Biovail case study

Topics: Revenue, Income statement, Generally Accepted Accounting Principles Pages: 14 (3056 words) Published: October 3, 2014
Table of Contents

Biovail Corporation was one of the Canada’s largest pharmaceutical publicly traded companies which expert in the development and large scale of manufacturing of pharmaceutical products. Biovail Company engaged activities on enhance formulate of the existing drugs, clinical testing, manufacture and commercial pharmaceutical products and utilized advanced drug delivery technologies. In the case, on September 30, 2003 there was a truck carrying a shipment of Wellbutrin® XL from Biovail’s manufacturing facility in Manitabo to Biovail’s Distributor, North Carolina was involved in a multi-vehicle traffic accident near Chicago. From these case, we see that many issues come out when truck accident happen. The outcome was not favourable, as Biovail's acquisition methods were labelled as unethical and their accounting practices were questioned. The company announced that the loss of the quarterly earnings which target in the range of $215 million to $235 million is because of the truck accident happened that contributed a significant unfavourable variance where the company estimated that revenue of the truck that involved in accident was in the range of $10 million to $20 million. There are several issues that addressed in this case when truck accident was happen which included accounting policy of the revenue recognition that “Freight On Board” (FOB) point which are FOB Shipping point and FOB Destination point, and ethic of earning management where Biovail is suspected might significantly overestimate the value of the product that involved in the truck accident due to Biovail fail to meet its third quarter 2003 earnings guidance.  On October 9, 2003, analysts state there ‘overweight’ rating on Biovail on estimate revenue lost in the accident and have poor earning quality in accounting. Previously year, Trappel mentioned that company’s revenue and earnings performance had not been of high quality. There is having some simulations here during conference call. When the truck accidents happen, Trooper estimated that the truck is not fully filled-up. The investigation suggested that Biovail might have significant overestimated the amount on the truck. They only filled up third-quarter item in that truck. So, because of this accident happen many issues come out and seen they use some magic in presenting their financial report.

Issue 1: Revenue Recognition
Based on Boivail case, one of the issues arises is about accounting policy on their revenue recognition. According to US GAAP a company should recognize revenue according to the SEC, SAB 101. Company are not allowed to recognize revenue until the revenue is realized or realizable and earned. For revenue to be recognized under SAB 101, a company must consider it meet all criteria before recognise as revenue. First criteria are the persuasive evidence of an arrangement exists. This criterion permits identification of the seller’s obligations whether the seller had fulfilled the obligation and earned the related revenue. In this case, there has not stated any information regarding on this criteria. But, it seems that there are high possibility that persuasive evidence exists between Biovoil Corporation and its Distributors. Second criteria, the seller’s price to the buyer is fixed or determinable. This criterion has a complete clear evidence provide in this case. Next, third criterion is the collectability is reasonably assured where collectability is evaluated on a customer-by-customer basis. In this case this criterion was probably covered as well. Lastly, fourth criteria is the Delivery has occurs or services have been rendered. This criterion to ensure the obligation undertaken by sellers has been completed or not. In this case, this criterion is facing problem either FOB Shipping point or FOB Destination point being applied. Biovail account for their sales either FOB Shipping Point or FOB Destination. This...

Bibliography: Gaa, J. (2007, May). The Ethics of Earnings Management. The Case of Income Smoothing, University of Alberta.
Godfrey, J., Hodgson, A., Holmes, S., & Tarca, A. (2006). Accounting Theory. Sydney: John Wiley & Sons.
M. M., M. M., & M. J. (2013). Techniques, Motives and Controls of Earnings Management. International Journal of Information Technology and Business Management, 12.
Thomas. J. Philips Jr, Michael S. Luehlfing & Cynthia M. Daily. (2001). The Right Way to Recognize Revenue. Journal of Accountancy.
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