...UNIVERSITI UTARA MALAYSIA COLLEGE OF BUSINESS FIRST SEMESTER SESSION 2013/2014 BKAL3063 INTEGRATED CASE STUDY GROUP F (2) CASE 3: BIOVAIL CORPORATION - REVENUE RECOGNITION AND FOB SALES ACCOUNTING PREPARED FOR: AMIN BIN ALI PREPARED BY: GAN PEI WEN 205401 SARA LEE HWEI MEI 206998 THEH JIA HUI 207133 JUMAIAH BINTI YASIN 207827 AISHA ANUAR 207919 DATE OF SUBMISSION: 21st OCTOBER 2013 TABLE OF CONTENTS INTRODUCTION 1 ISSUES 1 QUANTITATIVE ANALYSIS 2 QUESTION 1 2 QUALITATIVE ANALYSIS 3 QUESTION 2 3 QUESTION 3 4 QUESTION 4 5 RECOMMENDATION 6 CONCLUSION 6 REFERENCE 7 INTRODUCTION Biovail Corporation is one of the largest Canadian pharmaceutical companies, public traded on the New York Stock Exchange. The company’s products are commercialized and distributed locally (in Canada) and internationally through strategic partners. Biovail applies advanced technology on drug delivery, focusing on several main therapeutic areas such as central nervous system disorder, pain management, and cardiovascular disease. Biovail utilizes its expertise in development and large scale manufacturing, by focusing on enhanced formulations of existing drugs, combination products which use different drug classes, and difficult-to-manufacture generic pharmaceuticals. David Maris is an analyst at Banc of America Securities (BAS), assigned to cover on Biovail’s stocks. Maris did not like what he saw at the company, but neither did he like giving...
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...Biovail Business Memo Based on the assumptions provided in the case literature, each tractor trailer contains volume of 191.25 mᶾ, or 191,250,000 cmᶾ. Assuming that each tablet takes up 1.5 cmᶾ of space and has a wholesale price of $2.83 per tablet, each trailer can carry up to $360,825,000 worth of Wellbutrin XL product. $10,000,000 worth of product would take up 0.03 trailers, or 3% of a trailer’s total volume. The company’s stated accounting treatment of their product shipments is FOB shipping point, which would render the company’s accounting for product shipments and accompanying revenues to be accurate as title transfers when shipments take place. However, management appears to be assuming an incorrect contract structure with its distributors, which is indicated to be FOB destination by the distributor. This information was not provided to Biovail’s CFO prior to the company’s quarterly earnings call. As the shipment in question took place on September 30th, the shipment would not have reached North Carolina from Canada prior to the close of the quarter; revenues for this shipment must be recognized during October and reported with fourth quarter operating results under FOB destination contract terms. Revenues associated with the shipment would be recognized as-of September 30th under FOB shipping point accounting treatment. The company is utilizing an FOB shipping point contract structure for its accounting; had the accident not occurred, revenues for the quarter...
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...Biovail Corporation Issues : 1) The company has the problem with their recognition of the profit * Whether they should realize or not the revenue for the third quarter. 2) Issues on the concepts of revenue recognition that have been apply in the company to show their financial results. * Whether Biovail Corporation recognize its revenue using FOB shipping point or FOB destination. Suggested Solution 1) FOB Destination shipping term * The truck accident had no impact on company’s third quarter financial results. * The truck left Manitoba on Sep 30, which was too late to reach Distributor’s North Carolina facility prior the end of the quarter. * Biovail could not have recognized revenue resulting from the shipment regardless of the accident. 2) From David Maris view, Biovail should not be able to record revenue from the sale of drugs in the truck in the third quarter. 3) Refer to page 2 from the 4th and 5th paragraph, it has been mentioned there has been a disagreement on the FOB contract structure which could lead to a trace back to an attempt by personnel in Biovail to setup an accounting fraud scheme from the truck accident. From Biovail most recent filing with US SEC stated that they recognized product sales revenue when the product was shipped to the customer provided that the firm had not retained any significant risk of ownerships or future obligations with the respect to the product shipped. Recommendation * Biovail should...
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...shipment leaves Manitoba, provided that Biovail does not retain any significant risks of ownership or future obligations. Biovail recognized revenue when the product was shipped to the customer provided that it has not retained any risk of ownership or future obligations when the product has been shipped to the customer. The revenue so recognized is recognized net of reserves for estimated product returns, recalls, rebates and chargebacks. These reserves are estimated at the beginning of the transaction and based on estimates of the proportion of product sales subject to return, recall, rebate or chargeback. This implies that Biovail should recognize the revenue relating to the shipment when the truck leaves the manufacturing facility in Manitoba, Canada on 30 September 2003. Note that here we assume that the requirements relating to SAB101 has been satisfied, namely: 1) Persausive evidence of an arrangement exists; 2) Delivery has occurred or services has been rendered 3) The sellers price to the buyer is fixed or determinable 4) Collectability is reasonably assured/ Option 2: FOB destination point: Recognise revenue when shipment arrives in North Carilina As per Kennith Howling, the revenue recognition policy of Biovail is not correct. He claims that risk of loss and ownership relating to the shipment only passes to the distributor when the shipment arrives in North Carolina. This implies that Biovail should not recognize the revenue on 30...
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...SECURITIES AND EXCHANGE COMMISSION New York Regional Office 3 World Financial Center New York, NY 10281 (212) 336-1120 UNITED STATES DISTRICT COURT -SOUTHERNDISTRICT OF NEW YORK SECURITIES AND EXCHANGE COMMISSION, Plaintiff, 08 Civ. ECF CASE BIOVAIL CORPORATION, EUGENE N. MELNYK, BRIAN CROMBIE, JOHN MISZUK, and KENNETH G. HOWLING, Defendants. COMPLAINT Plaintiff Securities and Exchange Commission, for its Complaint against Defendants Biovail Corporation ("Biovail" or the "Company"), Eugene N. Melnyk, Brian Crombie, John Miszuk and Kenneth G. Howling (collectively, "Defendants"), alleges as follows: SUMMARY OF ALLEGATIONS 1. This case involves chronic fraudulent conduct - including financial reporting fraud and other intentional public misrepresentations - by Biovail Corporation, a Canadian pharmaceutical company whose common stock is traded on the New York and Toronto stock exchanges. Obsessed with meeting quarterly and annual earnings guidance, Biovail's executives repeatedly overstated earnings and hid losses in order to deceive investors and create the appearance of achieving that goal. And, when it ultimately became impossible to continue to conceal the Company's poor performance, Biovail actively misled investors and analysts as to its cause. This corrupt strategy was employed by Biovail's most senior officers: Eugene Melnyk, former chairman and chief executive officer; Brian Crombie, former chief financial officer; Jo,hn Miszuk, vice...
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...Biovail Corporation Issues : 1) The company has the problem with their recognition of the profit * Whether they should realize or not the revenue for the third quarter. 2) Issues on the concepts of revenue recognition that have been apply in the company to show their financial results. * Whether Biovail Corporation recognize its revenue using FOB shipping point or FOB destination. Suggested Solution 1) FOB Destination shipping term * The truck accident had no impact on company’s third quarter financial results. * The truck left Manitoba on Sep 30, which was too late to reach Distributor’s North Carolina facility prior the end of the quarter. * Biovail could not have recognized revenue resulting from the shipment regardless of the accident. 2) From David Maris view, Biovail should not be able to record revenue from the sale of drugs in the truck in the third quarter. 3) Refer to page 2 from the 4th and 5th paragraph, it has been mentioned there has been a disagreement on the FOB contract structure which could lead to a trace back to an attempt by personnel in Biovail to setup an accounting fraud scheme from the truck accident. From Biovail most recent filing with US SEC stated that they recognized product sales revenue when the product was shipped to the customer provided that the firm had not retained any significant risk of ownerships or future obligations with the respect to the product shipped. Recommendation * Biovail should...
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...1. a) What is the manufacturer revenue per pill? (Please see attached calculation file) Biovail Distributor Wholesaler Retailer Retailer Wholesaler Distributor Cost = $2.83 Margin = (Price – Cost)/Price Margin = 0.35, Price = $2.83 Cost = Price(1 – Margin) Cost = $1.84 Markup = (Price – Cost)/Cost Markup = 4, Prices = $.184 Cost = Price/(1 + Markup) Cost = (1.84)/5 = $0.37 Biovail = $0.3679 revenue per pill = $0.37 revenue per pill (rounded) • How many pills equate to $10m in revenue? $10m = X * $0.37 X = 27,027,027.03 = Rounded up 27,027,028 pills equate to $10m in revenue • What is the volume of $10m worth of pills? Per Pill = 1.5 cm3 $10m worth of Pills converted to cm3 27,027,028 Pills = 40,540,542 cm3 1 Liter = 1000 cm3 40,540,542 / 1000 = 40,540.54 Liters 1 Gallon = 3.7854 Liters 40,540.54 Liters / 3.7854 Liters = 10,709.71 Gallons 64 Gallons = 1 Drum 10,709.71 Gallons / 64 Gallons = 167.34 Drums The volume of $10m worth of pills is 167.34 Drums • How many truckloads are required to carry $10 million worth of pills? One 18-wheeler Truck = (17m (100) * 4.5m (100) * 2.5m (100)) = 191,250,000 cm3 Truckload(s) to carry $10m worth of pills = 40,540,542 cm3 / 191,250,000 cm3 = 0.211977 = 21.1977% One truckload is more than enough to carry $10 million worth of pills, approximately 21.1977% of a truckload or roughly one fifth of the truck equates to $10 Million worth of pills. 2. How should the company...
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...Biovail Case Assignment Questions: 1. How many truckloads of product are actually required to carry $10 million of product? Show your calculations. Given: a. 1 Wellbutrin XL tablet is estimated to be 1.5 cm3 (this includes the packing space) b. 1 18-wheeler trailer’s dimensions are: 17m x 4.5m x 2.5m Since the tablet and the trailer are using different units of measurements we need to convert the trailer dimensions to centimeters before we can calculate the volumes. a. To convert meters into centimeters the ratio is: 1meter = 100 centimeters 17m= 1,700 centimeters 4.5m = 450 centimeters 2.5m = 250 centimeters To calculate volume b. Volume of a rectangular prism = a x b x c Volume= 1,700 x 450 x 250 Volume = 191,250,000 cm3 c. To find out how many Wellbutrin XL tablets fit into a trailer 1.5x=191,250,000 X=127,500,000 d. How much revenue does Biovail get from a single pill ? 400% 35% $2.83 Biovail → Distributor → Wholesaler → Retailer 0.52 ← 2.10 / 400% ← 2.83/1.35%=2.10 127,500,000 x 0.52= $6,630,000 One truck can definately carry $10 million worth of Wellbutrin XL tablet product. 2. How should the company recognize revenue based upon the two possible FOB contract structures mentioned in the case? Since Biovail’s stock is publically owned it needs to file its financial statements with the SEC. The SEC requires that it abide by GAAP...
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...Biovail Case Part 1: Assumptions: 1. The mark-up is from the Distributor to the Wholesaler, and the margin is from the Wholesaler to the Retailer Biovail Distributor purchase price Wholesaler purchase price = Distributor purchase price + 400% mark-up Retailer price = Wholesaler price + 35% margin 2. We don’t know the excess space needed in the truck for the 64 gallon drums so we assumed that the 1.00 cm3 accounts for the excess space needed. 3. We assumed the given dimensions is completely usable for storage 4. The revenue associated with the shipment goes with the price the distributor pays Unknown: The number of trucks needed to carry $10 million of product Given: * Wholesaler purchase price = $2.83 * Truck volume = 17m x 4.5m x 2.5m Needed information: * Distributor purchase price * Truck volume in cm3 * Volume needed for $10 million worth of product Distributor purchase price = $0.57 2.835=0.566 2.83-0.5660.566=400% Truck volume in cm3 =17*4.5*2.5m3*1000000cm31m3= 191,250,000cm3 # of tablets worth $10 million =$10,000,000$0.566tablet=17,667,845 tablets Volume needed for this many tablets =17,667,845tablets*1.5cm3/tablet=26,501,767cm3 Trucks Needed=26,501,767 cm3191,250,000cm3per truck=14% of 1 Truck It appears that the estimates for lost revenue may be accurate knowing that the truck was filled about 25% and it only takes roughly 14% to reach $10...
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...Table of Contents 1.0 Abstract 2 2.0 Introduction 2 3.0 Questions and answer 4 4.0 Recommendations 14 5.0 References 15 1.0 Abstract Biovail Corporation, a large pharmaceutical company and had applied advanced drug-delivery technologies to improve the clinical effectiveness of medicines. It is recently had its stock downgraded by a well-known pharmaceutical analyst and a number of other analysts were also scrutinizing the company. The outcome was not favorable, as Biovail's acquisition methods were labeled as unethical and their accounting practices were questioned. An investor with the company must decide if she will continue to invest in a company that has been identified with low ethical standards. 2.0 Introduction Biovail Corporation was one of Canada’s largest publicly traded pharmaceutical companies. Its products commercialized both directly in Canada and through strategic partners (internationally). The company was very expert in the development and large scale of manufacturing of pharmaceutical products. Besides that, Biovail’s stock had listed on both the Toronto and New York stock exchanges. Biovail filed annual reports to the U.S. SEC and prepared financial statements in accordance with both U.S. and Canadian generally accepted accounting principles (GAAP). Biovail Company engaged activities on enhance formulate of the existing drugs, clinical testing, manufacture and commercial pharmaceutical products and utilized advanced drug delivery...
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...11 INTRODUCTION 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. This company had listed on the Toronto and New York Stock Exchange (NYSE). 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. The company announced that the loss of the quarterly earnings which target by $260 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 which included accounting policy based on the revenue recognition; how Biovail Corporation should account the sales based on two different “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...
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...Wellbutrin® XL on board would have to be less than $7.41 million. This indicates that Management’s estimate of the lost revenue is overstated by at least $2.59 million to $12.59 million or 35% to 170% and likely much more than those figures would suggest. Furthermore for the losses to even reach these high estimates, one would have to assume the product was a complete loss which is highly unlikely that such an accident would ruin the entire shipment of drugs. Given that Management indicated that the manufacturing cost of the shipment had been fully insured the economic loss (if any) to Biovail would be significantly mitigated adding to my concerns about the inflated negative guidance. This smacks of a convenient excuse for explaining missing revenue guidance. Issues Regarding Revenue Recognition at Biovail Under US GAAP this revenue should not have been recognized by Biovail because delivery did...
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...transaction and there was an arrangement further after. Second is seller's price is fixed for the buyer and in the case we can see is the truth. Third in which collection is reasonably assured has been also followed as we can see in the case. And the last one concerning the delivery. As mentioned inside of the case the company though that the product was free on the board and it was not their responsibility to take care of the shipment process and the product. However the case was the opposite as Distributor's employee made sure to change the title and finish the transaction as the product would reach the destination. In this case Biovail should recognize the revenue the moment that the product have left the first destination and the company in order to go to Distributor's destination. That way the responsibility would be not only concern Biovail but also Distributor. 3.it does not influence them in third quarter at least, in any of the case whether they take revenue at the moment the product reaches the destination or they count revenue the moment it leaves the warehouse. In first case it cannot affect the third quarter due to the fact that the company can recognize the revenue no matter what happened with the product further. And in the second case it is also not affected due to the fact that they would not have reached the destination before the end of the quarter....
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...Biovail Corporation Case Study 1. The truck’s trailer dimensions are: 17m x 4.5m x 2.5m. To convert the trailer dimensions to centimeters to compare the volume of the boxes to the volume of the trailer: 1 meter = 100 centimeters 17m= 1,700 centimeters 4.5m = 450 centimeters 2.5m = 250 centimeters So the dimensions of the truck in centimeters are: 1,700 x 450 x 250, the volume of which is 191,250,000 cm3 1.5x = 191,250,000 x =127,500,000 In order to carry $10 million of product, only 1 truck is needed. 2. In its most recent filing with the U.S. Securities Exchange Commisions, Biovail recognized revenue when the product was shipped to the consumer (FOB shipping point), meaning the buyer is responsible for the product when it leaves the premises at Biovail. If it recognizes revenue this way, then sales would be recognized net of reserves for estimated product returns, recalls, rebates, and/or chargebacks. If, instead, Biovail recognized revenue under “FOB destination”, then Biovail would be responsible for the product until it’s in the buyer’s possession. It would clear up who would be responsible for loading and unloading costs. Biovail, should recognize revenue under FOB destination to avoid issues of misplaced product. 3. If Biovail recognized the revenue from the sale at the moment the product left Biovail's facility, then the truck accident would not have impacted the company’s third quarter financial results. According...
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...LAWS7012 | Case Studies Topic 5 Case Study 1 Are the following self-education expenses deductible under section 8-1? Provide reasons for your answer. a. Barry, a trainee accountant, is studying commerce part-time at university. Barry enrolled after he started his employment with his firm. b. Brianna, a company director, was having difficulty coping with work due to stress brought about by difficulties with her family situation. She decided to attend a four-week course in stress management to help her deal with the situation. Brianna attended the course after hours and paid for it herself. c. Kieran, a computer salesman, takes six months leave without pay to undertake a business administration course at a private provider not registered as a higher education institution. He has an agreement with his employer that, upon successful completion of the course, he will be promoted to an assistant manager position with his current employer. d. After finishing her final year of school, Sarah enrols in a full-time fashion photography course at a TAFE college. She is supported by her parents during her studies and does not receive any government assistance. She works as a casual sales assistant on weekends. e. Stuart wants to be the manager of a hotel. He enrols in a hotel management course at a TAFE college, one semester of which involves an industry placement to gain work experience. Stuart is placed with a major hotel where he gains experience in all facets...
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