Audit regulator asks Mahindra Holidays to review policies. Investors should not ignore.

Target Date - July 31, 2023

National Financial Reporting Authority (NFRA) has directed Mahindra Holidays to “thoroughly and proactively” review its accounting policies and practices in respect of segment reporting.

What’s the background and what exactly is this all about?

  • NFRA order is passed in the wake of Delhi High Court’s order of January 18, 2023 following a writ filed by petitioner Brigadier Vivek Kashinath Chhatre, who alleged various irregularities, including accounting and auditing irregularities in the functioning of the Company. The Delhi High Court had asked NFRA to dispose of the matter by March 31.
  • The issue raised by Chhatre in his complaint (that potentially relates to implementation of accounting standards) is that the Company MHRIL raises substantial revenues through the Annual Subscription Fee (ASF) but does 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 utilisation.
    • Also, MHRIL does not meet it’s 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.
  • NFRA concluded that both these issues impacted the implementation of the accounting standards.

Customers (members) of Mahindra Holidays have long complained that it’s very difficult to book properties when needed. As they have paid upfront membership fee and also pay annual maintenance charges, many of them feel disgruntled.

To be fair to the Company, this is also the nature of the business and it’s impossible for the Company to always please the members. Any property will always be in limited supply compared with the potential demand out of 2.8 lakh + members; especially during the peak seasons.

The petitioner seems to have followed an interesting approach of forcing the Company to report ASF as a separate segment. The hope is that this will streamline the process and make the Company’s operations more efficient and transparent.

(An accounting policy being used to bring in efficiency into operations is quite unique. How much it helps, remains to be seen.)

What’s the order?

NFRA has directed that MHRIL’s review and the changes brought in its accounting practices and reporting should be properly documented, especially with respect to the Chief Operating Decision Maker’s exercise of monitoring and control, both at the aggregated and disaggregated, granular level, and such documentation should be verified by Company’s Statutory Auditor who should complete this process by July 31, 2023.

NFRA after reviewing this documentation will decide the further course of action.

Why investors should not ignore?

If we assume that the complainant achieves it’s intended objective and change in accounting policy brings in any efficiency into the Company’s obligations towards it’s members, it implies lower revenues from non member sales/ bookings.

The subject order in any case should ideally make the Company more careful towards it’s obligations towards the members. Further so, as the industry is under revival and the Company has aggressive growth targets that it would not be able to achieve without increasing the happiness quotient of it’s customers.

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