Level 1 Assets
- Assets that have readily observable prices, and therefore a reliable fair market value. Level 1 assets include listed stocks, bonds, funds, or any assets that have a regular “mark to market” mechanism for pricing. Publicly traded companies must classify all of their assets based on the ease that they can be valued, with Level 1 assets being the easiest.
The classification system including Level 1, Level 2 and Level 3 assets came about as a result of Financial Accounting Standards Board (FASB) Statement 157, which required public companies to allocate all assets based on the reliability of fair market values.
The statement went into effect for all fiscal years after 2007, and came about largely as a result of the credit market turbulence surrounding subprime mortgages and related securitized assets like asset-backed securities (ABSs). Many assets became illiquid and fair value pricing could only be done by internal estimates or other mark-to-model procedures during 2007's credit crunch. As such, regulators needed a way to inform investors about securities where value could be open to interpretation.
Investment dictionary. Academic. 2012.
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