What is the purpose of the fair value hierarchy used by Apricot Lane, as described in the 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, the fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values of financial instruments. This hierarchy categorizes inputs into three levels, based on how easily they can be verified and how closely they reflect actual market transactions. The categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
Level 1 inputs are the most reliable, consisting of quoted market prices in active markets for identical assets or liabilities. Level 2 inputs include observable market-based inputs or unobservable inputs that are corroborated by market data, making them less transparent than Level 1 but still grounded in market realities. Level 3 inputs are the least transparent, relying on unobservable data not corroborated by the market.
For a prospective Apricot Lane franchisee, understanding this hierarchy is important because it reflects how the company values its assets and liabilities for financial reporting. The FDD states that as of December 31, 2024 and 2023, all financial instruments are Level 1, meaning that Apricot Lane uses the most reliable and transparent data for valuing its financial instruments. This suggests a commitment to using objective market data in its financial reporting, which can provide franchisees with greater confidence in the company's financial statements.
Management's judgment is required to determine what constitutes observable inputs. Observable inputs are considered 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.