Standard Economic Life
The standard economic life (SEL) is best determined by considering the technical and economic factors. Economic factors need to be recognized in determining SEL as the technical life may be longer than the useful period of the asset.
This section provides guidance on:
- How technical and economic factors influence SEL
- Who should determine the impact of technical factors and economic factors.
Evaluation of Technical and Economic Factors
Initially technical life influenced by technical factors will be appropriate to apply as an estimate of the SEL. These factors will determine the length of service expected from the assets physical existence.
As noted earlier, the technical factors consider:
- The physical characteristics
- The asset management approach used by the organization
- The physical environment within which the asset is used.
Economic factors should then be considered, since the life of the assets is likely to be reduced from a defined technical life if these economic factors apply.
Not all economic factors will be recognized as affecting the asset’s life because there is not sufficient valuation evidence to assert a shorter life. The valuation should attempt to fairly represent the conditions, as they are known at the time.
Recognition of the Technical and Economic Factors
Economic factors can impact the valuation result from a number of areas in the valuation process (asset life, optimization, and economic valuation adjustment).
Some economic factors should be evaluated within the asset life determination, while others factors should be evaluated by the valuer to enable a complete assessment on the valuation result.
The valuer has the responsibility to ensure the valuation is appropriately undertaken. Therefore, the valuer will determine where the economic factors are best recognized.
The technical factors are recognized by the engineers when considering the physical characteristics of the asset.
Judgment is required in evaluating the individual circumstances, for example the likelihood of earthquakes (as an economic environmental impact) may exist (even with a high probability over a long time period) but it is not common to reduce technical lives for this possible future event. The initial technical lives can be influenced by such factors where the effect is known and has historical basis.
Demand changes and operational costs are dealt with in other parts of the valuation process. Operational costs include repairs and maintenance levels but are not included in the economic factors as they should form part of the technical factors.
General uncertainty or contingency factors should not be included as this builds in conservatism or prudence, and does not evaluate the facts based on the best information available.