FINANCIAL ACCOUNTING

Case 2

BIOCON Done By: Aayushi Trivedi, Chinmay

Somani, Shivansh Agarwal, Shreya
Anturkar, Tanvi Kadukar,Vatsal Shah,
Yash Saraogi
 INTRODUCTION
In the year 2011, Biocon mentioned in their annual report that it has
the capacity to bring a bright future to diabetes care with the help of
Pfizer.

Biocon commercialized it’s insulin products worldwide with the

partnership of Pfizer.

In 2012, this agreement was terminated due to change in priority

within Pfizer’s biosimilars division which led preference to in house
biosimilars programs.

Method used by Biocon to show the amount received from Pfizer

was percentage completion method (revenues and expenses of
long-term contracts are recognized as a percentage of the work
completed during the period).
 Evaluation of Biocon’s Accounting
Compensation received from Pfizer: $164mn from which $34mn was accounted by percentage of completion method. Remaining

$130mn was not realized. Biocon said that it will continue to develop insulin portfolio and will set off the retained income against

expenses.

Biocon has also not factored in its P&L the $200-million upfront milestone payment it received from Pfizer when the insulin deal

between the two companies was called off. Instead, it chose to keep it in its balance sheet and recognize it with R&D costs.*

The deal was not an outright licensing deal, but a development licensing deal (Biocon showed unearned revenues in its balance

sheet on the liabilities side) that mandated Biocon to incur development costs.
*Ref. (
https://www.business-standard.com/article/companies/i-bank-espirito-santo-concerned-at-biocon-s-accounting-processes-112052200042_1.ht
ml
)
Our take on brokerage’s views
Brokers view: the company should have taken the amount of upfront fee as an exceptional item instead of
deferring it to future periods commenting that the accounting policy.
In accrual accounting, revenue is only recognized when it is earned. If a customer pays for goods/services in
advance, the company does not record any revenue on its income statement and instead records a liability on
its balance sheet.* On the basis of this we agree to the broker’s view.
Generally, deferred revenue is recognized (periodically) on the income statement to the extent the revenue is
"earned." Biocon simply bypassed the deferred revenue account all together and posting it directly to revenue
on the income statement, therefore this is aggressive accounting and this effectively overstates sales revenue.

*Ref. (https://cleartax.in/s/gaap-india)
 Comments on Auditor’s Position
◦ Auditors, S R Batliboi Associates expressed an opinion and tried to throw focus on the decision of Biocon’s
management to defer recognition of amounts in the consolidated statement of profit and loss.

◦ The auditor in his opinion has aptly brought to light the matter of deferred revenue by referring to note
41 which shows that inclusion of deferred revenue shown in the consolidated profit and loss account.
Thus, we believe this deferred revenue might lead to an overstatement of sales revenue in Biocon’s
financial statement.