I came across this statement in one of the mocks. Can someone please explain to me this statement?
Accounting for changes in value of AFS investments biases the valuation by incorrectly stating ROE but not book value of equity.
I thought book value of equity is also wrongly stated as all the unrealized GL flow to equity.
anyone?
dirty surplus issue
My thoughts are that the Net Income number is not affected, but equity is. The point with violations of clean surplus accounting is that equity will more fully reflect the equity of a firm (as with AFS or other things that flow to equity instead of IS), but ROE is skewed because Net Income (the return) is not affected while equity will be. IE, in the case of large unrealized gains in AFS securities, equity will rise but net income will not reflect these, and ROE will be lower.
Book value should be correctly stated, it is NI that will be wrong.
Alrite thanks!