UNIVERSITI UTARA MALAYSIA

COLLEGE OF BUSINESS
SCHOOL OF ACCOUNTANCY
SESSION 2014/2015 SEMESTER 1 A141

BKAL 3063
INTEGRATED CASE STUDY

GROUP 1
CASE 1- BIOVAIL CORPORATION: REVENUE RECOGNITION &
FOB SALES ACCOUNTING



PREPARED BY:

NG MUN WAI 212540
LIM XIAN ZHEN 212719
NG SZE CHUEN 212891
LIM YONG EOW 213047
CHOY HUI NI 213209

PREPARED FOR:
PROF DR. KU NOR IZAH BT KU ISMAIL

INTRODUCTION
Biovail Corporation was one of Canadas largest publicly traded pharmaceutical
companies. For many years, the company had applied advanced drug-delivery
technologies to improve the clinical effectiveness of medicines. The company
commercialized its products, both directly (in Canada) and through strategic partners
(internationally). Its main therapeutic areas of focus had been central nervous system
disorders, pain management, and cardiovascular disease.
Biovails core competency was its expertise in the development and large-scale
manufacturing of pharmaceutical products. It leveraged this expertise by focusing on
(1) enhanced formulations of existing drugs, (2) combination products that
incorporated two or more different therapeutic classes of drugs, and (3) difficult-to-
manufacture generic pharmaceuticals.
Late on 9 October 2003, David Maris, an analyst at Banc of America Securities
(BAS), was trying to interpret the shocking events of the previous few days and finish
the write-up of his first report on the Canadian pharmaceutical firm, Biovail
Corporation. He wanted to make sure he was giving the best advice to his investment
clients in any events.
A few days earlier, Biovail had released guidance for the quarter ended 30 September
2003, indicating that revenues would be in the range of $215 million to $235 million
and earnings per share of $0.35 to $0.45, both below previously issued guidance. The
company stated in its press release that the loss of revenue and income was associated
with a significant in-transit shipment loss of Wellbutrin XL, Biovails antidepressant
product, due to a traffic accident that contributed significantly to this unfavorable
variance. As far as Maris was aware, this was the first time that Biovail had missed its
quarterly guidance.
On 3 October 2003, immediately following the announcement of the truck accident,
Canadian Imperial Bank of Commerce announced that it was cutting its stock rating
on Biovail to Sector Performer from Sector Outperformer and removing the company
from the Special Research Series (SRS), effectively ceasing coverage of the stock.
The reasons given for the downgrade cited ongoing production delays and operational
uncertainties at Biovail.
Following the truck accident, Maris, who had taken over the account from Treppel,
and his team started to do some digging. They called the state trooper handling the
crash investigation, got a copy of the accident report, and talked to someone at the
impound lot where the truck was towed. The trooper estimated that the truck was
about one quarter full and that even 25 pallets would not have filled up a tractor-
trailer of the size involved in the accident.
Maris and his team also talked to the towing company and to a local TV reporter who
had shot the scene. Maria also watched the report on the TV stations website. The
investigation suggested that Biovail might have significantly overestimated the
amount of Wellbutrin XL on the truck. Maris also thought that if there have been $20
million worth of Wellbutrin XL pills on that truck, it would have been full, or nearly
full.
Maris felt that Biovail should not be able to record revenue from the sale of the drugs
in the truck in the third quarter. It just didnt feel right. However, he wanted to make
sure that he really understood the effects of the accident on the firm before he signed
off on his Sell recommendation.
QUESTION 1
How many truckloads of product are actually required to carry $10 million of
product? Show your calculations.
The following details are extracted from the case study for calculation purpose:-
1 Wellbutrin XL tablet (300 mg) was estimated to be roughly 0.5 cm
3
with
an additional 1.00cm
3
per tablet for packing space.


The interior dimensions of a typical 18 wheeler trailer :

A wholesale acquisition price per tablet is $2.83 which included 400% markup
for the distributor and a 35% wholesaler margin.
The supply chain on this case study is start from Biovail, the manufacturer.
Biovail will ship its pharmaceutical products to the distributor in huge bulk. The
distributor then will sell it according to the order made by the wholesaler. Next, each
retailer will buys in small or medium bulk from wholesaler. The customer who buys
pharmaceutical products from retail store is the end user on this supply chain. The
supply chain will be illustrated as follow:-
Biovail Distributor Wholesaler Retailer End User (Customer)
The calculation steps are as below:
Step 1: Convert the size of trailer to cubic centimetres (cm
3
), due to the tablet and
trailer are using different units of measurements. 1 cubic metre is equal to 1,000,000
cubic centimetres.

Step 2: Calculate the total volume of Wellbutrin XL tablet(X) that can fit into the
trailer.







We conclude that the total volume of Wellbutrin XL tablet that can fit into
one trailer is 127,500,000 tablets.
Step 3: Determine the revenue of Biovail earned from a single tablet.
Selling price of wholesaler to retailer, 35% wholesaler margin:

Selling price of Biovail to distributor included 400% mark up for the distributor:

The revenue of Biovail earned from a single tablet is $0.37.
Step 4: Determine the size of total tablet for $10 million of product. The equation is as
follow:

Step 5: The equation for the percentage of total truckload required to carry $10million
of product is =21.20%

QUESTION 2
How should the company recognize revenue based upon the two possible FOB
contract structures mentioned in the case? Why?
The company currently is arguing in a situation whereby the company itself retains
that they are using Freight On Board (FOB) shipping point and the buyer retains that
FOB destination should take place in the responsibility. Therefore in these 2 possible
outcomes the company will record their revenue differently depends on the FOB.
(Whether is shipping point or destination).
FOB Shipping Point
If the company is on FOB shipping point, the company will record their revenue once
the goods had left the premise of the company or left the shipping point as the sales
arrangement was satisfied, service rendered and a determinable sales price established.
This is because for FOB shipping point, the responsibility of the goods will be
transfer to the buyer when the goods had left the dock of the seller company. The
buyer will then need to ensure the goods arrive their dock safely at it is all on their
own responsibility.
FOB Destination
If the company is accountability for the FOB destination then the company will need
to record their revenue after the goods had safely arrive at the dock and been transfer
to the hands of the buyer, and before the goods arrive to the buyer hands, the
responsibility will still be in the hands of the seller.
The reason here is because based on FOB destination, the rights of goods only
transfer to the buyer when the goods reached the buyer hands and before that, the
rights of the goods will remain in the hands of the seller. Therefore, when the
responsibility and rights of goods havent transfer to the buyer, the seller cannot
record the goods as revenue.
According to the case the company should recognize revenue via FOB destination
because The agreement between Biovail and the Distributor provided that title to and
risk of loss with respect to the product would not have passed to the Distributor until
the product was delivered to the Distributors facility. According to the case, there
are contrary to the generally accepted accounting principles (GAAP) requirements
where the revenue cannot be recognize as the seller has not done everything required
under the sales agreement. Then, the title and risk of the shipment remain at the
sellers until received by the buyer and GAAP requirement ultimately the Biovail is
liable for shipping incidents.

Question 3
How does the accident affect the stated revenues under the different FOB
contract structures? Explain your reasoning.
By way of answering the question, we shall look thoroughly through Biovails
revenue recognition policy, FOB method as well as the period where the accident took
place respectively. By far, this argument will explain the effectiveness of the FOB and
revenue recognition in relations with the reported revenue specifically during the
quarter.
The vicious accident which involved Biovails shipment cargo took place during 30
th

September of 2003. Since Biovails stocks were publicly traded in the New York
Stock Exchange, the company quarterly will issued its financial reports. Now, it
comes to the question how the revenue affected subject to the accident which in fact
does not affect anything at all. The next paragraph will discuss and clarify further why.
If Biovail as initially claimed applying FOB shipping point, which indicates that the
buyer takes responsibility for the goods when the goods leave the seller's premises. At
this particular point, the significant risks and rewards of ownership of the goods have
been transferred to the distributor which means that Biovail will recognize revenue
once delivery or shipment of goods has been made. Now, for the shipment on 30
th

September 2003, under FOB shipping point, Biovail has already recognize the
revenue once the goods loaded into the shipment cargo leaving its manufacturing
facilities in Manitoba, Canada. At this timeframe, the status of ownership had already
passed to the distributor and since revenue had already recognize way before the
accident occurred then its clarify why the accident have no effect to the stated
revenue particularly on the 3
rd
quarter.
On the other hand, if Biovail applying FOB destination, which indicates that, the
seller will hold responsibility for the goods until the delivery is completed to the
buyer. Due to that, Biovail will still bear the risk and ownership of the shipped goods
before the shipment completed respectively. By all means, Biovail will only recognize
the revenue under FOB destination upon delivery completion. Now, for the shipment
on 30
th
September 2003 and the event of accident, the status of ownership had not yet
passed to the distributor as the goods failed to reach to the hand of the distributor in
North Carolina. As no revenue shall be recognized for the shipment on 30
th

September 2003, so we can conclude that the accident once again has no effect to the
stated revenue of Biovail.
In the nutshell, the accident will have no effect on Biovails stated revenue under both
FOB contract. Under FOB shipping point, revenue had been recognized but the
accident will have no effect on it because ownership and risk has already transferred
to the distributor. Meanwhile, under FOB destination, no revenue shall be recognized
before the delivery completion. Thus the accident would have nothing to do with
revenue as delivery failed to be completed.

Question 4
Are you concerned about the companys treatment of analysts who cover the
stock? Would you want to be an analyst covering this company?
Yes. We are concerning about the companys treatment of analysts Treppel who
cover the stock as a recommendation of analyst who play a critical role in interpreting,
analyzing, and disseminating management disclosures to less sophisticated investors
will influence the reaction of investor and contributes changes of stock prices. Stock
recommendation can be considered a summary judgment that incorporates the
analysts assessment of the companys future earnings potential and stock price
appreciation potential. Nonprofessional and unsophisticated investors may suffer if
they overly in such overoptimistic stock recommendations.
Treppel did all the task in correct manner which do not void the code of ethics but yet
still been drag into trouble by Biovail. Treppel was in the dilemma status that whether
to help Biovail to conceal the ugly truth or report the actual and unbiased situation. As
a professional analysts, he has to report the actual and unbiased situation of the
company thus the investor could have more authentic information to understand the
company. End up, he chose to report the actual situation of the company and not to
conceal, but he get himself in trouble and lost his job after he highlighted and
disclosed the fraud.
We would not be the analyst that covering the Biovail because of several issues
happen when we reflected back on the cases and the poor management control and
company culture. First, Biovail are utilizing aggressive accounting method to inflate
their revenue. In this case, we concern about the revenue recognition method. Biovail
record the revenue once the product left the shipping dock (FOB Shipping Point). In
fact, US GAAP required the company only can recognize the revenue only when the
risk had been transfer. Biovail tried to use this method to manipulated and increase
the revenue of the company.
Besides, Biovail also have a low quality of revenue and earnings performance in the
prior period. Biovail did not provide a clear information about how they sustain the
rapid sales growth reported. We believe that Biovail has the intention to hide the
information that affect their company performance and trying to conceal the evidence
that they inflated their revenue. As lacking of these information, we could not
accurately analyze the company performance.
Lastly, when referred back to the Treppel, Biovail tried to use the false statement to
drag analyst in trouble. Biovail alleged that Treppel intentionally published
misleading research to gain profit from the decline in their stock price. This led
Treppel into trouble and investigated by several parties. As Biovail has a dishonest
culture, if we as an analyst to revealed the fraud done by Biovail, we would
encountered into the same situation like what Treppel faced, which will be
investigated and defamed. Furthermore, the past treatment of Treppel from Biovail
makes us worry about our employment. This happened right after Treppel doubted
about the information disclosed by Biovail and wrote a sell recommendation.

CONCLUSION
According to the case, the company should recognize revenue via FOB destination
because The agreement between Biovail and the Distributor provided that title to and
risk of loss with respect to the product would not have passed to the Distributor until
the product was delivered to the Distributors facility. The case also shown that there
are contrary to the generally accepted accounting principles (GAAP) requirements
where the revenue cannot be recognize as the seller has not done everything required
under the sales agreement. Then, the title and risk of the shipment remain at the
sellers until received by the buyer and GAAP requirement ultimately the Biovail is
liable for shipping incidents.
The accident will not affect the stated revenues under different FOB contract. Under
FOB shipping point, revenue had been recognized but the accident will have no effect
on it because ownership and risk has already transferred to the distributor. Meanwhile,
under FOB destination, no revenue shall be recognized before the delivery completion.
Thus the accident would have nothing to do with revenue as delivery failed to be
completed.
We will concern about the companys treatment of analysts who cover the stock as a
recommendation of analyst who play a critical role in interpreting, analyzing, and
disseminating management disclosures to less sophisticated investors will influence
the reaction of investor and contributes changes of stock prices.
In this case, Biovail alleged that Treppel intentionally published misleading research
to gain profit from the decline in their stock price. This led Treppel into trouble and
investigated by several parties. Hence, this situation shows that companys actions
will influence the decision made by the financial analyst.
In conclusion, we would not want to be an analyst covering Biovail. Biovail has a bad
and poor management control and company culture. Biovail executive use unethical
action to cope with Treppel when Treppel refuse to retract the report, which showed
us that Biovail has a dishonest culture in the company where financial analyst report
recommendation must not reveal the fraud. So, if we am the financial analyst for
Biovail, we could not provide the report objectively and fairly although there is
sufficient evidence to prove Biovail had provided misleading information. Thus, this
situation will lead me to overlap my professional ethics.