The 2013 annual report of the Boeing Company contains a disclosure about fair value measurement using the fair value hierarchy. There are three levels of inputs in the fair value hierarchy, with Level 1 representing the highest priority and Level 3 representing the lowest. The fair value of the assets or liabilities, estimated based on the quoted prices for identical assets or liabilities in an active market – the most reliable input, are categorized as Level 1. The fair values which are based on significant observable inputs other than Level 1 inputs such as quoted prices of similar assets or liabilities are categorized as Level 2. Level 3 represents the lowest level of reliability, since the inputs are generally unobservable and represents management’s subjective assumption.
The fair value discussion in the annual report provides the investors with a general idea of the reliability of the fair value estimation. As it is shown in the disclosures, Boeing has investments in all three levels with level 3 investment constituting the smallest portion which is about 14% while Level 2 investments accounts for the largest amount. The relatively small number of level 3 investments indicates that the fair value estimation of Boeing Company are mostly based on objective and observable inputs, and that the investor may consider the fair value estimations to be more reliable. In addition, since the valuation of the Level 3 investments are generally based on subjective assumptions, which are consequently more vulnerable to errors, more disclosures are required for Level 3 investments. For example, in the disclosure notes, Boeing provides a table of reconciliation of Level 3 assets during the financial year including the net realized gains, net purchases issuance and settlements, and net transfers into/out of