Fair value hierarchy
The IFRS 13 fair value hierarchy classifies inputs to valuation techniques. Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities accessible at the measurement date. Level 2 inputs are observable directly or indirectly, other than Level 1 prices; Level 3 inputs are unobservable. If a measurement uses inputs from different levels, classify the entire measurement using the lowest-level input that is significant to it. The hierarchy classifies inputs and the resulting measurement, rather than naming a valuation technique.
Worked example
A company values an unquoted loan using observable market interest rates and a significant unobservable default-rate estimate reflecting market-participant assumptions. Assuming these are the relevant inputs, the significant Level 3 input makes the entire measurement Level 3, even though the interest rates are observable.
Common mistake
Calling a discounted cash-flow technique automatically Level 2, or ignoring a significant unobservable input when assigning the measurement level.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | SBR | Direct | September 2026–June 2027 |