Case Facts Nice Color Bank (NCB), a publicly traded commercial bank located in Los Angeles, has a December 31 year-end. NCB invests in a variety of securities to enhance returns, and manages its investment portfolio so as to earn returns greater than interest paid on bank deposits and other liabilities. As of December 31, 20X1, NCB's maintains an investment in equity securities of nonpublic companies. All cash payments made under these instruments are in U.S. dollars. NCB accounts for its equity investments at fair value, with changes in fair value reflected in earnings and debt securities as either trading securities or available-for-sale securities (with changes in fair value recorded through net income or other comprehensive income (OCI), respectively). In 20 X 1 , NCB invested in the common stock of Very Fun Dot (VFD), a privately held technology company that develops learning modules for preschoolers. Quoted prices are not available for VFD's stock. The security does not have a readily determinable fair value. Most of VFD's competitors are either privately held or subsidiaries of larger publicly traded technology companies. VFD is similar to two other organizations whose shares are thinly traded in an observable market. In determining an appropriate approach for measuring the fair value of its equity investment in VFD, NCB considered the following factors to establish whether a single or multiple valuation techniques should be adopted: - Availability and reliability of data - NCB had sufficient data to support both the income and market approaches. - Comparative levels of the alternative approaches in the fair value hierarchy - When using a market approach to measure the fair value of its investment in VFD, NCB would need to make significant entity-specific adjustments to observable market transactions (i.e., risk adjustments for illiquidity, uncertainty of VFD's future financial performance in relation to its comparables, and other adjustments to reflect business model differences between VFD and its comparables). Similarly, when measuring fair value using an income approach (on the basis of discounted cash flows), NCB would be required to use significant entity-specific assumptions in forecasting VFD's future cash flows. - Views of market participants on the relevance of valuation techniques - Through discussions with valuation specialists, NCB believes that market participants use multiple techniques (income and market approaches) to determine bid prices for similar investments. NCB also used both approaches in 20 X 0 when pricing its investment in VFD. On the basis of this information, in 20X0 NCB determined that it would use both market and income approaches (weighted equally) to measure the fair value of its investment in VFD. NCB has applied a consistent approach during 20 X 1 . Required: Determine the appropriate classification in the fair value hierarchy for the instruments referenced in the case as of December 31 , 20 X 1 . Provide support from appropriate authoritative guidance. Consider the following: - NCB's determination of whether the respective markets for the instruments were active or inactive and whether there was a significant decrease in the volume and level of activity for the instruments. - The valuation techniques (market approach, income approach, or both) used by NCB. Note that the techniques and inputs used by NCB are assumed to be appropriate in the circumstances. The information is provided to form a conclusion about where a measurement should be classified within the fair value hierarchy. - The classification in the fair value hierarchy for each input into the fair value measurement and how those classifications affect classification in the fair value hierarchy of the entire instrument. Case Facts Nice Color Bank (NCB), a publicly traded commercial bank located in Los Angeles, has a December 31 year-end. NCB invests in a variety of securities to enhance returns, and manages its investment portfolio so as to earn returns greater than interest paid on bank deposits and other liabilities. As of December 31, 20X1, NCB's maintains an investment in equity securities of nonpublic companies. All cash payments made under these instruments are in U.S. dollars. NCB accounts for its equity investments at fair value, with changes in fair value reflected in earnings and debt securities as either trading securities or available-for-sale securities (with changes in fair value recorded through net income or other comprehensive income (OCI), respectively). In 20 X 1 , NCB invested in the common stock of Very Fun Dot (VFD), a privately held technology company that develops learning modules for preschoolers. Quoted prices are not available for VFD's stock. The security does not have a readily determinable fair value. Most of VFD's competitors are either privately held or subsidiaries of larger publicly traded technology companies. VFD is similar to two other organizations whose shares are thinly traded in an observable market. In determining an appropriate approach for measuring the fair value of its equity investment in VFD, NCB considered the following factors to establish whether a single or multiple valuation techniques should be adopted: - Availability and reliability of data - NCB had sufficient data to support both the income and market approaches. - Comparative levels of the alternative approaches in the fair value hierarchy - When using a market approach to measure the fair value of its investment in VFD, NCB would need to make significant entity-specific adjustments to observable market transactions (i.e., risk adjustments for illiquidity, uncertainty of VFD's future financial performance in relation to its comparables, and other adjustments to reflect business model differences between VFD and its comparables). Similarly, when measuring fair value using an income approach (on the basis of discounted cash flows), NCB would be required to use significant entity-specific assumptions in forecasting VFD's future cash flows. - Views of market participants on the relevance of valuation techniques - Through discussions with valuation specialists, NCB believes that market participants use multiple techniques (income and market approaches) to determine bid prices for similar investments. NCB also used both approaches in 20 X 0 when pricing its investment in VFD. On the basis of this information, in 20X0 NCB determined that it would use both market and income approaches (weighted equally) to measure the fair value of its investment in VFD. NCB has applied a consistent approach during 20 X 1 . Required: Determine the appropriate classification in the fair value hierarchy for the instruments referenced in the case as of December 31 , 20 X 1 . Provide support from appropriate authoritative guidance. Consider the following: - NCB's determination of whether the respective markets for the instruments were active or inactive and whether there was a significant decrease in the volume and level of activity for the instruments. - The valuation techniques (market approach, income approach, or both) used by NCB. Note that the techniques and inputs used by NCB are assumed to be appropriate in the circumstances. The information is provided to form a conclusion about where a measurement should be classified within the fair value hierarchy. - The classification in the fair value hierarchy for each input into the fair value measurement and how those classifications affect classification in the fair value hierarchy of the entire instrument