What is a Write-Up?
A write-up means an increase in the book value of an asset as its carrying value is higher than the fair market value. Generally, a write-up occurs when a company is being acquired, and the assets and liabilities of the company are being re-evaluated to fair market value under the M&A accounting method.
Write-ups also occur when the initial value of the asset is not recorded properly or when an initial write-down of the asset's value is very large.
Asset write-downs are the opposite of asset write-ups, and both are non-cash items.
Breaking Down Write-Ups
Businesses initiating write-ups are not often reported because they impact the balance sheets of the businesses. However, drastic changes in write-downs gain investor interest and make headlines.
A write-up is not considered a positive prospect for the future of a business since it is a one-time event. In contrast, a write-down is supposed to be a red flag.
During an asset write-up, intangible assets and their tax liabilities are treated specially. The deferred tax liability is generated from future depreciation expense.
Illustration
Consider that Company X is ready to acquire Company Y for a deal worth Rs.2 crore. At this point, the book value of Company Y's net assets was Rs.1.4 crore. Before completing the deal, Company Y's assets must be marked-to-market to figure out the fair market value.
Upon evaluation, if the FMV is found to be Rs.1.7 crore, the raise in the book value will be Rs.30 lakh. This raise represents a write-up. The new FMV minus the sale price, Rs.30 lakh, is the goodwill as written in Company X's balance sheet.
