Statement Analysis

Problem 3 1. Key accounting policies and areas of accounting flexibility for Euro Disney are: a. Accounting for the special-purpose financing companies. Euro Disney leases land and hotels from special-purpose financing companies. This could potentially help the company to keep some of its assets off the balance sheet; however the company has chosen to consolidate all special-purpose companies because of the influence that it (and its primary shareholder) has on the SPEs. From an investor’s perspective, this is certainly the most desirable and informative solution (note that most operating lease commitments automatically arise on the balance sheet). b. Revenue recognition. Areas of discretion are: i. Timing of revenue recognition (especially regarding pre-sold entrance tickets, multi-day tickets and pre-paid hotel/convention/show fees). Revenues should be recognized when services have been provided. In the past, Euro Disney has had a significant liability for deferred revenues (approximately 10% of total sales). This liability has become smaller over time. ii. Amount of revenues (especially regarding discounts and promotional activities). c. Accounting for property. One of Euro Disney’s key assets is its property. A key accounting choice that Euro Disney must make is deciding on the value of its property and determining whether write-downs are necessary. The company’s management has discretion in the choice between fair value and historical cost accounting, the assessment of fair values, the timing of write-offs and the assessment of whether leased property is economically owned. d. Accounting for employee expenses. Euro Disney has a large number of employees with permanent contracts. Because of the high uncertainty surrounding the future values of pension commitments and assets, the determination of pension expenses is discretionary. e. Recognition of royalties and management fees. An important accounting choice related to royalties and management fees is when...