Research On Fair Value Hierarchy And Inputs

The Decision on Major Issues Concerning Comprehensively Deepening Reforms was adopted at the close of the Third Plenary Session of the 18 th CPC Central Committee. The Decision declared that the market plays a decisive role in the resource allocation instead of a basic role. Fair value accounting which features “true”and “fair” and faces the market and future can solve the problem of information asymmetry in the entrusted agency, reduce the risk of moral hazard and adverse selection, promote the effective resource allocation, and replace history cost accounting gradually.This paper mainly describes the concept of fair value hierarchy and inputs, also gives some illustrative examples about the application of valuation techniques.Furthermore, this paper researches on the auditing of the fair value hierarchy and inputs and analyzes the current condition about the application in China with some constructive suggestions.As the backbone of fair value measurement, fair value hierarchy and inputs plays a key role in fair value measurement. There are three levels in the fair value hierarchy.In the ever-changing market environment, the fair value dynamically falls in different levels, and the accounting personnel need to select the appropriate valuation techniques(a single or multiple techniques) to measure the fair value and disclose the fair value with varying degrees, providing the fair value information with different degree of reliability(Level 1 is most reliable, followed by Level 2, and then Level 3).Auditing the fair value accounting estimate can further enhance the reliability of the fair value information externally in the practical application.The innovation view of this paper is as follows: the key to audit the fair value is to audit the fair value accounting estimates, its core link is to audit the process to develop inputs, and its starting point is to identify the circumstances of the audited entity. The source of inputs includes not only data, but also assumptions used by management from th e perspective of market participants.The difficulty in auditing the level 3 inputs is to audit assumptions about risk inherent in inputs.