Inputs and Hierarchy

Question 1

What are Inputs?

Answer 1

The various assumptions that market participants would use in determining fair value

Question 2

What is an Observable Input?

Answer 2

Derived from market data from sources independent of the reporting entity

Question 3

What is an Unobservable Input?

Answer 3

An Entity’s assumptions based on best information available in circumstances.

Question 4

Which input should be used most of the time?

Answer 4

Observable input. Use of this should be maximized

Question 5

What does level 1 (Rank 1) Fair Value Hierarchy technique do?

Answer 5

Unadjusted quoted prices at measurement date in active markets for identical items

• Highest level with most desirable inputs
• Most reliable evidence of fair value
• Should be used when available
• Liquidity discount-permitted
• Control premium-not permitted
• Blockage discount-not permitted

Question 6

What does level 2 (Rank 2) Fair Value Hierarchy technique use?

Answer 6

Inputs observable, either directly or indirectly, that do not meet all conditions for level 1

• Quoted prices in active markets for similar items
• Quoted prices in markets that are not active
• Observable inputs other than quoted market prices that are relevant to an item being value
• Inputs derived from observable market data using correlation
• May need to be adjusted for characteristics specific to the item being valued (i.e., location, condition)
• If significant unobservable inputs are used to adjust observable inputs, it may result in a level 3 measurement.

Question 7

What does level 3 (Rank 3) Fair Value Hierarchy technique use?

Answer 7

Lowest level of hierarchy. Unobservable inputs for the item being value

• Lowest level with least desirable inputs
• May use reporting firm’s internal data
• Based on assumptions or inferences that market participants would make
• Example: Determining FV of closely held stock