Financial Accounting · Subsidiaries

Consolidated Reserves and Post-acquisition Profits Explained

Updated 11 October 2026 · Fact-checked

Consolidated retained earnings equal the parent's retained earnings plus the parent's share of the subsidiary's post-acquisition profits. Post-acquisition profit is the subsidiary's retained earnings at the reporting date minus its retained earnings at acquisition. Pre-acquisition profits are never added, because they are already reflected in goodwill.

Understand Consolidated Reserves and Post-acquisition Profits

When a parent buys a subsidiary, it pays for the net assets the subsidiary already owns. Those net assets include profits the subsidiary earned before the purchase. These are pre-acquisition profits. The parent paid for them, so they are dealt with in the goodwill calculation, not in group reserves.

Profits the subsidiary earns after the parent gains control are post-acquisition profits. These belong partly to the group, so they increase group retained earnings. The group share is the parent's percentage holding. The rest belongs to the non-controlling interest (NCI).

The group retained earnings working has one purpose: to show only profits that the group has earned since it took control. You start with the parent's own retained earnings, then add the parent's share of the subsidiary's post-acquisition movement. Then you adjust for group items such as unrealised profit on intragroup inventory and any goodwill impairment.

The subsidiary's share capital and share premium never go into group reserves. Only retained earnings (and other reserves, using the same logic) do. The parent's investment in the subsidiary is replaced by the subsidiary's net assets and goodwill, so it does not appear in the consolidated statement of financial position.

Key formulas to remember

Post-acquisition profit: Subsidiary's retained earnings at reporting date − Subsidiary's retained earnings at acquisition; Use the same logic for any other reserve, such as a revaluation surplus, if the question gives one.
Consolidated retained earnings: Parent's retained earnings + (Parent's % × Subsidiary's post-acquisition profit) − parent's share of goodwill impairment − parent's share of any unrealised profit adjustment; Adjust for unrealised profit and impairment only where the question tells you about them. Where the NCI is measured at fair value, impairment is shared with the NCI. Where it is measured at its share of net assets, the group bears all of it.
Unrealised profit in closing inventory: Inventory still held × profit % on the sale; Use mark-up on cost or margin on sales, as the question states. If the parent sold the goods, the whole adjustment reduces the parent's profit. If the subsidiary sold them, share it with the NCI.
Pre-acquisition profits: Subsidiary's retained earnings at acquisition date; These feed into net assets at acquisition in the goodwill working. They are never added to group reserves.

How to solve Consolidated Reserves and Post-acquisition Profits questions

Use the same short working for every question. Set it out in columns so you can see what each figure is.

1Identify the acquisition date and the parent's percentage holding. Check that the parent has control, normally more than 50% of voting rights.
2Write the subsidiary's retained earnings at the reporting date and at the acquisition date. Take the difference as the post-acquisition profit.
3If the question gives the profit for the year and the acquisition happened part-way through, only count the profit after the acquisition date. Assume profits accrue evenly unless told otherwise.
4Start the group working with 100% of the parent's retained earnings.
5Add the parent's % of the subsidiary's post-acquisition profit.
6Deduct the parent's share of any unrealised profit on intragroup inventory and any goodwill impairment, as the question requires.
7Total the column. This is the group retained earnings figure for the consolidated statement of financial position.
8Check the NCI working separately. The NCI takes its own % of the same post-acquisition profit, so group and NCI shares should together equal the full adjusted post-acquisition movement.

Quickest way: Three-line reserves shortcut

When to use it: Use this in a number entry or multiple choice question where there are no complications beyond a simple holding and acquisition-date reserves.

Write: Parent reserves = figure given.
Work out: (Sub reserves now − Sub reserves at acquisition) × parent %.
Add the two lines, then subtract any adjustments the question mentions.
Sense-check: the answer should be above the parent's own reserves if the subsidiary has made post-acquisition profits.

Common mistakes in Consolidated Reserves and Post-acquisition Profits

Adding the subsidiary's whole retained earnings to group reserves.
The student forgets that profits before acquisition were bought by the parent.
Fix: Always subtract the acquisition-date reserves first. Only the movement since acquisition counts.
Using 100% of the post-acquisition profit instead of the parent's share.
Group statements show 100% of assets and liabilities, so students assume reserves work the same way.
Fix: Reserves in the group working take only the parent's %. The NCI holds the rest. Only the consolidated net assets are shown at 100%.
Adding share capital or share premium of the subsidiary into group reserves.
The student treats all equity of the subsidiary as profits.
Fix: Subsidiary share capital and premium are eliminated against the investment. Only reserves enter the working.
Forgetting the unrealised profit adjustment or taking it from the wrong company.
The adjustment sits in a note and the seller is not checked.
Fix: Find who sold the goods. Parent seller: deduct the full amount from the parent's reserves. Subsidiary seller: deduct it from the subsidiary's post-acquisition profit before taking the group share.
Using the reporting date reserves as the acquisition reserves, or mixing up the two.
Both figures are given in the question and are easy to swap.
Fix: Label each figure 'at acquisition' or 'at year end' in your working before subtracting.
Applying the full goodwill impairment to the group when the NCI is measured at fair value.
The student ignores the NCI measurement method.
Fix: With full goodwill, the NCI shares the impairment in proportion to its holding. With the proportionate method, the group bears all of it.

Worked examples

Example 1

P bought 80% of S on 1 January when S's retained earnings were $40,000. At 31 December, P's retained earnings are $150,000 and S's are $90,000. There are no other adjustments. Calculate consolidated retained earnings.

Show the solution

S post-acquisition profit = $90,000 − $40,000 = $50,000.
P's share = 80% × $50,000 = $40,000.
Group retained earnings = $150,000 + $40,000 = $190,000.
The NCI's share of post-acquisition profit is 20% × $50,000 = $10,000, which is not in group reserves.

Answer: $190,000

Example 2

P owns 75% of S, acquired when S's retained earnings were $60,000. At the reporting date, P's retained earnings are $200,000 and S's are $120,000. During the year S sold goods to P for $40,000 at a margin of 25% on selling price. Half of the goods are still in P's inventory. Goodwill impairment of $8,000 has arisen, and the NCI is measured at its share of net assets. Calculate consolidated retained earnings.

Show the solution

Post-acquisition profit of S before adjustment = $120,000 − $60,000 = $60,000.
Unrealised profit: inventory held = $40,000 × 1/2 = $20,000. Profit in it = 25% × $20,000 = $5,000.
S was the seller, so deduct from S's post-acquisition profit: $60,000 − $5,000 = $55,000.
P's share = 75% × $55,000 = $41,250.
Impairment is borne entirely by the group because the NCI is at its share of net assets: $8,000.
Group retained earnings = $200,000 + $41,250 − $8,000 = $233,250.

Answer: $233,250

Exam tips

In objective test questions, write the three lines of the working on your scratch pad before looking at the answer options. This helps you avoid distractor answers built from common mistakes.
Check whether the question gives reserves at acquisition directly. If it gives profit for the year and a mid-year acquisition date, time-apportion the profit first.
Look for the seller of any intragroup goods. The seller decides whose reserves take the unrealised profit adjustment.
Number entry answers need the exact figure. Re-add your working column before you type, and check the sign of each adjustment.
In multiple response questions about group reserves, remember that pre-acquisition profits and subsidiary share capital are never added to group reserves. Use this to eliminate wrong statements quickly.

Practice questions from Subsidiaries

Consolidated Reserves and Post-acquisition Profits in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Consolidated Reserves and Post-acquisition Profits: frequently asked questions

What is the difference between pre-acquisition and post-acquisition profits?

Pre-acquisition profits were earned by the subsidiary before the parent gained control. They are part of the net assets the parent paid for and go into the goodwill calculation. Post-acquisition profits are earned after control starts and are shared between the group and the NCI.

Why is the parent's investment not included in group reserves?

The investment is replaced in the consolidated statement of financial position by the subsidiary's net assets and goodwill. Counting it again would double count. Only the parent's own reserves and its share of post-acquisition profits are used.

Do I use the NCI percentage in the group reserves working?

No. The group working uses only the parent's percentage. The NCI's share of post-acquisition profit is added to the NCI figure in its own working, not to group reserves.

How do I treat a subsidiary that made a loss after acquisition?

The same formula applies. The post-acquisition movement is negative, so the parent's share of the loss reduces group retained earnings. Do not ignore it or treat it as zero.