Residual Income: What is the clean surplus relation?

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CFA.Rhythm

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From Qbank I read this:
RI models are not appropriate under the following circumstances:
The clean surplus accounting relation is violated significantly.
But, what is the clean surplus accounting relation?
CFAI says: “the RI model requires the clean surplus relation.”
 
BV + Net Income - Div = Ending BV
Doesn’t work if there are other adjustments such as pension adj, CTA, stock options, etc.
 
You want the flow of net income to BV to be clean, i.e. no adjustments to equity directly (as is the case for cash flow hedges, pension adjustments like real vs expected return on assets, unrealized gains on AFS securities, foreign currency hedges and CTAs under all-current method).
If all that stuff exists, then your BV won’t change exactly with an increase in net income - dividends - big assumption when you calculate Beginning Book Value * ROE = Earnings at end of period. Basically, BiPolarBoyBoston explained it well and I’m just writing this to see if I could remember PUFE ;)
 
just to confirm…
3 types of hedges
FV Hedge - both realized and unrealized gains / losses go to Income statement.
Cash flow hedge : Realized - Income statement, Unrealized - Direct to Equity.
Net Investment hedge in a foreign subsidiary: Unrealized gains / losses - direct to Equity.
 
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