The model of accounting under ideal or non ideal conditions is based on a present value approach under certainty and uncertainty. The concepts of accounting under ideal conditions and fair value accounting are closely linked as the present values calculated in ideal and non ideal conditions are based on fair values. The calculations are based on present value of future cash flows approach and market value approach.
The first approach implements assumptions while the other approach applies underlying market values of a security or asset (Scott 2009). The assumptions in the present value approach are at the discretion of company management. The amendments proposed in the fair value accounting standard require managers to disclose these assumptions with alternative scenarios to present their impact on asset values.
Folmer and Teitenberg (2001) explained that measurement approached include two opposing alternatives. One approach is based on actual phenomenon and behavior while the other alternative is based on conjectures and assumptions. The measurement of assets and liabilities of level 3 in fair value accounting is based on various assumptions which are completely related to the second alternative of the measurement approach.
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