What is Book Value?

What is Book Value?

Book Value (also known as Adjusted Cost Base or ACB) is a concept that is often confusing to investors.  It is used in calculating the capital gain or loss resulting from the sale of securities or mutual funds in a taxable portfolio. 

So what is Book Value and why is it reported on investment statements?  The first thing to note is for most mutual funds, it will not be the same as your original investment.  Initially, these numbers will be the same, but over time, the Book Value will change with any transactions that take place (including fund distributions).  This is why Book Value or ACB should not be used to determine how your funds have performed.

Mathematically (simplified example - excludes sales charges):

ACB = initial investment + subsequent contributions
          + distributions reinvested – withdrawals

Most mutual funds make distributions at least annually, so each time a distribution is paid out and additional units are purchased, the ACB will increase by the distribution amount.  This is important in a taxable account because investors are taxed on the distributions earned each year (shown on the T3).  Over time, if the value of the portfolio increases when the units are sold a capital gain is triggered.  The capital gain is determined to be the Market Value of the transaction less the ACB.  If the ACB did not increase every year by the amount of the distributions, you would be paying tax twice on the distribution amounts, so it is important that the ACB increases with each distribution.  Note, however, if distributions are not reinvested, the ACB will not change.

If the ACB increases every year, over time it may exceed the market value. This is especially true for income generating funds.  If this happens, it is possible for the fund to appear to be losing money if one uses the ACB incorrectly as a proxy for the amount deposited originally.  The ACB therefore should not be confused with the amount of the initial contribution.

The best way to measure performance is to determine your actual dollar amount invested compared to the market value of your portfolio, but remember to factor in any withdrawals or deposits of capital.  Investment firms should be able to provide your account performance information.  At Leith Wheeler, we provide this through our online access portal.

If you have questions about ACB or other investment terminology, please contact your Portfolio Manager or Investment Funds Advisor.

This article is not intended to provide advice, recommendations or offers to buy or sell any product or service. The information provided is compiled from our own research that we believe to be reasonable and accurate at the time of writing, but is subject to change without notice