Question

Compare and contrast the techniques used to determine the economic life of an asset whose lifespan is (1) longer and (2) shorter than the planning horizon.

Answer 1

People define and measure asset lifespan in several different ways, including:

1. Depreciable Life- The time over which an asset can lawfully depreciate to its salvage value defines its depreciable life. Each year of this life, owners calculate a depreciation expensefor the asset using standard accounting methods. This expense reduces the book value (Balance sheet value) of the asset, reduces the company's reported income, and creates tax savings. Likewise For somekinds of assets, however, life is prescribed by the country's tax and ICAI authorities.
2. Economic Life-The number of years in which the asset returns more value to the owner than it costs to own, operate, and maintain, defines its economic life. When these costs exceed returns, the asset is beyond its economic life.

Several different factors can reduce or end an asset's economic life, including:

• Wear, degradation, or damage
  These factors lower asset performance and raise maintenance and operation costs.
• Obsolescence
  Obsolescence can raise maintenance costs and render asset performance relatively inefficient when compared to more current alternatives.
• Changes in company operations, product offerings, or the company's business model
  These factors can reduce the value certain assets can deliver.

3. Service life: The number of years the acquisition will be in service defines its service life.

An asset's service life is over when all of the following conditions exist:

• The asset is sitting idle, and it is not in use for any purpose.
• Owners are not retaining it as a contingency "back up," that could go into service when other assets fail
• Owners are not retaining it as a source of "spare parts" for other assets in service.

The asset's service life is over, in other words, when it is providing no business value of any kind to owners.