Final answer:
The use of unobservable inputs such as a pricing model or discounted cash flow is an example of a level 3 estimate in financial reporting, involving significant judgment and estimation with non-market observable data.
Step-by-step explanation:
The use of unobservable inputs such as a pricing model or discounted cash flow is an example of a level 3 estimate. This type of estimate is part of the fair value hierarchy used in accounting and finance to gauge the reliability of fair value measurements. Level 3 estimates involve inputs that are not observable in the market and are typically derived from the entity's own assumptions. These inputs may include the entity's own data, adjusted for assumptions that a market participant would use.
In finance and valuation, the tendency to rely on initial values is known as anchoring, which can influence the estimated value of an investment or project. On the other hand, the analysis that puts a value or worth on inputs and outputs that aren't generally quantifiable is often critical for making informed decisions. Techniques such as a discounted cash flow model or other pricing models allow for this type of complex valuation analysis.
Level 3 estimates are important in financial reporting and are often scrutinized due to the significant judgment and estimation involved in designing and implementing the inputs to the valuation model.