Educational guidance on the accounting implications of the abolition of the MPF-LSP offsetting mechanism in Hong Kong

The guidance below was developed by the Financial Reporting Standards Committee(FRSC) of the Hong Kong Institute of Certified Public Accountants (HKICPA) and isfor general reference only. The HKICPA, FRSC and the HKICPA staff do not acceptany responsibility or liability, and disclaim all responsibility and liability in respect ofthe guidance and any consequences that may arise from any person acting orrefraining from action as a result of any materials in the guidance. Members of theHKICPA and other users of this guidance should also read the full HKFRS Standards,as found in the HKICPA Members’ Handbook for further reference, and seekprofessional advice where necessary when applying the references contained in thisguidance.The HKICPA's Standard Setting Department welcomes your comments and feedback onthis guidance, which should be sent to commentletters@hkicpa.org.hk.Accounting implications of the abolition of the MPF-LSP offsetting mechanismin Hong KongOn 22 February 2023, the HKICPA published Financial Reporting Alert 44 to highlight thepotential accounting impact of the abolition of the Mandatory Provident Fund (MPF)-LongService Payment (LSP) offsetting mechanism (the Abolition) on entities in Hong Kong and, inparticular, two broad tentative approaches to analysing the issue. This publication providescomprehensive guidance for the accounting for the impact arising from the Abolition. It shouldbe noted that this guidance focuses on the interaction of the MPF and LSP, as MPF is themost prevalent retirement scheme in Hong Kong. The principles discussed in this guidanceapply equally to other retirement schemes, e.g. Occupational Retirement Schemes Ordinance,that may also be impacted by the Abolition.ContentsPageI. Background of the issue ..................................................................................................... 2II. Two acceptable accounting approaches ........................................................................... 3III. Comparison of the two approaches .................................................................................. 9IV. Further practical considerations ..................................................................................... 13V. Selection of accounting policy and transition................................................................... 13VI. Disclosures .................................................................................................................... 14VII. Time to implement the guidance ................................................................................... 15VIII. Further update to the guidance .................................................................................... 16Appendices

1.Summary of the offsetting mechanism and the changes introduced by the Amendment Ordinance

2.Illustration of approach 1 (before taking into account the impact of the Amendment Ordinance)

3.Illustration of approach 1 (after taking into account the impact of the Amendment Ordinance)

4.Illustration of approach 2 (before taking into account the impact of the Amendment Ordinance)

5.Illustration of approach 2 (after taking into account the impact of the Amendment Ordinance)

I. Background of the issueHistory of the LSP and MPF

1.There are several statutory employee benefit schemes in Hong Kong, one of which is thelong service payment (LSP) benefit. The LSP is calculated based on a specified formulataking into account an employee’s last monthly salary and his number of years of service(subject to a cap), and is payable by the employer under certain circumstances1. Anotheris the accrued benefits2 under the Mandatory Provident Fund (MPF) scheme in terms ofwhich the employer makes mandatory contributions (capped at HK$1,500 per month) andvoluntary contributions (if any) to the trustee who administers the assets held in a trustsolely for the retirement benefits of each individual employee.

2.While LSP was intended for meeting the short-term financial needs of employees whobecome unemployed under specific circumstances as well as providing for retirementbenefits, the sole purpose of MPF was to assist the working population to save forretirement. The timing of cash payments under the two schemes mirrors such purposes:

employees have a right to LSP payments upon eligible loss of employment, while MPFentitlements are withdrawable normally only when MPF scheme members reach the ageof 65.

3.LSP precedes MPF as a statutory minimum social safety net for employees in Hong Kong.Offsetting3 of LSP against an employee’s accrued retirement benefits was first introducedin 1990 when retirement schemes were voluntary in Hong Kong (i.e. before MPF) suchthat employers ‘will not pay twice’; however, the primary purpose of LSP remainedunchanged: to provide short-term financial support to employees upon loss ofemployment. When the MPF was introduced in 1995 through the Mandatory ProvidentFund Schemes Ordinance (Cap. 485) (MPFSO), the offsetting mechanism was retainedto balance the interests of employers and employees.

4.The MPFSO permits the withdrawal of accrued benefits derived from an employer’s MPFcontributions for the purpose of offsetting LSP payable to an employee under theEmployment Ordinance (Cap. 57) (EO). Under the MPFSO, the employer can either seeka reimbursement from the approved trustee of an individual employee’s MPF schemewhen it has paid the LSP; or request the employee to obtain the LSP payments from theaccrued benefits derived from the employer’s contributions to the MPF scheme directlyfrom the approved trustee.Abolition of the offsetting mechanism

5.In June 2022, the Government of the HKSAR gazetted the Employment and RetirementSchemes Legislation (Offsetting Arrangement) (Amendment) Ordinance 2022 (theAmendment Ordinance). The Amendment Ordinance abolishes the use of the accruedbenefits derived from employers’ mandatory MPF contributions to offset severancepayment (SP)4 and LSP (the Abolition). In April 2023, HKSAR Chief Executive John Leeannounced that the Abolition will officially take effect on 1 May 2025 (the Transition Date).1 See pages 1 and 2 of the summary prepared by the Labour Department of the HKSAR Government here for the eligibility of the LSP.2 Accrued benefits mean the accumulated MPF contributions plus returns generated less losses incurred.3 The term ‘offset’ used in this guidance should be interpreted in terms of general parlance as opposed to how the term is applied inaccounting standards (i.e. in terms of the gross vs net presentation in the financial statements when offsetting is allowed generally onlywhen specified criteria are met).4 In terms of the EO, an employee is entitled to a severance payment (SP) if he has been employed continuously for at least 24 monthsbut is dismissed due to redundancy. The amount of SP is calculated using the same formula as the LSP; however, an employee will notbe simultaneously entitled to both LSP and SP. In terms of accounting, SP is classified as ‘termination benefits’ for the purposes of HKAS19 Employee Benefits. As SP is not subject to the same level of actuarial assumption and estimation uncertainty as the LSP, it is notcovered in this guidance.

6.At a high level, the Amendment Ordinance has two effects:

(i)

The accrued benefits derived from an employer’s mandatory MPF contributions mayno longer be used to offset LSP/SP in respect of the employment period after theTransition Date (post-transition LSP); and(ii)

The last month’s salary immediately preceding the Transition Date (instead of thedate of termination of employment) is used to calculate the portion of LSP/SP inrespect of the employment period before the Transition Date (pre-transition LSP).

7.At the same time, the Government has indicated that it would launch a scheme to subsidiseemployers for a period of 25 years after the Transition Date on the LSP/SP payable byemployers up to a certain amount per employee per year (Government Subsidy).

8.Appendix 1 provides a summary of the offsetting mechanism and the changes introducedby the Amendment Ordinance.The accounting issues resulting from the Abolition

9.LSP has historically been accounted for as a defined benefit plan in accordance with HKAS19 Employee Benefits. The measurement of the LSP liability is subject to actuarialassumptions and estimates. Historically, many entities have accounted for the expectedoffset arising from the offsetting mechanism as a reduction of the LSP liability and the netLSP position may have been immaterial for their financial statements. It is also observedthat many entities currently have limited or no disclosures about the LSP liability in theirfinancial statements.

10.In light of the Amendment Ordinance, the FRSC has considered it necessary to reassessthe accounting for the offsetting mechanism. This is because firstly, the Abolition has apervasive impact – it affects all entities that are subject to the LSP provisions of the EOand that are required to make mandatory MPF contributions; and secondly, the accountingfor the offsetting mechanism could become material in light of the Abolition depending onfactors such as the composition and salary of an entity’s workforce.

11.One of the key complexities of the accounting for the offsetting mechanism lies in theinteraction between the employer MPF contributions (which have attributes of a definedcontribution plan) and the entity’s LSP obligation (which has attributes of a defined benefitplan), when the two plans have different accounting models in HKAS 19 and there is nospecific guidance in the standard on how to account for such an interaction.II. Two acceptable accounting approaches

12.Having given due consideration to the issue, the FRSC considered that there are twoacceptable approaches to account for the offsetting mechanism and hence the impactarising from the Abolition. As the two approaches characterise the nature of the employer’sright to the accrued benefits arising from its MPF contributions differently, they would resultin different recognition, measurement, as well as presentation and disclosure outcomes inan entity’s financial statements. In particular, the two approaches could result in a differentextent and/or direction of change to the LSP liability before and after the enactment of theAmendment Ordinance (see Section III for further details). As the Amendment Ordinancewas enacted in June 2022, the ‘year of enactment of the Amendment Ordinance’ is thefinancial year that includes June 2022.Approach 1: Account for the amount expected to be offset as a deemed employee contributiontowards his LSP benefits in terms of HKAS 19.93(a)

13.Under approach 1, the accrued benefits arising from employer MPF contributions that havebeen vested with the employees5 and which would be used to offset the employee’s LSPbenefits (offsetable accrued benefits) are treated as a deemed contribution by theemployee towards the LSP in accordance with HKAS 19.93(a). This is because theamount of LSP that an employer has to pay is net of the offsetable accrued benefits, butsuch offsetable accrued benefits have already been vested with the employees. In effect,an employee is required to use ‘his own money’ (viz. the vested MPF benefits) to fund aportion of his own LSP benefits. As such, the offsetable accrued benefits are regarded asa deemed employee contribution to the LSP.6

14.It follows that the relevant offsetable accrued benefits are projected and attributed toperiods of service as a reduction in service cost (negative service cost) when determiningthe ultimate net cost to the entity of the benefit that the employees have earned in returnfor their service in the current and prior periods (HKAS 19.57(a)(i) and (ii)). Consequently,the LSP obligation under approach 1 is measured on a ‘net’ basis in that the amount isdetermined after deducting the negative service cost arising from the offsetable accruedbenefits.See Example 1 for an illustration of approach 1 before taking into account the impact ofthe Amendment Ordinance.5 Despite the fact that the benefits have been vested with the employees, they cannot withdraw the accrued benefits unless certainconditions are met.6 Historically, some entities might have applied the practical expedient in HKAS 19.93(b) to account for the deemed employeecontributions. Whether the practical expedient continues to be applicable after the Abolition depends on whether the deemed employeecontributions to the LSP remain ‘independent of the number of years of service’, which is the qualifying criterion for the practical expedientin HKAS 19.93(b). HKAS 19, however, does not provide any specific guidance on how to apply the ‘dependent / independent of thenumber of years of service’ criterion.In light of the fact that the determination of the offsetable accrued benefits depends on a number of factors, and that the AmendmentOrdinance introduces different rules about how the pre-transition LSP and the post-transition LSP should be determined, it is noted thatfollowing the enactment of the Amendment Ordinance, the amended LSP scheme is no longer a ‘simple type of contributory plans’ towhich the IASB had intended the practical expedient to apply (HKAS 19.BC150I and BC150J). This is because the contributions are nolonger ‘linked solely to the employee’s service in that period’ since mandatory employer MPF contributions after the Transition Date canstill be used to offset pre-transition LSP (HKAS 19.BC150J). This means it would no longer be appropriate to view the contributions as‘independent of the number of years of service’ which is the qualifying criterion for the practical expedient in HKAS 19.93(b).Accordingly, those entities that change from applying HKAS 19.93(b) to HKAS 19.93(a) following the Abolition will recognise a cumulativecatch-up adjustment in profit or loss against the LSP liability in the year of enactment of the Amendment Ordinance. The cumulative catch-up adjustment is calculated as the difference at the enactment date (16 June 2022) between the carrying amount of the LSP liabilitycalculated under HKAS 19.93(b) before the Abolition and the carrying amount of the LSP liability calculated under HKAS 19.93(a) afterthe Abolition. See example 2 for a detailed calculation of the carrying amount of the LSP liability under HKAS 19.93(a) after the Abolition.Example 1 - Illustrating paragraphs 13 - 14 before taking into account the impact ofthe Amendment OrdinanceBackground informationFinancial year end of the entity (employer): 30 AprilEmployee joined in 2016 (Year 1); Employee is expected to leave in 2035 (Year 20)

Annual salary: HK$120,000 (Year 1); Salary increment: 4% per annumMPF contribution by employer (assuming at the end of the financial year): 5% of monthlysalary (monthly cap of HK$1,500, equivalent to an annual cap of HK$18,000)

Investment return on MPF contribution: 3% per annumDiscount rate determined in accordance with HKAS 19.83: 3% per annumThe employee is entitled to a lump sum benefit at retirement (i.e. LSP) determined as:

Last month salary x 2/3 x no. of years of service (with a cap of HK$390,000)

For simplicity, all the examples in this guidance ignore any adjustments needed to reflectthe probability that the employee may leave the entity at an earlier or later date and assumeno changes in actuarial assumptions. The entity attributes benefits to periods of service ona straight-line basis.The journal entries (HK$) recorded by the entity for the year ended April 2023 are as follows:

Dr Employee benefits expense7,896Cr Bank7,896To recognise the employer MPF contribution as a defined contribution planDr Current service cost (CSC)

9,851Dr Interest expense2,009Cr LSP obligation11,860To recognise the defined benefit obligation for the LSP in accordance with HKAS 19.70before taking into account the deemed employee contribution as a negative service costDr LSP obligation9,753Cr Interest expense1,652Cr CSC8,101To recognise the deemed employee contribution as a negative service cost in accordancewith HKAS 19.93(a)

Refer to Appendix 2 for the detailed calculation.

15.Under approach 1, the enactment of the Amendment Ordinance generally reduces theamount of expected offsetable accrued benefits if the employer does not make anyvoluntary MPF contributions. This is because the accrued benefits derived from mandatoryemployer MPF contributions may no longer be used to offset an employee’s post-transitionLSP obligation.

16.The reduction in expected offsetable accrued benefits effectively reduces the totalprojected negative service cost over the entire expected service period (past, current andfuture) of an employee. This in turn increases the expected net cost of the LSP obligationto an entity over the entire expected service period. The revised expected net cost to anentity (i.e. benefits to the employees after deducting the offsetable accrued benefits)

determined in accordance with the Amendment Ordinance is reattributed on a straight-linebasis from the date when services by employees first lead to benefits in terms of the LSPlegislation7, with a catch-up adjustment for past service cost and a corresponding increasein the LSP obligation in the year of enactment of the Amendment Ordinance. Theadjustment is recognised as a past service cost in profit or loss in accordance with HKAS

19.94(a) as the Abolition was not contemplated in the original LSP legislation.See Example 2 for an illustration of approach 1 after taking into account the impact of theAmendment Ordinance.Example 2: Illustrating paragraphs 15 - 16 after taking into account the impact of theAmendment OrdinanceSame background information as Example 1.Assume the entity (employer) adopts approach 1 before and after the Abolition.The journal entries (HK$) recorded by the entity in the year of enactment of the AmendmentOrdinance (i.e. year ended April 2023 as the Amendment Ordinance was enacted in June2022) are as follows:

Dr Past service cost21,581Cr LSP obligation21,581To recognise a catch-up adjustment for past service cost and a corresponding increase inthe LSP obligation. (a) (33,475 <“Y” in App 3> – 11,894 <“X” in App 2>)

(a) Given the Amendment Ordinance was enacted on 16 June 2022, the catch-up adjustment should be determined bycomparing the existing and revised LSP balances at that date. However, for simplicity, this example determines the catch-upadjustment using the LSP balance at the beginning of the financial year assuming any related movements during the 1.5months to the enactment date are insignificant.Dr Employee benefits expense7,896Cr Bank7,896To recognise the employer MPF contribution as a defined contribution planDr Current service cost (CSC)

8,253Dr Interest expense1,683Cr LSP obligation9,936To recognise the defined benefit obligation for the LSP in accordance with HKAS 19.70before taking into account the deemed employee contribution as a negative service costDr LSP obligation4,006Cr Interest expenseCr CSC3,328To recognise the deemed employee contribution as a negative service cost in accordancewith HKAS 19.93(a)

Refer to Appendix 3 for the detailed calculation.7 HKAS 19.70 requires an entity to attribute benefit on a straight-line basis if an employee’s service in later years will lead to amaterially higher level of benefit than in earlier years, which is generally the case with the LSP obligation.Approach 2: Account for the employer MPF contributions and the offsetting mechanism as afunding mechanism for the LSP obligation

17.Under approach 2, in view of the historical development, policy objectives as well as theemployer’s rights under the LSP and MPF legislations (paragraphs 1 - 4), the employerMPF contributions and the offsetting mechanism are regarded as a funding mechanism tohelp employers save for the LSP obligation and is accounted for as such. This is becausean entity may either pay the gross LSP to an employee and claim a reimbursement fromthe MPF trustee, or pay the net LSP to an employee after deducting the offsetable accruedbenefits accumulated in the MPF system (paragraph 4 and Appendix 1). In other words,the employer has a statutory right to reimbursement or offset.

18.Following from the above characterisation, the right to reimbursement or offset isaccounted for as a reimbursement asset in accordance with HKAS 19.116. That paragraphstates that an entity should recognise its right to a reimbursement as a separate assetwhen ‘it is virtually certain that another party will reimburse some or all of the expenditurerequired to settle a defined benefit obligation’. As the MPFSO and the EO stipulate that anentity will be reimbursed or be entitled to an offset when it needs to settle an LSPobligation, for mandatory employer MPF contributions the virtually certain recognitioncriterion is met when the contributions are made.

19.The right to reimbursement is recognised as a separate asset on the statement of financialposition and is measured at fair value at the reporting date. The changes in fair value aredisaggregated and recognised in the same way as for changes in the fair value of planassets in HKAS 19, which typically comprise (not exhaustive):

(i)

interest income recognised in profit or loss (HKAS 19.125);

(ii) return on the underlying assets, excluding the amount included in interest incomeper (i) above, recognised in other comprehensive income (OCI) (HKAS 19.127(b));

(iii) additional contributions to the underlying assets; and(iv) payments of benefits.

20.The LSP obligation is measured on a ‘gross’ basis under this approach in that it is notreduced by the offsetable accrued benefits, as the employer’s rights to those benefits arerecognised as a separate reimbursement asset as explained above.

21.It should be noted that the fair value measurement of the reimbursement asset underapproach 2 (determined in accordance with HKAS 19.116(a) and HKFRS 13 Fair ValueMeasurement8) is not the same as the measurement of the offsetable accrued benefitsunder approach 1 (determined using an actuarial valuation method in accordance withHKAS 19.67 to 98).See Example 3 for an illustration of approach 2 before taking into account the impact ofthe Amendment Ordinance.8 Although the reimbursement asset is measured with reference to HKFRS 13, it is exempt from the disclosure requirements thereof(HKFRS 13.7(a)).Example 3: Illustrating paragraphs 17 - 21 before taking into account the impact ofthe Amendment OrdinanceSame background information as Example 1.For simplicity, we assume the return on the reimbursement asset recognised in OCI is nil inthis example (see paragraph 19(ii) above).The journal entries (HK$) recorded by the entity for the year ended April 2023 are as follows:

Dr Reimbursement asset7,896Cr Bank7,896To recognise the employer MPF contribution as a reimbursement asset associated with theLSPDr Reimbursement asset1,549Cr Interest income1,549To recognise the interest income on the reimbursement asset(a)

Dr Current service cost9,851Dr Interest expense2,009Cr LSP obligation11,860To recognise the defined benefit obligation for the LSP in accordance with HKAS 19.70(a)

(a) HKAS 19.116(b) allows entities to recognise the components of defined benefit cost (in profit or loss or OCI) net of amountsrelating to changes in the carrying amount of the reimbursement asset, i.e. a net presentation option. This example shows thegross presentation option without netting the relevant amounts.Refer to Appendix 4 for the detailed calculation.

22.Under this approach, the financial impacts in the year of enactment of the AmendmentOrdinance are as follows:

(a) An adjustment to the LSP obligation to reflect the change in reference date used fordetermining the last month’s salary (i.e. just before the Transition Date) whencalculating the pre-transition LSP; and(b) No specific impact on the measurement of the reimbursement asset arising from theAbolition except for capping it at the amount of the pre-transition LSP due to thechange brought about in (a) above.See Example 4 for an illustration of approach 2 after taking into account the impact of theAmendment Ordinance.Example 4: Illustrating paragraph 22 after taking into account the impact of theAmendment OrdinanceSame background information as Example 1.Assume that the entity (employer) adopts approach 2 before and after the Abolition.For simplicity, we assume the return on the reimbursement asset recognised in OCI is nil inthis example (see paragraph 19(ii) above).The journal entries (HK$) recorded by the entity in the year of enactment of the AmendmentOrdinance (i.e. year ended April 2023 as the Amendment Ordinance was enacted in June2022) are as follows:

Dr LSP obligation10,861Cr Past service cost10,861To recognise the adjustment to pre-transition LSP(a). (56,090 <“Q” in App 5> – 66,951 <“P”

in App 4>)

(a) Given the Amendment Ordinance was enacted on 16 June 2022, this adjustment should be determined by comparing theexisting and revised LSP balances at that date. However, for simplicity, this example determines the adjustment using theLSP balance at the beginning of the financial year assuming any related movements during the 1.5 months to the enactmentdate are insignificant.Dr Reimbursement asset7,896Cr Bank7,896To recognise the employer MPF contribution as a reimbursement asset associated with theLSPDr Reimbursement asset1,549Cr Interest income1,549To recognise the interest income on the reimbursement asset(b)

Dr Current service cost8,253Dr Interest expense1,683Cr LSP obligation9,936To recognise the defined benefit obligation for the LSP in accordance with HKAS 19.70(b)

(b) HKAS 19.116(b) allows entities to recognise the components of defined benefit cost (in profit or loss or OCI) net of amountsrelating to changes in the carrying amount of the reimbursement asset, i.e. a net presentation option. This example shows thegross presentation option without netting the relevant amounts.Refer to Appendix 5 for the detailed calculation.III. Comparison of the two approaches

23.Referring to the above examples, the overall effects of the two accounting approaches onthe respective items in the statement of financial position and the statement ofcomprehensive income (i) without taking into account and (ii) after taking into account theAbolition in the year of enactment of the Amendment Ordinance (FY2023), as well as forFY2024 after taking into account the Abolition are summarised overleaf.As at/ for the year ended 30 April 2023As at/ for the year ended30 April 2024Approach 1Approach 2Approach 1Approach 2IgnoringAbolitionReflectingAbolitionIgnoringAbolitionReflectingAbolitionExample 1Example 2Example 3Example 4(Note 1)

(Note 2)

(Note 1)

(Note 2)

Statement of financial position (Note 3)

AssetsReimbursementasset--61,079(e)

61,079(h)

-71,123(m)

LiabilitiesLSP obligation14,001(a)

39,405(c)

78,811(f)

66,026(i)

45,661(k)

76,508(n)

For illustrative purposes onlyLSP liabilityminus LSP-related assets(14,001)

(39,405)

(17,732)

(4,947)

(45,661)

(5,385)

Statement of comprehensive income(p)

Impact on profit /(loss)

(10,003)(b)

(35,407)(d)

(10,311)(g)

2,474(j)

(14,466)(l)

(8,650)(o)

(a) App 2 Closing LSP obligation as at 30 April 2023(b) Example 1: 7,896+9,851+2,009-1,652-8,101(c) App 3 Closing LSP obligation as at 30 April 2023(d) Example 2: 21,581+7,896+8,253+1,683-678-3,328(e) App 4 Closing fair value of reimbursement asset as at 30 April 2023(f) App 4 Closing LSP obligation as at 30 April 2023(g) Example 3: 9,851+2,009-1,549(h) App 5 Closing fair value of reimbursement asset as at 30 April 2023(i) App 5 Closing LSP obligation as at 30 April 2023(j) Example 4: 8,253+1,683-10,861-1,549(k) App 3 Closing LSP obligation as at 30 April 2024(l) App 3 (for the year ended 30 April 2024): 8,211 <5% contribution to MPF by employer> +1,182 <Net Interest > +5,073 <Net currentservice costs>(m) App 5 Closing fair value of reimbursement asset as at 30 April 2024(n) App 5 Closing LSP obligation as at 30 April 2024(o) App 5 (for the year ended 30 April 2024): 1,981 <Interest expense> +8,501 <Current service cost> -1,832 <Interest income>(p) We have assumed for simplicity purposes that the impact to OCI is nil in all the examples. In practice, it is likely that there will beremeasurements of the net defined benefit liability which are recognised in OCI, such as actuarial gains/losses and a return onreimbursement assets that is different from the amount reflected as interest income. (HKAS 19.120(c))

Notes:

(1)As mentioned above, the LSP obligation is measured on a ‘net’ basis under approach1 and on a ‘gross’ basis under approach 2.

(2)A comparison of the one-off adjustment to the LSP obligation in the year of enactmentof the Amendment Ordinance (i.e. year ended April 2023 in these examples) revealsthe following:

 Approach 1 (example 2): the LSP obligation increases by HK$21,581 Approach 2 (example 4): the LSP obligation decreases by HK$10,861The decrease under approach 2 is due to the use of a smaller last month’s salary tocalculate the pre-transition LSP based on the last month’s salary ‘immediatelypreceding the Transition Date’ instead of that ‘immediately before termination ofemployment’. Although this change is also reflected in approach 1, its impact isoutweighed by the reduction in negative service cost (which is attributed to the periodsof service on a straight-line basis) as the accrued benefits from mandatory employerMPF contributions may no longer be offset against the post-transition LSP obligation.Entities applying approach 2 would generally recognise a higher expense in later yearsas compared to approach 1 once the accrued benefits from mandatory employer MPFcontributions have reached the pre-transition LSP amount (see years ending after April2027 and the related note in Appendix 5). Ultimately, the LSP liability for a specificemployee under both approaches will converge to the same amount at the time theLSP liability is expected to be settled.

(3)Under both approaches, the amount of accrued benefits derived from mandatory9employer MPF contributions that may be used to offset LSP is capped at the amountof the pre-transition LSP obligation, i.e. HK$94,887 in examples 2 and 4.Under approach 1, the cap is reflected by limiting the amount of projected totalaccrued benefits derived from deemed employee contributions (see ‘B’ in Appendix3 and note how the total amount of ‘contribution plus interest’ is capped atHK$94,887 from April 2024 onwards). The cap is therefore embedded in the LSPobligation line item on the balance sheet;

Under approach 2, the cap is reflected by capping the fair value of thereimbursement asset at HK$94,887 (see the ‘fair value of reimbursement asset’section in Appendix 5 and note how the fair value is capped at HK$94,887 fromApril 2027 onwards). No further interest income or return on assets will berecognised once the cap has been reached and any further mandatory employerMPF contributions will be recognised as an expense (unless the fair value of thereimbursement asset drops below the pre-transition LSP liability).

24.The table below compares the two approaches on steady state application.AspectsApproach 1Approach 2AEmployer MPFcontributionsExpensed as incurred Recognised asreimbursement asset uponpayment, taking into accountthe LSP liability recognisedto date and the maximumamount that is eligible foroffset against the LSP (the‘cap’);

 Any further contributions arerecognised as an expenseas incurred.9 To the extent that accrued benefits are derived from voluntary employer MPF contributions or gratuities, those benefits may continue tobe used to offset pre- and post-transition LSP irrespective of when the original contributions were made. Voluntary contributions andgratuities will therefore affect the projection of the total accrued benefits derived from deemed employee contributions (approach 1) andthe valuation of the reimbursement asset (approach 2).AspectsApproach 1Approach 2BLSP – current service cost(P/L) (before deductingany negative service cost)

Same under both approachesCLSP – negative servicecost (P/L)

Represents the deemedemployee contribution to theLSP as if he is using ‘his ownmoney’ to fund his own LSPbenefitsNADDefined contribution planexpense (P/L)

(HKAS 19.53)

[Linked to A]Reflects the employer MPFcontributionsReflects the employer MPFcontributions exceeding theamount of reimbursement assetthat can be recognisedEDefined benefit planexpense (P/L)

(HKAS 19.57(c))

[B – C amongst others*]Smaller than approach 2 due tothe deduction of negativeservice costBigger than approach 1 as nonegative service costFLSP liability – definedbenefit liability (B/S)

(HKAS 19.57(b))

[Incorporates E amongstothers*]Smaller than approach 2 as it ismeasured on a ‘net’ basis inthat the amount is determinedafter deducting the negativeservice cost arising from theoffsetable accrued benefitsBigger than approach 1 as it ismeasured on a ‘gross’ basis inthat the offsetable accruedbenefits are recognisedseparately as a reimbursementassetGReimbursement asset(B/S)

(HKAS 19.116)

[Linked to A]NARepresents the entity’s right toclaim reimbursement from theMPF trustees for the offsetableaccrued benefits when settlinga LSP liabilityHLSP liability minus LSP-related assets (forillustrative purposes only)

[F – G]Generally bigger than approach2; however,Generally smaller thanapproach 1; however,both approaches will converge to the same amount at the time theLSP liability is expected to be settled.* The other components have not been listed here for the sake of simplicity

25.Any changes in actuarial assumptions (e.g. employee turnover and mortality, discountrates, benefit levels, increases in salary etc.) will affect the LSP liability (both approaches)

and the reimbursement asset (approach 2) with a corresponding adjustment to OCI as aremeasurement gain or loss (HKAS 19.120(c)). Such amounts recognised in OCI may notbe subsequently reclassified to profit or loss (HKAS 19.122). For example, if the employeein the examples above resigns unexpectedly, the LSP liability and the reimbursementasset will be derecognised in full with a corresponding adjustment to OCI.IV. Further practical considerations

26.For simplicity, the examples in this guidance are constructed on the following assumptions:

(a) one employee who is expected to earn the right to LSP;

(b) a constant discount rate of 3% for the LSP obligation and a constant investment returnof 3% for the deemed employee contribution as well as for the reimbursement assetthroughout all years (actual discount rate and return equal expected); and(c) no actuarial gains/losses i.e. no difference between the previous actuarial assumptionsand what has actually occurred (e.g. employee turnover and mortality, discount rates,benefit levels, increases in salary etc.) and no change in any of the actuarialassumptions throughout all years.

27.In practice, however, entities will often be dealing with more complex situations, such as(a) groups of employees where an entity can only form expectations of who will be entitledto LSP and at which points in time on a cohort basis; (b) the discount rate for the LSPobligation and the return on deemed employee contributions or reimbursement assets maynot be the same; and (c) changes in actuarial assumptions and experience adjustments.

28.In light of the above, entities should consider the following when applying this guidance:

(a) Estimate the number of employees that will earn the right to LSP and the timing of theLSP payments, with corresponding adjustments to the deemed employee contributionsor the reimbursement asset;

(b) Beware that the market yields on high quality corporate bonds by reference to whichthe discount rate for the LSP obligation is determined (HKAS 19.83) may not be thesame as the return on deemed employee contributions or the reimbursement asset;

and(c) Any actuarial gains/losses arising from changes in actuarial assumptions andexperience adjustments as well as the difference between the projected interestincome and the actual return of the reimbursement asset would be recognised in OCI.

29.Furthermore, the MPFSO and the EO stipulate that the accrued benefits derived from anemployer’s MPF contributions for an employee may only be used to offset that employee’sLSP. The impact of this on both approaches is that the projected total accrued benefitsderived from deemed employee contributions (approach 1) and the reimbursement asset(approach 2) must not exceed the portion of that employee’s LSP obligation that is eligiblefor offset. From a practical point of view, entities should consider whether they canreasonably estimate the relevant amounts under the respective approaches for eachemployee, e.g. by obtaining sufficient appropriate information to determine the individualemployee’s offsetable accrued benefits in his MPF account to the extent material.10V. Selection of accounting policy and transition

30.Prior to the Abolition, the net liability for the LSP may have been immaterial for manyentities due to the offsetting mechanism, so there had not been much related disclosurein terms of accounting policy, presentation in the statement of financial position, theamounts recognised in the statement of comprehensive income, or the type of post-employment employee benefits in terms of which they are accounted for.

31.There is no specific guidance in HKAS 19 on how to account for the offsetting mechanismand the FRSC considers the related issues highly complex. This guidance provides new10 See section 6 of TechWatch 161 issued in March 2016 for a discussion of the limits imposed by the Personal Data (Privacy) Ordinanceon an employer’s access to an employee’s MPF account data.information to help entities assess their situation and account for the impact arising fromthe Abolition. Consistent with the principles in paragraph 8.6 of the IASB and IFRSInterpretations Committee Due Process Handbook (IASB and IFRS IC DPH), theexplanatory material in this guidance may provide additional insights that might change anentity’s understanding of the principles and requirements in HKFRS Standards and,because of this, an entity might determine that it needs to change its related accountingpolicies.

32.As a result of this guidance, therefore, entities have to determine whether their accountingpolicies for (i) the offsetting mechanism in general and (ii) the impact arising from theenactment of the Amendment Ordinance in particular remain appropriate. In making thisassessment, entities should bear in mind that a voluntary change in accounting policy ispermitted only if the change results in the financial statements providing reliable and morerelevant information about the effects of the offsetting mechanism and the Abolition (HKAS

8.14(b)). Any resulting change in accounting policy should be applied retrospectively inaccordance with HKAS 8 Accounting Policies, Changes in Accounting Estimates andErrors, subject to the impracticability constraint in HKAS 8.50-53.

33.In the article Agenda decisions—time is of the essence, Sue Lloyd, former Vice-Chair ofthe IASB and former Chair of the IFRS Interpretations Committee, explained theconsiderations about agenda decisions as a form of explanatory materials and stated that“… the Board has acknowledged that agenda decisions often provide new information thatshould be seen as helpful and persuasive (for example, by integrating requirements in theStandards with material in the Basis for Conclusions and Illustrative Examples). Thismeans that a company does not have an error simply because its application of IFRSStandards was inconsistent with an agenda decision.”

VI. Disclosures

34.Regardless of which accounting policy is adopted by an entity for the LSP obligation andthe associated offsetting mechanism, it should provide details thereof in accordance withparagraph 117 of HKAS 1 Presentation of Financial Statements if the related accountingpolicy information is material. An entity should also provide relevant disclosures in relationto a defined contribution plan (e.g. MPF) and a defined benefit plan (e.g. LSP) as requiredby HKAS 19.53-54 and 135-152 respectively to the extent material. In particular, entitiesshould provide a description of the plan amendment as required by HKAS 19.139(c) in theyear of enactment of the Amendment Ordinance.

35.Given that the crux of the issue lies in the interaction between MPF and LSP and the twoapproaches described in this guidance characterise the interaction differently foraccounting purposes, entities should provide clear disclosures that are consistent with theaccounting characterisation to the extent the information is material. Below are somepoints for consideration:

(a) Approach 1: the interaction is reflected through the recognition of a negative servicecost. Disclosures should therefore be made about (inter alia) the basis for such acharacterisation, how the negative service cost is estimated, projected and attributedto periods of service, the actuarial assumptions involved, the cap to which the negativeservice cost is subject and how its measurement is subsumed within the LSP liability.Employer MPF contributions are recognised as an expense when incurred in terms ofthe basic principles of a defined contribution plan under this approach and are subjectto the disclosure requirements of HKAS 19.53 and 54.(b) Approach 2: the interaction is reflected through the recognition of a reimbursementasset. Disclosures should therefore be made about (inter alia) the basis for such acharacterisation, the discount rate for the purposes of recognising interest income, howthe fair value of the reimbursement asset is determined and the cap to which it issubject.In addition, entities should disclose a reconciliation from the opening balance to theclosing balance of the reimbursement asset in accordance with HKAS 19.140(b) and141, as well as describe the relationship between the reimbursement right and therelated obligation (HKAS 19.140(b)).With regard to those employer MPF contributions that are not accounted for as anexpense, the disclosure requirement of HKAS 19.53 would not be applicable.Nevertheless, entities would still need to disclose information about employer MPFcontributions for key management personnel in accordance with HKAS 19.54.

36.In the event that an entity has changed its accounting policy with respect to the LSPobligation and the offsetting mechanism, it should provide the following disclosures inaccordance with HKAS 8.29 with regard to a voluntary change in accounting policy:

(a) the nature of the change in accounting policy;

(b) the reasons why applying the new accounting policy provides reliable and morerelevant information;

(i) for each financial statement line item affected; and(ii) if HKAS 33 Earnings per Share applies to the entity, for basic and dilutedearnings per share;

(d) the amount of the adjustment relating to periods before those presented, to the extentpracticable; and(e) if retrospective application is impracticable for a particular prior period, or for periodsbefore those presented, the circumstances that led to the existence of that conditionand a description of how and from when the change in accounting policy has beenapplied.Financial statements of subsequent periods need not repeat these disclosures.VII. Time to implement the guidance

37.As mentioned above, the FRSC acknowledges that given the highly complex nature of thisissue and the lack of specific guidance in extant literature, an entity should be entitled tosufficient time to determine its accounting policy and implement any necessary policychange (for example, an entity may need to obtain new or more detailed information,formulate additional estimates or adapt its systems to implement a change). This is byanalogy to the time allowed for entities to implement changes resulting from agendadecisions published by the IFRS Interpretations Committee as set out in paragraph 8.6 ofthe IASB and IFRS IC DPH11.

38.Determining how much time is sufficient to implement the change is a matter of judgementthat depends on an entity’s particular facts and circumstances. There is no specific timeframe for implementing the change. However, entities are expected to consider thisguidance and implement any necessary accounting policy change on a timely basis.VIII. Further update to the guidance

39.The FRSC will consider the need for further guidance in relation to the GovernmentSubsidy in due course (paragraph 7). The Government Subsidy does not yet meet therecognition criteria of any element of the financial statements based on an assessment ofrelevant facts and circumstances at the time of writing. When preparing their financialstatements, entities should consider the latest developments with respect to theGovernment Subsidy and evaluate the impact of those developments on their financialstatements. This includes the need to provide any relevant subsequent event disclosuresabout the Government Subsidy based on relevant facts and circumstances up to the timethe financial statements are authorised for issue.11 Paragraph 8.6 of the IASB and IFRS IC DPH states that “… It is expected that an entity would be entitled to sufficient time to make thatdetermination and implement any necessary accounting policy change (for example, an entity may need to obtain new information oradapt its systems to implement a change).”

Appendix 1 - Summary of the offsetting mechanism and the changes introduced by theAmendment OrdinanceThe offsetting mechanism

1.HK employers are obliged by law to:

(a) make monthly contributions to a MPF for their employees to provide for the latter’sretirement benefits; and(b) make a LSP to employees when they are dismissed by the employer (conditionsapply), resign at age 65 or above or on grounds of ill health, or die.

2.An employer’s mandatory MPF contribution is calculated as: 5% × employees’ relevantincomeThe contribution is capped at HK$1,500/employee/month.

3.The LSP is calculated as: Last month’s salary × 2/3 × no. of years of serviceLast month salary is capped at HK$22,500. The amount of LSP payable per employee iscapped at HK$390,000.

4.The EO and the MPFSO provide that an employer can offset the accrued benefits derivedfrom an employer’s MPF contributions against the LSP.For example, assume an entity dismisses an employee and needs to pay him a LSP ofHK$100 applying the formula in point 3 above (i.e. before applying the offset). Assumefurther that the accrued benefits from the employer’s MPF contributions to date for thisemployee is HK$75. The employer only needs to pay the employee a LSP of HK$25 andthe employee can claim the remaining HK$75 from the MPF trustee. Alternatively, theemployer can pay the employee the full LSP of HK$100 and claim a reimbursement ofHK$75 from the MPF trustee. No top-up needs to be made to the MPF trustee after the‘withdrawal’ of the HK$75 used as part-payment for the LSP.Changes introduced by the Amendment Ordinance

5.The Amendment Ordinance introduces the following two key changes:

Pre-amendmentPost-amendment1st changeThe amount ofaccruedbenefitsderived fromemployer MPFcontributionthat may beused to offsetLSPAccrued benefitsderived from bothmandatory andvoluntarycontributions madeby the employerbefore, on and afterthe Transition Datemay be used tooffset LSPAccrued benefits derived from mandatory employercontributions may not be used to offset post-transitionLSPNote:

 accrued benefits derived from mandatory employercontributions made pre-, on or post-transition maycontinue to be used to offset pre-transition LSP accrued benefits derived from voluntary employercontributions and gratuities made pre-, on or post-transition may continue to be used to offset pre-and post-transition LSP2nd changeCalculationbasis for lastmonth’s salaryLast month’s salaryimmediately beforetermination ofemploymentPre-transition LSP: last month’s salary immediatelypreceding the Transition DatePost-transition LSP: last month’s salary immediatelybefore termination of employmentAppendix 2 - Illustration of approach 1 (before taking into account the impact of the Amendment Ordinance)

Please note that the numbers presented throughout this appendix have been rounded, and thus may not add up precisely to the totals provided.Year ofenactmentTransitionyear(transitiondate:

1 May2025)

Apr-16Apr-17Apr-18Apr-19Apr-20Apr-21Apr-22Apr-23Apr-24Apr-25Apr-26Apr-27Apr-28Apr-29Apr-30Apr-31Apr-32Apr-33Apr-34Apr-35YearSalary increase/discount rateAnnual salary4%a120,000124,800129,792134,984140,383145,998151,838157,912164,228170,797177,629184,734192,124199,809207,801216,113224,758233,748243,098252,822Project benefit at retirement (lastmonthly salary x year of service x 2/3)

280,913A(Projected LSP obligation to be paid after 20 years services) = $252,822/12*20*2/3Project benefit at retirement attributedto year of serviceb = A/2014,04614,04614,04614,04614,04614,04614,04614,04614,04614,04614,04614,04614,04614,04614,04614,04614,04614,04614,04614,046Gross benefit (LSP)

Opening obligationc-8,01016,50125,49435,01145,07755,71566,95178,81191,322104,513118,413133,053148,465164,682181,739199,670218,514238,309259,095Interest3%d = c*3%-1,0501,3521,6712,0092,3642,7403,1353,5523,9924,4544,9405,4525,9906,5557,1497,773Current service coste = b/(1+3%)^h8,0108,2508,4988,7539,0159,2869,5649,85110,14710,45110,76511,08811,42011,76312,11612,47912,85413,23913,63714,046215,233(Current service costs without offsetting the MPF contributed by employer)

Closing obligationf8,01016,50125,49435,01145,07755,71566,95178,81191,322104,513118,413133,053148,465164,682181,739199,670218,514238,309259,095280,913Deemed contribution from employee5% contribution to MPF by employerg = a*5%6,0006,2406,4906,7497,0197,3007,5927,8968,2118,5408,8819,2379,6069,99010,39010,80611,23811,68712,15512,641No. of year of investment of the 5%contribution to MPFh-Contribution plus interest to Year 203%i = g*(1+3%)^h10,52110,62310,72610,83010,93611,04211,14911,25711,36711,47711,58811,70111,81411,92912,04512,16212,28012,39912,52012,641231,007BAttributed contributionj = B/2011,55011,55011,55011,55011,55011,55011,55011,55011,55011,55011,55011,55011,55011,55011,55011,55011,55011,55011,55011,55049,906(Projected amount of the net LSP liability with offset of MPF at the end of 20 years)

Attributed contributions ('discounted')

Openingk6,58713,56920,96428,79137,06945,81755,05764,81075,09885,94697,376109,416122,089135,425149,452164,197179,694195,972213,065Interest3%l = k*3%1,1121,3751,6521,9442,2532,5782,9213,2823,6634,0634,4844,9265,3915,8796,392Negative benefitm = j/(1+3%)^h6,5876,7856,9887,1987,4147,6367,8658,1018,3448,5958,8529,1189,3919,6739,96310,26210,57010,88711,21411,550176,995(Negative service cost used to 'offset' the gross LSP benefit)

Closingn6,58713,56920,96428,79137,06945,81755,05764,81075,09885,94697,376109,416122,089135,425149,452164,197179,694195,972213,065231,00738,238(Net current service cost with consideration of the offset of MPF)

Liability to be recorded by the employerXOpening LSP obligationo1,4232,9314,5296,2208,0089,89811,89414,00116,22418,56721,03723,63826,37629,25732,28735,47338,82042,33746,030Interest3%p = o*3%1,0641,1651,2701,381Net current service costs - currentservice cost less negative benefitq = e-m1,4231,4661,5101,5551,6021,6501,6991,7501,8031,8571,9121,9702,0292,0902,1522,2172,2842,3522,4232,495Closing LSP obligationr1,4232,9314,5296,2208,0089,89811,89414,00116,22418,56721,03723,63826,37629,25732,28735,47338,82042,33746,03049,906(Projected amount to be offset against the LSP obligation, being the sum of'Contribution plus interest' from Y1 to Y20)

Appendix 3 - Illustration of approach 1 (after taking into account the impact of the Amendment Ordinance)

Please note that the numbers presented throughout this appendix have been rounded, and thus may not add up precisely to the totals provided.Year ofenactmentTransitionyear(transitiondate:

1 May 2025)

Apr-16Apr-17Apr-18Apr-19Apr-20Apr-21Apr-22Apr-23Apr-24Apr-25Apr-26Apr-27Apr-28Apr-29Apr-30Apr-31Apr-32Apr-33Apr-34Apr-35YearSalary increase/discount rateAnnual salary4%a120,000124,800129,792134,984140,383145,998151,838157,912164,228170,797177,629184,734192,124199,809207,801216,113224,758233,748243,098252,82294,887LSP accrued before the Transition Date(Based on last monthly wages before Transition Date x year of service x 2/3)

Project benefit at retirement (lastmonthly salary x year of service x 2/3)

235,344AProject benefit at retirement attributedto year of serviceb = A/2011,76711,76711,76711,76711,76711,76711,76711,76711,76711,76711,76711,76711,76711,76711,76711,76711,76711,76711,76711,767Gross benefit (LSP)

Opening obligationc6,71113,82421,35829,33237,76546,67756,09066,02676,50887,55999,204111,470124,382137,968152,257167,280183,067199,651217,065Interest3%d = c*3%1,1331,4001,6831,9812,2952,6272,9763,3443,7314,1394,5685,0185,4925,9906,512Current service coste = b/(1+3%)^h6,7116,9127,1197,3337,5537,7808,0138,2538,5018,7569,0199,2899,5689,85510,15010,45510,76911,09211,42411,767180,318(Current service costs without offsetting the MPF contributed by employer)

Closing obligationf6,71113,82421,35829,33237,76546,67756,09066,02676,50887,55999,204111,470124,382137,968152,257167,280183,067199,651217,065235,344Deemed contribution from employee5% contribution to MPF by employerg = a*5%6,0006,2406,4906,7497,0197,3007,5927,8968,2118,5408,8819,2379,6069,99010,39010,80611,23811,68712,15512,641No. of year of investment of the 5%contribution to MPFh-Contribution plus interest3%i = g*(1+3%)^h(until FY2023; seeremarks in last columnfor FY2024 onwards)

10,52110,62310,72610,83010,93611,04211,14911,2577,803-----------94,887BAttributed contributionj = B/204,7444,7444,7444,7444,7444,7444,7444,7444,7444,7444,7444,7444,7444,7444,7444,7444,7444,7444,7444,744140,457(Projected amount of the net LSP liability with offset of MPF at the end of 20 years)

Attributed contributions ('discounted')

Openingk2,7065,5748,61111,82615,22618,82022,61526,62130,84735,30339,99844,94350,14955,62761,38867,44573,81080,49687,518Interest3%l = k*3%1,0591,2001,3481,5041,6691,8422,0232,2142,4152,626Negative benefitm = j/(1+3%)^h2,7062,7872,8702,9573,0453,1373,2313,3283,4273,5303,6363,7453,8583,9734,0934,2154,3424,4724,6064,74472,702(Negative service cost used to 'offset' the gross LSP benefit)

Closingn2,7065,5748,61111,82615,22618,82022,61526,62130,84735,30339,99844,94350,14955,62761,38867,44573,81080,49687,51894,887107,616(Net current service cost with consideration of the offset of MPF)

Liability to be recorded by the employerYOpening LSP obligationo4,0058,25012,74717,50622,53827,85833,47539,40545,66152,25659,20766,52774,23382,34190,86999,835109,257119,154129,547Interest3%p = o*3%1,0041,1821,3701,5681,7761,9962,2272,4702,7262,9953,2783,5753,88632,840Net current service costs - currentservice cost less negative benefitq = e-m4,0054,1254,2494,3764,5084,6434,7824,9265,0735,2265,3825,5445,7105,8826,0586,2406,4276,6206,8187,023107,616Closing LSP obligationr4,0058,25012,74717,50622,53827,85833,47539,40545,66152,25659,20766,52774,23382,34190,86999,835109,257119,154129,547140,457140,457(Projected amount to be offset against the LSP obligation)

As a result of the Amendment Ordinance, the accrued benefits derived from mandatoryemployer MPF contributions may only be used to offset pre-transition LSP (calculated basedon the last monthly wages before Transition Date x year of service x 2/3), i.e. $94,887 in thisexample. Therefore, the accrued benefits is capped at $7,803 in 2024 (being $94,887 less theforecast cumulative amount from previous years) and no further deemed employeecontribution is projected thereafter.(Projected LSP obligation to be paid after 20 years of services:

- Pre-transition LSP: based on the wages for April 2025;

- Post-transition LSP: based on last monthly wages before termination)

= $170,797/12*10*2/3+$252,822/12*10*2/3Appendix 4 - Illustration of approach 2 (before taking into account the impact of the Amendment Ordinance)

Please note that the numbers presented throughout this appendix have been rounded, and thus may not add up precisely to the totals provided.Year ofenactmentTransitionyear(transitiondate:

1 May 2025)

280,913A(Projected LSP obligation to be paid after 20 years services)

= $252,822/12*20*2/3Project benefit at retirement attributedto year of serviceb = A/2014,04614,04614,04614,04614,04614,04614,04614,04614,04614,04614,04614,04614,04614,04614,04614,04614,04614,04614,04614,046Gross benefit (LSP)

POpening obligationc8,01016,50125,49435,01145,07755,71566,95178,81191,322104,513118,413133,053148,465164,682181,739199,670218,514238,309259,095Interest expense3%d = c*3%1,0501,3521,6712,0092,3642,7403,1353,5523,9924,4544,9405,4525,9906,5557,1497,773Current service coste = b/(1+3%)^remaining years of service8,0108,2508,4988,7539,0159,2869,5649,85110,14710,45110,76511,08811,42011,76312,11612,47912,85413,23913,63714,046215,233(Current service costs without offsetting the employer MPF contribution)

Closing obligationf8,01016,50125,49435,01145,07755,71566,95178,81191,322104,513118,413133,053148,465164,682181,739199,670218,514238,309259,095280,913Fair value of reimbursement assetOpeningg6,00012,42019,28226,61034,42742,76051,63561,07971,12381,79793,132105,163117,924131,452145,786160,965177,032194,030212,006Interest income3%h = g*3%1,0331,2831,5491,8322,1342,4542,7943,1553,5383,9444,3744,8295,3115,8216,360Employer contributionI = a*5%6,0006,2406,4906,7497,0197,3007,5927,8968,2118,5408,8819,2379,6069,99010,39010,80611,23811,68712,15512,641(Pre-funding of LSP through employer MPF contribution)

Closingj6,00012,42019,28226,61034,42742,76051,63561,07971,12381,79793,132105,163117,924131,452145,786160,965177,032194,030212,006231,007Net defined benefit liability net of reimbursement asset (for illustrative purposes only; gross presentation on statement of financial position)

Present value of defined benefit obligation and net defined benefit liability8,01016,50125,49435,01145,07755,71566,95178,81191,322104,513118,413133,053148,465164,682181,739199,670218,514238,309259,095280,913Fair value of reimbursement asset(6,000)

(12,420)

(19,282)

(26,610)

(34,427)

(42,760)

(51,635)

(61,079)

(71,123)

(81,797)

(93,132)

(105,163)

(117,924)

(131,452)

(145,786)

(160,965)

(177,032)

(194,030)

(212,006)

(231,007)

Net2,0104,0816,2118,40110,65012,95515,31617,73120,19922,71625,28127,89030,54133,23035,95338,70541,48244,27947,08949,906Appendix 5 - Illustration of approach 2 (after taking into account the impact of the Amendment Ordinance)

Please note that the numbers presented throughout this appendix have been rounded, and thus may not add up precisely to the totals provided.Year ofenactmentTransitionyear(transitiondate:

1 May2025)

Apr-16Apr-17Apr-18Apr-19Apr-20Apr-21Apr-22Apr-23Apr-24Apr-25Apr-26Apr-27Apr-28Apr-29Apr-30Apr-31Apr-32Apr-33Apr-34Apr-35YearSalary increase/discount rateAnnual salary4%a120,000124,800129,792134,984140,383145,998151,838157,912164,228170,797177,629184,734192,124199,809207,801216,113224,758233,748243,098252,82294,887LSP accrued before the Transition Date(Based on last monthly wages before Transition Date x year of service x 2/3)

Project benefit at retirement (lastmonthly salary x year of service x 2/3)

QOpening obligationc6,71113,82421,35829,33237,76546,67756,09066,02676,50887,55999,204111,470124,382137,968152,257167,280183,067199,651217,065Interest3%d = c*3%1,1331,4001,6831,9812,2952,6272,9763,3443,7314,1394,5685,0185,4925,9906,512Current service coste = b/(1+3%)^remaining years of service6,7116,9127,1197,3337,5537,7808,0138,2538,5018,7569,0199,2899,5689,85510,15010,45510,76911,09211,42411,767180,318(Current service costs without offsetting the employer MPF contribution)

Closing obligationf6,71113,82421,35829,33237,76546,67756,09066,02676,50887,55999,204111,470124,382137,968152,257167,280183,067199,651217,065235,344Fair value of reimbursement assetOpeningg6,00012,42019,28226,61034,42742,76051,63561,07971,12381,79793,13294,88794,88794,88794,88794,88794,88794,88794,887Interest income3%h = g*3%(until FY 2026; see note from FY2027 onwards)

1,0331,2831,5491,8322,1342,4541,755--------Employer contributionI = a*5%(until FY 2026; see note from FY2027 onwards)

6,0006,2406,4906,7497,0197,299.927,5927,8968,2118,5408,881---------(Pre-funding of LSP through employer MPF contribution)

Closingj6,00012,42019,28226,61034,42742,76051,63561,07971,12381,79793,13294,88794,88794,88794,88794,88794,88794,88794,88794,887NoteNet defined benefit liability net of reimbursement asset (for illustrative purposes only; gross presentation on statement of financial position)

Present value of defined benefit obligation and net defined benefit liability6,71113,82421,35829,33237,76546,67756,09066,02676,50887,55999,204111,470124,382137,968152,257167,280183,067199,651217,065235,344Fair value of reimbursement asset(6,000)

(12,420)

(19,282)

(26,610)

(34,427)

(42,760)

(51,635)

(61,079)

(71,123)

(81,797)

(93,132)

(94,887)

Net1,4042,0762,7223,3373,9174,4564,9475,3855,7626,07216,58229,49443,08057,37072,39388,180104,763122,177140,457Note: Accrued benefits from mandatory employer MPF contributions (i.e. principal plus interest) pre-, at- and post-transition date can be used to offset the pre-transition date LSP liability (i.e. $94,887 in this example).The reimbursement asset is therefore capped at $94,887 and the interest income for FY2027 is capped at $1,755 (being $94,887 less the opening balance of the reimbursement asset).In practice, there may be complexity in how to limit the FV of reimbursement asset to the pre-transition LSP liability given past MPF contributions continue to accrue interest (or incur losses) until the ultimate retirement date.This is especially the case when the return on the reimbursement assets could be negative. In other words, even if the FV of reimbursement asset has reached the pre-transition LSP threshold in a previous year, the fair valuecan drop in future years due to losses in the MPF fund. In this case, future employer MPF contributions will once again be eligible to form part of the reimbursement asset to fund the pre-transition LSP balance.For the sake of simplicity, this example assumes no further interest accrual on the reimbursement asset after the $94,887 threshold has been reached. Mandatory employer MPF contributions after this date will be accounted for as a normal defined contribution plan,i.e. Dr expense; Cr bank.(Projected LSP obligation to be paid after 20 years of services:

- Pre-transition LSP: based on the wages for April 2025;

- Post-transition LSP: based on last monthly wages before termination)

= $170,797/12*10*2/3+$252,822/12*10*2/3

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