In Part 4 of my series on Digital Transformation, I look at how to overcome obstacles in quantifying the value of data assets.
The accelerating value of all types of business data has resulted in a fast-growing movement to require that data be recorded as an asset on the corporate balance sheet. If the concept’s proponents are successful in their quest, the onus will be on companies to attach a specific monetary value to different types of data for accounting purposes.
Under current accounting rules, generally, only items of tangible value purchased by a company are listed as financial transactions. Since data is routinely produced by a business and often is not purchased, it typically is not recorded on the balance sheet. While it is common for business people to refer to data as an asset or “currency,” it is not treated as such – well, not yet.
The reason has to do with the abstractness of data. As The Wall Street Journal reported, “Assigning a value to a physical asset like a store or equipment is relatively easy. But, in the murky world of intangible assets, the calculations are squishy. The problem of how to value such assets has vexed accountants for decades.”
Although the Financial Accounting Standards Board (FASB) assembled a group of researchers in 2016 to study updating its accounting rules to potentially record data as an asset, the researchers have yet to figure out how to estimate the fair value of such assets, the WSJ reported.
Until the FASB can figure out how to estimate data value and encourage the viewing of data as an asset, the accounting rules will remain as they are. “Although information arguably meets the formal criteria of a business asset, present-day accounting practices disallow organizations from capitalizing it,” research firm Gartner stated.
At some point, such estimations of data’s value will be achievable. As the old adage goes, “Where there is a need, there is a way.” And there is definitely a need to account for the value of data. According to the Federal Reserve Bank of Philadelphia, U.S. companies likely have more than $8 trillion in intangible assets, roughly half the market capitalization of the S&P 500 Index!
No wonder shareholders, institutional investors, and boards of directors are clamoring to conceptualize data as an asset on the balance sheet. In many information-rich businesses, data may, in fact, be their biggest asset. A report by CapGemini EMC on Big Data indicates that 61 percent of companies believe the monetization of their data could eventually be as valuable as their existing products and services.
Unfortunately, many investors are leery about committing capital to information-rich companies because the asset value of their information “cannot be found anywhere on the balance sheet,” Gartner stated.
Time will tell
In all likelihood, data will eventually be recorded as a tangible asset. Gartner advises using its Information Valuation Method to value information assets much like other enterprise assets. It includes six formal information valuation models, a mix of financial measures, leading indicators, and trailing indicators.
It’s a good start. But companies still need to establish the means to rapidly accumulate data into relevant types to apply the valuation methodology accordingly. Many organizations are impeded in this goal by legacy technology tools that require the need for software developers to integrate data from across the enterprise.
There is a better way to positively influence the completeness and timeliness of the valuation process. Businesses that can empower their teams to unify the multiple endpoints of diverse systems and applications – from databases and cloud applications to Big Data streams and analytics tools – will have a universe of data instantly accessible for valuation, available to data scientists to apply the analytics.
Given the very strong chance that accounting regulations will soon change to require listing data as an asset on the balance sheet, these early movers will have a competitive advantage. Gartner predicts that by 2022, companies will be valued on their information portfolios. As the firm stated, “Those in the business of valuing corporate investments, including equity analysts, will be compelled to consider a company’s wealth of information in properly valuing the company itself.”