Question

Briefly describe the fair value hierarchy.

Short answer

The fair value hierarchy differentiates the assets and liabilities that are traded in an active market from those that do not.

Step-by-step solution

Introduction to fair value

The International Accounting Standards Boardcharacterizesfair valueas the price received to sell an asset or in an orderly transaction paid to transfer a liability among market participants on a specific date, generally for utilization on financial statements over time.

Describing the fair value hierarchy

The inputs used in valuation methodologies are organized into three levels using the fair value hierarchy. The hierarchy provides (un-adjusted) supplied prices in active markets for comparable assets or liabilities the greatest priority (Level 1), and unobservant inputs are given the lowest priority (Level 3).