Carrying Value

Carrying value of a fixed asset (also called book value) is the amount at which a fixed asset is appears on a balance sheet. It equals the original cost or revalued amount of the asset minus accumulated depreciation and accumulated impairment loss, if any.

When a fixed asset (i.e. an item of property, plant and equipment) is acquired, it is recognized at its historical cost which includes the invoice amount, transportation costs, installation and testing costs, etc. and all such costs which are necessary to get the asset ready for its intended use. Because an asset generates economic benefits over more than one accounting periods, its cost is expensed out through the process of depreciation. The accumulated depreciation is the amount of total depreciation expense that has been charged on the asset since its acquisition.

Formula

Carrying value = C – AD – AI

Where C is the historical cost or revalued amount (if revaluation is allowed, as in IFRS), AD is the accumulated depreciation (or adjusted accumulated depreciation, as in the IFRS revaluation model) and AA is accumulated impairment.

A fixed asset is presented on a balance sheet at its carrying value. The accumulated depreciation and accumulated impairment are contra-accounts to the fixed asst cost account.

Example

Aaahan, Inc. purchased machinery with invoice value of $30 million. The cost of transportation and insurance in transit is $0.5 million and $0.2 million. The cost of installation is $5 million. Test production will cost $1 million, $0.5 of which will be recovered by selling the production during testing phase. The machinery has a residual value of 10% of the original cost and useful life of 10 years.

Find out the carrying value at the end of third year under the straight-line depreciation method. The machinery shall be recorded at a total cost of $ as determined below:

Invoice amount $30 million
Plus: transportation cost $0.5 million
Plus: insurance-in-transit $0.2 million
Plus: installation cost $5 million
Plus: testing cost $1 million
Less: proceeds from test production ($0.5 million)
Cost of machinery $36.2 million

The depreciable cost is $32.58 million (=$36.2 million minus residual value of $3.62 million ($36.2 million × 0.1)). Annual depreciation under the straight-line method would be $3.258 million (=$32.58 million divided by 10). At the end of third year, accumulated depreciation would be $9.774 million (=$3.258 million × 3). The carrying value works out to $26.426 million ($36.2 million - $9.774 million).

Machinery – historical cost $36.2 million
Less: accumulated depreciation ($9.774 million)
Machinery - carrying value $26.426 million

Written by Obaidullah Jan, ACA, CFA and last modified on