What characterizes Level 3 inputs in the context of Beauty Bungalows' asset and liability valuation?
Beauty_Bungalows Franchise · 2025 FDDAnswer from 2025 FDD Document
The accounting guidance describes a hierarchy of three levels of input that may be used to measure fair value:
- Level 1 Inputs based on quote prices in active markets for identical assets and liabilities.
- Level 2 Inputs other than Level 1 quoted prices, such as quoted prices for similar assets and 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 asset or liability.
- Level 3 Unobservable inputs based on little market or no market activity and which are significant to the fair value of the assets and liabilities.
The Company's material financial instruments consist of primarily cash and cash equivalents and accounts payable and accrued expenses. The fair values of cash, accounts and notes receivable, accounts payable and accrued expenses are equal to their carrying values based on their liquidity. The fair value measurement of these assets is categorized as Level 1.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 47)
What This Means (2025 FDD)
According to Beauty Bungalows' 2025 Franchise Disclosure Document, Level 3 inputs are unobservable and based on little to no market activity. These inputs are significant when determining the fair value of assets and liabilities.
Beauty Bungalows uses a three-level hierarchy to measure fair value, prioritizing inputs based on market participant data. Level 1 relies on quoted prices in active markets for identical assets and liabilities. Level 2 uses other quoted prices, such as those for similar assets or in less active markets, or observable data for the asset's or liability's full term.
For Beauty Bungalows, the material financial instruments primarily consist of cash and cash equivalents, accounts payable, and accrued expenses. The fair values of cash, accounts and notes receivable, accounts payable, and accrued expenses are equal to their carrying values based on their liquidity. The fair value measurement of these assets is categorized as Level 1, indicating that they are based on readily available market data.