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cpa2bsoon
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Posted: 27 May 2009 at 01:06 \| IP Logged

does anyone have an MCQ on the above subject? Maybe that will help...

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Jdot514
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Posted: 27 May 2009 at 02:09 \| IP Logged

I haven't done my review of chapter 1 yet, but I thought I'd jump in and say that I think arsenal may have it backward. It is my understanding that in this sentence, they meant for the lowest level of input to be level 1 (lower than levels 2 or 3)...therefore, if you have both level 1 and level 3 input, it would fall into the level 1 category. I could be wrong, but that's what makes the most sense to me.

Btw, I looked and did not find any MCQs that clarified this issue...you might try listening to the lecture for that section of the material and see if he clears it up at all.

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Aiman
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Posted: 27 May 2009 at 02:28 \| IP Logged

arsenal79, thank you for your explanation

Jdot514 you stole my thought!! I couldn't think of anything other than what you said. The book didn't say what the highest and lowest level is, so I will go with what you said.

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arsenal79
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Posted: 27 May 2009 at 09:55 \| IP Logged

JDot
Thanks for the point.
However, think about it this way that if you have inputs from two levels and you would get into level I without doing a significance test, you'd be providing the investors with incorrect information by saying that the fair value is based on observable inputs. Therefore you always have to do a significance test. In the significance test you would look at the lowest level of input (the smallest amount) which is significant to the overall valuation. If a level III input (this is the lowest level per FAS 157, Becker has mentioned this in an opening para. which talks about level I providing the most reliable fair value) is significant, i.e., any change in that number would have a significant impact on the fair value, then you would treat the security as being in level III despite having level I inputs.

For your reference, below is the extract of the relevant para. from FAS 157 which talks about this issue:

22. To increase consistency and comparability in fair value measurements and related disclosures, the fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability.

Hope this gets clear to you guys.

Jdot514
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Posted: 27 May 2009 at 12:11 \| IP Logged

Thank you very much arsenal! I appreciate you clarifying the issue for me!

AIMAN - PLEASE READ THIS! Don't go with what I said...Arsenal is right here. I'd hate to be responsible for you getting questions wrong about this issue!

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BEC - Feb 26 - 86!
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AUD - May 14 - 95!
FAR - May 31 - 95!
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