What is Book Value vs Fair Value?
In accounting & finance, it is important lớn underst& the differences between book value vs fair value. Both concepts are used in the valuation of an asset, but theyrefer to lớn different aspects of an asset’s value. In this article, we will discuss book value vs fair value in detail và indicate their key distinctions.
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Book value indicates an asset’s value that is recognized on the balance sheet. Essentially, book value is the original cost of an asphối minus any depreciationDepreciation ExpenseWhen a long-term asphối is purchased, it should be capitalized instead of being expensed in the accounting period it is purchased in. It is, amortization, or impairmentImpairmentThe impairment of a fixed asmix can be described as an abrupt decrease in fair value due to physical damage, changes in existing laws creating costs.
On the other hvà, fair value is referred to as an estimate of the potential value of an asmix. In other words, it is the intrinsic value of an asphối.
What is Book Value?
Book value (also known as carrying value or net asset valueNet Asset ValueNet asmix value (NAV) is defined as the value of a fund’s assets minus the value of its liabilities. The term “net asset value” is commonly used in relation khổng lồ mutual funds & is used khổng lồ determine the value of the assets held. According khổng lồ the SEC, mutual funds và Unit Investment Trusts (UITs) are required to calculate their NAV) is the value of an asset that is recognized on the balance sheet. It is determined as the cost paid for acquiring an asphối minus any depreciation, amortization, or impairment costs applicable to the asphối. The concept of book value arises from the practice of recording the assets on the balance sheet at its historical cost.
Book value is one of the most important concepts in accounting. Book value is the historical value of an asmix on a company’s balance sheet. Since stockholders’ equityStockholders EquityStockholders Equity (also known as Shareholders Equity) is an trương mục on a company”s balance sheet that consists of tóm tắt capital plus is calculated as the difference between the assets’ và liabilities’ values, the book value is used khổng lồ determine the theoretical equity value attributable khổng lồ the company’s shareholders.
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lưu ý that the book value of assets indicates the recorded value that shareholders own in case of the company’s liquidation. In addition, the book value is commonly used lớn evaluate whether an asphối is over- or underpriced by comparing the difference between the asset’s book & market values.
What is Fair Value?
Fair value is a reasonable and unbiased estimate of the intrinsic value of an asphối. Essentially, the fair value of an asmix is based on several factors such as utility, related costs, and supply and dem& considerations. Another comtháng definition of fair value is the price that would be obtained for the sale of an asset or paid lớn transfer a liability in a transaction between the market participants at the measurement date.
Essentially, the estimation of an asset’s fair value is a generally complicated process. Determining the asset’s fair value is generally guided by the accounting standards. IFRSIFRS StandardsIFRS standards are International Financial Reporting Standards (IFRS) that consist of a phối of accounting rules that determine how transactions and other accounting events are required lớn be reported in financial statements. They are designed khổng lồ maintain credibility & transparency in the financial world và US GAAPGAAPGAAPhường, Generally Accepted Accounting Principles, is a recognized mix of rules và procedures that govern corporate accounting and financial provide guidance on how to measure the fair value of an asmix.
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cảnh báo that in accounting, the concept of fair value is not applied lớn all assets. Fair value is usually estimated for current assets that are held for resale such as marketable securities. Accounting using fair values is frequently exposed to potential accounting fraud due khổng lồ the fact that companies can manipulate the fair value calculations.
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