Carrying Amount

Carrying Amount Definition

Carrying amount, also known as book value of asset, is the cost of tangible assets, intangible assets or liability recorded in the financial statements which is net of accumulated depreciation/amortization or any impairments or repayments and this carrying cost may be different from current market value of such asset or liability as the market value of any asset or liability depend upon the demand and supply market conditions

It can also be defined as the value that the shareholders will get in the event of liquidation of the company. This value is generally determined by keeping in mind the GAAP or IFRS accounting principles when accounted for.

Carrying Amount Formula

Below is the overall formula

Carrying-Amount-Formula

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Carrying Amount (wallstreetmojo.com)

How to Calculate Carrying Amount?

Company XYZ purchases machinery for $20,000 on Oct-18. It uses Straight-line depreciation on the asset @ 10%. Accounting for the asset will be done as follows.

  1. For the year ending Dec-18. The asset depreciation amount will be $20,000*10/100*3/12 = $500.

  2. Since the asset was purchased in the month of October, the depreciation amount on the asset will only be charged for 3 months, i.e., $500 for that year. Hence on the balance sheet for the yearBalance Sheet For The YearA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more ending 31-Dec-18, the asset’s carrying amount will be $20,000- $500 = $15,000.

  3. For the next year, full depreciation will be charged on the asset till the scrap value becomes zero.

Carrying Amount vs. Fair Value

The market value of the asset, which is also often referred to as the fair value of an asset, means for how much an asset can sell for in the market. It is the value for which an asset can be sold in the open market. For example, Company XYZ has total assets of $10,000 with a total liabilities of $80,000 the book value of the company will be $20,000 which is the value of the assets less the value of liabilities.

The market value often differs due to the following factors: –

For example, the company purchase equipment for $200,000 each month. The company depreciates the asset for $5,000 for 4 months and then decides to sell the asset. The asset is sold for $150,000. Since the asset is sold for only $150,000 the market value of the asset is $150,000 but the carrying amount of the asset will be ($200,000 – $20,000) = $180,000. Hence the company will book a loss of $30,000 in the profit and loss statement.

When Fair Value is lower than the Carrying Value

When the company’s market value of the shares and it’s share is lower than the carrying amount, it indicates that the market and the shareholders have lost confidence in the company’s fundamentals. The future earnings are not enough to pay its debt and liabilities. There are many cases, especially with the start-up companies that their book value and market value differ significantly, and the assets are worth much less in the market than it is shown in the books of accounts. Ideally, the company should be sold off when it’s market value becomes less than the book value of the company.

When a Fair Value is greater than the Carrying Value

When the market value of the company exceeds the book value of the company, the market is positive about the future earnings prospects, increased investments. It increases profits, which will increase the market value of the company and, in turn, higher returns on the stock. A company that has consistently higher profits and increased profits will have a market value greater than the book values of the company.

However, sometimes significantly higher market values indicate overvalued stocksIndicate Overvalued StocksOvervalued Stocks refer to stocks having more current market value than their real earning potential or the P/E Ratio. Overvaluation of stocks might occur due to illogical decision making or deterioration in a Company’s financial health. read more and are most likely to experience a steep fall in the market prices of the stocks as investors have been too positive about the stock, and the market needs to be corrected.

When a Fair Value is equal to the Carrying Value

It is seldom that the investor will think and of the opinion that the company’s carrying amount is equal to that of the market. However, in that case, the company can be called a perfectly valued company.

Carrying Amount for an Investor

It is also the fundamental value of the company, which can be easily defined as how much the net assetsNet AssetsThe net asset on the balance sheet is the amount by which your total assets exceed your total liabilities and is calculated by simply adding what you own (assets) and subtract it from whatever you owe (liabilities). It is commonly known as net worth (NW).read more of the company are worth. For fundamental and value growth investors, this value is important because, for a company having a high market value from its book value is a good opportunity for investing. The price to book value ratioPrice To Book Value RatioPrice to Book Value Ratio or P/B Ratio helps to identify stock opportunities in Financial companies, especially banks, and is used with other valuation tools like PE Ratio, PCF, EV/EBITDA. Price to Book Value Ratio = Price Per Share / Book Value Per Share read more is a good indicative ratio to measure the carrying amount of the company. The ratio indicates whether you’re paying too much for what would remain if the company is approaching bankruptcy.

Recommended Articles

This article has been a guide to Carrying Amount and its definition. Here we discuss the formula to calculate carrying amount along with examples and its differences from fair value, etc. You can learn more about accounting from the following articles –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *