Financial Education

Clean surplus accounting means that all changes in shareholder equity that do not result from transactions with shareholders (such as dividends, share repurchases or share offerings) are reflected in the income statement. Residual income valuation models such as EVA(R) assume that there is a clean surplus.

Dirty surplus accounting occurs when some items – most notably foreign currency translation adjustments and certain pension liability adjustments – are adjusted from shareholder equity without passing through the income statement. In order to adjust the income statement to reflect a clean surplus, an investor can replace “net income” with “total comprehensive income.”

For more information, see all articles on: Accounting, Adjusting Reported Financial Statements

See also:

Strengths and Weaknesses of the Residual Income Model

Best and Worst Situations for Applying Residual Income Models

Income Statement Accounting for Pension Expense: An Overview

Strategic Asset Allocation Concerns for Defined Benefit Plans

The Cash Method of Accounting