The Fair Value Hierarchy is a key concept within financial reporting, particularly for IFRS and GAAP standards. It provides guidance to categorize the inputs used to determine the fair value of assets and liabilities into three different levels. Level 1 inputs are observable market data, like prices on active markets for identical assets or liabilities. Level 2 inputs are observable but involve data other than prices for the exact item on active markets, such as quoted prices for similar items or inputs from inactive markets. Lastly, Level 3 inputs are unobservable, relying on internal models or assumptions when market data is not available.

For example, publicly traded stock prices would fall into Level 1 as they are directly observable in active markets. Meanwhile, the pricing of a bond may use Level 2 inputs if the bond itself doesn't trade often but similar bonds do. An investment in a private company lacking significant market data may rely on Level 3 inputs. By categorizing fair value measurements in this hierarchy, financial reports provide better transparency to stakeholders about the reliability and nature of the valuations presented.