Determining the useful life and salvage value (or residual value) of an asset requires judgment and an understanding of the reporting entity’s planned use of that asset, amongst other factors, which are discussed in PPE 4.2.1 through PPE 4.2.4.
Definition from ASC Master Glossary
Useful Life: The period over which an asset is expected to contribute directly or indirectly to future cash flows.
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 factors in determining an asset’s useful life. For example, when considering the useful life of a customer-related intangible asset, the uncertainty of revenues dependent upon retention of key employees, the “churn” rate of customers, and the mobility of customer and employee bases should be taken into account. Reporting entities should consider all of the relevant facts and circumstances when estimating an asset’s useful life. However, ASC 350-30-35-2 is clear that the useful life of an intangible asset is not the period that it would take the reporting entity to internally develop an intangible asset providing similar benefits.
Although not defined, we believe the use of the term “useful economic life” in ASC 360-10-35-4 is intended to have the same meaning as “useful life,” as defined in the ASC Master Glossary. The useful life assessment of a long-lived asset is based on entity-specific assumptions about how the entity intends to use the asset, which may be different from market-participant assumptions. Accordingly, the useful life could be different than the economic life or actual physical life of the asset.
For example, if a reporting entity purchases a machine that is designed to be used for ten years but, unlike market participants, the entity’s practice is to use the machine for only five years and sell it for salvage value, the useful life would be five years whereas the economic life may be ten years. When the life cycle of an entity’s product is shorter than the equipment used to manufacture the product, and new equipment is required to manufacture the next generation product, the useful life of the equipment would be over the product’s shorter life cycle.
For an intangible asset, a reporting entity should first determine whether the useful life of the asset is finite or indefinite, considering the factors outlined in ASC 350-30-35-3. Further, ASC 350-30-35-4 states that the useful life of an intangible asset should be considered indefinite if no legal, regulatory, contractual, competitive, economic, or other factors limit its useful life to the entity. ASC 350-30-35-4 also explains, “The useful life of an intangible asset is indefinite if that life extends beyond the foreseeable horizon—that is, there is no foreseeable limit on the period of time over which it is expected to contribute to the cash flows of the reporting entity.” The term indefinite, however, does not mean infinite or indeterminate.
See BCG 8 for further information on indefinite-lived intangible assets. If an intangible asset is deemed to have a finite life, the entity should determine its useful life considering the factors discussed in ASC 350-30-35-3. In addition, ASC 350-30-55-2 through ASC 350-30-55-28F include several illustrative examples for determining the useful life of an intangible asset. See BCG 4.6 for a summary of intangible assets and typical useful life characteristics found in major industries.