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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.
