Under what circumstances are Checkers' deferred tax assets reduced by a valuation allowance?
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 require the Company to recognize income tax benefits and expenses for 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 net operating loss carryforwards ("NOLs"). 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 such, as of January 1, 2024 (Successor) and January 2, 2023 (Predecessor), 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, deferred tax assets must be reduced by a valuation allowance in certain circumstances. This happens when it becomes more likely than not that the deferred tax assets will not be realized. Realization of these assets depends on Checkers generating sufficient taxable income in the periods when the deferred tax assets are available for use.
Checkers reviews its deferred tax assets periodically to determine if they are recoverable. As part of this review, valuation allowances are adjusted as necessary. Management considers all relevant factors, including cumulative losses over the past three years, to assess the likelihood that the company will realize its deferred tax assets in the future.
For a prospective Checkers franchisee, this means that the value of deferred tax assets, which could potentially offset future tax liabilities, may be reduced if Checkers does not generate enough taxable income. This could impact the company's overall financial health and its ability to support its franchisees. It is important for potential franchisees to understand how Checkers manages its deferred tax assets and the potential implications for the company's financial performance.