BIOVAIL CORPORATION: REVENUE RECOGNITION AND FOB SALES ACCOUNTING EXECUTIVE SUMMARY Largest publicly traded pharmaceutical companies. Expertise in the development and large- scale manufacturing pharmaceutical product. In 2003, truck carrying shipment involved in multi-vehicle traffic accident. Accounting policies based on revenue recognition. Freight On Board (FOB) : FOB shipping point FOB destination STATEMENT OF THE PROBLEM Revenue recognition. misscommunication between the staff misstatement to recognize either FOB shipping point or FOB destination Overestimated the products in trucks revenue overestimated by $5 million CAUSE OF THE PROBLEM Revenue recognition Four conditions must be met. 1. Persuasive evidence of an arrangement exists. 2. Seller's price to the buyer is fixed or determinable 3. Collection is reasonably assured
4. Delivery has occures or services have been rendered FOB shipping point: recognize revenue at the moment when the product leaves Biovail shipping docks at the warehouse. FOB destination: recognize revenue at the moment when the product is delivered to the Distributor's premise.
DECISION CRITERIA AND ALTERNATIVE SOLUTIONS Enhance the Internal Control make sure employees to be employed independent and free from bias manage risks by determine level of risk tolerance periodic testing of effectiveness and efficiency RECOMMENDATION Pay attention to the content of the agreement Alert to the revenue recognition - hire another staff or professional staff Avoid fraud