How does Sonesta Select Sonesta Essential develop Level 3 inputs for asset and liability pricing?
Sonesta_Select_Sonesta_Essential Franchise · 2025 FDDAnswer from 2025 FDD Document
Applicable accounting standards define fair value 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 (an exit price). We measure our assets and liabilities using inputs from the following three levels of the fair value hierarchy: • Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability
- to 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 assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs). • Level 3 includes unobservable inputs that reflect assumptions about what factors market participants would use in
- pricing the asset or liability. We develop these inputs based on the best information available, including our own data.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 84)
What This Means (2025 FDD)
According to Sonesta Select Sonesta Essential's 2025 Franchise Disclosure Document, the company uses a three-level hierarchy to determine the fair value of its assets and liabilities. Level 3 inputs are unobservable and reflect assumptions about what factors market participants would use in pricing the asset or liability.
Sonesta Select Sonesta Essential develops these Level 3 inputs based on the best information available, including their own data. This means that the company relies on its internal knowledge and experience to estimate the fair value of assets and liabilities when market data is not readily available.
For a prospective franchisee, this indicates that Sonesta Select Sonesta Essential's financial statements may include valuations that are based on internal estimates rather than purely on market transactions. While this is a standard accounting practice when objective market data is lacking, it introduces a degree of subjectivity into the financial reporting. Franchisees may want to understand the specific methodologies Sonesta Select Sonesta Essential uses for these Level 3 valuations and how they could impact the financial performance of the franchise system.