BIOVAIL CORPORATION Case Solution
CASE OVERVIEW
Biovail Corporation has succeeded because of the clinical effectiveness of its medicines. The company had to miss the quarterly for the first time in the second quarter of 2003. The company has suffered great loss since the truck accident, which has made the company incur losses amounting to $10 to $20 million.
The company faced a conflict of revenue recognition. It was the estimation by the company that the truck loaded with the drugs had a loss of approximately $10 million to $20 million. However, the actual value of merchandise in the truck was about $ 5 million. This document is accompanied with discussion and analysis on following issues
Q1 a) ACCOUNTING ISSUE – REVENUE RECOGNITION, MANAGERIAL MOTIVATIONS ANDRESEARCH COMPONENT
Free on board shipping point and free on board destination are two important terms in revenue recognition, there are now two scenarios in the case of Biovail Corporation. It is true that in free on board destination event, revenues were overstated by 5 million or $15 million. This is because the truck met with an accident before its arrival at the distributer warehousing facility.
The performance obligations of the contract will play a critical role in the recognition of revenue and its timings. If both the parties adopted free on board shipping point transaction type in the contract, then the revenue should be recorded when the title of goods are transferred to the buyer from the seller.
On the other hand, if the contract specify that free on board destination transaction method was chosen, then the revenue should be recorded on its arrival to distributer facility. However, the point here is that the truck met with an accident and as a result Biovail should have recorded revenues accordingly by removing overstated revenues from the books, in the event of free on board destination transaction.The truck accident does not bring any affect to Biovail’s revenue in case of free on board shipping point transaction.
Assuming if there was no accident, then the revenue should have been recorded on the transfer of ownership of wellbutrin cargo, not when the truck left. However, the important factor is transfer of ownership and signed contract. In case of free on board destination, the revenue should have been recorded whenever the cargo arrived at distributer’s facility. It does not depend upon 1st or 2nd October, but the arrival of truck on the premises of distributer is important.
Q1 b) DISGREMENT BETWEEN BIOVAIL AND DISTRIBUTER
It appears that the reason behind dissention is inappropriate recording of contract; the sale contract is always of paramount importance in the recording of revenues. Biovail Corporation assumed the free on board shipping point contract structure in the recognition of the revenues in the financial statements. On the other hand, the distributor is of the opinion that free on board destination was the rightful contract structure...................
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