The useful economic life of an asset is the period over which the asset is expected to generate economic benefits for the entity. In other words, it is the period of time during which the asset is expected to be used by the entity to generate revenue or other economic benefits.
The useful economic life of an asset is an important concept in accounting, as it is used to determine the amount of depreciation or amortization that should be recognized for the asset. Depreciation is the systematic allocation of the depreciable amount of a tangible asset over its useful life, while amortization is the systematic allocation of the amortizable amount of an intangible asset over its useful life.
The useful economic life of an asset is determined by the entity based on its expected use of the asset. The useful economic life of an asset may be shorter than its physical life, if the entity expects to dispose of the asset before the end of its physical life. For example, a vehicle may have a physical life of 15 years, but the entity may expect to dispose of the vehicle after 5 years, in which case the useful economic life of the vehicle would be 5 years.
The useful economic life of an asset may also be affected by obsolescence or technological changes. If an asset becomes obsolete or is replaced by a newer technology, the useful economic life of the asset may be shorter than its physical life. For example, a computer may have a physical life of 5 years, but if it becomes obsolete after 3 years, the useful economic life of the computer would be 3 years.
