What is the asset and liability method for income taxes that Carbones Pizzeria uses?
Carbones_Pizzeria Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company accounts for income taxes under asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributed to temporary differences between the financial reporting basis and the respective tax basis of these assets and liabilities
Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which the differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in income in the period that includes the enactment date.
A valuation allowance is recorded for carryforwards and other deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized. Based on its facts, the Company considered all available evidence, both positive and negative, including historical levels of taxable income, expectations, and risks associated with estimates of future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance.
Source: Item 22 — CONTRACTS (FDD page 30)
What This Means (2025 FDD)
According to the 2025 FDD, Carbones Pizzeria utilizes the asset and liability method for accounting for income taxes. This approach involves recognizing deferred tax assets and liabilities to account for the future tax consequences resulting from temporary differences between the financial reporting basis and the tax basis of assets and liabilities. These deferred tax assets and liabilities are measured using the enacted tax rates expected to be in effect when the differences are recovered or settled. Any changes in tax rates will impact the deferred tax assets and liabilities, with the effect recognized in income during the period that includes the enactment date.
Furthermore, Carbones Pizzeria records a valuation allowance for carryforwards and other deferred tax assets if it is more likely than not that some or all of these assets will not be realized. The company considers all available evidence, both positive and negative, including historical levels of taxable income, expectations, risks associated with future taxable income estimates, and tax planning strategies, to assess the need for a valuation allowance. This indicates that Carbones Pizzeria is actively monitoring and adjusting its tax assets based on its financial outlook and tax environment.
For a prospective franchisee, understanding Carbones Pizzeria's income tax accounting method is crucial for assessing the company's financial health and stability. The asset and liability method provides a more comprehensive view of the company's future tax obligations and potential tax benefits. Franchisees should be aware of how changes in tax rates or the company's financial performance could impact these deferred tax assets and liabilities, and consequently, the company's overall financial position. It is advisable for potential franchisees to seek professional financial advice to fully understand the implications of this accounting method.