What is Net Book Value?
The Net Book Value (NBV) describes the carrying value of an asset recorded on a company’s balance sheet for bookkeeping purposes.
How to Calculate Net Book Value (Step-by-Step)
The starting point for calculating an asset’s NBV, or “net book value”, is its historical cost.
Under accrual accounting reporting standards – specifically, the historical cost principle – the value of a company’s asset is recognized as its cost on the date of original purchase.
The net book value is most applicable to fixed assets, which are capitalized on the balance sheet since their useful life assumption is expected to exceed twelve months.
The accounting concept of depreciation, a non-cash expense added back on the cash flow statement (CFS), reduces the fixed asset’s net book value in accordance with its useful life and salvage value assumption.
Based on the specific asset in question, its historical cost can be reduced by the following items.
- Accumulated Depreciation
- Accumulated Amortization
- Accumulated Depletion
- Asset Impairment
- Asset Write-Down
Net Book Value (NBV) vs. Fair Market Value (FMV)
The book value of equity reflected on a company’s balance sheet is seldom equal to, or even near, the market value of equity.
Barring unusual circumstances, a company’s market value of equity – i.e. the market capitalization (“market cap”) – is most often substantially greater than the book value of equity reported on the balance sheet.
Unlike the net book value, the fair market value (FMV) of a company’s equity is adjusted to reflect the value according to the market on the present date, rather than on the original date of purchase and conservative accounting adjustments.
Likewise, the same concept is applied to the value assigned to the fixed assets recorded on a company’s balance sheet.
Simply put, the net book value of an asset is NOT equivalent to its fair value.
Learn More → Book Value Formal Definition (LLI)
NBV Formula
The formula for calculating the net book value (NBV) of a fixed asset, i.e. property plant and equipment (PP&E), is as follows.
While only the accumulated depreciation is deduced from the purchase cost here, the formula can become more complex if there are other additional variables such as if the company determines that the fixed asset is impaired and must be written-down on the books.
Impairment stems from a circumstance wherein the company decides that an asset’s market value is less than its net book value, i.e. a downward reduction is applied to the asset’s book value to reflect its true value more accurately.
In effect, the methodology results in the gradual reduction in the carrying value of a fixed asset (PP&E), however, the stated amount does not necessarily represent the actual fair value per the market in the current period.
NBV Calculator – Excel Model Template
We’ll now move to a modeling exercise, which you can access by filling out the form below.
Step 1. PP&E Purchase Cost and Depreciation Calculation
Suppose a company is estimating the net book value (NBV) of a fixed asset (PP&E) to record on its balance sheet. The original purchase price associated with acquiring the fixed asset – i.e. the capital expenditure (Capex) – was $20 million.
- Purchase Cost of PP&E = $20 million
With regard to the assumptions surrounding the fixed asset, the useful life assumption is 20 years while the salvage value is assumed to be zero.
- Useful Life = 20 Years
- Salvage Value = $0
Step 2. NBV Calculation Analysis
Given the above assumptions, what is the recorded net book value (NBV) in Year 4?
Since four years have passed, where the annual depreciation expense is $1 million, the accumulated depreciation totals $4 million.
- Number of Years in Service = 4 Years
- Accumulated Depreciation = $4 million
If we subtract the $4 million in accumulated depreciation from the fixed asset’s original purchase cost of $20 million, we arrive at a net book value of $16 million.
- Net Book Value (NBV) = $20 million – $4 million = $16 million
