What are the three levels of the fair value hierarchy used by Carls, and how are they defined?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
cash equivalents each approximate their respective carrying amounts due to the short maturity of the balances. The carrying amounts of notes receivable, net (both current and noncurrent) of related allowance for credit losses approximate fair value. The estimated fair value of our borrowings under the Series 2018-1 Variable Funding Notes approximates the carrying value due to the expected short maturity of the borrowings. The estimated fair values of our borrowings under the Series 2018-1, Series 2020-1 and Series 2021-1 Class A-2 Notes were determined by obtaining estimated market prices from an investment banking firm as of the balance sheet dates.
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;
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 the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When measuring fair value, Carls is required to maximize the use of observable inputs and minimize unobservable inputs, adhering to a three-level hierarchy.
The three levels of the fair value hierarchy are defined as follows. 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 is comprised of unobservable inputs that are supported by little to no market activity and that are significant to the fair value of the assets or liabilities.
These levels are used to categorize the inputs used in fair value measurements, with Level 1 being the most reliable (as it is based on actual market prices) and Level 3 being the least reliable (as it relies on the company's own assumptions). This hierarchy ensures that fair value measurements are based on the most objective and reliable data available, which is a standard practice in financial reporting. Carls reports 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, on a periodic basis, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable, Carls assesses its long-lived assets for impairment. When impairment has occurred, such long-lived assets are written down to fair value.