Comprehensive Earnings and the Residual Earnings Model

The clean-surplus relation underlying the residual earnings model requires comprehensive earnings, that is, Net Income plus Other Comprehensive Income. Thus, in the residual earnings model, it is future comprehensive earnings that is to be forecasted. However, most items in Other Comprehensive Income are not forecastable: They unrealized gains and losses and one cannot predict whether it will be a gain or loss. In statistical terms, they are mean zero.

So, we can proceed by predicting net income rather than comprehensive income with no loss in precision.