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TMI Blog2023 (7) TMI 832X X X X Extracts X X X X X X X X Extracts X X X X ..... ssues raised in the complaint were under consideration. Paragraphs 6 of the orders of the Hon. High Court dated 18th January 2023 are reproduced below for context: "6. Considering this stand of NFRA, the NFRA is directed to dispose of the complaint by 31 March 2023. The NFRA would take into consideration the pleadings and the documents in this writ as also the documents annexed with the two fresh applications filed by the Petitioner" 2. We have perused the writ filed by the petitioner VKC and the attached documents as also the documents annexed with the two fresh applications by the petitioner. VKC has made representations on a host of issues covering accounting and consumer protection issues. NFRA's mandate has been defined in Section 132 of the Companies Act 2013 (CA-2013 hereafter) and includes monitoring and enforcement of compliance with the accounting standards and auditing standards. Therefore, this order is restricted to the issues raised by the petitioner that directly or potentially pertain to the accounting and auditing standards. 3. The companies are required to keep their books of account based on which they are required to prepare their financial statements, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etings on 3.3.2023 were conducted separately with VKC and MHRIL, following the latter's request to protect its corporate information. Post the inperson meeting, MHRIL submitted a written response on 11.3.2023 and was given another hearing on 17.3.2023 to offer further clarification on the points raised during the meeting on 3.3.2023. The meeting on 17 March 2023 was also attended by its Managing Director and CEO, Mr Kavinder Singh (List of persons who attended is at Annex II). VKC has also submitted some additional information and documents subsequent to the in-person meeting on 3.3.2023. The documents and information submitted by both counterparties have been duly considered while passing this order. The issues raised in the complaint 5. In brief, the complainant is a Member of the MHRIL, which entitles him to a week's vacation at different resorts of MHRIL, subject to availability and entitlement. For being eligible, the Members have to pay a one-time (or in instalments) Membership Fees (MF) and recurring Annual Subscription Fee (ASF), in addition to charges on food and beverages actually consumed during the vacation stay. MHRIL has averred that it follows a mixed-busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity) (b) whose operating results are regularly reviewed by the entity's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and (c) for which discrete financial information is available." 10. NFRA had examined the matter in the past in response to a reference from the Central Consumer Protection Authority (CCPA) and, based on the information and explanations provided by MHRIL at that time, had taken the position that ASF is not a separate reporting segment. Subsequently, however, NFRA has reviewed copies of MHRIL's statutory filings made to the Ministry of Corporate Affairs (MCA) in Form MGT-9 and made available to NFRA by VKC. These filings show that for the years ended 31 March 2015 to 2020, MHRIL has consistently disclosed three principal business activities of the company (disclosed as main products/ services) viz., Income from sale of Vacation Ownership (VO), Annual Subscription Fee (ASF) from VO members, and Income from sale of Food and Beverages, each of them acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tractual obligations and privileges. MHRIL was asked if they had considered Members and FITs as separate segments. MHRIL gave the following reasons for not reporting FITs as a separate segment (page 9 of MHRIL reply dated 11 March 2023): (a) The revenue generated from FIT is in effect incremental in nature arising from the rooms in the resorts booked for them that OTHERWISE remain unoccupied; (b) No separate resources are allocated for FIT. Thus, the question of "review of operating results by the entity's Chief Operating Decision Maker (CODM) to make decision about resources to be allocated to the segment and assess its performance" is not applicable; (c) The expenses for services provided to the FIT and the members holidaying at the resorts are common; (d) In the last 5 years, the revenue from FIT (Room from Rentals) has been in the range of 2% and 4.8% of the total turnover; To say the least this is insignificant. (e) The operating results pertaining to FIT are not regularly reviewed by the CODM (Board) of the Company to make decisions about resources to be allocated to the same and assess its performance (Condition b of para 5 of IND AS 108 not being fulfilled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hold of 10 % has been prescribed in paragraph 13 for a segment to become reportable. Segments that do not meet the quantitative thresholds can be combined with other segments that do not meet the quantitative thresholds to produce a reportable segment subject to their being similar and meeting the aggregation criteria (paragraph 14). Needless to say, the presence of operating segments that do not meet the quantitative thresholds, does not affect the reportability of a reportable segment that otherwise meets the reporting threshold. The information that needs to be disclosed while reporting segments has been prescribed in paragraphs 20-24 and includes the general information (paragraph 22), information about a reported segment's profit or loss, including revenues and expenses, and assets and liabilities. Evidently, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting segments. 19. 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. Being so distinct from each other there may be a strong case for evaluating them as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... II. Recognition of revenue from contracts 21. VKC has also raised the point that MHRL has not been meeting its commitment, stated in its public pronouncements, of the Members First policy, and that he has evidence that he did not get booking as a Member but got it as FIT for the same date. The Members First policy has been stated in MHRIL's prospectuses issued in 2009 and 2013 at the time of public issues. It is understood that the rooms for FITs were available for booking only 15 or less days before the date of accommodation. A perusal of the Confirmation Vouchers (CVs) issued by MHRIL to FITs, of which copies were provided by MHRIL, shows that the accommodation booked by a FIT can be cancelled 45 or more days in advance without any cancellation charges. This means that a FIT can book an accommodation even more than 45 days in advance. MHRL's position is that it was not bound to stick to its position stated in the 2009 and 2013 prospectuses, and that the policy stated by it was a dynamic one, liable to be changed as per the business requirements. 22. We believe that this issue has accounting implications inasmuch as this can potentially breach the Members First policy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h customers, written, expected and otherwise communicated, may differ at different times and may raise questions on how MHRIL ensures compliance with the principles in para 4 of Ind AS 115 that the effects on the financial statements of applying this Standard to the portfolio of Vacation Ownership would not differ materially from applying this Standard to the individual contracts with the members. 25. In addition, as per para 31, an entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer. An asset is transferred when (or as) the customer obtains control of that asset. Para 33 further explains that Goods and services are assets, even if only momentarily when they are received and used. Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset. In the case of vacation ownership, the members are able to obtain control when they are able to get a confirmed booking of accommodation at their option ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olicies 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 and directions 27. It is usual for the regulators internationally, to question the preparers of financial statements (like MHRIL) about the basis and rationale for their segment reporting policies and practices. The FASB Statement No. 131 [AC section S30], for example, requires that public business enterprises report certain information about products and services, geographic areas, and major customers regardless of whether that information is used by management in assessing segment performance. Similar provision exists in paragraph 22 (a) of Ind AS 115 which requires an entity to disclose general information about factors used to identify its reportable segments, including whether management has chosen to organise the entity around differences in products and services, geographical areas, regulatory environments, or a combination of factor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bliss and GoZest), or the other categories of customers such as FIT, and MHRIL has not produced any evidence of testing the criteria of operating segment as per Ind AS 108 on these potential segments. Further, in respect of Ind AS 115, the company needs to show demonstrable controls in recognition of revenue related to performance obligations in respect of contract with customers as discussed in the above paragraphs. Accordingly, and in compliance of the orders of the Hon. High Court of Delhi dated 18th January 2023, and in exercise of our powers under section 132 of the Companies Act 2013 and the NFRA Rules made thereunder we pass the following directions 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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