Discuss if a financial instrument is mandatory redeemable.

ACC 420 – Spring 2015
ASC Research Assignment #2

General Instructions
In this assignment, you will use the Accounting Standards Codification (ASC) to research an accounting issue. In the Website Links folder on Blackboard, I have included the link to the ASC along with the username and password you will need to login.

Background
Assume you are a staff accountant for High Tech Inc., a nonpublic company. Ron Lennon, CFO of High Tech, has asked you to research the accounting for High Tech’s Series A Preferred Stock. Information about the stock follows:

1. Series A Preferred Stock was issued in 2013.
2. Series A contains a provision which requires High Tech to redeem the shares in cash if High Tech receives final FDA approval for a new medical device that High Tech is developing. The redemption must occur within one year of final FDA approval.
3. Preliminary trials of the device were successful and were approved by the FDA.
4. The final trial of the device was very successful, and the results of that trial were submitted to the FDA at the beginning of 2015. The FDA staff has been performing its review of the results from the final trial of the device, and feedback from the FDA staff has been extremely positive. Based on discussions with the FDA staff, High Tech expects the FDA to provide final approval of the device in December 2015.
5. In 2013 and 2014, High Tech classified the Series A preferred stock shares in the stockholder’s equity section of its balance sheet. A disclosure in the notes to the financial statements outlined the provisions of the conditional redemption of the shares.

Lennon wants to know how the shares should be classified during the period between FDA approval, if it happens, and the subsequent redemption of the shares. He is uncertain if the stock should be considered mandatorily redeemable preferred stock, and he also wants to know how to account for any change in the classification in the shares.

Research Instructions
Access the ASC and research this topic. Hint: Distinguishing between liabilities and equity is covered in Topic 480 of the ASC. Use the Join all Sections feature to compile all of the guidance on the topic. Once all sections have been joined, look for the Print icon at the bottom of the page. Scroll over the icon and click on Printer Friendly. You don’t have to print the guidance, but taking these steps will make the guidance easier to read. Read the ASC guidance and apply it to the above situation.

Memo Requirements
1. Write a memo from you (as a High Tech Inc. staff accountant) to Ron Lennon, CFO of High Tech Inc. which:
a. Provides Lennon with a summary of the ASC guidance explaining
i. how to decide if a financial instrument is mandatorily redeemable
ii. how to classify a financial instrument that is mandatorily redeemable
iii. how to classify a financial instrument that has a conditional obligation to redeem the instrument
iv. how to account for a change in the classification of a redeemable financial instrument
b. Applies the ASC guidance to High Tech’s Series A Preferred Stock, recommends a classification for the stock in the December 31, 2015 balance sheet, and explains how to account for a change in classification of the stock (if you recommend a change).
Note: Your recommendation must be supported by a strong rationale that is well grounded in the ASC guidance.
2. YOU MUST USE THE ASC as the basis for this memo. Do not pull information from other sources (such as your textbook) if the information is available in the ASC. Cite the sources of any ASC guidance or other information you use in your memo. When citing the ASC, you should state the topic, subtopic, section, and subsection that you are using. You may cite ASC sources with in-text citations immediately following the appropriate sentence in the memo or in an endnote. If you use sources other than the ASC, provide the full citation in a reference list or in an endnote. Refer to Appendix 8 – E in the May & May text for guidance on using endnotes.
3. Do not Cut and Paste large sections of the ASC. As much as possible, paraphrase the ASC guidance.
4. For help with the format of the memo, refer to Chapter 10 in the May & May writing handbook.
5. For help in writing concisely, refer to Chapter 4 in the May & May writing handbook.
6. If you have trouble with grammar, refer to Chapter 5 in the May & May writing text.
7. To ensure that your memo fits what I expect, refer to my GUIDELINES FOR WRITING BUSINESS MEMOS that I have posted on Blackboard.
8. The maximum length of the memo (excluding endnotes or reference list) is two, single-spaced pages.
9. Your score on this assignment will be based on the quality of your communication as well as the quality of your content.

THIS IS AN INDIVIDUAL ASSIGNMENT. DO NOT CONSULT WITH ANYONE ELSE AS YOU COMPLETE THIS ASSIGNMENT.