Overview – Different Ways to Report Asset or Portfolio Value
When looking at a portfolio, the terms “book value”, “adjusted cost base”, and “market value” may appear when reporting the value of the portfolio or when talking about taxes. Although these terms are commonly used in investment jargon, what exactly do they mean?
When an investor is asked to report the value of their investment portfolio, what number would they need to give? This simple question has some very serious implications, whether it’s for tax purposes or when an investor wants to sell their investments.
One investor may report the value of their portfolio with respect to how much they paid for those assets. Another may report how much they paid for those assets plus any fees they needed to pay while buying those assets. Or perhaps one investor chooses to report the value of their portfolio in terms of what their assets are worth today.
So, what exactly is the correct “value” to report? Well, that depends on what an investor wants to know or want to make known to those asking.
This article will go over three commonly reported numbers when assessing portfolio or asset value: book value, adjusted cost base, and market value. Because of accounting nuances between asset classes, the scope of this discussion will be restricted to equities (i.e., stocks).
Book Value
Book value is arguably one of the most commonly reported investment metrics – many companies report it in their annual and quarterly reports. A snapshot/summary of a company’s major financial data may include book value, and it is used in some analytical metrics such as the price to book (P/B) ratio.
Although book value is commonly reported, depending on the context of its use, book value may take on a slightly different meaning.
Context is crucial when trying to understand book value – failure to understand the context may cause some misunderstandings to happen between people/groups, which may have severe financial repercussions later.
When talking about a company’s assets or balance sheet, book value is the value of an asset as recorded on its balance sheet1. Book value is the price that was paid to acquire an asset, plus any adjustments attributable to depreciation, amortization, or asset impairment1.
When talking about the book value of an entire enterprise, this is the claim investors have on a company’s assets after all liabilities have been repaid. By definition, this claim on assets is the total equity (Total Equity = Total Assets – Total Liabilities).
Book value per share is a company’s equity on a per-share basis. If a company has $100,000 in equity and has 10,000 shares outstanding, then the book value per share is $10.
When talking about an investment portfolio, book value is the price an investor originally paid to acquire an asset, excluding any fees needed to acquire it such as paying a commission. If an investor buys 100 shares for $1,000, the book value of their shares is $1,000.
Notice how the definition of book value has its nuances based on the context it is used in. Before talking about book value, an investor needs to have a clear understanding of the context it is being used in. Failure to understand this context may lead to some incorrect information being shared.
Adjusted Cost Base (ACB)
Say you want to sell some shares because the current value of those shares (i.e., its market value) exceeds the cost paid to acquire them (their book value).
To make a profit (or, when talking about the sale of assets, a capital gain), the current value of an asset should exceed the price originally paid to purchase it.
So, this naturally raises the question of “what is the ‘cost’ I subtract from the market value?” One may think that capital gains are calculated as market value less book value, but that is incorrect.
To calculate capital gains, you do not subtract book value from the current market value. Rather, you subtract a value known as the adjusted cost base (ACB). Capital gains described in equation form is2:
Capital Gain = Proceeds of Disposition – Adjusted Cost Base
With respect to stocks, ACB is the book value of the purchased shares plus the commission you pay to purchase them.
The Canada Revenue Agency provides a more generalized definition of ACB by stating “The adjusted cost base (ACB) is usually the cost of a property plus any expenses to acquire it, such as commissions and legal fees.3”
Let us clarify this concept by way of example:
Adjusted Cost Base Example
Say an investor purchases $1,000 worth of shares and pays a $25 commission. The adjusted cost base for this transaction would therefore be $1,025 ($1,000 [book value of shares] + $25 [commission]).
This investor decides to purchase another $2,000 worth of shares, and again pays $25 in commission. The adjusted cost base for this second transaction would be $2,025.
A few years later, the market value of those shares increases to $5,000. Because the investor stands to make a capital gain, they decide to sell.
Recall the equation for capital gains:
Capital Gain = Proceeds of Disposition – Adjusted Cost Base
In this scenario, the proceeds of disposition would be $5,000 less any commissions/fees to process the transaction – let’s assume a $25 commission when selling.
The adjusted cost base would be $1,025 (first transaction) plus the $2,025 (second transaction), so the adjusted cost base comes to $3,050.
Using the equation given above, the expected capital gain, before taxes, is:
$5,000 [Proceeds of Disposition] – $25 [Commission when selling] – $3,050 [Adjusted Cost Base] = $1,925.
Therefore, the capital gain the investor would earn from this sale would be $1,925.
Market Value
Market value is simply the current price an asset is selling for at a given point in time. For example, when stock markets are open, a stock’s market value is the price at any given time that you check.
Market value is transient, with some market values being more transient than others. Stocks change their price virtually every second, whereas a house may increase or decrease in value every month or so.
When purchasing assets, the following detail must be remembered: an asset is purchased at market value, but once an asset is held by an investor or other entity the price it was purchased at becomes the asset’s book value.
Imagine you want to buy 10 shares with a market value of $100 a share (for the sake of simplicity, assume that no commission was paid). You pay $1,000 (the market value) to acquire these 10 shares.
After the purchase, $1,000 is added to the value of your portfolio. This $1,000 now represents the book value of the shares you just purchased because that was the price you paid to acquire them.
Wrapping Up
There is more than one way to report the value of an investment portfolio, so an investor is responsible for understanding what those different ways are.
If someone wants to know the market value of an investor’s portfolio, but they report the book value, then this will surely cause some confusion between the two individuals. Obviously, this is a scenario that investors would want to avoid.
Understanding the different ways to report market value may seem like a trivial matter, but every small error may lead to bigger problems down the road.
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