What inputs does Carls maximize the use of, and minimize the use of, when measuring fair value?
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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 79–80)
What This Means (2024 FDD)
According to Carls's 2024 Franchise Disclosure Document, when measuring fair value, the company is required to maximize the use of observable inputs and minimize the use of unobservable inputs. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date.
The fair value hierarchy used by Carls consists of three levels. Level 1 includes 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 includes unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
This means that Carls prioritizes using real-world, market-based data when determining the value of its assets and liabilities. This approach aims to provide a more transparent and reliable valuation. For a prospective franchisee, understanding this valuation approach is important because it reflects how Carls assesses the financial health and value of its assets, which can impact various aspects of the franchise system, such as financial reporting and potential impairment assessments.