What is Carls' definition of 'fair value' as it relates to financial instruments?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Entities are required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value based on the following fair value hierarchy:
Level 1 - Quoted prices in active markets for identical assets or liabilities;
- Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
- Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Our non-financial long-lived assets, including intangible assets and property and equipment, are reported at carrying value and are not required to be measured at fair value on a recurring basis. However, on a periodic basis, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable, we assess our long-lived assets for impairment. When impairment has occurred, such long-lived assets are written down to fair value. See Note 16 for further information regarding impairment charges.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 79–80)
What This Means (2024 FDD)
According to Carls's 2024 Franchise Disclosure Document, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, also known as an exit price. This price is determined in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Carls is required to prioritize observable inputs and minimize unobservable inputs when measuring fair value. This is based on a fair value hierarchy that includes three levels. Level 1 consists of quoted prices in active markets for identical assets or liabilities. Level 2 includes observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 consists of unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Carls reports its non-financial long-lived assets, including intangible assets and property and equipment, at carrying value and are not required to be measured at fair value on a recurring basis. However, Carls assesses these assets for impairment on a periodic basis, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. When impairment has occurred, these long-lived assets are written down to fair value. The document refers to Note 16 for further information regarding impairment charges.