Fair Value Accounting Tiers Essay
The actual security Family Finance Co. (FFC) was not active on an exchange, instead this security had been valued based of comparable securities that were traded in a liquid market. This market was active until September 30, when the market experienced significant decline in volume compared to historical levels. More evidence to the market become less active was the widening of the bid of ask in the market place.
Family Finance Co. (FFC) decided to best way to value the security was using the income approach using observable inputs and to try to minimizes the use of unobservable inputs. These inputs included the implied rate of return in which the market was active, current market spreads, …show more content…
Section 2 • Inputs: Old Market rate, current market spread, increased liquidity risk premiums, market information (quoted prices for same/similar CDOs, Analysis reports, current interest rates and information of underlined collateral). As well as nonbinding prices from brokers based on hypothetical assumptions. • According to FAS157, these are level three inputs. This is because they are not in active markets with quotes prices so it is not level 1. They are not level 2 because they are not observable prices. Therefore, they are level 3 and should be valued using the income approach using relevant information to establish the implied rate of return. • Inputs: Comparable securities market prices. • According to FAS 157, these should be valued as a level 2. This is because they are comparable securities, and these comparable are not being traded in an active market. • Inputs: nonmarket