How do applicable accounting standards define fair value for Sonesta Select Sonesta Essential?

According to Sonesta Select Sonesta Essential's 2025 Franchise Disclosure Document, fair value is defined by applicable accounting standards as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, also known as an exit price. This definition is crucial for understanding how Sonesta Select Sonesta Essential values its assets and liabilities in its financial statements.

The document further explains that Sonesta Select Sonesta Essential measures its assets and liabilities using inputs from three levels within a fair value hierarchy. Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the company can access at the measurement date. Level 2 inputs include quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar items in inactive markets; observable inputs like interest rates and yield curves; and market-corroborated inputs. Level 3 inputs are unobservable and reflect assumptions about what market participants would use in pricing the asset or liability, developed using the best available data, including the company's own data.

For a prospective franchisee, understanding these definitions and measurement levels is important because they impact how Sonesta Select Sonesta Essential reports its financial performance. For instance, the value of notes receivable is estimated using expected future receipts discounted at risk-adjusted rates, which are considered Level 3 inputs. Additionally, the document mentions that the carrying values of cash, accounts receivable, and accounts payable approximate fair value due to their short-term nature. This information helps franchisees understand the basis for the company's financial reporting and the assumptions that underlie the valuation of its assets and liabilities.