Posted in Finance, Accounting and Economics Terms, Total Reads: 412
Definition: Appraisal Method of Depreciation
It is defined as the method of depreciation on the basis of appraisal value. This is a method of depreciation where the value of asset is appraised before the accounting period and after the accounting period. If the value of the asset has decreased, then it is considered as the depreciation amount.
In case, there is no decrease in value, depreciation for that accounting period is zero.
Consider an example of machinery. The cost of purchase is $1000. After a year, the value has been calculated as $900. Therefore, the depreciation for the period is $100. If for the subsequent years, depreciation is found out to be $200, $250, $75, $125, $105, $95 respectively, then the asset is no longer useful after 7 years. But, this would be only realized after the 7th year appraisal and the firm might not be able to allocate the required amount within time.
Consider the example of land owned by the firm. The cost of acquisition is $6 mn. Due to recession, the value of land has fallen by 25%. So, the value of land for the next year would be $4.5 mn. The depreciation would be $1.5mn. Due to real estate boom after two years the value of land has increased by 40%. The new value of land is $6.3 mn. Therefore, there would no depreciation according to Appraisal Method of Depreciation.
• As the value is calculated every year, there is no pattern in the depreciation every year
• There is no estimated lifetime of the asset
• No defined residual value. Therefore, the firm doesn’t know when to replace the asset or when to give the asset for maintenance and servicing
• This method is not recognized by the GAAP principles