2. How should the company recognize revenue based upon the two possible FOB contract structures mentioned in the case? Since Biovail’s stock is publically owned it needs to file its financial statements with the SEC. The SEC requires that it abide by GAAP. GAAP requires that revenue be recognized when it is earned or realized. Meaning that the company has done everything it is supposed to do; which would include shipment. So Biovail should recognize revenue once its products have reached the Distributor’s FOB.
3. How does the accident affect the stated revenues under different FOB contract structures? Explain your reasoning? If Biovail recognizes revenues when the product leaves Biovail’s FOB shipping point then it is recognizing revenue before it has been earned and realized. Thus abusing accounting accruals and overstating revenues and net income on financial statements, consequently giving stakeholders misleading information. On the other hand, if Biovail recognizes revenue when the product has reached the Distributor’s FOB destination it has recognized revenue when it has been earned and will accurately state revenues and net income on its financial statements.
4. Are you concerned about the company’s treatment of analysts who cover the stock? Would you want to be an analyst covering this company? Yes, it is of concern that Biovail would single out analysts who would downgrade stock recommendations. I would not want to be an analyst covering their stock because it would put me in an uncomfortable position. If there was evidence that Biovail had misleading financial statements my integrity would tell me to tell the truth and give an honest recommendation. However, I would be worried because I would not want an investigation tainting my innocent name and leading to separation from my employment.