Table of Contents
What Is a Write-Up?
Let me explain what a write-up is: it's an increase you make to the book value of an asset because its carrying value is less than its fair market value. You'll see this happen if a company is being acquired and its assets and liabilities get restated to fair market value under the purchase method of M&A accounting. It can also occur if the initial value of the asset wasn't recorded properly, or if an earlier write-down in its value was too large. Remember, an asset write-up is the opposite of a write-down, and both are non-cash items.
Understanding Write-Ups
You need to understand that a write-up affects the balance sheet, so the financial press doesn't usually report on everyday cases where businesses initiate a write-up of asset values. On the other hand, big write-downs do grab investor attention and create better news stories.
While a write-down is generally viewed as a red flag, a write-up isn't considered a positive sign of future business prospects—since they're usually just a one-time event.
When you're dealing with an asset write-up, pay attention to special treatment for intangible assets and tax effects. With a write-up, you generate a deferred tax liability from the additional future depreciation expense.
Example of a Write-Up
Here's an example to make this clear: assume Company A is acquiring Company B for $100 million, and at that point, the book value of Company B's net assets is $60 million. Before the acquisition wraps up, Company B's assets and liabilities must be marked-to-market to find their fair market value (FMV).
If the FMV of Company B's assets comes out to $85 million, the $25 million increase in their book value is a write-up. The $15 million difference between the FMV of Company B's assets and the $100 million purchase price gets booked as goodwill on Company A's balance sheet.
Other articles for you
A waiver of coinsurance clause in insurance policies exempts policyholders from paying a portion of claims under specific conditions, often leading to higher premiums.
The 1944 Supreme Court case United States v
Undisclosed reserves are hidden bank assets counted as Tier 2 capital but not publicly listed on financial statements.
Neutral trading involves strategies that profit from securities with minimal price movement, neither bullish nor bearish.
Transfer pricing is the method used to set prices for transactions between related entities within a company, often to manage profits and taxes across divisions or countries.
A money purchase plan is an employer-sponsored retirement plan requiring fixed annual contributions based on employee salary, with tax advantages and specific withdrawal rules.
A Veblen good is a luxury item where demand rises with increasing price due to its status appeal, defying standard economic principles.
Net proceeds represent the amount a seller receives after deducting all costs from the gross proceeds of an asset sale, which is used for capital gains tax calculations.
Business reorganization is a major restructuring of a troubled company to restore profitability, often under court supervision in bankruptcy.
This text explains what loads are in mutual funds, including types like front-end and back-end, and contrasts them with no-load options.