Data as an Asset. An Executive Guide

What people mean when they say “data is an asset” is that data is valuable to the business. However, some suggest that data is indeed of such a nature that it should be treated as an asset and capitalized. Now if accounting for digital assets like data was supported by the accounting profession (the industry has some catch-up to do in the digital age), what would be some of the implications of doing so?

Let’s begin by considering the basic data value chain:

* Data is produced during the operation of the business by means of its processes

* Data is integrated and organized

* Data is transformed into various reports and distributed

In some businesses, data remains fragmented and is archived or deleted to save on storage, server and database costs. In other words, they view data as a cost rather than as an asset, and are thus unlikely to consider capitalization. Other businesses however view data as having economic value that exceeds the costs of storing and processing it. Here, data is probably already largely managed as an asset, although it is probably not recorded as one.

Data valuation

So the heart of the matter is whether data is truly an asset. In other words, from an accounting perspective, can data be traded or sold (not considered in this paper), or can data enable revenue growth, expense optimization or risk mitigation. In this context, consider Table 1:  

	Data Maturity	Data Usage	Data Value
Immature	Low	Basic financial reporting	Low
Operational	Low to medium	+ operational reporting	Low
Developed	Data Warehouse and Business Intelligence	+ automation, consistency and broader availability	Low
Tactical	+ derived data and basic analytics	+ ability to leverage customer equity*	Medium
Data-driven	+ analytics-driven	+ value-enabling info on risk, products, channels, customers and operations	High
Strategic (Mature)	+ external data	+ data-driven strategy	Very high

Table 1: Data maturity model

*customer equity – a discounted, propensity-based assessment of the total financial value of the expected future sales that could be made to existing customers over an appropriate timeframe. Usually enabled by CRM

From table 1, only businesses that are mature with respect to their treatment of data and that have a track record of generating value from it should consider capitalizing their data, because they already manage data as productive asset. 

In terms of valuing the data asset, since the assessment of customer equity is consistent with the discounted future cash flow approach to company valuation, it is one of the most CFO-friendly ways to value the asset (see footnote 2 at the end of this paper).

Implications of capitalization

As an introduction, a balance sheet details the business assets and how those assets are funded across liabilities (debt) and equity (shareholders funds). The sum of the value of the assets balances the value of the sources of capital in the accounting identity, Assets = Equity + Liabilities. 

In the context of considering data as an asset, there are two main scenarios to consider per table 2, that of internally generated data versus external data, which for the purposes of this paper, are considered to be purchased:

	Internal data	External data
Source of the Asset	Generated by business processes	Purchased
How the Asset is Funded	Indirectly funded by operating assets, so the accounting identity must be balanced through an increase in equity* if assets grow as a result of capitalization	Cash purchase, exchanging one asset for another
Assets	Increase	No change
ROE	*Equity increase. If returns do not increase (by means of the exploitation of data), ROE will be diluted	-
ROA	Asset increase. IF returns do not increase (by means of the exploitation of data), ROA will be diluted	-
ROCE	Capital Employed increases (*equity)	-
Depreciation	An important consideration concerns how to account for the decreasing value of the data over time and with usage

Table 2: Implications of capitalization

From table 2, if the data does not enable incremental NOPAT (returns), then ROE, ROA and ROCE will be diluted by capitalization. 

Furthermore, effort needs to be expended on how the use of data will be expensed back to the income statement. For example, in a simple two product business where your customer has one product and you have used your data to cross sell the second product to your customer, the value of that particular piece of data becomes zero, and is thus no longer an asset and must be written off. There are clear implications for internal financial policy in the case of capitalization.

In conclusion, deciding to capitalize data is a significant decision with potentially serious financial consequences, so recording data as an asset is best left to data-mature businesses with a track record of generating value from their data. And the next time a business says that data is an asset or that they are data-driven, it might be informative to check out their balance sheet...

Follow up articles will:

1. outline customer equity as a valuation tool in more detail. Completed 7 Sep 2013
2. outline why the calculation of customer equity is consistent with the discounted cash flow (DCF) method of company valuation. Completed 7 Sep 2013