Useful economic life

Useful economic life is management's estimate of how long an asset will serve the business. Under IAS 16 the cost less any residual value is spread across that life, so the estimate rather than the asset determines the annual depreciation charge.

Because it is an estimate, it is a genuine judgement lever. Extending the assumed life of a class of assets lowers depreciation, raises operating profit and raises net income without a euro of cash moving. It has to be disclosed and is reviewed annually under IAS 16, so it is visible to anyone who reads the property, plant and equipment note, and a change in it is worth understanding before comparing margins across years.

It is also why depreciation is an imperfect proxy for the cash cost of replacement. A plant on a 25 year life charges roughly 4% a year of what it cost a quarter of a century ago, while replacing it happens at today's prices and frequently to a higher specification. The longer the assumed life, the wider that gap can grow.

The practical use in comparison work is to look at the lives peers assume for similar assets. Two companies running the same equipment on materially different assumed lives are reporting different margins for a reason that has nothing to do with how well either is operated.