Carrying Value vs. Fair Value: An OverviewThe carrying value and the fair value are two different accounting measures used to determine the value of a company's assets. Show
The carrying value, or book value, is an asset value based on the company's balance sheet, which takes the cost of the asset and subtracts its depreciation over time. The fair value of an asset is usually determined by the market and agreed upon by a willing buyer and seller, and it can fluctuate often. In other words, the carrying value generally reflects equity, while the fair value reflects the current market price. Because the fair value of an asset can be more volatile than its carrying value or book value, it's possible for big discrepancies to occur between the two measures. The market value can be higher or lower than the carrying value at any time. These differences usually aren't examined until assets are appraised or sold to help determine if they're undervalued or overvalued. Key Takeaways
Carrying ValueThe carrying value of an asset is based on the figures from a company's balance sheet. When a company initially acquires an asset, its carrying value is the same as its original cost. However, this changes over time. To calculate the carrying value or book value of an asset at any point in time, you must subtract any accumulated depreciation, amortization, or impairment expenses from its original cost. Example of Carrying ValueLet's say company ABC bought a 3D printing machine to design prototypes of its product. The 3D printing machine costs $50,000 and has a depreciation expense of $3,000 per year over its useful life of 15 years under the straight-line basis of calculating depreciation and amortization. Straight-line depreciation is a simple way to calculate the loss of an asset's carrying value over time. This calculation is particularly useful for physical assets—such as a piece of equipment—that a company might sell in whole or in parts at the end of its useful life. Therefore, the book value of the 3D printing machine after 15 years is $5,000, or $50,000 - ($3,000 x 15). Carrying ValueFair ValueDifferent from the carrying value, the fair value of assets and liabilities is calculated on a mark-to-market accounting basis. In other words, the fair value of an asset is the amount paid in a transaction between participants if it's sold in the open market. A willing buyer and seller have agreed upon this value. Due to the changing nature of open markets, however, the fair value of an asset can fluctuate greatly over time. Example of Fair ValueLet's say an investment company has long positions in stocks in its portfolio. By having long positions, the company anticipates favorable market conditions, also known as a "bull market." The company is holding onto these stocks with the expectation they will rise in price over time. The investment company's original cost of these assets was $6 million. However, after two negative gross domestic product (GDP) rates, the market experiences a significant downturn. The company's portfolio falls 40% in value, to $3.6 million. Therefore, the fair value of the asset is $3.6 million, or $6 million - ($6 million x 0.40). Determining the fair value of an asset can be difficult if a competitive, open market for it doesn't exist—an unusual piece of equipment in a manufacturing plant, for example. Fair ValueIs Carrying Value the Same as Book Value?Both book value and carrying value refer to the accounting value of assets held on a balance sheet, and they are often used interchangeably. "Carrying" here refers to carrying assets on the firm's books (i.e., the balance sheet). How Do You Determine Fair Value?The fair value of an asset or security is often determined by the market, at a price agreed upon by a willing buyer and seller. This can be determined by the forces of supply and demand, by a valuation model, or several other methods, depending on the particular asset or security involved. How Do You Determine Carrying Value?Carrying value is typically determined by taking the original cost of the asset, less depreciation. What Is Carrying Value?Carrying value or book value is the value of an asset according to the figures shown (carried) in a company’s balance sheet. Carrying value is calculated as the original cost of the asset less any depreciation, amortization, or impairment costs. Formula to Calculate Carrying or Book ValueBook Value or Carrying Value = Total Assets – Total
Liabilities Uses of Carrying or Book ValueCarrying value has two main uses:
Therefore, carrying value is the accounting value of the enterprise. In other words, it is the total value of the enterprise’s assets that owners (shareholders) would theoretically receive if an enterprise was liquidated. In reality, carrying value does not always reflect what shareholders will receive in the event of liquidation. For example, even if the inventory is stated at full cost (100% value) in the books, who would want to buy a bunch of Pentium IV chips if the company goes out of business? This means that the realization value of assets of ongoing concern is different from the value of assets under liquidation. It is important to predict the fair value of all assets when an enterprise stops its operations. Generally, it is estimated that the fair values of cash and cash equivalents, short-term investments (less than one year), and long-term investments (beyond one year) are equal to 100% of the book value. The fair values of different items are given below:
Hence, if an enterprise undergoes liquidation, the fair value prediction of assets clearly indicates that the owners (shareholders) cannot receive the net carrying value of assets. Importantly, this thought process for determining carrying value versus fair value prediction paves the way for the concept of entity value (or enterprise value), which is a holistic measure of organizational value. ExampleUsing the table below, calculate the following:
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Frequently Asked QuestionsWhat is the carrying value?The carrying value of an asset is its net worth—the amount at which the asset is currently valued on the balance sheet. How do I calculate the carrying values?The carrying values of an asset can be calculated by subtracting the total liabilities of that particular asset from its total assets. In case the value obtained is negative, it means that the asset has a net loss or it can be said that its losses exceed its profits, thus making it a liability. What are the uses of a carrying value?In personal finance, an investment’s carrying value is the price paid for it in shares/stock or debt. When this stock or debt is sold, the selling price less the book value is the capital gain/loss from an investment. Therefore, carrying value is the accounting value of the enterprise. In other words, it is the total value of the enterprise's assets that owners would theoretically receive if an enterprise was liquidated. What is the difference between a carrying value and a book value?Book value is the accounting value of an asset. Carrying value, on the other hand, is the theoretical or expected exit (liquidation) value that shareholders would receive if they were to sell all their assets and pay off all associated debt at once. So, your book values are actual values that you list in your financial reports while your carrying values are the 'estimated' or 'appraised value' that you would get if you were to sell off all your assets. What is the difference between a book value and a fair market value?All three terms can be used interchangeably because they refer to the same thing - the true market value of an asset at any given point in time. About the Author True Tamplin, BSc, CEPF®True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists. True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics. To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.
What does carrying value mean?Carrying value is a measure of value for a company's assets. Carrying value is typically measured as the original cost of the asset, minus any depreciating factors. The depreciating factors for an asset vary based on the nature of the asset. Some assets, such as land, are not considered depreciable.
What is carrying amount book value?The carrying value, or book value, is an asset value based on the company's balance sheet, which takes the cost of the asset and subtracts its depreciation over time. The fair value of an asset is usually determined by the market and agreed upon by a willing buyer and seller, and it can fluctuate often.
What is the difference between value and book value?Book value is the net value of a firm's assets found on its balance sheet, and it is roughly equal to the total amount all shareholders would get if they liquidated the company. Market value is the company's worth based on the total value of its outstanding shares in the market, which is its market capitalization.
Is carrying value the same as selling price?Carrying value, also known as carrying amount, is an accounting concept used to measure the current value of an asset. The carrying value is equal to the original price paid for an asset minus the accumulated depreciation or amortization .
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What is book value vs carrying value?
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