How does Exit recognize the effect of a change in tax rates on deferred tax assets and liabilities?
Exit Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company accounts for income taxes using FASB ASC 740, Income Taxes ("FASB ASC 740"). Under FASB ASC 740, 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. 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. Under FASB ASC 740, the effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company records valuation allowances against deferred tax assets as deemed necessary.
Source: Item 23 — RECEIPT (FDD pages 42–235)
What This Means (2025 FDD)
According to Exit's 2025 Franchise Disclosure Document, the company adheres to FASB ASC 740, Income Taxes, for accounting of income taxes. Under this standard, Exit recognizes deferred tax assets and liabilities based on the future tax consequences of differences between the financial statement carrying amounts and their tax bases. These assets and liabilities are measured using the enacted tax rates expected to be in effect when the temporary differences are recovered or settled.
Specifically, Exit recognizes the impact of changes in tax rates on deferred tax assets and liabilities in the income for the period that includes the date the change was enacted. This means that if tax rates increase or decrease, Exit will adjust its deferred tax assets and liabilities to reflect these changes in the period they become law.
Furthermore, Exit records valuation allowances against deferred tax assets if it deems necessary, meaning that Exit reduces the carrying value of deferred tax assets if it believes that some or all of the assets will not be realized. This is a conservative approach that ensures that Exit does not overstate its assets on its balance sheet. As a prospective franchisee, understanding these accounting policies can provide insight into how Exit manages its financial reporting and tax obligations.