Depreciation in Machinery and Equipment Appraisals

Depreciation is a definition that has accounting and appraisal definitions.  In accounting, the term depreciation relates to cost allocation of an asset.  Accountants will use methods such as straight-line depreciation or accelerated depreciation, for example, to allocate the purchase price of the asset over a period of time which is acceptable for the asset class that they are depreciating.  Since it is basically a mathematical cost allocation, it doesn't necessarily have a direct correlation to the assets physical life.

Depreciation for machinery and equipment appraisers has an entirely different meaning.  For equipment appraisals, depreciation is the estimated loss in value due to its loss in value of an asset.  This may be due to economic obsolescence, functional obsolescence, or physical deterioration, or a combination of them all.

An example of this difference could be a metal stamping press that is fully functional that is fifteen years old.  For accounting purposes, the asset probably has been fully depreciated.  On the balance sheet, the press has a book value of zero.  However, there may be an active market for presses of a similar age that are fully functional that if the owner decided to sell, the press would generate a sale greater than zero.  An equipment appraiser would evaluate the machine using the various approaches to value to estimate the fair market value of the machine.  The value that the machine has decreased from the initial purchase is the depreciated value in the terms of the equipment appraiser which is different than the depreciated value from the accountant.