Net book value is what an asset is carried at on the books after everything charged against it has been deducted, which is its recorded cost less the accumulated depreciation or amortization taken on it and less any accumulated impairment. NBV is the common abbreviation, and carrying amount is the same figure under the name the accounting literature usually uses.
It is a record of cost already allocated, not an estimate of what the asset would fetch. Two identical machines bought in different years sit at different net book values on the same date, and neither number is a price.
The Formula
Cost recorded when the asset was placed in service
less Accumulated depreciation or amortization to date
less Accumulated impairment to date
= Net book valueThe second line is a contra account balance rather than an expense, and how it accumulates and where it stops is worked through in accumulated depreciation. The third line only appears where a write-down has actually been recognized, and once it has, the reduced amount becomes the asset’s new cost basis going forward, which is the point developed in impairment losses.
Cost, machine placed in service $ 340,000
Accumulated depreciation to date 198,000
Accumulated impairment recognized 25,000
Net book value $ 117,000Nothing in that subtraction consults a market. It consults the ledger.
The Net Figure Is Not a Prescribed Line
Worth knowing before a client goes looking for it in a filing, because no caption carries it.
Regulation S-X enumerates the asset captions a registrant files, running from Cash and cash items at caption 1 to Total assets at caption 18. Property, plant and equipment sits at caption 13 with its accumulated depreciation, depletion and amortization at caption 14, a pair already read in fixed asset turnover, and intangible assets repeat the arrangement at captions 15 and 16. No caption in that list is the difference between a pair (17 CFR 210.5-02).
So the net figure is a subtraction the reader performs, not a line the rule asks for. Where a statement does print one net line, caption 14’s second alternative has been used and the deducted amount sits in a note instead.
That is the tell for reading somebody else’s balance sheet. A single property, plant and equipment line with no accumulated depreciation beside it is not a young asset base. It is a disclosure that moved.
The Book Number and the Tax Number Are Not the Same Number
The same asset carries two running balances in a well-kept file, and they rarely agree.
The book figure follows the useful life and method the entity adopted for reporting. The tax figure follows the recovery period and method the Internal Revenue Code prescribes, and it is reduced by depreciation allowed or allowable whether or not the deduction was ever claimed, a rule set out in depreciable basis. Neither number is wrong. They answer to different rulebooks.
The gap between them is not a reconciling error to be chased out. It is a temporary difference, and what it does to the tax accounts is the subject of the ASC 740 income tax provision. A client who reads a fixed asset schedule expecting one figure per asset has usually been shown the tax column and told it is the balance sheet.
What Net Book Value Is Not
- Market value. Nothing in the calculation asks what a buyer would pay. The gain or loss booked when the asset finally leaves is the measure of how far apart the two had drifted, and the disposal entry itself is worked through in accumulated depreciation.
- Book value of equity. That is the residual for the whole entity, total assets less total liabilities, and it is a different subtraction on a different scope. It is worked through in book value to equity.
- Salvage value. Salvage value is a forecast made at acquisition of what the asset will bring at retirement, and it is the floor net book value heads toward rather than the balance itself. The distinction is drawn in salvage value.
- Net realizable value. That figure is built forward from an expected selling price less the costs to complete and sell, so it looks at a future transaction. Net book value looks only backward at recorded cost. See net realizable value.
Common Questions
Take the asset’s recorded cost, subtract the accumulated depreciation or amortization charged against it to date, and subtract any accumulated impairment recognized on it. What is left is the net book value at that date.
Yes, for a long-lived asset. Carrying amount is the phrase the accounting literature uses and net book value is the phrase practice uses, and both name the balance left after the contra accounts are deducted.
Because the rule asks for the components instead. Regulation S-X requires the gross property, plant and equipment amount and the accumulated depreciation amount to be given separately, in the balance sheet or in a note, and prescribes no caption for the difference.
Yes. Depreciation stops when the charges have consumed the depreciable amount, and nothing about that moment requires the asset to leave the business. A fully depreciated machine still running sits at its salvage estimate, or at zero where none was estimated.
Accountably places trained offshore accountants inside US CPA and EA firms, and a firm can grade a real block of its own fixed asset work through a trial task before any client file moves.
