What is Economic Life?

Economic life is the period over which an entity expects to be able to use an asset, assuming a normal level of usage and preventive maintenance. Economic life can also refer to the number of units produced; for example, the economic life of a vehicle may be 100,000 miles, rather than three years. The concept is used as the basis for the time period over which depreciation is charged against an asset. Economic life can be less than the physical life of an asset, since it may eventually become outmoded and so is no longer productive, even though the asset could theoretically still be used.

Economic Life Best Practices

There are several best practices related to the economic life concept, which are as follows:

Apply on a consistent basis. For efficiency reasons, every asset assigned to an asset classification may be assigned the same economic life. Doing so makes it easier to calculate the depreciation expense for the assets within that classification. Otherwise, you would have to research the most appropriate economic life to assign to each asset, which could result in a wide array of economic lives being assigned to the assets within each classification.
Reassess when an asset is impaired. Regularly reassess the economic life as part of impairment testing. This means adjusting the economic life when significant changes in circumstances occur, such as obsolescence or shifts in market demand.