Part 2, 1.2

1.2 The asset life cycle Return to
Contents of Part 2

Non-current physical assets typically have a long life. They consume resources to acquire or create them and to keep them in operational condition over the whole of that life. Many decisions about assets are enduring, and have long-term implications. Because of these characteristics, it is helpful to consider the use of assets in terms of their life cycle.

The phases through which an asset passes during its life are:

the identification of need, where the requirement for a new asset is planned for and established;

the acquisition phase, where the asset is purchased, constructed or otherwise created;

the operation and maintenance phase,
where the asset is used for its intended
purpose. This phase may be punctuated
by periodic refurbishment or major repair,
requiring the asset to be taken out of
service for periods of time; and

the disposal phase, initiated when the
economic life of the asset has expired, or
when the need for the service provided by
the asset has disappeared.
The asset life cycle is shown
diagrammatically in Figure 2.3.

Decisions taken about an asset in one phase can affect its performance in others. As an example, seeking minimum capital cost solutions in the acquisition phase can have adverse effects on long-term operating costs. Inadequate attention to maintenance can accelerate the need for major repairs, or shorten the operational life of the asset. It can also prejudice the achievement of maximum returns on disposal. Conversely, careful management of existing assets can extend their effective life and avoid or defer the need for
new acquisitions.

The concept of ‘the asset life cycle’ is aimed at encouraging an understanding of these effects, and at helping managers to reach decisions about assets in a whole-of-life context. Economic evaluation tools such as discounted cash flow are often useful in assessing the long-term effects of individual decisions about assets.

Entities should consider whether the asset management responsibilities of their managers reflect a life cycle approach. Limiting the responsibility of managers to a single phase (such as acquisition, or operation and maintenance) will not lead to sound long-term decisions about assets. Asset managers should be accountable for the life cycle effects of their decisions.

Return to Contents of Part 2