Updated July 11, 2023
Definition of Carrying Value
Carrying Value (CV) is an asset’s accounting value based on the balance sheet’s figures. CV is calculated using the original book value of cost minus accumulated depreciation for physical assets. CV is the original value minus accumulated amortization for non-physical assets such as intellectual property.
Explanation
The CV method is one method to determine an asset’s current value. It is based on the current book value of the asset. Usually, the CV of an asset is lower than the fair or market value. For the assets, the initial book value is recorded in balance sheets. Then based on the estimated life and depreciation method, depreciation is calculated on the asset after each period. The CV of assets is the net book value of assets after subtracting the accumulated depreciation from the initial cost. This value can be much different from the asset’s current market or fair value, which is estimated using current market conditions.
Formula
The CV is the asset’s book value, calculated by deducting accumulated depreciation from the asset’s initial cost.
How Does it Work?
CV is the cost of the asset after reducing accumulated depreciation. Usually, it is not shown in the balance sheet but can easily be calculated.
When an asset is bought, its original cost is recorded on the balance sheet. This original cost can be linked back to the buying receipt of the asset. Then, based on the asset’s useful life and the appropriate depreciation formula, some depreciation or amortization is attached to the asset each year. CV or book value at any time will be the asset’s initial cost minus accumulated depreciation. Note that buildings, plants, etc .are depreciation assets, but the land are not a depreciation asset. This CV can be very different from the asset’s fair value because the fair value will be dependent on the current market condition and subjective.
Examples
Let’s assume in 2015, company A bought a piece of machinery for its factory for $1.2 million. Based on its market condition, its useful life is assumed at 10 years, and the accountant has agreed to adopt a straight-line depreciation method. So below is the depreciation schedule and CV of the machinery each year.
| Initial Cost | $1,200,000 |
| Useful life in years | 10 |
| Year | Yearly Depreciation | Accumulated Depreciation | Carrying Value |
| 2006 | $120,000 | $120,000 | $1,080,000 |
| 2007 | $120,000 | $240,000 | $960,000 |
| 2008 | $120,000 | $360,000 | $840,000 |
| 2009 | $120,000 | $480,000 | $720,000 |
| 2010 | $120,000 | $600,000 | $600,000 |
| 2011 | $120,000 | $720,000 | $480,000 |
| 2012 | $120,000 | $840,000 | $360,000 |
| 2013 | $120,000 | $960,000 | $240,000 |
| 2014 | $120,000 | $1,080,000 | $120,000 |
| 2015 | $120,000 | $1,200,000 | $0 |
For 2006
** Carrying Value is calculated as
Carrying Value = Initial Cost – Accumulated Depreciation
- CV = $1,200,000 – $120,000
- CV = $1,080,000
Similarly calculated for all years
Your company has bought new HP laptops for the employees at $1,200 per laptop. You have assumed the useful life of the laptops as 3 years. Below are the depreciation schedule and CV of the laptops each year.
| Initial Cost | $1,200 |
| Useful life in years | 3 |
| Year | Yearly Depreciation | Accumulated Depreciation | Carrying Value |
| 0 | $0 | $0 | $1,200 |
| 1 | $400 | $400 | $800 |
| 2 | $400 | $800 | $400 |
| 3 | $400 | $1,200 | $0 |
** CV is calculated as
CV = Initial Cost – Accumulated Depreciation
- Carrying Value = $1,200 – $0
- = $1,200
Carrying Value of A Bond
The CV of the bond can also be mentioned as the book value of the bond. A company usually issues bonds at a premium or discount of the face value. Carrying value can be defined as the difference between the face value of the bond and the unamortized portion of the premium or discount. For example, a company issue bonds with a face value of $1,000 at a $20 discount. So to calculate the carrying value, the first unamortized portion of this discount is calculated at any period. Then the carrying amount of the bond at that time can be calculated as the difference between the face value and the unamortized portion of the discount.
Difference Between Carrying Value and Fair Value
CV is based on the asset’s book value, which depends on the asset’s initial cost and depreciation schedule. The fair value of the asset is the current market value of the asset. For example, let’s assume an asset bought at $1,000,000 in 2015 has a carrying value of $500,000 as per the books. But the fair value of the same asset can be $800,000, which depends on the current market estimate and is subjective. Usually, the asset’s fair value has a higher value than the carrying value.
Conclusion
CV is an important concept in accounting principles. With CV calculation, the investor can find out the asset’s remaining useful life and decide on the firm using this calculation. But it needs to remember that carrying value is not the true value of assets per the market estimates.
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