Clean Surplus Model and Important of Dirty Surplus Items

Valuation is important topic in corporate finance and investment. One of the objectives of representing accounting information is providing information for investment decisions and the choosing among the investment options. Firm value is associated with accounting information, since accounting income aims to determine per share cash flow. Clean Surplus Model links book value of assets with the firm inherent value. This model judge that the value of the company equals book value of stock accompanying with the present value of abnormal future earnings. In the mentioned model earnings are reflected in the balance sheet after they are presented in income statement; however in order to prevent earning volatility some of the items are transferred to balance sheet directly. These items are called dirty surplus. Therefore considering these items in valuation models is debatable. This paper describes the clean surplus and dirty surplus models.