Level 2

Learning objectives

• Identify Level 2 inputs and assess the effect of a significant adjustment on the categorisation.L2

Normative references

• IFRS 13 §81Level 2: inputs other than Level 1 quoted prices that are observable for the asset or liability, either directly or indirectly.
• IFRS 13 §82For an item with a specified contractual term, a Level 2 input must be observable for substantially the full term; examples: quoted prices for similar items in active markets, prices for identical or similar items in markets that are not active, observable inputs other than prices (interest rates and yield curves, implied volatilities, credit spreads), market-corroborated inputs.
• IFRS 13 §83Adjustments to Level 2 inputs depend on factors specific to the item: the condition or location of the asset, the extent to which inputs relate to comparable items, and the volume or level of activity in the markets in which the inputs are observed.
• IFRS 13 §84A significant adjustment to a Level 2 input that is based on significant unobservable inputs may result in the measurement being categorised within Level 3.
• IFRS 13 §85Cross-reference: the use of Level 2 inputs for particular assets and liabilities is illustrated in paragraph B35.
• IFRS 13Examples of markets in which inputs may be observable: exchange markets (closing prices readily available and generally representative), dealer markets (bid and ask prices), brokered markets (brokers match buyers and sellers) and principal-to-principal markets (negotiated without an intermediary, little public information).
• IFRS 13Examples of Level 2 inputs by type of item: swap rate or yield curve observable for substantially the full term, implied volatility extrapolated and corroborated by market data, royalty rate of a licence recently negotiated with an unrelated party, retail or wholesale price adjusted for finished goods inventory, price per square metre of a building or valuation multiple of a cash-generating unit derived from observed transactions in comparable items.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

2 questions

• An analyst classifies in Level 1 the measurement of a Prelane bond, on the grounds that it uses the quoted price, in an active market, of another Prelane bond from the same issuer but with a different maturity. What is the error?L2
• Which of these inputs falls in Level 2 of the fair value hierarchy?L2