#12 Inputs & Hierarchy

Question 1

Describe Level 1 inputs in the Fair Value Hierarchy

Answer 1

Inputs in Level 1 are unadjusted quoted prices in active markets for assets or liabilities identical to those being valued that the entity can obtain at the measurement date.

Question 2

Describe Level 2 inputs in the Fair Value Hierarchy

Answer 2

Level 2 inputs include:

Quoted prices for similar assets or liabilities in active markets

Quoted prices for identical or similar assets or liabilities in markets that are not active markets in which there are few relevant transactions, prices are not current or vary substantially, or for which little information is publicly available

Inputs, other than quoted prices, that are observable for the assets or liabilities being valued, including, for example, interest rates, yield curves, implied volatilities and credit spreads

Inputs that are derived principally from, or corroborated by, observable market data by correlation or other means (referred to as “market-corroborated inputs”)

Question 3

Describe Level 3 inputs in the Fair Value Hierarchy

Answer 3

Level 3 inputs are are unobservable for the assets or liabilities (or equity items) being valued and should be used to determine fair value only to the extent observable inputs are not available.

Unobservable inputs should reflect the entity’s assumptions about what market participants would assume and should be developed based on the best information available in the circumstances, which might include the entity’s own data.

Question 4

What are observable inputs?

Answer 4

Inputs used in pricing an asset, liability, or equity item that are developed based on market data obtained from sources independent of the reporting entity.

Question 5

What are unobservable inputs?

Answer 5

Inputs that reflect the reporting entity’s own assumptions used in pricing the asset, liability, or equity item that are developed based on the best information available in the circumstances.