What are Level 2 inputs, as defined in 7 Brew's fair value measurement hierarchy?
7_Brew Franchise · 2025 FDDAnswer from 2025 FDD Document
Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. The hierarchy comprises three levels of inputs that may be used to measure fair value:
- Level 1 Quoted prices in active markets for identical assets or liabilities
- Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, 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 Unobservable inputs supported by little or no market activity and that are significant to the fair value of the assets or liabilities
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 82)
What This Means (2025 FDD)
According to 7 Brew's 2025 Franchise Disclosure Document, Level 2 inputs within the fair value measurement hierarchy are defined as observable inputs other than Level 1 prices. These include quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, or other inputs that are observable. These inputs can be corroborated by observable market data for substantially the full term of the assets or liabilities.
In simpler terms, Level 2 inputs are based on market data but are not direct prices for the exact same item. Instead, they might be prices for comparable items, prices from less active markets, or other data points that can be verified using market information. This level of input is used when direct, readily available prices (Level 1 inputs) are not available.
For a prospective 7 Brew franchisee, understanding these definitions is important for interpreting the company's financial statements. Fair value measurements are used to determine the value of certain assets and liabilities, and the level of input used affects the reliability and accuracy of those measurements. Level 2 inputs are generally considered more reliable than Level 3 inputs, which rely on unobservable data, but less reliable than Level 1 inputs, which are based on direct market prices.