In Checkers' financial statements, what are examples of Level 2 observable inputs, other than quoted prices included in Level 1, that are used to determine the fair value of assets and liabilities?
Checkers Franchise · 2025 FDDAnswer from 2025 FDD Document
The three levels of the valuation hierarchy are based upon the transparency of inputs to the valuation of an asset or liability on the measurement date that are defined as follows:
- Level 1 Quoted prices (unadjusted) for an identical asset or liability in an active market.
- Level 2 Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
- 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 page 91)
What This Means (2025 FDD)
According to Checkers' 2025 Franchise Disclosure Document, Level 2 observable inputs are used to determine the fair value of assets and liabilities. These inputs are defined as observable data other than the Level 1 quoted prices. Level 2 inputs include quoted prices for similar assets and liabilities in active markets. They also include quoted prices for identical or similar assets and liabilities in markets that are not active. Level 2 inputs also include other inputs that are observable or can be corroborated by observable market data.
For a prospective Checkers franchisee, understanding these fair value measurements and the levels of inputs is crucial for interpreting the financial statements provided in the FDD. It helps in assessing how Checkers values its assets and liabilities, which can impact the overall financial health and stability of the company. This knowledge is particularly important when evaluating the long-term viability and potential risks associated with investing in a Checkers franchise.
The distinction between Level 1, Level 2, and Level 3 inputs highlights the degree of subjectivity involved in determining fair values. Level 1 inputs are the most transparent and reliable, while Level 3 inputs involve more estimation and judgment. The reliance on Level 2 inputs suggests that Checkers uses market-based data to some extent, but it may also need to make adjustments or use comparable data when active market prices are not available. Franchisees should be aware of these valuation methods and consider how they might affect the perceived value of Checkers' assets and liabilities.
While the FDD provides a general definition of Level 2 inputs, it does not specify which particular assets or liabilities are measured using these inputs. A prospective franchisee may want to inquire about specific examples of assets and liabilities valued using Level 2 inputs to gain a better understanding of the company's valuation practices. This additional information can provide a more comprehensive view of Checkers' financial reporting and risk management strategies.