How to Calculate the Useful Life of an Asset

How do we define an asset’s useful life?

An asset’s useful life is the estimation of how long it can be used for in order to be beneficial to the company — in other words, the amount of time that it can be used to generate revenue. While an asset such as a piece of machinery, vehicle, or equipment may be operational for many years, the asset’s useful life is often shorter. 

It’s important to note that when we talk about the useful life of assets, we’re talking specifically about fixed assets. These are typically assets that are used by an organisation to generate revenue for longer than a year, for example, the equipment used to manufacture a product. In contrast, a product that is manufactured and sold for profit is a current asset. It’s not important to calculate the useful life of a current asset because these are usually expected to be disposed of or sold within a year. 

Why are an asset’s actual lifespan and useful life different?

Let’s take the example of a vehicle. A tangible asset that can often be used for many years, vehicles nonetheless gain wear and tear over time, might need to be fixed or have parts replaced, or might simply become obsolete due to technological improvements. At some point, the cost of repairing the vehicle will outweigh the value that the asset generates for the business. So, although the vehicle technically can still undergo maintenance and repairs for continued use (its actual lifespan), this becomes so costly that the asset turns into a liability. Therefore, the asset has reached the end of its useful life. 

What is a re-life?

An asset is assigned a useful life when acquired, but this life span may change for various reasons. This is called a re-life. Typically, an asset will be re-lifed when something happens to the asset, which means the useful life will be shorter or longer than originally planned. A vehicle may have an initial useful life of five years, but after three years, it is decided that the vehicle’s useful life can be extended by another five years through scheduled maintenance. In this case, the previous depreciation periods remain unchanged, but future periods will be adjusted to reflect the new lifespan based on the current net book value (NBV).

What can impact assets’ useful lives?

The exact same asset may have a different useful life when used by different businesses. For example, a piece of machinery that is expected to have a useful life of ten years by one company may have a longer useful life in a different organisation. This is because useful life is impacted by a range of factors, including how frequently the business uses the asset and how complex equipment is maintained. 

Even the condition and location of the business environment can impact an asset’s useful life – for example, if the asset is located in an area prone to natural disasters or extreme climate, this can also have an impact on the useful life calculation. 

Technological improvements can also impact the useful life of an asset if it is likely to become obsolete soon. In this case, for example, the asset itself may still be operational, but other more up-to-date assets may be in use, making it more costly to continue using an outdated and incompatible asset than to replace it with a new one. 

Finally, wider changes can also impact the useful life of an asset. For example, an economic or legal change may be a factor in estimating useful life.