What are Level 3 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 3 inputs within the fair value measurement hierarchy are defined as unobservable inputs. These inputs are supported by little to no market activity. Their significance lies in their impact on determining the fair value of assets or liabilities.
In simpler terms, when 7 Brew assesses the value of its assets or liabilities, it prioritizes using observable market data. However, when such data is scarce or unavailable, the company may rely on its own assumptions and judgments. These unobservable inputs, if substantial, are categorized as Level 3 inputs.
For a prospective 7 Brew franchisee, understanding this definition is crucial because it sheds light on how the franchisor values certain aspects of its business. While Level 1 and Level 2 inputs are based on market realities, Level 3 inputs involve more subjectivity. This could potentially affect financial reporting and the overall financial health assessment of the 7 Brew franchise system.