Regarding Hardees' financial statements, what constitutes Level 2 observable inputs, other than Level 1 prices, used in determining fair value?
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' 2025 Franchise Disclosure Document, Level 2 observable inputs, other than Level 1 prices, used in determining fair value include 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.
In Hardees' financial reporting, assets and liabilities are categorized into a fair value hierarchy consisting of three levels (Level 1, Level 2, and Level 3) depending on the observability of inputs used in the valuation. Level 2 inputs are those that are not direct quoted prices from active markets (Level 1) but are still observable, either directly or indirectly. These can include prices for similar assets, prices from less active markets, or data that can be confirmed by market observations.
For a potential Hardees franchisee, understanding these classifications is important because it provides insight into how Hardees values its assets and liabilities. This understanding can be useful when reviewing Hardees' financial statements and assessing the overall financial health and stability of the company. It's also relevant in the context of impairment charges, where long-lived assets may be written down to fair value if their carrying value is deemed unrecoverable.