The three-level fair value hierarchy of IFRS 13 classifies the inputs used in fair value measurements from most reliable (observable market prices) to least reliable (unobservable entity-specific assumptions). Level 1 inputs are quoted prices in active markets for identical assets or liabilities — directly observable, no adjustment required. Level 2 inputs are observable inputs other than Level 1 prices, including: quoted prices for similar assets in active markets, quoted prices for identical assets in inactive markets, observable market data (yield curves, credit spreads, foreign exchange rates), or market-derived inputs. Level 3 inputs are unobservable inputs reflecting the entity's own assumptions about what market participants would use.

For business valuation purposes, the vast majority of work on unlisted company assets falls within Level 3: DCF models use unobservable revenue growth assumptions, margin projections, and discount rates derived from judgment-based beta estimates and WACC components. This places significant disclosure burden on preparers and creates higher audit scrutiny — auditors and valuers must demonstrate that Level 3 assumptions are internally consistent, market-participant-based, and supported by observable market data where available.

In a PPA context, customer relationships and technology typically fall at Level 3; financial liabilities with observable market terms fall at Level 2; liquid financial instruments fall at Level 1. The level classification determines the extent of sensitivity analysis disclosure required and the rigour of the audit review. At Hectelion, all Level 3 fair value work is fully documented with input sensitivity analysis.

At Hectelion, we apply the IFRS 13 hierarchy in all our fair value mandates, with full Level 3 documentation and sensitivity analysis for unlisted asset valuations.