breakdown method

breakdown method

In appraisal,the process of dividing depreciation into separate components, assigning a weight to each one, and then arriving at a depreciated value of the property.This has nothing to do with book depreciation or tax depreciation, but is instead intended to calculate the true current value of the improvements.The three types of property depreciation are:

1. Physical depreciation. What is the condition of the improvement?

2. Functional obsolescence. Loss of value because of physical factors other than deterioration, such as a poor floor plan, a one-car garage instead of a two-car garage, or high ceilings and multiple windows creating heating and cooling problems.

3. Economic obsolescence. Loss of value because of factors outside the property, such as noise  pollution from nearby highways or an airport.

References in periodicals archive ?
The breakdown method also is not particularly practical.
The emphasis to date in accounting for accrued depreciation has been to estimate the difference between cost and value by referring to sales rather than to refine the breakdown method of measuring causes of accrued depreciation.
The breakdown method of measuring accrued depreciation typically lists the causes in the following order: curable physical depreciation, incurable physical depreciation, curable functional obsolescence, incurable functional obsolescence, and external obsolescence.
The reordering of the deductions adopts the breakdown method of estimating accrued depreciation, but there are changes in how some of these items are perceived and defined.
The deduction for any item of special incurable functional obsolescence is limited to the reproduction cost remaining at this stage in application of the suggested cost approach method for measuring accrued depreciation by the breakdown method.
The breakdown method of measuring accrued depreciation using engineers' elemental costs is warranted in appraisal projects involving significant, viable special-purpose buildings, like churches, schools, public buildings, and specially designed industrial or research facilities, and especially in cases where litigation is involved.
The changes in estimating accrued depreciation suggested here use the five basic categories of the breakdown method.
The breakdown method of estimating physical depreciation entails estimating "all items of depreciation individually"(1) then adding the individual estimates together and deducting the sum from the estimated reproduction or replacement cost.
Because the breakdown method is employed often in practice, it is important to know if markets exhibit the pattern of property depreciation over time implied by the breakdown method.
Max Derbes relies on the breakdown method of estimating physical depreciation to derive a residual estimate of the productive life of long-lived components of property improvements.
4) He notes that the crucial difference between the use of the breakdown method of computing physical depreciation and using the simpler age-life method is that the breakdown method employs estimates of physical life to compute building component depreciation whereas the age-life method utilizes a ratio of effective age to economic life.
Because Marshall and Swift depreciation schedules only consider effective age and economic life, they are not amenable to calculating physical depreciation of the core structure by the breakdown method.