What are Level 3 inputs, as they pertain to Craters & Freighters' financial statements, 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 the 2025 Craters & Freighters FDD, Level 3 inputs are defined within the framework of ASC 820, "Fair Value Measurement," which guides how the fair value of certain assets and liabilities are measured and disclosed. Level 3 inputs are "unobservable inputs in which there is little or no market data, which requires the entity to develop it's own assumptions." This means that when valuing assets or liabilities, if there isn't readily available market information, Craters & Freighters must create its own assumptions to determine fair value.
In simpler terms, Level 3 inputs are used when the value of an asset or liability can't be easily determined by looking at market prices or other observable data. Instead, Craters & Freighters has to rely on its own judgment and estimations to come up with a fair value. This could involve using internal data, industry trends, or other relevant information to make informed assumptions.
However, the FDD states that Craters & Freighters' investments in stocks, mutual funds, and exchange traded funds are valued using Level 1 inputs, which are quoted prices in active markets for identical assets or liabilities. 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 needing to develop its own assumptions. Therefore, as a prospective franchisee, it is important to understand the valuation methods used by Craters & Freighters and how they might impact the company's financial statements.