Financial Reporting · Preparation of consolidated financial statements for a simple group

Consolidated Retained Earnings and Post-Acquisition Reserves

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 retained earnings, after consolidation adjustments. Those adjustments include unrealised profit, fair value depreciation and the group's share of goodwill impairment (all of it if NCI is measured at the proportionate share of net assets).

Understand Consolidated Retained Earnings and Post-Acquisition Reserves

Retained earnings in the consolidated statement of financial position show the profits the group has earned and kept. The parent owns shares in the subsidiary, so the group shares in the subsidiary's profits. But only profits earned after the parent gained control belong in group reserves.

Profits the subsidiary earned before acquisition were already paid for in the purchase price. They sit inside the net assets acquired, and they are used in the goodwill calculation. That is why you strip them out. Only the post-acquisition movement counts.

So you start with the parent's own retained earnings. You then add the parent's percentage of the subsidiary's post-acquisition retained earnings. The rest of the subsidiary's post-acquisition profit belongs to the non-controlling interest (NCI), not to the group.

Then you adjust. Unrealised profit on intra-group inventory reduces reserves. Extra depreciation on a fair value uplift reduces the subsidiary's post-acquisition profit. Goodwill impairment reduces group reserves. Under the proportionate method the whole impairment is deducted, because the goodwill belongs to the parent. Under the full goodwill method only the parent's share is deducted, and the NCI bears the rest.

You calculate the retained earnings working independently. If your net assets and goodwill are right, it should agree to the figure needed to make the consolidated statement of financial position balance. That is a useful check.

Key rules to remember

Subsidiary post-acquisition retained earnings: Subsidiary retained earnings at reporting date − subsidiary retained earnings at acquisition; Use adjusted figures. Include any fair value depreciation and unrealised profit where the subsidiary is the seller.
Consolidated retained earnings: Parent retained earnings + parent % × (subsidiary post-acquisition retained earnings, adjusted) − group's share of goodwill impairment (100% if NCI is proportionate) − other group adjustments; Other adjustments include unrealised profit where the parent is the seller, and any correction of the parent's own figures.
Unrealised profit in closing inventory: Inventory still held × profit ÷ selling price (if a margin) or × mark-up ÷ (100 + mark-up); Margin is on sales. Mark-up is on cost. Check which one the question gives.
Net assets at acquisition: Share capital + reserves at acquisition date + fair value adjustments; Used in goodwill. Pre-acquisition reserves never go into group reserves.
Fair value depreciation: Fair value uplift ÷ remaining useful life × years since acquisition; Reduces the subsidiary's post-acquisition profit.

How to solve Consolidated Retained Earnings and Post-Acquisition Reserves questions

Use the same layout every time. A consistent working keeps the adjustments in view and earns method marks.

1Write down the parent's holding, the acquisition date and the subsidiary's reserves at acquisition. Work out the time since acquisition in months or years.
2Set up a three-column working: reserves at the reporting date, reserves at acquisition, and the post-acquisition difference. Start with the subsidiary's retained earnings.
3Adjust the subsidiary column. Deduct extra depreciation on fair value uplifts from the reporting-date figure. If the subsidiary sold inventory to the parent, deduct the unrealised profit here.
4Work out the unrealised profit on intra-group inventory. If the parent sold, deduct it from the parent's reserves. If the subsidiary sold, deduct it in the subsidiary working.
5Calculate the post-acquisition reserves of the subsidiary after adjustments, then take the parent's percentage.
6Work out the group's share of cumulative goodwill impairment. Under proportionate NCI, the whole impairment is deducted from group reserves. Under full goodwill, deduct only the parent's share of the goodwill impairment, as the NCI takes the rest. The split follows the goodwill shares, which usually match the shareholding unless the question says otherwise.
7Add the parent's retained earnings after its own adjustments. Add the group share of post-acquisition profit. Subtract the group's share of impairment. This gives consolidated retained earnings.
8Check that your reserves working agrees to the figure needed to make the consolidated statement of financial position balance. Then work out the NCI separately. Under the proportionate method, NCI = NCI % × the subsidiary's adjusted net assets at the reporting date. Under full goodwill, NCI = NCI at acquisition (at fair value) + NCI % × the subsidiary's adjusted post-acquisition profit − the NCI's share of goodwill impairment.

Quickest way: One-line reserves build-up

When to use it: Use this in Section A and B objective questions, where only the final figure matters and time is short.

Write: Parent reserves + parent % × (sub reserves now − sub reserves at acquisition).
Correct the subsidiary change first for fair value depreciation, and for unrealised profit if the subsidiary sold.
Subtract unrealised profit from the parent's reserves if the parent sold.
Subtract the group's share of goodwill impairment (all of it if NCI is proportionate).
Sense check: deduct only items that reduce profit, such as unrealised profit, extra depreciation and impairment. Make sure the subsidiary's share uses the post-acquisition movement only. If the subsidiary made a loss after acquisition, the group share reduces the total.

Common mistakes in Consolidated Retained Earnings and Post-Acquisition Reserves

Including the whole of the subsidiary's retained earnings in group reserves.
Students add the subsidiary's reserves straight from the statement of financial position and forget the acquisition date.
Fix: Always deduct reserves at acquisition first. Only the post-acquisition movement belongs to the group.
Taking 100% of the subsidiary's post-acquisition profit instead of the group share.
It looks like a line-by-line addition, as in the statement of financial position, where 100% of net assets is included.
Fix: In the reserves working use only the parent's percentage. The NCI gets its own share in a separate working.
Forgetting goodwill impairment or deducting all of it when NCI is at proportionate share.
Impairment is often given as a note near the end and is easy to miss. Under proportionate NCI the goodwill belongs wholly to the parent.
Fix: Underline impairment in the question. With proportionate NCI the parent takes it all. With full goodwill the impairment is allocated between the parent and the NCI on the basis of their goodwill shares, usually in line with the shareholding unless the question states otherwise.
Deducting unrealised profit from the wrong company's reserves.
Students do not check who sold the goods.
Fix: Write 'seller' next to the adjustment. The seller's reserves take the deduction. If the parent sold, it comes off the parent. If the subsidiary sold, it comes off the subsidiary and is shared with the NCI.
Using margin and mark-up the wrong way round.
Both are a percentage of something, and the question wording is brief.
Fix: Margin is on selling price: profit = inventory × margin %. Mark-up is on cost: profit = inventory × mark-up ÷ (100 + mark-up).
Ignoring fair value depreciation after acquisition.
The fair value uplift is dealt with in goodwill, so students think it is finished.
Fix: Whenever there is a fair value uplift on a depreciable asset, deduct the extra depreciation from the subsidiary's post-acquisition profit for each year since acquisition.

Worked examples

Example 1

Parent P bought 80% of Subsidiary S on 1 January 20X1, when S's retained earnings were $40,000. At 31 December 20X3, P's retained earnings are $200,000 and S's are $100,000. Goodwill has been impaired by a cumulative $5,000. NCI is measured at the proportionate share of net assets. There are no other adjustments. Calculate consolidated retained earnings.

Show the solution

S's post-acquisition retained earnings = 100,000 − 40,000 = $60,000.
Group share = 80% × 60,000 = $48,000.
Goodwill impairment is borne entirely by the group because NCI is at proportionate share: $5,000.
Consolidated retained earnings = 200,000 + 48,000 − 5,000 = $243,000.

Answer: $243,000

Example 2

P owns 75% of S, acquired when S's retained earnings were $30,000. At the reporting date P's retained earnings are $150,000 and S's are $90,000. At acquisition S had a building with a fair value $20,000 above its carrying amount, with 10 years of remaining life. Two years have passed since acquisition. During the year S sold goods to P at a mark-up of 25% on cost. P still holds inventory bought from S for $12,500. Goodwill impairment to date is $4,000, all charged to the group (proportionate NCI). Calculate consolidated retained earnings.

Show the solution

Fair value depreciation = 20,000 ÷ 10 × 2 = $4,000.
Unrealised profit = 12,500 × 25 ÷ 125 = $2,500. S is the seller, so this comes off S.
S's adjusted retained earnings at the reporting date = 90,000 − 4,000 − 2,500 = $83,500.
S's post-acquisition retained earnings = 83,500 − 30,000 = $53,500.
Group share = 75% × 53,500 = $40,125.
Consolidated retained earnings = 150,000 + 40,125 − 4,000 = $186,125.

Answer: $186,125

Exam tips

Write the reserves working as a table in Section C, with columns for reporting date, acquisition and post-acquisition. Even if you slip on a number, you still earn method marks.
In Section A and B, work out the adjusted post-acquisition movement first. Wrong options often use 100% of the profit, ignore impairment or use the wrong acquisition-date reserves.
Check who made the intra-group sale. It decides whether the deduction comes off the parent or the subsidiary, and so whether the NCI shares in it.
If the acquisition happened part-way through the year, use the profit up to the acquisition date as pre-acquisition. Apportion on a time basis unless the question says otherwise.
Compare your retained earnings answer with the figure needed to make the statement of financial position balance. A mismatch points to a missed adjustment.

Practice questions from Preparation of consolidated financial statements for a simple group

Consolidated Retained Earnings and Post-Acquisition Reserves in other exams

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

Consolidated Retained Earnings and Post-Acquisition Reserves: frequently asked questions

Why are pre-acquisition profits excluded from group retained earnings?

The parent paid for those profits when it bought the shares. They are part of the net assets acquired and are reflected in goodwill. Including them again in reserves would count them twice.

Does the NCI share in unrealised profit?

It does when the subsidiary is the seller, because the profit sits in the subsidiary's reserves. When the parent is the seller, the whole deduction comes off the parent's reserves, and the NCI is not affected.

How is goodwill impairment treated in group reserves?

With NCI at the proportionate share of net assets, goodwill belongs to the parent, so the whole impairment is deducted from group reserves. With full goodwill, the impairment is allocated between the parent and the NCI on the basis of their goodwill shares. These usually follow the shareholding unless the question states otherwise.

What if the subsidiary made a loss after acquisition?

The post-acquisition movement is negative. The group takes its share of that loss, so consolidated retained earnings are lower than the parent's own reserves before any other adjustments.