ACCA SBR ^INT Syllabus C. Reporting The Financial Performance Of A Range Of Entities - The ‘Fair Value Hierarchy’ - Notes ^{2 / 3}

The ‘Fair Value Hierarchy’

This hierarchy aims to increase consistency and comparability in fair value measurements 

So it categorises the inputs used in valuation techniques into three levels. 

Highest priority given to quoted prices in active markets for identical assets 
Lowest priority to unobservable inputs

1. Level 1 inputs are Quoted prices in accessible active markets for identical assets

   These give the most reliable evidence of fair value and are used without adjustment

   (This is used even if the market's cannot absorb the quantity held by the entity)

2. Level 2 inputs are observable inputs (other than quoted market prices) 

   Level 2 inputs include:

   Quoted prices for similar assets in active markets 
   Inputs that are corroborated by observable market data by correlation for example ('market-corroborated inputs').

3. Level 3 inputs inputs are unobservable inputs for the asset 

   Use the best information available in the circumstances, eg. Your own data, taking into account all information about market participant assumptions that is reasonably available