TREX CO INC Fair Value Disclosure
| 6. | FAIR VALUE MEASUREMENT |
The Company’s assets measured at fair value are summarized in the following table and consist of assets held for sale. Fair value is determined based on management’s best estimate of market participants’ pricing of the assets, including input from broker and industry specialists, and considers the condition of the assets (in thousands):
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Total Fair Value Measurement December 31, 2015 |
Level 1 | Level 2 | Level 3 | |||||||||||||
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Assets held for sale |
$ | 4,414 | $ | — | $ | — | $ | 4,414 | ||||||||
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The remaining assets held for sale are recorded at cost as the fair value exceeded the cost at December 31, 2015.
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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.