Video: Fair Value Hierarchy

In this lesson, Nick Palazzolo, CPA, demystifies the fair value hierarchy used in financial reporting, illustrating how assets and liabilities are valued based on the transparency and availability of the data used in the valuation process. He begins by examining level one inputs, using the example of stock prices which are valued through easily observable market prices. He moves on to dissect level two inputs with assets like over-the-counter bonds, encouraging a more intricate valuation process with comparisons to similar instruments. Lastly, Nick delves into the complexity of level three inputs, where valuation becomes more challenging due to the unique and unobservable nature of the assets, such as a novel technology or a unique company. Throughout the lesson, practical examples are provided to help grasp the differences between each level, aiding in not only understanding the material but also offering advice on securing points during the exam.