Level 2 inputs are in the middle of a hierarchy of information sources that range from Level 1 (best) to Level 3 (worst). The general intent of these levels of information is to step the accountant through a series of valuation alternatives, where solutions closer to Level 1 are preferred over Level 3. They are directly or indirectly observable inputs other than quoted prices. This definition includes prices for assets or liabilities that are (with key items noted in bold):
- For similar items in active markets; or
- For identical or similar items in inactive markets; or
- For inputs other than quoted prices, such as credit spreads and interest rates; or
- For inputs derived from correlation with observable market data.
An example of a Level 2 input is a valuation multiple for a business unit that is based on the sale of comparable entities. Another example is the price per square foot for a building, based on prices involving comparable facilities in similar locations.
It may be necessary to adjust the information derived from Level 2 inputs, since it does not exactly match the assets or liabilities for which fair values are being derived. Adjustments may be needed for such factors as the condition or location of assets and the transaction volume of the markets from which information is derived.