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Biovail Case Study

1682 words - 7 pages

Contents
INTRODUCTION & ISSUE 2
ANALYSIS OF ISSUES 3
Qualitative Analysis 3
Quantitative Analysis 4
RECOMMENDATIONS 6
CONCLUSION 7

INTRODUCTION & ISSUE
Biovail Corporation was one of a Canada’s largest publicity traded pharmaceutical companies, operating internationally in all aspects of pharmaceutical products which is development, manufacture, marketing, licensing, and distribution of pharmaceutical products for the treatment of chronic medical conditions. Its major production facility was located in Steinbach, Manitoba, Canada. It merged with Valeant Pharmaceuticals International in 2010.

From this case, the main issue was David Maris wanted to make sure he was ...view middle of the document...

They confirmed that the manufacturing cost value of this shipment had been fully insured so they might be claimable if it meets the specification of the insurance. They also had some problem about the Freight On Board (FOB) which the product did not passed to the Distributor until the product was delivered to the Distributor’s facility (FOB destination) which is the seller remains responsibility for the goods. In addition, Biovail also sued by John Treppel claiming defamation and it seem like would take a long time for the litigation to be resolved. This will directly influence the contingency liabilities of Biovail.

ANALYSIS OF ISSUES
Qualitative Analysis
On October 1, 2003, a truck carrying a shipment of Wellbutrin® XL from Manitoba, Canada to a distributor in North Carolina crashed near Chicago, Illinois. The Wellbutrin® had been produced by Biovail Corporation, one of Canada’s largest publically traded pharmaceutical companies. The truck left Biovail manufacturing facility on September 30; a date which coincided with the end of the 3rd quarter. A few days after the accident, Biovail released guidance for the 3rd quarter, indicating that revenues and earnings would be below the previously released guidance. The company stated that the loss ($10 - $20 million) was associated with the accident. The case is centered on the question of revenue recognition and how the company should have accounted for the sales (FOB Company or FOB destination). FOB shipping point means that Biovail would have recognized the revenue the same day it shipped as the sales arrangement was satisfied, service rendered, and a determinable sales price established. Furthermore, FOB destination would not have allowed Biovail to recognize the revenue until the shipment reached the distributer.   In such a contract service is not rendered and, therefore, revenues are not earned until shipment arrival.   Based on this case, the company should recognize revenue via FOB shipping point as “The agreement between Biovail and the Distributer provided that title to, and risk of loss with respect to, the product would not have passed to the Distributer until the product was delivered to the Distributer’s facility. In this scenario, using generally accepted accounting principles (GAAP) requirements, revenue cannot be recognized as the seller has not done everything required under the sales agreement.   In this specific sales agreement, title and risk of the shipment remains the seller’s until received by the buyer.   Therefore, Biovail is liable for shipping incidents. It is also important to note here that Biovail stock is listed on the NYSE and must stand by U.S. GAAP.   While GAAP is not law and does allow for corporate choice, Biovail aggressive accounting practices should give rise to concern.   While GAAP does allow firms flexibility in certain areas (e.g. estimations regarding time and future costs), Biovail would venture outside of this flexibility and violate GAAP if it...

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