Companies are required to record certain assets at their present value, not historical cost, and classify them as Level 1, 2 or 3 assets, depending on how easily they can be valued.
Level 3 assets are financial assets and liabilities that are considered the most illiquidand the most difficult to value.
Their value can only be estimated using a combination of complex market prices, mathematical models and subjective assumptions.
Examples of Tier 3 assets include mortgage-backed securities (MBS), private equity, complex derivatives, foreign equities, and distressed debt.
The Tier 3 asset valuation process is known as model valuation.