The abolition of the MPF offsetting long-service payment arrangements will have significant accounting implications for employers. Here's how:
Accounting Implications: The Hong Kong Institute of Certified Public Accountants (HKICPA) has issued a guideline for the accounting implications of this abolition, in accordance with Hong Kong Accounting Standard 19 - Employee Benefits (HKAS 19). This guideline outlines acceptable approaches to account for the LSP liability.
Assessment of LSP Liability: The determination of the LSP liability requires actuarial calculations. These calculations involve the projection of LSP benefits at retirement or upon termination of service in the future. Key assumptions for the calculations include employee turnover rates, the increase rate for the statutory LSP salary cap and dollar limit, the MPF or ORSO investment return, the discount rate, and the salary increase rate.
Financial Impact: Historically, many companies' LSP liability after offsetting employers’ MPF contributions was immaterial. However, with the abolition of the offsetting arrangement, the impact on the profit & loss and the balance sheet for LSP may not now be immaterial, and should therefore be reflected in a company’s financial statements .
No Retrospective Effect: The abolishment of the MPF offset has no retrospective effect. In the case of an employee who began employment before the Transition Date and whose termination of employment occurs on or after the Transition Date, the employer may continue to take advantage of the current offsetting arrangement in respect of the portion of severance payment or long service payment accrued in respect of the pre-transition employment period.
Supporting Measures for Employers: Considering the abolishment of the offsetting arrangement may add financial burden on employers, the Hong Kong Government will introduce a 25-year subsidy scheme to provide targeted assistance to employers, especially micro, small, and medium-sized enterprises, in the initial years after the abolition.
Remember, employers are advised to start determining the financial impact of the change to the offsetting arrangement as early as possible to avoid the rush at the end of the financial year.
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