The HKICPA has released a guidance pertaining to the accounting for the removal of the MPF offsetting arrangement. We aim to provide our clients with a concise summary of the crucial aspects of the guidance.
Background
Severance Payment (“SP”) and Long Service Payment (“LSP”) as one of the statutory employee benefit schemes, under the current regulation, permitting employers to offset employees’ SP or LSP against the accrued benefits attributable to their contributions to the MPF or ORSO schemes.
To enhance the employees retirement protection, The Legislative Council passed the Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 on 9 June 2022 to abolish the use of the accrued benefits of employers’ mandatory contributions under the Mandatory Provident Fund (MPF) System to offset SP and LSP. During a Labor Day reception held on April 28, 2023, Hong Kong’s Chief Executive, John Lee, declared that the abolition of the MPF offsetting mechanism is scheduled to come into force on May 1, 2025.
Accounting Impact to employers
LSP falls under the category of a defined benefit plan, and in accordance with Hong Kong Accounting Standard 19 (HKAS19), a company is mandated to account for such plans by disclosing the defined benefit obligations (DBO) and the associated service costs within its financial statements.
Historically, many entities have limited or no disclosures about the LSP liability in the financial statements due to the LSP position netting of the MPF offsetting would immaterial. Under the impact of Amendment Ordinance, the FRSC considered that it is essential to reassess the accounting for the offsetting mechanism.
The accounting impact for the offsetting mechanism could be material depending on the number of employees in Hong Kong and the composition of workforce.
Two Approaches suggested
FRSC suggested two acceptable accounting approaches. Given the two methods interpret the employer’s entitlement to accrued benefits from MPF contributions differently, they lead to varying outcomes in terms of recognition, measurement, and the presentation and disclosure in an entity’s financial statements.
Approach 1
Accrued benefits arising from employers MPF contributions are treated as a deemed contribution by the employee under HKAS 19.93(a). As such, the LSP obligation under approach 1 is measured on a ‘net’ basis in that the amount is determined after deducting the negative service cost arising from the offsetable accrued benefits.
Approach 2
The right to offset is treated as a reimbursement asset in accordance with HKAS 19.116. The LSP obligation is measured on a ‘gross’ basis under this approach in that it is not reduced by the offsetable accrued benefits, as the employer’s rights to those benefits are recognised as a separate reimbursement asset and is measured at fair value at the reporting date.
It is noted that the fair value measurement of the reimbursement asset under approach 2 (determined in accordance with HKAS 19.116 (a) and HKFRS13 Fair Value Measurement) is not the same as the measurement of the offsetable accrued benefits under approach 1.
Entities applying approach 2 would generally recognize a higher expense in later years as compared to approach 1 once the accrued benefits from mandatory MPF contributions have reached the pre-transition LSP.
Comparison of both approaches
Disclosures
Company should provide clear disclosures that are based on the approaches selected.
Approach 1
- how the negative service cost is estimated, projected and attributed to periods of service;
- the actuarial assumptions involved;
- the cap to which the negative service cost is subject and
- how its measurement is subsumed within the LSP liability.
Approach 2
- the discount rate for the purposes of recognising interest income
- how the fair value of the reimbursement asset is determined
- the cap to which it is subject
- a reconciliation from the opening balance to the closing balance of the reimbursement asset
- information about employer MPF contributions for key management personnel
How BonVision can help?
Leveraging BonVision’s comprehensive expertise in LSP valuation, coupled with our advanced automation solutions, management can optimize their efficiency during the demanding financial reporting season. This enables executives to allocate more time to critical tasks, enhancing overall productivity and ensuring a seamless financial reporting process.
References
Accounting implications of the abolition of the MPF-LSP offsetting mechanism in Hong Kong- HKICPA
https://www.hkicpa.org.hk/-/media/HKICPA-Website/New-HKICPA/Standards-and-regulation/SSD/gMPFLSP.pdf
Financial Reporting Alert 44 – HKICPA
Arrangements for Offsetting Long Service Payment and Severance Payment – MPFA
https://www.mpfa.org.hk/en/mpf-system/long-service-and-severance-payments