The term Level 1 asset refers to a hierarchy framework that identifies assets and liabilities possessing the most transparent and tangible values. Companies are required to value certain assets and liabilities at their current value, not historical cost. The hierarchy framework used to value these assets includes three levels, with Level 1 being the easiest to verify.
Generally Accepted Accounting Principles require companies to record certain assets at their current value, not historical cost. The three approaches used to determine these values include mark-to-market, mark-to-model, and mark-to-management. These processes were developed so assets appearing on a company’s balance sheet reflected their true value, which can materially differ from historical cost.
Guidance is provided in Statements of Financial Accounting Standards No. 157, Fair Value Measurements, which describes both the fair value hierarchy as well as the disclosure requirements for assets and liabilities not recorded at historical cost. Generally, Level 1 assets and liabilities are valued using the mark-to-market approach, which are considered the most reliable of prices.
Level 1 assets and liabilities include financial instruments such as securities that are actively traded or have values listed on an exchange. Examples of Level 1 assets and liabilities include common stocks of publically-traded companies, mutual funds, government debt securities, and corporate bonds.