Iveda Solutions, Inc. Fair Value Disclosure
NOTE 5 FAIR VALUE MEASUREMENTS
We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure the fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurements.
Level I - Quoted prices in an active market for identical assets or liabilities.
Level II - Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets and liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level III - Inputs that are generally unobservable and typically reflect our estimate of assumptions that market participants would use in pricing the asset or liability.
The carrying amounts for cash, accounts payable, accrued expenses, and short-term debt approximate their fair values due to the short period of time until maturity. The fair value of the convertible option and debenture warrants are measured by using the Black-Scholes option-pricing model. As of December 31, 2015 and 2014, the assumptions used to measure the fair value of the liability of the freestanding warrants included an exercise price of $1.00 per share, a purchase price of $1.00, maturity dates ranging from December 2018 through March 2020, and a volatility of approximately 20%. As of December 31, 2013, the assumptions used to measure fair value of the liability embedded in our debenture included a conversion price of $1.50, and our freestanding debenture warrants included a warrant exercise price of $1.65 per share, a common share price of $1.10, December 2018 maturity, and a volatility of approximately 21%.
The following table sets forth, by level within the fair value hierarchy, our financial instrument liabilities as of December 31,
| 2015 | 2014 | |||||||
| Derivative liability | ||||||||
| Level I Quoted Prices | $ | - | $ | - | ||||
| Level II Observable Inputs | - | - | ||||||
| Level III Unobservable Inputs | 53,152 | 112,009 | ||||||
| Total | $ | 53,152 | $ | 112,009 | ||||
The following table sets forth a summary of changes in the fair value of our Level 3 financial instrument liability as of December 31,
| 2015 | 2014 | |||||||
| Beginning Balance | $ | 112,009 | $ | 39,804 | ||||
| Issued | - | 172,803 | ||||||
| (Gains) losses during the period | (58,857 | ) | (100,598 | ) | ||||
| Settlements | - | - | ||||||
| Ending Balance | $ | 53,152 | $ | 112,009 | ||||
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.