Fair value hierarchy

The fair-value hierarchy ranks the inputs used in a fair-value measurement by their observability. It has three levels. The hierarchy does not rank asset quality, investment risk, or management skill.

Classify the inputs

ASC 820-10-35-37 gives the highest priority to unadjusted quoted prices in active markets for identical items and the lowest priority to unobservable inputs. A Level 1 input meets the identical-item, active-market, and entity-access conditions. Level 2 inputs include observable information such as quoted prices for similar items or observable yield curves, as described in ASC 820-10-35-48. Level 3 inputs are unobservable under ASC 820-10-35-52.

Classify the entire measurement from its lowest-level significant input. For example, an observable benchmark yield plus a significant company-specific cash-flow adjustment that is unobservable can produce a Level 3 measurement. A price shown on a screen is not automatically Level 1 if it concerns a similar instrument or an inactive market.

Keep hierarchy and scope apart

Topic 820 explains how to measure fair value when another Topic requires or permits it. It does not decide whether an investment belongs at fair value. ASC 820-10-35-36 requires valuation techniques to maximize relevant observable inputs and minimize unobservable inputs. Document the technique, input inventory, significance assessment, market access, date, controls, and disclosures.