Under ASC 740, how are deferred tax assets and liabilities measured for Checkers?
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' 2025 Franchise Disclosure Document, the company adheres to ASC 740, Income Taxes, for accounting of income taxes. This standard uses an asset and liability method, where deferred tax assets and liabilities are recognized based on the future tax implications of differences between the carrying amounts of assets and liabilities in financial statements and their respective tax bases.
These deferred tax assets and liabilities are measured using the enacted tax rates that are expected to be in effect when the temporary differences are recovered or settled. Checkers must reduce deferred tax assets by a valuation allowance if it is deemed more likely than not that these assets will not be realized. The realization of these assets is contingent upon Checkers generating sufficient taxable income during the periods when the deferred tax assets can be utilized. Checkers has recorded a valuation allowance against deferred tax assets that are not considered realizable under this standard.
The recoverability of deferred tax assets is reviewed periodically, and valuation allowances are adjusted as necessary. Furthermore, under ASC 740, any changes in tax rates will affect deferred tax assets and liabilities, and this impact is recognized as either income tax expense or benefit during the period that includes the enactment date. This means that a Checkers franchisee needs to be aware that changes in tax laws can impact the valuation of deferred tax assets and liabilities, which in turn can affect the company's reported income tax expenses or benefits.