What is absolute physical life?
The absolute physical life is the period of existence or lifetime of agood physical. It is the time required for an asset to be fully depreciated, at which point it has no financial value.
- Absolute physical useful life refers to the literal useful life of a physical asset – the period of time before its ability to function, and therefore its financial value, degrades to zero.
- The absolute physical useful life of an asset ends when it becomes technologically obsolete, physically degrades to the point of inadequacy, or when the product's life cycle ends.
- For businesses, absolute physical useful life applies to assets that are not at risk of obsolescence: buildings, equipment/tools, vehicles or furniture.
- Absolute physical lifetime is calculated to determine risk
in the purchase of assets.
- The absolute useful life differs from the useful life of an asset, which is management's best estimate of the useful life of the asset (and for calculating deductions for depreciation on tax returns).
understanding of absolute physical life
A physical asset, also known asgood stuff, is an object of economic, commercial or exchange value that has a material existence. For most businesses, physical assets usually relate to real estate, equipment, and inventory.
Absolute physical useful life refers to the length of time a company can use a physical asset. The absolute physical useful life of an asset ends when it becomes technologically obsolete, physically degrades to the point of unsuitability, or the product islifespanends. The absolute physical lifecycle calculation can be used to determine the risk involved in purchasing an asset.
Generally, the term is used to describe assets with a low risk of becoming obsolete: buildings, equipment, vehicles, tools or furniture. It can refer to larger types of electronic equipment such as generators, but more rarely to smaller products such as laptops or cell phones. This type of product is often made obsolete through software changes and updates long before its physical parts fail.
Absolute physical life vs. lifespan
Absolute physical life is different from thateconomicallyorlifespanan asset, d. H. the expected period of time that an asset is literally useful to the average owner. Absolute physical useful life is the actual period of time over which an asset adds value, while useful life is theexpecteduseful life of an asset.
Some authorities use economic life and useful life interchangeably. Others differentiate economics in terms of how long something can work at a price comparable to alternatives (like buying something new). In other words, an asset might still be useful, but so expensive to operate (requires frequent repairs, etc.) that it doesn't make economic sense to do so. Such an asset would technically still have a useful life, but it would have reached the end of its economic life.
Although it can be calculated in advance, the absolute physical life is actually determined after the end of an asset's useful life. In contrast, useful life must be estimated before an asset is acquired or placed into service. Useful life is management's estimate and best estimate of how long the asset will be used.
For example, if a company buys a device for $10,000 and expects to use it for 10 years, the useful life is 10 years. In this case, assuming no salvage value, you would depreciate the asset by $1,000 per year. However, the actual or absolute physical life of that asset may end before or extend beyond its projected useful life.
Ofinance department(IRS) requires companies to use a lifetime standard for purposes of determining tax deductionscanceledasset value.
Changes in Useful Life
In theory, the useful life of an asset is (or should be) equal to its absolute physical useful life, but because the useful life is an estimate, deviations can occur.
Lifetime changes occur when the asset becomes obsolete sooner than expected, as is often the case with high-tech products. The IRS allows such a change to be reported with detailed justification. In this case, the IRS may allowaccelerated depreciationto account for the shorter-than-expected life of the asset.