Accounting

What is fair value hierarchy levels? An IFRS view of the definition

What is fair value hierarchy levels?

The fair value hierarchy level is a hierarchy of inputs into the fair value measurement. The inputs are the assumptions that market participants make when using a valuation technique in pricing an asset or liability.

 

The inputs are classified as observable or unobservable. The fair value hierarchy levels gives the highest priority to observable inputs and the lowest to unobservable inputs.

The hierarchy does NOT priorities the valuation techniques, just the inputs to those techniques.

The fair value hierarchy level prioritises inputs into 3 levels – Level 1, 2 and 3

 

The hierarchy is also used in the disclosure process as a fair value measure is classified in its entirety based on the lowest level input that is significant to the entire measurement.

 

What valuation techniques are available to measure fair value?

 

–           the market approach: prices generated by market transaction

–           the cost approach: prices based on amounts required to replace the service capacity of an asset.

–           the income approach: prices generated by considering future cash flows or future income and expenses

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