The positive accounting theory explains and forecasts what accounting policies would be used by managers in the future. The theory implies what motivates managers to use specific accounting policies in valuation of various assets and liabilities. The managers may be motivated by personal gain through increased managerial compensation or by organizational efficiency in corporate governance through appropriate disclosure (Mattessich 2007). The current standard of fair value accounting does not require managers to use particular inputs in while valuing level 3 assets and liabilities and managers use their personal judgment to evaluate the inputs whereas after the proposed amendments are in place the managers would be required to use a range of inputs and disclose the impact of changing these inputs. This implies that managers cannot select the accounting policy and apply favorable input variables but have to follow regulations.
Accounting under ideal or non ideal conditions implies the certainty and uncertainty factor in accounting procedures. The accounting procedures performed ideal conditions with certainty tend to present a more realistic reflection of financial statements whereas in uncertainty the procedures are based on probable outcome and assumptions. The proposed amendments in the fair value accounting standard would shift fair values of level 3 assets and liabilities towards a more realistic reflection and provide users of financial statements with information based on what is really present rather than what could be present.
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