Biovail Corporation Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Biovail Corporation: Revenue Recognition and FOB Sales Accounting

Introduction:

This report presents a detailed quantitative analysis of the truck accident issue as well as assessment of the revenue recognition issues and options available to the management of Biovail Corporation (BC) in this respect. Following areas are discussed in the report;

- How many truck loads are required to carry $10 million of BC’s product?

- How should revenue be recognized based on the two FOB contract structures?

- Effect of accident over revenues stated in case of each FOB contract structure.

- Ethical issues pertaining to Biovail’s treatment with analysts covering its stock.

How many truck loads are required to carry $10 million of BC’s product?

For the purpose of analyzing BC’s claim regarding loss in the truck accident, we performed a calculation which determines an estimated value of revenue that may be lost due to this accident. The calculation is attached to this report in appendix (at the end of this report).

Calculations are based on the facts and data gathered by the analyst and as available in the case. Furthermore, calculations also consider two separate cases for the purpose of determining BC’s revenue per tablet. These are;

a- If 35% margin is on distributors' selling price.

b- If 35% margin is on BC’s selling price.

Calculations clearly reflect that a fully loaded 18 wheeler truck can transit Wellbutrin XL valuing approx $53.45 million (case-a) to $67.44 million (case-b). However, as per the trooper, analyst got to know that only one quarter of truck was filled with the drug which leads to an estimated value of $13.36 million (case-a) to $16.8 million (case-b) and based on this calculation, it is estimated that in order to transit $10 million worth of Wellbutrin XL, only 15% to 19% of 18 wheeler truck load is required.

Therefore it can be easily concluded that the truck load required to transit $10 million matches with the actual load that was carried by BC’s truck which faced accident.

How should revenue be recognized based on the two FOB contract structures?

It should be noted that BC’s revenue recognition criteria as stated in its recent SEC filing specifies that it recognizes product revenue when product is shipped to the customer after considering any retained risks of ownership or future obligations, net of reserves for estimated product returns, recalls, rebates, and charge-backs. Simultaneously, Chief Financial Officer of BC concludes that the title and risk is passed to customer on FOB shipping basis that suggests that title passes in Manitoba when shipment leaves the shipping dock for distributor. However, this was not the case as the distributor previously made it clear to BC’s Vice President of Finance that the agreement suggests a title and risk change on FOB destination basis where the title and risk passes to distributor only when the product is delivered at distributor’s facility (in North Carolina). This was realized by the VP and CFO later when he was informed about it; which required him to change his previous statement about the title change.

	FOB SHIPPING	FOB DESTINATION
Ownership transfer	Upon shipment in Manitoba	Upon delivery in North Carolina
Revenue earned	Shipment (delivery is considered to be at shipping dock)	Destination (delivery is considered to be at distributor’s location)
Assuming no accident, date of revenue	30^th September 2003	When product reaches distributor’s destination
Status of revenue at time of accident	Earned as title passed in Manitoba when shipping dock was left	Not earned as title had not passed.
Effect of accident on third quarter revenue	No effect, as the title has already passed, revenue is included in third quarter and loss is of distributor.	No effect, as the title has not passed in third quarter, so revenue should not be recorded in third quarter and loss would be recorded in the fourth quarter.

Effect of accident over revenues stated in case of each FOB contract structure:

Using FOB shipping as a base, BC considers that revenue from the truck, which left Manitoba on 30^th September 2003, would be included in BC’s revenue of third quarter that ended on 30^th September 2003. Even if there was no accident on 1^st October 2003, revenue would have been earned on 30^th September as the truck leaves Manitoba’s shipping dock. The revenue recognition criteria states “Delivery has occurred or services have been rendered”; this criteria is met in FOB shipping as the proposed title change in Manitoba on 30^th September 2003 would have the effect of delivery. In FOB destination as the product got involved in an accident at Chicago, Illinois that is before reaching distributor’s destination after the third quarter; therefore this product actually did not qualify the above said criteria and should not be included in revenue (neither in third nor in fourth quarter).

As the terms of contract are FOB Destination, therefore; it is concluded that not only revenue recognition criteria wasn’t met as the agreement required the delivery to be made at the destination of distributor in....................................

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