Question

Identify and briefly describe the three component levels of the U.S. generally accepted accounting principles (GAAP) hierarchy of inputs used for determining fair value?

Answer 1

The U.S. GAAP hierarchy of inputs for fair value determination consists of three component levels: Level 1, Level 2, and Level 3.

Step-by-step explanation:

The U.S. generally accepted accounting principles (GAAP) hierarchy of inputs used for determining fair value consists of three component levels:

1. Level 1 Inputs: These are the most reliable inputs and are based on quoted prices for identical assets or liabilities traded in active markets. For example, the market prices of stocks listed on major stock exchanges can be considered Level 1 inputs.
2. Level 2 Inputs: These inputs are based on observable market data other than quoted prices for identical assets or liabilities in active markets. It includes prices of similar assets, market indices, yield curves, and interest rates.
3. Level 3 Inputs: These inputs are unobservable and require management judgment or estimation. They are based on data that is not readily available from external sources. Examples include discounted cash flow models and other valuation techniques.