Biovail Case Study Analysis and Solution

Biovail Case 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. A 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. 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: Volume of a rectangular box = 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=127,500,000d. How much revenue does Biovail get from a single pill? Biovail +400 % (Distributor mark-up) +35 % (wholesaler margin) = $2.83 Biovail → Distributor → Wholesaler → Retailer 0.42 ← 2.10 / 500% ← 2.83/135% =2.10 e. The total value of tablet in one fully loaded trailer 127,500,000 x 0.42= $53,550,000 One truck can carry $10 million worth of Wellbutrin XL tablet product.

2. How should the company recognize revenue based upon the two possible FOB structures mentioned in the case? According to GAAP, four conditions must be met in order to recognize revenue: 1. Persuasive evidence of an arrangement exists: although the case does not provide extra information on this aspect, it seems clear that there is an ongoing relationship between Biovail and the Distributor and that certainly there was a bill, purchase order and/or invoice in order to support this sale. 2. Seller’s price to the buyer is fixed or determinable: the case provides clear evidence in this aspect. 3. Collection is reasonably assured: given the ongoing relationship between Biovail and the Distributor, it appears evident that this aspect was probably covered as well. 4. Delivery has occurred or services have been rendered: this is the key point of conflict in the Biovail’s case. There are basically two different moments of revenue recognition according to the FOB condition: A . FOB Shipping: The Company should recognize revenue at the moment/in the period in which product leaves Biovail shipping dock at the warehouse since in that precise moment both ownership and responsibility over the goods is transferred from Biovail to the client. b. FOB Destination: The Company should recognize revenue at the moment/in the period in which product is delivered to the Distributor’s facility since in that precise moment both ownership and responsibility over the goods is transferred from Biovail to the client. 3. How does the accident affect the stated revenues under the different FOB contract structures? Explain your reasoning. Given the facts and information presented in the case, Biovail should have recognized revenue following the FOB Destination structure. However, Biovail recognized revenue as if it was operating under FOB shipping, probably in an attempt to boast revenue for the period. Under GAAP, revenue may be recognized on the sale of a product like Wellbutrin XL when, among other things, delivery of the product by the seller to the buyer has occurred. Biovail's agreement with the distributor stated that all deliveries of WellbutrinXL were "F.O.B. Destination. The "F.O.B. Destination" delivery term means that delivery occurs and revenue may be recognized only when the product reaches the buyer's facility. Thus, the truck accident could not have impacted Biovail's third quarter financial results.

COMPLIANCE WEEK Bruce Carton | September 16, 2010 Yesterday, the SEC announced a settlement in its case against John Miszuk, former controller and VP at Biovail Corp. The SEC alleged in 2008 that back in the second quarter of 2003, Miszuk and others engaged in two separate accounting fraud schemes that resulted in Biovail materially misstating its financial statements by overstating its revenue and understating its loss for that quarter. The SEC noted that its case against former Biovail chairman and CEO Eugene N. Melnyk and former CFO Brian Crombie "remains pending." One of the schemes that Melnyk, Crombie and others allegedly carried out--the now-famous "truck accident" scheme--is particularly interesting and has the makings of a great law school exam question. The SEC's complaint states that on September 30, 2003, a truck carrying $5 million worth of Biovail's Wellbutrin XL product left its Steinbach, Manitoba, plant bound for the North Carolina facility of one of Biovail's major distributors. On October 1, however, while en route to North Carolina, the truck was involved in a traffic accident on a highway in Illinois, destroying the Wellbutrin XL. Soon thereafter, Melnyk, Crombie and others allegedly made numerous public statements "declaring that the loss of revenue and income associated with the truck accident contributed significantly to Biovail's substantial revenue shortfall for the third quarter of 2003 in the amount of $10 million to $20 million, or about 23% to 38% of the total announced revenue shortfall for the quarter." The SEC charged, however, that these statements were materially false and misleading for two reasons: 1. Under GAAP, revenue may be recognized on the sale of a product like Wellbutrin XL when, among other things, delivery of the product by the seller to the buyer has occurred. Biovail's agreement with the distributor stated that all deliveries of Wellbutrin XL were "F.O.B., [the Distributor's] facilities in the U.S.A. (freight collect)." As the SEC points out, and as I very vaguely recall from my U.C.C. class in law school, the "F.O.B. Destination" delivery term means that delivery occurs and revenue may be recognized only when the product reaches the buyer's facility. Thus, the SEC alleged, the truck accident could not have impacted Biovail's third quarter financial results because the truck left Manitoba for North Carolina on September 30--too late to possibly reach North Carolina prior to the end of the quarter. 2. The SEC also alleged in its complaint that even if the the shipping terms had been "F.O.B. Biovail," meaning that Biovail could have recognized the revenue from the sale at the moment the product left Biovail's facility, the truck accident still could not have impacted Biovail's third quarter financial results. The SEC alleged that even in this scenario, "the truck accident would have had no impact on Biovail's third quarter financial results because the title to the product -and the risk associated with the accident -would have passed to the Distributor as soon as the truck left Biovail's Manitoba plant. Under those circumstances, Biovail could have recognized revenue resulting from the shipment regardless of the accident."