FAR Fair Value · Updated November 2026
Level 1, Level 2, or Level 3: What Makes an Input Higher Quality?
The hierarchy focuses on the inputs used in the valuation, not how complicated the asset looks.
Level 1
Quoted prices in active markets for identical assets or liabilities accessible to the entity.
Level 2
Observable inputs other than qualifying Level 1 prices, such as quoted prices for similar assets or observable market rates.
Level 3
Significant unobservable inputs relying more heavily on assumptions about market-participant assumptions.
Do not classify casually
The level depends on significant valuation inputs under the applicable rules.
The takeaway
Level 1 is directly observable. Level 2 is indirectly observable. Level 3 relies significantly on unobservable inputs.
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FAQ
Is Level 3 automatically wrong?
No.
Is a quoted price for a similar asset Level 1?
Generally no.
Does the hierarchy rank valuation techniques?
It primarily prioritizes valuation inputs.