Case Study 1 :

BIOVAIL
CORPORATION:
REVENUE
RECOGNITION
AND
FOB
SALES
ACCOUNTING
GROUP MEMBER

NO MATRIC

CHIN HWEI SHAN

225957

NORHUDA BT SAID

227039

NUR FARHANIE BT KAMARUDDIN

227143

KEE PEI MIN

227193

BACKGROUND OF COMPANY
Biovail Corporation
Canadian pharmaceutical company listed on the
New York Stock Exchange
Commercialized the product directly and
internationally
Announces that miss its quarterly earnings

STATEMENT OF THE PROBLEM

Problem 1: Recognized their corporation
revenue either they should realize the
corporation revenue on the third quarter
financial statement or not.
Truck carrying the shipment involved in the
multi-vehicle accident on the last day of the
quarter 30 September 2003.
Influence on the third quarter revenue if it
was been reported in the financial statement
due on the shortfall of revenue.
Revenue range is between $215 million to
$235 million with an EPS of $0.35 to $0.45

Problem 2: Should recognition the revenue sales

based on the accounting policy with two different
Freight On Board (FOB) point either FOB
Shipping or FOB Destination.

Conflict occur:
Biovails CFO inform the analyst that the
contract between Biovails and Distributor had
little change in Manitabo when it left the
shipping dock (FOB shipping point).
Vice President of Biovails received an email
from Distributor employee in order to correct
agreement statement on title to.

Problem 3: Overestimated of the stock

inside the truck that involved in accident
During, the truck accident happen the
stock of product was not filled completely
full.
According Tropper, the truck was just
about one-quarter full (25 pallets not been
fill up)
Biovails had estimated that the range of
loss due to the accident was $10 million to
$20 million.
Actual real value estimated was around $5
million.

CAUSES OF THE PROBLEM

1. Revenue recognition
Whether they should recognize the
revenue on the third quarter financial
statement or not.
According to the case, on September
30, 2003 which is the last day of the
quarter, there was an accident happen
involving truck carrying a shipment from
Biovails manufacturing facility in
Manitoba to Biovails Distributor, North
Carolina.

According to Thomas J. Phillips, 2001 which

state that the companies should not
recognize revenue until it is realized earned
and transactions must meet these four
criteria:
1. There is persuasive evidence of an
arrangement.
2.The sellers price to the buyer is
fixed or determinable.
3.Collectability is reasonably assured.
4. Delivery has occurred or services
have been rendered.

There are basically two different moments

of revenue recognition according to the Free
On Board (FOB) condition.
FOB
shipping
pointRevenue
was
recognized at the time the goods leave the
company premises.
FOB destination- Revenue is recognized
only when goods are delivered to the
customer.

2. Overestimate the product.

Following the truck accident, Maris found
out, Trooper estimated that the truck was
only one-quarter full.
This issue arises due to the lack
knowledge of the audit committee of Biovail
Corporation and this actually can be avoided
if the members of audit committee aware
and
know
exactly
their
role
and
responsibilities.

DECISION CRITERIA AND ALTERNATIVE

SOLUTIONS
Enhance management authority
Strengthen internal control
Practice an ethical principle

RECOMMENDED SOLUTION,
IMPLEMENTATION AND JUSTIFICATION
Enhance the internal control
- Recruit independent external auditor
- Adjust revenue recognition and follow
GAAP
- Finance department should really
understand about FOB concept/
agreements
- Hire external to obtain legal advice about FOB
concept / agreements