As most financial analysts know by now, the banking crisis sparked by Silicon Valley Bank is fundamentally about asset valuation. SVB held a large quantity of financial assets based on low-interest loans, which plunged in value in today’s high interest rate world, which led to an accumulation of unrealized losses that eventually imploded the balance sheet.

Some people might wonder whether similar dysfunction could affect non-financial companies, and how you might analyze corporate disclosures to get a better sense of that risk. Today let’s explore how one might perform that analysis.

This idea came to us as we were studying Urban Outfitters ($URBN), which filed its most recent quarterly report earlier this week. Among its many disclosures was a footnote about the fair value of financial assets the company has. For any company you might choose, your analysis can start there.

Like many companies, Urban Outfitters invests some of its cash in other financial assets. The companies must then report the estimated fair value of those assets every quarter. Figure 1, below, shows what Urban Outfitters disclosed this quarter.

This is a standard table for disclosure of marketable securities. Under U.S. Generally Accepted Accounting Principles, companies must classify the securities they hold into one of three categories:

• Level 1, where the price comes from readily observable inputs such as quoted prices in active markets for identical assets or liabilities.
• Level 2, where prices are less readily apparent, so values are determined by other means — say, quoted prices for assets that are similar but not identical.
• Level 3, reserved for assets that don’t have readily available markets, so the company estimates a value based on its own best assumptions and calculations.

So if we go back to Urban Outfitters and Figure 1, we can see that the company has $11.98 million of Level 1 assets, which are mutual funds held in a rabbi trust (a type of tax-deferred account so named because a rabbi first came up with the idea). The company also has $272.2 million in various Level 2 assets, mostly corporate bonds; and no Level 3 assets.

As disclosures of financial assets go, Urban Outfitters’ report is rather run of the mill. Many companies, financial and non-financial alike, will have similar disclosures.

What About Level 3 Assets?

The trickier question are Level 3 assets, since they rely so much more on models and assumptions to determine their value rather than market data.

What might that look like in practice? One example comes from Loews Corp. ($L), which disclosed $1.64 billion in Level 3 assets in its 2022 annual report, filed in February. See Figure 2, below.

To be clear, Loews does not have much value tied up in these Level 3 assets; that $1.64 billion is only 4.3 percent of the total $37.7 billion in financial assets Loews reported for last year and only 2.1 percent of $75.5 billion in total assets. Even if those Level 3 assets suddenly dropped to zero (unlikely), that would barely be material to the overall balance sheet.

Our point, however, is that Level 3 assets theoretically could see sudden, wild swings in value that catch investors by surprise, because Level 3 assets don’t trade on easily accessible markets.

To help you understand the changes in those values over time, companies do need to reconcile the values from fiscal year-start to fiscal year-end, and report those numbers. Figure 3, below, shows how Loews reconciled its Level 3 assets. (Be warned, you may need to squint.)

There’s a lot going on in Figure 3, but basically it shows that Loews started 2022 with $1.55 billion in Level 3 assets, lost value in some of them, gained value while purchasing others, and ended 2022 with that $1.64 billion we mentioned above.

You can run similar exercises on other companies reporting Level 3 assets. Speaking of which…

How You Find the Data

That’s easy. As we mentioned, you can find the disclosures for specific companies using our Footnote Disclosure tool, looking for the Fair Value footnote that most companies (and just about all banks and financial firms) report.

Or, to find those disclosures in bulk, you can use our Multi-Company search page. In the standardized metrics field, just start typing “Level.” Before you even finish, you’ll see a platoon of choices to research Level 1, 2, or 3 assets; and any transfers of value from one level to another.

Then it’s off to the races. Here’s hoping your asset values always stay strong.