Solution

The financial instrument issued by X Co. Limited to Y Co. Limited is a redeemable debenture. This is because the debenture has a fixed maturity date of 10 years from the date of issue and can be redeemed by the issuer at maturity.

The debenture carries an interest rate of 15% per annum, but the interest payment is at the discretion of the issuer. This means that the issuer has the option to pay or not to pay the interest payment depending on its financial position and credit risk profile.

The discretionary dividend feature of the debenture is not relevant to the classification of the instrument as a financial liability or equity. The key features of the instrument are the fixed maturity date and the obligation to pay the principal amount at maturity.

It is important to note that the specific classification of the instrument as either equity or financial liability will depend on the specific terms and conditions of the instrument.

In this case, the debenture has a fixed maturity date, and the issuer has an obligation to pay the principal amount of the debenture at maturity. The interest payment is at the discretion of the issuer and does not create an additional obligation for the issuer. Therefore, it is likely that the instrument will be classified as a financial liability, as the issuer has an obligation to pay cash at maturity. The specific classification will depend on the specific terms and conditions of the instrument, including the fair value of the liability component and the allocation of the proceeds between the liability and equity components.