An accurate financial picture is key to making good decisions for the future.
Part of this picture is understanding the value of the assets within your organization and how usage and time affect this figure.
Unlike cash holdings, the value of physical assets like machinery, equipment, vehicles, and buildings fluctuates over time.
Some assets may appreciate, but most lose value as time goes on. Keeping an accurate estimate of this decline is central to accounting accuracy.
Enter Net Book Value (NBV).
This method of estimating the value of tangible and intangible assets gives Finance the most accurate figures for tracking value over time.
It can be used to give context to your financial reporting. It can also help accounting accurately forecast future value and expenditures.
Today we’ll cover everything you need to know about net book value.
- What is Net Book Value (NBV)?
- Why is NBV important?
- Asset depreciation: an overview
- What are the depreciation methods for NBV?
What is Net Book Value (NBV)?
Net book value is an accounting principle used to calculate the value of a company’s fixed assets.
Its purest form represents the carrying value of such assets, as reflected in the balance sheet.
It provides accurate accounting records of the original value of a fixed asset (for instance, a piece of equipment) and adjusts it based on a scheduled loss of value called depreciation.
NBV offers a snapshot of the company’s financial position at a certain time, considering its obligations and what it owns.
Knowing an organization’s NBV improves data-informed decision-making, such as where to invest or how much debt is feasible.
What is the net book value formula?
The net book value of an asset is calculated by subtracting accumulated depreciation from the original purchase price (also called its historical cost).
Here's the NBV formula:
Net book value = original asset cost - accumulated depreciation
In other words, NBV is the original cost of the asset less accumulated depreciation.
Consider asset age, condition, and degree of wear-and-tear or obsolescence as you calculate net book value.
Use a depreciation schedule—more on these methods below.
Where is NBV reported?
As these calculations concern a company’s assets, net asset value is reported on the company’s balance sheet.
Is NBV the same as market values?
Yes and no. Net book value is a determination used for tax and financial reporting purposes.
The information is used to estimate the value of the company’s assets, to leverage smart tax strategy, or to outline values for liquidation.
Fair market value refers to an asset's price on the open market. It’s an estimate of the price a buyer would be willing to pay based on larger market influences of supply and demand.
Why is NBV important?
NBV is a tool a company can use to demonstrate its value and estimate total financial worth.
This number is helpful to investors requiring context for the value of assets held within the company beyond its cash holdings or debt.
Net book value can also identify assets that no longer have useful life.
This calculation helps with forecasting and helping leaders make good financial decisions about their portfolios' tangible and intangible assets.
Accurate NBV also assists the finance department in forecasting future expenses by estimating when equipment will need replacement and outlining the remaining value an asset might have at its end of useful life (also called its salvage value).
An overview of depreciation of assets
Depreciation is the way companies reduce costs over time.
Depreciating an asset acknowledges that assets and tangible items lose value over time.
For instance, a car will have much higher value and more usefulness rolling off the lot than five years (and many thousands of miles) later.
Depreciation prevents a company from having to record the “brand new” price of an asset indefinitely.
How to determine eligibility for depreciation
Accounting principles and tax laws outline the specific requirements for the depreciation of assets. Not every asset is eligible for depreciation.
As a general rule, you can depreciate tangible assets if
- You (or the organization) are the asset owner
- The asset is used for generating revenue
- The asset has at least a year of useful life left
What can and can’t be depreciated?
With the above rules in mind, the following types of fixed assets can be depreciated:
- Machines and production units
- Company-owned vehicles
- Owned office buildings
- Rental properties leased for income
- Intangible assets: patents, copyrights, and software
The following are non-depreciable assets:
- Cash or accounts receivable
- Investment instruments (stocks and bonds)
- Personal property
- Leased property
What are the depreciation methods for NBV?
There are four methods for depreciating assets: Straight-line, double declining balance, sum-of-the-years’ digits, and production units.
The IRS provides taxpayers with guidance on depreciation methods and timelines.
The straight-line method is the simplest way to depreciate an asset.
Depreciation over the period of service begins with the market value, decreasing consistently until it reaches total depreciation.
When graphing the depreciation, it forms a straight line.
Straight-line depreciation is helpful when the original value is known, and the asset depreciates predictably.
Double declining balance
This method accelerates the depreciation to frontload the expense of depreciation losses in its earlier years of service.
This depreciation method works well for short-lifespan assets like computers and electronics.
This is another accelerated depreciation method. Sum-of-the-years’ digits works as follows:
Take an asset's expected useful life. Add together the digits for each year.
For instance, if the asset has a useful life of 5 years, add 5 + 4 + 3 + 2 + 1 = 15. Then divide each digit by the sum. This provides the percentage of depreciation for each year.
With this method, the bulk of depreciation occurs in year 1.
In the above example, the depreciation proceeds as follows:
Year 1 = 5/15 = 33%
Year 2 = 4/15 = 27%
Year 3 = 3/15 = 20%
Year 4 = 2/15 = 13%
Year 5 = 1/15 = 7%
This depreciation, like the declining balance method, front-loads depreciation expense in the years the asset will offer the most use.
Units of production
Time-based depreciation is great for some assets but not as useful for others.
This depreciation method works for assets that produce units (for instance, a bottling machine that bottles and seals a certain number of products in a given period).
This method is often used for high wear-and-tear assets that will be most used in earlier years of operation.
Now you know the basics of net book value and depreciation.
We hope this quick guide helps you to make better decisions about the assets in your organization to strengthen your company’s financial position.
Calculating NBV and all your other key figures is easier with the right tools. Cube offers a powerful FP&A platform that allows your team to make sound financial decisions without moving away from their spreadsheets.
To see how Cube can help improve your planning and forecasting, schedule a demo to learn more.