How does Checkers account for the effect of a change in tax rates on deferred tax assets and liabilities?
Checkers Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company accounts for income taxes based upon the provisions of ASC 740, Income Taxes. Under the asset and liability method required by ASC 740, Income Taxes, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets must be reduced by a valuation allowance when it becomes more likely than not that they will not be realized. Realization of the deferred tax assets is dependent on generating sufficient taxable income in the periods when the deferred tax assets are available to be utilized. The Company has recorded a valuation allowance against the deferred tax assets that are not realizable under this standard. The deferred tax assets are reviewed periodically for recoverability, and valuation allowances are adjusted as necessary. Under ASC 740, Income Taxes, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense or benefit in the period that includes the enactment date.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkers's 2025 Franchise Disclosure Document, the company adheres to ASC 740, Income Taxes, when accounting for income taxes. This standard stipulates an asset and liability method where deferred tax assets and liabilities are recognized based on the future tax implications of differences between the financial statement carrying amounts of assets and liabilities and their tax bases. These deferred tax assets and liabilities are measured using the enacted tax rates expected to be in effect when the temporary differences are recovered or settled.
Checkers reduces deferred tax assets by a valuation allowance if it's deemed more likely than not that they won't be realized. The realization of these assets depends on the company generating sufficient taxable income during the periods when the deferred tax assets can be utilized. The company has recorded a valuation allowance against deferred tax assets that are not deemed realizable under this standard. These deferred tax assets are periodically reviewed for recoverability, and valuation allowances are adjusted as necessary to reflect current conditions and expectations.
Specifically, the FDD states that any impact on deferred tax assets and liabilities resulting from a change in tax rates is recognized by Checkers in the income tax expense or benefit during the period that includes the date the change is enacted. This means that if tax rates increase or decrease, the corresponding adjustment to the deferred tax assets and liabilities is reflected in the company's income statement in the period when the new tax rates become law.