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The future life of the building has been defined as the period during which the income received from the property consisting of land and building is more than the income from the bare land alone.
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Life is said to be over, when a fixed asset is withdrawn from useful services or the same is pulled down and scrapped, the life may come to an end due to any of the factors given below:
- Natural calamities like earthquake, flood, fire, storm etc.
- Wear and tear from use.
- Decay due to the passage of time.
- Functional death due to (i) obsolescence either because of economic consideration or being out of style and mode. (ii) The inadequacy of purpose for which it has been designed.
Any property will have, three types of lives, namely,
- Economic life
- Physical life
- Life till obsolescence sets in.
The economic life of an asset is assessed in light of the following parameters.
- Material of construction
- Repairs and maintenance
- Climatic conditions
- Subsoil condition
- Type of use of building
- Vibrations due to the existence of machinery in a workshop.
Depreciation, Life and Salvage Value:
Besides the usual wear and tear caused by the normal working, any asset in use is liable to a certain amount of deterioration in spite of the care and attention bestowed on its maintenance and preservation. While some of this deterioration may be possible to be kerbed it cannot altogether be avoided. Such deterioration may be due to its inherent characteristics such as ageing or to external factors such as exposure to weather and soil conditions. In fact, a complexity of environmental, usage and other factors, contribute towards a continuous lowering of its strength, capacity and/or dependability resulting in a continuous reduction in its usefulness and value. This is taken as depreciation. The annual depreciation expressed as a percentage of the total permissible depreciation or its money equivalent expressed as a percentage of the total value of the asset based on its useful life is taken as the rate of depreciation.
Due to continuous deterioration taking place in the body as the physical condition of the asset, a stage is reached beyond which it becomes uneconomical, or unsafe to use or work it. The duration in years from the date of the asset was originally put to use, till this stage is likely to be reached is taken as the ‘Life’ of the asset or its life expectancy.
Once this stage is reached beyond which it is considered as uneconomical or unsafe, the asset has to be dismantled or replaced. The constituent parts of the asset may be put to alternative minor uses or sold or disposed of as scrap. In any case, the value of parts is taken as salvage value.