Chapter 12 Accrued depreciation Agelife method Book value Capitalized income method Cost basis Costtocure method Curable depreciation Curable postponed Currentvalue accounting Deferred maintenance ID: 639214
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ESTIMATING LOSS IN VALUE: ACCRUED DEPRECIATION
Chapter
12Slide2
Accrued depreciationAge-life methodBook valueCapitalized income methodCost basisCost-to-cure methodCurable depreciationCurable postponed
Current-value accountingDeferred maintenanceDepreciation in accountingDepreciation in appraisalDiminished utilityEconomic life
2CHAPTER TERMS AND CONCEPTSSlide3
Economic obsolescenceEffective ageFunctional obsolescenceLocational obsolescenceLoss of utilityMisplaced improvementOver-improvement Physical deterioration
Rental loss methodSales data methodStraight-line methodSuper adequacyUnder-improvement
3CHAPTER TERMS AND CONCEPTSSlide4
LEARNING OUTCOMESDistinguish the concept of depreciation as it is used in
accounting from that used in appraisal.Name and give the causes of three types of depreciation.
Name four methods of estimating accrued depreciation and describe how they may be applied to an appraisal problem.4Slide5
DEPRECIATIONDefinition:In accounting practice, all capital assets except land are
considered to be wasting assets, assets that decline in value over time.The estimate of accrued depreciation in appraisal, first, a dollar or percentage amount is deducted from the estimated
cost of the improvements as if new on the date of value, rather than from their historical cost basis. Second, the amount of depreciation represents the appraiser’s best estimate of the actual market loss in value as compared to a new building, whereas accounting depreciation is a theoretical loss.5Slide6
Appraisal Depreciation6Slide7
DEPRECIATION: BOOKBook DepreciationDefinition: Deduction from cost
Purpose: Accounting, income tax reporting, etc.How Determined: Company policy, IRS RegulationsHow Applied: Deduction from book or historic costs.
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DEPRECIATION: ACTUALActual DepreciationDefinition: Loss in value
Purpose: Used in Appraisals (cost approach primarily)How determined: Cost to cure, age-life, sales data, rental loss…..How applied: Deduction from current replacement cost.
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TYPES OF ACCRUED DEPRECIATIONPhysical DeteriorationFunctional obsolescence
External Obsolescence9Slide10
CURABLE DEPRECIATIONCurableCost to correct the condition or defect is less than the amount of value restored
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INCURABLE DEPRECIATIONIncurableCost to correct the condition or defect is greater than the amount of value restored
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What do you think?12Slide13
MEASURING ACCRUED DEPRECIATIONStraight-Line or Age-LifeSales Data (Market) Method
Cost-to-Cure (Observed Condition)Capitalized Income
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BY THE SALES DATA METHOD14Slide15
Cost-to-Cure Method15
It measures the accrued depreciation by the cost to cure or repair any observed building defects. After inspecting the premises, the appraiser tries to
identify each building defect, feature, or condition that reduces value. Each is then classified as either physical, functional, or economic. In addition, each defect must be studied to estimate whether it is economically curable or incurable. However, economic obsolescence is rarely economically curable, so the cost-to-cure method is of little use.Slide16
Physical Deterioration• Deferred maintenance—
curable• Deferred maintenance—incurable•
Short-lived items• Long-lived items16Slide17
Functional Obsolescence• Curable—an addition• Curable—a replacement or substitution• Curable—super adequacy
or over-improvement• Incurable—a deficiency• Incurable—a super adequacy
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Capitalized Income Methodor rental loss method can be used to estimate either the total loss in value from all causes,
or simply the loss in value from a single cause. To estimate loss in value from all causes, a comparison is made between the rent
of the subject building on the date of value and the rent of a new or modern building that could take its place.18Slide19
SUMMARY OF THE COST APPROACH19Slide20
Cost Approach Section of the URAR and 2055 Forms20Slide21
SUMMARY21
Accrued
depreciation for appraisal purposes is the estimated loss in market value of the improvements, when compared to their replacement or reproduction cost on the date of value. This value loss can be caused by physical deterioration, functional obsolescence, and/or economic obsolescence. Many types of physical deterioration, such as deferred maintenance, are curable by painting, fixing up, or doing repair work. Accrued depreciation may be estimated by the straight-line/age-life method, the sales data method, the cost-to-cure/observed condition method, or the capitalized income method.