BIOVAIL CORPORATION •REVENUE RECOGNITION There are two possible FOB contract structures mentioned in the case, namely FOB shipping point and 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. Conversely, 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.
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Therefore, Biovail is liable for shipping incidents. It is also important to note here that Biovail’s stock is listed on the NYSE and must abide by U. S. GAAP. While GAAP is not law and does allow for corporate discretion, Biovail’s 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 were to deliberately recognize revenues contracted under FOB destination as soon as the shipment left its docks.
In this case, it would incorrectly affect such reports as revenues and earnings per share for the third and fourth quarters. •Effect on Stated Revenues FOB shipping point would have allowed Biovail to recognize the revenue from the shipment once it left the facility. Under this structure, an accident would not have affected Biovail as the buyer has title of goods once the shipment leaves the shipping docks, regardless of any product damage during shipping. The shipment’s revenue would have been recorded on September 30, he day of departure, and would have been a third quarter item as stated by CEO Eugene Melnyk, “This accident will have a negative financial impact on Biovail’s third quarter revenues. However, in reality, sales revenue associated from the shipment could not have been recognized in the third quarter. The contract was structured FOB destination, not FOB shipping point. The shipment departed from Canada on the last day of September and would not have reached the distributer in North Carolina until October first, at the earliest.
This is significant because it is only at that time, during the fourth quarter, that Biovail would have done everything under the sales agreement and have been able to recognize the revenue under GAAP. In short, Biovail is in error in citing the accident as the reason for the loss of third quarter sales revenue. Even if the accident had not taken place, the revenue still could not have been recognized until received by the distributer in the fourth quarter.
It is misleading for management to suggest that the reason for the lower than predicted revenues and earnings per share is the multi-vehicle accident that damaged a shipment of Wellbutrin XL on October 1. •Analyst Concern There is reason to express concern over Biovail’s treatment of analysts who cover its stock. In each case that Banc of America Securities (BAS) analyst Jerry Treppel downgraded the stock recommendation for pharmaceutical company, it resulted in stock price decline.
Apparently, in order to reverse the negative effects on stock price, Biovail attempted to pressure BAS to retract its analysis and publicly criticized Treppel. These actions by Biovail began a chain of events that ultimately led to the analyst’s resignation. We would personally not desire to cover this company for these reasons. First, the company historically has attacked analysts who do not publish favorable stock reports. Second, transparency into the company is not clear and would make ascertaining truth and accuracy of their financial status more difficult.
Third, Biovail’s aggressive accounting methods further compound the issue of transparency and producing an accurate analysis. This case illustrates how an event that should not have affected the third quarter was given as reason by management for a lower than forecast performance nonetheless. Such reporting inaccuracies, coupled with aggressive behavior toward third party reporting, serves only to heighten the scrutiny experience by the pharmaceutical manufacturer.
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