Useful Life

Useful life is the length of time a business expects to use a long-lived asset in its operations, or the total number of units of output it expects to obtain from it. It is a key estimate in accounting for fixed assets and intangible assets, because the asset's cost, less its salvage value, is charged to expense over this period through depreciation or amortization.

Useful life is an entity-specific estimate. It reflects how long this particular business plans to use the asset, which may be shorter than the asset's total physical or economic life. A rental car company may keep its cars for only two years before selling them, even though the cars could run for fifteen. In that case the useful life for the rental company is two years, and the expected sale price is its salvage value.

• Physical wear and tear: how heavily the asset will be used, the number of shifts it runs, and the environment it operates in.
• Maintenance policy: a strong repair and servicing program can extend useful life.
• Technological obsolescence: computers, software and some production equipment may be replaced long before they wear out because newer versions are more efficient.
• Commercial obsolescence: changes in demand for the products the asset makes.
• Legal or contractual limits: leasehold improvements are depreciated over the shorter of their life and the lease term, and patents and licenses over their legal or contractual term at most.
• Company policy and experience: many businesses use standard lives for asset classes, such as 3 to 5 years for computers, 5 to 10 years for machinery and 25 to 40 years for buildings.

A logistics company buys a forklift for $48,000, with an estimated salvage value of $8,000 and a useful life of eight years. Straight-line depreciation is:

Here cost is $48,000, salvage value is $8,000 and useful life is 8 years, giving $5,000 a year. After three years, the book value is $33,000. The company then decides, because of heavier use in a new warehouse, that the forklift will last only three more years, not five. Under the rules for a change in accounting estimate, past depreciation is not restated. The remaining depreciable amount of $33,000 minus $8,000, or $25,000, is spread over the three remaining years, raising depreciation to about $8,333 a year. Had the life been extended instead, depreciation would have fallen.

For intangible assets, useful life may be finite or indefinite. A customer list might have a useful life of five years, while a trademark that can be renewed indefinitely and that the company plans to keep supporting may have an indefinite useful life. Assets with finite lives are amortized, as described under amortization of intangible assets. Indefinite-lived intangibles and goodwill are not amortized under US GAAP for public companies or under IFRS, but are tested for impairment at least annually. Land is generally considered to have an unlimited useful life and is not depreciated.

Under IFRS, IAS 16 and IAS 38 require useful lives to be reviewed at least at each financial year end. US GAAP expects estimates to be reviewed when events or circumstances indicate they may have changed. Companies disclose their depreciation methods and the useful lives or ranges used for each major asset class in the notes to the financial statements.

For US federal income tax, businesses do not use their own estimates for most tangible property. MACRS assigns fixed recovery periods by asset class, such as 5 years for cars and computers, 7 years for office furniture, 27.5 years for residential rental property and 39 years for nonresidential real property. These tax lives often differ from the useful lives used for book depreciation, creating timing differences recorded as deferred income taxes.