What techniques are used to determine fair values when dealing with Level 3 assets for Chocolate Bash?
Chocolate_Bash Franchise · 2024 FDDAnswer from 2024 FDD Document
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.
As of December 31, 2023, December 31, 2022, & December 31, 2021, the carrying amounts of the Company's financial assets and liabilities reported in the balance sheets approximate their fair value.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 38)
What This Means (2024 FDD)
According to Chocolate Bash's 2024 Franchise Disclosure Document, Level 3 assets, which have unobservable inputs, are evaluated using pricing models, discounted cash flows, or similar techniques. The fair values are determined using these methods when at least one significant model assumption or input is unobservable.
For a prospective Chocolate Bash franchisee, this means that if Chocolate Bash holds assets whose value isn't readily apparent from market data, the company uses internal models to estimate their worth. These models rely on assumptions that aren't directly verifiable, adding a layer of subjectivity to the valuation.
It's important to note that as of December 31, 2023, December 31, 2022, and December 31, 2021, the carrying amounts of Chocolate Bash's financial assets and liabilities reported in the balance sheets approximate their fair value. This suggests that the impact of Level 3 assets on the company's overall financial picture may be limited, but it is still something a potential franchisee should be aware of and understand.