Redefining accrued depreciation and reordering its application in the cost approach will improve the valuation process.
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.
Redefining some cost approach terms for clarification will help explain why the order of the deductions for accrued depreciation needs to be rearranged.
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.
One item of accrued depreciation, superadequacy, a form of incurable functional obsolescence, has long been accepted as the first deduction from reproduction cost since it measures the difference between reproduction cost new and replacement cost new.
The most reliable method of developing an accrued depreciation factor is to extract it from the market.
When the total accrued depreciation is subtracted from the cost estimate new, the resulting figure is the depreciated value of the improvements.