What is Book Value vs Fair Value?
In accounting and finance, it is important lớn understand the differences between book value vs fair value. Both concepts are used in the valuation of an asphối, but theyrefer lớn different aspects of an asset’s value. In this article, we will discuss book value vs fair value in detail & 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 asmix minus any depreciationDepreciation ExpenseWhen a long-term asset 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 h&, fair value is referred khổng lồ as an estimate of the potential value of an asmix. In other words, it is the intrinsic value of an asmix.
What is Book Value?
Book value (also known as carrying value or net asset valueNet Asmix ValueNet asset value (NAV) is defined as the value of a fund’s assets minus the value of its liabilities. The term “net asmix value” is commonly used in relation lớn mutual funds and is used khổng lồ determine the value of the assets held. According to the SEC, mutual funds and 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 asmix 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 account on a company”s balance sheet that consists of giới thiệu 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.
Note 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 to lớn evaluate whether an asset is over- or underpriced by comparing the difference between the asset’s book và market values.
What is Fair Value?
Fair value is a reasonable and unbiased estimate of the intrinsic value of an asmix. Essentially, the fair value of an asset is based on several factors such as utility, related costs, và supply và demand considerations. Another common definition of fair value is the price that would be obtained for the sale of an asmix or paid khổng lồ 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 mix of accounting rules that determine how transactions & other accounting events are required khổng lồ be reported in financial statements. They are designed to lớn maintain credibility & transparency in the financial world và US GAAPGAAPGAAP.., Generally Accepted Accounting Principles, is a recognized mix of rules và procedures that govern corporate accounting & financial provide guidance on how to lớn measure the fair value of an asset.
cảnh báo that in accounting, the concept of fair value is not applied to 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 khổng lồ potential accounting fraud due lớn the fact that companies can manipulate the fair value calculations.
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