Answer
The fair value is usually hierarchy is usually divided into three broad levels inclusive of;
Level 1: this level includes observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
Level 2: Includes inputs other than quoted prices including level 1 that are observable for the assets or liability either directly or through conformity with observable data.
Level 3: comprises of non-observable inputs for instance; a company's own assumptions or data.
Work Step by Step
Generally, the fair value hierarchy provides insight into the priority of valuation techniques that are highly used to determine fair value. Its important to note that, level 1 is the most reliable and crucial since its based on quoted prices, level 2 is the next most crucial and reliable and would rely on evaluating similar assets or liabilities within an active market. Level three is the most unreliable level since much judgement is required based on the best information available to arrive at a relevant and representational trustworthy fair value appraisal.
