Under what circumstances does Checkers reduce deferred tax assets 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. Specifically, this reduction occurs when it becomes more likely than not that the deferred tax assets will not be realized. The realization of these assets is dependent 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 assess their recoverability and adjusts the valuation allowances as needed. This process involves evaluating various factors, including cumulative losses over the past three years. Management's assessment of these factors determines whether a portion of the deferred tax assets is unlikely to be realized in future periods.
For a prospective Checkers franchisee, this means that the company's ability to utilize deferred tax assets depends on its future profitability. If Checkers experiences ongoing losses or anticipates insufficient taxable income, it may reduce the value of these assets, impacting its financial statements. Franchisees should be aware of these potential adjustments, as they reflect the company's financial outlook and tax planning strategies. Understanding these factors can help franchisees assess the financial health and stability of the Checkers franchise system.