SHOULD “DATA” BE RECOGNISED AS AN ASSET ON THE BALANCE SHEET?
Since the 1950s the world has witnessed a very different demographic where the average publicly-traded company listed on the S&P has gone down from being 60 years old to less than 20 years. This significant shift is mainly attributable to the emergence of new technology and the unique capabilities that businesses could build with technological and digital tools.
Companies that embraced new technologies, automation, big data, machine learning and innovation are gaining market share and are disrupting traditional businesses that have been slow to adapt and transform in digital changes.
Today, the six biggest companies by market capitalisation are in the data technology business (Apple, Amazon, Alphabet, Google, Microsoft and Facebook). These companies understand the true value of their data and leverage it with advanced analytics to drive growth. Their ability to use big data solutions gives these companies their competitive advantage by reducing operational cost, increasing revenue, predicting behavior and improving cash flow. With such competitive advantage, new dynamics emerged. Data is not only collected from historical transactions but is also being used to predict and motivate transformative changes at unprecedented speed.
Generally, it is accepted that data is an intangible asset alongside such other commonly accepted non-physical assets like patent, copyrights, trademarks, customers list, brand names and logo. While data in recent years has proved to provide competitive advantage to many companies, it leaves many businesses questioning why it is not listed on the asset column of their balance sheet.
Recognition of an asset under existing accounting rules
Before we set forth our perspective, it is helpful to step back and review the objectives of financial statements. Accounting Standards are designed to help companies report financial metrics using standard principals with the universal objective to ensure that financial statements are relevant, reliable, comparable, and consistent.
A balance sheet shows what the company owns and owes. The assets side shows the tools the company has at its disposal to operate the business, and the liabilities/owners’ equity side shows how the company financed these assets. These fundamentals are important before we proceed to the next step.
Typically, when we use the term, “asset”, it would mean something useful. It could mean something tangible or as just a noun where one would say, “she is an asset to the team”. Hence, in the context of this usage, data is absolutely an asset to a company. However, the meaning from the accounting perspective is more specific.
In accounting, an asset reflects future economic benefits that are expected to result from past transactions or events. The category of asset that is the subject of this discussion is intangible asset which is a class of asset that is non-physical (e.g. trademarks, patents, copyrights, customers list, software development, goodwill and license agreement etc.). At a higher level, a company’s data seem to fit the definition of an intangible asset. However because of its inherent nature, there are some significant constraints to recognise it as an intangible asset under current accounting rules.
There are rules and guidelines that impact how and when a company could recognise an asset. We set forth some of the rules as they currently stand that would make recognising data as an asset difficult as otherwise it may lead to mischaracterising of the balance sheet.
- Internally-Created Asset:
Intangible asset that are listed on a company’s balance sheet should be those of an acquired asset. They have an identifiable value, a useful lifespan and appropriate amortisation policies could be adopted to amortise these assets over different lifecycles.
Unfortunately, the current accounting standards tends to overlook internally-created assets. This would means that a business cannot recognise any internally-generated assets as an intangible asset. In instances where there are intangible asset listed on the balance sheet they will most likely be those gained as part of the acquisition of another business, or they were purchased outright as an individual asset.
An example of this could be the Apple logo in the case of Apple. Although the Apple logo does not appear on Apple’s balance sheet because the logo was developed internally and was not acquired, it is still an intangible asset.
It is a generally accepted that any asset listed on a company’s balance sheet should have an identifiable fair value attached to it. Hence, if data is to be considered as an asset, there must be a corresponding cost for acquiring or building this asset. This means that a company would have to value the hours spent on collecting, refining and enriching their data, as well as the personnel recruiting costs, storage, computing costs and other cost factors that were appropriated for data asset development. This process, until now, is challenging due to the complex factors associated with it and its lifecycle. There is no accounting model that a business could adopt to measure and impute a value to such an asset. Unlike equipment or building, if such an asset is assessed by independent assessors, the value could be ascertained using appropriate valuation methodology.
When tangible assets aged, they lose their value. Hence, applicable depreciation policy must be implemented to reflect the period of its useful life. On the other hand, when data asset ages, they can either loss or gain in value. Data, by its nature, is certainly more challenging to predict its useful life. In certain cases, when master data (which represent business entities such as customers and product data) ages, it gains its relevance and the value of these data objects are usually shared in the enterprise. Consequently, if the data is purely transactional (which represent business events such as invoices and deliveries), when it ages, it loses its relevance and its value as well. Further, if the data is incorrect or inappropriate, its useful life could relatively be just a few weeks or even days. On the other hand, the value of data may increase the more it is used. Hence, over time, it may even be non-depletable, durable or even strategic.
It is therefore a daunting task to formulate an acceptable depreciation cycle to determine the useful life of such an asset. It requires specific skill sets to formulate a prudent depreciation policy for which the current standards and regulations still lack.
Assets listed on the balance sheet are usually utilised in a similar manner at all times under different circumstances. It can be safely concluded that the same type of equipment would be used by two different companies in almost the same manner. The same cannot be said of data as data is largely contextual. By its characteristics, raw data is alphanumeric in nature and it increases in value as it moves through the valuation chain. Hence, depending on the usage value of the data under various circumstances, the difficulty in assigning a value to it stems from the uncertainty of the future benefits.
Data can very quickly transform itself to a huge liability if it has poor security and policy compliance. While tangible assets such as machinery or buildings can also become a liability for a company, the rate of change from an asset to a liability in an intangible asset like data is significantly higher as compared to a tangible asset.
Whilst we can conclude that despite the significant role that data could contribute to the value of an organisation, because of its inherent nature, it has not found its place on the balance sheet. Though academics, financial controllers and regulators are researching into such policies, none is generally acceptable nor completely satisfactory. Notwithstanding this, due to its importance, it should not be too long before data potentially finds its place on the balance sheet. To embark on this journey, the key consideration is the ability to assign a value to it.
Save for what is said, it had been proven that the value of data have objectively been recognised in company’s valuation especially in M&A transactions. Professionals representing both the acquirer and vendor has applied different methodologies to determine the value of data in order to arrive at a value which will represent the entire business ecosystem.
Gartner, a US leading research and advisory firm, offers a variety of methods to compute the value of information assets including multiple models for various need and circumstances. Such formulae includes information models in determining the intrinsic value of information, business value of information, performance value of information, cost value of information, market value of information, economic value of information and a mix of financial measures together with leading and trailing indicators.
Gartner also offers various frameworks and theories on how an organisation could manage, deploy and ultimately monetise information assets both directly and indirectly.
With this, we can safely conclude that data is indeed a very unique form of intangible asset with an unconventional outlook. As proven in M&A transactions, such as the 26 billion dollar acquisition of Linkedin by Microsoft, it has been widely accepted that the value of data has a significant role/ contribution to the valuation of a business. However, from the accounting perspective, although it might have met the formal established criteria of a balance sheet asset, archaic accounting practices had disallowed the capitalisation of information asset on the balance sheet.
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© July 2019. This article is contributed by Acutus Advisory Pte. Ltd. All rights reserved.