Going Concern Principle Tested
As a student of Accounting & Accounting Professional, we are taught the fundamental accounting principle that all business entities will fulfill the basic criteria of Going Concern. In other words the Financial Statements of a business entity will be prepared with a clear assumption that business will continue to exist indefinitely. It is with this assumption that all Financial Statements are prepared and understood by various stakeholders of the business .
However recently Principle of Going Concern was tested & invoked due to certain events impacting the business entities which raised question mark on the ability of these business entities to carry on its businesses in future. I refer to three recent instances where the principle of Going concern was invoked:
Bharti Airtel Limited
Vodafone Idea Limited
New Delhi Televisions Limited
Both Airtel & Vodafone are Telecommunication Service Providers & the recent Supreme Court decision on Adjusted Gross Revenue matter (relating to Licence Fees payable by telecom service providers to Government) had upheld the Stand of the Government regarding the Licence fees computation resulting in huge liability of about Rs 1.33 lacs crores for the Telecom Operators with Airtel & Vodafone Idea suffering brunt of the demands / liability. Both Airtel & Vodafone Idea Board of Directors have expressed their doubt on the ability of their businesses to continue as a Going Concern in their recently approved Unaudited Financial Statements of September 2019 filed with Stock exchanges. In case of New Delhi Televisions Limited, the company suffered abnormal heavy loss during the recently concluded Quarter ended September 2019 against profit in the previous year & while The Board in its report did cast a doubt on ability to carry on as Going concern but unlike Airtel & Vodafone Idea expressed its hope to meet the contractual obligations & Liabilities based on their planned business strategies & hence justified its stand that its Financial statements are prepared as a going concern.
Relevant extracts from each of the 3 Companies Quarterly reports are shared below which gives insight into this matter & Board of Directors views specially with respect to its ability to carry on as a Going concern in the foreseeable
Extracts from Unaudited Financial Results For the Quarter ended Sept 2019 of Vodafone Idea Limited
The Hon'ble Supreme Court on Oct 24,2019 announced its judgement on the Adjusted Gross Revenue ( AGR) matter which has significant financial implication for the industry. Further the Hon'ble SC has provided 90 days time to pay the amount and report compliance. We have accounted for the estimated liability of Rs 276.1 billion related to Licence Fee & Rs 165.4 billion related to Spectrum Usage Charges upto September, 30, 2019 including the interest, penalty, and interest thereon of Rs 330.1 billion. This estimate is based on demands received from DoT till date, an estimation for the period for which demands have not been raised, together with interest & penalty adjusting for certain computation corrections. Whilst the company has provided for SUC, considering that no spectrum is used for generating non telecom income, the company is evaluating the levy of SUC on such income. Accordingly, during the quarter we recognized a charge of Rs 256.8 billion as a part of exceptional item after adjusting the available provision and potential payments, on satisfaction of contractual conditions, under a mechanism with Vodafone Group. We are in the process of filing a review petition.
It is to be noted that our ability to continue as a going concern is dependent on obtaining the reliefs from the Government as discussed above & positive outcome of the proposed legal remedy. Pending the outcome of the above matters, these financial results have been prepared on a Going Concern basis.
Extracts from Unaudited Financial Results for QE Sept 2019 of Bharti Airtel Limited
Note 3. The financial results have been prepared on the basis of the accounting principles applicable to a going concern. Attention is drawn to a specific event post quarter end as delineated below.
On Oct 24, 2019, The Honourable Supreme Court of India delivered a judgment in relation to a long outstanding industry-wide case upholding the view considered by DoT in respect of the definition of Adjusted Gross Revenue( AGR). The Honourable SC has allowed a period of three months to the affected parties to pay the amount to DoT. The court judgement has significant financial implications on the Group.
In the absence of available reliefs, the Group has in these Financial results, provided for an additional amount of Rs 168150 Mn ( Comprising of Principal of Rs. 32070 Mn., interest of Rs 70000 Mn, penalty of Rs24920 Mb, and interest on penalty of Rs 41160 Mn ) as a charge to the statement of Profit & Loss, with respect to the license fee payable as estimated based on Court judgment. in addition, an amount of Rs116,350 Mn ( comprising of principal of Rs 29,570 Mn, interest of Rs 52,190Mn, penalty of Rs 12, 068 Mn, and intrest on penalty of Rs. 21, 910 Mn ) with respect to Spectrum usage Charges ( SUC) based on the definition of AGR, has further been provided as a charge to the statement of porofit & loss as estimated, albeit the Group believes SUC is a charge related to use of spectrum and should be levied only on the AGR earned from wireless access subscribers/ services. These Provisions have been made without prejudice to the Group's right to contest DoT's demands on facts as well ason rights available in law.
Management Plan to deal with this event and the material uncertainty related to the event
The Group will require significant additional financing to discharge its liability under the court judgment; the Management's action include, inter alia, accessing diversified source of finance. The Group has established track record of accessing diversified sorces of Finance across markets and currencies . However, there can be no assurance of the success of management plans to access additional sources of finance to the extent required, on terms acceptable to the Group. And to raise these amounts in a timely manner. This represents a material uncertainity whereby, it may be unable to realize its assets and discharge its liabilities in the normal course of business, and accordingly may cast significant doubt on the Group's ability to continue as a Going Concern.
Extracts from Unaudited Financial Results for the quarter Ended September 2019 of New Delhi Televisions Limited
New Delhi Televisions Limited, the Television arm of the group, has incurred a loss of Rs 1016 lakhs (Rs 10.16 crores) during the quarter ended 30 th Sept 2019 as against profit of Rs 19 lakhs (INR 0.19 crores) during the corresponding quarter ended 30th September 2018, As on 30th September 2019, New Delhi Televisions Limited, Current liabilities exceeds the current assets by INR 8892 lakhs (INR Rs 88.92 crores. The Television arm of the group, New Delhi Television Limited ability to continue as a going concern is significantly dependent on meeting its long term & short term Working capital requirements, ability to pay its overdue payables, management implementation of initiatives like rationalizing costs, initiatives to improve advertising revenues, which are pressure, negotiating extended credit terms, sale/ divestment of non-core businesses and building efficiencies in collections. Based on current business plans & projections prepared by the management, the New Delhi Televisions Limited expects the improvement in operation with better operational efficiencies. The material nature of the aforesaid matters, may have material adverse impact in future plans of the company. However, the management, based on their understanding of the overall business and planned strategies, has a reasonable expectation that the company will be able to meet the contractual obligations and liabilities due in the near future.Accordingly the financial statements have been prepared on going concern basis
Accounting Standard AS-1 stipulates among other things that Members should ensure that Fundamental accounting assumption of Going Concern is followed & disclosed in the Financial Statements. This is generally followed and practiced while preparing the Financial Statements, nonexistence or threat to Going concern needs to be highlighted which is what the above three Business Entities have rightly disclosed & dealt with in their Financial Statements. It is for each stake holders to take cognizance of the situation ( wherever going concern is under threat) & take his own decision while dealing with the Business entity.