In the context of fair value measurement for Bojangles, what are Level 2 inputs, and what distinguishes them from Level 1 inputs?
Bojangles Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
- Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
- Level 2 Other than quoted prices included in Level 1, inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
- Level 3 Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
In instances whereby inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company's assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.
Source: Item 22 — CONTRACTS (FDD page 82)
What This Means (2025 FDD)
According to Bojangles's 2025 Franchise Disclosure Document, Level 2 inputs are a part of the company's fair value measurements. Bojangles utilizes valuation techniques to maximize the use of observable inputs and minimize unobservable inputs when determining fair value. The company determines fair value based on assumptions that market participants would use when pricing an asset or liability. The fair value hierarchy distinguishes between observable and unobservable inputs, categorizing them into three levels.
Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, allowing for situations where there is little market activity for the asset or liability at the measurement date.
In situations where inputs fall into different levels within the fair value hierarchy, Bojangles categorizes the fair value measurements based on the lowest level input that is significant to the valuation. This assessment requires judgment and considers factors specific to each asset or liability. This means that if a Level 3 input is significant to the valuation, the entire measurement is categorized as Level 3, even if Level 1 or Level 2 inputs are also used.