Table of content Introduction -------------------------------------------------------------------------------------------- 2

Question 1 ---------------------------------------------------------------------------------------------- 3

Question 2 ---------------------------------------------------------------------------------------------- 4 - 5

Question 3 ---------------------------------------------------------------------------------------------- 6

Question 4 ---------------------------------------------------------------------------------------------- 7 - 8

Introduction Biovail Corporation is Canada's largest publicly traded pharmaceutical company. Biovail Corporation is a specialty pharmaceutical company that applies advanced drug-delivery technologies to improve the clinical effectiveness of medicines. The Biovail Corporation, engages in the formulation, clinical testing, registration, manufacturing, and commercialization of pharmaceutical products utilizing various drug-delivery technologies as well offering clinical trial and research services to third party companies in the United States and Canada. At the end of September 2008, Biovail had $219 million in cash and $23 million in marketable securities. In addition, the Company has no long-term debt and no outstanding borrowings under its credit facility. Biovail receive bad impact when one of the trucks carrying a shipment of Wellbutrin XL was involved in a traffic accident near Chicago. After the truck accident, the company have the problem with their recognition of the profit whether they should realize or not the revenue for the third quarter. The issue for the company is the concepts of revenue recognition that have been apply in the company to show their financial results. Should Biovail Corporation recognize its revenue using FOB shipping point or FOB destination. David Maris suspects that Biovail Corporation might have manipulated the result of their financial statement. This refers to fraudulent accounting of Biovail Corporation. David Maris, an analyst at Banc of America Securities (BAS) has investigate that Biovail might have significantly overestimated the amount of Wellbutrin XL on the truck.

Question 1 How much truckload of product are actually required to carry $10million of product? Show your calculations. The information given that the size of the Wellbutrin XL tablet is 1.5 cm which already include the packing space. The 18-wheeler trailers volume is 17m x 4.5m x 2.5m. First of all, we need to convert the unit of meter to centimeter in order to continue with the calculation. The volume of the 18-wheeler trailer will become 1,700cm x 450cm x 250cm which is equals to 191,250,000 cm. Next, we need to find out how many Wellbutrin XL tablets are able to fit into the trailer. The calculation will be 1.5x cm = 191,250,000 cm, where the x is equal to 191,250,000 cm divided by 1.5 cm. Total 127,500,000 Wellbutrin XL tablets are able to fit into the trailer. After that, we will calculate the revenue that Biovail can earn from the single tablet. The information given that the price of single tablet is $2.83, mark-up is 400% and 35% margin for Distributors. The 35% margin for Distributors is equal to $2.83 divided by 135% which is $2.10. Then the mark-up 400% is equal to $2.10 divided by 500% which is $0.42. The total value of the Wellbutrin XL tablet can be loaded in the 18-wheeler truck is equal to 127,500,000 x $0.42 which is $53,550,000. Based on the calculation above, one full loaded truck is able to carry $10million worth of Wellbutrin XL tablet.

Question 2 How should the company recognize revenue based upon the two possible FOB contract structures mentioned in the case? Why? According to Generally Accepted Accounting Principles (GAAP), few circumstances need to meet to recognize revenue is influential the proof of a plan exists where even though the case does not provide additional on this side. Besides that, it seems clear that there is a continuing relationship between Biovail Corporation and the distributor. This will definitely support by a bill, invoice or purchase order in order to upkeep this sale. The other circumstance that must be seen to recognize revenue is the vendors bill to the buyer must be determinable or else fixed; this case gives clear evidence in this aspect. Furthermore, the collection is practically assured where it is proven through the ongoing positive relationship between the Biovail Corporation and the distributor. In this Biovail Corporation, the delivery has happened or services have been rendered. There are fundamentally two possible FOB Free on Board or Freight on Board contract structures stated in the case are FOB shipping point and FOB destination. FOB shipping point indicates that the buyer takes concern of the goods once the belongings leave the sellers buildings whereas the FOB destination designates that the vendor still accountable for the goods until the buyer takes ownership. It can also be used to identify who is responsible for loading and unloading costs. Under the FOB shipping point, the company should recognize revenue at the same day in which the product leaves Biovail Corporation shipping dock as the sales arrangement was fulfilled, service rendered and a determinable sales price established. The ownership over the goods is transferred from Biovail Corporation to the client. Under the FOB destination, Biovail Corporation can only recognize the revenue up to the shipment reached to the distributor. A contract service is rendered and the revenues are earned until shipment arrival. However, Biovail Corporation recognized revenue as if it was operating under FOB shipping, probably in an attempt to boast revenue for the duration. Based on the circumstances of this case, Biovail Corporation should recognize revenue thru FOB shipping point where the contract between Biovail Corporation and the distributor provided that
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title to and risk of loss with respect to and the product would not have passed to the Distributor until the product was delivered to the distributors facility. In this situation using the GAAP requests, the revenue cannot be recognized as the seller has not done everything obligatory under the sales contract. In sales contract, the title and risk of the shipment remains the sellers until received by the buyer. Thus, Biovail Corporation is liable for shipping incidents. In addition, Biovail Corporations stock is listed on the NYSE and must be accept by the U.S GAAP. Besides that, GAAP is not law and it does not allow for the corporate discretion; the Biovail Corporations antagonistic accounting practices should give rise to concern. GAAP does not allow companies flexibility in some areas such as estimations regarding time and future costs. The company would risk outside of this flexibility and violate GAAP if it were to deliberately recognize revenues constricted under FOB destination as soon as the shipment left its docks. In this situation, it would incorrectly affect such reports as revenues and earnings per share for the third and fourth quarters.

Question 3 How does the accident affect the stated revenues under the different FOB contract structures? Explain your reasoning. Based on the facts and information given 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. According to GAAP, the revenue on the sale of a product like Wellbutrin XL tablets can be recognized when the delivery of the product by the seller to the buyer has occurred. The agreement between Biovail with the distributor clearly stated that all deliveries of Wellbutrin XL tablets were "F.O.B. Destination which means that when the delivery has occurred, the revenue can only be recognized when the product reaches the buyer's facility safely. After the case has been analyzed, the accident of the truck would not have much impact on the third quarter financial results of Biovail as the truck was left for North Carolina on September 30 which it was already late to reach North Carolina prior to the end of the quarter. From the other point of view, even if the terms had been "F.O.B. Shipping," which means that revenue from the sale was being recognized by Biovail at the moment the product left Biovail's facility. The accident of the truck still would not have much impact on the third quarter financial results of Biovail. Besides that, the title to the products and the risk associated with the accident would be passed to the Distributors as soon as the truck left Biovails facility. In addition, for those powerful Distributors would be willing to bear with the risk which associated with FOB shipping, small and medium size distributor would normally prefer FOB destination as the cost involved is high.

Question 4 Are you concerned about the companys treatment of analyst who cover the stock? Would you want to be an analyst covering this company? As this is related to my employment and reputation, I am really concerned about Biovail Corporations treatment of analysts who cover the stock. As referring back to this case, I would not want to be an analyst covering Biovail Corporation. Biovail Corporation has a very bad company culture and management control. Besides that, this company utilizes an aggressive accounting system and also with insufficient disclosure. In April 2002, Jerry Treppel, Mariss predecessor at BAS found that the earning quality of Biovail Corporation was low and the accounting information was really not clear. The truck accident that significantly contributed to this unfavorable variance and Biovail Corporation did not comply with GAAP policy and tended to inflate the revenue during the truck accident incident. Other than that, Biovail Corporation denied its incorrect accounting by issuing an argument to public right after Jerry Treppel writing a sell recommendation. This will definitely give the public a picture of the deceitful control and culture. Besides that, uneven information exists internally throughout the process of agreement with the distributor. Moreover, Crombie the employee from the distributor had no clue of the email sent from distributor to verify the agreement. This definitely indicates the management control system of Biovail Corporation is immature and it has lacks of a good communication between coworkers. In addition, I am very worried about the report that Biovail provides are fair and true and if it is not then it will cause an ethical dilemma to me. As an analyst, I will be a responsible and honest towards my job. I am very conscious on disclosing everything that I have seen and will provide an objectively fair report. This will show a professional analyst through disclosing the misleading financial statements evidence of Biovail Corporation to tell the truth to the public and make the sell recommendation. I will definitely support the truth even though my position in danger and which will cause me to end with uncomfortable circumstances. The past treatment to Jerry Treppel from Biovail Corporation makes me worry about my employment. This happened right after Jerry Treppel doubted about the information disclosed by Biovail Corporation and wrote a sell recommendation.
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