Fair value hierarchy
In this lesson, you'll learn how the fair value hierarchy works and how to classify valuation inputs into the correct level. Understanding this framework is essential for Financial Reporting and Strategic Business Reporting papers, where fair value measurements appear regularly in exam questions.
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In this lesson
- 0:00 Fair value hierarchy overview
- 0:29 Level one inputs explained
- 0:47 Level two inputs explained
- 1:23 Level three inputs explained
- 1:50 Applying hierarchy to real items
About this lesson
The fair value hierarchy exists to ensure consistency and comparability in valuations. It categorises inputs into three levels based on reliability: level one uses quoted prices in active markets for identical assets (most reliable); level two uses observable inputs like quoted prices for similar assets or market data such as interest rates; level three relies on unobservable inputs and the entity's own assumptions when no market data exists (least reliable). We'll walk through how to identify which level applies to different assets—from listed shares to unlisted entities to derivatives like interest rate swaps—so you can confidently classify inputs in your exam.
Duration: 3m
Transcript
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