What is the Absolute Physical Life
Absolute physical life is the 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 no longer functions and has zero financial value.
BREAKING DOWN Absolute Physical 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 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.
Absolute physical life is determined after an asset’s life ends, while the useful life must be estimated before buying or putting an asset into service. 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.
Theoretically, an asset's useful life is equal to its absolute physical life, but because the service life is an estimate, this is not always the case. The Internal Revenue Service (IRS) requires companies to use useful life for the purpose of determining tax deductions on the depreciated value of assets.
Absolute Physical Life vs. Useful Life
Absolute Physical Life is the time frame a business can use an asset. It’s generally used to describe an asset that is at low-risk of becoming technically obsolete. That is, an asset such as a laptop will become obsolete given technological advances well before the physical life gives out. Absolute physical life can pertain to assets such as buildings, equipment, vehicles, electronics or furniture.
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
Changing the estimated useful life happens when the asset is rendered obsolete sooner than expected, such as can be the case with technology. The IRS allows 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.