What are the characteristics of Level 2 inputs in 360 Painting's fair value hierarchy?
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 company uses a fair value hierarchy to prioritize the inputs used to measure fair value. This hierarchy is divided into three levels. The categorization within the hierarchy is based upon the lowest level of input that is available and significant to the fair value measurement.
Level 2 includes observable inputs other than quoted prices in active markets for identical assets and liabilities. These can include quoted prices for identical or similar assets or liabilities in inactive markets. Level 2 inputs also consist of other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
This means that 360 Painting uses market-based information, where available, to determine the fair value of its assets and liabilities. However, unlike Level 1 which relies on direct, active market prices for identical items, Level 2 uses prices from less active markets or data that can be verified through market observations. This approach is common in financial reporting to ensure that assets and liabilities are valued as accurately as possible, even when direct market prices are not available.