Intangible assets in a company isn’t a new concept. Organisations deal with patents, software, trade secrets and more on a regular basis. But data is a relatively new entry on the scene, and many companies are left working out how (or whether) to put data on the balance sheet.
The Federal Reserve Bank of Philadelphia estimates that U.S. companies hold more than $8 trillion in data and other intangible assets. Companies could be seriously undervalued if they don’t recognise their data as holding a value – especially information-heavy organisations. Some 61% of companies expect that the monetisation of their data will eventually be as valuable as their existing products and services.
But putting data on the balance sheet is completely new territory. How can a CFO begin to achieve this – especially when accounting is left playing catch-up?
The first step in putting data on the balance sheet is understanding what it is worth. Any asset on a balance sheet must have a fair market value. But many organisations struggle with actually putting a figure on their data – both in terms of data management and the data lifecycle, and also the benefits that it brings. A building that’s assessed by two different parties would likely have a similar valuation. But there’s no set standard for valuing data, so would two valuations be the same?
If data is on your balance sheet, you need to determine how its value decreases as time goes on. When data ages, it can lose some of its relevance and usefulness and therefore its value. Organisations will have to devise ways of working out how much data depreciates over time.
To make things more complicated, some data assets might actually increase in value. Master data gains relevance as it ages because it’s usually shared across the enterprise. But transactional data loses its value. If data is incorrect then depreciation formulas won’t work on it – it’ll require a different set of calculations. Because this is still relatively new to most companies, those formulas haven’t been fully developed yet.
If you’re considering data as an asset on your balance sheet, then the cost of it also needs to be determined. There are costs involved in acquiring, building and storing data, not to mention the manpower and resources involved in doing this, including the team and computing costs.
Some organisations partly do this when determining return on investment (ROI), but this is typically done per-project and not on a company-wide scale. To put data on the balance sheet, you need to scale this up.
The data on your balance sheet can be an asset, but that also means it can be a liability. Poor data governance puts your data at risk of a breach. Due to the new GDPR regulations, the cost of this is extortionate. Organisations in breach of GDPR risk a fine of €20 million or 4% of global revenue (whichever sum is greater). This attaches a huge risk to using and storing data, and one which needs to be reflected on your balance sheet. Plus, there’s not just the financial liability: a data leak can negatively impact your reputation as well, and that could take years to restore.
All organisations hold swathes of useless data, whether it is data that’s decades old, or data that has been routinely backed-up and never used. There’s an ongoing cost involved with maintaining these stores. Putting data on the balance sheet can uncover useless data and allow an organisation to purge it. More importantly, putting it on your balance sheet provides an extra incentive to reduce the costs involved with storing and processing data. Therefore, data with little to no value is more likely to be purged in order to increase the overall value of your organisation’s data.
Organisations are beginning to realise that data has value and that it needs to be put on the balance sheet. 20% of UK companies have already begun assigning financial value to their data. Progress is slow moving, but it is happening. As more companies begin to put data on their balance sheets, the rest will soon catch up. Especially, when there’s a set of standards for determining data value and cost.
Putting data on the balance sheet offers a host of benefits. For one, it drives better data governance. If there is a clear cost involved with poor governance and management, then everyone will feel more accountable for that data. Likewise, it will uncover areas where data is not being used to its full potential or where it needs to be removed. You can’t manage what you can’t measure. Having data on the balance sheet puts it front-and-centre. People will also be more aware of data’s value in the organisation, helping to drive buy-in and widespread adoption of data projects.
Data is soon going to be on balance sheets. It’s simply too valuable to be left out. Therefore, it’s worth being aware of this now, and planning for the near-future when data is recorded on balance sheets.