10.5 Fair Value Hierarchy

ASC 820-10

Fair Value Hierarchy

35-37 To increase consistency and comparability in fair value measurements and related disclosures, this Topic establishes a fair value hierarchy that categorizes into three levels (see paragraphs 820-10-35-40 through 35-41, 820-10-35-41B through 35-41C, 820-10-35-44, 820-10-35-46 through 35-51, and 820-10-35-52 through 35-54A) the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).

35-37A In some cases, the inputs used to measure the fair value of an asset or a liability might be categorized within different levels of the fair value hierarchy. In those cases, the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. Assessing the significance of a particular input to the entire measurement requires judgment, taking into account factors specific to the asset or liability. Adjustments to arrive at measurements based on fair value, such as costs to sell when measuring fair value less costs to sell, shall not be taken into account when determining the level of the fair value hierarchy within which a fair value measurement is categorized.

35-38 The availability of relevant inputs and their relative subjectivity might affect the selection of appropriate valuation techniques (see paragraph 820-10-35-24). However, the fair value hierarchy prioritizes the inputs to valuation techniques, not the valuation techniques used to measure fair value. For example, a fair value measurement developed using a present value technique might be categorized within Level 2 or Level 3, depending on the inputs that are significant to the entire measurement and the level of the fair value hierarchy within which those inputs are categorized.

35-38A If an observable input requires an adjustment using an unobservable input and that adjustment results in a significantly higher or lower fair value measurement, the resulting measurement would be categorized within Level 3 of the fair value hierarchy. For example, if a market participant would take into account the effect of a restriction on the sale of an asset when estimating the price for the asset, a reporting entity would adjust the quoted price to reflect the effect of that restriction. If that quoted price is a Level 2 input and the adjustment is an unobservable input that is significant to the entire measurement, the measurement would be categorized within Level 3 of the fair value hierarchy.

ASC 820-10 — Glossary

Level 1 Inputs

Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

Level 2 Inputs

Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 Inputs

Unobservable inputs for the asset or liability.

The FASB established the fair value hierarchy in Statement 157 (codified in ASC 820) to increase the consistency and comparability of fair value measurements and disclosures about such measurements. The hierarchy is divided into three categories on the basis of the relative observability and reliability of the inputs used in a fair value measurement. The categorization of inputs is important both to estimating fair value and to providing the related disclosures.

With respect to measuring fair value, the fair value hierarchy focuses on inputs rather than valuation techniques. However, ASC 820-10-35-38 indicates that the availability of inputs and their relative subjectivity might affect the selection of the valuation technique. For example, a valuation technique in which an entity uses relevant inputs classified within Level 2 of the fair value hierarchy takes precedence over a valuation technique containing significant unobservable inputs (i.e., Level 3 inputs). In addition, with limited exceptions, an entity is precluded from using a valuation technique that employs Level 2 or Level 3 inputs if a Level 1 quoted market price in an active market is available for an asset, liability, or equity instrument subject to fair value measurement.

ASC 820-10-35-37 through 35-38A give an overview of the fair value hierarchy, including the prioritization of inputs used in valuation techniques (which is relevant to the measurement of fair value) and the determination of the categorization of a fair value measurement in its entirety (which is relevant to disclosures about fair value measurements regardless of whether the item is measured or only disclosed at fair value). ASC 820-10-35-40 through 35-54D provide interpretive guidance on the categorization of inputs into the three levels of the fair value hierarchy. For more detailed discussion of the fair value hierarchy, see Chapter 8.

Confidential and Proprietary — for Use Solely by Authorized Personnel

This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.