How are The Standardx's preferred equity investments classified in the fair value hierarchy?
The_Standardx Franchise · 2025 FDDAnswer from 2025 FDD Document
e in the fair value hierarchy, are estimated using probability-based discounted future cash flow models based on current market inputs for similar types of arrangements. The primary sensitivity in these models is the selection of appropriate discount rates and probability weighting. Fluctuations in these assumptions could result in different estimates of fair value. The remaining HTM debt securities are classified as Level Two in the fair value hierarchy due to the use and weighting of multiple market inputs being considered in the final price of the security.
Convertible Debt Security—During the year ended December 31, 2023, we invested in a $30 million convertible debt security associated with a franchised property, which is classified as AFS and recorded in other assets on our consolidated balance sheets. The investment has a contractual maturity date in 2029. The convertible debt investment is remeasured at fair value on a recurring basis and is classified as Level Three in the fair value hierarchy. We estimated the fair value of this investment to be $42 million and $39 million at December 31, 2024 and December 31, 2023, respectively. The fair value is estimated using a discounted future cash flow model, and the primary sensitivity in the model is the selection of an appropriate discount rate. Fluctuations in our assumptions could result in different estimates of fair value. Net unrealized gains recognized on our consolidated financial statements were as follo
Source: Item 23 — Receipts (FDD pages 85–132)
What This Means (2025 FDD)
According to The Standardx's 2025 Franchise Disclosure Document, the company classifies its preferred equity investments as Level Three in the fair value hierarchy. The fair values are estimated using probability-based discounted future cash flow models, which rely on current market inputs for similar arrangements.
The primary sensitivity in these models is the selection of appropriate discount rates and probability weighting. This means that the estimated fair value of these investments is highly dependent on management's judgment and assumptions, as these inputs cannot be corroborated by observable market data. Fluctuations in these assumptions could result in different estimates of fair value.
For a prospective franchisee, this classification indicates that the valuation of these assets involves a higher degree of subjectivity and may be more difficult to verify compared to assets classified as Level One or Level Two, which rely on more readily available market data. The Standardx also classifies a convertible debt security as Level Three in the fair value hierarchy.