Level 3 Assets
Level 3 Assets refer to financial instruments whose fair value is determined using unobservable inputs, meaning they are not based on observable market data. These Assets are often complex and illiquid, making valuation challenging. Level 3 Assets are categorized under the fair value hierarchy established by accounting standards like IFRS and GAAP.
Examples of Level 3 Assets include:
- Private Equity Investments: Investments in companies not publicly traded, where valuation relies on subjective estimates.
- Derivatives: Complex financial instruments whose value is Dependent on other underlying variables not readily observable.
- Real Estate Investments: Properties or real estate-backed Securities where market conditions and specific property details heavily influence valuation.
- Illiquid Debt Instruments: Bonds or loans that are not traded in active markets, requiring subjective assessment for valuation.
Cases where Level 3 Assets may come into play include:
- A hedge fund Investing in a startup company, relying on projected Cash Flows and market conditions for valuation.
- A bank holding a portfolio of complex derivatives, where pricing is based on models with inputs that cannot be directly observed in the market.
- A Pension fund Investing in a commercial real estate property, assessing its worth based on unique characteristics rather than comparable sales.