NFRA issues directions to Company and Auditor for deficiencies in Accounting Policies of segment reporting and revenues

Background:

In respect of complaint made by Brigadier Vivek Chhatre against Mahindra Holidays Resorts India Limited (MHRIL), NFRA issued directions to MHRIL and its auditor w.r.t accounting and auditing irregularities in the functioning of the MHRIL, while observing that “current accounting policies and practices of MHRIL need review in application of Ind AS 108 – Segment Reporting.”

Issue:

MHRIL deals with two distinct categories of customers, the Members and FITs (Free Inward Travelers viz. non-members), of which the former constitute the major portion of business and the latter, according to MHRIL, have contributed less than 10% of the occupancy in the past. NFRA highlights that “MHRIL’s Consolidated Financial Statements do not provide disaggregated segment reporting for the one distinct category at the customer type level i.e Members. Therefore, the reporting by MHRIL is found deficient in application of Ind AS 108”. NFRA also opines that “the Consolidated Financial Statements do not take into account a number of other potential segments like

• Vacation Ownership, ASF (Annual Subscription Fee), and Food & Beverages (all three described as main products / services in its MGT-9 filings), or
• the types of Membership (Purple, Blue, Red and White or CMH, 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.

Directions issued by NFRA to MHRIL and its auditor:

• The MHRIL shall 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 NFRA’s findings relating to deficiencies in accounting disclosures. Following such a review, MHRIL shall take necessary measures to address the deficiencies pointed out by NFRA and effect changes in the disclosures in its financial statements as required under the Companies Act and the SEBI LODR. MHRIL shall complete this process by June 30, 2023.
• MHRIL’s review and the changes brought in its accounting practices and reporting should be properly documented, especially with respect to the CODM’s (Chief Operating Decision Maker) exercise of monitoring and control, both at the aggregated and disaggregated, and such documentation shall be verified by MHRIL’s statutory auditor who shall complete this process by July 31, 2023.
• 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 Companies Act, 2013 and the NFRA Rules.

SW Point of View:

Such directions by NFRA will create awareness among companies regarding their accounting and auditing irregularities and the need to review them.

Tamanna Bansal, Audit Associate, SW India