Net Book Value (NBV) : Meaning, Formula, Benefits & Calculation

Introduction 

To generate revenue and ensure smooth business operations, companies own multiple assets, both tangible and intangible. For example, a corporate business would have to own or rent an office space for employees to work at. Similarly, a cake delivery company would need to own a delivery van to deliver goods to its customers for revenue generation. 

Assets such as office spaces and company-owned vehicles are subject to depreciation as their value decreases over time. To accurately ascertain asset value over time in order to ensure precise financial overview, businesses need to determine the net book value (NBV) of the asset at the beginning of every accounting period. 

In this blog, we are going to understand what NBV is, why it’s important, how to calculate it and how an automated record to report software helps in accurate accounting. 

What Is Net Book Value (NBV)? 

Net book value is an accounting principle used to calculate the current value of fixed assets by adjusting their original value for depreciation, depletion, or amortization. NBV helps record the correct value of an asset on the balance sheet, which ensures accurate financial reporting. 

NBV is an important accounting practice as it helps businesses get an accurate assessment of their fixed assets value and provides a snapshot of their current financial position. Correctly calculating NBV is crucial for businesses for making informed financial decisions. 

Why Is Net Book Value Important? 

NBV is an important factor for organizations to consider due to multiple reasons, including accurate financial reporting, enhancing accounting process efficiency, and strategic decision-making. 

Here are the key aspects that make NBV critical for businesses:

1. Performance evaluation: NBV helps businesses determine how well an asset is being used to generate revenue. By calculating the net book value of assets after every accounting period, companies can track whether the asset is being used efficiently. 
2. Regulatory compliance: Businesses need to calculate NBV to ensure adherence to accounting standards such as Generally Accepted Accounting Principles (GAAP). 
3. Tax benefits: Another important benefit of NBV is that it helps businesses assess the accurate tax deductions related to depreciation. By correctly calculating the depreciation of assets, companies can reduce their taxable income. 
4. Depreciation tracking and financial management: NBV further helps businesses determine the remaining useful life of an asset at any given point in time. They can plan ahead when it comes to maintenance or replacement of an asset by determining its net book value. 

What is the Net Book Value Formula? 

To calculate the net book value of a fixed asset, the accumulated depreciation value is subtracted from the historical value of the asset. The historical value is the original purchase cost of the asset. 

NBV formula:

Net book value = Original asset value – accumulated depreciation

How to Calculate Net Book Value

Now that we’ve understood what net book value is and its formula, let’s see how to calculate NBV. 

Here are the steps to calculate NBV:

1. Determine the original value, i.e., the purchase price, of the asset. 
2. Calculate the accumulated depreciation value. The formula for calculating this value will vary according to the depreciation method. 
3. Once both the values are identified, apply the NBV formula. 

Example of Net Book Value Calculation

Let’s consider an ABC company that bought an asset for $12000 on January 1, 2024. If the organization uses the straight-line depreciation method, where the value of the asset depreciates evenly each year, after 3 years the accumulated depreciation value will be $3000. 

Here’s how the net book value of the asset will be calculated in this scenario:

$12000 (the original value of the asset) – $3000 (the accumulated depreciation value) = $9000

Factors that Reduce Net Book Value

There are multiple factors that reduce the net book value of an asset throughout its life cycle. Let’s take a look at the same:

1. Depreciation: Depreciation systematically reduces the NBV of an asset by factoring in the regular wear and tear caused by its use. 
2. Amortization: The NBV of intangible assets such as patents and copyrights is decreased due to amortization. Amortization works similarly to depreciation, specific for intangible assets. 
3. Impairment: Another factor that reduces the net book value of an asset is impairment. Impairment happens when an asset suddenly loses its value due to permanent damage or volatile market conditions. 
4. Obsolescence: An asset can become obsolete during its remaining useful life due to the introduction of new technologies, thereby significantly reducing the NBV. 

Depreciation of Assets in NBV 

As we discussed in the previous section, depreciation systematically reduces the net book value of an asset over its useful life. Depreciation recognizes the fact that an asset will lose its value over time due to its usage, resulting in wear and tear. 

For instance, if a company buys a delivery van, it will be much more useful in the initial years of purchase than, say, after 5 years. Depreciation recognizes the same and prevents companies from recording the initial purchase price of the asset on the balance sheet. 

Eligibility for depreciation 

To depreciate assets, the company and the asset need to meet specific criteria as directed by GAAP, or International Financial Reporting Standards (IFRS). 

Broadly speaking, an asset can be depreciated if the following conditions are met:

1. The company owns the asset. 
2. The asset is used for revenue generation. 
3. The asset is useful for at least one more year. 

Depreciable and non depreciable assets

Now let’s take a look at a few assets that can and cannot be depreciated.

Depreciable assets:

1. Machinery and equipment
2. Vehicles that a business owns
3. Company-owned office buildings
4. Properties that help companies generate income

Non-depreciable assets:

1. Personal property
2. Land
3. Stocks and bonds
4. Accounts receivable
5. Cash and cash equivalents

Depreciation Methods for NBV 

The calculation of NBV depends on the depreciation method used. There are various depreciation methods; however, the following are the most commonly used: 

• Straight line depreciation

  Straight-line depreciation is the simplest way to calculate depreciation and reduces NBV consistently throughout the useful life of the asset. Formula: (Cost – Salvage value)/Useful life

• Double declining depreciation

  While calculating depreciation through the double declining method, the assets depreciate faster in the earlier years By front-loading the depreciation expense, businesses can better match the expense with the revenue generated by the asset. Here a constant rate is applied at the beginning of the accounting period to determine the book value of the asset.Formula: 2 x (1/Useful life of asset) x Book value at the beginning of the year

• Units of production depreciation

  To calculate depreciation through the units of production method, you need to determine the number of units the asset is capable of producing and the life of the asset in units in addition to its cost and salvage value. Here depreciation is based on the actual usage or output of the product and it’s not dependent on time. Formula: (Number of units produced / Total units the asset is expected to produce) x (Cost of asset – Scrap value of asset)

• Sum-of-the-years depreciation

  For this depreciation method, higher depreciation expense is assigned to assets in its earlier years. With time the depreciation expense gradually decreases. Formula: (Remaining life of the asset / Sum of the years’ digits) x (Cost of asset – Scrap value of asset) 

How can Highradius Help? 

HighRadius offers a cloud-based Record to Report software that helps accounting professionals streamline and automate the financial close process for businesses. We have helped accounting teams from around the globe with month-end closing, reconciliations, journal entry management, intercompany accounting, and financial reporting.

Our Financial Close Software is designed to create detailed month-end close plans with specific close tasks that can be assigned to various accounting professionals, reducing the month-end close time by 30%.The workspace is connected and allows users to assign and track tasks for each close task category for input, review, and approval with the stakeholders. It allows users to extract and ingest data automatically, and use formulas on the data to process and transform it. 

Our Account Reconciliation Software provides an out-of-the-box formula set that can configure matching rules and match line-level transactions from multiple data sources and create templates to automate various transaction processing required for month-end close. Our solution has the ability to prepare and post journal entries, which will be automatically posted into the ERP, automating 70% of your account reconciliation process. 

Our AI-powered Anomaly Management Software helps accounting professionals identify and rectify potential ‘Errors and Omissions’ throughout the financial period so that teams can avoid the month-end rush. The AI algorithm continuously learns through a feedback loop which, in turn, reduces false anomalies. We empower accounting teams to work more efficiently, accurately, and collaboratively, enabling them to add greater value to their organizations’ accounting processes.

FAQs 

Q1. What do you mean by NBV?

NBV, or net book value, is a practice that helps businesses know the current value of their fixed assets. The accounting practice is used to calculate the carrying value of an asset. Net book value adjusts the original cost of the asset by taking into account its depreciable value. 

Q2. How to compute net book value?

Net book value is calculated by subtracting the accumulated depreciation value by the historical cost, i.e., the original purchase price, of the asset. This is done because physical assets lose their value over time, so companies need to adjust the original purchase value every year to show the assets’ depreciation over time. 

Q3. What is another name for net book value?

Net book value is also referred to as ‘carrying value’ or ‘carrying amount’. The terms are used interchangeably in the accounting industry and reflect the remaining value an asset has after its use in the previous accounting period. NBV is important to accurately calculate depreciation of assets. 

Q4. What are the benefits of net book value?

Net book value is a crucial accounting practice as it helps companies determine how valuable an asset is after its use over the previous accounting period. NBV calculations help companies evaluate the condition of their assets, adhere to accounting standards, track depreciation, and make better financial decisions. 

Q4. Where is NBV reported?

The net book value is reported on the balance sheet as it helps determine the value of fixed assets at a given point in time. Since the balance sheet reports about a company’s assets, liabilities, and equity, NBV automatically becomes a part of the balance sheet. 

Q5. Is net book value the same as fair market value?

No, net book value is not the same as fair market value. The former is used for a company’s accounting processes, while the latter is the current value of an asset as per the market conditions. Fair market value is impacted by market changes and supply & demand changes.