Appraisal Method Of Depreciation

The appraisal method of depreciation is a calculation of the decline in value of an asset from the beginning to the end of a reporting period. The depreciation is calculated by appraising the value of the asset being depreciated both at the beginning and end of the depreciation period. The difference between the appraised values constitutes the amount of depreciation that can be taken.

The appraisal method of depreciation assumes that the value of the asset being depreciated is decreasing over the term. If this is not the case, then no depreciation will be reported. Furthermore, this method of depreciation calculation is generally not recognized by GAAP principles. This is in part because the appraisal method is based on a judgmental derivation, as opposed to an objective valuation based on published market prices, such as for stocks or bonds or equipment. In other words, a business could avoid charging depreciation by inflating the ending appraised value of an asset. Whether or not depreciation is beneficial to a business depends on multiple factors in place over the reporting period.

Businesses depreciate long-term assets for both tax and accounting purposes. For tax purposes, businesses can deduct the cost of tangible assets they purchase as business expenses; however, businesses must depreciate these assets in accordance with IRS rules about how and when the deduction may be taken.

The appraisal method of depreciation can be used by a business owner to understand the current value of her business. For example, a bakery owner may have an appraiser review a number of factors to determine the current value of bakery and other business equipment by considering physical deterioration, economic obsolescence and functional obsolescence. The appraiser will also look at the normal useful life of machinery and equipment, and not the accounting depreciable life, since these are often not the same. In this case, the appraiser can also adjust for the current replacement cost or reproduction cost, where standard accounting depreciation takes only the original cost in its calculation.