Effective Lives & Depreciation

Most infrastructure assets have a finite life, which varies considerably from asset to asset. Asset life directly impacts on the problem of asset valuation. The main effect is in the determination of depreciation. The depreciation method adopted will impact on asset values (balance sheet), profit, loss and the setting of realistic rates or charges for services.

It is difficult to accurately determine the useful economic lives of some assets. For a number of larger passive assets, especially those that are specific to water diversion, hydroelectricity and power production (eg. dams, pressure mains, power stations), there is limited precedent to support any estimated economic life. This is because there are few or no examples of similar types of assets, constructed in the same way, which have become unusable or have been in use long enough to give an accurate indication of effective operational life.

An asset also has a physical life, which is described as the time an asset is physically capable of continuing to operate. However an asset could become prohibitively expensive to operate or maintain long before the end of its physical life. This represents an efficiency (cost) or reliability (level of service) failure.

The determination of effective life needs to take into account the following factors:

• How often has regular maintenance repairs been completed or will be programmed in the future?
• Will funds be available and budgeted as required to enable an effective maintenance program to be carried out?
• How long will it be, based on previous experience, before a failure requiring repair or rehabilitation will occur and how long will it be for each successive failure requiring repair?
• Based on failure rates, cost of repairs, expected time between failures and cost to replace, how many failures are to be incurred and hence how long will it be before it is more economical to replace the asset rather than repair it?
• Technological improvements. Is there a more efficient asset that could be installed cost effectively to the organization?
• Demographic movements, including expectations of when a particular asset will no longer be required, or when an asset of increased capacity will be required to replace the current asset. If this indicates a life shorter than the economic life, the shorter life should be the life used.

As knowledge of an asset is improves over time and as more is learned about failure rates and maintenance and operating requirements, adjustments to an asset’s expected life should be made to reflect the evidence revealed.

The overall effective life will generally be determined from the design stage and is often called the "Design Life". This life should be used from the initial construction to a point where the residual life can be more clearly identified. The residual life will vary, and as the asset passes through its life, the responsible asset manager will need to model external impacts on the asset that will determine its ultimate life.

The following factors will shape useful life:

Obsolescence (Support)

• The point when the asset cannot be maintained because spare parts are no longer available or are not economic to produce.

Efficiency (Technical Obsolescence)

• The asset can be economically replaced because of the benefits gained in efficiency of the new asset.

Capacity (Unable to Meet Demand)

• The asset needs to be replaced or augmented if it cannot supply the service required. Also, lack of demand for an asset (lack of utilization) may render it redundant.

Physical Life (Mortality)

• The asset has reached the end of its physical life.

Renewal Life

• The asset can be cost-effectively renewed or rehabilitated to extend its life, performance and reliability.

Economic Life

• This is the life attributed to an asset for the purpose of determining the cost of the service, especially for rate setting. It represents the estimated period of time the asset will actually provide service to the utility and whose cost of service will be reflected in the rate structure. In some cases this will be much less than the actual physical life, and may be used to match an image, e.g. Customer Offices - Corporate image.