Husch Ltd. acquired 35% of the common shares of Megia Ltd. on June 30, 20X1. Husch uses the equity method to record its investment. On June 30, 20X8, Husch acquired another 40% of Megia's common shares. At June 30, 20X8, how should the original 35% ownership be treated?

Question

Quizplus · Accepted Answer

When an investor acquires additional ownership in an investee, any prior investment is deemed to have been disposed of and reacquired at its fair value at the date of the new acquisition. Therefore, the original 35% investment should be revalued at its fair value at June 30, 20X8, and added to the new acquisition of 40%. This is because the investor has now gained control over the investee and should therefore account for the investment under the appropriate accounting standard (IFRS 10, Consolidated Financial Statements). Option A is incorrect because adding the original valuation of the 35% to the valuation of the new acquisition does not reflect the revaluation required under the equity method. Option C is incorrect because it suggests adding the carrying value of the original investment, which would not reflect the fair value required under IFRS 10. Option D is incorrect because the original investment is relevant and should be accounted for appropriately.

Husch Ltd Acquired 35% of the Common Shares of Megia Ltd