Under what circumstances must 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 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, deferred tax assets must be reduced by a valuation allowance in certain circumstances. This happens when it becomes more likely than not that the company will not realize the full value of these assets. The realization of deferred tax assets depends on Checkers generating sufficient taxable income before any tax attributes expire.
Checkers reviews these deferred tax assets periodically to determine if they can be recovered. As part of this review, valuation allowances are adjusted as necessary. Management considers several factors, including cumulative losses over the past three years, to assess whether a portion of the deferred tax assets will not be realized in the future.
As of December 30, 2024, and January 1, 2024, Checkers adjusted the valuation allowance to reflect the amount of deferred tax assets, net of reversing deferred tax liabilities, that management does not believe will be realized. This means Checkers is proactively accounting for potential losses by reducing the value of its deferred tax assets to align with what they realistically expect to recover.