What do unobservable 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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 35)
What This Means (2024 FDD)
According to Bombs Away's 2024 Franchise Disclosure Document, unobservable inputs for financial instruments reflect market assumptions. The document explains that the Financial Accounting Standards Board (FASB) uses a hierarchy of valuation techniques to determine the fair value of financial instruments, based on whether the inputs are observable or unobservable. Observable inputs are based on market data from independent sources, while unobservable inputs reflect the company's own assumptions about the market.
The hierarchy prioritizes valuation methods, giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 3 financial instruments are those whose fair values are determined using pricing models, discounted cash flows, or similar techniques, relying on at least one significant unobservable assumption or input.
For a prospective Bombs Away franchisee, this means that some of the company's financial assets and liabilities may be valued based on internal assumptions rather than direct market data. While this is a standard accounting practice, it's important to understand that these valuations are subject to management's judgment and could potentially differ from actual market values. Reviewing the notes to the financial statements can provide more insight into these assumptions and their potential impact.