How is the effect of a change in tax rates recognized for Carbones Pizzeria?
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 Carbones Pizzeria's 2025 Franchise Disclosure Document, the company accounts for income taxes using the asset and liability method. This method necessitates the recognition of deferred tax assets and liabilities, which represent the expected future tax consequences arising 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 anticipated to be in effect when the differences are expected to be settled or recovered.
Specifically, the FDD states that the effect of a change in tax rates on these deferred tax assets and liabilities is recognized in income during the period that includes the date the change was enacted. This means that if there is a change in tax laws, Carbones Pizzeria will adjust its financial statements in the period the new tax law comes into effect to reflect the impact of the new rates on its future tax obligations and benefits.
For a prospective franchisee, this accounting practice is important because it affects how Carbones Pizzeria reports its financial performance. Changes in tax rates can have a direct impact on the company's net income, which in turn could affect the perceived profitability and financial health of the franchise system. Franchisees should be aware of how these changes are accounted for, as they can influence investment decisions and financial planning.
Additionally, the FDD notes that a valuation allowance is recorded for carryforwards and other deferred tax assets if it is deemed more likely than not that some or all of these assets will not be realized. This allowance is based on an assessment of available evidence, including historical income levels, future income expectations, and tax planning strategies. This indicates that Carbones Pizzeria takes a conservative approach to recognizing tax benefits, which can provide a more realistic view of its financial position.