Legal Definitions - functional depreciation

Definition: Functional depreciation is a decline in the value of an asset due to it becoming obsolete or outdated, even if it is not yet worn out from use.

For example, imagine a factory that uses a machine to produce goods. After a few years, a new and improved machine is invented that can produce the same goods faster and more efficiently. Even though the old machine may still work, it is now considered functionally depreciated because it is no longer the best option for the factory to use.

Another example could be a computer that is still in good working condition but cannot run the latest software or programs. It may still have value, but it is functionally depreciated because it cannot perform the tasks that newer computers can.

Functional depreciation is important to consider when determining the value of an asset, as it can affect its usefulness and ultimately its worth.