What Is Carrying Value? (With Comparisons and Examples)
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Businesses often require valuing their assets when preparing their balance sheet to understand their present worth. The carrying amount or value is a technique that helps value an asset by writing off its cost over its entire useful life. Learning about this technique can help you improve the quality of your financial statements.
In this article, we define the carrying value, list the steps to calculate it, compare it with the fair, market, and book values, explain the carrying amount per share, and give multiple examples of how to calculate it.
What is carrying value?
Carrying value or carrying amount is one of the techniques that accountants use to determine the value of an asset or a company. It represents the cost of an asset, as it appears in a company's balance sheet, minus its accumulated depreciation or amortization. Depreciation means reducing the cost of a tangible asset over time, while amortization helps reduce the cost of an intangible asset over time.
An asset's original cost is what appears on the company's balance sheet. The business can usually trace this back to the purchase document, such as a receipt. The carrying amount applies to various depreciable assets but doesn't apply to non-depreciable assets, such as land.
How to calculate the carrying amount
To calculate the carrying amount, here's a list of steps you can take:
Determine the original cost of the asset and deduct the salvage value, which is the amount you expect to receive for it at the end of its useful life.
Divide the difference between the asset's cost and its salvage value by its useful life. The value you get here is the depreciation amount, which accumulates annually.
You may calculate the accumulated depreciation by multiplying the annual depreciation by the number of years the asset has been in use.
Subtract the accumulated depreciation value from the original purchase price to obtain the carrying amount.
Carrying amount vs. fair value
Both carrying and fair values help determine the values of assets, but they use different approaches. The carrying amount considers the asset's original cost and subtracts it from its accumulated depreciation, while fair value assesses its intrinsic worth. Fair value represents the amount that a buyer and a seller may agree upon regarding an asset transaction that both consider reasonable. It's often the more accurate assessment of an asset because it represents what it can sell for under normal conditions without liquidation or depreciation.
Disparities typically occur between the carrying and fair values because of the absence of depreciation of the asset. For example, a construction company purchases new machinery for $50,000 and expects it to depreciate at $2,000 per year. If the company maintains the machinery, its condition remains optimal, and its fair value may remain the same or rise, depending on the machine's effectiveness, specific function, and buyer's willingness.
Carrying amount vs. market value
According to experts and investors in the open market, market value is the worth of an asset. It often depends on demand and supply, which affects the price of similar assets or items. For example, if a company wants to sell one of its assets, it may consider the price that individuals pay for the same asset or a similar one in the marketplace. With that, it can set a reasonable price. If demand is high, market value is high, and if demand is low, market value is also low.
That means the market value is subject to rising and falling, unlike the carrying amount, which falls continually. Like fair value, the market value of an asset can also differ significantly from its carrying amount. For example, a company owns the copyright for a software program, and it depreciates at $3,000 annually, but the popularity of the technology may make the software appreciate. If the company eventually decides to sell it in the open market, its selling price can exceed its initial price even though its carrying amount is far less than both.
Carrying amount vs. book value
Carrying and book values of an asset are similar as they show the business records on its balance sheet. They also follow the same mathematical calculation but have some differences between them. When a business purchases a new item, they use depreciation or amortization to spread its initial cost over its useful life.
Depreciation or amortization enables them to carry the asset's cost over multiple accounting periods, and the resulting cost becomes the item's carrying or monetary value. Investors tend to use book value when evaluating an entire business rather than a single asset.
Carrying or book value per share
The book value per share refers to the amount that each shareholder receives if they liquidate the business. To obtain this per share value, divide the carrying amount of the business by the number of shares outstanding. Outstanding shares refer to the company's stocks that shareholders have purchased and are presently holding. The carrying amount per share can sometimes be the baseline value per share, representing the amount below which the market price of a share may not drop.
Examples of carrying value
Here are four examples of calculating carrying value to help you learn more about the concept:
Example of calculating carrying value in a standard way
The example below shows the standard way to apply the carrying amount:
Construction FZ is a construction company in Toronto, Ontario. The company recently purchased an excavator worth $60,000 to use on their new project, which involves building a multipurpose hall. Their accounting department records a new excavator asset in their books with a value of $60,000. The company considers usage and maintenance history factors and records five years as the machine's useful life. The company decides to depreciate the asset using a straight-line basis with a salvage value of $10,000.
They deducted this salvage value from the asset's original cost to obtain $50,000, then divided this value by five years which is the asset's useful life, to get $10,000. The excavator has been with the company for two years, so its accumulated depreciation at the end of the second year is $20,000. They subtracted this value from $60,000, which is the asset's original purchase price, to obtain $40,000. This value then becomes the carrying amount of the excavator and is what the business records as the asset's value in their balance sheet.
Example of calculating the carrying amount for computers
Study the example below to understand further how to calculate the carrying amount:
An insurance company recently purchased computers worth $5,000 for office use. The company estimated that they might be able to use the computers for four years and receive $600 as salvage value at the end of this time. The business depreciates the computer using the straight-line basis by subtracting the salvage value from the original cost and dividing the resulting value by the asset's useful life. That returned $1,100.
The company was preparing its balance sheet at the end of the first year, so the depreciation hadn't accumulated. They then subtracted the $1,100 from $5,000 to obtain $3,900, which is the computers' carrying amount.
Example of calculating the carrying amount of a patent
If you require calculating the carrying amount of an intangible asset, you may follow the example below:
Grape Technologies recently obtained a patent for the computer software program they developed, covering 20 years. That means the asset's useful life is 20, while its residual or salvage value is zero. Once the patent expires, the software becomes free for any individual or organization to use without permission. The residual value of most intangible assets is zero, as they become worthless at the end of their useful life.
Suppose it costs the business $15,000 to develop the software. They can amortize it using the straight-line basis by subtracting the residual value from the initial cost, then dividing the result by the asset's useful life. The company then deducts the resulting value of $750 from the asset's original value of $15,000 to obtain $14,250, which is the item's carrying amount at the end of the first year.
Example of calculating carrying amount per share
You can study the example below to understand how to calculate the carrying amount per share
A company has total assets of $500,000 and total liabilities of $300,000. It also has a preferred stock of $100,000 and average outstanding shares of $50,000. To calculate its carrying amount per share, the company's accountant first deducted the total liabilities from the total assets to obtain the shareholders' equity, which is $200,000. They then subtracted the preferred stock of $100,000 from the shareholders' equity to get $100,000. The last stage of the calculations process required the accountant to divide this value by the average shares outstanding of $50,000. The carrying amount per share of the company is $2.
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