Hearts R Us (Hearts or the Company) is an early-stage research and development medical device company. Hearts 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. There are two other companies with similar products under development. Bionic Body (Bionic), a SEC registrant, is a biological medical device company that focuses on the development of implantable biological devices, surgical adhesives, and biomaterials. Bionic could benefit from the approval of the Heart Valve System since it has a supplementary device that could be used in tandem with the Heart Valve System. Bionic is not a direct competitor of Hearts. As part of a financing strategy to support its operations, Hearts sold Bionic $3.5million of Series Preferred Shares (the Shares) of the Company with a par value of $1 per Share. The transaction was completed on November 30, 2018. As part of the Series A Preferred Stock purchase agreement, Bionic has the following rights: Board RightsAs the holder of the preferred stock, Bionic is entitled to appoint one member to the Companys board of directors (the Board). In addition, Bionic has the right to appoint an observer to receive all information provided to the Board and to be present at meetings of the Board. This is the first time the Company has allowed an outside member on its Board. Mandatory Conversion RightThe Shares will be converted to the Companys common stock upon execution of an initial public offering (IPO) that nets at least $50 million in proceeds. Contingent Redemption RightThe Shares will be redeemed for par value on the fifth anniversary of the date of purchase conditioned upon the event that Hearts has not obtained FDA approval for the Heart Valve System. Additional Protective RightsBionic has the right to limit future equity and debt issuances as well as the right to participate in future funding rounds to protect its investment percentage. Right of First Refusal and Co-Sale RightsBionic has the right of first refusal to purchase and right of co-sale on sale of shares by identified key holders of Hearts shares. At this time, Bionic is not certain whether it will exercise the first refusal right. The Company is a calendar year-end company. The Company plans to go through an IPO in the near future and Hearts management (Management) has begun to think about how it may record its transactions in accordance with the applicable U.S.GAAP for public registrants. Currently, Hearts prepares financial statements to comply with the covenants of its outstanding debt, but such financial statements are not required to be filed with the SEC. Hearts is not required to comply with SEC regulations when preparing financial statements and currently has not elected to do so. However, Hearts does currently use social media to discuss its developments. Required: 1. Research how Hearts should account for the Series A Preferred Shares upon issuance under U.S. GAAP and IFRS. 2. Describe how your answer to Requirement #1 would change if Hearts was subject to SEC requirements. 3. After year 4, Hearts has determined that it is certain the product will not receive FDA approval by the end of Year 5. What, if anything, should Heart do now to account for the Series A Preferred Shares under U.S. GAAP and IFRS?