Biovale casestudy
Question one
(a)
The current revenue recognition policy of Biovail is “Free On Board” (FOB) which states that in which point shipper can transfer the responsibility and the ownership of goods to the buyer. There are two possibilities of FOB. When the contract use “FOB shipping point”, the seller has the responsibility for the goods until the goods leave the seller’s dock. Alternatively, when the contract uses “FOB destination”, before the buyer takes the possession, the seller still keeps the responsibility for the goods.
According to the facts of the case, Biovail’s most recent filing with the U.S. Securities
Exchange Commission stated that they used“FOB shipping point” to recognize product sales revenue and they have no responsibility to shoulder any risk of loss or other future problems when the product was shipped to the distributor . In the earnings guidance, Brian Crombie still told analysts that the contract between Biovail and the Distributor is based on“FOB shipping point”, which means Boivail would recognize the revenue when the goods left the shipping dock and the title is changed to the distributor. However, Brian Crombie did not know that the agreement between
Biovail and the distributor is using“FOB destination”, which means the responsibility, the risk of loss of the product should not have passed to the distributor until they received the product, so Boivail should recognize product sales revenue when the product are delivered to the distributor.
To sum up, in general, Boivail uses“FOB shipping point” to recognize product sales revenue, but this contract between Boivail and the buyer is based on“FOB destination”, which means Biovail’s chief financial officer, Brian Crombie has to correct the statement about the revenue in using “FOB destination”. Brian Crombie should recognize sales revenue when the distributor received the product.
(b)
FOB Biovail
Ownership transfers?
FOB Destination
upon shipment
upon delivery
(a)
The current revenue recognition policy of Biovail is “Free On Board” (FOB) which states that in which point shipper can transfer the responsibility and the ownership of goods to the buyer. There are two possibilities of FOB. When the contract use “FOB shipping point”, the seller has the responsibility for the goods until the goods leave the seller’s dock. Alternatively, when the contract uses “FOB destination”, before the buyer takes the possession, the seller still keeps the responsibility for the goods.
According to the facts of the case, Biovail’s most recent filing with the U.S. Securities
Exchange Commission stated that they used“FOB shipping point” to recognize product sales revenue and they have no responsibility to shoulder any risk of loss or other future problems when the product was shipped to the distributor . In the earnings guidance, Brian Crombie still told analysts that the contract between Biovail and the Distributor is based on“FOB shipping point”, which means Boivail would recognize the revenue when the goods left the shipping dock and the title is changed to the distributor. However, Brian Crombie did not know that the agreement between
Biovail and the distributor is using“FOB destination”, which means the responsibility, the risk of loss of the product should not have passed to the distributor until they received the product, so Boivail should recognize product sales revenue when the product are delivered to the distributor.
To sum up, in general, Boivail uses“FOB shipping point” to recognize product sales revenue, but this contract between Boivail and the buyer is based on“FOB destination”, which means Biovail’s chief financial officer, Brian Crombie has to correct the statement about the revenue in using “FOB destination”. Brian Crombie should recognize sales revenue when the distributor received the product.
(b)
FOB Biovail
Ownership transfers?
FOB Destination
upon shipment
upon delivery