How do you make a new estimate of effective life?
The process of recalculating effective life is the same as the process of estimating effective life. To make a new estimate, you estimate the period (in years) the asset can be used for income-producing purposes by any entity, from the time you first started to use the asset for any purpose. The period is based on your expected use of the asset and assumes that it is maintained in reasonably good order and condition. For more information on how to estimate the effective life of an asset, refer to Uniform capital allowance system: calculating the decline in value of a depreciating asset.
The new estimate of effective life takes effect for the year in which you make it.
DA Pty Ltd acquires a depreciating asset on 1 July 2001 and starts to use it on the same day. The company works out that the effective life of the asset is seven years. During 2001–02, the company is advised that use of the asset will be prohibited by law from 1 July 2003.
The effective life cannot be recalculated for 2001–02 because this is the year in which the company started to use the asset. However, for 2002–03 the company may recalculate the effective life at two years. The recalculated effective life is worked out from the time the company first started to use the asset to the date when it can no longer be used for income-producing purposes.
End of example