Question

Briefly describe the nature of level 2 inputs identified in the fair value framework of U.S. Generally Accepted Accounting Principles (GAAP).

Answer 1

Level 2 inputs in the fair value framework of GAAP are observable inputs other than quoted prices in an active market for identical assets or liabilities.

Step-by-step explanation:

In the fair value framework of U.S. Generally Accepted Accounting Principles (GAAP), level 2 inputs are defined as observable inputs other than quoted prices in an active market for identical assets or liabilities. These inputs include market-based inputs that are observable for similar assets or liabilities, as well as inputs that are derived from observable market data.

An example of a level 2 input could be the use of comparable sales data to determine the fair value of a property. If there are no quoted prices for identical properties in an active market, an appraiser may reference sales of similar properties in the same area as a level 2 input.

Level 2 inputs are considered less reliable than level 1 inputs but more reliable than level 3 inputs, which are unobservable inputs based on the entity's own assumptions.