Inputs and 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

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

Answer 2

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.

Question 3

Describe fair value measurement inputs.

Answer 3

The various assumptions market participants use in determining fair value, including:

1. Assumptions about the risk inherent in using a particular valuation technique;
2. Risk inherent in using various inputs (data, assumptions, etc.) with each valuation technique.