For investing assets reported at fair value, companies disclose information to enable users to assess the fair value estimates and reasonableness of assumptions made in determining fair value. How is this accomplished?
What will be an ideal response?
Answer: Companies report securities based on a fair value hierarchy that reflects the reliability of significant inputs used in making fair value measurements. The levels are ranked from most reliable to those fair values that required the most judgment. The levels are:
Level 1: Fair values are determined based on quoted prices in active markets for identical assets.
Level 2: Fair values are determined using significant other observable inputs. Other observable input could include securities dealer quotes, or prices based on similar assets in the open markets.
Level 3: Fair values are determined using significant unobservable inputs. For instance, fair values in this group could be estimated based on pricing models such as discounted cash flows.
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