Most people are familiar with accounting depreciation. But what about appraisal depreciation?
When performing a machinery valuation, an appraiser will do his or her best to determine the value of all pieces of equipment and machines utilized in business. As part of determining the present value of a particular item, an appraiser will review the depreciation of a given item. When you understand what appraisal depreciation is, you will better understand the information presented to you by the appraiser.
What is the appraisal method of depreciation?
Hopefully, you are already familiar with the concept of depreciation. This refers to the amount of value that an item loses (or depreciates) in a time period.
Let's say you drive a new truck off the lot and plan to use it for business. You just paid $39,999 for the truck. The minute you drive the truck off the lot, it begins to depreciate.
After two years and 60,000 miles, let's say that you want to sell the truck. Since it has depreciated for 24 months, you could not sell it for the same amount you paid. If the truck depreciated $12,000, you could assume a sales price of $28,000. In the case of a truck, a better option might be to look at comparable sales. But what if you had a niche piece of equipment where there are not many comps?
An equipment appraiser has access to manuals that outline depreciation formulas for specific types of equipment. Appraisers look at a number of factors when determining depreciation which may include physical deterioration, economic obsolescence and functional obsolescence. Appraisers will look at the normal useful life of machinery and equipment, not the accounting depreciable life, since these are often not the same. Appraisers also adjust for the replacement cost or reproduction cost new, where accounting depreciation takes the original cost in its calculation.
Why do appraisers take depreciation?
There are many reasons that a company owner might ask for a machine appraisal. Common scenarios to get equipment appraisals performed include:
- When selling, auctioning, or trading in an asset
- When donating an asset to charity
- When preparing to sell the business
- When getting insurance estimates
- When declaring bankruptcy
- When taking out a loan, financing, or refinancing your business
- For accounting or tax purposes
Savvy business owners understand that they have a flawed idea of how much their business and their assets are worth on the open market. They attach sentimental or emotional value to equipment because they take pride in what they do. To get a "reality check" on an item's value, business owners contact an appraiser who works with other companies in their niche. Appraisers specialize just like other business professionals do, and you wouldn't contact a real estate appraiser for machinery valuation, would you?
When an appraiser estimates the depreciation of an item, they have insight into its value. By comparing the depreciation with current market demand for the item, the item's historical uniqueness, and other variables, the appraiser can set a fair dollar value for the item.
Taken together, asset depreciation, independent research, and equipment analysis can help the appraiser accurately appraise a piece of equipment and your business as a whole.