What method does Engel & Volkers use for accounting for income taxes?
Engel_Volkers Franchise · 2025 FDDAnswer from 2025 FDD Document
ed other comprehensive income (loss). Realized exchange gains (losses) from foreign currency transactions are reported as other income (expense) in the consolidated statements of comprehensive income (loss).
Advertising and Marketing
Advertising and marketing costs are expensed as incurred and aggregated $7,563,663, $8,160,136 and $7,806,867 for the years ended December 31, 2024, 2023 and 2022, respectively.
Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax laws or rates is recognized in results of operations in the period that includes the enactment date. Valuation allowances are established against deferred tax assets when it is more likely than not that such deferred tax assets will not be realized.
In accordance with the provisions of FASB ASC 740, Income Taxes, tax positions initially need to be recognized in the consolidated financial statements when it is more likely than not that the positions will be sustained upon examination by taxing authorities. It also provides guidance for recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
As of December 31, 2024 and 2023, the Company had no uncertain tax positions that qualified for either recognition or disclosure in the consolidated financial statements. Additionally, the Company had no interest or penalties related to income taxes.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Variable Interest Entities
In accordance with the provisions of FASB ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities ("ASU 2018-17"), FASB no longer requires nonpublic companies to apply variable interest entity guidance to certain common control arrangements, including leasing arrangements under common control. The Company has applied these provisions to the accompanying consolidated financial statements and has determined that the entities disclosed in Note 10, meet the conditions under ASU 2018-17, and accordingly, it is not required to include the accounts of the related parties in the Company's consolidated financial statements.
Subsequent Events
The Company has evaluated subsequent events through March 6, 2025, the date on which these consolidated financial statements were available to be issued. Except as disclosed in Note 11, there were no material subsequent events that required recognition or additional disclosure in these consolidated financial statements.
**NOTE 3.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 88)
What This Means (2025 FDD)
According to Engel & Volkers' 2025 Franchise Disclosure Document, the company uses the asset and liability method for accounting for income taxes. This approach involves recognizing deferred tax assets and liabilities for the future tax consequences of differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, as well as operating loss and tax credit carryforwards. These deferred tax assets and liabilities are measured using the enacted tax rates expected to apply when those temporary differences are recovered or settled. Any changes in tax laws or rates will affect these deferred tax assets and liabilities and are recognized in the period that includes the enactment date. Valuation allowances are established against deferred tax assets if it is more likely than not that these assets will not be realized.
Engel & Volkers follows FASB ASC 740, Income Taxes, which requires tax positions to be recognized in the consolidated financial statements if they are more likely than not to be sustained upon examination by taxing authorities. This standard also provides guidance for recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. As of December 31, 2024 and 2023, Engel & Volkers had no uncertain tax positions that required recognition or disclosure, and there were no interest or penalties related to income taxes.
Furthermore, the FDD states that Engel & Volkers' effective tax rate differs from the federal statutory rate primarily due to state income taxes and non-deductible expenses. As of December 31, 2024, the company's deferred tax assets consisted primarily of net operating loss carryforwards of approximately $13,100,000, a portion of which will begin to expire in 2034. This amount is net of an estimated limitation of approximately $1,475,000 under Internal Revenue Code Section 382, resulting from an ownership change in 2021. This limitation may impose an additional annual restriction on the amount of net operating loss carryforwards that can be used in future years, potentially affecting the availability of these losses. The company has not performed a formal Section 382 study to definitively determine this limitation.
Management assesses available evidence to estimate whether sufficient future taxable income will be generated to permit the use of existing deferred tax assets. In prior years, a cumulative loss over a three-year period resulted in a 100% valuation allowance on the deferred tax assets. However, during 2021, Engel & Volkers reduced its valuation allowance based on an assessment of positive and negative evidence, projecting a three-year cumulative taxable income to utilize the deferred tax asset, subject to certain limitations. This detailed approach to income tax accounting provides transparency into how Engel & Volkers manages its tax obligations and deferred tax assets, which is crucial for prospective franchisees to understand the financial health and tax strategies of the company.