Biovail Case, Question 2

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. Sellers 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 Biovails 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 Distributors facility since in that precise moment both ownership and responsibility over the goods is transferred from Biovail to the client.

Biovail Case, Question 3

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 Wellbutrin XL 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

because the truck left for North Carolina on September 30--too late to possibly reach North Carolina prior to the end of the quarter. Even if the terms had been "F.O.B. Shipping," 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 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 plant. Under those circumstances, Biovail could have recognized revenue resulting from the shipment regardless of the accident." Additional comments - Only big distributors would be willing to run the risk associated with FOB shipping; smaller distributors would likely prefer FOB destination. Given the high cost involved.