What Is Absolute Physical Life?
Absolute physical life is the period of existence, or lifespan, of a physical asset. It is the length of time that it takes for an asset to become fully depreciated, at which point it has zero financial value.
- Absolute physical life refers to the literal lifespan of a physical asset—the amount of time before its ability to function, and thus its financial value, drops to zero.
- An asset’s absolute physical life comes to an end when it becomes technologically obsolete, physically deteriorates to the point of inadequacy, or the product life cycle ends.
- For businesses, absolute physical life applies to assets that are at low risk of becoming obsolete: buildings, equipment/tools, vehicles, or furniture.
- The absolute physical life is often calculated to determine the risk involved
in the purchase of assets.
- Absolute physical life is different from the useful life of an asset, which is a best-guess estimate by management for how long the asset will be in use (and one employed to figure deductions for deprecation on tax returns).
Understanding Absolute Physical Life
A physical asset, aka a tangible asset, is an item of economic, commercial, or exchange value that has a material existence. For most businesses, physical assets usually refer to properties, equipment, and inventory.
Absolute physical life refers to the time frame a business can use a physical asset. An asset’s absolute physical life comes to an end when it becomes technologically obsolete, physically deteriorates to the point of inadequacy, or the product life cycle ends. Calculating the absolute physical life can be used to determine the risk involved in purchasing an asset.
Generally, the term's used to describe assets that are at low risk of becoming obsolete: buildings, equipment, vehicles, tools, or furniture. It could refer to larger sorts of electronic equipment, like generators, but less often to smaller goods, like a laptop or mobile phone. That sort of product often will become obsolete given changes and upgrades to software, well before its physical parts give out.
Absolute Physical Life vs. Useful Life
Absolute physical life is different from the economic or useful life of an asset, which is the expected period of time during which an asset is literally useful to the average owner. The absolute physical life is the actual time frame an asset provides value, while the useful life is the expected lifespan of an asset.
Some authorities use economic life and useful life interchangeably. Others distinguish economic life as referring to how long something can function at a cost that is comparable to alternatives (like buying something new). In other words, an asset might still be useful, but so expensive to operate (requiring frequent repairs, etc.) that it makes no economic sense to do so. Such an asset would still technically have a useful life, but be at the end of its economic life.
Although it can be calculated in advance, absolute physical life is truly determined after an asset’s life ends. In contrast, the useful life must be estimated before buying or putting an asset into service. Useful life is an estimate and best guess by management for how long the asset will be in use.
For example, if a company purchases a piece of equipment for $10,000 and it expects it to be usable for 10 years, the useful life is 10 years. In that case, assuming no salvage value it would depreciate the asset at $1,000 per year. However, the actual physical, or absolute physical life, of that asset could end sooner, or extend beyond the projected useful life.
Changes in Useful Life
Theoretically, an asset's useful life is (or should be) equal to its absolute physical life, but because the useful life is an estimate, discrepancies can ensue.
Changes in the useful life happen when the asset is rendered obsolete sooner than expected, as is often the case with high-tech products. The IRS allows the reporting of such a change with a detailed explanation of why. In this case, the IRS may permit accelerated depreciation to account for the shorter-than-expected lifespan of the asset.