The front page of the Business & Tech section of the US print edition of the Wall Street Journal aired a piece titled, Accounting’s 21st Century Problem. The problem, of course, is that accounting practices do not take account of intangible assets such as brands and customer data- the two examples noted in the article.
It seems FASB, the accounting standards body, is considering (again) methods to permit the inclusion of intangible asset valuation. It is a difficult challenge. One of the larger challenges is that people cannot agree on how to value such things as data. Should it be at cost, as in cost to create the data? Or should it in some way reflect the use of the data?
There are of course many different ways to value data, and different ways to quantify cost or use. So maybe FASB should not worry too much about a perfect calculation- why not permit several? Why not permit a second set of books for a couple of years to allow firms to get used to the effort, and to allow investors to make their own call as to which approach adopted by firms is most useful?
More fundamentally there is another issue with valuing data: does data have an intrinsic value, or is a piece of data’s value dependent upon the potential uses of that day? There is ample evidence published that suggests that data has intrinsic value but that value is not relevant when compared to the value from the use of that data in influencing decisions and behaviors. Thus the real, or most valuable focus for data valuation is not intrinsic, but should be focused on the potential impact on outcomes as a result of that data’s use.
This means that there is less value in comparing one customer master to another. It means that how a firm might be able to use either customer data set is more important than the data itself. As such, the customer data set and its quality and context applicability compared to the potential uses is key.
This is a complex calculation. It’s so complex that FASB won’t likely even consider it. The stock market only works well in valuing a firms stock since all stocks are interchangeable – there is no intrinsic difference between $10 worth of P&G and $10 worth of mom and pop, all other factors being equal. Additionally information concerning future earnings of firms are public and widely available. Information valuation cannot operate like this until and if all the data was as freely available and liquid like stocks.
So I believe that firms could compile their own second set of books right now. Use Gartner’s Infonomics algorithms (see Why and How to Measure the Value of Your Information Assets) to draft a second balance sheet. Use our information yield curve analysis (see Measure Your Information Yield to Maximize Return on Information and Analytics Investments) to draft a second cash flow balance model and P&L. Then share the data publicly every quarter. Then see how the competition responds. Then see how the financial market responds.
The firms that are smarter at exploiting their information assets, that are smarter with their investments in those assets and realized decision management, intelligent operations and information governance, should outpace the others.
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This is an interesting thought. But, harken back to when The Sarbanes-Oxley Act was implemented. It was outragiously expensive for companies to convert. I would imagine this would be a similar effort. How would the effort be simplified for corporations so they don’t spend LOTS of money to implement tracking etc?