by Ronald M. Mano and Matthew L. Mourtisen

Back when the authors were students, we studied what was euphemistically called “clean surplus” and “dirty surplus” accounting. More technically, they were called the “all-inclusive concept” and the “current operating concept.”

Over the years, we have been total advocates of the all-inclusive concept, or clean surplus. The basic difference is that under clean surplus, all charges and credits go through the income statement; there are no items that go directly into or out of retained earnings.

We were clean surplus advocates because we felt that it was more transparent to have everything clearly disclosed in the income statement, and that to put items directly into or out of retained earnings was not full disclosure.

On March 11, The Wall Street Journal reported that Global Crossing had posted a quarterly profit of $24.88 billion, the highest quarterly profit ever reported by an American company.

Remember that Global Crossing is the same company that is currently in the throes of bankruptcy. We took the article to a colleague and asked him how much revenue he thought they had. He stated that they must have had more than $24.88 billion. Then we told him that Global Crossing had reported $24.88 billion in profit on $719 million in revenue.

You might ask how that can be.

Remember the basic accounting equation: Assets = liabilities + owners’ equity. In bankruptcy, debts are forgiven. That means liabilities are reduced. Since assets do not change, owners’ equity must change. It must increase. The parts of owners’ equity are revenues, expenses, gains, losses and capital, i.e. retained earnings and stock. The only two logical accounts to increase are retained earnings or gains. Clean surplus would put it in gains; dirty surplus would put it in retained earnings. Since we tend to be a clean surplus profession, it went into gains and thus Global Crossing reported a $24.88 billion income on only $719 million of revenue.

Global Crossing has changed our minds.

We are still basically advocates of clean surplus because we believe in the transparency that it provides. However, we just cannot support reporting $24.88 billion of income on $719 million of revenue. Therefore, we now advocate that extraordinary gains be taken directly to retained earnings and extraordinary losses be put in the income statement.

Now, we realize that this makes us look wishy-washy and inconsistent. It is wishy-washy to change our opinions. It is inconsistent to advocate that extraordinary gains be reported one way and that extraordinary losses be treated differently.

However, allow us to be wishy-washy and inconsistent, because it makes this profession (a profession that we love) look like the laughing stock of the business world when it reports $24.88 billion of profit on only $719 million in sales.


Ronald M. Mano, Ph.D., CPA, CFE, is a professor of accounting, Eccles Accounting Fellow and department chair at Weber State University. Matthew L. Mourtisen, Ph.D., is an assistant professor of accounting at WSU.

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