How does Benjamin Franklin Plumbing define 'fair value' when applying fair value accounting?
Benjamin_Franklin_Plumbing Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company applies fair value accounting for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.
The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, 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 Inputs that are generally unobservable and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability.
The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, inventory, prepaid expenses, accounts payable, accrued liabilities and deferred franchise fees approximate fair value because of the short maturity of the instruments. The carrying value of long-term debt approximates fair value as the stated interest rates are at market rates.
Source: Item 22 — CONTRACTS (FDD pages 87–88)
What This Means (2025 FDD)
According to Benjamin Franklin Plumbing's 2025 Franchise Disclosure Document, the company uses fair value accounting for its financial assets, liabilities, and certain nonfinancial items. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This means that Benjamin Franklin Plumbing aims to value its assets and liabilities based on what they would realistically fetch in an open market transaction.
When determining fair value, Benjamin Franklin Plumbing considers the most advantageous market for the transaction and the market-based risk measurements or assumptions that participants would use. These assumptions include inherent risk, transfer restrictions, and credit risk. This ensures that the valuation reflects real-world factors that would influence a buyer's or seller's decision.
Benjamin Franklin Plumbing uses a three-level hierarchy to prioritize the inputs used in measuring fair value. Level 1 relies on quoted prices in active markets for identical assets or liabilities, representing the most reliable measure. Level 2 uses observable inputs other than quoted prices, such as prices for similar assets in inactive markets. Level 3 involves unobservable inputs, reflecting management's estimates of assumptions that market participants would use. The categorization depends on the lowest level of input that is significant to the fair value measurement. This hierarchical approach ensures a structured and consistent valuation process.
The document also notes that the carrying amounts of certain assets and liabilities, such as cash, accounts receivable, inventory, prepaid expenses, accounts payable, and deferred franchise fees, approximate fair value due to the short maturity of these instruments. Similarly, the carrying value of long-term debt approximates fair value because the stated interest rates are at market rates. This implies that these items are already valued close to their market value, simplifying the accounting process for Benjamin Franklin Plumbing.