When are financial instruments considered Level 3 for Bombs Away?

According to the 2024 Bombs Away FDD, financial instruments are classified into three levels based on the observability of inputs used in their valuation. Level 3 represents the lowest priority, relying on unobservable inputs.

Specifically, Bombs Away considers financial instruments as Level 3 when their fair values are determined using pricing models, discounted cash flows, or similar techniques. A key factor is that at least one significant model assumption or input is unobservable, meaning it's not based on market data from independent sources. This implies that the valuation involves subjective assumptions made by Bombs Away.

For a prospective Bombs Away franchisee, this classification is important because it reflects the degree of uncertainty and judgment involved in valuing certain financial assets or liabilities. Level 3 valuations are more susceptible to errors or manipulation compared to Level 1 or Level 2 valuations, which are based on observable market data. Therefore, understanding the methods and assumptions used to determine Level 3 fair values is crucial for assessing the financial health and risk profile of Bombs Away.