Level 3 Assets

AAA

DEFINITION of 'Level 3 Assets'

Assets whose fair value cannot be determined by using observable measures, such as market prices or models. Level 3 assets are typically very illiquid, and fair values can only be calculated using estimates or risk-adjusted value ranges. In addition to Level 1 and Level 2 assets (both of which have more accurate fair values), Level 3 assets must be reported on by all publicly traded companies as of 2008.

INVESTOPEDIA EXPLAINS 'Level 3 Assets'

This classification system came about as a result of FASB Statement 157, which aims to bring clarity to the balance sheet assets of corporations. Even though they are hard to value, Level 3 assets are held at large investment shops and commercial banks by the billions.

These assets received heavy scrutiny during the credit crunch of 2007, as many Level 3 assets consist of mortgage-backed securities (which suffered massive defaults and write-downs in value). The firms that owned them were often not adjusting asset values downward even though credit markets had dried up in the market for asset-backed securities, and all signs pointed to a decrease in fair value.

RELATED TERMS
  1. FASB 157

    A Financial Accounting Standards Board (FASB) Statement that ...
  2. Credit Crunch

    An economic condition in which investment capital is difficult ...
  3. Intrinsic Value

    1. The actual value of a company or an asset based on an underlying ...
  4. Mortgage-Backed Security (MBS)

    A type of asset-backed security that is secured by a mortgage ...
  5. Mark To Market - MTM

    1. A measure of the fair value of accounts that can change over ...
  6. Level 1 Assets

    Assets that have readily observable prices, and therefore a reliable ...
Related Articles
  1. The Importance Of Corporate Transparency
    Investing Basics

    The Importance Of Corporate Transparency

  2. Off-Balance-Sheet Entities: An Introduction
    Investing

    Off-Balance-Sheet Entities: An Introduction

  3. The Fuel That Fed The Subprime Meltdown
    Personal Finance

    The Fuel That Fed The Subprime Meltdown

  4. What is happening during a risk repricing?
    Investing

    What is happening during a risk repricing?

comments powered by Disqus
Hot Definitions
  1. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  2. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  3. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  4. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  5. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  6. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
Trading Center