When are financial instruments classified as Level 3 for Bombs Away?

According to the 2024 Bombs Away FDD, financial instruments are classified as 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. This classification is part of a hierarchy established by the Financial Accounting Standards Board (FASB) to categorize valuation techniques based on the observability of inputs.

Level 3 is the lowest priority in this hierarchy, indicating that the valuation relies on unobservable inputs, which are the franchisor's own assumptions about market conditions. This contrasts with Level 1, which uses unadjusted quoted prices in active markets for identical assets or liabilities, and Level 2, which uses observable inputs other than quoted prices from Level 1.

For a potential Bombs Away franchisee, understanding these classifications is important for assessing the financial statements provided in the FDD. Level 3 assets and liabilities involve a higher degree of estimation and judgment, which could impact the perceived financial health of the franchisor. It is worth noting 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.