Introduction:

Zen Ltd $($Zen$)$ is a leading information technology company in India and is planning to acquire a company: ABC Inc. located in the US$.$ To finance these acquisitions, Zen needs USD $400$ million.

Acquisition Plan

$1.$ Zen Ltd will take advantage of its credit rating and raise debt at low interest rates

$2.$ Zen Ltd$.$ gives a loan of USD $350$ Mn to Zen LLC in USD which the US entity uses for acquiring ABC Inc.

$3.$ Zen Ltd$.$ directly acquires the Indian subsidiary of ABC Inc. $($ABC India Pvt$.$ Ltd$.)$ for USD $50$ Mn $($or equivalent in INR$).$

$4.$ Assume the loan tenor to be that of

five years

Prevailing Market Conditions $($September $2021)$:

Abundant liquidity in the banking sector.

Global uncertainties due to the COVID$-19$ pandemic.

USD considered as a safe haven currency leading to a higher forward premium compared to INR

Funding Options Available:

$1.$ USD Loan from US Bank

a$.$ Interest rate: SOFR $+1\%$ spread $($considering historically low SOFR in $2021)$

b$.$ Pre$-$payment option after $2$ years

$2.$ Fixed Rate INR Loan from Indian Banks

a$.$ Interest rate: $5\mathrm{.}8\%,$ fixed.

$3.$ Cross$-$Currency Interest Rate swap $($INR to USD$)$

a$.$ Offered by Indian banks at a range of $5\mathrm{.}8\%($INR$)$ to $1\mathrm{.}75\%($USD$)$

$4.$ Bank Loan in the US

a $5-$year fixed rate at $4$:$25\%$

b$.2-$year fixed rate at $3\mathrm{.}5\%$ with an interest rate reset afterward,

c$.$ Pre$-$payment option available after $2$ years,

Management's Objectives:

Minimize the interest burden on the acquisition financing.

Consider potential arbitrage opportunities arising from interest rate and currency fluctuations.

Manage financial risks associated with the transaction.

Case Study Requirements:

Transaction Structuring

Given the funding options available and that Zen Ltd$.$ will finance the acquisitions and extend a loan to Zen LLC$,$ what structure would you propose for the transaction? Consider management's objectives given above. Compare different options and justify your recommendation.

Analyze the impact if Zen chooses a $2-$year fixed$-$rate loan at $3\mathrm{.}5\%$ offered by the US bank and partially hedges the remaining $3$ years using forward contracts or currency options to manage exchange rate risk.

Pre$-$Payment Option

What would be the accounting treatment if Zen takes a loan with a pre$-$payment option after $2$ years? How would the accounting treatment differ if the pre$-$payment option is $($a$)$ exercised versus $($b$)$ not exercised?

Accounting Treatment

Detail the accounting treatment for the chosen structure in the books of Zen Ltd$.($standalone and consolidated$)$ under IFRS $9.$ This includes:

Recognition and measurement of the loan swap and hedging instruments.

Impact on the income statement and balance sheet.

Internal control considerations for managing the hedge.

Impairment of Acquired Assets

How does potential value deterioration of ABC. Inc. affects the books of account?

Tax Implications

What impact does this impairment have on the Exported Credit Losses $($ECL$)$ assessment?

Analyze the tax implications of each structure, dealing what tax benefits can be availed by Zen Ltd$.$ in India $($consider assumptions regarding SEZ operations$)$

note : pls provide the reference for IFRS $($if used $-$accounting treatment$)$ and proper rationale for structuring the fund options