What is the Appraisal Method of Depreciation?

Under the appraisal method of depreciation, depreciation is calculated as the decline in the appraised value of an asset from the beginning to the end of a reporting period. If there is no decline in the appraised value during the period, then no depreciation is charged to expense. In essence, it shows the economic loss in value of an asset over the course of a reporting period.

Problems with the Appraisal Method of Depreciation

The appraisal method of depreciation is not considered acceptable under generally accepted accounting principles, for several reasons. The main concerns with it are as follows:

Highly subjective. The appraisal value assigned to an asset is a judgmental derivation, so a person could avoid charging depreciation by falsely inflating the ending appraised value of an asset.
Opportunity for fraud. Because the assignment of value to an asset is subjective, the appraisal method could be used to fraudulently avoid charging any depreciation expense, thereby inflating an organization’s reported earnings.
Reporting inconsistency. Given that appraisal values are subjective, the resulting depreciation may fluctuate substantially over time. This results in unpredictable reported depreciation expense levels.
Expensive method. If you were to hire appraisers to examine your asset values, this may introduce a substantial administrative expense that is not value-added.
Time consuming process. The appraisal process is slow, so this could significantly delay the issuance of financial statements at month-end.
Not standardized. There is no strict guideline for how appraisals are to be conducted, so different appraisers might come up with different asset values. The result can be variability in asset values, depending on who is doing the appraising.