Mass Hysteria Entertainment Company, Inc. - FORM 10-Q - XML - IDEA: XBRL DOCUMENT - October 24, 2011
Summary of Significant Accounting Policies | 9 Months Ended |
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Aug. 31, 2011 | |
| Accounting Policies [Abstract] | |
| Significant Accounting Policies [Text Block] | NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim financial statements of Mass Hysteria have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in the Form 10-K filed with the SEC. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to our financial statements which substantially duplicate the disclosures contained in our Annual Report on Form 10-K for the year ended November 30, 2010 have been omitted.
Development-Stage Company
On August 5, 2009, the Company entered into the development stage with its intended new business, which currently has minimal revenues. Management expects to sustain losses from operations until such time it can generate revenues sufficient to meet its anticipated cost structure. The Company is considered a development-stage company in accordance with Accounting Standards Codification (“ASC”) 915 “Development-Stage Entities.” Upon distribution of the Company’s products, it will exit the development stage. The nature of our operations is highly speculative, and there is consequently a risk of loss of your investment. The success of our plan of operation will depend to a great extent on the operations, financial condition, and management of the identified business opportunity.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The accounting estimates that require the Company's most significant, difficult and subjective judgments include the valuation and recognition of share-based compensation, convertible debt, and capitalization of script costs.
The Company bases its estimates and judgments on historical experience and on various other factors that are considered reasonable under the circumstances, the results of which form the basis for making judgments that are not readily apparent from other sources. Actual results could differ materially from these estimates.
Fair Value of Financial Instruments
Fair value is defined as the exchange price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or
liability. There are three levels of inputs that may be used to measure fair value:
Level 1. Observable inputs such as quoted prices in active markets;
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Convertible Debt
Notes with adjustable conversion options
We have convertible debt which contains rights that allow the holders to adjust their conversion price in the event the Company issues common stock at a price per share below their conversion price or convert principal into a variable number of shares with no floor price. Accordingly, the provisions of ASC 815 “Derivatives and Hedging” (“ASC 815”) apply and must be evaluated by us. ASC 815 applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. These conversion features are bifurcated and recorded at fair value at each reporting date using the Black Sholes valuation model.
Notes with conversions issued at a discount
Convertible debt is accounted for under the guidelines established by ASC 470 “Debt with Conversion and Other Options” and ASC 740 “Beneficial Conversion Features” (“BCF”). The Company records a discount upon the issuance of convertible debt that has conversion features at fixed or adjustable rates that are in-the-money when issued.
Discounts on notes are amortized using the effective interest method over the contractual term of the note.
Stand-Ready Obligation
The Company provides guarantees for film financing and accounts for such under ASC 460 “Guarantees”. The Company’s exposure to credit loss, in the event of underperformance by the related film does not include a specified term unless otherwise noted in the agreement, as the term is linked to the timeline in which the film is completed and revenues are derived from the film. Commitments made by the Company to guarantee returns of investment for films are reviewed by the Chief Executive Officer. The Company will not relieve the stand-ready obligation until it is probable that such stand-ready obligation will expire without cost to the Company. In the event our Chief Executive Officer determines that it is probable that a liability related to the guarantee will be incurred, we will record a provision for loss at that time. See Note 6 for discussion of our stand-ready obligation.
Loss per Share
Loss per share is computed on the basis of the weighted average number of common shares outstanding. Diluted loss per share is computed on the basis of the weighted average number of common shares outstanding. At August 31, 2011, the Company’s dilutive securities outstanding consisted of (1) the CEO’s options to purchase shares of common stock (see Note 8), for which the exercise price is above the average closing price of the Company’s common stock and thus excluded under the treasury method; (2) 6,768,447 shares relative to convertible notes to a related party (post conversion) beginning in February 2015; and (3) approximately 33,415,254 shares relative to convertible notes (post conversion) beginning in September 2011.
Equity Method Investment
An affiliate entity that is not consolidated, but over which the Company exercises significant influence, is accounted for under the equity method of accounting. Whether or not the Company exercises significant influence with respect to an affiliate depends on an evaluation of several factors including, among others, representation on the affiliated entity's board of directors, impact of commercial arrangements, and ownership level, which is generally a 20% to 50% interest in the voting securities of the affiliated entity. Under the equity method of accounting, the affiliated entity's accounts are not reflected within the Company's balance sheets and statements of operations; however, the Company's share of the earnings or losses of the affiliated entity is reflected in the caption "Equity in (loss) earnings of affiliated companies" in the statements of operations.
When the Company's carrying value in an equity method affiliated company is reduced to zero, no further losses are recorded in the Company's financial statements unless the Company guaranteed obligations of the affiliated entity or has committed additional funding. When the affiliated entity subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.
An impairment charge is recorded when the carrying amount of the investment exceeds its fair value and this condition is determined to be other-than-temporary.
New Accounting Pronouncements
In May 2011, the FASB issued guidance to amend certain measurement and disclosure requirements related to fair value measurements to improve consistency with international reporting standards. This guidance is effective prospectively for public entities for interim and annual reporting periods beginning after December 15, 2011, with early adoption by public entities prohibited, and is applicable to the Company's fiscal quarter beginning January 1, 2012. The Company is currently evaluating this guidance, but does not expect its adoption will have a material effect on its consolidated financial statements.
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