What constitutes Level 3 inputs for Craters & Freighters' financial reporting, and what is required to develop them?
Craters_Freighters Franchise · 2025 FDDAnswer from 2025 FDD Document
ASC 820, "Fair Value Measurement," provides a framework for measuring fair value of certain assets and liabilities and enhanced disclosures about how the fair value was determined based on the significant levels of inputs used to determine the fair value as follows:
- Level 1 Inputs: Quoted prices in active markets for identical assets or liabilities.
- Level 2 Inputs: Quoted prices in active markets for similar assets or liabilities and other external inputs that are observable.
- Level 3 Inputs: Unobservable inputs in which there is little or no market data, which requires the entity to develop it's own assumptions.
The Company's investments in stocks, mutual funds, and exchange traded funds are valued using Level 1 inputs. The Company does not hold any investments using Level 2 or 3 inputs. There were no changes in the valuation methodology from the prior year.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 49)
What This Means (2025 FDD)
According to Craters & Freighters' 2025 Franchise Disclosure Document, Level 3 inputs are defined as unobservable inputs for which there is little to no market data. This means that Craters & Freighters must develop its own assumptions to determine the fair value of certain assets and liabilities.
For a prospective franchisee, this is relevant because it provides insight into how Craters & Freighters values its assets and liabilities when preparing financial statements. Understanding the different levels of inputs can help a franchisee assess the transparency and reliability of the company's financial reporting. However, the document states that Craters & Freighters' investments in stocks, mutual funds, and exchange traded funds are valued using Level 1 inputs, and the company does not hold any investments using Level 2 or 3 inputs.
This indicates that Craters & Freighters relies on readily available market data for its investments, rather than subjective assumptions. Franchisees may want to inquire whether this policy extends to the valuation of other types of assets or liabilities that might be relevant to their own franchise operations.