How is fair value defined in the Apricot Lane FDD?
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 the sale of an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date. This definition is crucial for understanding how Apricot Lane assesses the value of its financial instruments. The FDD also states that the carrying value of the company's financial instruments, such as cash, marketable securities, accounts receivable, accounts payable, and accrued liabilities, approximates fair values due to their short-term nature. Similarly, the carrying amounts of long-term debt approximate fair value because the applicable interest rates are close to current market rates.
To prioritize the quality and reliability of information used to determine fair values, Apricot Lane uses a fair value hierarchy. This hierarchy categorizes fair value measurements into three levels based on the inputs used. 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 is based on the lowest level of input significant to the fair value measurement.
For a prospective Apricot Lane franchisee, understanding these definitions and the hierarchy is important for interpreting the financial statements provided in the FDD. It helps in assessing the financial health and stability of the franchisor. Additionally, it provides insight into how the company values its assets and liabilities, which can be useful in evaluating the overall investment opportunity. As of December 31, 2024 and 2023, all financial instruments are Level 1, meaning they are based on quoted market prices in active markets for identical assets or liabilities.