Question

Long Life Insurance Company Limited (‘the Company’) commenced life insurance business in Hong Kong on 1 July 2010. It makes up accounts to 30 June each year. The following information is extracted from the actuarial report and the accounts it prepared for the period 1 July 2012 to 30 June 2014:

i) Value of life insurance fund at 30 June 2014 $13,800,000

ii) Actuarial liability on policies comprising life fund at 30 June 2014 $11,200,000

iii) The life insurance fund had a surplus of $1,100,000 according to the actuarial report for the period ended 30 June 2012.

iv) Premiums received and receivable in respect of life insurance policies:

Year ended 30 June 2013 $1,600,000

Year ended 30 June 2014 $1,600,000

v )The Company has incurred deductible management expenses over the entire period of $1,000,000 and the proportion which relates to life insurance is $750,000. The management expense has not been charged to the life fund.

vi) The fund includes credits of $10,000 for profits on disposal of fixed assets, $30,000 for profits on disposal of shares comprising part of the life fund and $13,000 for transfer from reserve for contingencies.

vii) The fund also includes debits of $20,000 for transfer to contingency reserve and $25,000 for general provision for doubtful debts.

viii) Depreciation allowances applicable to the life insurance business have been agreed by the Assessor to be:

2013/14 $65,000

2014/15 $55,000

Required:

(a) Compute the assessable profits (or allowable losses) for the years of assessment 2013/14 and 2014/15 of the Company on the basis that the Company elects to compute its profits from the life insurance business using the adjusted surplus approach.

(b) Other than the adjusted surplus approach mentioned in (a) above, section 23 of the Inland Revenue Ordinance (IRO) provides another method to compute the assessable profits of life insurance business. Briefly explain the alternative method of computation of assessable profits of life insurance business.

Answer 1

2014	30-Jun	Value of life insurance fund		$13,800,000
2013	30-Jun	Premiums received and receivable		$1,600,000
2014	30-Jun	Actuarial liability		($11,200,000)
		proportion which relates to life insurance		$750,000
		management expenses		($1,000,000)
		credits of $10,000 for profits		($10,000)
		disposal of fixed assets		($30,000)
		transfer to contingency		($20,000)
		provision for doubtful debts		($25,000)
		Depreciation allowances		($65,000)
		Profit / lose		$3,800,000