Fair value measurement bases refer to the various techniques used to determine the fair value of an asset, liability, or equity instrument for financial reporting purposes. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The fair value measurement bases include:

1. Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.
2. Level 2: Inputs are other observable market data (excluding Level 1 inputs) for the asset or liability, such as quoted prices for similar assets or liabilities, interest rates, yield curves, and credit ratings.
3. Level 3: Inputs are unobservable data for the asset or liability, such as estimates and assumptions used in financial models or valuations.

The level of the fair value hierarchy used for a particular asset or liability will depend on the availability and reliability of market data and other inputs used in the valuation process.

The use of fair value measurement bases is important in financial reporting because it provides more relevant and reliable information about the value of an item than historical cost or amortized cost, particularly for items that are subject to frequent market fluctuations or that have no observable market data. However, fair value measurement can be complex and subjective, and it requires careful consideration of the inputs and assumptions used in the valuation process to ensure that the resulting fair value is both accurate and reliable.

Here's an example of fair value measurement using the Level 2 input:

Let's say a company holds a portfolio of bonds that it intends to sell in the near future. One of the bonds has a face value of $1,000 and a coupon rate of 5%, with a remaining term of 5 years. The company believes that the bond's fair value is currently $1,100, based on the prevailing interest rate in the market.

To measure the bond's fair value, the company could use a valuation model that takes into account the bond's remaining term and coupon rate, as well as prevailing interest rates in the market. Let's assume that the company determines that the bond's fair value can be estimated using the following inputs:

• Market interest rate for bonds with similar characteristics: 6%
• Credit risk of the issuer: Low

Based on these inputs, the company estimates that the bond's fair value is $1,105.

This fair value measurement would fall under Level 2 of the fair value hierarchy, as it relies on observable market data (the market interest rate for similar bonds) and other inputs (the credit risk of the issuer) to estimate the bond's fair value.

The journal entry to record the fair value measurement would be:

Bonds held for sale (asset) $105

Unrealized gain on bonds held for sale (income) $105

This entry would increase the asset balance for the bonds held for sale by $105 and create a corresponding increase in the unrealized gain on bonds held for sale income account.