There are various theories of accounting which relate to the issues and ideas expressed in the article. The first theory which relates to this article is the positive accounting theory which is concerned with forecasting accounting procedures and methods applied by managers. The theory identifies what stimulates managers to prefer and use specific valuation techniques over others (Hoque 2006). The article highlights why managers use historical costs and why fair value measurements should be applied. The provision created for potential losses are based on judgments of management which can be more realistic if managers realise losses early on and value assets and liabilities using fair value measurement techniques.
The theory of accounting under ideal and non ideal conditions explains the level of certainty and uncertainty in accounting policies, methods and procedures. During certainty accounting procedures produce a pragmatic manifestation of financial statements whereas accounting procedures in uncertain conditions base valuations on assumptions and suppositions. Bank managers currently use estimates and judgment to identify probable losses whereas using fair values and realising loses early can present a more clear and realistic picture. The ideal and non ideal conditions exist in the banking industry like all other industries where regulators and standard setting bodies need to implement policies and standards to ensure that bank managers apply accounting procedures under ideal conditions with certainty (Mattessich 2007).
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