Business ValuationDecember 21, 2020by Business Valuation TeamFair Value Hierarchy and Disclosures under Fair Value Measurements during the Coronavirus Pandemic

This piece will investigate the possible accounting effects of the coronavirus pandemic on fair value measurements, focusing on the fair value hierarchy and disclosures about fair value measurements. The definition of fair value and valuation approaches as well as techniques and inputs in light of the coronavirus pandemic are available elsewhere.

The Fair Value Hierarchy

The coronavirus disease 2019 (COVID-19) pandemic may have a significant impact on how the fair value of assets and liabilities is measured and, hence, how fair value measurements in the fair value hierarchy are classified.

Based on the inputs used to determine the measurement, fair value measurements can be classified into one of three levels:

  1. Level 1 inputs: Unadjusted quoted prices for assets or liabilities in active markets;
  2. Level 2 inputs: Observable inputs not included in Level 1 (including quoted prices in active markets for similar assets or liabilities);
  3. Level 3 inputs: Unobservable inputs.

As a result of the economic fallout from the COVID-19 pandemic, the type of inputs or the source of these inputs may have to change. You may also need to consider reclassifying a previous fair value measurement. If this happens, consider the following:

  • Are the quoted prices still available?
  • Do any adjustments to an observable input need to be made to reflect the current facts and circumstances?
  • Does an observable input need to be replaced with an unobservable input?

Generally speaking, companies should not make an adjustment to a Level 1 input; however, there are limited circumstances in which this may be required. One of those situations arise when a quoted price in an active market does not represent fair value at the time of measurement. This can happen if a major event occurs, such as transactions in another market or announcements, after a market closes but before the measurement is made.

Other possible scenarios in which adjustments may need to be made include the approval of a new drug to treat COVID-19 or a company/industry bailout. Any adjustment requires a judgment call and the necessary supporting documentation.


Disclosure is incredibly important in uncertain and rapidly-changing market conditions. In these trying times, it is important that stakeholders understand changes in the inputs and valuation techniques used to measure fair value during the COVID-19 pandemic. These stakeholders may also focus on reclassifications between levels of the fair value hierarchy.

Changes happen fast and, as a result, companies should always be aware of events that require disclosure.

COVID-19 may have substantial effects on the fair value hierarchy and fair value disclosures. As the COVID-19 situation evolves, there may be additional accounting effects as the full impact of this disease manifests itself and it is important to stay informed on the latest developments in accounting and financial reporting.

Speak with an experienced business valuer today.