Airlines fly into audit red-flags over 'going concern' claims
New Delhi: As airlines continue to find it tough to generate profits and raise funds, auditors of all three listed carriers -- Jet Airways, Spicejet and Kingfisher -- have raised red-flags on their 'going concern' status.
In their latest quarter review reports, the auditors of all three airlines have said that the "appropriateness of the going concern basis" is dependent on the respective company's ability to generate adequate finance to meet short-term and long-term obligations and to operate profitably.
A company is typically known as a 'going concern' if it has sufficient resources to continue to operate indefinitely and to avoid any potential bankruptcy risks.
Troubled air carrier Kingfisher Airlines, part of Vijay Mallya-led UB Group, has faced the most stringent set of adverse auditor comments, while auditors for Naresh Goyal-led Jet Airways and Maran family-run Sun Group's Spicejet have also commented on their 'going concern' status.
However, the management of all three carriers have defended their decisions to prepare their respective financial statements on 'going concern' basis.
Announcing its latest quarter results for the period ended September 30, 2013, Kingfisher said its flying permit has lapsed and lenders have recalled their loans, but the "company has detailed plans for renewal of its operations".
Despite being grounded for over a year now, Kingfisher said it is confident of raising adequate finance, obtaining renewal of the permit, rescheduling debt and receiving continued support from the promoter group.
"Therefore, the management holds the view that the company will realize its assets and discharge liabilities in the normal course of business. Accordingly, the financial results have been prepared on the basis that the Company is a going concern and that no adjustments are required to the carrying value of assets and liabilities," Kingfisher said.
However, the auditors pointed out that Kingfisher has prepared its latest quarter results on going concern basis, "notwithstanding the fact that the company's networth is completely eroded, the scheduled air operator's permit issued by the Director General of Civil Aviation, Government of India, has lapsed and the consortium banks have recalled their debts to the company".
"These events cast significant doubt on the ability of the company to continue as a going concern," auditors said, while adding that the appropriateness of this basis is inter-alia dependent on the company's ability to obtain renewal of permit, infuse requisite funds, reschedule debts and resume normal operations.
The auditors have also said that certain accounting methods adopted by Kingfisher "is not in accordance with generally accepted accounting standards prevalent in India".
Kingfisher posted a net loss of Rs 715 crore for quarter ended September 30, 2013, while its accumulated losses at the end of last fiscal stood at over Rs 16,000 crore.
In their latest quarter review report, Jet Airways' auditors have also said that "the appropriateness of assumption of going concern is dependent upon implementation of the alliance with Strategic Partner (Etihad Airways) and/or the company's ability to raise requisite finance/generate cash flows in future to meet its obligations, including financial support to its subsidiary."
Earlier this year, Jet proposed to sell 24 percent stake to Abu Dhabi-based Etihad, but the deal has been stuck for a long time for want of various regulatory approvals.
Posting a net loss of Rs 891 crore for July-September 2013 quarter, Jet said that Etihad deal is expected to result in "sustainable cash flows and accordingly the statement of financial results continue to be presented on a going concern basis, which contemplates realisation of assets and settlement of liabilities in the normal course of business."
Spicejet's auditors, in their limited review report for the July-September quarter, said that the company's operating results have been materially impacted by various factors and its accumulated losses as on September 30, 2013, have fully eroded the networth of the company.
"The appropriateness of the going concern assumption is dependent on the company's ability to establish consistent profitable operations and generate positive cash flows as well as raising adequate finance to meet short-term and long-term obligations," the auditors said, while adding that that the management believes that the going concern assumption is appropriate.
Reporting a net loss of Rs 559 crore for the quarter, Spicejet said its operating results continued to be materially affected by factors like high fuel costs, currency depreciation, seasonal pricing pressure and economic slowdown.
However, various measures being undertaken by the company and improving investor sentiments "will not only result in sustainable cash flows, but also enhance the company's plans for expansion," Spicejet said.
"Accordingly, the company's financial statements have been prepared on a going concern basis," it added.
In accounting parlance, if a company prepares its financial statements on 'going concern' basis, it is assumed that it will continue to operate in foreseeable future without any need or intention on the part of management to liquidate the company or to significantly curtail operations.
If 'going concern' assumption of a company is considered to be invalid, it needs to prepare its financial statements on 'break-up' basis by listing the assets as per their sale value and the liabilities with their settlement amounts.
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