Carrying value refers to the balance sheet value of an asset.
For tangible assets, the carrying value is the asset’s acquisition price less accumulated depreciation and any impairments. For intangible assets, the carrying value is the asset’s acquisition price less amortization and any impairments.
An asset’s carrying value can differ substantially from the asset’s market value. The asset’s market value reflects the amount for which the asset can be sold. Certain assets, such as real estate, may appreciate significantly over time.
For example, suppose a company purchases an office building for $25 million. Suppose the land value is estimated at $5 million, the estimated residual value is $3 million, and the estimated useful life of the building is 25 years. Land is not depreciated. Thus, the company recognizes $17 million (the building value minus the residual value) of depreciation over the building’s estimated life. The asset’s carrying value at the end of the depreciation period is the sum of the building’s residual value and the land value. So, the real estate’s carrying value at the end of the depreciation period is $8 million.
Suppose in the above example the property has appreciated an average of 4% per year. At the end of the depreciation period, the property’s market value is $66.65 million. Because the carrying value is only $8 million, the asset’s balance sheet value understates the property’s value by almost $60 million.
Because for many assets the carrying value will understate market value, the concept of carrying value reflects the principle of conservatism inherent in financial reporting rules.
