What are Level 3 inputs for determining the fair value of Exit's digital assets, and what is required to develop them?
Exit Franchise · 2025 FDDAnswer from 2025 FDD Document
Level 3 - Unobservable inputs for the asset or liability. In these situations, the Company develops inputs using the best information available in the circumstances. These inputs require significant judgment and estimation from management.
The Company accounts for digital assets held as a result of these transactions as indefinite-lived intangible assets in accordance with ASC 350, Intangibles - Goodwill and Other. The company has ownership of and control over the digital assets and uses third-party custodial services to secure it. The digital assets are initially recorded at cost and are subsequently remeasured on the consolidated balance sheets at cost, net of any impairment losses incurred since acquisition.
The fair value of the Company's digital assets is determined on a nonrecurring basis in accordance with ASC 820, Fair Value Measurement, based on quoted prices on the active exchange(s) that the Company has determined is the principal market for such assets (Level 1 inputs). The Company performs an analysis at year end to determine whether events or changes in circumstances, principally decreases in the quoted prices on active exchanges, indicate that it is more likely than not that the Company's digital assets are impaired. In determining if an impairment has occurred, the Company considers the market price of one unit of digital asset quoted on the active exchange at year end. If the then current carrying value of a digital asset exceeds the fair value so determined, an impairment loss has occurred with respect to those digital assets in the amount equal to the difference between their carrying values and the price determined.
Source: Item 23 — RECEIPT (FDD pages 42–235)
What This Means (2025 FDD)
According to Exit's 2025 Franchise Disclosure Document, Level 3 inputs are unobservable inputs for an asset or liability. When these situations arise, Exit develops inputs using the best information available. These inputs require significant judgment and estimation from management.
Exit accounts for digital assets as indefinite-lived intangible assets, initially recorded at cost. Subsequently, these assets are re-measured on the consolidated balance sheets at cost, accounting for any impairment losses since acquisition. The fair value of Exit's digital assets is determined on a nonrecurring basis, based on quoted prices on active exchanges that Exit identifies as the principal market for such assets, which are considered Level 1 inputs.
At year-end, Exit analyzes whether events or changes in circumstances, particularly decreases in quoted prices on active exchanges, indicate potential impairment of digital assets. If the current carrying value of a digital asset exceeds its fair value, an impairment loss is recognized, and the digital asset is written down to its fair value. This new cost basis is not adjusted upward for subsequent increases in fair value, and gains are recorded only upon sale, net of any impairment losses.