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

IFRS provides that purchase of additiownal shares by Parent from Non Controlling shareholder's is a transaction between two shareholders and does not affect the operations. Any excess paid over the carrying vaue of the NCI should be recorded directly in the Equity. However, standard does not provide which component of equity. Industry practice has been to debit the Additional Paid In Capital for the amount paid in excess of carrying value of the NCI.

Purchase of additional shares 5% by the Parent is a transaction between shareholders and should be accounted based on aforesaid principles.

Retained earnings of Lupin on date of acquisition- 185 million

5% of above= 185*5%= $9.25 million

Consideration paid- $19 million

Excess amount paid= $9.75 million

Folowing journal entries should be recorded-

Non Controlling Interest A/c--- Dr 9.25

Additional Paid in Capital A/c---Dr. 9.75

To Bank A/c 19

(Being shares purchase from NCI)

Following entry should be recorded to correct -

Additional Paid In Capital A/c---Dr 9.25

Non Controlling Interest A/c---Dr 9.75

To Profit for the year A/c--- 19

(Being rectification entry posted)

Alternatively, if there is no Additiona Paid In Capital, this entry should be recorded-

Retained earnings A/c---Dr 9.25

Non Controlling Interest A/c---Dr 9.75

To Profit for the year A/c--- 19

(Being rectification entry posted)

Difference between debiting profit and loss and retained earning is that by debiting profit and loss impact was recorded in PL which is incorrect and by debiting retained earnings transaction is recorded directly in equity which meets guidance.