Economic life is another name for useful life: the period over which a business expects an asset to be productive and worth keeping in service. It sets the number of periods across which the asset's cost is spread as depreciation.
Economic life compared with physical life
An asset's economic life is often shorter than its physical life. A laptop may keep working for ten years, but if it becomes too slow for the software a firm relies on after four years, its economic life is four years. Wear, changes in technology, the cost of repairs, and plans to replace equipment all shorten the period over which an asset is worth using.
Management estimates economic life when an asset is acquired, together with its salvage value. With a cost of $50,000, a salvage value of $5,000 and an economic life of nine years, straight-line depreciation is $5,000 a year. If later evidence shows the asset will last a different length of time, the estimate is revised and the remaining carrying value is spread over the new remaining life. This is a change in accounting estimate, handled going forward without restating past years.
The term is also used in lease accounting, where the economic life of the underlying asset helps decide whether a lease transfers most of the asset's value to the lessee.