Abolition of MPF Offsetting Arrangement & LSP Valuation
Employers are gearing up for the abolition of the MPF offset on 1 May 2025, concentrating on the new method for calculating long service payment (LSP) and the actuarial valuation of LSP liabilities.
The Abolition of MPF Offset
Jun 2022
The Legislative Council passed the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022.
Feb 2023
HKICPA published Financial Reporting Alert 44 to highlight the potential accounting treatment for LSP obligations due to the abolition of MPF offsetting.
Apr 2023
The Government has announced that the abolition will take effect on 1 May 2025 (the Transition Date)
Jul 2023
HKICPA issued guidance for making provision for the long service payment obligations in the company’s financial statements
Employees whose employment commences before the transition date:
Employers can no longer use the accrued benefits derived from their mandatory MPF contributions (ERMC) to offset the employees’ post-transition portion of Severance Payment/Long Service Payment (SP/LSP), but may continue to use the accrued benefits derived from their MPF contributions to offset pre-transition portion of SP/LSP
Employees whose employment commences on/after the transition date:
If employees commence employment on or after the transition date, employers can no longer use ERMC to offset SP/LSP.
No retrospective effect
- Employers may continue to use the accrued benefits to offset employees’ pre-transition portion of SP/LSP
- > $390,000: the amount in excess will be deducted from post-transition portion of SP/LSP
Occupational Retirement Schemes
- Applicable to the benefits of following occupational retirement schemes (ORS)
- the “carved-out benefits” cannot be used to offset SP/LSP
Calculation
- Monthly-paid employee: Final Monthly Salary × 2/3 × Reckonable years of service
- Daily-rated/piece-rated employee: any 18 days’ wages chosen by the employee out of his/her last 30 normal working days × Reckonable years of service
Keeping wage records
- Comply with Employment Ordinance
- the 12 months immediately preceding the transition date until six months after the employee ceases to be employed
Accounting Implications
LSP Liability Provisions
Hong Kong companies must include LSP liability provisions in their F/S in line with HKAS 19
Financial Statement Adjustments
Account for LSP as a plan amendment, potentially affecting most companies materially
LSP Liability Provisions
In July 2023, the HKICPA issued guidelines for accounting Long Service Payment (LSP), emphasizing the need for employers to consult with auditors early for assessing impacts on financial statements. Significant effects may necessitate a mandatory actuarial valuation to accurately account for LSP liabilities in accordance with HKAS 19 / IAS 19 standards, incorporating projections of employee salaries, service durations, and departure patterns.
PV of Defined Benefit Obligation (DBO)
PV of Defined Benefit Obligation (DBO), as defined in HKAS 19, is “the present value, without deducting any plan assets, of expected future payments required to settle the obligation resulting from employee service in the current and prior periods”.
- Legally required post-employment benefit
- Reporting defined benefit obligations (DBO) and associated service costs
- Valuing the LSP obligations to understand the financial impact on their statements
Valuation Methodology
- The preferred actuarial method is the projected unit credit method
- Involves computing the present value of future benefits based on service to date and recognizing service and interest costs in financial reporting
- The LSP is calculated as a product of the employee’s final monthly salary, a factor derived from the employment period, and the number of reckonable years of service. The maximum LSP payable is capped at HK$390,000 in Hong Kong
What we can help you
LSP valuation is complex and demands advanced modelling and data analysis skills. We collaborate extensively with leading audit firms and employers to establish a consensus on the methodology and assumptions for calculating LSP liabilities and their annual financial impact.
Finance:
- Engage with your auditor early to discuss timing, assumptions, and methodologies.
- Perform an initial valuation of long service payment.
HR:
- Examine the long service payment policies for termination and retirement.
- Compile data on current employees and previous terminations for a long service payment (LSP) valuation.
Information checklist for LSP Valuation
- Employee Number (or unique ID)
- Date of Birth
- Date of Hire
- Gender (M/F)
- Full Time/Contract
- Monthly Basic Salary
- Grade / Designation/ Division
- ORSO/MPF
- Accrued Benefit as of the Valuation Date (Mandatory)
- Accrued Benefit as of the Valuation Date (Voluntary)
Useful Websites:
Labour Department – Calculating Tool
Disclaimer: This publication is intended for general informational purposes only and does not address specific issues of any particular company. While we strive to ensure accuracy, we do not accept any responsibility or liability for the information discussed herein. Readers should consult their professional adviser before acting based on the contents of this publication.