The age-life method of depreciation is used by residential appraisers, and involves assessing the depreciation of an asset, based on the effective age of the asset. The effective age differs from the actual age of the asset, and is estimated on the basis of the amount of wear and tear that the asset has undergone. Excessive wear and tear in comparison to the actual age, will mean that the asset is assigned an effective age that is greater than its actual age.
For example, take an asset that was constructed five years ago, but owing to excessive wear and tear, the asset is not in good condition. It is therefore considered to have an effective age of 15 years. If the total economic life of the asset is considered to be 30 years, the accumulated depreciation of the asset will then be computed using 50% of the cost or market value of the asset.
In the case of a building that is four years old with an estimated useful life of 50 years, this may have sustained considerable wear and tear for various reasons during its first four years of life, with the result that it is assigned an effective age of 10 years. The accumulated depreciation of the building could therefore be computed at 20% of the original cost.
Where this type of assessment is performed frequently, depreciation of the asset can be allocated to accounting periods based on the amount of wear and tear that the asset has actually sustained, rather than by a more mechanical formula based on a percentage of cost or net book value. The age-life method of depreciation may therefore have some use in determining the depreciation charge for accounting purposes.