What temporary difference is mentioned in relation to deferred tax assets for Ledgers?
Ledgers Franchise · 2025 FDDAnswer from 2025 FDD Document
r the sale of the franchise license and ARAs received prior to the recognition of revenue are recorded as deferred revenue. Deferred revenue at December 31 are as follows:
| 2024 | _ | 2023 | 2022 | |
|---|---|---|---|---|
| Deferred initial franchise fee | $ 24,000 | $ | 33,989 | $ 80,614 |
| Deferred area representative fees | 83,000 | 114,000 | 741,000 | |
| $ 107,000 | $ | 147,989 | $ 821,614 | |
| Prior year deferred fees recognized as income | $ 30,336 | $ | 113,362 | $ 110,000 |
Income Tax Status
For income tax purposes, the Company has elected to be taxed as a C Corporation by filing an Entity Classification Election (Form 8832). The Company accounts for income taxes using the asset and liability method whereby deferred tax asset and liability account balances are determined based on temporary differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. A valuation allowance is established when management estimates that it is more likely than not that deferred tax assets will not be realized.
Source: Item 22 — CONTRACTS (FDD page 46)
What This Means (2025 FDD)
According to Ledgers' 2025 Franchise Disclosure Document, the temporary difference that relates to deferred tax assets concerns net operating losses. The document states that the deferred tax asset represents the future tax benefit of these net operating loss differences. As of December 31, 2024, Ledgers' net operating losses approximated $2,900,000.
Deferred tax assets arise from temporary differences between the book value of assets and liabilities reported on a company's financial statements and their tax bases. These differences result in future deductible or taxable amounts. In Ledgers' case, the net operating losses can be carried forward to reduce future taxable income, creating a deferred tax asset.
The FDD indicates that Ledgers' management believes all deferred tax assets will be realized in future periods before they expire, and therefore, the deferred tax assets have not been reduced by a valuation allowance. This means Ledgers anticipates generating sufficient taxable income in the future to utilize these net operating loss carryforwards. A valuation allowance would be required if it was more likely than not that some or all of the deferred tax assets would not be realized.
For a prospective Ledgers franchisee, this information provides insight into the company's financial management and tax planning strategies. Understanding how Ledgers manages its deferred tax assets and net operating losses can give franchisees confidence in the company's financial stability and its ability to navigate tax regulations effectively. Additionally, it shows that Ledgers anticipates future profitability, which is a positive sign for potential franchisees.