For Hardees, what does Level 3 of the fair value hierarchy represent?
Hardees Franchise · 2025 FDDAnswer from 2025 FDD Document
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Entities are required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value based on the following fair value hierarchy:
- Level 1 Quoted prices in active markets for identical assets or liabilities;
- Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
- Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Source: Item 21 — Financial Statements (FDD pages 84–85)
What This Means (2025 FDD)
According to Hardees's 2025 Franchise Disclosure Document, Level 3 of the fair value hierarchy represents unobservable inputs that are supported by little to no market activity and are significant to the fair value of the assets or liabilities. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. Hardees is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
In simpler terms, Level 3 assets or liabilities are those whose value is difficult to determine because there isn't an active market or readily available data to base the valuation on. This could include unique or specialized assets where there aren't many comparable sales or transactions to use as a reference. The valuation relies more on the company's own assumptions and estimates, which introduces a higher degree of subjectivity.
For a prospective Hardees franchisee, understanding this hierarchy is important because it sheds light on how Hardees values its assets, especially during impairment assessments. If Hardees needs to write down the value of certain assets (like underperforming restaurants), the level of inputs used in determining that fair value can indicate the reliability of the valuation. Level 3 valuations, being the most subjective, carry the highest risk of being inaccurate or challenged.
Specifically, the FDD mentions that assets to be held and used are classified as Level 3 assets when measuring impairment charges. For example, in fiscal year 2025, impairment charges for assets to be held and used were valued using Level 3 inputs. This means that the estimated value of these assets relied heavily on internal assumptions rather than market data. Franchisees should be aware of how Hardees accounts for and values its assets, as this can impact the overall financial health of the company and, potentially, the support and resources available to franchisees.