Economic life is the time within which an asset or goods retain their value for users or owners. As soon as an asset isn’t able to meet all of the user's requirements, it may be described as “to be past its economic life”. The tricky thing is that the economic life of an asset doesn’t equal a real physical asset’s life, an asset may be in its perfect state and absolutely unable to satisfy its owner. For instance, with the introductions of smartphones, flip phones became out of date, but not because they stopped to manage their main functions.
Assessing the economic life of an asset is exceedingly crucial for businesses since it’s the best way to figure out whether it’s the right thing to improve and develop manufacturing or not.
Economic life is deeply connected to several things. First is the reasonable estimating involved time, it may be done according to Generally Accepted Accounting Principles (GAAP). The second thing is depreciation schedules.
Economic Life in finance
In terms of finance there are also things that are essential to consider regarding economic life. It comprises the cost at the moment of buying, the time during which an asset may be utilized in production, the time at which an asset must be changed to the new one, and expenses of such changes.
Sometimes these changes occur due to the new industry standards. In case an equipment doesn’t meet updated standard’s requirements may be replaced with a new one.
Economic Life and deprecation
Deprecation means the decrease of the economic value of an asset. It’s utilized to evaluate the effects of aging, daily use, and wear and tear degree. In terms of technologies risk of obsolescence is also comprised.
Generally, business admits all kinds of depreciation expenses on a schedule, which assesses the duration of the economic life of an asset. It’s worth noting that the economic life which is utilized in inner calculations and depreciable life that is needed for tax purposes are different.
The depreciation may be estimated on the basis of goals that management pursues. For instance, for a business, it’s crucial to lower present tax liability, then this business decides to use accelerated depreciation schedules and figure out all expenses as fast as possible.