What does Level 1 consist of for Chocolate Bash's financial instruments?
Chocolate_Bash Franchise · 2024 FDDAnswer from 2024 FDD Document
Financial Accounting Standards Board ("FASB") guidance specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:
- Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities.
- Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (e.g., quoted prices of similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active).
- Level 3 Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when their fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 38)
What This Means (2024 FDD)
According to Chocolate Bash's 2024 Franchise Disclosure Document, Level 1 of the fair value hierarchy for financial instruments consists of unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity can access at the measurement date. These Level 1 financial instruments are valued based on quoted market prices, such as exchange-traded instruments and listed equities.
This means that Chocolate Bash prioritizes using readily available market prices when assessing the value of its financial assets and liabilities. This approach is considered the most reliable because it relies on actual transactions and observable data, rather than relying on internal models or subjective assessments. For a franchisee, this indicates that Chocolate Bash aims to use transparent and market-driven valuations for its financial reporting.
The FDD also specifies two other levels, Level 2 and Level 3. Level 2 uses observable inputs other than quoted prices, such as prices of similar assets. Level 3 relies on unobservable inputs like pricing models and discounted cash flows when observable data is not available. The hierarchy prioritizes Level 1, suggesting a preference for market-based valuations whenever possible.