New Book on Clean Surplus Accounting

Clean Surplus was mentioned in the Research Project (bottom of post) here:

Clean Surplus Accounting

Clean surplus accounting is calculated by not including transactions with shareholders (such as dividends, share repurchases or share offerings) when calculating the return of an organization. Current accounting for financial statements requires that the bottom-line items from the balance sheet and income statement—(book value and earnings)—and its format requires the change in book value to equal earnings minus dividends (net of capital contributions).[3]

The key use of the clean surplus theory is to estimate the value of a company’s shares (instead of the more lengthy discounted dividend/cash flow approaches. Secondary use would be an alternative to CAPM to estimate the cost of capital.


The book on clean surplus accounting has been added to the book folder–Thanks Dustin. (I will submit an index of this folder by tonight so you can be aware of what investing books are now available). The book added is here: Book-on-Buffett-Methods-of-Clean-Surplus

Research on:Feltham Ohlson 1995 valuation and clean surplus accg oper fin act

One response to “New Book on Clean Surplus Accounting

  1. OK, very interesting John. I’m reading the book. I’ve only got to page 65, but I’m seeing the idea. The author uses a LOT of words to describe a very simple concept.

    What’s very interesting is that by stuffing a lot of so-called one-off charges through P&L, a company is able to “juice” its returns for the year, creating an artificially high ROE for subsequent years. Does it mean that clean surplus accounting paints too rosy a picture of a company? The answer is: probably not. With clean surplus accounting, all that “juicing” gets accumulated into the retained earnings of the company, so that in subsequent years, assuming the absense of further exceptional items, returns will actually come out lower. So in effect, clean surplus accounting isn’t being fooled by these non-recurring charges into over-estimating ROE.

    The drawback seems to be that you have to go back into the mists of time to find out what the true retained earnings should be, and scrupulously adjust for capital issues, and suchlike. To make matters worse, you need a good set of accounts, which you can probably only get for 5 years. Sites might give you net income, but they wont give you comprehensive income – information which you need to see what’s been shifted around where.

    Also, what’s you view on goodwill? Should it be treated as a non-recurring charge?

    What about exceptionals that seem all-too-frequent? Would you treat them all as non-recurring, or might you assign a proportion as recurring, and a proportion as non-recurring? Maybe you could say a proportion of sales would count as non-recurring, and a proportion as recurring. Maybe you could take a proportion as recurring – say 20% – and the rest non-recurring. You could, of course, argue that over the long term, all exceptional items are recurring to a first order of approximation.


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