Carrying Amount Definition Formula How To Calculate

Carrying Amount Definition

It can also be defined as the value that the shareholders will get in the event of liquidation of the company. This value is generally determined by keeping in mind the GAAP or IFRS accounting principles when accounted for.

Carrying Amount Formula

If the company has purchased some patent or any other intangible assetIntangible AssetIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can’t touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. read more on its balance sheet, the formula to calculate the asset’s carrying amount will be (Original purchase cost – Amortization Expense).On the other hand, the formula for physical assets calculation, such as machinery or building, will be (Original purchase cost- depreciation).

Below is the overall formula

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How to Calculate Carrying Amount?

Carrying Amount vs. Fair Value

The asset’s market value, which is also often referred to as the fair value of an asset, means how much an asset can sell in the market. It is the value for which an asset can be sold in the open market. For example, Company XYZ has total assets of $10,000 with a total liabilities of $80,000. Therefore, the company’s book value will be $20,000, which is the value of the assets less the value of liabilities.

For the year ending Dec-18. The asset depreciation amount will beu00a0$20,00010/1003/12 = $500. Since the asset was purchased in the month of October, the depreciation amount on the asset will only be charged for 3 months, i.e., $500 for that year. Hence on the balance sheet for the yearBalance Sheet For The YearA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more ending 31-Dec-18, the asset’s carrying amount will be $20,000- $500 = $15,000. Full depreciation will be charged on the asset until the scrap value becomes zero for the next year.

For the year ending Dec-18. The asset depreciation amount will beu00a0$20,00010/1003/12 = $500.

Since the asset was purchased in the month of October, the depreciation amount on the asset will only be charged for 3 months, i.e., $500 for that year. Hence on the balance sheet for the yearBalance Sheet For The YearA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more ending 31-Dec-18, the asset’s carrying amount will be $20,000- $500 = $15,000.

Full depreciation will be charged on the asset until the scrap value becomes zero for the next year.

The market value often differs due to the following factors: –

A difference in the depreciation methodsDepreciation MethodsDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year.
read more which is used by the company and other evaluatorsThe forces of supply and demand factors make the market value of an asset vary over time depending upon the availability of the asset, which can result in substantial variance in the values.Market Value is very subjective in nature, whereas this value is based on accounting principlesAccounting PrinciplesAccounting principles are the set guidelines and rules issued by accounting standards like GAAP and IFRS for the companies to follow while recording and presenting the financial information in the books of accounts.read more and can be traced back to the purchase receipt of an asset.The market value of an asset is not related to the company’s financial statements Financial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more. In contrast, this value of an asset is related to the profit and loss and balance sheet item.

For example, the company purchases equipment for $200,000 each month. The company depreciates the asset for $5,000 for four months and then decides to sell the asset. The asset is sold for $150,000. Since the asset is sold for only $150,000 the market value of the asset is $150,000 but the carrying amount of the asset will be ($200,000 – $20,000) = $180,000. Hence the company will book $30,000 in the profit and loss statement.

When Fair Value is lower than the Carrying Value

When the company’s market value of the shares and its share is lower than the carrying amount, it indicates that the market and the shareholders have lost confidence in its fundamentals. The future earnings are not enough to pay its debt and liabilities. There are many cases, especially with the start-up companies, in which their book value and market value differ significantly, and the assets are worth much less in the market than is shown in the books of accounts. Ideally, the company should be sold off when its market value becomes less than its book value.

When a Fair Value is greater than the Carrying Value

When the company’s market value exceeds the book value of the company, the market is positive about the future earnings prospects and increased investments. As a result, it increases profits, which will increase the market value of the company and, in turn, higher returns on the stock. A company that has consistently higher profits and increased profits will have a market value greater than the book values of the company.

However, sometimes significantly higher market values indicate overvalued stocksIndicate Overvalued StocksOvervalued Stocks refer to stocks having more current market value than their real earning potential or the P/E Ratio. Overvaluation of stocks might occur due to illogical decision making or deterioration in a Company’s financial health. read more and are most likely to experience a steep fall in the market prices of the stocks as investors have been too positive about the stock, and the market needs to be corrected.

When a Fair Value is equal to the Carrying Value

It is seldom that the investor will think and think that the company’s carrying amount is equal to that of the market. However, in that case, the company can be called a perfectly valued company.

Carrying Amount for an Investor

It is also the company’s fundamental value, which can be easily defined as how much the net assetsNet AssetsThe net asset on the balance sheet is the amount by which your total assets exceed your total liabilities and is calculated by simply adding what you own (assets) and subtract it from whatever you owe (liabilities). It is commonly known as net worth (NW).read more of the company are worth. For fundamental and value growth investors, this value is important because for a company having a high market value from its book value is a good opportunity for investing. The price to book value ratioPrice To Book Value RatioPrice to Book Value Ratio or P/B Ratio helps to identify stock opportunities in Financial companies, especially banks, and is used with other valuation tools like PE Ratio, PCF, EV/EBITDA. Price to Book Value Ratio = Price Per Share / Book Value Per Share read more is a good indicative ratio to measure the carrying amount of the company. The ratio indicates whether you’re paying too much for what would remain if the company is approaching bankruptcy.