What happens to deferred tax assets and liabilities of Carbones Pizzeria when tax rates change?
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 addresses income taxes using the asset and liability method. This method involves recognizing deferred tax assets and liabilities to account for the future tax consequences arising from temporary differences between the financial reporting and tax bases of assets and liabilities.
When tax rates change, Carbones Pizzeria measures deferred tax assets and liabilities using the new enacted tax rates expected to be in effect when those differences are eventually settled or recovered. The financial impact resulting from a change in tax rates is recognized as income during the reporting period that includes the date the new tax rates become law.
For a prospective Carbones Pizzeria franchisee, this means that changes in tax laws can affect the value of deferred tax assets and liabilities reported on the company's balance sheet, which in turn can impact the net income reported in a particular period. It is important to note that the company also records a valuation allowance against deferred tax assets if it is determined that some or all of those assets are unlikely to be realized.