What is a write-up?
When an asset’s carrying value is lower than its fair market value, an increase in the asset’s book value is known as a write-up. According to the buy method of M&A accounting, a write-up usually happens when a firm is bought, and its assets and liabilities are restated to their fair market value. It might also occur if the asset’s original value was incorrectly reported or if there was an excessive value write-down in the past. The reverse of a write-down is an asset write-up, and both include non-cash things.
Understanding Write-Ups
The financial press only covers more commonplace cases of corporations starting asset values since the write-up affects the balance sheet. Significant write-downs, on the other hand, do attract investor attention and provide better news cycles.
Since write-ups are often one-time events, they are rarely seen as a good sign of future business opportunities, unlike write-downs, typically seen as warning signs.
Tax implications and unique treatment for intangible assets are considered during an asset write-up—the deferred tax obligation resulting from asset results from higher (future) depreciation expenditure.
Example of a Write-Up
For example, Company B’s book value was $60 million, and Company A is paying $100 million to acquire it. Company B’s assets and liabilities must be marked-to-market to ascertain their fair market value (FMV) before the purchase is finalized.
If Company B’s assets are valued at $85 million at fair market value (FMV), the $25 million rise in book value is a write-up. On Company A’s balance sheet, the $15 million discrepancy between the acquisition price of $100 million and the FMV of Company B’s assets is recorded as goodwill.
