The first quarter results for 2023-24 of cement major India Cements Ltd, announced on August 7, has triggered an interesting discussion in the context of note No 5. The note is as follows:
“The company with a view to address the profitability/liquidity concerns, has initiated steps to modernise some of its plants to improve the operating efficiencies. The company has also engaged the services of management consultants to study the operations in its plants and suggest measures to reduce the variable costs. In addition to the above, the company has also plans to infuse funds from sale of non-core assets and mobilise additional resources to improve the operations including sales volume.”
This note has to be understood in the context of the following facts. The company has reported three quarters of continuous losses , and there seems to be liquidity and profitability stress. The reasons are multifarious, which is not the remit of this piece.
The thrust is on the import of the note, which forms part of the financials.
The company has asserted that there are profitability and liquidity concerns. It must be made clear that the note nowhere suggests that it is leading to a “going concern” issue. The good part is it has put all the users and stakeholders in “alert mode” by making this voluntarily disclosure in the financials rather than deal with it on ‘Investors Calls’, which is normally the case.
In tough times like Covid, Audit Committees and the Board spend time dealing with audit disclosures in the context of “going concern”. It may be recalled that during the pandemic several companies were grappling with both liquidity and profitability issues.
However, in other situations, how does one apply the tests of going concern? It depends on the industry and the specific situations that confront a company. In the case discussed, the company has indicated specific plans of action to pull the company out of the woods.
This itself would serve as a roadmap to ensure that the dreaded issue of going concern will not stare in its face during the next quarter.
This upfront disclosure of clear actionable plans is to be appreciated as a good and proactive initiative not driven by regulatory compulsions alone. While the ultimate test of the success of this disclosure rests on achieving the results from the actions listed, it has at least served as a potent weapon to drive performance in the foreseeable future.
Drivers for disclosure
The aforesaid note has raised the critical question as to what sort of items be disclosed more as good practice even if it not required by the regulations?
For example, companies do face situations like a sudden show-cause notice of a huge tax demand, an alarming attrition of people at the middle and senior levels of management, or even serious data theft. Should these, like note 5, be reported for the sake of good order?
At the same time, companies should ensure that they do not fall into the trap of unnecessary and excessive reporting of non-significant matters. There is, however, the human tendency to postpone matters rather than take the bull by the horns.
The simplest way to test a proposition is not by merely listing out issues, assigning weights and deciding the probability factor. If the MD/CEO has had sleepless nights pondering over some matter in the company which may or may not have a financial impact, it is a sure-shot case of an issue worthy of disclosure.
India Cements has certainly raised the bar on proactive disclosure on issues of concern, in the larger context of the corporate world. The subtle distinction between “issues of concern” and “going concern issue” will occupy centre-stage in the years to come.
The writer is a chartered accountant