How often does Checkers review deferred tax assets for recoverability?
Checkers Franchise · 2025 FDDAnswer from 2025 FDD Document
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. As of December 30, 2024 (Successor) and January 1, 2024 (Successor), the valuation allowance has been adjusted to the amount of deferred tax assets, net of reversing deferred tax liabilities, that management believes will not be realized.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkers's 2025 Franchise Disclosure Document, the company reviews its deferred tax assets periodically for recoverability. This means Checkers assesses whether it is likely to realize the value of these assets in the future, based on its ability to generate sufficient taxable income. As part of this review, Checkers adjusts valuation allowances as necessary. These allowances reduce the carrying value of deferred tax assets on the balance sheet to reflect the amount Checkers believes is not likely to be realized.
For a prospective Checkers franchisee, this periodic review and adjustment of valuation allowances is important because it can impact the company's reported financial performance. Deferred tax assets arise from temporary differences between the book and tax bases of assets and liabilities. If Checkers determines that it is unlikely to realize these assets, it must record a valuation allowance, which reduces net income.
The FDD indicates that management considers factors such as cumulative losses over the past three years when assessing the recoverability of deferred tax assets. As of December 30, 2024, and January 1, 2024, the valuation allowance has been adjusted to the amount of deferred tax assets, net of reversing deferred tax liabilities, that management believes will not be realized. This suggests that Checkers has taken a conservative approach in valuing its deferred tax assets, which could affect its overall financial position and profitability.
While the FDD states that these assets are reviewed 'periodically,' it does not define the specific intervals (e.g. monthly, quarterly, annually) at which these reviews occur. A prospective franchisee may want to inquire about the specific frequency and process Checkers uses to review deferred tax assets to gain a better understanding of the company's financial management practices.