What characterizes Level 3 inputs that 360 Painting uses to determine fair value?
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, Level 3 inputs for fair value determination are characterized as generally unobservable. These inputs typically reflect management's estimates of assumptions that market participants would use when pricing an asset or liability.
In simpler terms, when 360 Painting assesses the fair value of certain assets or liabilities, they categorize the inputs used in that assessment into three levels. Level 3 represents the most subjective end of the spectrum, relying on internal estimates rather than concrete market data. This might occur when there isn't an active market for a particular asset or liability, making it difficult to determine its value based on observable transactions.
For a prospective 360 Painting franchisee, understanding this fair value hierarchy is important for interpreting the company's financial statements. While the carrying amounts of certain assets and liabilities like cash, accounts receivable, and short-term debts approximate fair value due to their short maturity, Level 3 inputs involve more judgment and estimation. Franchisees should be aware that these estimates could impact the reported financial position of the company.