Level 3

Learning objectives

• Identify Level 3 inputs and how they are developed using the best information available.L3

Normative references

• IFRS 13 §86Level 3: unobservable inputs for the asset or liability.
• IFRS 13 §87Unobservable inputs are used to the extent that relevant observable inputs are not available (little, if any, market activity); the objective remains an exit price from the perspective of a market participant that holds the asset or owes the liability, so these inputs reflect market participant assumptions, including about risk.
• IFRS 13 §88Level 3 inputs reflect market participant assumptions, including about the risk inherent in the valuation technique and in its inputs.
• IFRS 13 §89Unobservable inputs are developed using the best information available, which may include the entity's own data, adjusted if other market participants would use different data or if something particular to the entity (for example an entity-specific synergy) is not available to others; exhaustive efforts are not required, but all information about market participant assumptions that is reasonably available is taken into account.
• IFRS 13 §90Cross-reference: the use of Level 3 inputs for particular assets and liabilities is illustrated in paragraph B36.
• IFRS 13Level 3 inputs: illustrations of unobservable inputs and of situations in which they are used.

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

4 questions

• An entity has to develop an unobservable Level 3 input to measure an instrument. How does it proceed?L3
• For an unlisted debt, Wendrel sets the risk premium of its discount rate from its own internal data only, without consulting the reasonably available market information, which indicates that market participants would require a different premium. What is the error?L3
• Dravane measures an unlisted convertible debt. Its model uses a risk premium estimated internally at 4%. Reasonably available market information (comparable debts recently issued) suggests that market participants would rather require 5.5%. The team hesitates between keeping 4%, using 5.5%, or launching an exhaustive study of all investors. Write a reasoned analysis of the approach to follow for the Level 3 input.L3
• For units in an unquoted fund, with no observable transaction, Ivrelle writes in its note: « Lacking an active market, our objective is no longer an exit price: we use the value the units have for us, without a risk premium, as we do not intend to sell them. » What is the error?L3