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Useful Life Definition
Useful life is a term that can be applied to asset, whether long-term assets or short-term assets. The useful life of an asset refers to the period of time during which the asset was used for the intent it was purchased. This is the estimated lifespan of an asset, the number of years that an asset it estimated to remain in service for and generate profit. The useful life estimates of different assets vary depending on how long the asset has been used before purchase, the time of purchase and what the asset is being used for. The useful life of an asset is important to the IRS because it informs the depreciation of the fixed asset.
A Little More on What is Useful Life
Generally, short term assets have a useful life of less than a year, these assets include cash and cash equivalents, accounts receivable, marketable securities, prepaid expenses and inventory. Fixed asset on the other hand have longer periods as their useful life, assets like these are land, machines, facilities, buildings and equipment. The useful life of a fixed asset is important for accounting purpose because such asset depreciates, the longer their useful life is.
One a fixed asset becomes depleted or is unable to generate income or serve the purpose for which it was bought, its useful life has ended. The useful life of fixed assets is measured in years.
Useful Life and Straight Line Depreciation
It is important to know that in most cases, the useful life of a fixed asset does not match the economic value or physical life of the asset. If the depreciation of a fixed asset is to be calculated using the straight line model, the formula that will be used is;
The cost of an asset / the estimated life of the asset.
The above calculation will help identify the annual depreciation value of the asset. For instance, if a machine was purchased for $750,000 and its estimated useful life is 15 years, using the above formula;
The annual depreciation value of the asset = $750,000/ 15 = $50,000.
Useful Life and Accelerated Depreciation
When accelerated depreciation method is used to calculate depreciation in fixed assets, the book value of the asset decreases faster because higher depreciation levels are applied to the early years of the assets. Using the accelerated model, that the asset is exposed to greater deductions at its earlier years and the dollar amount of the depreciation reduces each year throughout the period the asset was in use.
Useful Life Adjustments
There are certain conditions that can cause adjustments to be made to the measurement of the useful life of an asset. For instance, if a machine becomes obsolete in no time due to the development of certain technologies that were not in the machine before, the useful life estimate of such assets will be adjusted. The adjustment is due to the advent of the new technology because without the introduction of the new technology, the machine might still have more useful years.
References for “Useful Life”
Academic Research for “Useful Life”
Remaining useful life estimation–a review on the statistical data driven approaches, Si, X. S., Wang, W., Hu, C. H., & Zhou, D. H. (2011). Remaining useful life estimation–a review on the statistical data driven approaches. European journal of operational research, 213(1), 1-14.
Prognostic modelling options for remaining useful life estimation by industry, Sikorska, J. Z., Hodkiewicz, M., & Ma, L. (2011). Prognostic modelling options for remaining useful life estimation by industry. Mechanical systems and signal processing, 25(5), 1803-1836.
Comparison of prognostic algorithms for estimating remaining useful life of batteries, Saha, B., Goebel, K., & Christophersen, J. (2009). Comparison of prognostic algorithms for estimating remaining useful life of batteries. Transactions of the Institute of Measurement and Control, 31(3-4), 293-308.
A similarity-based prognostics approach for remaining useful life estimation of engineered systems, Wang, T., Yu, J., Siegel, D., & Lee, J. (2008, October). A similarity-based prognostics approach for remaining useful life estimation of engineered systems. In 2008 International Conference on Prognostics and Health Management (pp. 1-6). IEEE.
Remaining useful life estimation based on a nonlinear diffusion degradation process, Si, X. S., Wang, W., Hu, C. H., Zhou, D. H., & Pecht, M. G. (2012). Remaining useful life estimation based on a nonlinear diffusion degradation process. IEEE Transactions on Reliability, 61(1), 50-67.
Particle filtering prognostic estimation of the remaining useful life of nonlinear components, Zio, E., & Peloni, G. (2011). Particle filtering prognostic estimation of the remaining useful life of nonlinear components. Reliability Engineering & System Safety, 96(3), 403-409.
Why do some strategic alliances persist beyond their useful life?, Inkpen, A. C., & Ross, J. (2001). Why do some strategic alliances persist beyond their useful life?. California Management Review, 44(1), 132-148.
Recurrent neural networks for remaining useful life estimation, Heimes, F. O. (2008, October). Recurrent neural networks for remaining useful life estimation. In 2008 international conference on prognostics and health management (pp. 1-6). IEEE.
Remaining useful life estimation of critical components with application to bearings, Medjaher, K., Tobon-Mejia, D. A., & Zerhouni, N. (2012). Remaining useful life estimation of critical components with application to bearings. IEEE Transactions on Reliability, 61(2), 292-302.
Remaining useful life prediction of lithium-ion battery with unscented particle filter technique, Miao, Q., Xie, L., Cui, H., Liang, W., & Pecht, M. (2013). Remaining useful life prediction of lithium-ion battery with unscented particle filter technique. Microelectronics Reliability, 53(6), 805-810.