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Sir could u pls explain me a three-level hierarchy for inputs that valuation technique use to measure fair value.Thanks
Try this – it’s a bit long-winded but should help!
“Level 1 inputs
Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date.
A quoted market price in an active market provides the most reliable evidence of fair value and is used without adjustment to measure fair value whenever available, with limited exceptions.
If an entity holds a position in a single asset or liability and the asset or liability is traded in an active market, the fair value of the asset or liability is measured within Level 1 as the product of the quoted price for the individual asset or liability and the quantity held by the entity, even if the market’s normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price.
Level 2 inputs
Level 2 inputs are inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
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
inputs other than quoted prices that are observable for the asset or liability, for example
interest rates and yield curves observable at commonly quoted intervals
implied volatilities
credit spreads
inputs that are derived principally from or corroborated by observable market data by correlation or other means (‘market-corroborated inputs’).Level 3 inputs
Level 3 inputs inputs are unobservable inputs for the asset or liability.
Unobservable inputs are used to measure fair value to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
An entity develops unobservable inputs using the best information available in the circumstances, which might include the entity’s own data, taking into account all information about market participant assumptions that is reasonably available.
Sorry to be such a wind-bag but it’s probably better for your greater appreciation!
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