Does anyone have an intuitive explanation of why clean surplus has to hold for residual income valuation? What happens conceptually if the clean surplus does not hold in terms of valuation? Thanks!
Your residual income value will be wrong because your net income value will be wrong.
Thank you for your reply, in that case, wouldn’t adding the change in OCI to NI fix that problem?
Yes.
And that’s the point: an analyst (not an accountant) has to make an adjustment for the clean surplus violation.
Thank you!
My pleasure.