How did Checkersrallys account for the Out-of-Court Restructuring regarding deferred tax assets and liabilities?
Checkersrallys Franchise · 2025 FDDAnswer from 2025 FDD Document
As part of the Out-of-Court Restructuring, which was accounted for as a business combination, the Company recognized the deferred tax asset and liabilities based on the difference in the fair values of the assets and liabilities acquired and their tax basis. In addition, as part of the Out-of-Court Restructuring, the Company reassessed its tax attributes and recognized a reduction in tax attributes no longer available to the Company.
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 Checkersrallys's 2025 Franchise Disclosure Document, the Out-of-Court Restructuring on June 16, 2023, was accounted for as a business combination. As part of this restructuring, Checkersrallys recognized deferred tax assets and liabilities based on the difference between the fair values of acquired assets and liabilities and their tax basis. This means Checkersrallys adjusted the value of its deferred tax assets and liabilities to reflect the new fair market values established during the restructuring process.
Additionally, Checkersrallys reassessed its tax attributes and recognized a reduction in tax attributes that were no longer available to the company as part of the Out-of-Court Restructuring. This reassessment could impact the future tax benefits Checkersrallys can claim. The company accounts for income taxes following ASC 740, which requires recognizing income tax benefits and expenses for changes in income tax assets and liabilities. Deferred tax assets are subject to reduction by a valuation allowance if realization isn't likely.
Management periodically reviews deferred tax assets for recoverability and adjusts valuation allowances as needed. As of January 1, 2024 (Successor) and January 2, 2023 (Predecessor), Checkersrallys adjusted the valuation allowance to the amount of deferred tax assets, net of reversing deferred tax liabilities, that management believes will not be realized. This indicates that Checkersrallys does not expect to realize the full value of its deferred tax assets in the future, which could impact its future tax obligations and financial performance. For a prospective franchisee, this accounting treatment means that Checkersrallys's financial statements reflect the impact of the restructuring on its tax position, but it also highlights the uncertainty surrounding the realization of deferred tax assets.