Under IAS 32, a compound financial instrument is a financial instrument that contains both a liability component and an equity component. When a compound financial instrument is issued, the components are measured separately on initial recognition.

The liability component is initially measured at the fair value of a similar liability that does not have an equity conversion option. This value is then adjusted for any transaction costs directly attributable to the issuance of the liability component.

The equity component is initially measured at the fair value of the residual interest in the assets of the entity after deducting the fair value of the liability component. Any transaction costs directly attributable to the issuance of the equity component are accounted for as a deduction from equity.

If the compound financial instrument includes a detachable warrant, the fair value of the warrant is allocated between the liability and equity components based on their relative fair values on initial recognition.

Once the liability and equity components have been initially measured, subsequent changes in their fair values are accounted for separately. Changes in the fair value of the liability component are recognized in profit or loss, while changes in the fair value of the equity component are recognized in other comprehensive income.

Overall, the separate measurement and subsequent accounting for the liability and equity components of a compound financial instrument is important to ensure that the financial statements accurately reflect the economic substance of the transaction.