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3) Summary of Significant Accounting Policies: Derivative Financial Instruments (Policies)
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9 Months Ended |
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Sep. 30, 2013
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| Policies | |
| Derivative Financial Instruments | Derivative Financial Instruments
In connection with the issuance of certain convertible debentures, the terms of the convertible debentures included an embedded conversion feature which provided for a conversion of the convertible debentures into shares of common stock at a rate which was determined to be variable. The Company determined that the conversion feature was an embedded derivative instrument pursuant to ASC 815 “Derivatives and Hedging”.
The accounting treatment of derivative financial instruments requires that the Company record the conversion options at their fair values as of the inception date of the convertible debenture agreements and at fair value as of each subsequent balance sheet date. As a result of entering into the convertible promissory note, the Company was required to classify all other conversion options as derivative liabilities and record them at their fair values at each balance sheet date. Any change in fair value was recorded as a change in fair value of derivative liability for each reporting period at each balance sheet date. The Company reassesses the classification at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.
The fair value of conversion options at a fixed number of shares are recorded using the intrinsic value method and conversion options at variable rates are deemed to be a “down-round protection” and therefore, do not meet the scope exception for treatment as a derivative under ASC 815. Since, “down-round protection” is not an input into the calculation of the fair value of the conversion option and cannot be considered “indexed to the Company’s own stock” which is a requirement for the scope exception as outlined under ASC 815. |