carrying amount of an asset

The carrying amount is different from fair value and value in use.

On the one hand, fair value is the price that an entity would receive to sell an asset or pay a company to transfer a liability in an orderly transaction between market participants at the measurement date.

In other words, it is a value that is determined by the effects of supply and demand in the market.

And on the other hand, we find the value in use.

The value in use, is the present value of estimated future cash flows expected to arise from the continuing use of an asset.

Now, why is it essential to consider fair value and value in use?

The answer is that when an entity has indications that an asset or group of assets is impaired, it must compare the recoverable amount versus its carrying amount.

If an entity finds that the recoverable amount is below its carrying amount, it must recognize an impairment loss for the difference between these two values.

Thus, an entity must choose the higher between the fair value and value in use to determine the recoverable amount.

Carrying amount calculation

Calculating carrying value requires an entity to take the initial cost of an asset and deduct accumulated depreciation and impairment losses.

However, the carrying amount of an intangible with an indefinite useful life, for example, should only take into account impairment losses since this type of intangible does not show amortization.

Within international financial reporting standards, there is a concept called carrying amount revised.

This term refers to the fact that at the time an entity recognizes an impairment loss on an asset, the depreciation charges will be adjusted for future periods in order to distribute this value systematically throughout its remaining useful life.

Let’s look at an example:

In year 1, a hospital purchases a specialized machine that is intended to detect problems in the nervous system of patients.

The cost of the machine is $2,000,000 with a useful life of 20 years.

At the end of year 9, with the arising of new technology, the hospital finds that the asset’s recoverable amount equals: $700,000.

In this way, the entity considers that it must recognize an impairment loss for the difference between the carrying amount and the recoverable amount.

Then, the carrying amount at the end of year 9 is as follows:

Asset cost: 2,000,000

Accumulated depreciation: 900,000 (2,000,000 /20 x 9)

Carrying amount: 1,100,000

Recoverable amount: 700,000

Impairment: 400,000

In this way, the carrying amount revised is as follows:

Asset cost: $2,000,000

Accumulated depreciation: ($900,000)

Impairment losses: ($400,0000)

Carrying amount revised: $700,000

Determining the carrying amount is essential because this will be the new basis for calculating depreciation for subsequent periods, in accordance with paragraph 63 of IAS 36.

That is, for year 10, the depreciation expense is as follows:

Depreciation expense: carrying amount revised/remaining useful life

Depreciation expense: (700,000 / 11 years) = 63,636

Carrying amount in exchange assets

IAS 16 requires that all items of property, plant and equipment acquired in exchange for non-monetary assets or a combination of monetary and non-monetary assets must be measured at fair value.

However, when the fair value of none of the assets exchanged can be determined with confidence, the cost of the asset acquired in the exchange should be measured based on the asset’s carrying amount.