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Fair value measurements (Level 1, 2 and 3)

The three-level hierarchy 10-Ks use when they report assets at fair value, with P&G's and Salesforce's notes.

The short answer

Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction. US accounting rules sort those measurements into three levels, based on how directly the inputs come from a market: quoted prices for the same item (Level 1), other observable inputs (Level 2), and the company's own unobservable assumptions (Level 3). The 10-K usually describes the hierarchy in a fair-value note and then tables the assets that fall into each level.

The three levels

Procter & Gamble's 10-K for fiscal 2026 states the hierarchy this way:

Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs, or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs reflecting the reporting entity's own assumptions or external inputs from inactive markets.

P&G also says it had no significant activity with Level 3 assets and liabilities during the periods presented. Cash equivalents such as money-market funds often sit in Level 1; many corporate bonds and derivatives sit in Level 2; private investments, certain customer contracts and some acquired intangibles can sit in Level 3.

Salesforce's 10-K for fiscal 2026 uses the same three-tier hierarchy, with slightly different wording: Level 1 is quoted prices in active markets for identical assets, Level 2 is significant other inputs that are observable, and Level 3 is significant unobservable inputs supported by little or no market activity. It then tables cash equivalents and marketable securities by level.

Source: Procter & Gamble 10-K for fiscal 2026, filed Aug 4, 2026 · Salesforce 10-K for fiscal 2026, filed Mar 2, 2026

Why the level matters

A Level 1 price can be checked against a public market. A Level 3 value cannot; it depends on the company's model and assumptions, and it can move when those assumptions change. The note is most useful when a large balance sits in Level 3, or when amounts move between levels during the year. Fair value is not the same thing as historical cost: property and equipment are usually carried at cost minus depreciation, not at a Level 1, 2 or 3 fair value. The hierarchy applies to items the company measures at fair value, such as many investment securities and derivatives.

Common questions

What is the fair value hierarchy?

A three-level ranking of the inputs used to measure fair value: quoted prices for identical items (Level 1), other observable inputs (Level 2) and unobservable assumptions (Level 3).

What is a Level 3 asset?

One whose fair value depends mainly on inputs that cannot be observed in a market, such as a private-company valuation or a model of expected cash flows.

Do all assets on the balance sheet have a level?

No. The hierarchy applies to assets and liabilities measured at fair value. Factories and equipment are usually carried at cost minus depreciation and are not assigned a level.

Where is this in the 10-K?

In a note titled fair value measurements, or in the accounting-policy note, often with a table that places cash equivalents, securities and derivatives into Level 1, 2 or 3.

Is a Level 3 value unreliable?

It is less directly checkable than a Level 1 quoted price. The note should describe the methods and, for material amounts, how sensitive the value is to the assumptions.

Disclosures

Editor holdings: The editor holds no position in any company named on this page. As of Nov 11, 2026.
Compensation: Nobody paid for this page. No affiliate links on this page.
Sources: Each company's own SEC filings, linked next to each number.
Last updated: Nov 10, 2026

General education, the same for every reader. Not a recommendation to buy, sell or hold any security, and it doesn't consider your situation.

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