FAR - FASB - Fair Value Framework - Inputs & Hierarchy

Question 1

What purpose does the fair value hierarchy serve?

Answer 1

To prioritize the inputs to valuation techniques used to measure fair value.

Question 2

Describe fair value measurement inputs.

Answer 2

Inputs can be observable or unobservable.
Observable inputs are based on market data from independent sources.
Unobservable inputs are the entity’s assumptions about the factors that impact determination of fair value.

Question 3

What are the three levels of the fair value hierarchy and what does each consist of?

Answer 3

Level 1: highest level, are unadjusted quoted prices in active markets for assets and liabilities identical to those being valued.
Level 2: are observable for assets or liabilities, either directly or indirectly, other than quoted prices described in Level 1
Level 3: lowest level, are unobservable and used to determine fair value only if observable inputs are not available.