What constitutes a Level 1 measurement for Bombs Away's financial instruments?
Bombs_Away Franchise · 2024 FDDAnswer from 2024 FDD Document
Financial Accounting Standards Board ("FASB") guidance specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:
- Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities.
- Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (e.g., quoted prices of similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active).
- Level 3 Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when their fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable.
As of December 31, 2023, the carrying amounts of the Company's financial assets and liabilities reported in the balance sheets approximate their fair value.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 35)
What This Means (2024 FDD)
According to Bombs Away's 2024 Franchise Disclosure Document, Level 1 measurement in financial instruments refers to unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity can access at the measurement date. These Level 1 instruments primarily consist of financial instruments whose value is based on quoted market prices, such as exchange-traded instruments and listed equities. This is the highest priority in the fair value hierarchy.
In simpler terms, Level 1 measurements are based on real-time, easily verifiable market prices for assets that are actively traded. This means that the value of these assets is transparent and less subject to estimation or subjective judgment. For a prospective Bombs Away franchisee, understanding these measurements is crucial for assessing the financial health and stability of the franchisor.
The FDD also mentions Level 2 and Level 3 measurements, which involve more complex valuation techniques. Level 2 uses observable inputs other than quoted prices, while Level 3 relies on unobservable inputs and pricing models. The hierarchy prioritizes Level 1 because it provides the most reliable and objective valuation. Bombs Away states that as of December 31, 2023, the carrying amounts of the company's financial assets and liabilities reported in the balance sheets approximate their fair value.
As a potential franchisee, it's important to understand how Bombs Away values its assets and liabilities, as this can impact the overall financial picture presented in the FDD. While Level 1 measurements offer the most transparency, it's also worth inquiring about the methods used for Level 2 and Level 3 valuations to gain a comprehensive understanding of the company's financial practices.