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\fGAAP, IFRS GUIDELINE The research assignments must be completed by using the FASB Accounting Standards Codification and/or IFRS. For the access to the FASB Codification database, please log in at http://www2.aaahq.org/ascLogin.cfm using the following: User ID: AAA52079 Password: jA76FVr The IFRS Foundation offers free access to the IFRSs, but you need to register as a user of the website. Please go to http://www.ifrs.org/IFRSs/Pages/IFRS.aspx for registering as a user of the access. The format requirements for the research assignments are as follows: A. Restate or repeat the questions; B. Provide your answers using complete statements and using proper grammar; C. Provide proper references from FASB Codification in proper form such as ASC 350-20-35-3 or ASC450-20-25-2. Provide proper references from IFRS in proper form, such as IAS 10, para. 6 or IFRS 13, para. 8. The references must be specific to the paragraphs; D. Must be typed, in the font of 12. 1 Internal memo: Golf-Travel Inc. Subject: Tax issues of earnings of foreign subsidiaries To: Chief Executive Officer- Ben Waston. From: C.F.O Date: 17th May 2017. The tax and accounting treatments of foreign earnings continue to be a topic of interest and controversy to tax policy makers in Washington, investors and other stakeholders, the SEC, and the PCAOB. This has led to potential income tax disclosure changes specific to foreign earnings. The laws tentative disclosure decisions with respect to foreign earnings include: Income before taxes separated between domestic and foreign earnings. This ensures that foreign earnings would be further disaggregated for any country that is significant to total earnings. Moreover, it is mandatory for entity to ensure that the undistributed foreign earnings for which the indefinite reinvestment assertion is no longer made and an explanation of why the assertion has changed should be availed. However the law does not to require the disclosure of: Disaggregation of deferred tax liabilities for undistributed foreign earnings by country. More so an estimate of the unrecognized deferred tax liability based on simplified assumptions and any change in management's plans for undistributed foreign earnings based on past or current conditions is not required. The growing globalization of businesses has meant that a greater share of income is generated outside a reporting entity's home country and in jurisdictions with no tax or low-tax rates. For US reporting entities alone it is estimated by various studies that as much as $2 trillion of accumulated foreign income is held outside the US, mostly in jurisdictions with low tax rates. The high technology and pharmaceutical industries in particular have very significant accumulated foreign earnings which have not been subject to US tax. Current US GAAP (ASC 740) generally requires the recognition of a deferred income tax liability at the parent entity's home country tax rate for the excess of financial reporting basis over tax basis in the stock of a foreign subsidiary (i.e., outside basis difference).The outsidebasis difference generally consists of unremitted earnings (including translation effects) and could also include purchase accounting book-tax differences. An exception to recognition of a deferred tax liability exists if the parent entity has the intent and ability to assert that undistributed foreign earnings are indefinitely or \"permanently\" reinvested outside the parent's jurisdiction (for US reporting entities, the foreign earnings would have to be invested outside the US). In conclusion it is better to note that the United States taxes the income of its domestic corporations but it does not tax foreign earnings until the earnings are reinvested in the parent company. When Golf Travel Inc., prepares a strategy for reinvestment of earnings of Irish subsidiary back to United States in the form of dividends, it has to pay tax on dividend received. Another advantage for paying taxes to foreign government is that the United States permits tax payers to claim foreign tax credits up to the amount of tax paid to foreign government Hearts 'R Us Preferred Stock Classification 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. 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. As part of a financing strategy to support its operations, Hearts sold Bionic $3.5 million of Series A Preferred Shares (the \"Shares\") of the Company with a par value of $1 per Share. The transaction was completed on November 30, 2011. As part of the Series A Preferred Stock purchase agreement, Bionic has the following rights: Board Rights As the holder of the preferred stock, Bionic is entitled to appoint one member to the Company's 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. Mandatory Conversion Right The Shares will be converted to the Company's common stock upon execution of an initial public offering (IPO) that nets at least $50 million in proceeds. Contingent Redemption Right The 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 Rights Bionic 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 Rights Bionic has the right of first refusal to purchase and right of co-sale on sale of shares by identified key holders of Hearts' shares. 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. Required: 1. How should Hearts account for the Series A Preferred Shares upon issuance? 2. After Year 4, Hearts is still in the process of filing for FDA approval; however the clinical testing and administrative process for filing for the FDA approval have taken much longer than initially anticipated. In addition, the trial results have been worrisome because of certain post-surgery issues that have been experienced by patients who received the Heart Valve System. The Company has determined that it is certain the product will not receive FDA approval by end of Year 5. What, if anything, should Hearts do now to account for the Series A Preferred Shares? 3. Would your answer to Question #1 change if Hearts were subject to SEC requirements? 4. What would be your answers to Question #1 and #2 under IFRSs? Explain your answer supported by the references from IFRSs. Copyright 2010 Deloitte Development LLC A sample research report for the case 1. How should Hearts account for the Series A Preferred Shares upon issuance? Hearts should account for the Series A Preferred Shares upon issuance by classifying them as equity based on ASC 480-10-25-5 and 25-7. \"A financial instrument that embodies a conditional obligation to redeem the instrument by transferring assets upon an event not certain to occur becomes mandatorily redeemable if that event occurs, the condition is resolved, or the event becomes certain to occur.\" (ASC 480-10-25-5) \"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. However, that financial instrument would be assessed at each reporting period to determine whether circumstances have changed such that the instrument now meets the definition of a mandatorily redeemable instrument (that is, the event is no longer conditional). If the event has occurred, the condition is resolved, or the event has become certain to occur, the financial instrument is reclassified as a liability.\" (ASC 480-10-25-7) In Hearts' case, the financial instrument's redeemable option depends on a future event that is not certain to occur. More specifically, it depends on Hearts not obtaining FDA approval for the Heart Valve System. The Series A Preferred Shares should be classified as equity until the event occurs, the condition is resolved, or the event becomes certain to occur. In summary, Hearts has no present obligation because the redeemable option of the Series A Preferred Shares depends on an uncertain event. Thus, the Preferred Shares should be classified as equity. 2. After Year 4, Hearts is still in the process of filing for FDA approval; however, the clinical testing and administrative process for filing for the FDA approval have taken much longer than initially anticipated. In addition, the trial results have been worrisome because of certain post-surgery issues that have been experienced by patients who received the Heart Valve System. The Company has determined that it is certain the product will not receive FDA approval by end of Year 5. What, if anything, should Hearts do now to account for the Series A Preferred Shares? After Year 4, the company has determined that it is certain the product will not receive FDA approval by the end of Year 5. Therefore, Hearts should now reclassify the Series A Preferred Shares as a liability according to ASC 480-10-25-5 and 25-7. The event that occurs is that Hearts is certain that the product will not receive FDA approval by the end of year 5. The contingent redeemable shares have become mandatorily redeemable shares because the event has become certain to occur. According to ASC 480-10-25-4, \"A 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.\" (ASC 480-10-25-4) Since the financial instrument became a mandatorily redeemable financial instrument after the event, the financial instrument should now be classified as a liability. 3. Would your answer to Question #1 change if Hearts were subject to SEC requirements? No, the answer would not change if Hearts were subject to SEC requirements. According to ASC 480-10-S99-1-.01, \"On July 27, 1979, the Commission amended Regulation S-X to modify the financial statement presentation of preferred stocks subject to mandatory redemption requirements or whose redemption is outside the control of the issuer. The rules adopted do not impact reporting practices of registrants not having such securities outstanding. Registrants having such securities outstanding are required to present separately, in balance sheets, amounts applicable to the following three general classes of securities: (i) preferred stocks subject to mandatory redemption requirements or whose redemption is outside the control of the issuer; (ii) preferred stocks which are not redeemable or are redeemable solely at the option of the issuer; and (iii) common stocks.\" (480-10-S991-.01) The redemption of the Series A Preferred Shares is outside the control of Hearts, but the SEC does not require Hearts to classify the Series A Preferred Shares as a liability. Instead, the SEC would require Hearts to present the Series A Preferred Shares separately from common stocks and other non-redeemable preferred stocks. However, even though Hearts would have to present the Series A Preferred Shares separately, the shares are still considered equity so the answer would not change. Furthermore, ASC 480-10-S99-3A-4 provides additional support for classifying the Series A Preferred Shares as equity. \"ASR 268 requires equity instruments with redemption features that are not solely within the control of the issuer to be classified outside of permanent equity (often referred to as classification in 'temporary equity'). The SEC staff does not believe it is appropriate to classify a financial instrument (or host contract) that meets the conditions for temporary equity classification under ASR 268 as a liability.\" (ASC 480-10-S993A-4) In summary, the answer to question #1 would not change if Hearts were subject to SEC requirements. Based on the statements from the SEC, the Series A Preferred Shares should not be reported as permanent equity, but they do not qualify as a liability either. Instead, they should be reported as temporary equity separately from equity accounts with no redeemable features. 4. What would be your answers to Question #1 and #2 under IFRSs? Explain your answer supported by the references from IFRSs. My answer to question #1 under IFRS would be to report the financial instrument (the Series A Preferred Shares) as a liability based on IAS 32, para. IN11. \"IAS 32 incorporates the conclusion previously in SIC-5 Classification of Financial Instruments-Contingent Settlement Provisions that a financial instrument is a financial liability when the manner of settlement depends on the occurrence or non-occurrence of uncertain future events or on the outcome of uncertain circumstances that are beyond the control of both the issuer and the holder. Contingent settlement provisions are ignored when they apply only in the event of liquidation of the issuer or are not genuine.\" (IAS 32, para. IN11) Under this IAS, the Series A Preferred Shares would be considered a financial liability. The contingent redemption option depends on a future uncertain event-Hearts NOT being able to receive FDA approval on the fifth anniversary of the date of purchase of the shares by Bionic Body. This future event is clearly beyond the control of both the issuer and the holder of the preferred share. Therefore, the shares should be classified as a liability. IAS 32, para. 25 provides additional support for classifying the Series A Preferred Shares as a liability. \"A financial instrument may require the entity to deliver cash or another financial asset, or otherwise to settle it in such a way that it would be a financial liability, in the event of the occurrence or non-occurrence of uncertain future events (or on the outcome of uncertain circumstances) that are beyond the control of both the issuer and the holder of the instrument, such as a change in a stock market index, consumer price index, interest rate or taxation requirements, or the issuer's future revenues, net income or debt-toequity ratio. The issuer of such an instrument does not have an unconditional right to avoid delivering cash or another financial asset (or otherwise to settle it in such a way that it would be a financial liability). Therefore, it is a financial liability of the issuer unless: a) The part of the contingent settlement provision that could require settlement in cash or another financial asset (or otherwise in such a way that it would be a financial liability) is not genuine; b) The issuer can be required to settle the obligation in cash or another financial asset (or otherwise to settle it in such a way that it would be a financial liability) only in the event of liquidation of the issuer; or c) The instrument has all the features and meets the conditions in paragraphs 16A and 16B.\" (IAS 32, para. 25) In summary, the answer to question #1 would be to classify the preferred shares as a liability because the redeemable option depends on the occurrence of an uncertain future event that is beyond the control of both the issuer and the holder of the shares. My answer to question #2 under IFRS would be the same as under US GAAP. That is, the Series A Preferred Shares would be reported as a liability. According to IAS 32, para. IN7, \"In addition, when an issuer has an obligation to purchase its own shares for cash or another financial asset, there is a liability for the amount that the issuer is obliged to pay.\" (IAS 32, para. IN7) In question #2, Hearts is certain that the product will not receive FDA approval by the end of year 5. Hearts has a present obligation to redeem the preferred shares. Therefore, Hearts should classify the preferred shares as a liability