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Functional Obsolescence: Understanding Functional Obsolescence with Example

What is Functional Obsolescence?

Functional Obsolescence refers to the decrease in an object's attractiveness and utility as a result of qualities that are recognized as old-fashioned and outdated at that point in time. It happens when an object's efficiency or appeal is lowered due to an outmoded form or characteristic that needs to be rectified or upgraded.

This term is used differently depending on businesses. In real estate, it represents a loss of assets value as a result of an old component, such as an old place with one toilet in a neighborhood full of new houses with at least three restrooms. It could also apply to out-of-date technology, such as a computer or smartphone processor from a previous generation.

Understanding Functional Obsolescence

Customers can reduce the amount of money they lose due to functional obsolescence by evaluating the long-term utility of their purchases. They may find an item bland and boring if it is designed to limit upgrades or communication with suitable devices. Due to the regular invention of new, updated versions, many market devices are recognized for their functional obsolescence.

Businesses also make use of this obsolescence in terms of long-term planning. For instance, depreciation can be an example of functional obsolescence. Businesses can estimate depreciation on their records using a variety of accounting procedures, but the primary purpose is to quantify and monitor an asset's deteriorating value over time as a result of numerous depreciations causes to determine a suitable fair value for assessment and estate tax reasons. 

This concept of business development also assists businesses in predicting the need to trade or buyback new properties. It enables sensible tax returns for estate tax reasons, and also financing for the acquisition of new technology and preparing for the asset sale due for an update. 

Unfortunately, such methodologies only give a limited and imperfect picture of an asset's present worth. While operational expiration is commonly linked with decaying buildings and communities, it may also happen in the reverse situation. 

Practical Example

Suppose, a small house with one bedroom, one small living room and one bathroom built in the or a 1940s cottage with two bedrooms and one toilet built inside a residensial area where two-story homes with six bedrooms and five bathrooms is the norm. Even if the small and old place are still in good shape and completely habitable, they are considered functionally obsolete. That’s because they lack the capacity to accommodate the need of the purchasers in this marketplace.

Another example can be the fact that in tech business there is this continuously changing features of cellphones and the advancement of mobile applications. New cellphones can do more and have more updated functions, rendering comparatively older models essentially outdated.

In Sentences

  • The term functional obsolescence is basically used in businesses or corporations to indicate a property's or asset's unattractiveness or reduced value due to being unable to keep up with the changing times.
  • Due to their age and functional obsolescence the old PCs and printers were replaced.


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