How does 360 Painting define Level 3 inputs within its 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 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 the 2025 FDD, 360 Painting uses a fair value hierarchy to prioritize inputs when measuring fair value. This hierarchy consists of three levels. Level 3 inputs are defined as those that are generally unobservable and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability.
For a prospective 360 Painting franchisee, understanding this definition is important because it relates to how the company values its assets and liabilities in its financial statements. Level 3 inputs, being unobservable, involve a degree of subjectivity and estimation by the management of 360 Painting. This could impact how certain items, such as intangible assets or goodwill, are valued on the company's balance sheet.
The FDD also mentions that the carrying amounts of cash and cash equivalents, accounts receivable, inventory, prepaid expenses, accounts payable, accrued liabilities, and deferred franchise fees approximate fair value due to the short maturity of these instruments. Additionally, the carrying value of long-term debt approximates fair value because the stated interest rates are at market rates. This indicates that these particular assets and liabilities are not categorized as Level 3, as their fair values are more readily determinable.
As a potential franchisee, it would be prudent to understand the specific types of assets or liabilities that 360 Painting values using Level 3 inputs. Further due diligence may involve inquiring about the assumptions and estimates used by management in determining these fair values, as they can have a material impact on the company's financial position and performance.