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HMRC internal manual

International Manual

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Thin capitalisation: practical guidance: accountancy issues: FRS 17: non-recurring items (past service costs, settlements and curtailments)

Past service cost is the increase in the present value of the scheme liabilities related to employee service in prior periods arising in the current period as a result of the introduction of, or improvement to, retirement benefits.

Past service costs are recognised in the profit and loss account over the period until the benefits vest (the employee becomes fully entitled). If the benefits vest immediately, the past service cost is recognised immediately.

Settlement transactions occur when an irrevocable action occurs which relieves the employer (or the defined benefit scheme) of a pension obligation.

Curtailment transactions are events that reduce the expected years of future service of present employees, or reduce for a number of employees the accrual of defined benefits for some or all of their future service.

Gains and losses arising on settlements and curtailments are recognised immediately in the profit and loss account.

Treatment for thin capitalisation purposes - all GAAPs

Whether there should be an adjustment for the above non-recurring items will depend on what a third-party lender may do when assessing the borrower’s ability to service debt. In INTM515060 there is a consideration of the effect of unexpected items on interest cover, and similar considerations apply to past service costs, settlements and curtailments. Thus, if an item is one that is large and exceptional, that may reasonably be ignored in the calculation of maintainable earnings, then an adjustment should be made.