Depreciation, Provisions and Reserves

example, a machine is purchased and it is estimated that it can be used in production process for years. After years the machine may still be in good physical condition but can’t be used for production profitably, i.e., if it is still used the cost of production may be very high. Therefore, the useful life of the machine is considered as years irrespective of its physical life. Estimation of useful life of an asset is difficult as it depends upon several factors such as usage level of asset, maintenance of the asset, technological changes, market changes, etc. As per Accounting Standard – useful life of an asset is normally the “period over which it is expected to be used by the enterprise”. Normally, useful life is shorter than the physical life. The useful life of an asset is expressed in number of years but it can also be expressed in other units, e.g., number of units of output (as in case of mines) or number of working hours. Useful life Pre-determined by legal or contractual limits, e.g. in case of leasehold asset, the useful life is the period of lease. The number of shifts for which asset is to be used. Repair and maintenance policy of the business organisation. Technological obsolescence. Innovation/improvement in production method. Legal or other restrictions.