Case study on biovail

1. Case Study
Biovail Corporation
Revenue recognition and FOB sales accounting
Group E

2. Case Overview
• Biovail corporation – one of the largest publically
trading pharmaceutical company in Canada.
• The company specialized in large scale production of
drugs.
• Company missed its quarterly guideline for the first
time in second quarter of 2003.
• Reason given : Shipment loss in truck accident on
30th September, carrying a truck load of Wellbutrin
worth of $10 to $20 million.

3. Case Overview (cont…)
• Conflicting point of views on FOB contract structure
– FOB shipping point vs FOB destination.
• A case of aggressive accounting by a firm and dispute
over revenue recognition.
• David Baris – an analyst to Biovail Corporation.

4. Questions…
$10 million product equals how many truckload?
- 64 gallons drums (D)= 64 X 3.7854 X 1000 cm3
- Vol of one 300mg tablet (T)= 0.5 + 1 = 1.5 cm3
- C.P. of 1 tablet = x
x + 4x + .35 X 5x = 2.83, x ~ $0.42
- Vol of truck (V)= 17 X 4.5 X 2.5 m3
- No. of drums in a truck = V/D ~ 789
- No. of drums for $10million product
= 10 X 106 X T / D X x ~ 147 drums
= 147 / 789 ~ 0.18 of truckload

5. Questions …
FOB contract structure:
1. FOB Shipping point – Revenue is recognized at the
time goods leave the company premises.
2. FOB Destination – Revenue is recognized only when
goods are delivered to the customer.
Biovail corporation follows FOB Shipping point,
hence revenue from the mentioned goods were
recognized in the second quarter itself.

6. Questions…
Affect of accident on the stated revenue
1. FOB shipping point – Revenue is recognized as the
stock had already left the dock. The loss will be bore
by the distributor.
2. FOB destination – The stock would be recorded as
the loss to the company.

7. Questions…
An analyst’s point of view
• The company clearly practices aggressive accounting.
• FOB Shipping point is assumed in preparation of
statement even though distributor stated otherwise.
• Jerry Treppel sued by Biovail for downgrading stock
recommendation.
• WE WOULD NOT LIKE TO BE ANALYST FOR THIS
COMPANY.

8. References
• Craig Chapman, Biovail Corporation: Revenue
Recognition and FOB Sales Accounting, Harvard
Business Publishing.
• Adam Feuerstein, “Analyst Questions Biovail’s
Accident Loss”, TheStreet.com, 08th October 2003.
• Adam Feuerstein, “SEC Charges Biovail, Execs With
Fraud ”, TheStreet.com, 24th March 2008.

9. THANK YOU