How does Bombs Away define Level 2 inputs in relation to Level 1 inputs?
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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 35)
What This Means (2024 FDD)
According to Bombs Away's 2024 Franchise Disclosure Document, Level 2 inputs are defined in relation to Level 1 inputs within the context of fair value measurement for financial instruments. The FDD specifies a hierarchy of valuation techniques, prioritizing observable market data over unobservable assumptions. This hierarchy is used to determine the fair value of Bombs Away's financial assets and liabilities.
Level 1 measurements are based on unadjusted quoted prices in active markets for identical assets or liabilities that Bombs Away can access at the measurement date. These primarily consist of financial instruments with values based on quoted market prices, such as exchange-traded instruments and listed equities. Level 2 inputs, on the other hand, are inputs other than the quoted prices included within Level 1. These Level 2 inputs are observable for the asset or liability, either directly or indirectly. Examples include 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.
In simpler terms, Level 2 inputs use data that is still based on market activity but requires some degree of adjustment or comparison to similar, rather than identical, items. This distinction is important for Bombs Away because it affects how the company values its financial instruments. The FDD indicates that as of December 31, 2023, the carrying amounts of Bombs Away's financial assets and liabilities reported in the balance sheets approximate their fair value.
For a prospective franchisee, understanding these definitions is less about day-to-day operations and more about the financial health and reporting practices of the franchisor. It assures that Bombs Away adheres to standard accounting practices when valuing its assets and liabilities, providing a degree of transparency in its financial statements.