Question

Bogart is a listed company that reports using IFRS and has a reporting date of 30 September 2020. Bogart purchased 18% of Lupin’s 100 million $1 ordinary shares for $43 million cash on 1 October 2018, gaining significant influence. Lupin had retained earnings of $85 million and no other components of equity, on the date of purchase.

The investment in Lupin was accounted for correctly in Bogart’s individual financial statements for the year ended 30 September 2019, when Lupin had retained earnings of $150 million and no other components of equity.

Bogart acquired control over Lupin on 1 October 2019, purchasing a further 67% of its ordinary shares. Cash consideration of $160 million was correctly included in calculating goodwill. Purchase consideration included 3 million of Bogart’s own $1 ordinary shares, with a fair value of $1.40 each. No accounting entries were posted for this share consideration.

Bogart derecognised the carrying amount of the existing 18% holding in Lupin and included it in calculating the goodwill of the business combination. The carrying amount of the net assets of Lupin was also used in calculating goodwill. The fair value of the existing 18% holding was $73 million at 1 October 2019 and the fair value of the identifiable net assets of Lupin was $285 million. The excess of the fair value of net assets over the carrying amount was due to equipment with a remaining useful life of ten years. The fair value of the non-controlling interest in Lupin on 1 October 2019 was $63.8 million and was included in calculating goodwill.

On 30 September 2020, Bogart purchased an additional 5% of the ordinary shares of Lupin. Consideration transferred for these additional shares was $19 million cash, which was expensed to the consolidated statement of profit or loss. On 30 September 2020, Lupin had retained earnings of $185 million and no other components of equity.

Required:

Discuss, with calculations, how the purchase of the additional share capital in Lupin should be accounted for in the consolidated financial statements. Show the accounting entry required to correct any error.  

Answer 1

Total Shareholding of Bogart in Lupin :

October 1, 2018 - 18%

October 1, 2019 - 67%

On October 1, 2019 when Bogart has acquired a total of 85% shareholding in Lupin, Lupin becomes a partially owned subsidiary of Bogart.

On October 1, 2020 on acquiring additional 5%, Bogart's total shareholding becomes 90%

Calculation of Minority Interest and Cost of Control on October 1, 2019
	100%	Shareholding of Bogart on October 1, 2019	Minority Interest
		(18+67 = 85%)
Share Capital	100,000,000	85,000,000	15,000,000
Reserves	150,000,000	127,500,000	22,500,000
		212,500,000	37,500,000
Less : Cost of Investment
Shares of Bogart ($1.4*3Million Shares)		(4,200,000)
Cash Consideration ($160Million + $43Million)		(203,000,000)
Goodwill		5,300,000

Accounting for Purchase of additional 5% Equity of Lupin on October 1, 2020

Calculation of Minority Interest and Cost of Control on October 1, 2020
	100%	Shareholding of Bogart on October 1, 2020	Minority Interest
		(18+67+5 = 90%)
Share Capital	100,000,000	90,000,000	10,000,000
Reserves	185,000,000	166,500,000	18,500,000
		256,500,000	28,500,000
Less : Cost of Investment
Shares of Bogart (1.4*3Million)		(4,200,000)
Cash Consideration		(222,000,000)
($43 + $160 + $19) Million
Goodwill		30,300,000