Economic life

Economic life also known as useful life is either Economic life

  1. the period over which an asset is expected to be economically usable by one or more users, or Economic life
  2. the number of production or similar units expected to be obtained from an asset by one or more users. Economic life

Every asset has a lifecycle, which is its useful life from acquisition to disposal. Inevitably, the facilities we manage will outlive their installed building systems. The facility manager is responsible for managing not only the maintenance, but also the replacement of these systems. Additionally, facility managers replace components and systems for the purpose of improving performance or efficiency, which might occur prior to the end of the asset’s useful life. Regardless of the reason, all replacement projections are put into a strategy referred to as a long-term capital renewal plan, which aids the facility manager in their budget forecasts and requests. There are three stages in the life cycle:Economic life

  • Acquisition – This begins the lifecycle of the asset. Once the asset is designed, procured, and installed according to specifications, it is placed in the RPI (Real Property Inventory). Here, it is tracked through its useful life Economic life
  • Useful life – This stage encompasses the vast majority of the life cycle. All O&M activities are performed and tracked during the useful life stage in the life cycle. When the asset has reached the end of its useful life, it is disposed of Economic life
  • Disposal – At the end of the asset’s useful life, it is removed from service and sold, re-purposed, thrown away or recycled. If there is still an operational need for the disposed asset’s purpose, the life cycle begins again with acquisition of a replacement Economic life

The useful life of an asset refers to two things. First is an asset’s condition of service. An asset is still within its useful life if it is functioning properly. If the asset is not functioning and cannot be repaired, it has reached the end of its useful life. Second is the asset’s intended use. Assuming it is functioning properly, an asset that is still meeting its intended purpose is within its useful life. If operations have changed and the asset no longer meets its intended use, it is no longer within its useful life. Economic life

The useful life is a input to the depreciation methods and such. Economic life

Depreciation period

Depreciation starts when the asset is in the location and condition necessary for it to be capable of operating in the manner intended by management. This is the same moment up to which directly attributable costs can be recognised as a part of the cost of PP&E. An asset is depreciated over its useful life, which is the period over which an asset is expected to be available for use by an entity (IAS 16 6). Economic life

Useful life should be entity-specific and can be much shorter that the useful life that would be determined by others. It depends on the activity profile of an entity and its asset management policy (IAS 16 57). Useful life can be also expressed in the number of production or similar units expected to be obtained from the asset. Paragraph IAS 16.56 lists factors that should be considered in determining the useful life of an asset. Economic life

See also accounting for assets acquired in a business combination that the acquirer does not intend to use.

The depreciation method should allocate the depreciable amount of an asset on a systematic basis over its useful life and reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity (IAS 16 60). The most popular depreciation methods are:

  • straight-line method, Economic life
  • diminishing balance method and Economic life
  • units of production method, Economic life

However, an entity may apply its own method that best reflects the consumption of economic benefits of an asset over its useful life.

See also:

Economic life

Leave a comment