Fair value measurement are categorized into a three level hierarchy,explain?

Overview

IFRS 13 seeks to increase consistency and comparability in fair value measurements and related disclosures through a 'fair value hierarchy'. The hierarchy categorises the inputs used in valuation techniques into three levels. The hierarchy gives the highest priority to (unadjusted) quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. [IFRS 13:72]

If the inputs used to measure fair value are categorised into different levels of the fair value hierarchy, the fair value measurement is categorised in its entirety in the level of the lowest level input that is significant to the entire measurement (based on the application of judgement). [IFRS 13:73]

Level 1 inputs

Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date. [IFRS 13:76]

A quoted market price in an active market provides the most reliable evidence of fair value and is used without adjustment to measure fair value whenever available, with limited exceptions. [IFRS 13:77]

If an entity holds a position in a single asset or liability and the asset or liability is traded in an active market, the fair value of the asset or liability is measured within Level 1 as the product of the quoted price for the individual asset or liability and the quantity held by the entity, even if the market's normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price. [IFRS 13:80]

Level 2 inputs

Level 2 inputs are inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. [IFRS 13:81]

Level 2 inputs include:

• quoted prices for similar assets or liabilities in active markets  
• quoted prices for identical or similar assets or liabilities in markets that are not active  
• inputs other than quoted prices that are observable for the asset or liability, for example
  • interest rates and yield curves observable at commonly quoted intervals  
  • implied volatilities  
  • credit spreads
• inputs that are derived principally from or corroborated by observable market data by correlation or other means ('market-corroborated inputs').

Level 3 inputs

Level 3 inputs inputs are unobservable inputs for the asset or liability. [IFRS 13:86]

Unobservable inputs are used to measure fair value to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. An entity develops unobservable inputs using the best information available in the circumstances, which might include the entity's own data, taking into account all information about market participant assumptions that is reasonably available. [IFRS 13:87-89]

Hierarchy for inputs used in measuring fair value that maximize the the use of observable inputs and minimizes the use of unobservable inputs by requiring thst the observable inputs be used when available._The fair value is broken down into three levels based on the reliability of inputs1_The valuationd are based on market approach2_

The answer is clearly descriped at the following page ;

https://www.iasplus.com/en/standards/ifrs/ifrs13

 

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