Unobservable inputs are inputs used in fair value accounting for which there is no market information available, which instead use the best information available for pricing assets or liabilities. An unobservable input may include the reporting company’s own data, adjusted for other reasonably available information. Examples are an internally-generated financial forecast and the prices contained within an offered quote from a distributor. Unobservable inputs can be quite subjective.
The most favored approaches to deriving fair values for assets and liabilities are those that maximize the use of relevant observable inputs and minimize the use of unobservable inputs. Observable inputs are derived from market data that properly reflect the assumptions that third parties would use when setting prices for assets and liabilities. Examples of markets that are considered to provide observable inputs are stock exchanges, dealer markets, and brokered markets.