We determine the carrying value of an asset using data from a company’s balance sheet. When a company first acquires an asset, its carrying value equals the asset’s original cost. This, however, changes over time. In this article, we will compare the carrying value of a bond to other terms.
What is Carrying Value?
Carrying value is the original cost of an asset less any accumulated depreciation or amortization and less any accumulated asset impairments. It is the net recorded amount of all assets less the net recorded amount of all liabilities for an entire business. A more restrictive approach that results in a lower carrying value is to exclude from the calculation the recorded net amount of all intangible assets and goodwill.
Carrying Value Example
As an example of carrying value computation, XYZ International pays $100,000 for a widget stamper and records $40,000 in accumulated depreciation against it. It has also logged accumulated impairment charges of $24,000 against the stamper. Thus, the carrying value of the widget stamper is $36,000, which we compute as:
$100,000 Purchase price – $40,000 Depreciation – $24,000 Impairment
Carrying value = $36,000
Types of Carrying Value
#1. Carrying Value of Asset
Assume a corporation possesses a $1,000,000 factory and machinery to manufacture certain company products. The machinery mentioned above has a depreciation value of $4000 and a usable life of 15 years.
Please keep in mind that the cost of plant and machinery includes transportation, insurance, installation, and any other tests required to get the asset suitable for use.
#2. Bond Carrying Value
When the price of bonds is excessively high, investors pay a larger premium on the bond price. In contrast, if the bond’s price is low, investors will buy it at a discount. However, this depends on the market interest rate at the time they receive the bond.
These premiums and discounts are amortized over the bond’s term so that the bond matures with a book value equal to its face value.
The bond carrying value is the bond’s par value plus the unamortized premium less the unamortized discount. This appears in the company’s balance sheet and we also refer to it as the book value.
For example, suppose the bond has a face value of $1,000, was issued on January 1, 2019, and matures on December 31, 2021. Let us suppose the coupon rate is 5%.
The investors will expect a 4-percentage-point return upon the release of the bond.
First, we must determine whether the bond is issued at a premium or at a discount. Ideally, we should be aware of the market rate of interest, which is 4%. The interest rate is less than the coupon rate, which is 5%. As a result, the bond is sold at a premium of $ 1250. Assume $100 is amortized after two years. Thus, the bond carrying value is $1,000 plus $150, or $1,150; and vice versa, if the market interest rate is 6%, they can sell the bond.
Carrying Value Of A Bond Explained
The carrying value of a bond is equal to the face value of the bond plus any unamortized premiums or less unamortized discounts. We can also refer to the carrying value as the carrying amount or book value of the bond.
Bonds rarely sell at face value since interest rates are constantly fluctuating. Instead, they sell at a premium or a discount to par value, based on the difference between actual interest rates and the bond’s stated interest rate on the issue date. Premiums and discounts are amortized during the bond’s life. As a result, at maturity, book value equals par value.
Calculating the Carrying Value of a Bond
The first step in calculating the carrying value is to determine the bond’s terms. Using the effective interest rate method, for example, we must isolate the following three bond features:
- The par value of the bond
- The interest rate on the bond
- The maturity date of the bond
Following the establishment of these values, it is necessary to evaluate whether a bond sells at face value, at a premium, or at a discount.
At par, a bond with an interest rate equal to current market rates is sold. If current market rates are lower than the interest rate on an outstanding bond, the bond will sell at a premium. If current market rates are higher than the interest rate on an outstanding bond, the bond will sell at a discount.
You must also establish how much time has gone since the bond was issued, as well as how much of the premium or discount has been amortized. We often calculate amortization on a straight-line basis. That is, for each reporting period, the same amount is amortized.
Once you’ve gathered this information, you may use a carrying value calculator, such as a bond price calculator, to calculate the bond’s carrying value.
To get to carrying value, we either remove or add the unamortized component of the bond’s discount or premium to the bond’s face value.
Credit rating companies such as Moody’s Investors Service and Standard & Poor’s rate bond issuers and the individual bond instruments they offer. Bond issuers with higher credit ratings are significantly more likely to sell their bonds at greater prices than equivalent, lower-rated issuers.
How Is the Carrying Value of a Bond Recorded?
A company’s balance sheet discloses carrying value information through numerous accounts. Face value, in other words, appears as a credit balance in the Bonds Payable account. Unamortized premium is reported in the Premium on Bonds Payable liabilities account as a credit balance. Unamortized discount is documented in the Discount on Bonds Payable contra-liability account as a debit balance. The current value is written off as a long-term liability.
Carrying Value vs Market Value
The carrying value idea simply refers to the amount of an asset that remains in a company’s accounting records; it has nothing to do with the item’s underlying market value (if any). Demand and supply, as well as perceived worth, all contribute to determining the market value. Thus, it can differ significantly from an asset’s carrying value. For example, a building may have been purchased many years ago and has since increased in value, but the owner has been depreciating it for a period of years. Thus, resulting in a significant gap between the building’s carrying value and market value.
Furthermore, a company that conducts great equipment maintenance may discover that the market worth of its assets is substantially higher than that of a company that does not invest sufficiently in asset maintenance. As a result, the carrying value and market value of the same assets owned by various organizations can differ significantly.
Carrying Value per Share
We can calculate the carrying value per share by dividing the carrying value of a whole firm by the number of outstanding shares. We frequently regard this sum as the baseline value per share, below which a share’s market price should not fall. However, because there isn’t always a link between the two, the baseline statement might be difficult to defend.
For example, a firm may subject a fixed asset to accelerated depreciation, reducing its carrying value rapidly. However, the asset’s market value is substantially higher because market participants believe that the asset retains value better over time than would be indicated by using an accelerated depreciation approach.
Fair Value vs. Carrying Value
The carrying value and the fair value are two accounting measurements that we use to determine the value of a company’s assets.
Carrying value, or book value, is an asset value that we calculate from the company’s balance sheet by deducting the asset’s cost from its depreciation over time. The market determines the fair value of an object, which a willing buyer and seller agree upon, and it fluctuates frequently. In other words, the carrying value reflects equity in general, whereas the fair value reflects the current market price.
Because the fair value of an asset might be more variable than its carrying value or book value, large differences between the two measurements are possible. At any point, the market value can be higher or lower than the carrying value. These disparities are typically not investigated until assets are appraised or sold in order to determine whether they are undervalued or overvalued.
Fair Value
We calculate the fair value of assets and liabilities on a mark-to-market basis, as opposed to the carrying value. In other words, the fair value of an item is the amount paid in an open market transaction between parties. A willing buyer or seller already agrees on this price. However, due to the volatile nature of free markets, the fair value of an asset might fluctuate substantially over time.
Fair Value Illustration
Assume that an investing firm holds long positions in equity in its portfolio. The company anticipates favorable market conditions, also known as a “bull market,” by holding long positions. The company is holding these stocks in the hope that their value will rise over time.
The original cost of these assets to the investment firm was $6 million. However, the market suffers a significant downturn after two consecutive negative GDP rates. The portfolio of the corporation loses 40% of its worth, falling to $3.6 million. As a result, the asset’s fair value is $3.6 million, or $6 million Minus ($6 million x 0.40).
Determining the fair value of an asset might be difficult if there is no competitive, open market for it—for example, an odd piece of equipment in a manufacturing plant.
The difference between Carrying Value and 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 depict 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 outstanding shares |
| Based on the historical cost of the asset. | Based on the current market price of the assets |
In Conclusion,
A bond’s carrying value is the sum of its face value plus unamortized premium or the difference between its face value and its unamortized discount. We can calculate it in a variety of ways, including the effective interest rate technique and straight-line amortization. It appears on a company’s balance sheet. Carrying value is the net recorded amount of all assets less the net recorded amount of all liabilities for a whole business.
Frequently Asked Questions
How do you calculate carrying value?
To calculate an asset’s carrying value, deduct any accumulated depreciation, amortization, or impairment expenditures from its initial cost.
Is carrying value the same as book value?
Yes, carrying value is the same as book value
