Euro Disney Case Study

AC3103: SEMINAR 10

3-2 (a) If management reports truthfully, what economic events are likely to prompt the following accounting changes?

n Increase in the estimated life of depreciable assets.

n Decrease in the allowance for doubtful accounts as a percentage of gross trade receivables.

n Recognition of revenues at the point of delivery rather than at the point cash is received.

n Capitalization of a higher proportion of research expenditures costs.

(b) What features of accounting, if any, would make it costly for dishonest managers to make the same changes without any corresponding economic changes?

3-3 The conservatism (or prudence) principle arises because of concerns about management’s incentives to overstate the firm’s performance. Joe Banks argues, ‘‘We could get rid of conservatism and make accounting numbers more useful if we delegated financial reporting to independent auditors rather than to corporate managers.’’ Do you agree? Why or why not?

Problem 3 Euro Disney and the first five steps of accounting analysis

Euro Disney S.C.A. is a holding company, holding 82 percent of the shares of Euro Disney Associe´s S.C.A., which operates, amongst others, the Disneyland Park, Disneyland Hotel, and Davy Crockett Ranch in Paris and holds 99.99 percent of the shares of EDL Hotels S.C.A. EDL Hotels operates all of the Disney Hotels in Paris (except for the Disneyland Hotel and Davy Crockett Ranch). Euro Disney Associe´s leases the Disneyland Park (including land) under a finance lease from Euro Disneyland S.N.C., which is owned by (1) a syndicate of banks and financial institutions (83 percent participation) and (2) a wholly-owned subsidiary of US-based The Walt Disney Company (17 percent participation). EDL Hotels S.C.A. rents land to a group of six special-purpose financing companies, who, in turn, own the hotels on the land and lease these hotels back to EDL Hotels. All special-purpose financing companies are fully consolidated in Euro Disney’s...