1. Are LSP Liabilities “Defined Benefit Obligations”?
Under Hong Kong law (the Employment Ordinance), the Long Service Payment is a mandatory benefit payable to employees upon termination under specific circumstances (e.g., redundancy, expiration of contract, or long service).
Because the ultimate payment is based on an employee’s salary and length of service at a future date (which is uncertain), HKAS 19 / IAS 19 classifies LSP as a “Defined Benefit Plan.”
2. Does it require an annual valuation?
IAS 19 / HKAS 19 requires that the present value of defined benefit obligations be determined with sufficient regularity that the amounts recognized in the financial statements do not differ materially from the amounts that would be determined at the reporting date.
- The “Materiality” Clause: If your LSP obligation is immaterial, you may not need a full-blown actuarial valuation every year. However, for most companies with significant staff numbers, the LSP obligation is considered material.
- The Actuarial Requirement: For material defined benefit obligations, standard practice requires the use of the Projected Unit Credit Method to determine the present value of the obligation. This requires an actuarial method. Actuary involvement is recommended but not mandatory.
- Annual Requirement: While the standard does not explicitly state the frequency of assessment required, in practice, auditors require this valuation to be performed at every annual reporting date to ensure the financial statements are accurate.
3. Key Considerations for HKAS 19 / IAS 19 Compliance
If you are preparing financial statements, you must ensure the following:
- Projected Unit Credit Method: You cannot simply estimate the “lump sum” currently payable if everyone quit today. You must use actuarial techniques to discount the estimated future payments back to the present value, accounting for factors like salary increases, staff turnover rates, and mortality rates.
- The Impact of the MPF Offsetting Mechanism: If your company is in Hong Kong, you must factor in the “offsetting mechanism.” (Note: As of May 2025, the offsetting mechanism is being abolished in Hong Kong. This is a significant event that requires a re-measurement of the liability for many companies.)
- Disclosures: You are required to provide specific disclosures in the financial statements regarding the nature of the benefits, the risks, and the actuarial assumptions used (e.g., discount rate, salary growth rate).
Further Reading:
Long Service Payments valuation under the New Legislations for Hong Kong Companies
