ASC 820 Level 1: Equity Lockups and Blockage Discounts

Answer C. The quoted price for identical unrestricted shares in an active market remains a Level 1 input even if the reporting entity has a holder-specific contractual sale restriction, such a restriction specific to the holder is not reflected in the fair value measurement. The municipal bond is Level 2 because the pricing service relied on observable market inputs (comparable trades, benchmark yield curves, observable credit spreads) and Lark made no entity-specific adjustments. Investments measured at NAV per share using the practical expedient are disclosed separately and are not categorized within the ASC 820 fair value hierarchy.

Why not A: This distractor plays on the incorrect shortcut that any model-based price equals Level 3. When a pricing vendor uses primarily observable market inputs (recent comparable trades, yield curves, observable credit spreads), the significant inputs are observable and the measurement is Level 2, not Level 3. The NAV practical expedient also does not put the investment into Level 3.

Why not B: This is tempting because candidates often assume any sale restriction lowers the level. However, a restriction that is specific to the holder and not a market-wide feature does not change the measurement when identical unrestricted shares trade in an active market. Also, using NAV as a practical expedient does not place the investment into Level 2.

Why not D: This combines two common errors: downgrading the exchange-traded equity because of a holder-specific lock-up and treating vendor-priced bonds as necessarily Level 3. The holder-specific restriction does not override an active-market quoted price, and observable inputs used by the pricing service keep the bond in Level 2. The NAV treatment is correctly left outside the hierarchy in this choice, but the other classifications are incorrect.

Answer D. The publicly traded stock is a Level 1 measurement because Bex uses the unadjusted quoted price for an identical security in an active market; a contractual sale restriction does not change that classification. Investments measured using the NAV practical expedient are disclosed separately and are not assigned to Level 1, 2, or 3 in the fair value hierarchy. Therefore the stock is Level 1 and the real estate fund is not categorized within Levels 1-3.

Why not A: This combines two mistakes. The contractual sale restriction does not reclassify the exchange-traded stock from Level 1 to Level 2 when the measurement uses the unadjusted quoted price. Also, absence of a quoted market price does not automatically place an NAV-measured investment into Level 3 because investments measured using the NAV practical expedient are excluded from the hierarchy.

Why not B: This is tempting because sale restrictions affect marketability, but when a fair value measurement is based on an unadjusted quoted price for an identical security in an active market, it remains Level 1. The second half (the NAV-measured fund is not categorized) is correct, but the stock classification is incorrect.

Why not C: This distractor leverages the idea that underlying unobservable inputs suggest Level 3, but the question states Bex measures the fund using the NAV practical expedient. Investments measured using that expedient are not included in Levels 1-3, even if the fund's underlying assets are illiquid.

Answer C. The 90-day contractual sale restriction is specific to Orion and would not transfer with the shares, so it is a holder-specific restriction and is not reflected in the fair value, identical unrestricted shares trading in an active market provide a Level 1 quoted price of $48. For the swap, the fair value hierarchy is determined by the lowest significant input used in the measurement; because an internally developed, significant unobservable adjustment for nonperformance risk is applied, the swap valuation is Level 3.

Why not A: Although the swap is valued using observable forward curves and a standard model, the hierarchy depends on the lowest significant input; the presence of a significant unobservable nonperformance-risk adjustment makes the measurement Level 3, so Level 2 is incorrect.

Why not B: Tempting because a sale restriction might suggest a discount, but the stem specifies the restriction is holder-specific and would not transfer with the shares, so the quoted unrestricted market price remains the fair value and Level 1 applies; the swap classification in this choice is correct but the stock treatment is wrong.

Why not D: This bundles two errors: it treats a holder-specific sale restriction as reducing fair value (incorrect given the stem) and it ignores the significant unobservable input in the swap valuation that pushes that measurement to Level 3.

Answer B. ASC 820 gives highest priority to unadjusted quoted prices in active markets for identical assets; such quotes are Level 1 inputs. Because Delta's quoted closing price in Hall's principal market is observable, Hall should measure fair value at the unadjusted $40. A block discount reflects Hall's position size (a holder-specific circumstance), not an asset characteristic, so adjusting the Level 1 price is inappropriate.

Why not A: This distractor is tempting because it tries to reflect the likely decline in proceeds from selling a large block. However, ASC 820 requires use of an unadjusted quoted price in an active market for identical assets when available; a block discount is a holder-specific adjustment, not a market-observable input, so adjusting a Level 1 quote (and calling it Level 2) is not appropriate.

Why not C: This appeals to candidates focused on proceeds from disposing the entire position, but a model-based Level 3 approach is lower priority and unnecessary when an unadjusted Level 1 quoted price for identical shares in an active market is available. Models and unobservable inputs are used only when relevant observable inputs are not available or adequate.

Why not D: Tempting because the exchange quote is the primary observable, but once the quoted price is adjusted for a non-asset characteristic (block size), the measurement no longer relies solely on an unadjusted Level 1 input. Moreover, adjusting for Hall's position size is a holder-specific factor ASC 820 does not permit to change a Level 1 measurement.

Answer B. The sale restriction is holder-specific and would not transfer with the shares to a market participant, so it is not reflected in fair value. Because an unadjusted quoted price for an identical asset is available in an active market, that price is used and the measurement is Level 1: 8,000 × $25 = $200,000.

Why not A: Tempting because a restriction might seem to make the holding different from exchange-traded shares and thus lower the hierarchy level. It is wrong because Level 1 still applies when an unadjusted quoted price in an active market exists for an identical asset, even if the current holder has a holder-specific restriction.

Why not C: Plausible because sale restrictions sometimes lead to marketability discounts. Incorrect here because the restriction is specific to Norwood and would not transfer to a market participant, so no adjustment to the active-market quoted price is made.

Why not D: Attractive because an entity-specific discount would involve unobservable inputs and imply Level 3. It fails because observable quoted prices for identical shares in an active market are available and used unadjusted; an entity-specific, unobservable discount is not required.