What are examples of observable inputs that 360 Painting would classify as Level 2 in the 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.
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 categorize the inputs used to measure fair value in its financial statements. This hierarchy has three levels. Level 2 includes observable inputs other than quoted prices in active markets for identical assets and liabilities. These can include quoted prices for similar assets or liabilities in inactive markets. Level 2 also encompasses other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
In simpler terms, Level 2 inputs are those that can be verified by looking at market data, even if they aren't direct prices for the exact same item. This is important for franchisees to understand because it relates to how 360 Painting values its assets and liabilities, which can affect the company's financial health and stability. Understanding these valuation methods can provide insight into the company's financial practices.
For a prospective franchisee, this means that 360 Painting aims to use market-based information where available to determine the fair value of its assets and liabilities. While the FDD defines Level 2 inputs, it does not provide specific examples of what those inputs might be for 360 Painting. To gain a clearer understanding of what specific inputs 360 Painting considers Level 2, a prospective franchisee should ask the franchisor for specific examples during their due diligence process.