Facts of the Case

Brigadier Vivek Kashinath Chhatre, a member of Mahindra Holidays & Resorts India Limited (MHRIL), filed a complaint alleging several irregularities in the functioning of MHRIL, including accounting and auditing issues.

The matter came before NFRA pursuant to directions issued by the Delhi High Court in W.P. (C) No. 12985/2022, directing NFRA to dispose of the complaint.

The complainant contended that:

1.      MHRIL collected substantial Annual Subscription Fees (ASF) from members but failed to disclose ASF-related activities as a separate operating segment under Ind AS 108.

2.      Members were allegedly denied their assured vacation benefits due to non-availability of rooms, whereas similar accommodations were allegedly available to Free Independent Travelers (FITs).

3.      Such practices raised concerns regarding transparency in financial reporting and compliance with accounting standards.

NFRA examined pleadings, documents, statutory filings, responses submitted by MHRIL, and conducted hearings with both parties before passing the order.

Issues Involved

1.      Whether MHRIL was required to separately evaluate and disclose certain activities, including Annual Subscription Fees (ASF), Membership-related operations, Food & Beverage operations, and other customer categories as operating/reportable segments under Ind AS 108.

2.      Whether MHRIL’s accounting policies and disclosures relating to segment reporting complied with the requirements of Ind AS 108.

3.      Whether MHRIL’s revenue recognition practices complied with Ind AS 115, particularly where members allegedly did not receive accommodation despite payment of membership-related charges.

4.      Whether adequate controls existed to ensure revenue was recognized only upon satisfaction of performance obligations under customer contracts.

Petitioner’s Arguments

The complainant argued that:

• ASF constituted a significant portion of MHRIL’s revenue and should have been separately reported as an operating segment under Ind AS 108.

• Lack of separate reporting resulted in inadequate transparency regarding determination, utilization, and management of ASF collections.

• MHRIL failed to honour its Members First Policy and did not consistently provide assured vacation benefits to members.

• Members were allegedly unable to obtain bookings despite accommodations being available for FIT customers.

• Such practices potentially affected the accuracy of revenue recognition and financial disclosures.

Respondent’s Arguments

MHRIL contended that:

• ASF was not an independent business activity but merely revenue arising from membership operations.

• Membership Fees and ASF formed part of an integrated business model and could not be treated separately.

• ASF did not satisfy the criteria prescribed under Paragraph 5 of Ind AS 108 for classification as an operating segment.

• Separate resources were not allocated for FIT operations, and operating results relating to FIT customers were not separately reviewed by the Chief Operating Decision Maker (CODM).

• Revenue from FIT operations was insignificant and therefore did not warrant separate segment reporting.

• The Members First Policy was dynamic in nature and subject to changes based on business requirements.

Court / NFRA Findings

NFRA made several important observations:

1.      Deficiencies in Segment Reporting

NFRA observed that MHRIL’s statutory filings had consistently disclosed three principal products/services:

• Vacation Ownership Revenue
• Annual Subscription Fee (ASF)
• Food & Beverage Revenue

Each category crossed the 10% threshold prescribed under Ind AS 108 for reportable segments in several years.

NFRA found that MHRIL had not produced evidence demonstrating that the CODM had properly evaluated whether these categories qualified as operating segments.

2.      Distinct Customer Categories

NFRA noted that Members and FITs were distinct customer categories having:

• Different contractual arrangements;
• Different payment obligations;
• Different service entitlements; and
• Different benefits.

Therefore, there existed a strong case for evaluating them separately under Ind AS 108.

3.      Concerns Regarding Accounting Systems

NFRA questioned MHRIL’s assertions that:

• No separate resources were allocated to FIT operations;
• FIT performance was not reviewed separately; and
• No discrete expense information relating to FIT customers was available.

According to NFRA, such assertions raised concerns regarding the adequacy of accounting systems and internal reporting mechanisms.

4.      Revenue Recognition Concerns under Ind AS 115

NFRA observed that under Ind AS 115, revenue can be recognized only when performance obligations are satisfied.

The authority noted that if a member was denied accommodation while rooms remained available and were allotted to FIT customers, recognition of revenue from members could become questionable.

NFRA further observed that MHRIL failed to demonstrate adequate controls ensuring compliance with performance obligation requirements under Ind AS 115.

5.      Need for Enhanced Disclosures

NFRA concluded that MHRIL’s disclosures did not adequately reflect several potential reportable segments and therefore required comprehensive review.

Court Order / Directions

NFRA directed as follows:

1.      MHRIL shall comprehensively review its accounting policies and practices relating to:

• Ind AS 108 – Operating Segments
• Ind AS 115 – Revenue from Contracts with Customers

2.      MHRIL shall rectify deficiencies identified by NFRA and make necessary improvements in financial statement disclosures in compliance with the Companies Act, 2013 and SEBI LODR requirements.

3.      The review process was directed to be completed by 30 June 2023.

4.      MHRIL’s statutory auditor was directed to verify the review and related documentation, including CODM monitoring and control processes, by 31 July 2023.

5.      Both MHRIL and its statutory auditor were directed to submit separate compliance reports to NFRA.

6.      NFRA reserved the right to take further action based on its review of the compliance reports.

7.      The complaint was accordingly disposed of.

Important Clarifications

• NFRA did not impose any penalty in this order.

• NFRA held that MHRIL’s existing accounting policies and disclosures required review and improvement.

• NFRA specifically found deficiencies in the application of Ind AS 108 relating to segment reporting.

• NFRA also expressed concerns regarding compliance with Ind AS 115 in relation to recognition of revenue from member contracts.

• The order highlights the importance of transparent segment disclosures, proper identification of operating segments, and robust controls over revenue recognition.

Sections / Provisions Involved

Companies Act, 2013

• Section 128 – Books of Account
• Section 129 – Financial Statements
• Section 132 – Powers of NFRA
• Section 133 – Accounting Standards
• Section 139 – Appointment of Auditors
• Section 143(10) – Auditing Standards

Indian Accounting Standards (Ind AS)

• Ind AS 108 – Operating Segments
• Ind AS 115 – Revenue from Contracts with Customers
• Ind AS 1 – Presentation of Financial Statements

Other Relevant Provisions

• SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR)

Link to download the order -https://cdnbbsr.s3waas.gov.in/s3e2ad76f2326fbc6b56a45a56c59fafdb/uploads/2023/03/2023032999.pdf

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