Service Life

Definition

The financial accounting term service life is used to describe the period of time over which an asset can be expected to perform its intended use.  Service life is typically limited by two factors:  physical wear and obsolescence.

Explanation

The matching principal dictates companies match revenues with expenses required to generate those revenues.  For example, a machine's service life is used to allocate the cost of this asset over the period of time it is expected to remain in service.  Companies typically use straight line depreciation when calculating the expense flowing to the income statement, while the Modified Accelerated Cost Recovery System (MACRS) is used in the calculation of depreciation expense for income tax purposes.

Generally, the serviceable life of an asset is limited by two factors:

  • Physical:  as the plant or equipment is used over time, the normal wear and tear will reduce the reliability of the asset and increase maintenance expense to the point where a business case would support a replacement.
  • Obsolescence:  this can include assets that are no longer able to economically compete with new equipment.  For example, a state-of-the-art machine can manufacture a part at lower cost.  The specifications of a product can also change over time, as is frequently the case with electronic equipment or components.  This category can also include assets that are no longer able to manufacture products in the quantities needed by the company.

The help of subject matter experts is often needed to develop an estimate of the service life of an asset.  Companies can also rely on their experience with similar equipment.  The term of support provided by the asset's manufacturer can also be used to determine service life, as can company policy.

The service life of an asset should not be confused with terms such as mean time between failures (MTBF), or maintenance free operating periods, which are used to describe reliability.

Related Terms

assets, matching principle, straight line depreciation, income statement, MACRS, impairment in value