Grounded carrier Kingfisher Airlines' decision to consider it a 'going concern' entity, despite having accumulated huge losses and defaulted on loans, has come for a sharp criticism by its own auditors, given a lack of clarity about its revival plans.
At the same time, the auditors of Kingfisher's parent entity, United Breweries (Holdings) Ltd, have also expressed their concern over the company's significant exposure to the airline, which has been grounded for about ten months now and its flying permit also lapsed long ago.
Part of Vijay Mallya-led UB group, Kingfisher has never reported a full-year profit as yet, its accumulated losses have crossed Rs 17,000 crore (Rs 170 billion), net worth has been completely eroded and lenders have recalled loans totalling more than Rs 6,000 crore (Rs 60 billion) after repeated defaults.
In their latest 'review report' presented to Kingfisher's board, the auditors said: "These events cast significant doubt on the ability of the company to continue as a going concern.”
In accounting parlance, 'going concern' entities are generally those that function without any threat of liquidation in the foreseeable future.
The auditors said that Kingfisher continues to prepare financial results on a going concern basis "notwithstanding the fact that the company's net worth is completely eroded, the scheduled air operator's permit issued by the Director General of Civil Aviation has lapsed and the consortium of banks have recalled their debt to the company."
They further said that the appropriateness of this 'going concern' basis is inter-alia dependent on the company's ability to obtain renewal of its flying permit, infuse requisite funds for meeting various obligations, rescheduling of debt and other liabilities and resuming normal operations.
The company on its part said that it has "detailed plans for renewal of its operations and has filed the necessary application to the DGCL to renew the permit and is exploring various options to recapitalise and resume operations".
"The company will also request the banks at an appropriate time for debt restructuring. Based on the detailed evaluation of the current situation, plans formulated and active discussions underway with prospective investors, management is confident of raising adequate finance, obtaining renewal of the permit, rescheduling debt and receiving continued support from the group.
"Therefore, the management holds the view that the company will realise 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 be carrying value of assets and liabilities," Kingfisher said in notes to its latest quarter financial results.
According to the company's latest financial results, it incurred a net loss of Rs 1,157 crore (Rs 11.57 billion) in the quarter ended June 30, 2013, while its accumulated losses as on March 31, 2013 stood at Rs 16,023 crore (Rs 160.23 billion).
Its net worth as on March 31, 2013 stood at minus Rs 1,292 crore (Rs 12.92 billion), while lenders recalled loans totalling Rs 6,203 crore (Rs 62.03 billion) in April this year.
Despite having no operations, the company continued to incur huge expenses towards employee costs (about Rs 60 crore or Rs 600 million), aircraft lease rental (Rs 103 crore or Rs 1 billion) and 'other operating expenses' (Rs 76 crore or Rs 760 million) in the last quarter. Besides, it also incurred Rs 323 crore (Rs 3.23 billion) as 'finance costs'.
The auditors, however, said that the method of accounting of costs incurred on major repairs and maintenance of aircraft is "not in accordance with generally accepted accounting standards prevalent in India and ought to have been recognised in the statement of Profit and Loss as and when incurred".
The auditors for UB Holdings, in their own review report for the latest quarter, also raised concern about the company's "significant financial exposure to Kingfisher Airlines Ltd", which stands at about Rs 14,000 crore.
"KFA's license to operate the airline business stands suspended. Its net worth is fully eroded. It is under severe financial stress and has defaulted in honouring its financial obligations on several counts," auditors for UB Holdings said.
UB Holdings' Kingfisher exposure as on June 30, 2013 included equity investment worth Rs 1,970 crore (Rs 19.70 billion), bank guarantee of Rs 6,631 crore (Rs 66.31 billion), guarantees to aircraft lessors and others at Rs 2,136 crore (Rs 21.36 billion), advances of Rs 2,931 crore (Rs 29.31 billion) and interest/commission/logo fees receivables worth Rs 311 crore (Rs 3.11 billion).
The auditors said that some of these guarantees have been invoked by the lenders, aircraft lessors and vendors of Kingfisher, while some beneficiaries of such guarantees have approached court against the company, but no provision has been made in UB Holdings' accounts for the probable losses that may arise on account of financial exposure to the airline.
UB Holdings, on its part, said that the company is taking steps to challenge the lenders' actions, including sale of certain investments belonging to UB Holdings and claim on a Goa property for recovery of loans given to Kingfisher.