What is Checkers' process for reviewing 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' 2025 Franchise Disclosure Document, the company reviews 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. If Checkers determines that it is more likely than not that some or all of the deferred tax assets will not be realized, a valuation allowance is applied to reduce the carrying value of these assets on the balance sheet. The valuation allowances are adjusted as necessary based on these periodic reviews.
This process is guided by ASC 740, Income Taxes, which provides the accounting standards for income taxes. As part of the review, Checkers' management considers all relevant factors, including cumulative losses during the last three years. If, after this review, management believes a portion of the deferred tax assets will not be realized, the valuation allowance is adjusted to reflect the amount of deferred tax assets, net of reversing deferred tax liabilities, that are not expected to be realized.
For a prospective franchisee, this indicates that Checkers' financial statements are prepared with a degree of conservatism regarding the realization of tax benefits. The existence of a valuation allowance suggests that Checkers has, at some point, determined that it may not be able to fully utilize all of its deferred tax assets. This could be due to past losses or uncertainty about future profitability. Franchisees should be aware that deferred tax assets are not guaranteed, and their value can be affected by Checkers' future financial performance.
It's important for potential franchisees to understand the implications of these deferred tax assets and valuation allowances, as they can affect Checkers' overall financial health and future tax obligations. While the FDD outlines the general process, franchisees may want to seek clarification from Checkers regarding the specific factors and assumptions used in their recoverability assessments. Understanding these factors can provide a more complete picture of the company's financial position and potential risks.