Third-party pricing service in fair value measurement reflects on the use of a pricing service for inputs in a fair value measurement does not change the analysis of the categorization of the inputs in the fair value hierarchy. Prices obtained from a pricing service are not considered observable simply because they were obtained from a third party. Instead, the resulting fair value measurement is categorized in the fair value hierarchy based on the nature (or source) of the prices provided by the pricing service. Therefore, an entity using a pricing service should obtain an understanding of the valuation methods and the sources of inputs used by the pricing service to properly categorize any fair value measurements based on those inputs. [IFRS 13 B45]
For example, if a pricing service provides quoted prices (unadjusted) from active markets for identical assets or liabilities, any resulting fair value measurement that relies solely on those prices would be Level 1. Alternatively, if the pricing service provides prices based on models that it has generated, any resulting fair value measurement would be a Level 2 or Level 3 measurement, depending on the observability and significance of inputs used in the model for the measurement and any adjustments made to those inputs. [IFRS 13 73, IFRS 13 75 -76]
In some cases, pricing services may provide Level 2 inputs determined using a matrix pricing methodology, even though Level 1 inputs are available to both the entity and the pricing service. Using Level 2 inputs in these situations is not appropriate unless the entity meets the criteria in the practical expedient not to sue Level 1 inputs. If these criteria are not met, the entity should obtain quoted prices (Level 1 inputs) either from the pricing service or from other sources. [IFRS 13 79(a)]
Example: Fair value measurement from pricing services
If a price is obtained from a pricing service, how should it be categorized in the fair value hierarchy in each of the following scenarios?
Scenario 1: Debt security traded in a dealer market Third-party pricing service in fair value measurement
Company H holds a debt security that is traded in a dealer market in which bid-ask quoted prices are available. Assume that the market is an active market for the debt security and Company H has access to this market.
If the pricing service used the price to measure the fair value of the debt security (i.e. the identical CUSIP1), the debt security would be a Level 1 measurement. However, if the pricing service uses a methodology for this class of debt securities based on observable market data using matrix pricing methodology in addition to Level 1 inputs when it meets the relevant criteria, the price would usually be categorized as a Level 2 measurement.
Scenario 2: Exchange-traded debt security Third-party pricing service in fair value measurement
Company H issued an exchange-traded debt security and elected to account for the instrument under the fair value option. The pricing service uses the quoted price for the security trading as an asset in an active market as its measurement of the fair value of the debt security. Third-party pricing service in fair value measurement
Company H evaluates whether the quoted price for the asset used by the pricing service requires adjustment for factors such as a restriction preventing the sale of that asset, which would not apply to the fair value measurement of the liability. Third-party pricing service in fair value measurement
In this case, Company H determines that no adjustments are required to the quoted price of the asset. Therefore, the debt security would be categorized as a Level 1 measurement. This is because the price used to measure the fair value of the debt security is for the identical instrument issued by Company H and traded as an asset, and no adjustments were made to the quoted price of the identical instrument. Third-party pricing service in fair value measurement
Third-party pricing service in fair value measurement
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