Euro Disney S.C.A. is a holding company, holding 82 percent of the shares of Euro Disney Associs

Euro Disney S.C.A. is a holding company, holding 82 percent of the shares of Euro Disney Associés S.C.A., which operates, amongst others, the Disneyland Park, Walt Disney Studios 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).

Until 2012 Euro Disney Associés leased the Disneyland Park (including land) under a finance lease from Euro Disneyland S.N.C., which was owned by (1) a syndicate of banks and financial institutions (83 percent participation) and (2) a wholly-owned subsidiary of the US-based Walt Disney Company (17 percent participation). EDL Hotels S.C.A. rented land to a group of six special-purpose financing companies that, in turn, owned the hotels on the land and leased these hotels back to EDL Hotels. All specialpurpose financing companies were fully consolidated in Euro Disney’s financial statements, despite the absence of ownership in some cases. In 2012 Euro Disney Associés and EDL Hotels exercised their options to acquire the Disneyland Park and hotels from the special-purpose financing companies.

Euro Disney’s primary sources of revenue are its two theme parks (entrance fees, merchandise, food and beverage, special events) and its seven hotels and Disney Village (room rental, merchandise, food and beverage, dinner shows, convention revenues).

Disney Village offers themed dining, entertainment, and shopping facilities. The company has, on average, around 15 thousand employees. The company and its subsidiaries are considered as one French economic and labor unit and have negotiated around 30 collective bargaining agreements with the various trade unions represented in the unit. The majority of the company’s employees (about 90 percent) have a permanent contract. To cope with the seasonal nature of the business, Euro Disney is able to move employees from its theme parks to its hotels and vice versa. Approximately 5.5 percent of total personnel expenses consist of training costs.

In 2012, after a long period of poor performance, Euro Disney restructured its financial obligations. As part of the restructuring, the company obtained two new loans (with an interest rate of 4 percent and a face value of €615.9 million) and a €100 million revolving credit facility from the Walt Disney Company that helped Euro Disney settle all outstanding loans from other creditors, thus effectively turning the Walt Disney Company into Euro Disney’s only creditor. Prior to the restructuring, Euro Disney’s debt agreements included debt covenants requiring the company to maintain minimum ratios of adjusted operating income (before depreciation and amortization) to total debt service obligations. The loan agreements with the Walt Disney Company include only negative debt covenants, limiting Euro Disney’s ability to make new investments or attract new debt capital. At the end of 2016 Euro Disney’s debt to total assets ratio was 77 percent (down from 82 percent in 2014).

Euro Disney S.C.A. is publicly listed on the Euronext Paris stock exchange. By the end of fiscal 2016, 76.7 percent of its shares were owned by the Walt Disney Company (up from 39.8 percent in 2014), and 23.3 percent were in the hands of dispersed shareholders. The company has a supervisory board with 12 members, three of which are representatives of the Walt Disney Company, an audit committee, and a nominations committee. Euro Disney S.C.A. as well as both operating companies of Euro Disney S.C.A., that is, Euro Disney Associés and Euro Disney Hotels, are managed by the management company Euro Disney S.A.S. (referred to as the Gérant), an indirect wholly-owned subsidiary of the Walt Disney Company. At the end of fiscal year 2016, the CEO of the Gérant (Euro Disney S.A.S.) was Catherine Powell, who replaced Tom Wolber in July 2016. For the management services provided to the holding and operating companies, the Gérant receives management fees consisting of a fixed percentage of revenues plus a performance-related portion. The aggregate compensation for the nine independent supervisory board members was €298,908 in 2016. The three representatives of the Walt Disney Company received an annual fixed salary, a bonus, restricted stocks, and stock options from the Walt Disney Company.

In 2016 the CEO of the Gérant (Euro Disney S.A.S.)

received an annual salary of € 502,991. The CEO’s employment contract further promised her:

1 A discretionary annual bonus based on individual performance relative to the objectives of the company and the Walt Disney Company Parks & Resorts operating segment.

2 Discretionary grants of the company’s stock options, the Walt Disney Company’s stock options, and the Walt Disney Company’s restricted stock.

3 The use of a company car.

In addition to the CEO (président), the executive committee of the Gérant consisted of three senior vice presidents and six vice presidents.

Euro Disney reported net losses in 2014, 2015, and 2016. Whereas the company’s total revenues decreased by 6.9 percent to €1,278 million in 2016, direct operating costs and marketing, sales, and general expenses increased by 4.0 and 7.0 percent, respectively. Euro Disney’s operating cash flows amounted to €78, €69, and ‑€68 million (negative) in 2014, 2015, and 2016, respectively. In all three years, the cash flows used in investing activities were more than the operating cash flows, resulting in negative free cash flows. In 2016 Euro Disney’s free cash flow decreased from ‑€65 million (negative) to ‑€261 million (negative) as a consequence of decreased operating performance and increased investments in attractions and hotel renovation.

The company’s trade receivables to sales ratio decreased from 5.9 percent in 2014 to 4.1 percent in 2016. Liabilities for deferred revenues as a percentage of sales increased from 10.8 percent in 2014 to 11.7 percent in 2016. The allowance for uncollectible receivables increased from 1.4 percent (of gross trade receivables) in 2014 to 1.9 percent in 2016 (after having been 3.2 percent in 2009); the allowance for inventories obsolescence decreased from 8.9 percent (of gross inventories) in 2014 to 8.3 percent in 2016. During fiscal year 2016, Euro Disney did not make any voluntary change in its accounting methods;

profit or loss included an impairment charge of €565 million related to tangible and intangible assets. Related party transactions consisted primarily of the payment of royalties and management fees to the Gérant, payments to the Gérant to reimburse the direct and indirect costs of the technical and administrative services provided, and interest payments to the Walt Disney Company. Such payments amounted to 12.9 percent of revenues in 2016 (or 9.8 percent excluding interest charges). Euro Disney’s tax expense was zero in 2014, 2015, and 2016.

At the end of fiscal year 2016, the company’s unused tax loss carryforwards amounted to €2.7 billion and could be carried forward indefinitely. The company’s 2016 financial statements received an unqualified audit opinion.

At the end of fiscal 2016, Euro Disney’s share price was €1.18. The company’s average share return since the end of fiscal 2008 had been −55 percent (or −9 percent annually). During fiscal 2014 the company’s share return had been ‑6 percent.

1 Identify the key accounting policies (step 1) and primary areas of accounting flexibility (step 2)

for Euro Disney.

2 What incentives may influence management’s reporting strategy (step 3)? Did the changes made in 2012 affect management’s incentives?

3 What disclosures would you consider an essential part of the company’s annual report, given its key success factors and key accounting policies (step 4)?

4 What potential red flags can you identify (step 5)?