What it means
When a balance sheet shows a building at $4,000,000, that figure is neither what it cost nor what it would sell for. It is what the accounting rules say it should be reported at today: its cost, less the portion of that cost already charged to profit as depreciation, less any write-down for impairment, or, if the company has chosen a revaluation policy, its last valuation less depreciation since.
The carrying amount is the answer to the question "what does the balance sheet say this is worth", with the understanding that the balance sheet is applying rules, not appraising. The concept applies to everything on the balance sheet.
Receivables are carried at the amount invoiced less an allowance for the portion expected not to be collected. Inventory is carried at cost, unless net realisable value is lower, in which case it is written down.
Goodwill and other intangibles are carried at cost less amortisation (for finite lives) and impairment. Investments are carried at cost, amortised cost, fair value or equity-accounted amount depending on their nature and classification.
Loans and bonds issued are carried at the proceeds received adjusted for the amortisation of issue costs and any discount or premium, so that a $10,000,000 bond issued for $9,800,000 is carried initially at $9,800,000 and accretes to $10,000,000 over its life. Provisions are carried at the best estimate of the amount required to settle them.
The carrying amount is the reference point for several calculations. A gain or loss on disposal is proceeds less carrying amount.
An impairment loss is carrying amount less recoverable amount, where the recoverable amount is the higher of value in use and fair value less costs to sell. A deferred tax balance arises from the difference between an item's carrying amount and its tax base.
The book value per share used in valuation is total equity, itself the sum of carrying amounts, divided by shares. The difference between carrying amount and market value is the source of most of the caution in reading balance sheets.
Property bought decades ago may be carried at a small fraction of its value. Internally generated brands are not carried at all.
Conversely, plant that has become obsolete may be carried at a value it will never recover until an impairment review catches up. Analysts adjust carrying amounts to market values when valuing a company on an asset basis, and standards require disclosure of fair values for some items (investment property, financial instruments) precisely because the carrying amount may be uninformative.
Under IFRS the term of art is carrying amount; US GAAP uses carrying value or book value; net book value is common usage for fixed assets. They are interchangeable in meaning.
In practice
Real-world examples.
Example
A retailer's head office, bought in 1985 for $2 million and depreciated to $600,000, is worth $30 million; its carrying amount understates equity by $29.4 million.
Example
A bank's loan book is carried at amortised cost less an expected credit loss allowance of 1.8%, reviewed quarterly.
Example
A publisher carries its acquired magazine titles at $12 million after an impairment test cut them from $20 million when advertising revenue fell.
Think of it
“Carrying amount is book value-what the balance sheet shows after depreciation and other adjustments.
Formula
Calculation
Carrying Amount (fixed asset, cost model) = Cost minus Accumulated depreciation minus Accumulated impairment
Carrying Amount (receivables) = Gross receivables minus Loss allowance
Carrying Amount (inventory) = Lower of cost and net realisable value
Carrying Amount (bond issued) = Proceeds + Cumulative amortisation of discount and issue costs
Gain or loss on disposal = Net proceeds minus Carrying amount
Impairment loss = Carrying amount minus Recoverable amount
Worked example. A company's balance sheet at year end includes the following, each at carrying amount.
Machinery: cost $3,200,000, bought four years ago, ten-year life, straight-line, residual nil. Accumulated depreciation $1,280,000. An impairment review two years ago wrote the carrying amount down by $200,000. Carrying amount = $3,200,000 minus $1,280,000 minus $200,000 = $1,720,000. (Depreciation after the impairment is recalculated on the reduced amount over the remaining life; the simplified figure here ignores that refinement.)
Receivables: invoices outstanding $2,600,000; loss allowance $130,000 (5%, based on expected credit losses). Carrying amount $2,470,000.
Inventory: cost $1,900,000; one product line with cost $300,000 has a net realisable value of $180,000. Carrying amount = $1,600,000 + $180,000 = $1,780,000.
Bond issued: $5,000,000 face, five years, issued three years ago at $4,850,000 net of costs, the $150,000 discount amortised straight-line (simplified) at $30,000 a year. Carrying amount = $4,850,000 + $90,000 = $4,940,000.
Uses of the figures:
- The company sells the machinery for $2,000,000: gain on disposal = $2,000,000 minus $1,720,000 = $280,000.
- A customer with $80,000 outstanding fails; the loss allowance already covered expected losses, so the write-off reduces gross receivables and the allowance with no further charge unless the allowance is now insufficient.
- The machinery's tax written-down value is $1,400,000 (faster tax depreciation). Taxable temporary difference = carrying amount $1,720,000 minus tax base $1,400,000 = $320,000; deferred tax liability at 25% = $80,000.
- The bond is repaid at maturity in two years at $5,000,000; the carrying amount will have accreted to that figure by then, with $60,000 of interest expense recognised through the accretion.
Market comparison: an independent valuation puts the machinery at $2,400,000 (specialised equipment in demand). The carrying amount stays at $1,720,000 under the cost model; the $680,000 difference is an unrecognised gain that would appear only on sale or under a revaluation policy.Case study
Seen in the real world.
A manufacturing company's balance sheet showed plant and equipment with a carrying amount of $28,000,000. The figure was accurate under the rules, but a new finance director asked what it meant. She found that it consisted of three things: $9,000,000 of modern equipment carried close to its replacement cost; $15,000,000 of a production line installed six years earlier for a product whose sales had since halved, which had never been impairment-tested because the company tested at the whole-plant level where other lines' profits masked the shortfall; and $4,000,000 of fully functional but old machinery carried at a small fraction of what it would cost to replace.
She ran an impairment test on the declining line as a separate cash-generating unit and wrote it down by $8,000,000, which the board found painful but the auditors had been on the point of requiring. She also disclosed in the annual report the estimated replacement cost of the plant ($55,000,000) so that lenders and shareholders could see that the carrying amount, even after the write-down, was not the value of what the company owned. Her note to the board explained that the carrying amount was neither too high nor too low but was three different things added together, and that the balance sheet was a set of rules applied consistently, not a valuation.
Watch out
Common mistakes.
- Reading carrying amounts as market values, in either direction: old property is usually carried far below value, obsolete equipment sometimes above it.
- Calculating a gain or loss on disposal from original cost rather than carrying amount.
- Impairment-testing at too high a level, so that a loss-making asset's carrying amount is sheltered by profitable ones.
Questions
People also ask.
Is carrying amount the same as book value?
Yes. Carrying amount is the IFRS term; book value and carrying value are used interchangeably, and net book value specifically for fixed assets.
Can carrying amount exceed cost?
Under the cost model, no. Under a revaluation model (permitted for property, plant and equipment under IFRS), yes, when the asset is revalued upward with the gain taken to a revaluation reserve.
Why does carrying amount matter for tax?
Deferred tax is calculated on the difference between an item's carrying amount and its tax base, so every carrying amount that differs from its tax value creates a deferred tax balance.
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