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Hearts 'R Us

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by

Ashley Chan

on 26 April 2016

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Transcript of Hearts 'R Us

add logo here
Hearts 'R Us
How should Hearts account for the preferred shares upon issuance? (continued)
If accounted for as a liability...

Per ASC 480-10-25-8:
An entity shall classify as a
liability
(or an asset in some circumstances) any financial instrument, other than an outstanding share, that, at inception, has both of the following characteristics:


a. It embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation.


b. It requires or may require the issuer to settle the obligation by transferring assets.

How should Hearts account for the preferred shares upon issuance? (continued)

Listed as preferred shares on equity section of Balance Sheet at $3.5 million.

According to ASC 505-10-50-3, the rights and privileges of the preferred shares would be disclosed.

According to ASC 505-10-50-11, disclose the redemption requirements.

What should Hearts do now to account for the Preferred Shares?

After Year 4, Hearts is still in the process of filing for FDA approval; however the clinical testing and administrative process for filing for the FDA approval have taken much longer than initially anticipated.
The Company has determined that it is certain the product will not receive FDA approval by end of Year 5.

Due to the product not receiving FDA approval,
should the preferred shares be listed as outside permanent equity or as a liability?

How should Hearts account for the preferred shares upon issuance?
Should Hearts account for the preferred shares as liability or equity, given that they are not a SEC registrant?
What should Hearts do now to account for the Preferred Shares? (continued)

What would be the effect on the Financial Statements and what would be the disclosure requirements?
Would you answer for #1 change of Hearts were subject to SEC requirements? (continued)
Since Hearts is now subject to the SEC, would the preferred shares be considered equity or a liability?
What should Hearts do now to account for the Preferred Shares? (continued)
According to ASC 480-10-65-1:

For instruments that are mandatorily redeemable on fixed dates for amounts that either are fixed or are determined by reference to an interest rate index, currency index, or another external index, the classification, measurement, and disclosure provisions of this Subtopic were effective for fiscal periods beginning after December 15, 2004.


What should Hearts do now to account for the Preferred Shares? (continued)
According to ASC 480-10-S99-3A-2:

Preferred securities that are redeemable for cash or other assets to be classified outside of permanent equity if they are redeemable...

(1) at a fixed or determinable price on a fixed or determinable date,

(2) at the option of the holder, or

(3) upon the occurrence of an event that is not solely within the control of the issuer.
Background
How should Hearts account for the preferred shares upon issuance? (continued)

If accounted for as a equity.

Per ASC 480-10-65-1:
The effective date of this Subtopic is deferred for mandatorily redeemable financial instruments issued by nonpublic entities that are not Securities and Exchange Commission (SEC) registrants, as follows:

For instruments that are mandatorily redeemable on fixed dates for amounts that either are fixed or are determined by reference to an interest rate index, currency index, or another external index, the classification, measurement, and disclosure provisions of this Subtopic were effective for fiscal periods beginning after December 15, 2004.


Would you answer for #1 change of Hearts were subject to SEC requirements? (continued)
For the preferred shares to be listed as a liability.

Per ASC 480-10-25-8:

An entity shall classify as a liability (or an asset in some circumstances) any financial instrument, other than an outstanding share, that, at inception, has both of the following characteristics: a. It embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation. b. It requires or may require the issuer to settle the obligation by transferring assets.


Would you answer for #1 change of Hearts were subject to SEC requirements? (continued)

For the preferred shares to be listed as an equity.

Per ASC 480-10-25-5
: “A financial instrument that embodies a conditional obligation to redeem the instrument by transferring assets upon an event not certain to occur becomes mandatorily redeemable if that event occurs, the condition is resolved, or the event becomes certain to occur.”

Per ASC 480-10-25-7: “If a financial instrument will be redeemed only upon the occurrence of a conditional event, redemption of that instrument is conditional and, therefore, the instrument does not meet the definition of mandatorily redeemable financial instrument in this Subtopic.”


Would you answer for #1 change of Hearts were subject to SEC requirements? (continued)

This would be listed in the equity section as preferred shares at $3.5 million.

Per ASC 480-10-50-1, the disclosure notes will include “the nature and terms of the financial instruments” and “the rights and obligations embodied in those instruments, including both:

1. Settlement alternatives, if any, in the contract

2. The entity that controls the settlement alternatives.”


By: Ashley Chan, David Galindo, Muhammad Siddiqui, Anam Vohra, & Kohsuke Yoshimune.
What would be the effect on the Financial Statements and what would be the disclosure requirements?
The shares will be classified as a liability, equity amount will decrease $3.5 million and the liability section will increase $3.5 million.

According to ASC 505-10-50-3, in the disclosure notes it should mention the rights and privileges of the preferred shares.

According to ASC 505-10-50-11, they should disclose the redemption requirements of the stock that is redeemed.

What would be the effect on the Financial Statements and what would be the disclosure requirements?

Conclusion
-Early stage R&D medial device company
-Heart Valve System
-Bionic Body interest
-3.5M Series A Preferred shares ($1 par value per share)
- Discussed different alternatives on accounting for Series A preferred shares sold to Bionic Body

- Not SEC registrant = classified as equity

-IF subject to SEC = classified as equity

- If no FDA approval = classify as liability, mandatorily redeemable

Full transcript