threshold of 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position obtaining in the MHRIL. 16. We have noted earlier that MHRIL has, in its statutory filings with the MCA for the years ending 31 March 2015 to 31 March 2020, in Form No. MGT-9, identified three main products/ services viz., (1) Income from sale of vacation ownership (VO) (32.74-56.01% of total turnover) , (2) Annual Subscription Fees from VO members (17 .97-28.09% of total turnover), and (3) Income from sale of food and beverages {10.59-13.89% of total turnover) 17. Notwithstanding the above classification of its products and services, where ASF has been identified as a separate product/ service consistently over the period 2014-15 to 2019-20 (MHRL discontinued filing the report in MGT-9 pursuant to notification issued by MCA with effect from 28 August 2020), the MHRL has not produced evidence of any analysis and consideration by the CODM whether these three distinct products/ services qualify for being operating segments, although each of these would appear to meet the reportability threshold of 10% under Ind AS 108. We note that the mainstay of VKC's demand has been to report the ASF as a separate segment. 18. In its submission dated 11 March 2023, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cally asked if the CODM had applied the parameters of operating segment to the two distinct categories viz., Members and FITs, MHRIL has not produced any verifiable evidence apart from stating that the revenues from FITs cannot be considered as a separate segment. In the process, MHRIL has made certain sweeping statements that would seem to defy prudent or even common business sense. These include statements like No separate resources are allocated to FITs , The operating results pertaining to FITs are not regularly reviewed by the CODM (Board) and No discrete information pertaining to the expenses of FITs is available with the Company . These statements raise questions about the way the business is operated and the way the accounts are kept by MHRIL. For example, if separate resources are not allocated for FITs, then how the business related to FITs is managed? Or, if the operating results are not reviewed, then how does the CODM know if the business is worth it? Similarly, the statement that no discrete information pertaining to expenses of FITs is available is curious in light of the fact that FITs are discrete units for which a majority of the services consumed should be ide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if he fails to make payment for the ASF, even if he has paid the membership fees. A totally different set of contractual conditions exists in respect of the FITs, who are in the nature of walk-in customers who pay and stay. In terms of the accounting standards, Ind As 115 provides the framework for recognition of revenue from contracts. We discuss below some of its possible implications and applicability to the MHRIL's case. 23. The main features of recognition of revenue from contracts under Ind AS 115 are: a. Para 4 specifies the accounting for an individual contract with a customer and provides for aggregation (portfolio of contracts or performance obligations) of contracts with similar characteristics if the effects on the financial statements would not differ materially. b. Paragraph 22 requires an entity to assess, at contract inception, the goods or services promised in the contract and identify each promise as a performance obligation. c. Paragraph 24 states that the performance obligation include not only the goods or services explicitly stated in the contract but also those implied by the entity's customary business practices, published policies or spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecognised even when a customer (Member) is unable to obtain accommodation on the ground of unavailability of rooms, while vacant rooms are available with the Company. In such a scenario recognition of revenue by MHRIL, while the control criterion in para 31 is not satisfied, may be questionable and the MHRIL could not provide any satisfactory reply how it ensures that this criterion is satisfied. This issue would be particularly relevant when a Member does not get an accommodation but a FIT gets it for the same date. MHRIL did not demonstrate what controls it has in place to ensure that revenue is not recognised when this situation is encountered; and the statutory auditor of MHRIL could also not demonstrate how this control, if instituted, has been tested by them in their statutory audits. 26. Para 110 of Ind AS 115 states that the objective of the disclosure requirements is for an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Para 15 of Ind AS 1 states that Financial statements shall present a true and fair view of the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting that the Management/CODM were reviewing the operating results at a more disaggregated, granular level but had identified only one operating segment. We note that a regulatory nudge led to more operating segments being reported in such cases. We are of the view that a proactive approach by the management/CODM, in the true spirit of the accounting standards, will result in more positive disclosures improving the quality and transparency of accounts. 29. In the case of MHRIL, in addition to the two broad categories at the customer type level (Members and FITs) we have noted existence of other product differentiations like CMH, Bliss and GoZest and the different colour categories of membership (Purple, Blue, Red and White) MHRIL has not presented any evidence of a proactive application of the prescribed criteria for operating segments. In the present context, it is desirable for the CODM of MHRIL to take note of the international developments and practices and also adopt a proactive stance in its disclosures, taking a cue also from the SEBI LODR that expects the entities to follow the disclosure norms in letter and spirit. 30. In summary, based on the facts and circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X
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