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Sometimes it isn't obvious how an asset or liability should be valued.
In such cases, someone must come up with a value.
Depending upon the item, a firm can use one of three methods. The higher the method number, the more risky and unreliable the valuation:
- Level 1 (aka Marked to Market) - Quoted prices for identical items in active markets
- Level 2 - Quoted prices for similar items or quoted prices for identical items in non-active markets
- Level 3 (aka Marked to Model) - Items with one or more unobservable inputs to price
Items in level 3 can be a bit dangerous, due to the number of assumptions being made.
The details for the value hierarchy are laid out in ASC 820-10-35-37.