LSP Valuation Hong Kong | HKAS 19 Long Service Payment

Why Hong Kong employers suddenly need this

Long service payment and severance payment are statutory entitlements under the Employment Ordinance. Because the eventual amount depends on an employee's wages and length of service at an uncertain future date, HKAS 19 (equivalent to IAS 19) treats the obligation as a defined benefit plan — which means it is measured using actuarial techniques, not a simple accrual.

For years, most Hong Kong employers carried little or no net LSP liability, on the basis that accrued benefits from employer mandatory MPF contributions would offset the payment when it fell due. The abolition of the MPF offsetting arrangement, which took effect on the transition date of 1 May 2025, changed that. Employers can no longer use accrued benefits from mandatory MPF contributions to offset the portion of LSP or severance payment relating to service on or after that date.

The result is that companies which previously recognised nothing now have a liability to measure and disclose — and auditors are asking for it.

The abolition is not retrospective. For employees who started before 1 May 2025, accrued benefits from employer MPF contributions can still offset the pre-transition portion of LSP or severance payment, calculated by reference to wages immediately preceding the transition date and pre- transition years of service. Accrued benefits from employer voluntary contributions and service-based gratuities can still offset both portions. The split between the pre- and post-transition portions is a central part of the calculation.

What the valuation involves

An HKAS 19 assessment projects each employee forward to their expected exit and discounts the resulting obligation back to the reporting date. The main components are:

Employee census data — date of birth, date of joining, current wages, employment terms and MPF arrangements for each employee in scope
Salary increase assumption — future wage growth, which drives the projected payment, subject to the statutory calculation mechanics
Withdrawal and mortality assumptions — the rate at which employees leave, and the circumstances of leaving, since LSP is only payable in defined situations
Discount rate — by reference to yields on high quality corporate bonds, or government bonds where a deep corporate market is not available, matched to the currency and estimated term of the obligation
MPF offset modelling — projecting accrued benefits available to offset the pre-transition portion, and the treatment of voluntary contributions
Government subsidy — the Labour Department operates a 25-year subsidy scheme sharing employers' expenses for the post-transition portion, and its treatment needs to be considered with your auditor

What you receive

Present value of the defined benefit obligation at the reporting date
Current service cost and interest cost for the period
Reconciliation of the movement in the obligation, splitting remeasurement into experience adjustments and assumption changes
The sensitivity disclosures HKAS 19 requires — typically discount rate and salary growth
Maturity profile of the obligation
A full assumption schedule with the basis for each, written for audit review

Practical points on timing and data

The employee census is almost always the bottleneck. Where records are held across payroll and HR systems, extracting a clean dataset takes longer than clients expect, and the valuation cannot start without it. Engaging before your reporting date rather than after it is the single biggest determinant of turnaround. Employee data is handled under confidentiality terms and does not need to identify individuals by name — a de-identified census is sufficient.

Where a group has several Hong Kong employing entities, each entity generally needs its own figure for its own accounts, even where the census is extracted centrally.

Common questions

Does every Hong Kong company need an LSP valuation now?

Not automatically — it depends on materiality. Companies with few employees, short average service, or an obligation that is immaterial to the accounts may not need a full assessment. Companies with a sizeable workforce, long average tenure, or a labour-intensive operation are much more likely to have a material provision. Your auditor will normally indicate whether they expect an independent assessment; if they have raised it, they usually do.

What employee data do you need, and is it confidential?

A de-identified census per employee: date of birth, date of joining, current monthly wages, employment type and MPF scheme details. Names are not required. Data is handled under the engagement's confidentiality terms and only for the purpose of the valuation. Many clients prefer to engage an external specialist for exactly this reason — it keeps individual payroll data out of wider circulation.

How is the pre-transition portion calculated?

It is based on the employee's monthly wages immediately preceding the transition date of 1 May 2025 and their years of service before that date. That portion can still be offset by accrued benefits from employer MPF contributions. The post-transition portion, based on service from 1 May 2025 onwards, cannot be offset by mandatory contributions. The valuation models both portions separately.

Does this need to be done every year?

Generally yes, where the obligation is material. HKAS 19 requires the obligation to be remeasured at each reporting date, with remeasurement gains and losses recognised in other comprehensive income. Once the first valuation is set up, subsequent years are usually faster because the data structure and assumption framework are already established.

Related valuation services

This page summarises how Valtech approaches this engagement type in Hong Kong. It is general information, not valuation, accounting, tax or legal advice for any specific entity. Scope and methodology are agreed in an engagement letter before work begins.

Long service payment (LSP) valuation