Clean Surplus violation clean, 2010, following, equation, someone

BC_MBA_student

We know the following holds for clean surplus equation:
Book 2011 = Book 2010 + Earnings - Dividends

Could someone please explain why pension liabilities, FX translation gains/losses and unrecognized gain/loss on available-for-sale securities are a violation of the clean surplus relationship?

Analyze_This

Pensions smoothing things, cumulative current translation effect and Unrecognized gain/loss on AFS are recognized in equity as other comprehensible income (which is difficult to forecast).

So Book 2011 = Book 2010 + earnings - Dividends +/- other comprehensible income. So clean surplus relationship does not hold.

wxs1986

Great, thanks.

Can we generalize to the effect that any accruals which impact OCI can be seen as a detriment to the clean surplus relationship (and not just pensions or unrecognized / FX translations gains/losses)?

tianxin

yeah. One important condition of RI method is the existence of clean surplus relationship.

defour44

This might be dated but anything that bypasses the income statement and goes directly to equity, examples you gave, are violations of clean surplus.

troymo

So, anything that flows though to OCI instead of the NI statement violates the clean surplus relationship:

OCI =
unrealized g/l in AFS
unrealized g/l from CF Hedge
unrealized g/l from current rate method
pension adjustments