Issue 44 (22 February 2023)
Accounting implications of the abolition of the MPF-LSP offsetting mechanism inHong KongI. The Amendment Ordinance
1.The Government of the HKSAR gazetted the Employment and RetirementSchemes Legislation (Offsetting Arrangement) (Amendment) Ordinance 2022 (theAmendment Ordinance) in June 2022.
2.The Amendment Ordinance abolishes the use of the accrued benefits1 derivedfrom employers’ mandatory contributions to a Mandatory Provident Fund (MPF) tooffset2 severance payment (SP) and long service payment (LSP) (the offsettingmechanism; the abolition of the offsetting mechanism is referred to as theAbolition).3
3.This Amendment Ordinance has two effects:
(i)
The accrued benefits derived from an employer’s mandatory MPFcontributions may no longer be used to offset LSP/SP in respect of theemployment period after a date to be determined (the transition date;
expected to be a date in 2025) (post-transition LSP); and(ii) The last month’s salary immediately preceding the transition date (instead ofthe date of termination of employment) is used to calculate the portion ofLSP/SP in respect of the employment period before the transition date (pre-transition LSP).
4.At the same time, the government will launch a scheme to subsidise employers fora period of 25 years after the transition date on the LSP/SP payable by employersup to a certain amount per employee per year (Government Subsidy).1 Accrued benefits mean the accumulated MPF contributions plus returns generated less losses incurred.2 The term ‘offset’ and its derivatives used in this paper should be interpreted in terms of general parlance as opposedto how the term is applied in accounting standards (in terms of which offsetting is allowed only when specified criteriaare met).3 See Appendix for a summary of the offsetting mechanism and the changes introduced by the Amendment Ordinance.Furthermore, the Abolition is also applicable to various other retirement schemes apart from the MPF, e.g. ORSO;
however, this Alert focuses on the interaction of the MPF and LSP as MPF is the most prevalent retirement scheme inHong Kong. The principles discussed in this Alert apply equally to other retirement schemes that are subject to theAbolition.II. Impact on Hong Kong companies
5.LSP has historically been accounted for as a defined benefit plan4 in accordancewith HKAS 19 Employee Benefits. The measurement of the LSP liability is subjectto actuarial assumptions and estimates. Historically, many companies haveaccounted for the offsetting mechanism as a reduction of the LSP liability and thenet LSP position may have been immaterial for the financial statements of manycompanies. It is also observed that many companies currently have limited or nodisclosures about the LSP liability in their financial statements.
6.In light of the Amendment Ordinance, the Financial Reporting StandardsCommittee (FRSC) has considered it necessary to reassess the situation. This isbecause the Abolition has a pervasive impact – it affects all companies that aresubject to the LSP provisions of the Employment Ordinance and that are requiredto make mandatory MPF contributions – and the impact could be materialdepending on factors such as the composition and salary of an entity’s workforce.III. Discussions since June 2022
7.Certain members of the FRSC have been discussing the accounting implication ofthe Amendment Ordinance since it was enacted. The FRSC has also formed atechnical panel comprising key stakeholders that are familiar with the issue,including experienced technical specialists from large accounting firms, preparersand actuaries to deliberate the issue with the aim of producing timely guidance forthe public. Nevertheless, due to the highly complex nature of the issue, the FRSCnoted in its December 2022 meeting that it was ‘expected that a considerableamount of time would still be needed for the Committee to address this issue’.
8.One of the key complexities of the matter lies in the interaction between theemployer MPF contributions (which have attributes of a defined contribution plan)
and the entity’s LSP obligation (which has attributes of a defined benefit plan)
when the two plans have different accounting models and there is no specificguidance in HKAS 19 on how to account for such an interaction. The Abolitioncoupled with the arrangement of the Government Subsidy have furthercomplicated the matter.
9.In particular, there are diverging views on how the employer’s MPF contributionssubject to the offsetting mechanism should be characterised in determining howto account for the interaction. A resolution of this question necessitated a detailedanalysis of the historical development of the MPF and LSP legislations including athorough review of the related government policy papers and communiques withthe aim of obtaining clarity on the policy objectives of these legislations.
10.After multiple rounds of extended deliberations in earnest, two broad tentativeapproaches to analysing the issue have emerged, each of which requires furtherdeliberation to address outstanding issues before it could be concluded as relevantand practicable in the circumstances.4 SP is a termination benefit and is subject to different requirements under HKAS 19. It is not subject to the same levelof actuarial assumption and estimation uncertainty as the LSP and is not covered in this Alert.IV. The two tentative approaches
11.As the two tentative approaches characterise the nature of the employer’s right tothe accrued benefits arising from its MPF contributions differently, they wouldresult in different recognition, measurement, as well as presentation anddisclosure outcomes in an entity’s financial statements. In particular, the twoapproaches could result in a different extent and direction of change to the LSPliability before and after the transition date.
12.Under the first approach, the amounts subject to the offsetting mechanism areviewed as deemed employee contribution towards the LSP and the offsetable MPFaccrued benefits are accounted for as a reduction of the LSP liability.
13.Under the second approach, the amounts subject to the offsetting mechanism areviewed as a right for the employer to be reimbursed upon payment of the LSP,which results in the recognition of an asset under the defined benefit planaccounting. The asset is measured at fair value at the reporting date based on thecomposition of the MPF plan assets of the individual employees without taking intoaccount any projection of future expected returns on the assets.V. Publishing guidance
14.The rigorous debate around the accounting for the Abolition has shed new light onhow the offsetting mechanism could be analysed. Details of the deliberation maytherefore provide additional insights that could change an entity’s understandingand application of the principles and requirements of HKAS 19, specifically howthe interaction between the LSP and MPF could be accounted for under HKAS 19.
15.Accordingly, the FRSC considered it would be in the public interest to provideguidance to stakeholders to promote consistency when accounting for theAbolition and to provide an orderly transition for affected entities. The FRSCcommits to continue deliberating the outstanding issues and to publishcomprehensive guidance to stakeholders following due process.
16.The FRSC acknowledges that given the highly complex nature of this issue andthe lack of specific guidance in extant literature, an entity should be entitled tosufficient time to determine its accounting policy and implement any necessarypolicy change when the final decision on the accounting is made by the FRSC (forexample, an entity may need to obtain new information, estimates or adapt itssystems to implement a change).5 Determining how much time is sufficient toimplement the change is a matter of judgement that depends on an entity’sparticular facts and circumstances. Furthermore, consistent with Sue Lloyd’sarticle titled Agenda decisions—time is of the essence, an entity is notautomatically considered to have an error simply because its current accountingfor this issue is inconsistent with any further guidance that the FRSC is going toissue.5 By analogy to the time allowed for entities to implement changes resulting from agenda decisions published by theIFRS Interpretations Committee (paragraph 8.6 of the IASB and IFRS Interpretations Committee Due ProcessHandbook).
17.In the meantime, entities would need to exercise judgement in determining anappropriate accounting policy for the Abolition based on relevant facts andcircumstances. An entity should change its accounting policy only if the changewould result in the financial statements providing reliable and more relevantinformation about the effects of the Abolition on the entity’s financial position,financial performance or cash flows (paragraph 14(b) of HKAS 8 AccountingPolicies, Changes in Accounting Estimates and Errors). If material, entities shouldprovide relevant financial statements disclosures including significant judgements,accounting policies and any changes thereto. Entities should also seekprofessional advice where appropriate.DisclaimerThis alert was developed by the FRSC of the Hong Kong Institute of Certified PublicAccountants (HKICPA) and is for general reference only. The HKICPA, FRSC andtheir staff do not accept any responsibility or liability, and disclaim all responsibilityand liability in respect of the alert and any consequences that may arise from anyperson acting or refraining from action as a result of any materials in the alert.Members of the HKICPA and other users of this alert should also read the full HKFRSAccounting Standard, as found in the HKICPA Members’ Handbook for furtherreference, and seek professional advice where necessary when applying thereferences contained in this alert.The HKICPA Standard Setting Department welcomes your comments and feedback,which should be sent to commentletters@hkicpa.org.hk.Connect with usAppendixThe offsetting mechanism
1.HK employers are obliged by law to:
a) make monthly contributions to a MPF for their employees to provide for the latter’sretirement benefits; andb) make a LSP to employees when they are dismissed by the employer (conditionsapply), resign at age 65 or above or on grounds of ill health, or die.
2.An employer’s mandatory MPF contribution is calculated as: 5%* employees’ relevantincomeThe contribution is capped at $1,500/employee/month.
3.The LSP is calculated as: Last month’s salary × 2/3 × no. of years of serviceLast month salary is capped at $22,500. The amount of LSP payable per employeeis capped at $390,000.
4.The Employment Ordinance and the Mandatory Provident Fund Schemes Ordinanceprovide that an employer can offset the accrued benefits derived from an employer’sMPF contributions against the LSP.For example, assume an entity dismisses an employee and needs to pay him a LSPof $100 applying the formula in point 3 above (i.e. before applying the offset). Assumefurther that the accrued benefits from the employer’s MPF contributions to date forthis employee is $75. The employer only needs to pay the employee a LSP of $25and the employee can claim the remaining $75 from the MPF trustee. Alternatively,the employer can pay the employee the full LSP of $100 and claim a reimbursementof $75 from the MPF trustee. No top-up needs to be made to the MPF trustee afterthe ‘withdrawal’ of the $75 used as part-payment for the LSP.Changes introduced by the Amendment Ordinance
5.The Amendment Ordinance introduces the following two key changes:
Pre-amendmentPost-amendment1st changeThe amount ofaccrued benefitsderived fromemployer MPFcontribution thatmay be used tooffset LSPAccrued benefits derivedfrom both mandatory andvoluntary contributionsmade by the employerbefore, on and after thetransition date may be usedto offset LSPAccrued benefits derived frommandatory employer contributions maynot be used to offset post-transition LSPNote:
• accrued benefits derived frommandatory employer contributionsmade pre-, on or post-transition maycontinue to be used to offset pre-transition LSP• accrued benefits derived fromvoluntary employer contributions andgratuities made pre-, on or post-transition may continue to be used tooffset pre- and post-transition LSP2nd changeCalculation basisfor last month’ssalaryLast month’s salaryimmediately beforetermination of employmentPre-transition LSP: last month’s salaryimmediately preceding the transition datePost-transition LSP: last month’s salaryimmediately before termination ofemployment
Alert 44: Accounting implications of the abolition of the MPF-LSP offsetting mechanism in Hong Kong
下载原件Issue 44 (22 February 2023)
Accounting implications of the abolition of the MPF-LSP offsetting mechanism inHong KongI. The Amendment Ordinance
1.The Government of the HKSAR gazetted the Employment and RetirementSchemes Legislation (Offsetting Arrangement) (Amendment) Ordinance 2022 (theAmendment Ordinance) in June 2022.
2.The Amendment Ordinance abolishes the use of the accrued benefits1 derivedfrom employers’ mandatory contributions to a Mandatory Provident Fund (MPF) tooffset2 severance payment (SP) and long service payment (LSP) (the offsettingmechanism; the abolition of the offsetting mechanism is referred to as theAbolition).3
3.This Amendment Ordinance has two effects:
(i)
The accrued benefits derived from an employer’s mandatory MPFcontributions may no longer be used to offset LSP/SP in respect of theemployment period after a date to be determined (the transition date;
expected to be a date in 2025) (post-transition LSP); and(ii) The last month’s salary immediately preceding the transition date (instead ofthe date of termination of employment) is used to calculate the portion ofLSP/SP in respect of the employment period before the transition date (pre-transition LSP).
4.At the same time, the government will launch a scheme to subsidise employers fora period of 25 years after the transition date on the LSP/SP payable by employersup to a certain amount per employee per year (Government Subsidy).1 Accrued benefits mean the accumulated MPF contributions plus returns generated less losses incurred.2 The term ‘offset’ and its derivatives used in this paper should be interpreted in terms of general parlance as opposedto how the term is applied in accounting standards (in terms of which offsetting is allowed only when specified criteriaare met).3 See Appendix for a summary of the offsetting mechanism and the changes introduced by the Amendment Ordinance.Furthermore, the Abolition is also applicable to various other retirement schemes apart from the MPF, e.g. ORSO;
however, this Alert focuses on the interaction of the MPF and LSP as MPF is the most prevalent retirement scheme inHong Kong. The principles discussed in this Alert apply equally to other retirement schemes that are subject to theAbolition.II. Impact on Hong Kong companies
5.LSP has historically been accounted for as a defined benefit plan4 in accordancewith HKAS 19 Employee Benefits. The measurement of the LSP liability is subjectto actuarial assumptions and estimates. Historically, many companies haveaccounted for the offsetting mechanism as a reduction of the LSP liability and thenet LSP position may have been immaterial for the financial statements of manycompanies. It is also observed that many companies currently have limited or nodisclosures about the LSP liability in their financial statements.
6.In light of the Amendment Ordinance, the Financial Reporting StandardsCommittee (FRSC) has considered it necessary to reassess the situation. This isbecause the Abolition has a pervasive impact – it affects all companies that aresubject to the LSP provisions of the Employment Ordinance and that are requiredto make mandatory MPF contributions – and the impact could be materialdepending on factors such as the composition and salary of an entity’s workforce.III. Discussions since June 2022
7.Certain members of the FRSC have been discussing the accounting implication ofthe Amendment Ordinance since it was enacted. The FRSC has also formed atechnical panel comprising key stakeholders that are familiar with the issue,including experienced technical specialists from large accounting firms, preparersand actuaries to deliberate the issue with the aim of producing timely guidance forthe public. Nevertheless, due to the highly complex nature of the issue, the FRSCnoted in its December 2022 meeting that it was ‘expected that a considerableamount of time would still be needed for the Committee to address this issue’.
8.One of the key complexities of the matter lies in the interaction between theemployer MPF contributions (which have attributes of a defined contribution plan)
and the entity’s LSP obligation (which has attributes of a defined benefit plan)
when the two plans have different accounting models and there is no specificguidance in HKAS 19 on how to account for such an interaction. The Abolitioncoupled with the arrangement of the Government Subsidy have furthercomplicated the matter.
9.In particular, there are diverging views on how the employer’s MPF contributionssubject to the offsetting mechanism should be characterised in determining howto account for the interaction. A resolution of this question necessitated a detailedanalysis of the historical development of the MPF and LSP legislations including athorough review of the related government policy papers and communiques withthe aim of obtaining clarity on the policy objectives of these legislations.
10.After multiple rounds of extended deliberations in earnest, two broad tentativeapproaches to analysing the issue have emerged, each of which requires furtherdeliberation to address outstanding issues before it could be concluded as relevantand practicable in the circumstances.4 SP is a termination benefit and is subject to different requirements under HKAS 19. It is not subject to the same levelof actuarial assumption and estimation uncertainty as the LSP and is not covered in this Alert.IV. The two tentative approaches
11.As the two tentative approaches characterise the nature of the employer’s right tothe accrued benefits arising from its MPF contributions differently, they wouldresult in different recognition, measurement, as well as presentation anddisclosure outcomes in an entity’s financial statements. In particular, the twoapproaches could result in a different extent and direction of change to the LSPliability before and after the transition date.
12.Under the first approach, the amounts subject to the offsetting mechanism areviewed as deemed employee contribution towards the LSP and the offsetable MPFaccrued benefits are accounted for as a reduction of the LSP liability.
13.Under the second approach, the amounts subject to the offsetting mechanism areviewed as a right for the employer to be reimbursed upon payment of the LSP,which results in the recognition of an asset under the defined benefit planaccounting. The asset is measured at fair value at the reporting date based on thecomposition of the MPF plan assets of the individual employees without taking intoaccount any projection of future expected returns on the assets.V. Publishing guidance
14.The rigorous debate around the accounting for the Abolition has shed new light onhow the offsetting mechanism could be analysed. Details of the deliberation maytherefore provide additional insights that could change an entity’s understandingand application of the principles and requirements of HKAS 19, specifically howthe interaction between the LSP and MPF could be accounted for under HKAS 19.
15.Accordingly, the FRSC considered it would be in the public interest to provideguidance to stakeholders to promote consistency when accounting for theAbolition and to provide an orderly transition for affected entities. The FRSCcommits to continue deliberating the outstanding issues and to publishcomprehensive guidance to stakeholders following due process.
16.The FRSC acknowledges that given the highly complex nature of this issue andthe lack of specific guidance in extant literature, an entity should be entitled tosufficient time to determine its accounting policy and implement any necessarypolicy change when the final decision on the accounting is made by the FRSC (forexample, an entity may need to obtain new information, estimates or adapt itssystems to implement a change).5 Determining how much time is sufficient toimplement the change is a matter of judgement that depends on an entity’sparticular facts and circumstances. Furthermore, consistent with Sue Lloyd’sarticle titled Agenda decisions—time is of the essence, an entity is notautomatically considered to have an error simply because its current accountingfor this issue is inconsistent with any further guidance that the FRSC is going toissue.5 By analogy to the time allowed for entities to implement changes resulting from agenda decisions published by theIFRS Interpretations Committee (paragraph 8.6 of the IASB and IFRS Interpretations Committee Due ProcessHandbook).
17.In the meantime, entities would need to exercise judgement in determining anappropriate accounting policy for the Abolition based on relevant facts andcircumstances. An entity should change its accounting policy only if the changewould result in the financial statements providing reliable and more relevantinformation about the effects of the Abolition on the entity’s financial position,financial performance or cash flows (paragraph 14(b) of HKAS 8 AccountingPolicies, Changes in Accounting Estimates and Errors). If material, entities shouldprovide relevant financial statements disclosures including significant judgements,accounting policies and any changes thereto. Entities should also seekprofessional advice where appropriate.DisclaimerThis alert was developed by the FRSC of the Hong Kong Institute of Certified PublicAccountants (HKICPA) and is for general reference only. The HKICPA, FRSC andtheir staff do not accept any responsibility or liability, and disclaim all responsibilityand liability in respect of the alert and any consequences that may arise from anyperson acting or refraining from action as a result of any materials in the alert.Members of the HKICPA and other users of this alert should also read the full HKFRSAccounting Standard, as found in the HKICPA Members’ Handbook for furtherreference, and seek professional advice where necessary when applying thereferences contained in this alert.The HKICPA Standard Setting Department welcomes your comments and feedback,which should be sent to commentletters@hkicpa.org.hk.Connect with usAppendixThe offsetting mechanism
1.HK employers are obliged by law to:
a) make monthly contributions to a MPF for their employees to provide for the latter’sretirement benefits; andb) make a LSP to employees when they are dismissed by the employer (conditionsapply), resign at age 65 or above or on grounds of ill health, or die.
2.An employer’s mandatory MPF contribution is calculated as: 5%* employees’ relevantincomeThe contribution is capped at $1,500/employee/month.
3.The LSP is calculated as: Last month’s salary × 2/3 × no. of years of serviceLast month salary is capped at $22,500. The amount of LSP payable per employeeis capped at $390,000.
4.The Employment Ordinance and the Mandatory Provident Fund Schemes Ordinanceprovide that an employer can offset the accrued benefits derived from an employer’sMPF contributions against the LSP.For example, assume an entity dismisses an employee and needs to pay him a LSPof $100 applying the formula in point 3 above (i.e. before applying the offset). Assumefurther that the accrued benefits from the employer’s MPF contributions to date forthis employee is $75. The employer only needs to pay the employee a LSP of $25and the employee can claim the remaining $75 from the MPF trustee. Alternatively,the employer can pay the employee the full LSP of $100 and claim a reimbursementof $75 from the MPF trustee. No top-up needs to be made to the MPF trustee afterthe ‘withdrawal’ of the $75 used as part-payment for the LSP.Changes introduced by the Amendment Ordinance
5.The Amendment Ordinance introduces the following two key changes:
Pre-amendmentPost-amendment1st changeThe amount ofaccrued benefitsderived fromemployer MPFcontribution thatmay be used tooffset LSPAccrued benefits derivedfrom both mandatory andvoluntary contributionsmade by the employerbefore, on and after thetransition date may be usedto offset LSPAccrued benefits derived frommandatory employer contributions maynot be used to offset post-transition LSPNote:
• accrued benefits derived frommandatory employer contributionsmade pre-, on or post-transition maycontinue to be used to offset pre-transition LSP• accrued benefits derived fromvoluntary employer contributions andgratuities made pre-, on or post-transition may continue to be used tooffset pre- and post-transition LSP2nd changeCalculation basisfor last month’ssalaryLast month’s salaryimmediately beforetermination of employmentPre-transition LSP: last month’s salaryimmediately preceding the transition datePost-transition LSP: last month’s salaryimmediately before termination ofemployment