What are the three levels of the valuation hierarchy that Checkersrallys uses for fair value measurements?
Checkersrallys 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 Checkersrallys's 2025 Franchise Disclosure Document, when recording and disclosing assets and liabilities at fair value, the company uses a three-level valuation hierarchy based on the transparency of inputs. This hierarchy is used to determine the fair value of assets or liabilities on the measurement date. Understanding this hierarchy is crucial for prospective franchisees as it provides insight into how Checkersrallys values its assets and liabilities, which can impact financial reporting and potentially affect the overall financial health of the company.
The first level, Level 1, consists of quoted prices (unadjusted) for an identical asset or liability in an active market. This level is the most transparent as it relies on direct market prices for identical items. Level 2 includes observable inputs other than quoted prices included in Level 1. These inputs can be 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 allows for some adjustments based on market data but still relies on observable inputs.
Finally, Level 3 comprises 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 level is the least transparent and relies heavily on the company's own assumptions and estimates. For a franchisee, understanding which level is used to value different assets can provide insight into the reliability and subjectivity of those valuations. Assets valued using Level 3 inputs may be subject to greater uncertainty and require more scrutiny. Therefore, it is important for potential franchisees to understand how Checkersrallys determines the fair value of its assets and liabilities, as this can impact their investment and the overall financial stability of the franchise.