Question

20. Which one of the following is an example of a level 2 input used in the measurement of the fair value of loans receivable by a bank?

Group of answer choices

Identical loans traded on the active market

The bank’s records of the borrower’s repayment history.

Bank's past lending history

Quoted prices for similar loans in markets that are not active.

Answer 1

Before answering let us know what level 1, level 2 and level 3 inputs mean as per US GAAP -

Level 1 Inputs – These represent the quoted prices in the active market for identical loans (in this case) which are not adjusted.

Level 2 Inputs – Other than those included in level 1, which includes quoted prices for similar loans either in active or inactive market.

Level 3 Inputs – Unobservable inputs for determining the fair value of the loans, this may include entity’s own assumptions.

Identical Loans traded on the active market - As these are identical loans and are traded on the active market, this will come under level 1 inputs. Hence not a level 2 input.

Bank’s records of the borrower’s repayment history – This will come under level 3 as it includes entity’s assumptions and not something which is shown to the public. Hence not a level 2 input.

Bank’s past lending history – This also will come under level 3 input as it is unobservable to the public and made of assumptions. Hence not a level 2 input.

Quoted prices of similar loans in markets that are not active – As these are quoted prices on inactive market these will come under level 2 inputs. Hence this is a Level 2 input.