Economic Life

What is Economic Life?

The economic life definition can be explained as the expected period during which the asset remains meaningful to the average consumers. When the asset no longer remains meaningful to the owners, it is then said to have fulfilled its economic life.

The economic life of a particular asset could be diverse than the corresponding actual life. Therefore, the given asset could remain in the optimal physical condition, still it might not be useful economically. For instance, technology products are mostly known to become obsolete with the respective technology becoming obsolete.

The estimation of the economic life of a particular asset is vital for businesses such that they are able to determine when it is worthwhile to make an investment in the all-new equipment. This also helps in the allocation of the right funds for purchasing replacements once the useful life of the equipment has been met.

Understanding of Economic Life

As per the GAAP (General Accepted Accounting Principles) requirements, the asset’s economic life is known to need a reasonable estimation of the total time involved. Businesses can look forward to shifting the respective requirements on the Basis of the estimated daily utilization along with other factors.

Economic life and its concept also remain connected to the respective Depreciation schedules. Setting bodies that determine the respective accounting standards are mostly known to accept the guidelines for the estimation and adjustment of the time period.

Finance & Economic Life

Financial considerations with respect to the asset’s economic life are known to include the overall cost during the purchasing time, the time for which the asset can be utilized for the production. Also, the time at which replacement will be needed, and the overall cost of replacement or maintenance. Chances in the respective Industry regulations or standards might also be involved.

The presentation of the new regulations could render the current equipment obsolete or it might raise the needed industry standards for the given asset beyond the specifications of the existing assets of the business. Additionally, the economic life of a single asset might be connected to the useful life of some other asset as well. In situations wherein there are two individual assets for completing a task, the loss occurring with respect to one asset could render the other asset also useless until the initial asset gets replaced or repaired.

Depreciation & Economic Life

Depreciation can be defined as the rate during which a particular asset is known to deteriorate over time. The rate of depreciation is useful in estimating the overall effects of daily utilization, aging, wear & tear, and so more of the particular asset. When the same is linked with technology, depreciation is also known to include the overall Obsolescence Risk.

The economic life concept utilized in internal calculations might differ on a significant basis from the respective depreciable life needed for tax purposes.