Valtech Valuation provides LSP valuation under new legislation

HONG KONG, Oct. 9, 2023 /PRNewswire/ -- Valtech Valuation has updated and enhanced their LSP valuation model based on Projected Unit Credit Method, making reference to the HKICPA issued comprehensive guidance for the accounting for the impact arising from the abolition of the Mandatory Provident Fund (MPF)-Long Service Payment (LSP) offsetting mechanism (the "Abolition") on entities in Hong Kong. Past service cost should be recorded in the year of enactment of the Amendment Ordinance.

Valtech Valuation's LSP Model

Valtech Valuation's LSP model is developed by a team of five valuation specialists with academic backgrounds in Master of Finance, Master of Statistics, CPA (HKICPA) and CFA graduated from the University of Hong Kong, the Chinese University of Hong Kong, HKUST and the PolyU.

Valtech Valuation has been appointed by multinational corporations and prominent employers in Hong Kong. Currently, Valtech Valuation is actively helping clients with several thousands of employees in quantifying their LSP obligation under the new legislation. It is far more complicated than one can expect in handling a lot of different possibilities with a sizable workforce. Appointment of specialist is highly recommended.

What inputs do you need to prepare for the valuation?

The details of employee existing salary (monthly or daily salary as applicable), employer contributed MPF, mortality rate, employee resignation rate, salary increase rate, dismissal rate, discount rate, employment types (including part-time and contract), current year's defined benefit obligation ("DBO") accumulation and related payments. There is some useful public information available online. For example, Hong Kong Life Table is published by Hong Kong Government regularly online. Statistics on MPF return is also published by Mandatory Provident Fund Schemes Authority regularly. Additional information may include gratuity and voluntary MPF contribution.

Why are you encouraged to hire a valuation specialist to perform the calculation?

The calculation is not too complicated for one single employee. Following the practical example provided by HKICPA, you can calculate the result and project the impact for a single employee under simplified assumptions using a single worksheet of a spreadsheet program. However, when the number of employees increase from one to hundreds or even to thousands, the complexity will increase significantly. Programming technique will be required to handle massive data. On the other hand, according to Hong Kong Accounting Standard 19 (HKAS 19), actuarial assumptions should be used. For example, staff turnover rate should be considered and it should be different for staff in different sex or age groups. Combining the impact of actuarial assumptions and large pool of employees, involvement of valuation specialist can support company in using a proper framework and perform a high-level review on the input data.

Projected Unit Credit Method is mentioned under HKAS 19 in measuring post-employment obligations and costs. Projected Unit Credit Model is an actuarial valuation method that treats each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation.

Can you hire a valuation specialist in LSP valuation whom is not an actuary?

A typical HKAS 19 exercise necessitates multidisciplinary knowledge in basic actuarial science, derivative valuation, and accounting standards, to which they are closely interacted. Nevertheless, it is further stated in the accounting standard that a qualified actuary's report is not mandatory under HKAS 19. A specialist with comprehensive knowledge can best serve the purpose. In particular, the Projected Unit Credit Method involves certain demographic and financial assumptions. Valuation specialists generally have good understanding in return, interest, discounting and fair value of obligations at given scenario. However, that is not enough. Only those valuation specialists with advanced knowledge in probability and statistics are capable of taking into account death rates, dismissal and resignation probability across ages in the LSP model. LSP valuation under HKAS 19 under the new legislation determines the important DBO figure in financial reporting. In addition, a qualified specialist can also help you to identify the past and current services costs, interest impact, change in accounting policy, change in actuarial assumptions. As such, it is highly preferable that the specialist should understand accounting standards' requirement. Valtech's qualified valuation specialists are holding CPA qualification. Their knowledge in accounting largely facilitates their communication with auditors.

About Valtech Valuation

Valtech Valuation is a professional valuation firm accredited with ISO-9001 in valuation advisory services. The firm is renowned for its expertise in advanced valuation techniques, customized valuation models, data-driven insights, and adherence to compliance and reporting standards. With a solid track record in valuation advisory for listed companies, private equity, fund managers, and financial institutions, Valtech Valuation has a qualified team of CPA, CFA, Chartered Valuation Surveyor of Royal Institution of Chartered Surveyors, and valuer having Accredited in Business Valuation (ABV) by AICPA.

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