Hearts 'R Us Preferred Stock Classification

3636 Words Dec 20th, 2015 15 Pages
MEMO

To: Borg

Re: Preferred stock classification

Facts
Borg (the Company) is an early-stage research and development medical device company. Borg has no current products in the marketplace but is in the final stages of going to market with the Heart Valve System. All preliminary trials have been approved by the FDA, and the Company is in the final trial; once the final trial is complete, the Company will present the product to the FDA for final approval. If approved by the FDA, the Heart Valve System will revolutionize the way medical professionals repair heart valve defects.
Bionic Body (“Bionic”), a SEC registrant, is a biological medical device company that focuses on the development of implantable biological devices, surgical
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For this reason, among others, Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Section 480 contains extensive guidance on distinguishing liabilities from equity. However, it is first necessary to determine if this Code section is applicable. ASC 480-10-15-3 states:
The guidance in the Distinguishing Liabilities from Equity Topic applies to any freestanding financial instrument, including one that has any of the following attributes: a. Comprises more than one option or forward contract
The Shares that Borg sold to Bionic contain both a mandatory conversion right and a contingent redemption right meaning that the Shares possess both a conversion option and an embedded put option (the holder can force redemption on the seller). These features are embedded in the host contract that the Shares represent. It would therefore be appropriate to apply the guidance of ASC section 480. To aid in the application of this guidance, Ernst & Young provides a flowchart in their publication, Issuer’s Accounting for Debt and Equity Financings (October 2015), Section 3.2 that is included at the end of this memo.
ASC 480-10-25-4 specifies that, “a mandatorily redeemable financial instrument shall be classified as a liability…” The Shares in this case possess a contingent redemption right wherein the Shares will be redeemed on the fifth anniversary of the date of purchase if the Heart Valve System that Borg

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