On 9 June 2022, the HKSAR Government announced the abolition of the use of accrued benefits derived from employers’ mandatory MPF contributions in offsetting the Long Service Payment (“LSP”) and Severance Payment (“SP”) effective 1 May 2025 (“Transition Date”).
Under the new legislation, employers would no longer be granted the right to adopt the existing mechanism for offsetting the post-transition portion of LSP/SP after the Transition Date. However, employers may continue to use the accrued benefits derived from employers’ mandatory MPF benefits for offsetting the pre-transition portion of LSP/SP.
The Financial Reporting Standards Committee of the Hong Kong Institute of Certified Public Accountants (“HKICPA”) recommended that all entities reassess the accounting for the offsetting mechanism.
A LSP provision assessment would be required to determine the extent of LSP liability, which involves sophisticated programming techniques to handle massive data and determine various actuarial and financial assumptions, so that the accounting provision for LSP obligations is made under the requirement of Hong Kong Accounting Standards (“HKAS”) 19.
According to the educational guidance published on 4 July 2023 and “Financial Reporting Alert 44” issued on 22 February 2023 by HKICPA, employers may choose either one of the two approaches to account for LSP liability in reflection of the change.
Under Approach 1, employers’ portion of accrued benefits in MPF shall be accounted for as a reduction of the LSP liability, while the portion of LSP subject to offsetting mechanism before the Transition Date shall be deemed as a contribution towards the LSP. An immediate expense shall be recognized in the profit and loss during the exact date of the change.
Under Approach 2, instead of a direct offset of the employer’s contributions in MPF against the LSP, the contributions previously made shall be recognized as an asset, with subsequent remeasurement at fair value. As a result, the impact of the change in the LSP liability would be amortized on a straight-line basis over the period in which the LSP is earned throughout the period.
Under either Approach, nonetheless, employers would need to determine the present value of the LSP, which is estimated with the Projected Unit Credit Method.
Our LSP assessment model is developed by valuation specialists and qualified actuary, which is meticulously designed to handle the complexities involved in LSP provision assessment. Our model accommodates various retirement savings schemes, including MPF, ORSO, voluntary contributions, vested portions, gratuities, and withdrawals, etc. We will also assist you in preparing the relevant financial disclosure information in your financial statements, including the preparation of sensitivity analysis.
We have extensive experience and a proven track record in assisting clients in performing the LSP provision assessment. We have conducted numerous LSP assessments for listed companies, MNCs, NGOs and private companies of varying sizes, from those with less than 50 employees to those with over 8000 employees across various industries.
Our professional valuation specialists possess the expertise to customize proposals specifically for your company, taking into account your organizational structure and industry characteristics. We coordinate effectively between your HR and Finance teams and address your auditor’s questions, ensuring a smooth and efficient process.
Please do not hesitate to contact us for more information.
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