Does Crab N Spice use market assumptions for unobservable inputs?
Crab_N_Spice 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.
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 pages 40–50)
What This Means (2024 FDD)
According to Crab N Spice's 2024 Franchise Disclosure Document, the company uses both observable and unobservable inputs when determining the fair value of financial instruments. Observable inputs are based on market data from independent sources, while unobservable inputs reflect market assumptions. The FDD specifies a hierarchy for valuation techniques, prioritizing unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and giving the lowest priority to unobservable inputs (Level 3 measurement).
Level 3 financial instruments are those for which fair values are determined using pricing models, discounted cash flows, or similar techniques, with at least one significant model assumption or input being unobservable. This means that Crab N Spice relies on its own assumptions and judgment to value these financial instruments, which could include items like complex derivatives or assets with limited trading activity.
For a prospective franchisee, this indicates that Crab N Spice's financial statements involve some degree of estimation and judgment, particularly in valuing certain financial instruments. While the company believes its carrying amounts of financial assets and liabilities approximate their fair value, franchisees should understand the potential for variability in these valuations due to the use of unobservable inputs. It's important to note that as of December 31, 2023, December 31, 2022, and December 31, 2021, the carrying amounts of the Company's financial assets and liabilities reported in the balance sheets approximate their fair value.