What are the three levels of the valuation hierarchy that Checkers uses, based on the transparency of inputs?
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's 2025 Franchise Disclosure Document, the company uses a three-level valuation hierarchy to determine the fair value of its assets and liabilities. This hierarchy is based on the transparency of the inputs used in the valuation process as of the measurement date. Understanding these levels is important for franchisees as it provides insight into how Checkers assesses the value of its assets, which can impact financial reporting and potential investment decisions.
The first level, Level 1, relies on quoted prices (unadjusted) for identical assets or liabilities in active markets. This is the most transparent level, as the valuation is based on readily available market data. Level 2 incorporates observable inputs other than the quoted prices used in Level 1. This includes 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. This level is less transparent than Level 1 but still relies on market-based information.
The third level, Level 3, uses unobservable inputs that are supported by little to no market activity and are significant to the fair value of the assets or liabilities. This is the least transparent level, as the valuation relies heavily on the company's own assumptions and estimates. For a prospective Checkers franchisee, understanding that the company may, at times, rely on Level 3 valuations is important because it reflects a higher degree of subjectivity in the financial reporting of Checkers's assets and liabilities.