In: Accounting
How to calculate the useful life of a tangible asset in order to calculate depareciation every year
The useful life of an asset is an estimation of the length of time the asset can reasonably be used to generate income and be of benefit to the company. Useful life does not refer to the length of time the asset will last. The useful life of identical assets varies by user, and that life depends on the asset's age, frequency of use, condition of the business environment, and repair policy. Additional factors that affect an asset's useful life include anticipated technological improvements, changes in laws, and economic changes.
The Internal Revenue Service (IRS) uses the useful life of an asset to estimate the period over which depreciation of the asset may occur. Because this estimate is based on facts that change over time, useful life can be adjusted to compensate for such changes if they are significant and if there is a definite reason for the adjustment.
The useful life of an asset is dependent on a number of entity-specific factors, the assessment of which may require judgment. When determining the useful life of an intangible asset, a reporting entity should consider the factors listed in ASC 350-30-35-3, which may also be useful to consider when determining the useful life of a tangible asset. None of the factors in ASC 350-30-35-3 should be considered more presumptive than the others, and the list is not all inclusive.
Factors involved in determining the useful life of a tangible asset include the age of the asset when purchased, how frequently the asset is used, and the environmental conditions of the business that purchased the asset