What do observable inputs reflect 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, observable inputs for financial instruments reflect market data obtained from independent sources. This contrasts with unobservable inputs, which reflect market assumptions. The document outlines a hierarchy of valuation techniques based on whether the inputs are observable or unobservable. This hierarchy prioritizes unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and gives the lowest priority to unobservable inputs (Level 3 measurement).
Level 1 measurements primarily consist of financial instruments whose value is based on quoted market prices, such as exchange-traded instruments and listed equities. Level 2 measurements include inputs other than quoted prices within Level 1 but are still observable, either directly or indirectly, such as quoted prices of similar assets or liabilities in active markets. Level 3 measurements involve unobservable inputs, where fair values are determined using pricing models, discounted cash flows, or similar techniques with at least one significant unobservable model assumption or input.
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. This indicates that the values recorded on Bombs Away's balance sheets are close to what those assets and liabilities would be worth if sold in the market. For a prospective franchisee, this suggests that Bombs Away's financial reporting relies on market-based data where available, providing a degree of transparency and reliability in its financial statements.