How is a Level 3 Valuation determined for Embassy Suites By Hilton, and what characterizes the inputs used?
Embassy_Suites_By_Hilton Franchise · 2025 FDDAnswer from 2025 FDD Document
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date (i.e., an exit price). We use the three-level valuation hierarchy for classification of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our own assumptions about the data market participants would use in pricing the asset or liability developed based on the best information available to us in the specific circumstances. The three-tier hierarchy of inputs is summarized below:
- Level 1 Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets.
- Level 2 Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument.
- Level 3 Valuation is based upon other unobservable inputs that are significant to the fair value measurement.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 97)
What This Means (2025 FDD)
According to the 2025 FDD, Embassy Suites By Hilton uses a three-level valuation hierarchy for fair value measurements of assets or liabilities. This hierarchy is based on the transparency of inputs used for valuation as of the measurement date. These inputs can be either observable, based on market data from independent sources, or unobservable, reflecting the company's own assumptions based on the best available information.
Level 3 valuation, as defined in the FDD, relies on "other unobservable inputs that are significant to the fair value measurement." This means that when determining the value of certain assets or liabilities, Embassy Suites By Hilton uses internal data and assumptions that are not readily available from external market sources. These unobservable inputs are considered significant, meaning they have a substantial impact on the overall fair value assessment.
For a prospective franchisee, this is relevant in understanding how Embassy Suites By Hilton assesses the value of its assets and liabilities, particularly in the context of acquisitions or financial reporting. The use of Level 3 valuation indicates a degree of subjectivity and reliance on internal judgment, which could be important to consider when evaluating the company's financial statements and strategic decisions. It is important to note that the classification of assets and liabilities within this hierarchy is based on the lowest level of input that is significant to the fair value measurement, and this classification is reviewed each reporting period.