Heart R Us

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Background Hearts ‘R Us (Hearts) is a private early-stage R&D company in the final trial of a medical device that will revolutionize the way heart valve defects are repaired – the Heart Valve System (HVS). Hearts has secured financing by issuing $3.5 million of Series A preferred shares ($1 par value) to Bionic Body (Bionic), an SEC registered company that produces medical devices, one of which could be used as supplement to the HVS. For its considerations, Bionic received a seat on Hearts’ Board of Directors, protective rights for its investment percentage (can limit future equity/debt issuances), and both the right of first refusal to purchase and co-sale on sale of shares by key share-holders. Bionic’s shares will be…show more content…
Is the embedded derivative closely related? In the event it is, the contract cannot be bifurcated and must be considered as a whole, though ASC 815-40-15-2 discusses contracts that are indexed to and potentially settled in an entity’s stock. Additionally, ASC 815-15-35-2 offers an alternative solution if the embedded derivative cannot be reliably measured or identified, and that is to assign a fair value to the entire contract, with gains and losses across reporting periods flowing through earnings. ASC 480-10-10-1 gives the objective of ASC 480 as the requirement to classify as a liability a freestanding financial instrument that embodies obligations for the issuer. It states in ASC 480-10-15-3 that freestanding financial instrument could include one with traits of equity and liability. It places a restriction on these instruments in ASC 480-10-15-5 by disallowing features embedded in a financial instrument that is not, in its entirety, a derivative, making the use of ASC 480 an all-or-nothing proposition since the guidance encompasses the financial instrument in its entirety (ASC 480-10-25-1). The contract between Hearts and Bionic contains obligations as defined by the ASC 480 that are conditional and/or unconditional, such as the contingent redemption right. ASC 480-20-30-7 requires fair value for financial instruments under ASC 480. Question 2 At issue here

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