The following example illustrates the application of paragraph 35 to a compound financial instrument.
Assume that a non-cumulative preference share is mandatorily redeemable for cash in five years, but that
dividends are payable at the discretion of the entity before the redemption date. Such an instrument is a
compound financial instrument, with the liability component being the present value of the redemption
amount. The unwinding of the discount on this component is recognised in profit or loss and classified as
interest expense. Any dividends paid relate to the equity component and, accordingly, are recognised as a
distribution of profit or loss. A similar treatment would apply if the redemption was not mandatory but at the
option of the holder, or if the share was mandatorily convertible into a variable number of ordinary shares
calculated to equal a fixed amount or an amount based on changes in an underlying variable (eg commodity).
However, if any unpaid dividends are added to the redemption amount, the entire instrument is a liability.
In such a case, any dividends are classified as interest expense.