Case 13 Hearts

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Whitney Steele Case 13-03 Hearts ‘R Us Preferred Stock Classification 2/16/2015 To: Hearts ‘R Us From: 5110 Whitney Steele Re: Preferred Stock Classification Date: February 16, 2015 Background Hearts ‘R Us (the Company) is an early stage, non-public research and development medical device company. They are in the final stages of going to market with the Heart Valve System. Bionic Body (Bionic), a SEC registrant, could benefit from the approval of the Hear Valve System and will help finance. Hearts sold Bionic $3.5 million of Series A Preferred Shares (Shares) of the Company with a par value of $1 per Share. The transaction was completed on November 30, 2011. As part of the stock purchase agreement, Bionic has the following rights:…show more content…
ASC 480-10-15-3 Distinguishing Liabilities from Equity applies because the preferred shares has “characteristics of both a liability and equity and, in some circumstances, also has characteristics of an asset (for example, a forward contract to purchase the issuer’s equity shares that is to be net cash settled).” Also ASC 480-10-25-4 states “mandatorily redeemable financial instrument shall be classified as a liability unless the redemption is required to occur only upon the liquidation or termination of the reporting entity.” The Shares are not considered mandatorily redeemable at issuance according to 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.” The Shares will be redeemed only upon the occurance of the Contingent Redemption Rights, so the Shares again are not considered mandatorily redeemable financial instruments meaning it is not classified as a liability. Since it is not certain that the Company will not receive FDA approval at issuance, the preferred stock can be considered equity. If by the fifth year the FDA does not approve the product, the Company will have to reclassify the Shares from equity to a liability. This is shown according to the second
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