Equity: Clean surplus violation: nonrecurring items items

CFA4Techie

for RI model, does non-recurring items already reflected in the equity or not? why we don't need to adjust B/S? Thanks.

book 618 as I read through it, I don't get the idea... Thanks.

DSquaredSlim

for RI model to work, the clean surplus must not be violated.

clean surplus is B(t)=B(t-1)+E(t)-D(t) where E(t)=(ROE-r)*B(t-1)

The idea is that if you have nonrecurring items on the IS that alter B(t) by an amount different that E(t)-D(t) then you CANNOT use the RI model. Said another way, for the RI model to be a valid, book value should only increase by E(t)-D(t).

Hope this helps.