Anupama Hotels Ltd. operating an all category resort – “THE VILLAS” which is a famous Vacation Property located in the Hills of Shivalik and the…

Anupama Hotels Ltd. operating an all category resort – “THE VILLAS” which is a famous Vacation Property located in the Hills of Shivalik and the Room occupancy is almost full throughout the year. This property was a hot favorite for not only the people of India but also for International tourists. But, unfortunately, due to sudden local crisis in the hills of Shivalik, this property also suffered huge economical losses with very less business and thus, the Board of Directors wanted to either go for putting it on sale or work out a process of restructuring as a measure to improve the economical feasibility of the property. Restructuring is the corporate management term for the act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs. Alternate reasons for restructuring include a change of ownership or ownership structure, demerger, or a response to a crisis or major change in the business such as bankruptcy, repositioning, or buyout. Restructuring may also be described as corporate restructuring, debt restructuring and financial restructuring. The underlying object of corporate restructuring is efficient and competitive business operations by increasing the market share, brand power and synergies. In the emerging scenario, joint ventures, alliances, mergers, amalgamations and takeovers are becoming the easiest and quickest way to expand capacities and acquire dominance over the market. They didn't want to sell it as the price quotes they were getting were quite low as they would have got if the conditions were normal. Out of all the offers they have been getting, they have come down to 3 Options and want to discuss them with you to finalise the most feasible option as follows :- Option :-1 Naman Hotels Ltd. has shown interest in acquiring this Resort Property as they are of the view that they can help each other in the Business with Naman Group's experienced staff and innovative team in collaboration with the beautiful structure and landscape of “THE VILLAS”. This business combination can be carried out by setting up a new entity called “the Namupama Villas Ltd.” that will issue 50 shares to Anupama Hotels Ltd. shareholders and 100 shares to Naman Hotels Ltd. shareholders in exchange for the transfer of the shares in those entities. The number of shares reflects the relative fair values of the entities before the combination. Also, respective company's shareholders get the voting rights in the Namupama Villas Ltd. based on their respective shareholdings. The timeline, if the deal is finalised, will stand as:- (a) Date of shareholder agreement 1st June (b) Appointed date as per shareholder agreement 1st April (c) Date of obtaining control over the Board representation 1st July (d) Date of transfer of shares 1st August Option:- 2 Another Company – Kavya Hotels Ltd. from a different state wants to acquire Anupama Hotels Ltd. to take charge of the Resort Property with its Managing Director, Miss Kavya Narula, having confidence of pulling the property out of economic losses using her vast experience in the field of Hospitality industry. To substantiate this, they are asked by the Management of Anupama Hotels Ltd. to put forward the financial details of their performance during the F.Y./P.Y. 2023-24 for Anupama Hotel Ltd.'s consideration regarding striking a deal with them w.r.t. “THE VILLAS”. The Head Accountant of Kavya Hotels Ltd. wants to discuss some peculiar transactions w.r.t. the Profit/Loss made by the Group with Miss Kavya and other members of the management as follows, before they finalise their books and submit a report of their Financial Performance to Anupama Hotels Ltd. The Head accountant tells them that their group's Statement of Profit and Loss for the previous year ended 31st March, 2024 shows a profit of 150 lakhs after debiting or crediting the following items:- (a) Payment of 0.35 lakh in cash on 20th December 2023 to a local farmer for purchase of daily use vegetables and - 0.30 lakh to a Confectionary Wholesaler on 26th December 2023 for different products. (b) Contribution towards employees' pension scheme notified by the Central Government under section 80CCD for a sum of 3 lakhs calculated at 12% of aggregate of basic salary and dearness allowance (forming part of retirement benefits) payable to the employees in terms of employment. (c) Payment of 5.50 lakhs towards transportation of various materials procured by the resort to M/s. PQR Transport, a partnership firm, without deduction of tax at source. The firm declares profit under presumptive taxation scheme under section 44AE and has furnished a declaration to this effect. It also furnished its Permanent Account Number in the tender document. (d) Profit of 12 lakhs on sale of a plot of land to Divya Limited, a domestic company, the entire shares of which are held by the assessee company. The plot was acquired by Kavya Hotels Limited on 1st June, 2022. (e) Contribution of 0.50 lakhs to Indian Institute of Technology with a specific direction for use of the amount for scientific research programme approved by the prescribed authority. (f) Expense of 5 lakhs on foreign travel of two directors for a collaboration agreement with a foreign company for a brewery project to be set up. The negotiation did not succeed, and the project was abandoned. (g) Fees of 1 lakh paid to independent directors for attending Board meeting without deduction of tax at source under section 194J. (h) Depreciation charged 10 lakhs. After submitting a report on their financial performance, Kavya Group works out on the Acquisition plan of “THE VILLAS” as this - On 1 April 2024, it will acquire 80 percent of the equity interest of Anupama Hotels Ltd. in exchange for cash of 300 Lakhs. Due to legal compulsion, Anupama Hotels Ltd. will have to dispose off their investments by a specified date such that they will not have sufficient time to market their property to multiple potential buyers. The management of Kavya Hotels Ltd. initially measures the separately recognizable identifiable assets acquired and the liabilities assumed as of the acquisition date in accordance with the requirement of Ind AS. The identifiable assets are measured at 600 lakhs and the liabilities assumed are measured at 200 lakhs. Kavya Ltd. engages an independent consultant who determined that the fair value of 20 per cent non-controlling interest in Anupama Hotels Ltd. is 84 lakhs. Kavya Hotels Ltd. reviewed the procedures it used to identify and measure the assets acquired and liabilities assumed and to measure the fair value of both the non-controlling interest in Anupama Hotels Ltd. and the consideration transferred. After the review, it decided that the procedures and resulting measures are appropriate and it waited for approval from the end of Anupama Hotels Ltd. to move ahead with this plan if they accept their offer. Option :- 3 The management of Anupama Hotels Ltd. wants you to carry out a special audit of the controls implemented in their Property and suggest them solutions to improve any deficiency in controls or any management incompetencies which might need improvement or replacement to bring back the good old days and the Company could ask its Financers for a Corporate Restructuring based on your Audit report. You suggest them about Risk Based audit and deliberate them about the process of this audit on their request. You tell them that your Audit would be risk-based or focused on areas of greatest risk to the achievement of the audited entity's objectives. Risk-based audit (RBA) is an approach to audit that analyzes audit risks, sets materiality thresholds based on audit risk analysis and develops audit programmes that allocate a larger portion of audit resources to high-risk areas. Risk Based Audit is an essential element of financial audit- both in the attest audit of the financial statements and in the audit of financial systems and transactions including evaluation of internal controls. It focuses primarily on the identification and assessment of the financial statement misstatement risks and provides a framework to reduce the impact to the financial statement of these identified risks to an acceptable level before rendering an opinion on the financial statements. It also provides indicators of risks as a basis of opportunity for improvement of auditee risk management and control processes. This affords an opportunity to the auditee to improve its operations from recommendations on risks that do not have a current impact on the financial statements but impact the audited entity's operational strategies and performance over the longer term. The auditor's objective in a risk-based audit is to obtain reasonable assurance that no material misstatements whether caused by fraud or errors exist in the financial statements. This involves the following three key steps: - Assessing the risks of material misstatement in the financial statements; Designing and performing further audit procedures that respond to assessed risks and reduce the risks of material misstatements in the financial statements to an acceptably low level; and Issuing an appropriate audit report based on the audit findings and this work is done in three distinct phases. You have three articles in your team and you delegate them the work as - Komal to check and evaluate the controls in the Restaurant & Bar and work on the risks associated while another two articles Sagar & Ritu to help you with the allotted works as follows:- KOMAL :- During the process of extracting the exception reports in the Restaurant, she observes numerous purchase entries without valid purchase orders. In terms of percentage, about 30% of purchases were made without valid purchase orders and also few purchase orders were validated after the actual purchase. Also there was no reconciliation between the goods received and the goods ordered. She proceeds ahead to check the validity of purchases at account Balance level and follows some specific audit procedures to achieve her objective. Also, she is told that the Resort has a tie up with Hard Coupons Ltd. which sells coupons to general public that are redeemable against specified luxury food products at selected properties and “THE VILLAS” being one of them. Each coupon is sold for value of 900but is redeemable for supplies worth - 1,000. She also notices a Working Capital Block relating to GST ITC utilisation by the Hotel. During the current year, they have been awarded a contract for catering in a marriage to be held at Dehradun. They have further subcontracted it for supply of snacks, to be served in the marriage, to Vanraj & Sons, a local caterer of Dehradun. The Head accountant is of the view that they can't avail ITC on such sub-contract. SAGAR :- Performing client acceptance or continuance procedures; Planning the overall engagement; Performing risk assessment procedures to understand the business and identify inherent and control risks; Identifying relevant internal control procedures and assessing their design and implementation; Assessing the risks of material misstatement in the financial statements, etc. RITU :- Designing and performing further audit procedures that respond to the assessed risks of material misstatement and will provide the evidence necessary to support the audit opinion. Finally, you, as the auditor, assess the audit evidence obtained and determine whether it is sufficient and appropriate to reduce the risks of material misstatement in the financial statements to an acceptably low level and hand over your Audit Report to the management of Anupama Hotels Ltd. with all your suggestions and scope for improvements for reviving the economic operations of the their Resort. THE DECISION:- Considering all the above options and working out on the feasibility of each, the management of Anupama Ltd. chooses to go further with Option No. 3 of going for Corporate Debt Restructuring and request you to frame a scheme to be discussed with their main financers XYZ Bank Ltd. in due time.