What fair value hierarchy does 360 Painting apply when measuring 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 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 three-level fair value hierarchy to prioritize the inputs used to measure fair value. This hierarchy categorizes measurements based on the lowest level of input that is both available and significant to the fair value assessment. This approach is a standard accounting practice to ensure transparency and consistency in financial reporting.
The hierarchy consists of the following levels: Level 1 includes quoted prices in active markets for identical assets or liabilities. Level 2 includes observable inputs other than Level 1 quoted prices, such as quoted prices for similar assets or liabilities in inactive markets, or inputs corroborated by observable market data for the assets' or liabilities' full term. Level 3 includes unobservable inputs that reflect management's estimates of assumptions that market participants would use in pricing the asset or liability.
The document also states that the carrying amounts of certain assets and liabilities, such as cash, accounts receivable, inventory, prepaid expenses, accounts payable, accrued liabilities, and deferred franchise fees, approximate fair value due to the short maturity of these instruments. Similarly, the carrying value of long-term debt approximates fair value because the stated interest rates are at market rates. This is a common practice, as short-term assets and liabilities are typically close to their fair market value, and market-based interest rates on debt reflect current valuations.