Question

How to calculate the useful life of an asset. While purchasing an asset how will you determine the useful life of an asset

Answer 1

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.

Excerpt from ASC 350-30-35-3

a. The expected use of the asset by the entity.

b. The expected useful life of another asset or a group of assets to which the useful life of the intangible asset may relate.

c. Any legal, regulatory, or contractual provisions that may limit the useful life. The cash flows and useful lives of intangible assets that are based on legal rights are constrained by the duration of those legal rights. Thus, the useful lives of such intangible assets cannot extend beyond the length of their legal rights and may be shorter.

d. The entity’s own historical experience in renewing or extending similar arrangements, consistent with the intended use of the asset by the entity, regardless of whether those arrangements have explicit renewal or extension provisions. In the absence of that experience, the entity shall consider the assumptions that market participants would use about renewal or extension consistent with the highest and best use of the asset by market participants, adjusted for entity-specific factors in this paragraph.

e. The effects of obsolescence, demand, competition, and other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels).

f. The level of maintenance expenditures required to obtain the expected future cash flows from the asset (for example, a material level of required maintenance in relation to the carrying amount of the asset may suggest a very limited useful life). As in determining the useful life of depreciable tangible assets, regular maintenance may be assumed but enhancements may not.

A reporting entity may also use other relevant fact