1. Fair Value Determination: The goal is to estimate the price at which the instrument would be exchanged in an orderly transaction between market participants[3][5].
2. Valuation Techniques: When active market prices are unavailable, entities use valuation techniques that maximize the use of observable market inputs and minimize the use of unobservable inputs[5]. Common techniques include:
- Discounted cash flow analysis
- Option pricing models
- Recent arm's length market transactions
- Reference to the current fair value of similar instruments
3. Market Inputs: Valuation models incorporate factors that market participants would consider in pricing the instrument, such as credit risk, liquidity risk, and market conditions[5].
4. Hierarchy of Inputs: A fair value hierarchy is typically used, prioritizing quoted prices in active markets (Level 1), then observable inputs (Level 2), and finally unobservable inputs (Level 3)[3].
5. Non-Marketable Securities: Some non-trading instruments may be non-marketable securities, which are particularly challenging to value due to their lack of liquidity and absence from public exchanges[4].
6. Over-the-Counter (OTC) Markets: Many non-trading instruments are valued using data from OTC markets rather than public exchanges[1][4].
7. Specialized Appraisal Methods: Certain non-security assets, like artwork or rare collectibles, require specialized appraisal methods for valuation[1].
8. Regulatory Considerations: Valuation practices often need to comply with accounting standards such as IFRS or GAAP, which provide guidelines for fair value measurement[5].
9. Periodic Revaluation: Non-trading instruments may require periodic revaluation to reflect current market conditions and any changes in the instrument's credit quality or other relevant factors[3].
10. Documentation: The valuation process and assumptions used should be well-documented to ensure transparency and consistency in financial reporting[5].
It's important to note that the valuation of non-trading instruments can be complex and often requires professional judgment, especially when dealing with illiquid or complex financial products. The goal is to provide a fair and accurate representation of the instrument's value in financial statements and for risk management purposes.