Carrying Value

Carrying Value Definition

Carrying value is the reported cost of assets in the company’s balance sheet, wherein its value is calculated as the original cost less than the accumulated depreciation/impairments. 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 asset’s value based on its useful life. In other words, we can say it is equal to the book value of an assetBook Value Of An AssetBook Value of Assets is the asset's value in the books of records of a company or an institution at any given instance. Assets Book Value Formula = Total Value of an Asset – Depreciation – Other Expenses Directly Related to it read more because it is not the same as the market/fair value of an asset.

The carrying value of a bondCarrying Value Of A BondThe carrying value of a bond, also known as the book value or carrying amount of a bond, is the sum of the bond's face value and unamortized premiums (if any) less unamortized discounts (if any) and is usually projected on the issuing company's balance sheet.read more is different from calculating the carrying value of bonds. It means the amount stated in the company balance sheet Balance SheetA 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 on its issue date. It is a combined total of its face value and the amortization premium or discount. It is also called  the carrying amountThe Carrying AmountThe carrying amount or book value of asset is the cost of tangible, intangible assets or liability recorded in the financial statements, net of accumulated depreciation or any impairments or repayments. Accordingly, the carrying amount may differ from the market value of assets.read more or the value of the book of the bond.

Carrying Value Formula and Calculation

Below are the formulas for carrying the value of an asset and bond.

Carrying value of asset = Original price of an asset – Depreciation value

Carrying the weight of bond = Face value of bond + unamortized premium – unamortized discount

Carrying-Value

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Source: Carrying Value (wallstreetmojo.com)

Examples

#1 – Carrying Value of Asset

Let’s assume that a company owns a plant and machinery amounting to $1,00,000 to produce certain company products. The above machinery has a depreciation value of $4000 and has a useful life of 15 years.

Carrying value Example 1

Please note that the cost of plant & machinery includes transportation, insurance, installation, and other testing charges necessary to get the asset ready for its use.

Further, depreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more means lowering the value of tangible assets due to wear and tear. Tangible assetsTangible AssetsAny physical assets owned by a firm that can be quantified with reasonable ease and are used to carry out its business activities are defined as tangible assets. For example, a company's land, as well as any structures erected on it, furniture, machinery, and equipment.read more represent plant & machinery, furniture, office equipment, etc.

#2 – Carrying Value of Bond

When the price of bondsPrice Of BondsThe bond pricing formula calculates the present value of the probable future cash flows, which include coupon payments and the par value, which is the redemption amount at maturity. The yield to maturity (YTM) refers to the rate of interest used to discount future cash flows.read more is too high, investors pay a higher premium on the price of the bond. Conversely, if the bond’s price is low, the investors purchase the same at the discounted price. However, this depends upon the market rate of interest on the bond’s issuance date.

These premiums and discounts are amortized throughout the bond’s life so that the bond matures its book value, which is equal to its face value.

In simple words, we can say that the bond’s carrying value means the bond’s par value plus the unamortized premium and less the unamortized discount. The same is reported in the company’s balance sheet and is also called the book value.

For example, the bond’s face value is $ 1000, and the date of the bond issue is January 1, 2019, and the maturity date is December 31, 2021. Let’s assume the coupon rate is at 5%.

Now, when the bond is issued, investors will require a rate of return of 4%.

First, we need to check whether the bond is issued on a premium or discount. Preferably, we must be aware of the market rate of interest, which is 4%. The interest rate is less than the coupon rate, i.e., 5%. Therefore, the bond is issued at a premiumBond Is Issued At A PremiumA premium bond refers to a financial instrument that trades in the secondary market at a price exceeding its face value. This occurs when a bond’s coupon rate surpasses its prevailing market rate of interest. For instance, a bond with a face value (par value) of $750, trading at $780, will reflect that the bond is trading at a premium of $30 ($780-750). read more, i.e., $ 1250. Suppose after two years, $100 is amortized. Thus, the bond’s carrying value is $1,000 plus $150, i.e., $1,150; and vice versa, they can sell the bond if the market interest rate is 6%.

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, also known as the Net Worth of the company; Calculated by multiplying the market price per share with the number of shares outstanding;
Based on the historical cost of the asset. Based on the current market price of the assets.
Note: We have used the word ‘amortized’ several times in our article. It means the spreading of intangible assets cost over the assets’ useful life, unlike depreciation. Intangible assets are not tangible assets. Examples of Intangibles assetsIntangibles AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. read more are copyrights, patents, software, franchise agreements, trademarks, etc.

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