Carrying Value Definition
Carrying value is the reported cost of assets in the balance sheet of the company wherein its value is calculated as the original cost less than the accumulated depreciation/impairments and that of the intangible asset is calculated as the actual cost less the amortization expense/impairments.
In simple words, it is the value of an asset in the books of accounts/balance sheet less the amount of depreciation on the value of the asset on the basis of the useful life of the asset. In other words, we can say it is equal to the book value of an asset because it is not the same as a market/fair value of an asset.
The carrying value of a bond is totally different from the calculation of carrying value of bonds. It means the amount stated in the company’s balance sheet on the date of its issue. It is a combined total of its face value and the amortization premium or discount. It is also called the carrying amount or the value of the book of the bond.
Carrying Value Formula and Calculation
Given below are the formulas of carrying the value of the asset and bond.
#1 – Carrying Value of Asset
Let us assume, the company owns a plant and machinery amounting to $1,00,000 to be used for the production of certain products of the company. The above machinery has a depreciation value of say $4000 and has a useful life of 15 years.
Please note that the cost of plant & machinery includes the cost of transportation, insurance, installation and other testing charges which are necessary to get the asset ready for its use.
#2 – Carrying Value of Bond
When the price of bonds is too high, investors pay the higher premium on the price of the bond and if the price of the bond is low then the investors purchase the same at the discounted price also depending upon the market rate of interest on the date of issue of bond. These premiums and discounts are amortized over the period of life of bond so that the bond matures its book value which is equal to face value of the bond.
In simple words, we can say that the carrying value of bond means the par value of the bond add unamortized premium and less unamortized discount. The same is reported in the balance sheet of the company which is also called the book value of the bond
For example, the face value of the bond is $ 1000 and the date of the issue of bond is 1st January 2019 and the maturity date is 31st December 2021. Let’s assume the coupon rate at 5%.
Now, when the bond is issued, investors require a rate of return as 4%.
First of all, we need to check whether the bond is issued on premium or discount we must be aware of the market rate of interest which is 4%. The rate of interest i.e. 4% is less than the coupon rate i.e. 5%. Therefore, the bond is issued at a premium i.e. $ 1250. Suppose after two years $ 100 is amortized. Therefore, the carrying value of the bond is $ 1000 plus $ 150 i.e. $ 1150. And vice versa, if the market rate of interest is 6%, then the bond shall be sold at discount.
Difference between the Carrying Value vs Fair Value
|Carrying Value||Fair Value|
|It is the book value or the asset value which is the actual cost of the asset.||The fair value of assets and liabilities is calculated on mark-to-market.|
|It is based on the figures from an entity’s balance sheet.||Whereas, the fair value figures depicts the value of the assets sold in the open market.|
|It is calculated by taking the difference of the assets and liabilities on the balance sheet which is also known as the Net worth of the company.||Fair value is calculated by multiplying the market price per share with the number of shares outstanding.|
|It is based on the historical cost of the asset||It is based on the current market price of the assets.|
This has been a guide to what is Carrying Value & its definition. Here we discuss Carrying Value Formula along with examples and its differences with Fair value. You can learn more about accounting from the following articles –