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HMRC internal manual

International Manual

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Thin capitalisation: practical guidance: accountancy issues: FRS 17: summary of the impact of FRS 17 on thin capitalisation

The table below provides a high level overview of the likely impact of defined benefit scheme transactions on thin capitalisation measures.

Category Comments Ref
     
Periodic Costs    
Current service cost Recognised as an expense of computing operating profit, so no adjustment required. INTM523270
Interest expense Not treated as “interest” for thin capitalisation purposes. Adjustment therefore needed to deduct the interest expense of a defined benefit scheme from operating profit and exclude this interest from debt interest used in the interest cover ratio.  
Expected return on assets As above for “interest expense”.  
Actuarial gains and losses Should be recognised in STRGL/OCI not profit and loss account/income statement, so should not impact on thin capitalisation covenants.  
If such amounts have been recognised in the income statement under IAS 19, then adjustments may be required for thin capitalisation purposes.      
       
  Non-periodic costs    
  Past service costs Adjust operating profit to remove these items if they are considered to be one-off items.  
  Settlements and curtailments Adjust operating profit to remove these items if they are considered to be one-off items.  
  Net scheme deficits/surpluses Consider actual facts of the case and impact on financial covenants.