MPF-LSP Offsetting Abolished: The Accounting Impact Every Hong Kong Employer Needs to Understand

• Standard: HKAS 19 — Employee Benefits (impacted by legislative change)
• Legislation: Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Ordinance 2022
• Effective Date: 1 May 2025
• Related: HKAS 20 — Government Grants (for the SSA subsidy)

If you employ people in Hong Kong, this one affects you directly.

The abolition of the MPF-LSP offsetting arrangement, effective 1 May 2025, is one of the most significant employment law changes in recent years—and it has real consequences for your financial statements.

What Changed

For decades, employers could use the accrued benefits from their mandatory MPF contributions to offset statutory severance payments (SP) or long service payments (LSP). It was a well-known mechanism that effectively reduced the cost of these obligations.

That’s over now. The Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Ordinance 2022 prohibits this practice for employment periods commencing on or after 1 May 2025.

For employees whose service straddles the transition date, the entitlement splits into two:

• Pre-transition portion (service before 1 May 2025): Employers can still use MPF benefits to offset. Business as usual.
• Post-transition portion (service from 1 May 2025 onwards): No offsetting allowed. Period.

The statutory formula for LSP remains two-thirds of the last month’s wages (capped at HKD 22,500) per year of service, with an overall cap of HKD 390,000. But without the offset, the net liability for many employers increases significantly.

The HKAS 19 Impact

Under HKAS 19, LSP is classified as a defined benefit post-employment arrangement. That means you need the Projected Unit Credit (PUC) method with actuarial assumptions—future salary growth, employee turnover, mortality rates.

The abolition changes the “benefit formula” under HKAS 19, requiring a recalculation of defined benefit obligations. The HKICPA issued guidance in July 2023 and updated technical alerts in January 2025 to clarify the treatment.

Bottom line: you need an actuary.

The Government Subsidy (SSA)

To soften the blow, the government introduced a 25-year subsidy scheme valued at over $33 billion. The scheme includes a “capped amount” for employers during the first nine years. For the first three years (2025–2028), this cap is as low as HK$3,000 per employee, subject to an overall annual cap.

The HKICPA says the SSA should be accounted for under HKAS 20 (Government Grants)—recognised as a credit in profit or loss on a systematic basis over the periods in which you recognise the related LSP expenses. In practice, this typically shows up as a reduction in staff costs or as other income.

Tax Treatment

The IRD has confirmed:

• Statutory SP and LSP received by employees are not chargeable to salaries tax
• For employers, the payments are generally tax-deductible when they become a present obligation

What You Need to Do

• Update payroll systems to track pre-transition and post-transition service periods separately
• Engage actuaries for a formal HKAS 19 valuation incorporating the abolition and the SSA
• Present the LSP liability as a provision for employee benefits in the statement of financial position
• Disclose the plan description, actuarial assumptions, and sensitivity analysis in the notes
• Coordinate with auditors early—this is a new area of judgement for many entities

The 2025 year-end financial statements will be the first to fully reflect this change. Don’t leave it to December.

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This article is for informational purposes only and does not constitute professional accounting or legal advice.