What is Net Book Value (NBV)?
Definition: Net book value in finance refers to an asset worth, at a given time. In its purest form, it represents the carrying value of assets, as represented in the balance sheet. It is calculated by subtracting accumulated depreciation from the original cost of total asset.
Likewise, people often refer to net book value as net asset value, which denotes a firm’s total assets less liabilities.
Net Book Value Formula
The net book value formula is calculated below:
Net Book value = Original asset cost – Accumulated Depreciation
Whenever an asset is purchased and used in the production process, it tends to lose its value due to depreciation over the estimated use of life. The depreciation increases with time and tends to decrease the net book value of the asset on the balance sheet. For that matter, NBV amounts to original cost of a fixed asset minus depreciation.
The original cost, in this case, is not only the acquisition cost but also the cost of bringing the asset to the location. In this case, the original cost may include items such as the purchase price of an asset, sales taxes as well as delivery charges, and set up costs.
The depreciation that affects the net book value of an asset is charged as an expense on the original cost. It is for this reason that the net book value declines continuously as the expense associated with depreciation increases. Conversely, the net book value of any asset should be equal to the salvage value at the end. Depreciation is the main factor that affects the net book value of any asset, while depreciation is accumulated most of the time; some companies choose to accelerate it.
The salvage value is another factor to consider when calculating the net book value. Some assets tend to have more value at the end of their useful life. For instance, a firm with a hauling truck may have a salvage on transforming the truck for use in other activities or operations. The salvage value is, therefore, the price at which a firm can sell an asset at the end of its useful life
Impairment materializes when NBV is higher than the market value of an asset. In this case, an accountant may have to write down the remaining net book value. Conversely, an impairment charge tends to have a negative impact on net book value of an asset.
Net Book Value Example
Consider company XYZ that is fresh from acquiring a machine worth $60,000. Management expects the machine to have a 5 year useful life and a $15,000 salvage value. With straight-line depreciation, the depreciation expense will be:
Depreciation rate= $50,000 – $15000 / 5 years = $9,000 a year
What this means is that after four years, the machine will have depreciated by $36,000; thus, the net book value of the machine would be $24,000.
In most cases, the balance sheet net book value and market value will never be equal. Most of the time does not take into consideration any depreciation that takes place over time. This is because companies have discretion as to how they record depreciation
Net book value allows firms to make fairer and more accurate accounting records, which help express the true value of any company.
Net book value is an important financial metric for valuing companies. While the measure can be used to a specific asset, it can also take into consideration the whole company. The measure is especially important when a company is considering liquidation. Similarly, the measure can help a company considering a potential takeover, make informed decisions depending on the value of the underlying assets.
Summary
Net Book Value is simply the value of an asset as it appears in a firm’s accounting records. The value tends to decrease gradually due to depreciation that occurs. At the end of an asset, useful life, the NBV might be equal to the salvage value.