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    Biovail Corporation: Revenue Recognition and FOB Sales Accounting Background Sample Essay

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    Late on October 9. 2003. David Maris.

    an analyst at Banc of America Securities ( BAS ) . was seeking to construe the flooring events of the old few yearss and complete the write-up of his first study on the Canadian pharmaceutical house. Biovail Corporation. Maris didn’t like what he saw at the company. but he ne’er liked composing “Sell” recommendations. In any event.

    he wanted to do certain he was giving the best advice to his investing clients. Biovail Corporation was one of Canada’s largest publically traded pharmaceutical companies. 1 For many old ages. Biovail had applied advanced drug-delivery engineerings to better the clinical effectivity of medical specialties. The company commercialized its merchandises.

    both straight ( in Canada ) and through strategic spouses ( internationally ) . Historically. its chief curative countries of focal point had been cardinal nervous system upsets. hurting direction. and cardiovascular disease.

    Biovail’s nucleus competence was its expertness in the development and large-scale fabrication of pharmaceutical merchandises. It leveraged this expertness by concentrating on ( 1 ) enhanced preparations of bing drugs. ( 2 ) combination merchandises that incorporated two or more different curative categories of drugs. and ( 3 ) difficult-to-manufacture generic pharmaceuticals.

    In the United States. Biovail distributed a figure of pharmaceutical merchandises. These included Zovirax® unction and pick ( topical anti-viral drugs ) and Cardizem® LA ( for high blood pressure ) . which were marketed by strategic spouses. In add-on.

    Biovail distributed a figure of branded off-patent merchandises referred to as “Legacy” merchandises. The Legacy merchandises portfolio included the well-known trade names Cardizem® Cadmium. Ativan® . Vasotec® .

    Vaseretic® . and Isordil® . These merchandises were non actively promoted by Biovail and represented non-core assets for which patent protection had1 Biovail’s stock was listed on both the Toronto and New York stock exchanges. As a foreign private issuer. Biovail filedone-year studies to the U. S.

    SEC on Form 20-F and equipped interim fiscal statements on Form 6-K. In 2003 Biovail included in its one-year and interim studies fiscal statements supposedly prepared in conformity with both U. S. and Canadian by and large accepted accounting rules ( GAAP ) . Craig Chapman. Senior Lecturer.

    Kellogg School of Management. prepared this instance specifically for the Harvard Business Publishing Brief Case Collection. This instance was prepared entirely as a footing for category treatment and non as an indorsement. a beginning of primary informations.

    or an illustration of effectual or uneffective direction. This instance was developed from published beginnings. Copyright © 2009 President and Fellows of Harvard College. To order transcripts or bespeak permission to reproduce stuffs.

    name 1-800-545-7685. write Harvard Business Publishing. Boston. MA 02163. or travel to http: //www.

    hbsp. Harvard University. edu. This publication may non be digitized. photocopied. or otherwise reproduced.

    posted. or transmitted. without the permission of Harvard Business School. The Truck Accident and Revised Net incomes GuidanceA few yearss before.

    Biovail had released counsel for the one-fourth ended September 30. 2003. bespeaking that grosss would be in the scope of $ 215 million to $ 235 million3 and net incomes per portion of $ 0. 35 to $ 0. 45. 4 both below antecedently issued counsel.

    The company stated in its imperativeness release that the loss of gross and income was associated with a important in-transit shipment loss of Wellbutrin® XL. Biovail’s antidepressant merchandise. due to a traffic accident that contributed significantly to this unfavourable discrepancy. Equally far as Maris was cognizant. this was the first clip that Biovail had missed its quarterly counsel.

    After go forthing Biovail’s fabrication installation in Manitoba. Canada. on September 30. 2003.

    a truck transporting a cargo of Wellbutrin® XL. edge for the North Carolina installation of one of Biovail’s strategic partners—a major international pharmaceutical company that distributed the merchandise ( the Distributor ) . was involved in a multi-vehicle traffic accident near Chicago. Illinois.

    at about 3 p. m. Central Daylight Time the undermentioned twenty-four hours.
    Eight people were killed and 16 injured in the accident.

    when an 18-wheeler plowed into the dorsum of a circuit coach. which so collided with Biovail’s contract bearer. All the human deaths were on the coach. 5 Biovail announced that the merchandise on the truck might still be saleable in the hereafter. However.

    it would necessitate to be returned for review to Biovail’s fabrication installation in Manitoba to guarantee that it was still within acceptable specifications. The company estimated that gross associated with this cargo was in the scope of $ 10 million to $ 20 million and confirmed that the fabrication cost value of this cargo had been to the full insured. Biovail’s most recent filing with the U. S. Securities Exchange Commission stated that they recognized merchandise gross revenues gross when the merchandise was shipped to the client provided that the house had non retained any important hazards of ownership or future duties with regard to the merchandise shipped.

    Gross from merchandise gross revenues was recognized cyberspace of militias for estimated merchandise returns. callbacks. discounts. and chargebacks. These militias were established in the same period in which the related merchandise gross revenues were recorded and were based on estimations of the proportion of merchandise gross revenues capable to return. callback.

    discount. or chargeback. In a conference call following the net incomes counsel. Biovail’s main fiscal officer. Brian Crombie. told analysts that Biovail’s contract with the Distributor had title alteration in Manitoba when it left the transportation dock ( FOB transporting point ) .

    6 However. unknown to Crombie. an employee from the Distributor had antecedently called and emailed Kenneth Howling. Biovail’s frailty president of Finance who reported to Crombie. to rectify the statement about when rubric to the merchandise passed to the Distributor.

    The understanding between Biovail and the Distributor provided that rubric to. and hazard of loss with regard to. the merchandise would non hold passed to the Distributor until the merchandise was delivered to the Distributor’s installation ( FOB finish ) . The Response of Other AnalystsOn October 3.

    2003. instantly following the proclamation of the truck accident. Canadian Imperial Bank of Commerce announced that it was cutting its stock evaluation on Biovail to Sector Performer from Sector Outperformer and taking the company from the Special Research Series ( SRS ) . efficaciously discontinuing coverage of the stock.

    The grounds given for the downgrade cited on-going production holds and operational uncertainnesss at Biovail. 7 In contrast. J. P.

    Morgan Securities Inc. was more cheerful. 8 On October 9. 2003. analysts at that place reiterated their “Overweight” evaluation on Biovail. foregrounding that ( I ) Biovail remained house on its estimation of $ 10 million to $ 20 million in Wellbutrin® XL grosss lost in the accident.

    ( two ) Biovail’s low quality of net incomes in the yesteryear should non be intelligence to those familiar with Biovail. and ( three ) hapless net incomes quality doesn’t equal bad accounting.
    In peculiar. J. P.

    Morgan calculated how much of the truck would necessitate to be filled to stand for the missing gross. proposing that it would do a fantastic interview inquiry for direction advisers. 9 The bulk of Wellbutrin® XL on the truck consisted of bulk tablets in 64-gallon membranophones. 10 Each 300 milligram Wellbutrin® XL tablet was estimated to be approximately 0. 5 cm3 with an extra 1.

    00 cm3 per tablet for packing infinite and a sweeping acquisition monetary value of $ 2. 83 per tablet. which included an false 400 % mark-up for the Distributor every bit good as a 35 % jobber border. The interior dimensions of a typical 18-wheeler dawdler were 17m ten 4. 5m ten 2.

    5m. 11 J. P. Morgan added that its analysts had ne’er argued with earlier claims that Biovail’s accounting might hold been aggressive. However. its analyst study concluded that Biovail’s current accounting did non look crying and that the net incomes impact of Wellbutrin® XL was wholly crystalline.

    History of Analyst Coverage and the Relationship with Banc of America Securities In October 2000. January 2002. and April 2002. Jerry Treppel. Maris’s predecessor at BAS. had downgraded his stock recommendation for Biovail.

    On each juncture. this resulted in significant diminutions in Biovail’s stock value—more than 20 % in the yearss following the April downgrade. 12 In the April 2002 study that contained a Sell recommendation. Treppel suggested that the company’s gross and net incomes public presentation over the anterior 18 months had non been of high quality. Although saying that the information was ill-defined.

    Treppel was concerned about the sustainability of the rapid gross revenues growing that Biovail was describing. In peculiar. he highlighted gross revenues of Cardizem® CD. which represented 40 % of merchandise gross revenues at Biovail. The reported gross revenues of Cardizem® CD for the old one-fourth were $ 52 million—at least $ 10 million more than was reported in the old one-fourth.

    13 Shortly after Biovail executives were unable to carry BAS to abjure the April 2002 study. Biovail made a figure of public statements sing Treppel’s coverage. which led to an probe of Treppel by the New York province lawyer general’s office. the Securities and Exchange Commission ( SEC ) . and the National Association of Securities Dealers into his personal trading activities. In May 2002.

    Treppel was placed on leave by BAS and finally resigned his place. In response. Treppel sued Biovail. some of its executives. and besides its public dealingss house.

    claiming calumny. It looked like it would take a long clip for the judicial proceeding to be resolved. The Research Findings at BASFollowing the truck accident. Maris. who had taken over the history from Treppel.

    and his squad started to make some excavation. They called the province trooper managing the clang probe. got a transcript of the accident study. and talked to person at the impound batch where the truck was towed.

    Harmonizing to the first cavalryman on the scene. who had obtained information straight from the measure of ladling. the truck contained 8 palettes of merchandise with a entire weight of 11. 690 pounds—all of it Wellbutrin® XL. since the truck had no other lading.

    The cavalryman estimated that the truck was about one-quarter full and that even 25 palettes would non hold filled up a tractor-trailer of the size involved in the accident. 14 Maris and his squad besides talked to the towing company and to a local Television reporter/cameraperson who’d shot the scene. Maris besides watched the study on the Television station’s web site. The probe suggested that Biovail might hold significantly overestimated the sum of Wellbutrin® XL on the truck. If there had been $ 20 million worth of Wellbutrin® XL pills on that truck. it would hold been full.

    or about full. thought Maris. Maris looked back at Treppel’s old remarks on Biovail from the file and remembered some of the remarks that had been made during the conference call.
    Melnyk had stated: “This accident will hold a negative fiscal impact on Biovail’s 3rd one-fourth grosss. ” He had so repeated “It is a 3rd one-fourth point.

    ” Maris wasn’t sure what to do of the remarks and went back to look into on some of the accounting regulations. inquiring if Treppel’s concerns about aggressive accounting might hold been right. First there were the general revelation demands laid out by the SEC. Its Financial Reporting Release ( FRR ) 36 required that a company’s Management Discussion and Analysis ( MD & A ; A ) should “give investors an chance to look at the registrant through the eyes of direction by supplying a historical and prospective analysis of the registrant’s fiscal status and consequences of operations. with a peculiar accent on the registrant’s chances for the hereafter.

    ” In the SEC’s staff accounting bulletin refering gross acknowledgment ( SAB 101 ) . the SEC reiterated that the MD & A ; A should include an analysis of the grounds and factors lending to the addition or lessening ( in revenues/net income ) . 15 However. in malice of these regulations. harmonizing to SEC ailments and allegations. many companies unnaturally inflated their reported grosss by intentionally directing retail merchants along the distribution channel more merchandises than they were able to sell ( a procedure referred to as “channel stuffing” ) .

    In such scenes. the SEC did necessitate some revelation sing such actions in the MD & A ; A. utilizing “shipments of merchandise at the terminal of a coverage period that significantly cut down client backlog and that moderately might be expected to ensue in lower cargos and gross in the following period” as a specific illustration. 17 In malice of these demands.

    a casual analysis of the MD & A ; A subdivisions of 10-K filings revealed merely rare revelations of this type. Most of those that could be found blasted seasonal client purchasing forms. Then there were the gross acknowledgment demands which were taught in about any fiscal accounting category. Since Biovail’s stock was listed on the New York Stock Exchange.

    it filed its one-year and interim fiscal statements with the SEC in conformity with U. S. GAAP. U. S.

    GAAP required that gross must be earned and realized or realizable in order for it to be recognized. More exactly. SAB 101 stated that these conditions would by and large be satisfied when the following four standards were met: I ) two ) three ) four ) Persuasive grounds of an agreement exists ; Delivery has occurred or services have been rendered ; The seller’s monetary value to the purchaser is fixed or determinable ; and Collectability is moderately assured. Maris felt that Biovail should non be able to enter gross from the sale of the drugs in the truck in the 3rd one-fourth. It merely didn’t feel right.

    However. he wanted to do certain that he truly understood the effects of the accident on the house before he signed off on his Sell recommendation. Assignment Questions1. 2. 3.

    4. How many truckloads of merchandise are really required to transport $ 10 million of merchandise’show your computations. 19 How should the company acknowledge gross based upon the two possible FOB contract constructions mentioned in the instance? Why? How does the accident affect the declared grosss under the different FOB contract constructions? Explain your logical thinking. Are you concerned about the company’s intervention of analysts who cover the stock? Would you desire to be an analyst covering this company?
    16 High profile illustrations included accusals of channel dressing at Bristol Myers Squibb. ClearOne Communications. Coca-Cola.

    and Sunbeam. hypertext transfer protocol: //sec. gov/litigation17 hypertext transfer protocol: //sec. gov/interps/account/sabcodet13. htm ( April 28. 2006 ) 18 By comparing.

    under International Financial Reporting Standards ( IFRS ) . gross was by and large recognized when all the undermentioned conditions were met: the important hazards and wagess of ownership of the goods have been transferred to the purchaser ; the marketer keeps neither go oning managerial engagement nor effectual control over the goods sold ; the sum of gross can be measured faithfully ; it is likely that the economic benefits associated with the dealing will flux to the marketer ; and the costs incurred or to be incurred in regard of the dealing can be faithfully measured. 19 It may be easier to change over all length dimensions to centimetres ( centimeter ) before ciphering volumes.
    Amalgamate Statements of Income ( Loss ) of Biovail Corporation ( In US $ 1000s. except per portion informations ) Three Months Ended June 30 2003 2002 Six Months Ended June 30 2003 2002 $ 284.

    644 6. 273 117. 756 408. 673 48. 744 39.

    819 103. 106 86. 407 84. 200 ( 34. 055 ) 328. 221 80.

    452 4. 702 ( 19. 489 ) 6. 664 72.

    329 10. 350 $ 61. 979 $ 0. 39 $ 0. 39 $ 287.

    642 11. 515 41. 227 340. 384 77. 007 24. 921 78.

    318 26. 528 0 0 206. 774 133. 610 2. 561 ( 11.

    797 ) ( 66 ) 124. 308 8. 700 $ 115. 608 $ 0.

    76 $ 0. 70Gross Product gross revenues Research and development Co-promotion. royalty and licensing Expenses Cost of goods sold Research and development Selling. general and administrative Amortization Acquired research and development Colonies Operating income Interest income Interest disbursal Other income Income before proviso for income revenue enhancements Provision for income revenue enhancements Net income ( loss ) Net incomes ( loss ) per portion – Basic Earnings ( loss ) per portion – DilutedLong-run investings Property.

    works and equipment. cyberspace Goodwill. cyberspace Intangible assets. cyberspace Other assets. net Entire Assets Liabilities Current Accounts collectible Accrued liabilities Income revenue enhancements collectible Deferred gross Current part of long-run duties Entire Current Liabilities Deferred gross Long-term duties Total Liabilities Shareholders’ Equity Common portions Stock options outstanding Executive Stock Purchase Plan loans Deficit Accumulated other comprehensive income ( loss ) Total Shareholders’ EquityEntire Liabilities plus Shareholders’ Equity
    $ 74. 568 100.

    836 42. 096 11. 321 92. 285 321. 106 16.

    200 749. 328 1. 086. 634$ 71. 641 95. 289 35.

    691 19. 947 122. 590 345. 158 18. 200 624. 760 988.

    1181. 443. 956 4. 678 ( 9. 988 ) ( 518.

    434 ) 23. 597 943. 809 $ 2. 030. 4431. 433.

    624 4. 856 ( 9. 988 ) ( 580. 413 ) ( 2. 393 ) 845. 686 $ 1.

    833. 804Senior Management Profiles at Biovail CorporationBrian Crombie is a Canadian citizen and a occupant of Mississauga. Ontario. and has been Biovail Corp’s main fiscal officer since May 2000. Crombie came to Biovail from The Jim Pattison Group. one of Canada’s largest private retention companies.

    During his term of office at that place. he served as Managing Director. Corporate Finance. where he was responsible for corporate development and exchequer. From 1990–1997.

    Crombie held a series of increasingly senior finance and general direction places with The Molson Companies ; as Senior Vice-President. Corporate Finance and Treasurer. he was responsible for be aftering. accounting and control. corporate development.

    exchequer and investor dealingss. Previously. Crombie worked for the Walt Disney Company. He besides has an MBA from The Harvard Business School. Eugene Melnyk ( born May 1959 ) is a Canadian citizen and a occupant of St. Philip.

    Barbados. Melnyk founded Biovail Corp. and has served as its president and as a manager since March 1994. Harmonizing to SEC filings. Melnyk owns over 27 million portions in Biovail. stand foring about 18 % of the common stock outstanding.

    Melnyk has been Biovail’s main executive officer since December 2001 and. harmonizing to Wikipedia. purchased the Ottawa Senators hockey nine of the NHL and their sphere. Scotiabank Place. out of bankruptcy in August 2003. Harmonizing to the Canadian Globe and Mail.

    Mr. Melnyk was one of the highest-paid Canadian executives in 2001 and 2002. He took place over $ 120 million and $ 60 million ( Canadian ) in wage and net incomes from exerting corporate stock options in 2001 and 2002 severally. John Miszuk is a Canadian citizen and a occupant of Mississauga.

    Ontario. Miszuk has been VicePresident. Controller. and Assistant Secretary of Biovail Corp. since June 2000. Miszuk joined the Company in July 1990 as Controller of an affiliate company and was appointed Corporate Controller in March 1994.

    In November 1997 he was appointed Vice President. Controller. Prior to fall ining Biovail. Miszuk occupied senior fiscal direction places for Becton Dickinson Canada Inc. including Manager of Planning and Analysis and Manager of Financial Accounting.

    His old experience includes fiscal places with Intercraft Industries Canada and Fruehauf Canada Inc. Kenneth G. Howling is a U. S. citizen and a occupant of Toronto.

    Ontario. He became the Company’s main fiscal officer in 1997 and was promoted to be Biovail’s frailty president of finance in 2000. In 2003 he assumed extra duties for external communications to investors and analysts when his rubric changed to Vice President. Finance and Corporate Affairs. He is a Certified Public Accountant licensed in New Jersey. but is non a Canadian chartered comptroller.

    Beginning: Bio information compiled from “Crombie Named to Board. ” Missisauga News. October 28. 2008 ; Biovail imperativeness release.

    “Biovail Announces Changes to Executive Team. ” August 4. 2004 ; World Wide Web. wikipedia. com and World Wide Web.

    patronsofsport. com profiles ( Melnyk ) ; World Wide Web. portfolio. com/resources/executive-profiles and Biovail web site World Wide Web.

    biovail. com ( Miszuk and Howling ) .

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