Net book value (NBV) is the value at which an asset is recorded in a company's accounts after deducting accumulated depreciation, amortization and impairment from its original cost. It represents the portion of the asset's cost that has not yet been expensed. The basic concept is explained in the entry on the book value of an asset; this entry focuses on how net book value is calculated over an asset's life, how it changes with events such as impairment and disposal, and how it is used in analysis. Accountants also use the term carrying amount for the same figure, and IFRS uses carrying amount as its standard term.
The word "net" signals that the figure is after subtracting a contra account. On the balance sheet, a machine might appear at a gross cost of $100,000, less accumulated depreciation of $40,000, giving a net book value of $60,000. For a whole company, net book value sometimes means total assets minus total liabilities, which is shareholders' equity; that meaning is covered in the entry on the book value of a company.
How net book value is calculated
The formula is:
- is the purchase price plus costs needed to bring the asset into use, such as shipping and installation.
- is the total depreciation (or amortization, for intangibles) charged since the asset was acquired.
- is the total of any write-downs recognized because the asset's recoverable value fell below its carrying amount.
Worked example
A bakery buys an oven for $48,000, including installation, expecting it to last eight years with a $8,000 residual value. Straight-line depreciation is $40,000 divided by 8, or $5,000 a year.
| End of year | Accumulated depreciation | Net book value |
|---|---|---|
| 1 | $5,000 | $43,000 |
| 3 | $15,000 | $33,000 |
| 5 | $25,000 | $23,000 |
| 8 | $40,000 | $8,000 |
If at the end of year three a new energy regulation reduces the oven's recoverable value to $25,000, the bakery records an impairment of $8,000. Net book value becomes $25,000, and future depreciation is recalculated on the lower figure. If the bakery sells the oven at the end of year five for $26,000, it records a gain on sale of assets equal to the difference between the sale price and the net book value at that date.
Net book value versus market value
Net book value is an accounting measure based on historical cost, not an estimate of what the asset would fetch. Land bought decades ago may have a net book value far below its market price, while specialized equipment may be worth much less than its net book value if no one else can use it. A fully depreciated asset has a net book value equal to its residual value, often zero, even if it is still in daily use.
Uses in analysis and decisions
- Disposals: the gain or loss on selling an asset is measured against its net book value.
- Asset age: comparing net book value with gross cost gives a rough idea of how far through their lives a company's assets are; a low ratio may signal that heavy capital spending is coming.
- Valuation: analysts compare a company's market value with its total net book value through the price-to-book ratio.
- Lending: secured lenders consider net book value but usually rely on independent appraisals, because forced-sale values can be much lower.
Net book value for tax purposes, sometimes called tax basis or written-down value, often differs from book net book value because tax depreciation follows different rules and rates. The difference creates deferred tax balances.