What factors does Checkers' management review when assessing the recoverability of deferred tax assets?
Checkers Franchise · 2025 FDDAnswer from 2025 FDD Document
liabilities based on the difference in the fair values of the assets and liabilities acquired end their tax basis. In addition, as part of the Out-of-Court Restructuring, the Company reassessed its tax attributes and recognized a reduction in tax attributes no longer available to the Company.
The Company accounts for income taxes in accordance with the provisions of ASC 740, Income Taxes, which requires the Company to recognize income tax benefits and expense of the changes in income tax assets and liabilities. Deferred tax assets must be reduced by a valuation allowance in certain circumstances. Realization of deferred tax assets is dependent on generating sufficient taxable income prior to the expiration of any tax attributes. The deferred tax assets are reviewed periodically for recoverability and valuation allowances are adjusted as necessary. After reviewing all relevant factors, including cumulative losses during the last three years, management believes that it is more likely than not that a portion of the Company's deferred tax assets will not be realized in a future period.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkers' 2025 Franchise Disclosure Document, the company reviews deferred tax assets periodically for recoverability and adjusts valuation allowances as necessary. Management considers all relevant factors, including cumulative losses during the last three years, to determine if a portion of the company's deferred tax assets will not be realized in a future period.
This means that Checkers assesses its ability to use deferred tax assets, which are essentially future tax benefits, based on its financial performance. If Checkers has experienced losses over the past three years, it may indicate that the company might not generate enough taxable income in the future to utilize these deferred tax assets. As a result, Checkers may reduce the value of these assets on its balance sheet through a valuation allowance.
For a prospective franchisee, this indicates that Checkers' financial health and profitability are crucial factors in determining the value of its deferred tax assets. The fact that the valuation allowance has been adjusted to the amount of deferred tax assets suggests that Checkers' management has concerns about the company's ability to realize these tax benefits in the future. This could be a red flag for potential investors, as it reflects potential financial instability or uncertainty about future profitability. Therefore, a franchisee should carefully review Checkers' financial statements and assess the company's recent performance and future prospects before investing in a franchise.