What characterizes Level 3 inputs, which 360 Painting uses in pricing assets or liabilities?
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 are characterized as generally unobservable inputs. 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 needs to determine the fair value of certain assets or liabilities, they use a hierarchy of inputs. Level 3 is the lowest level, meaning it relies on subjective estimates rather than objective market data. This might occur when there isn't an active market for the asset or liability in question, or when reliable market data is not available.
For a prospective 360 Painting franchisee, this information is relevant because it provides insight into how the company values its assets and liabilities. While it may not directly impact day-to-day operations, understanding the valuation methods can be useful for assessing the overall financial health and stability of the franchise system. It's important to note that using Level 3 inputs involves a degree of estimation and judgment, which could potentially affect the reported financial results.