Why does the carrying value of long-term debt approximate fair value for 360 Painting?
360_Painting Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure 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 measurement:
- Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities.
- Level 2 Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or 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 3 Inputs that are generally unobservable and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability. The carrying amounts of cash and cash equivalents, accounts receivable, inventory, prepaid expenses, accounts payable, accrued liabilities and deferred franchise fees approximate fair value because of the short maturity of the instruments. The carrying value of long-term debt approximates fair value as the stated interest rates are at market rates.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 56)
What This Means (2025 FDD)
According to 360 Painting's 2025 Franchise Disclosure Document, the carrying value of the company's long-term debt approximates fair value because the stated interest rates are at market rates. This means that the interest rates 360 Painting is paying on its debt are similar to what other borrowers would pay in the current market for similar loans.
This is important for prospective franchisees because it indicates that 360 Painting's debt is valued appropriately on its balance sheet. If the stated interest rates were significantly different from market rates, the carrying value might not accurately reflect the true economic value of the debt. This could potentially distort the company's financial picture and make it more difficult to assess its financial health.
The FDD also outlines how 360 Painting applies a fair value hierarchy to measure fair value. This hierarchy prioritizes inputs used to measure fair value into three levels: Level 1 (unadjusted quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs reflecting management's estimates). The fact that the interest rates on 360 Painting's long-term debt are at market rates suggests that they could be considered Level 2 inputs, as they are observable or can be corroborated by observable market data.
In summary, the alignment of stated interest rates with market rates provides confidence that 360 Painting's long-term debt is fairly valued, offering transparency to potential franchisees assessing the company's financial obligations.