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Entity S enters a ₹100 cr notional 5-year pay-variable (MIBOR) / receive-fixed (10%) interest rate swap with Counterparty C and pre-pays the ENTIRE variable leg at inception for ₹36 cr (current PV of expected variable payments). Entity S retains the right to receive ₹10 cr annually for 5 years. Is this contract a derivative under Ind AS 109?
AYes — interest-rate swaps are always derivatives regardless of prepayment
BNo — the ₹36 cr initial net investment equals what a similar non-derivative contract (e.g., a 5-year fixed annuity) would require, failing the "smaller than similar contracts" criterion
CNo — because Entity S now has only a one-way receive claim, not a true derivative
DYes — there is a fixed/variable swap with future settlement and a defined notional
Answer & Solution
Correct answer: B. No — the ₹36 cr initial net investment equals what a similar non-derivative contract (e.g., a 5-year fixed annuity) would require, failing the "smaller than similar contracts" criterion
Pre-paying the variable leg converts the contract economically into a loan to Counterparty C (₹36 cr advanced, ₹10 cr received yearly). The initial net investment equals what a comparable fixed annuity would require — so the "smaller than similar non-derivative contract" test fails. Not a derivative; accounted for as a loan/receivable under Ind AS 109.
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