Essay: Economic Behavior Theory

Sample Essay

The economic behavior theory is based on the analysis of economic behavior of entities after a change has been implemented. The application of fair value standards instead of historical costs drastically changed the economic behavior of companies especially the ones in the financial sector. The companies made risky decisions regarding investments in mortgages and real estate derivatives before the implementation of fair value accounting and these risky assets were recorded at historical costs and after the application of fair values this pattern of decision making changed significantly. The proposed amendments in fair values will also impact economic behavior as rigorous internal control accounting procedures will be implemented to ensure appropriate valuation of assets and liabilities even where specific guidelines are not available.

The decision usefulness theory of accounting presents how application of appropriate standards, concepts and principles are related to useful decisions and how investors can make useful decisions based on financial statements which have been prepared using appropriate accounting standards (Stamp, Mumford and Peasnell 1993). The financial statements prepared using fair value accounting standards provide true, dependable and pertinent information to users of financial statements which can make useful decisions based on this information.

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