Biovail Corporation’s Truck Accident: Revenue Recognition and FOB Sales Accounting
Biovail Corporation, a major Canadian pharmaceutical company listed on the New York Stock Exchange, announces that it will miss its quarterly earnings target by $25 to $45 million, blaming $10 to $15 million of the shortfall on a truck accident involving a shipment that left its facility on the last day of the quarter. The case was ultimately prosecuted by the U.S. Securities and Exchange Commission (SEC). The case is centered on the question of revenue recognition and how the company should have accounted for the sales (FOB company or FOB destination). However, it also provides a rich setting permitting exploration of peripheral topics around the ethics of earnings management. For example, the case discusses stock analysts' reactions to the announcement; questions how much product was actually in the truck; questions how aggressively the company responds against the analysts who downgrade the stock; and highlights the role of the SEC in enforcement. The primary objective is to explore the concepts of revenue recognition. Secondary points of interest include management of information flows to the capital markets, relationships with analysts and the enforcement role of the SEC
Chapman, Craig. 2009. Biovail Corporation’s Truck Accident: Revenue Recognition and FOB Sales Accounting. Boston, MA: Harvard Business Publishing, Case 4011.