Measurement and frameworks
The Level Game
Level 1 is a quoted price for the identical asset in an active market; anything less observable slides down the ladder.
How the exam words it
- -The stem describes a valuation input and asks 'the FV hierarchy level for this bond is' or 'this is a' Level 1, 2, or 3 measurement.
- -Prices exist only for 'similar' assets, or the market is inactive, or the model uses 'internally developed' projections.
- -It asks how ASC 820 defines fair value, or about principal versus most advantageous markets.
- -It asks which disclosure is required for Level 3 measurements, such as the rollforward.
The playbook
- 1Grade the input, not the asset: identical asset in an active market = Level 1; observable inputs like similar assets or inactive markets = Level 2; unobservable internal assumptions = Level 3.
- 2A measurement takes the level of its lowest significant input.
- 3Fair value is the exit price in the principal market (greatest volume), or most advantageous if none, and transaction costs are not part of the price.
- 4Disclosure grows down the ladder: valuation techniques and inputs for Levels 2 and 3, plus a rollforward for Level 3.
The trap
Calling a quoted price Level 1 when the market is inactive or the asset is merely similar. Level 1 demands identical assets in active markets; anything else is at best Level 2.
How the exam varies it
The same pattern, re-skinned along these axes:
Which level the inputs supportClassify a measurement versus define fair value versus pick the marketMeasurement versus disclosure requirements
Drill this pattern
8 questions of The Level Game from across the AUD topics. Clear it by getting 5 right with a streak of 3.