useful life

(noun)

the length of time, typically in years, that an asset is expected to function and be useful.

Related Terms

Examples of useful life in the following topics:

  • What Is Depreciation?

    • Depreciation is defined as the expensing of the cost of an asset involved in producing revenues throughout its useful life.
    • Depreciation is defined as the expensing of an asset involved in producing revenues throughout its useful life.
    • Depreciation expense can be calculated using a variety of methods.
    • The depreciation method chosen should be appropriate to the asset type, its expected business use, its estimated useful life, and the asset's residual value.
    • Depreciation reflects the wear and tear experienced by an asset in use.

  • Methods of Depreciation

    • The straight-line formula used to calculate depreciation expense is: (asset's historical cost - the asset's estimated salvage value) / the asset's useful life.
    • The sum of the digits can be determined by using the formula (n2+n)/2, where n is equal to the useful life of the asset.
    • First, calculate the depreciation rate by adding the years of useful life, or 1+2+3+4+5 (equal to 15).
    • For example, suppose a business has an asset with a cost of 1,000, 100 salvage value, and 5 years useful life.
    • The depreciation method for an automobile should reflect the asset's use throughout its life.

  • Factors for Calculating Depreciation

    • Estimated useful life of the asset.
    • Useful life refers to the window of time that a company plans to use an asset.
    • Assume a purchased truck is valued at $10,000, has a residual value of $5,000, and a useful life of 5 years.
    • First, calculate the depreciation rate by adding the years of useful life, or $1+2+3+4+5=15$.
    • To do this, divide 100 per cent by the number of years of useful life of the asset.

  • Limited-Life Impairment

    • Limited-life intangibles are amortized throughout the useful life of the intangible asset using either the units of activity or the straight-line method.
    • A software company has a patent valued at $10 million with a useful life of 40 years.
    • Limited-life intangibles are intangible assets with a limited useful life, such as copyrights, patents and trademarks
    • Intangible assets can have either a limited or an indefinite useful life.
    • Limited-life intangibles are systemically amortized throughout the useful life of the intangible asset using either units of activity method or straight-line method.

  • Amortization of Intangible Assets

    • The costs of intangible assets with identifiable useful lives are amortized over their economic/legal life.
    • This differs from tangible assets which are depreciated (resulting in a depreciation expense) over their useful life.
    • Intangible assets have a useful life that is either identifiable or indefinite.
    • Pertinent factors that should be considered in estimating the useful lives of intangible assets include legal, regulatory, or contractual provisions that may limit the useful life.
    • An intangible asset is amortized if the asset has an identifiable useful life.

  • Impact of Depreciation Method

    • When using the straight-line method, a company charges the same depreciation expense every accounting period throughout an asset's useful life, so the effect is a stable and uniform reduction in revenues and asset values in every accounting period of the asset's useful life.
    • Assume a purchased truck is valued at $10,000, has a residual value of $5,000, and a useful life of 5 years.
    • Assume a piece of machinery is purchased for USD 100,000 with a residual value of $40,000 and a useful life of 5 years.
    • First, calculate the depreciation rate by adding the years of useful life, or $1+2+3+4+5=15$.
    • To do this, divide 100 per cent by the number of years of useful life of the asset.

  • Franchises and Licenses

    • Amortization is the process of writing off the cost of an asset over its useful life.
    • For a franchise, the useful life is generally the length of the franchise contract.
    • The useful life of a license is how long it grants the holder the exclusive right to use the underlying product.
    • The amortization rate is calculated by dividing the initial value of the asset by its useful life.
    • Depending on when the balance sheet is issued, the useful life is presented as a number of months, quarters, or years.

  • Analyzing Intangible Assets

    • Intangibles with identifiable useful lives are amortized on a straight-line basis over their economic or legal life, whichever is shorter.
    • Intangible assets are typically expensed according to their respective life expectancy.
    • Intangible assets have either an identifiable or indefinite useful life.
    • Those with identifiable useful lives are amortized on a straight-line basis over their economic or legal life, whichever one is shorter.
    • Intangible assets with indefinite useful lives are reassessed each year for impairment.

  • Indefinite-Life Impairment

    • A software company has a trademark valued at $10 million with an indefinite useful life.
    • Under US GAAP, intangible assets are classified into: Purchased vs. internally created intangibles, and Limited-life vs. indefinite-life intangibles.
    • Since intangible assets are typically expensed according to their respective life expectancy, it is important to understand the difference between limited-life intangible assets and indefinite-life intangible assets.
    • Intangible assets with identifiable useful lives (limited-life) include copyrights and patents.
    • Instead of amortization, indefinite-life assets are evaluated for impairment yearly.

  • Overview of Lease Accounting

    • A lease is a contract calling for the lessee (user) to pay the lessor (owner) for use of an asset for a specified period.
    • If the lease has an ownership transfer or bargain purchase option, the depreciable life is the asset's economic life; otherwise, the depreciable life is the lease term.
    • The value of the leasehold improvements should be capitalized and depreciated over the lesser of the lease life or the leasehold improvements life.
    • If the life of the leasehold improvement extends past the life of the initial term of the lease and into an option period, normally that option period must be considered part of the life of the lease.
    • Classified as an asset; amortized using the straight-line method over the life of the lease.