Table of Contents

Executive Summary.......................................................................................................1

Question 1......................................................................................................................2

Question 2......................................................................................................................2

Question 3......................................................................................................................4

Question 4......................................................................................................................5
Executive Summary

Biovail Corporation was a Canadian pharmaceutical company. On the last day

of the end of the third quarter, an accident occur which involve a truck containing
Biovails products. This truck accident caused several issues regarding accounting
policy based on the revenue recognition to arise: how Biovail Corporation should
account the sales based on two different Freight On Board (FOB) point which are
FOB shipping point and FOB destination point and what the effects of the Biovails
revenue for both FOB contract structures. In addition, whether it is ethical and
relevant for Biovail Corporation to estimate the revenue of the product that involved
in the truck accident due to Biovail failed to meet its third quarter 2003 earnings
guidance.

Based on this case, the corporation was facing problems in recognizing their
corporation revenue whether they should realize on the third quarter financial
statement or not. There are a few solutions to overcome the problems. First, Biovail
Corporation can enhance the management authority. Second, Biovail Corporation can
strengthen its internal control systems. Third, Biovail Corporation can practice an
ethical principle in managing their business. We recommend the best alternative to
solve the problem arisen in Biovail Corporation is to strengthen the internal control in
many aspects. The corporation should recruit independent external auditor to review
the financial reporting. Besides, the corporation needs to ensure that the finance
department is really understand about FOB concept and what the effects is and also
needs to hire external expertise to obtain legal advice about FOB concept.

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Question 1

We have to convert all different units of measurement to same unit of

measurement in order to calculate how many truckloads of product are actually
required to carry $10 million of product. Centimeters will be converted and used for
the calculation. From the case study, the information that we know are:

3 3 3
1. Size of Wellbutrin XL per tablet= 1.5 cm ( 0.5 cm +1 cm )
2. Volume of typical 18-wheeler trailer=

191,250,000 cm3 ( 1700 cm 450 cm 250 cm )

3. Cost of Wellbutrin XL per tablet= $0.42

- Cost +400%(Distributor markup) +35%(wholesaler margin) = $2.83

Therefore, a typical 18-wheeler full loaded trailer can easily carry 127,500,00
3 3
tables ( 191,250,000 cm / 1.5 cm ) that worth for $53,550,000 (127,500,00

tables $0.42).

Question 2

According to Generally Accepted Accounting Principles (GAAP), there are 4

conditions should be achieve to recognize revenue which are persuasive evidence of
an arrangement exists, suppliers price to the customer is determinable or fixed,
collection is reasonably assured and services have been rendered or delivery has
occurred.

The first condition is persuasive evidence of an arrangement exists. This

condition allows identification of the suppliers obligations whether the supplier had
accomplished the obligation and gained the related profit. In Biovail case, although it
does not stated any extra information on this aspect, but it seems that there is high
possibility that persuasive evidence occurs between Biovail and the Distributor since
there was a purchase order, invoice or bill to support this sales.

The second condition is suppliers price to the customer is determinable or fixed.

In Biovail case, it provides complete clear evidence in this aspect.

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 The third condition is collection is reasonably assured where the collectability is
identified on a customer-by-customer basis. In Biovail case, this aspect was probably
covered as well.

The forth condition is services have been rendered or delivery has occurred. This
condition is the main point of conflict in Biovail case. Usually, there are 2 different
moments of revenue recognition following to the Free On Board contract structures
which are FOB Shipping and FOB Destination.

By applying FOB shipping, revenue can be recognized at the time when the
products are leaving the sellers warehouse. In this case, Biovail must recognize
revenue when the goods move out from Biovail shipping dock at the warehouse since
in that moment both obligation and ownership of the products is hand over from
Biovail Corporation to its customer.

By applying FOB Destination, sellers are responsible for the products until the
products delivered to the location of the customer and the revenue cannot be
recognize until the customer receives the products. In this case, Biovail must
recognize revenue when the product is transferred to the Distributors facility since in
that precise moment both obligation and ownvership of the products is hand over
from Biovail Corporation to its customer.

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Question 3

According to the information and facts given from the case, the revenue
should be recognized by Biovail as following the FOB Destination structure.
However, Biovail had recognize the revenue as thought it was being operated under
the FOB shipping which is most likely an attempt to boost their revenue for the
period.

According to GAAP, a product sold, such as Wellbutrin XL, can be recorded

as revenue when the product delivery from the seller to the buyer has taken place. As
clearly stated in the agreement, the distributor has agreed with Biovail that all delivery
of Wellbutrin XL tablets were F.O.B. Destination. This imply that after the delivery
of product, the revenue are only allowed to be recognized after the products has safely
reaches the buyers facility.

After analyzing the case, the incident of the truck accident shouldnt affect
Biovails financial results for the third quarter since the truck departed towards North
Carolina on 30th September and the truck was late to arrive at North Carolina prior to
the end of the quarter.

In another perspective, even though the terms was agreed upon F.O.B.
Shipping which the revenue from the sales that Biovail would recognize on the time
the products left Biovails facility, the truck accident still wouldnt have great impact
on Biovails third quarter financial results. Furthermore, the products title and the
risked which associated with the accident would have been passed to the Distributors
once the truck had left the facility of Biovail. Besides that, putting aside those large
Distributors who are capable and willing to bear the risk associate with FOB shipping,
many small and medium size distributor usually prefer FOB destination since the cost
incurred is high.

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Question 4

I am concerned about Biovail Corporation treatment of analysts who cover the

stock as this is concerning to my reputation and employment. I would not want to be
an analyst covering Biovail Corporation. The management control and culture in
Biovail Corporation was really bad. Besides, there was insufficient disclosure in
Biovail Corporation and the company was utilized an aggressive accounting system.

Marias predecessor at BAS, Jerry Treppel found that Biovail Corporation

earning quality was low and not clear with their accounting information stated on
April 2002. The truck accident was significantly contributed to this unfavourable
variance. Due to Biovail Corporation did not followed the GAAP policy and the
happened of truck accident incident, this lead to the company inflate their revenue.

Furthermore, Biovail Corporation issued an argument to public right and

denied that it was incorrect accounting after Jerry Treppel writing a sell
recommendation. A deceitful culture and control was the picture that the company
given to the public. Besides, Biovail Corporation internal management control system
was insufficient and communication between co-workers was lacking. For examples,
there was uneven information have went throughout internally when the in the
agreement with the distributor process. Moreover, the employee from the distributor,
Crombie has no idea how to verify the agreement that sent from the distributor.

The report of Biovail is whether true and fair or not is making me feels very
anxious. If the answer is not, this will cause an ethical dilemma to me. Being honest
and responsible is the responsibility of an analyst. As an analyst, I will surely support
the truth by disclose whatever issues I found to ensure the report is true and fair ever I
will put myself into danger which will lead me to precarious situations. Disclosing the
evidence of misleading financial statements in Biovail Corporation is behaviour of a
professional analyst. A professional analyst should tell public the truth and make the
Sell recommendation. The bygone conduct towards Jerry Treppel from Biovail
Corporation causes me anxious regarding my employment. This incident occurred
after Jerry Treppel suspected on Biovail Corporation disclosure and wrote a Sell
recommendation.