Write-Up
Contents
Deciphering the Concept of Write-Up in Accounting
Exploring the Basics of Write-Up
In accounting, a write-up refers to an increase in the book value of an asset, typically prompted by its carrying value being lower than its fair market value. This adjustment commonly occurs during mergers and acquisitions (M&A) transactions when the assets and liabilities of the acquired company are restated to reflect their fair market values. However, write-ups can also occur due to initial valuation errors or when a previous write-down was deemed excessive. It's important to note that both write-ups and write-downs are non-cash items.
Insights into Write-Up Procedures
Write-ups primarily impact the balance sheet, often going unnoticed by the financial press unless they are substantial. Unlike write-downs, which can raise concerns among investors, write-ups are generally not seen as positive indicators of future business performance, as they are typically one-time occurrences. During the process of asset write-up, special consideration is given to intangible assets and tax implications. Additionally, write-ups may result in the generation of deferred tax liabilities due to anticipated future depreciation expenses.
Illustrative Example of Write-Up
To better understand the concept, let's consider a scenario where Company A acquires Company B for $100 million. Prior to the acquisition, Company B's net assets were valued at $60 million on its balance sheet. As part of the acquisition process, Company B's assets and liabilities are reassessed to determine their fair market value. If the fair market value of Company B's assets is determined to be $85 million, the $25 million increase in their book value represents a write-up. The $15 million difference between the fair market value and the purchase price is typically recorded as goodwill on Company A's balance sheet.