HONG KONG, March 17, 2025 /PRNewswire/ -- There will be no more MPF offsetting from May 2025 in setting long service payments in Hong Kong. Beyond compliance, how can I more accurately predict long-service payment liabilities and annual expenses? Valtech Valuation offers specific solutions and advice if you consider appointing expert for compliance and better result.

For Companies, Hong Kong Subsidiaries of Multinational Corporations and NGOs

When calculating LSP liabilities or entrusting valuation to professionals, it is essential to avoid overly simplistic assumptions that overlook crucial actuarial factors. Common pitfalls include assumptions of zero layoff rates or zero mortality rates. Although some basic or even free online LSP valuation tools claim to meet "HKAS 19" requirements, finance and accounting departments must carefully verify whether these tools fully comply with the latest accounting standards under the new legislative framework.

Example of an Overly Simplistic Model: Consider an employee who is 40 years old with 5 years of service. Does your current valuation model only considers two exhaustive scenarios below.

1. Employee retires at age 65 and receives LSP
2. No long service payment

If the answer is yes, the probabilities will become

1. Probability of retiring at age 65 and
2. "1 minus the probability of retiring at age 65", resulting in zero long service payment

As you can imagine, how could the possible scenarios be so few? Furthermore, according to the law, long service payments are not necessarily paid only when you retire at the age of 65. This model is too simple and cannot meet the requirements of professional auditors and will have a significant risk of being questioned by regulatory authorities.

When seeking quotations from valuation service providers, companies and NGOs should specifically clarify the following matters (please feel free to copy the following 4 points directly):

• Does the appraiser have a proven track record of successfully passing actuarial reviews by reputable accounting firms?
• Which parameters or scenarios are deliberately omitted or "considered but believing it is not insignificant and therefore not considering it in the calculation"?
• Does your model allow for non-zero layoff rates and mortality rates aligned with Hong Kong Government census statistics?
• Can the turnover rate be estimated by considering differences in age, gender or years of service?

Robust justification should be provided if you get "No" from any of the question above.

If the appraiser applies the insignificant or immaterial principle to simplify the calculation, he/she should first confirm with the auditor whether the judgment is reasonable. Responsibility for validating these assumptions should be clearly defined between auditors and management.

Important Observations – Inadequate Consideration of Loyalty Factor

Valtech Valuation has noticed that many companies or valuers fail to consider employees' years of service or employee loyalty when making estimates. Generally speaking, estimates are made based on the company turnover rate as a whole or based on age, often ignoring employee seniority or employee loyalty. The impact can be huge. For instance, applying a same resignation rate to a 55-year-old new hire identically to a 55-year-old employee with 10 years of service may significantly distort the calculation. Obviously, overestimating the resignation rate will underestimate the potential long-service payment to be paid.

Advice for Employers with more than 1,000 employees

Valtech Valuation strongly recommends that large-scale companies actively build actuarial models to regularly recalculate and monitor the latest long-term service cost and liability levels. Employers with more than 1,000 employees generally have a mix of permanent and contract employees, which may involve complex calculations related to LSP, severance payments (SP), gratuities, and voluntary contributions, and other calculation issues arising from the differences between different types of jobs (such as different patterns for blue collar vs white collar workers). By establishing customized estimation programs, companies can perform regular recalculations to meet their financial statement preparation needs while also monitoring this increasingly important liability.

About Valtech Valuation

Valtech Valuation has performed professional valuations for many multinational corporations and well-known Hong Kong companies and is currently actively assisting clients with tens of thousands of employees to quantify their obligations for long service payments under the new ordinance. Valtech Valuation takes the valuation of long-term service liabilities very seriously and aims to raise the level of professionalism by sharing practical experience and important issues discovered during the development of its proprietary valuation program to increase the awareness of industry insiders, including corporate executives, accountants, auditors and regulators.

For more information, visit: https://valtech-valuation.com

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