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When Maintaining a “Second” Set of Financial “Books” is Worthwhile

By Andrew White | November 23, 2016 | 0 Comments

Information Yield CurveInformation ValueInfonomics


We all know the implications of a ‘second set of books’: The implication is that a firm or operating concern publishes one set of ‘official’ finances, typically publicly or to government officials in order to pay taxes; and keeps privately a second set of finances for some other purpose – perhaps the re-distribution of profits using some informal or some non-standard (i.e. illegal) method. I remember reading about the “gangster” era where two sets of books were kept.  But there is in fact a new and emerging reason why it may be practical to record a second set of “books” – for a good, legal reason.

In Tuesday’s US print edition of the Wall Street Journal there was an interesting article titled, “Codes for Valuation Experts” that explains how some consulting companies help organizations value their non-traditional assets such as patents, trademarks, and customer relations.  Many of these assets are recognized by you and me as business assets.  The rights to a patent is quite clear; maybe a firm could sell off its patents for cash.  In such a deal the buyer is a acquring the right to the use of the patent, not really the document itself.  But the principle is clear: there is value in information assets, not just physical assets.

But in accounting terms the world over, information asset accounting (IAA) is not a formal practice.  In fact the value of a customer list is most often recognized only once a firm has gone broke.  It is “sold off” along with a firms’ furniture and PC’s. But it is data.  Recently Microsoft bid to acquire LinkedIn, a repository of professionals in the business world.  Effectively Microsoft is buying a “customer database” where the customer is a set of networked business professionals.  But have you ever looked at your contacts on LinkedIn?  Can such a service and data repository be re-created?  How is trust in the data established?  How did Microsoft determine the bid for the data asset?  How do government agencies determine the value of such a deal to the buyer, the market or society in general?

The WSJ article of yesterday refers to the idea that new standards are needed to help firms evaluate things like patents.  But what firms really need is a standard method for valuing data assets – period.  I don’t mean the esoteric information assets such as patents; what I mean is the value of the data that drives your business, and not after you have gone broke!  If you know what assets you have, and how your (information) asset value differ, you can make smarter decisions about which assets to invest in. Such a value would represent an information asset on yor second or informal balance sheet.  It is just as important as the balance sheet that records the land-value of your offices and factories.

Once you know the balance sheet asset value of your information assets, you then have to ask ourself, how to maximize the return on investment in that data.  How do you invest in data?   You spend money on implementing on things like:

  • Business Intelligence
  • ERP
  • Content Management
  • Information governance or MDM
  • IOT
  • Big Data
  • Data Security
  • Application Development etc.

However, just like with investment vehicles you have choices: Which of the options above are most likely to yield the most value to the business; and how effective are your people and process and technology skills in delivering that specific project or program?

This is an ROI-type of dialog and this refers to a yield, and so this ends up creating a new profit and loss statement; the result of the work of investing and processing and using data.  However you need to start with an asset-based view and then add to this a use-base/ROI-base view.

Gartner has woven together several pieces of research that emerged in different lines of work:

  • Start here: Infonomics looks at the balance sheet statement of the value of specific information assets
  • Then overlay with this: Information yield/ROI looks at the profit and loss analysis of the likely return on information asset investments.

We are getting close to the idea that firms might make smarter investment and resource allocation decisions if they maintain an informal second set of books.  Of course this is not really a second set of books; it is an extension or addition to the formal set of books to help make more informed decisions about resource allocation.  Eventually, when such work leads to more effective and competitive progress, the accounting firms might actually update their own standards.  And those second set of books will come out into the open.


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