What are the three levels of the fair value hierarchy used by Carls for 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 uses a three-level hierarchy to maximize the use of observable inputs and minimize the use of unobservable inputs. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.
The first level, Level 1, consists of quoted prices in active markets for identical assets or liabilities. This is the most reliable measure of fair value because it is based on actual market transactions.
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 uses unobservable inputs that are supported by little to no market activity and that are significant to the fair value of the assets or liabilities. This level is the least reliable measure of fair value because it is based on management's own assumptions.