Functional obsolescence

Definition

Functional obsolescence occurs when an asset loses value due to outdated features or inefficiencies, despite still being operational. It often requires businesses to consider write-downs or accelerated depreciation.

5 Must Know Facts For Your Next Test

1. Functional obsolescence can impact the book value of long-term assets.
2. It may necessitate a re-evaluation of the asset's useful life and residual value.
3. Unlike physical deterioration, functional obsolescence is driven by technological advancements or changes in consumer preferences.
4. Companies may need to adjust their depreciation methods to account for functional obsolescence.
5. Recognizing functional obsolescence is crucial for accurate financial reporting and asset management.

Review Questions

• How does functional obsolescence differ from physical deterioration?
• What financial adjustments might a company make when an asset becomes functionally obsolete?
• Why is recognizing functional obsolescence important for accurate financial reporting?

Related terms

Depreciation:

The systematic allocation of the cost of a tangible asset over its useful life.

Book Value:

The value of an asset as recorded on the balance sheet, calculated as cost minus accumulated depreciation and impairment losses.

Impairment:

A permanent reduction in the recoverable amount of a long-term asset below its carrying amount on the balance sheet.