Q1: Identify the key accounting policies for each of these companies

Company A:
Juventus F.C. S.p.A. is an Italian publicly listed football club. The club’s primary
sources of revenue are: (1) Season and single tickets sale. (2) Television, radio and
media rights. (3) Sponsorship and advertising contracts. (4) The disposal of players’
registration rights. Players’ registration rights are recognized on the balance sheet at
cost and amortized over the players’ contract terms. The club leases its stadium Sta-
dio Delle Alpi under an operating lease arrangement; however, it has started the con-
struction of a new stadium which is cofinanced by an outside sponsor in exchange
of exclusive naming rights.

Revenue recognition

o Primary sources of revenues are ticket sales, media rights, and spon- sorship
contracts
o In exchange: Long-term commitment to provide services (i.e., play games)
o When to consider which revenues as realized?


Timing and amount of revenue recognition

 Expense recognition/accounting for players’ long-term contracts

o Juventus pays substantial amounts to a player’s previous club when it hires a new
player
o These outlays are initially capitalized and must be recognized as an expense
sometime during the contract period of the player
o Another issue is the recognition of write-offs once a player gets, e.g., injured
 
Amortization method

Timing and amount of write-offs

 Operating lease agreement

o Assets leased under operating lease agreements can be kept off- balance or
recognized as economically owned by the club


How to account for the operating lease payments for the stadium?

Company B:
Spyker Cars N.V. is a Netherlands-based publicly listed designer and manufacturer
of exclusive sports cars. In 2008, the company’s revenues amounted to €7,852
thou- sand, of which €5,772 thousand was related to car sales and €1,752
thousand was income from GT racing activities. In that year, Spyker produced 30
new cars and sold 37 cars. It held 42 cars in stock at the end of the year. Further,
the company spent close to €6 million on development and €378,000 on research.
Spyker had been loss- making since its initial public offering in 2004. At the end of
2008, the car manufactur- er had €76 million in tax-deductible carry forward losses.

 Accounting for inventories

o Large inventories, significant problems selling products
o Recognize write-offs for the impairment of inventories?
Timing and amount of write-offs

 Accounting for R&D

o Whether and to what extent development expenditures will result in future
revenues is very uncertain
o Based on assessment of the expenditures’ future benefits: Manage- ment has
to decide whether expenditures must be capitalized


Proportion of development expenditures that should be capitalized

Amortization method and period

Timing and amount of write-offs

 Carry forward losses

o Only if it is probable that management will realize the tax deductible carry
forward losses in future years they constitute a true asset
o If a proportion of the carry forward losses is unlikely to be realized, the
recognition of an allowance is warranted
 
Necessity and size of an allowance for non-realizable carry forward
losses

Company C:
J Sainsbury plc is a UK-based publicly listed retailer that operates 557 supermarkets
and 377 convenience stores and has an estimated 16 percent market share in the
UK. During the period 2007–2011, the company’s net profit margins ranged from 2.5
to 3.5 percent. At the end of March 2011, the net book value of Sainsbury’s land and
buildings was GBP7.1 billion. A part of the company’s supermarket properties was
pledged as security for long-term borrowings. In 2011 Sainsbury had 148,400 em-
ployees (99,300 full-time equivalents): many of them participated in one of the retail-
er’s defined-benefit pension plans.

 Accounting for property

o Property is one of the firm’s key assets
o Sainsbury must decide on the value of its property and determine whether write-
offs are necessary
o Importance of operating lease agreements? Assets leased under oper- ating lease
agreements can be kept off-balance or recognized as eco- nomically owned by
the retailer


Using fair value or historical cost accounting for property?

Determining the fair values of property

Timing and amount of write-offs

Determining whether leased assets are economically owned

 Accounting for personnel

o Large staff for which firm provides pensions
o Pension obligations arising from defined benefit plans increase during a fiscal
year as employees provide service to the retailer
o Need to recognize pension expense (i.e., an increase in the obligation)
o Pension expense is reduced if the retailer earns a return on its pension plan
investments


Determining the (change in the) present value of future pension ob- ligations
(e.g., discount rate assumption)
Determining the (change in the) fair value of the pension plan as- sets
Eigen antwoorden
Juventus
Revenue sources:
- Tickets
o Recognize over seasons
- Media rights
- Sponsorships
- Registration rights

Registration rights players

- Booked on balance sheet as liability and depreciated over the contract years
- How do they estimate residual values of players?
o What happens with injuries (industry characteristic)

Stadium is owned  Most significant asset

- Leasing agreement for the land by the city of Turin Operating lease (so no ownership)
- Term of 99 years
- In advance lease payment 12.8 million
o Estimation of residual leasing payments?
- Construction costs 105 million
o Contract with by market agency; selling name of the new stadium for 12 years
 In advance payment of 38.5 million
 Recognize these revenues over 12 years?

Spyker Cars N.V. Exclusive cars

2004-2013 on stock market; after that delisted
Figures
- Revenues: 19.7 million in 2006 vs 6.6 million in 2009
- Produced 242 cars and sold 194 end 2009: 28 cars in stock
- Approx. 135.000$ per car; 3.8 million$ worth of stock
- How to deal with such an expensive inventory?
o How to decrease residual values of cars?
o Depreciation costs for these cars?
- Development costs 2009: 9.8 million
o Added to development asset of 27.3 million
- 14,000 on research
- Much development costs relative to research
o Do they capitalize these development costs? (matching principle)
- Loss-making since 2004 (IPO)
o End 2009: 97 million tax-deductible losses (that can be carried forward)
o Only allowed if they have future profits; is questionable

J.Sainsbury plc Retailer

- 597 supermarkets 707 convenience stores
- Significant investments in properties
o How to depreciate?
o Inventory management (fifo/lifo)
o Fair value or historical costs?
- 16.7 % market share in UK
- 2010-2013: profit margin around 3.2%  2014: 2.8%
- Lands on balance sheet 6.9 billion
o Part of supermarket properties pledged as security for long-term borrowings
 - 2014: 107,000 FTE; many in pension plans
- Many employees:
o How to define residuals pension plans
o Hard to define pension costs / quite subjective matter
 Discount rate to value present value etc.
- True operating margin in future
o Accruals quality

Q2: What are these companies’ primary areas of accounting flexibility (for key policies)
Juventus:
- Depreciation policy:
o How do they estimate residual values of players?
o What happens with injuries (industry characteristic)?
- Policy leasing payments
- Name right selling: how flexible can they be in recognizing these revenues (12 years)

Spyker:
- Inventory
o Estimating value of inventory cars
- Flexibility in development costs vs research costs
-

Sainsbury:
- Flexibility in how to depreciate properties
o Overestimation?
- Residuals pension plans
o Discount rate etc.
1. Key accountancy policies
1.

2. Key accountancy policies

 -
2
Reporting incentive can be that the CEO want to get his bonus target and as a result the financial
statement might not (perfectly) reflect business reality (may be overstated so the CEO gets his
bonus)
Poor performance of a company in general can be an incentive that influences reporting strategies
Before 2012 there were debt covenants and minimum ratio’ which could be an incentive to not fully
reflect business reality
3

- Bonus based on performance

 - Poor performance in the past
o New CEO has incentives to be creative in accounting
 Can blame on last CEO with lots of write-offs and losses
- Unions have big influence
o So decreasing profit can be good to show the unions in negotiations
- Pensions

- Tell something about the new two loans

- Explain the accounting choices / methods
- Statements should show financial performance + non-financial performance
- Statement should show information for all segments (park, hotels, restaurants)
- New loan agreements limiting the ability to make new investments or attract new debt
capital

4
- When changes are not explained  restructure financial obligations + loan agreements
(because of poor performance)
- Why there is a new CEO?
- Controlling shareholder
- Increase in trade receivables in combination with lower uncollectible receivables
- No asset write offs
- Reduction in allowance of bad debts
- So many tax losses; can you use it?
- The debt covenants were more risky before
o Now negative covenants

Eigen:
- Until 2012:
o Financial lease (with ownership and maintenance) from banks and subsidiary
o EDL rented out land to financing companies
 These owned the hotels and leased to EDL
- From 2012:
o Euro Disney owns the Park and hotels
- Primary revenue sources
o Parks: entrance fees, merchandise, food beverages, special events
o Hotels
o Disney village: room rental, merchandise, food beverages, shows, conventions
- Employees
o Collective Bargaining Agreements with trade unions
o 90% permanent employees
o Can be used across park and hotel
- New loans; Walt Disney Company only creditor
o Before 2012 they needed minimum ratios to meet debt covenants
o Now negative debt covenant  not free to make investments / attract capital
 - Gérant manages and receives fee: Fixed and performance-related (stock options)
- Some stuff about board members and CEO

Performance 2014
- Revenues decreased
- Operating costs and marketing & sales, and general expenses increased
- Negative FCF
- Trade / Sales increased
- Deferred revenues / Sales increased
- Allowance % uncollectable decreased
o Flexibility in allowance uncollectable
- Allowance % obsolescence decreased
- Payments management fees, provided technical services, and interest payments
o Together 12.8% of revenues
- 2.3 billion tax to carry forward
- Unqualified audit opinion
- 2008 -> 2014: -51% share return (-11% per year) In 2014: -27%
Zie excel
Chapter 3 summary