entity a a retail counterparty enters into an interest rate swap in a retail market 612329

Interest rate swap at initial recognition [IFRS 13.IE24-26]

Entity A (a retail counterparty) enters into an interest rate swap in a retail market with Entity B (a dealer) for no initial consideration (i.e. the transaction price is zero). Entity A can access only the retail market. Entity B can access both the retail market (i.e. with retail counterparties) and the dealer market (i.e. with dealer counterparties).

From the perspective of Entity A, the retail market in which it initially entered into the swap is the principal market for the swap. If Entity A were to transfer its rights and obligations under the swap, it would do so with a dealer counterparty in that retail market. In that case the transaction price (zero) would represent the fair value of the swap to Entity A at initial recognition, i.e. the price that Entity A would receive to sell or pay to transfer the swap in a transaction with a dealer counterparty in the retail market (i.e. an exit price). That price would not be adjusted for any incremental (transaction) costs that would be charged by that dealer counterparty.

From the perspective of Entity B, the dealer market (not the retail market) is the principal market for the swap. If Entity B were to transfer its rights and obligations under the swap, it would do so with a dealer in that market. Because the market in which Entity B initially entered into the swap is different from the principal market for the swap, the transaction price (zero) would not necessarily represent the fair value of the swap to Entity B at initial recognition. If the fair value differs from the transaction price (zero), Entity B applies IAS 39 or IFRS 9 to determine whether it recognises that difference as a gain or loss at initial recognition.