Sample Essay

The Positive Accounting Theory entails positive economics and explains problems related to the real world focussing on what is present rather than what should be present. It examines the effects of this phenomenon on environments, markets and decisions with respect to financial statements. The positive accounting theory states how decisions are made but also the consequences of these results. Fair value accounting entails the recording and measurement of assets on the fair values instead of historical cost.

The positive accounting theory examines the people who make decisions based on the financial statements or accounting policies of an entity and measures decisions made by these people. The positive accounting theory also explains why managers prefer particular accounting policies to maximize the value of the firm through the financial statements, this means fair value accounting would considerably change the values in the financial statements and eventually the decisions made based on these statements. Agency theory examines the relationship between the shareholders and managers of an entity. The agency theory is not affected by fair value accounting as compared to historical cost accounting as both accounting procedures have the same result if wage contracts of the managers are changed according to the time periods (Raith 2009).

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