Under ASC 820, which of the following inputs would be considered Level 3 in the fair value hierarchy?

Answer options:

Quoted prices for identical assets in active markets.

Quoted prices for similar assets in active markets.

Interest rates that are observable at commonly quoted intervals.

Management's forecast of future cash flows used to value a closely held business.

How to approach this question

Level 1: Observable, Identical, Active. Level 2: Observable, Similar OR Identical but inactive. Level 3: Unobservable (estimates, forecasts).

Full Answer

D.Management's forecast of future cash flows used to value a closely held business.✓ Correct

Level 3 inputs are unobservable inputs for the asset or liability. Management forecasts and internal data used to estimate value fall into this category.

Common mistakes

Confusing Level 2 (observable but not identical/active) with Level 3.

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