Level 3 Assets
Candlefocus EditorLevel 3 assets pose a greater risk than other types of financial instruments, as their value can be difficult to accurately measure. This can expose investors to higher levels of uncertainty as to their true worth. As such, there are a number of restrictions and regulations surrounding the use of Level 3 assets in order to protect investors.
When measuring the value of Level 3 assets, companies must use the most accurate model available in order to give a reliable estimate. They must also designate these assets as Level 3 in their financial statements and disclose the assumptions and models used to value the assets. This is typically done in the footnotes or the management discussion and analysis section of a company's financial statements.
Furthermore, when classifying and valuing Level 3 assets, companies must be conscious of liquidity. Assets classified as Level 3 cannot be resold easily and typically bear a higher degree of illiquidity when compared to Level 1 and Level 2 assets.
In conclusion, Level 3 assets are financial instruments that pose a higher risk to investors when compared to other more liquid assets. Companies, when assessing the value of these assets, must be aware of the risks involved and the level of uncertainty associated with accurate pricing. Furthermore, they must ensure to use the appropriate accounting methods and disclose the models and assumptions used to accurately value these assets.