Modelling the accruals process and assessing unexpected accruals*

change in net financial obligations, or directly calculated as net financing expenses minus non-
equity financing cash flow.
The reason why direct and indirect methods may result in different measures (in Hribar and
Collins 2002) is because the income used to calculate accruals under the direct method is not
comprehensive. Dirty surplus items are by definition items that increase net assets and bypass the
income statements (Penman 2004). If these items have been accounted for in the calculation of
accruals, the direct and indirect methods will yield the same measure of accruals. For instance,
had the impact of foreign currency translations been accounted for, a classic dirty surplus item, it
would not lead to different measures of accruals under direct and indirect methods.
The compliance of the clean surplus relation is not an assumption, but rather is simply a
depiction of how accounting works. All clean surplus relations in section 2.1 reflect the basic
accounting identity of Asset = Liability + Equity. A violation of the clean surplus accounting
implies a violation of this basic accounting identity and a violation of the fundamental
accounting premise that debits equal credits. For accounting to work, the clean surplus relation or
identity, by definition, has to hold. The empirical evidence that is not in favor of clean surplus
relation does not automatically reject its existence. It can simply be due to the lack of data items
to comprehensively calculate the dirty surplus or non-articulation items. In short, accruals under
the direct and indirect methods should be the same if appropriate adjustments are made to either
method in compliance with clean surplus relations or accounting identities.
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