In a digital world, data is a critical aspect of business. However, from an accounting point of view, while data storage, backup, management and recovery can all easily be accounted for, the value of information itself is intangible and hard to quantify.[Tweet This]
Despite its intangible nature, quality data underpins practically every aspect of a successful business. As part of a sound accounting practice, businesses should be valued correctly, and in today’s world the value of a business is intrinsically linked to the value of certain of its data. Data is a vital business asset that has development costs attached to it and should be accounted for in the balance sheet.
However, assigning a value to this information can prove to be a challenging task, particularly if the quality of this data is not addressed up front.
An asset can broadly be defined as ‘something that generates money’. From this, it is clear that while some data is definitely an asset, not all data falls into this category, and organisations must decide which data delivers business value, and is therefore considered an asset. The customer database is one obvious example, as very often when mergers or acquisitions occur, the acquiring business is purchasing the acquired party’s customer base.
When a business is sold, the value always includes client information and information that the organisation owns. In other words, all of the things the buyer would have to develop themselves should they wish to start a new, competing business. This information is usually gathered over many years. An acquisition allows an organisation to fast track obtaining this information and additionally, allowing it to quickly access new markets.
The customer base and associated data, for example, has development costs including software, salaries and so on that have been absorbed into the income statement. This asset needs to be given a value in the balance sheet, with a non-distributable reserve to be raised under owners’ equity. It is also important to remember that data as an asset is not tax-deductible, but merely an indicator of value as part of good accounting practice.
The value of data is also directly linked to its quality, since, for example, the completeness and accuracy of customer information are critical in its usefulness and usability, from whence value is derived. While it is true that not all data is a direct business asset, the information generated by this data is often seen as a differentiator that provides a competitive edge to businesses in difficult economic times, providing the potential to generate revenue while cutting costs and mitigating a variety of risk.
Information-centric organisations base their decisions on the analysis of their data, and yet this data is not considered to be a business asset by current accounting standards. However, on an operational level, if data is not treated as an asset, it becomes difficult to justify investing in that data, which is critical for improving its quality and therefore its value. Poor quality data thus becomes a liability, as it is not serving the business and is a pure expense that must be stored, managed and aligned with compliance requirements.
The world has shifted from the industrial age to the information age, and industrial assets are becoming less and less relevant while the prominence of information grows. [Tweet this]
Without data, the vast majority of businesses today simply could not function, and yet while industrial assets are an important part of the accounting process, data and information are still left out. Ultimately, information derived from data is an asset and should be treated as such, not only by the IT department, but by finance and accounting as well.Tweet this]
This post was originally published by www.SALeader.com