How does Apricot Lane define 'fair value' in the context of financial instruments?
Apricot_Lane Franchise · 2025 FDDAnswer from 2025 FDD Document
Fair value is defined as the price that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The determination of what constitutes observable inputs requires management's judgement. Management considers observable inputs to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, provided by multiple, independent sources that are actively involved in the relevant market. The categorization of an instrument within the fair value hierarchy is based on the pricing transparency of the instrument and does not necessarily correspond to management's perceived risk of that instrument. As of December 31, 2024 and 2023, all financial instruments are Level 1.
Source: Item 23 — RECEIPTS (FDD pages 51–222)
What This Means (2025 FDD)
According to Apricot Lane's 2025 Franchise Disclosure Document, fair value is defined as the price that could be received upon selling an asset or the amount paid to transfer a liability in a standard transaction between market participants at the time of measurement. The document also mentions that the carrying value of Apricot Lane's financial instruments, such as cash, marketable securities, accounts receivable, accounts payable, and accrued liabilities, closely reflects their fair values due to their short-term nature. Similarly, the carrying amounts of long-term debt are considered close to fair value because the interest rates are similar to current market rates.
Apricot Lane uses a fair value hierarchy to prioritize the quality and reliability of information used to determine fair values. This hierarchy is divided into three levels. Level 1 includes quoted market prices in active markets for identical assets or liabilities. Level 2 consists of observable market-based inputs or unobservable inputs corroborated by market data. Level 3 includes unobservable inputs not corroborated by market data. The categorization within this hierarchy relies on the lowest level of input significant to the fair value measurement.
The determination of what constitutes observable inputs requires management's judgment. Apricot Lane considers observable inputs to be market data that is readily available, regularly distributed or updated, reliable, verifiable, non-proprietary, and provided by multiple, independent sources actively involved in the relevant market. As of December 31, 2024 and 2023, all financial instruments were categorized as Level 1, indicating the use of quoted market prices in active markets for identical assets or liabilities.