What it means
A balance sheet does not list what things are worth; it lists what the accounting rules require them to be shown at. Carrying value is the name for that figure.
The rules start from cost, because cost is objective, and then adjust it systematically: downward each year for the consumption of the asset's benefits (depreciation or amortisation), downward when the asset's recoverable value falls below the figure (impairment), and, for a few categories such as investment property, financial instruments held for trading and revalued property, to fair value. The result is a figure with a clear meaning and known limitations.
Its meaning is the unrecovered cost of the asset: the amount not yet charged to profit, which will be charged over its remaining life or recovered on sale. Its limitations are that it says nothing about what the asset could be sold for, that it depends on estimates (useful life, residual value, expected credit losses, net realisable value) which may be wrong, and that it excludes assets the rules do not allow to be recognised at all, such as internally developed brands and workforce.
Carrying value drives several important calculations. When an asset is sold, the difference between proceeds and carrying value is the gain or loss; if the asset was over-depreciated, a gain appears even on a sale below cost.
When an impairment test is performed, the carrying value is compared with the recoverable amount and written down to it if higher. When deferred tax is computed, the carrying value is compared with the tax base.
When a company is valued on its net assets, the carrying values are the starting point that the valuer then adjusts to market. When return on assets or return on capital employed is calculated, carrying values form the denominator, which is why old, heavily depreciated asset bases produce flattering returns.
For liabilities, carrying value follows the same logic. A bond issued at a discount is carried at the discounted proceeds and accreted to face value by charging the difference as interest over its life.
A lease liability is carried at the present value of remaining payments. A provision is carried at the best estimate of the settlement amount, discounted if the effect is material.
A deferred revenue balance is carried at the amount of consideration received for performance not yet delivered. Users of financial statements should always ask two questions about a carrying value: what rules produced it, and how far it might be from the economic value.
Notes to the accounts help with both: they disclose depreciation methods and lives, impairment tests and assumptions, fair values where required, and the movements in each category from opening to closing carrying value.
In practice
Real-world examples.
Example
A hotel group carries its hotels at cost less depreciation, and discloses in a note that a professional valuation puts them 60% higher.
Example
A bank's carrying value for a portfolio of bonds classified at amortised cost is $500 million while their market value is $470 million after rates rose; the loss is disclosed but not recognised.
Example
A company sells a fully amortised patent for $200,000 and reports the whole amount as a gain, because the carrying value was nil.
Think of it
“Carrying value is like the remaining value of a car on your books. It's not what you could sell it for-it's what your records say it's worth.
Formula
Calculation
Carrying Value = Original cost minus Accumulated depreciation or amortisation minus Accumulated impairment (plus or minus revaluation, where applicable)
Gain or Loss on Disposal = Net proceeds minus Carrying value
Worked example. A technology company reviews the carrying values of four items at year end.
Vehicle fleet: 20 vans bought three years ago at $40,000 each ($800,000), depreciated straight-line over five years to a residual of $8,000 each. Annual depreciation = ($800,000 minus $160,000) / 5 = $128,000. Accumulated $384,000. Carrying value $416,000. Market value from a dealer: $380,000. No impairment is required by the market figure alone, because the vans are held for use and their value in use (the cash flows from the delivery service) exceeds carrying value; the difference will emerge as a small loss on disposal in two years if the market figure holds.
Customer relationship intangible: acquired with a business two years ago at $1,500,000, amortised over six years. Accumulated amortisation $500,000. Carrying value $1,000,000. Customer churn has been higher than assumed; a value-in-use calculation on the remaining customers gives $700,000. Impairment loss $300,000; new carrying value $700,000; amortisation for the remaining four years becomes $175,000 a year.
Software licence: $240,000 paid for a three-year licence; amortised $80,000 a year; carrying value after year one $160,000. A cheaper equivalent is now available at $50,000 a year, but the licence cannot be cancelled and is still used, so no impairment: the value in use (the service it provides) still exceeds $160,000.
Convertible bond issued: $10,000,000 face, issued at par two years ago; the equity conversion option was valued at $900,000 and recorded in equity, leaving a liability of $9,100,000 accreting to $10,000,000 over five years at an effective rate above the coupon. Accretion to date $340,000. Carrying value $9,440,000. The bond's market price is $10,600,000 because the shares have risen; the carrying value is unaffected, since the liability is at amortised cost.
Summary: the three assets have carrying values totalling $1,276,000 after the impairment and the liability $9,440,000; none equals a market value; each is explainable from its rules.Case study
Seen in the real world.
A private equity buyer valued a logistics company on the basis of its balance sheet, which showed net assets of $22,000,000, and negotiated a price of $30,000,000, a premium it regarded as fair for goodwill. Due diligence by its advisers reworked the carrying values. The warehouse, carried at $6,000,000 after thirty years of depreciation, was valued at $19,000,000.
The fleet, carried at $4,500,000, was worth $3,800,000, with $2,000,000 of vehicles due for replacement within a year. Receivables of $5,000,000 included $600,000 from a customer in administration against an allowance of $100,000. Software developed in-house over five years, expensed as incurred, was carried at nothing but had a replacement cost of $2,500,000.
Adjusted net assets were about $36,000,000, and the buyer realised it was paying nothing for goodwill and $6,000,000 less than the assets alone were worth. It raised its bid to $34,000,000 to secure the deal before another buyer did the same analysis, and still bought below asset value.
The seller's finance director, who had prepared the accounts correctly for twenty years, had never presented the board with a comparison of carrying values and market values, because nothing required it. The buyer's first act after completion was to revalue the property under a revaluation policy so that the balance sheet, and the company's borrowing capacity, reflected what it owned.
Watch out
Common mistakes.
- Treating carrying value as market value when valuing a company, lending against assets or judging management's return on assets.
- Failing to reduce carrying value when an asset's recoverable amount falls, leaving the balance sheet overstated until a forced write-off.
- Comparing return on assets between companies with old, depreciated asset bases and those with new ones, without adjusting for the effect of carrying values on the denominator.
Questions
People also ask.
What is the difference between carrying value and carrying amount?
None. Carrying amount is the IFRS term; carrying value and book value are common equivalents.
How do I find an asset's carrying value in the accounts?
The fixed asset note shows cost, accumulated depreciation and impairment, and the resulting net carrying value for each class, with the movements in the year.
Does carrying value change if market value rises?
Under the cost model, no; the gain is recognised only on sale. Under a revaluation model, the carrying value is updated to the valuation, with the surplus taken to equity.
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