Under what circumstances might Remax establish a valuation allowance for deferred tax assets?
Remax Franchise · 2025 FDDAnswer from 2025 FDD Document
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 basis. Management periodically assesses the recoverability of its deferred tax assets based upon expected future earnings, future deductibility of the asset and changes in applicable tax laws and other factors. If management determines that it is not likely that the deferred tax asset will be fully recoverable in the future, a valuation allowance may be established for the difference between the asset balance and the amount expected to be recoverable in the future. The allowance will result in a charge to the Company's Consolidated Statements of Income (Loss).
Source: Item 1 — Business and Organization (FDD pages 334–464)
What This Means (2025 FDD)
According to Remax's 2025 Franchise Disclosure Document, the company recognizes deferred tax assets and liabilities for the future tax consequences of differences between the financial statement carrying amounts of existing assets and liabilities and their tax basis. Remax management periodically assesses the recoverability of its deferred tax assets based on expected future earnings, the future deductibility of the asset, changes in applicable tax laws, and other factors.
If Remax management determines that it is unlikely that the deferred tax asset will be fully recoverable in the future, a valuation allowance may be established. This allowance would cover the difference between the asset balance and the amount expected to be recoverable.
The establishment of a valuation allowance would result in a charge to Remax's Consolidated Statements of Income (Loss), effectively reducing the company's reported income. This accounting practice ensures that Remax's financial statements accurately reflect the true value of its assets, taking into account potential risks and uncertainties regarding their recoverability. For a prospective franchisee, this indicates that Remax is diligent in its accounting practices and adjusts its asset valuations based on future expectations.