Notes to CoNsolidated FiNaNCial statemeNts (In thousands of dollars except as noted and per share amounts) 3.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (k)  Financial instruments (continued): (ii) Derivative financial instruments and embedded derivatives: (iii) Compound financial instruments: (iv) Financing charges: (v) Trade date: (vi) Share capital: Common shares  Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares  are recognized as a deduction from equity, net of any tax effects. Dividends to the equity holders are  recorded in equity. The Company recognizes and derecognizes purchases and sales of derivative contracts on the trade date.  Financing charges, which reflect the cost to obtain new financing, are offset against the debt for which they  were incurred and recognized in finance costs using the effective interest method. Financing charges for the  revolving credit facility are recorded with other assets. Interest, dividends, gains and losses relating to the financial liability are recognized in profit or loss.   Subsequent to initial recognition, the liability component of a compound financial instrument is measured  at amortized cost using the effective interest method. The equity component of a compound financial  instrument is not remeasured subsequent to initial recognition.  The Company’s convertible unsecured subordinated debentures are accounted for as compound financial  instruments. The liability component of a compound financial instrument is recognized initially at the fair  value of a similar liability that does not have an equity conversion option.The equity component is recognized  initially as the difference between the fair value of the compound financial instrument as a whole and the fair  value of the liability component. Any directly attributable transaction costs are allocated to the liability and  equity components in proportion to their initial carrying amounts. The Company classifies derivative financial instruments which have not been designated as hedges for  accounting purposes and embedded derivatives as financial assets and liabilities at fair value through profit  or loss (marked-to-market), and values them at fair value each period with changes recorded in cost of sales  or net finance costs.The derivative financial instruments consist of sugar futures and at times options (“sugar  contracts”), foreign exchange forward contracts, natural gas futures and embedded derivatives which relate  to the foreign exchange component of certain sales contracts denominated in U.S. currency, all of which the  Company enters into during the regular course of business, which is recorded at fair value each reporting  period with changes recorded in cost of sales. In addition, the Company entered into an interest rate swap  agreement to protect itself against interest rate fluctuations, which is recorded at fair value each reporting  period with changes recorded in net finance costs. 52 Rogers Sugar Inc.