Carrying value and fair value are two different accounting measures used to determine the value of a company’s assets and liabilities. The carrying value, or book value, is an asset or liability’s value based on a company’s balance sheet, while the fair value of an asset or liability is based on the mark-to-market value.
The carrying value is the value of an asset based on the figures of the asset on the balance sheet. The book value of an asset is calculated by subtracting any accumulated depreciation, amortization or impairment expenses from its original cost.
For example, company ABC bought a 3D printing machine to design prototypes of its product. The 3D printing machine costs $50,000 and has a depreciation expense of $3,000 per year over its useful life of 15 years under the straight line basis. Therefore, the book value after 15 years is $5,000, or $50000 – ($3000*15).
Contrary to the carrying value, the fair value of assets and liabilities is calculated on a mark-to-market accounting basis. Thus, the fair value is the value of an asset received if the asset was sold in the open market. The fair value of a liability is the value paid in a transaction between participants in the open market.
For example, an investment company has long positions in stocks in its portfolio during an economic downturn. The investment company’s original cost of the asset was $6 million. However, after two negative gross domestic product rates, the company’s portfolio falls 40% in value to $3.6 million. Therefore, the fair value of the assets is $3.6 million, or $6 million – ($6 million*0.40).