The abolition of the Mandatory Provident Fund (MPF) offsetting arrangement, effective 1 May 2025, is a significant shift for Hong Kong employers. For decades, businesses have been allowed to offset Long Service Payment (LSP) and Severance Payment (SP) obligations using the accrued benefits derived from their contributions to the Mandatory Provident Fund.

With this mechanism being phased out, employers must prepare for increased liabilities and ensure compliance with updated accounting requirements.

This guide highlights the key changes and financial implications brought about by the MPF offsetting abolition and how we can assist your company with LSP liability calculation and accounting under the new legislation.

Understanding the MPF Offsetting Abolition

The MPF offsetting arrangement allowed employers to reduce their LSP and SP obligations by using accrued benefits derived from their mandatory MPF contributions.  It was introduced with the aim to reduce the burden of severance and long service payments by allowing employers to use accrued benefits derived from the employers’ mandatory contributions to cover part or all of these statutory payments. However, with increasing pressure to enhance employee retirement protection, the Hong Kong government abolishes this offsetting mechanism from 1 May 2025 (the transition date). 

Key points of the new legislation include:

• No offsetting for post-transition portion : Employers cannot use the accrued benefits derived from the MPF contributions made after 1 May 2025 to offset LSP or SP obligations.

• Grandfathering rule: Accrued benefits derived from employers’ mandatory contributions related to employment period before 1 May 2025 can continue be used to offset the pre-transition portion of LSP or SP obligation.

This change will increase liabilities for employers, particularly for those with long-serving staff members. Companies must review their financial and HR policies to align with these new requirements.

Financial and Accounting Implications

The abolition of MPF offsetting has direct implications for financial planning and reporting:

Financial Planning

• Employers must recognize full LSP/SP liabilities for post-transition employment periods.

• Long-serving employees will drive up future provisions, increasing workforce costs.

Accounting and Compliance

Employers must adopt proper accounting practices to comply with the Hong Kong Financial Reporting Standards (HKFRS).

• For businesses using full HKFRS, the HKICPA recommends engaging an actuary to assess liability exposure accurately, especially for large or ageing workforces.

• Contingent liabilities must be disclosed in financial reports, and provisions must be reflected in the statement of financial position, and statement of profit or loss.

Action Steps

• Engage an actuary or valuation expert to calculate LSP/SP liabilities.
• Update payroll systems to distinguish between pre- and post-transition liabilities.
• Collaborate with auditors to ensure compliance with financial reporting requirements.

Impact on SMEs: Should You Engage an Actuary?

For Small and Medium-sized Enterprises (SMEs), the need to engage an actuary depends on the accounting framework used:

1. HKFRS (Full Standards): Actuarial input is often required due to complex liability calculations, particularly for businesses with diverse or ageing workforces.

1. HKFRS for Private Entities/SME-FRS: These frameworks offer simplified reporting requirements. SMEs may not need to hire an actuary if they consider their LSP liabilities to be relatively immaterial, have a simple workforce structure, and possess internal expertise or access to basic valuation tools.

However, even for SMEs using simplified frameworks, accurately projecting liabilities can be challenging due to factors such as employee turnover and salary growth. Without proper valuation, businesses risk non-compliance and inaccurate financial reporting.

Where To Next?

At InCorp Hong Kong, we specialise in helping businesses navigate the financial and accounting challenges of the MPF offsetting abolition. Our services are designed to streamline compliance, reduce administrative burdens, and ensure accurate reporting. Here’s how we can assist:

• Internal Assessment Support: Acting as your accounting personnel to assess the LSP/SP liabilities.

• Guidance on Key Assumptions: Providing expert advice on the assumptions needed for liability assessments.

• Provision Calculations: Preparing accurate provision amounts for auditors’ assessments.

• Journal Entry Recommendations: Assisting with relevant journal entries to reflect liabilities in your financial statements.

The abolition of the MPF offsetting mechanism introduces new challenges, but with the right support, your business can stay compliant and focused on growth. Let us help you manage the complexities of LSP liability calculation and accounting with confidence.

Contact our Hong Kong team today to learn more about how we can help your business prepare for the transition and ensure compliance with the new legislation.