Under what circumstances must Checkersrallys reduce deferred tax assets by a valuation allowance?
Checkersrallys 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 Checkersrallys's 2025 Franchise Disclosure Document, the company adheres to ASC 740, Income Taxes, for income tax accounting. This standard necessitates the recognition of income tax benefits and expenses resulting from changes in income tax assets and liabilities. A key aspect of this accounting method is the treatment of deferred tax assets.
Specifically, Checkersrallys must reduce deferred tax assets by a valuation allowance under certain conditions. This reduction is required when it becomes more likely than not that the deferred tax assets will not be realized. The realization of these assets is contingent upon Checkersrallys generating sufficient taxable income in the future, which would allow the company to utilize these deferred tax assets.
Checkersrallys periodically reviews its deferred tax assets to assess their recoverability. As part of this review, the company adjusts the valuation allowances as necessary. This process involves evaluating various factors, including cumulative losses incurred over the past three years. Management's assessment of these factors determines whether a portion of the company's deferred tax assets is unlikely to be realized in future periods, thus necessitating an adjustment to the valuation allowance. As of December 30, 2024, and January 1, 2024, the valuation allowance was adjusted to reflect the amount of deferred tax assets, net of reversing deferred tax liabilities, that management believes will not be realized.