Chapter 9
Is Information an Asset?
At 10 a.m. on Wednesday, July 19, 2000, five distinguished gentlemen filed into the chambers of the U.S. Senate committee on banking, and proceeded to obliterate the tenets of our antiquated accounting system. They included the chairman of the American Institute of Certified Public Accountants (AICPA), a major accounting firm senior partner, a professor of accounting from New York University, and others.1 Even the name of the hearing didn’t soft-pedal what this was all about: the Hearing on Adapting a 1930’s Financial Reporting Model to the 21st Century.2 One after another, the experts lambasted the accounting profession for its abject failure to keep up with changes in the global economy. These changes, they argued, had rendered classic accounting practices all but ineffectual at gauging what has become the largest source of value in businesses today: intangible assets.
Steve M. Samek, of Arthur Andersen, lamented that balance sheets and income statements “form the backbone of today’s accounting system” but fail to “capture significant sources of value in our economy.” He wondered aloud about the actual value of several household-name businesses after pointing out outrageous accounting metrics about them, then questioning, “How much is each of these companies worth? The plain truth is that we cannot readily answer that question because our current measurement and reporting systems… do not capture emerging sources of value. The measurements we use don’t reflect all the ways that companies create or destroy value in the New Economy.”3
Samek went on to enumerate the issues this lack of transparency causes, including an inability for business leaders to make informed decisions about the use of resources, an inability of government to track and report on meaningful economic indices, and an inability of the investment community to apply anything more than “guesstimates” (his word) to value companies.
Next, Robert K. Elliott, chairman of the AICPA, stated:
Unfortunately the current accounting model is somewhat out of date. It is very much based on the assumption that profitability depends on physical assets, like plant and machinery; on raw materials, like coal, iron ore, sheet metal, electrical wire, and plastic; in other words, on the tangible inputs needed to produce tangible products. This is the accounting model of the industrial age. But we are no longer in the industrial age.4
Elliot suggested that in order for the U.S. to maintain its advantage, it must move to the “next plateau of transparency,” as he called it.
Over a decade and a half since this hearing, what has been done to improve transparency or to formally account for information and other intangible assets while the economy has become ever more digital? Not much, according to Tom Linsmeier, retiring board member of Financial Accounting Standards Board (FASB), who said: “[T]he current accounting model fails to provide much information on most internally developed intangible assets, resulting in an often-increasing market to book ratio for these organizations and leaving users with little financial reporting information to make their valuation assessments.”5 Irrespective of what accountants say or do, Linsmeier told me, “Accounting standards boards should be asking for an increased disclosure of internally-generated assets.”6
Here we are in the midst of the Information Economy, and the eponymous major source of value in that economy is considered valueless by the custodians of what constitutes value!
Throughout the next few chapters, we will explore what constitutes an asset from the perspectives of the accounting profession and the law, and uncloak the increasingly sticky matter of whether information is something that can be owned. Afterward, I will share various methods to help organizations better quantify the value of their information assets, and shed light on how key economic principles break down or need tweaking if they are to be applied to information assets. Finally, I will wrap up with a look at various IT, business, and information-related trends affecting your ability to monetize, manage, and measure information as a true asset.
Awakening to the Information Asset Realization
In interviews with dozens of business executives I conducted at industry events, nearly 80 percent believe that their company’s information asset value is represented under goodwill or elsewhere on the balance sheet.7 Despite meeting all the criteria of an intangible asset, information is absent as an asset class on the balance sheet. Even among enterprises whose core business is the buying and selling of information (e.g., TransUnion, Onvia, HG Data, IMS Health, A.C. Nielsen, and IRI), information assets are nowhere to be found on their balance sheets.
Public companies are required to inventory, quantify, or assess the value of other assets, but not their information assets. Yet, these assets are either their primary source of revenue generation, or increasingly and tangibly contribute to their top line. Even intangible assets, such as copyrights, patents, and trademarks, are recognized and reported. Therefore, the growing disparity between corporate book values and market values is in large part due to the undisclosed value of information assets.
While some executives may claim that information is not possible to quantifiably value, valuation models for other similarly non-depleting balance sheet intangibles are straightforward enough to apply. In chapter 12, we’ll show just how to do so.
Information, other than the various ways we represent it, is devoid of physical substance, yet is something we can clearly identify, and a resource owned and controlled by an entity. Recent legal rulings against insurers’ denied claims related to data loss or destruction have often confirmed electronic data as a physical property. Information is acquired by recording business transactions or other events, such as communications or processes. As illustrated throughout Part I, information increasingly is wielded as a resource to generate probable future economic benefits, primarily via improved decision making and process performance.
However, people often are tripped up by the common misconception that information only has value when applied—i.e., data has no value when sitting idly in a database. This simply is not so. Just as inventory sitting on a shelf in a warehouse has discernible value, so do idle information assets. This is the difference between realized value and the true definition of an asset, which takes into consideration its probable future economic benefit. All information has a probable future economic benefit. CDOs need to keep this in mind when considering strategies and options for acquiring, administering, and applying information.
Why Does Information’s Value Matter?
Throughout our lives and careers, we have been conditioned to talk about the concept of information in either purely technical or strictly contextual terms. Information is something to be created, captured, updated, stored, moved, arranged, integrated, and ultimately accessed, used (or ignored), and retired. The physical nature of information is varied and evolving, first from human gestures millennia ago, then to the spoken and written word in stone and on parchment, and today to magnetic fluxes, radio signals, optical bits, and data streams from billions of IoT devices.
Beyond its technical manifestation and more importantly, information means something. It has context, particularly when applied. Information is a message, an event, or a unit of knowledge. Yet it isn’t actually any of those things. Rather, information is merely symbolic of them—a proxy. While the meaning of information ultimately drives business processes and decisions, it is the increasingly efficient, neat, and compact way with which we can technically represent information that allows its nearly unfettered flow and accumulation. Therefore, it is information’s meaning, representation, and context that combine to improve business process performance and decision making.
Organizations whose business, information, and IT leaders all recognize this cycle and the growing importance of information, no doubt, are better positioned to take advantage of it. Information should no longer be seen merely as an operations byproduct to be managed, or even as just a business resource to be leveraged, but rather as an enterprise asset to be valued. As seen in the first few chapters, organizations in nearly every industry—including retail, financial services, manufacturing, life sciences, and telecommunications—recognize and realize information’s economic benefits, sometimes even above some traditional assets, in its ability to be monetized.
We also discussed that business leaders increasingly recognize that there are things in the business world that financial assets can’t buy, physical assets can’t perform, and humans can’t process. In supply chain and customer relationship domains, for example, most businesses don’t want cash from business partners; instead, they desire a cache of information. Businesses that do a better job of compiling, managing, and making available the information assets are more valued as business partners—and more valued by Wall Street.
Until legislation, regulations, and accounting practices catch up, information-based transactions have become a means to avoid taxation and to conceal certain business activity from public disclosure or the prying eyes of competitors. Once the corner store clerk knew his customers’ buying habits, families, financial situations, and personal interests. Today, this familiarity must be approximated on a grander scale in a global online information-based marketplace. Information assets and analytics have become the necessary, albeit impersonal, substitute for this personal touch.
Only by considering information as a true enterprise asset are organizations better positioned to manage it and monetize it with the same discipline as traditional assets—leading to vast improvements in the realized value of information.
Real World Evidence of Information’s Economic Value
From Pacioli to Digerati
In barely five hundred years, civilization has advanced from Luca Pacioli’s elementary form of double-entry accounting still used today to a class of business exclusively capitalizing on information’s unique accounting principles. The so-called “digerati” include companies for which information is their primary input and their primary output, or which rely primarily on information as a disruptor to provide new or traditional products or services better, faster, and cheaper than incumbents. For these kinds of companies, information is their currency, their capital, their lifeblood. And because information assets may not be capitalized on balance sheets according to current accounting standards, these companies have a particular advantage over those whose business models rely heavily on traditional assets.
Although it may be commonplace to think of these kinds of companies as unique, unusual, or different, in reality they are merely at one end of a spectrum of information utilization. At the other end of the spectrum are companies just dabbling in analytics—mostly periodic hindsight-oriented reporting—or implementing ERP or CRM systems, or merely running their small businesses on spreadsheets. Further along the spectrum are those that have begun to capitalize on their own information—using data collected from transactions and production to forecast and plan, or even to operate more efficiently in real time. Then there are organizations that incorporate exogenous data from public data sources, data brokers, and/or business partners to better sense and respond to market forces, enhance existing offerings, or develop new ones. But when executives and business leaders start to recognize their organization’s information as a direct form of value generation, well, that is when they can really start putting it to work in novel ways and start nipping at the heels of the digerati.
The goal for most businesses when it comes to leveraging information assets shouldn’t be to “become” a Google or an Amazon or a Bloomberg, but rather to better monetize the distinct fiscal advantages, flexibility, and performance that information assets offer—a secret that some of these companies’ leaders have known for decades or longer.
Investors Prize Infosavvy Companies
“Tobin’s q” is a simple ratio posited by Nobel laureate and American economist James Tobin in the 1960s to understand the relationship between a company’s market value and the replacement value of its tangible assets. Analysis shows that this quotient has been growing since financial statements were standardized following the Great Depression. “Tobin’s q” has more than doubled from 0.4 in 1945 and now regularly eclipses 1.0 in any given year. In fact, this ratio seems to have tripped in favor of market value over tangible assets about the same time data warehousing and business intelligence rose to mainstream popularity in the mid-1990s.
Moreover, a Gartner study found that companies demonstrating infosavvy behavior such as hiring CDOs and data scientists and launching enterprise data governance programs, have a q-value nearly 2 times greater than the market average. And little surprise, as they do more with fewer tangible assets, information-based business like those above enjoy a q-value 3 times greater than the market average. In short, investors see something special in infosavvy and infoproduct companies.8
We can also look at pure-play information companies to get a sense of how financial markets value information assets. When Facebook announced its initial public offering (IPO) in 2012, its S-1 filing with the U.S. Securities and Exchange Commission (SEC) indicated reportable assets of $6.6 billion and predicted a conservative post-IPO market cap of $75 billion. Since the only other non-reportable assets Facebook had, for the most part, were information assets, Facebook had close to $68 billion in information assets. Or more precisely, its investors expected Facebook to be able to monetize its information assets to the tune of $68 billion. At the time, that meant the information from each user account was worth about $81.9 Today this figure is well over $200.10
No, most organizations do not benefit from a global pool of unpaid content-churning staff and a pure information-based business model. But to remain competitive, they no less must continue to become more information-centric. As emphasized throughout this book, this starts with business leaders and CDOs considering what sources of information are available both internally and externally, envisioning how this information can be monetized in transformative ways, and valuing and managing information as an actual corporate asset.
Indeed, Facebook and the other digerati are extreme cases with extreme numbers to go along with them. Still, these companies are evidence that every leader in every organization must consider the vast amount of data available to their organization, and how if sanitized, packaged, and marketed effectively could introduce an entire new revenue stream—perhaps even self-funding ongoing enterprise data warehouse or nascent Big Data initiatives, as some organizations have done. This is the crux of infonomics.
We know that due to 75-year-old accounting standards, certain intangibles cannot be valued and reported. These unreportable intangibles frequently cited include human capital and intellectual capital. Yet, could these alone have doubled over seven decades? Do corporations of similar revenue have twice the number of employees they once did? Quite the opposite, as we’ve become more efficient and reliant on technology. Do humans have twice the knowledge capacity than we did back in the day? Even my teenager would fervently disagree with that!
Then what is it that companies have so much more of, that has been accumulating for over half a decade, and that is hidden from balance sheets? Information.
As data formats have evolved from stone to paper to punchcards to tape to disk to and now to flash memory, organizations have amassed evermore information assets (leading up to this era of Big Data) and finding ways to leverage them. Yet the value of information isn’t quantified or reported in any way. Even today’s infocentric companies whose business models revolve around collecting, buying, and selling data (e.g., Facebook, Google, Experian, Vizient, etc.) have balance sheets devoid of their most valuable asset.
Furthermore, a study by intellectual capital research firm Ocean Tomo shows that the portion of corporate market value attributable to intangibles has grown from 17 percent in 1975 to a whopping 80 percent in 2005, and another seven-point shift to 87 percent in 2015.11 Information accumulation has not only increased dramatically in businesses, but the importance of information itself has supplanted traditional assets in generating revenue, and therefore in contributing to market value as well.
What are CEOs to do knowing that information comprises a significant and growing chunk of their corporate value? First, forget what the accountants say, and listen to what the market is saying. Stop just talking about information as such an important asset and start treating it like one. Organizations with a chief data officer in place are well on their way to doing so.
What about measuring information’s value? It’s certainly a best practice we observed in other asset management domains. But many information leaders are hesitant to involve their CFO in measuring the value of their organization’s information assets. They think that since information isn’t a balance sheet asset, CFOs will dismiss the idea. Remember, the CFO’s role includes demonstrating overall corporate wealth and health to the board and investors, and strategic planning based on how to effectively leverage the organization’s available capital.
Organizations that treat idle information as anything less than having potential benefit do themselves a disservice. All information has a probable future economic benefit. IT and business leaders need to keep this in mind when considering strategies and options for acquiring, administering, and applying information. This probability varies based on a number of factors, including, but not limited to, its completeness, accuracy, consistency, timeliness, and business process relevance. Like any asset, its realized value depends upon the organization’s capacity to deploy the information.
Accounting for Information
What is an Asset, Anyway?
When we consider information as the newest class of enterprise asset, we must determine how it stands up to the formal definition of an asset. The common understanding of an asset is that it is merely “something of value.” There’s more to it than that. While there are differing formal definitions of an asset, we see some key commonalities.
- The Merriam-Webster dictionary defines an asset as: “the entire property of a person, association, corporation, or estate applicable or subject to the payment of debts” or “an item of value owned” among other ancillary definitions related to the military and spy craft.12
- Investopedia defines an asset as: “a resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit,” or “a balance sheet item representing what a firm owns.”13
- According to FASB, assets are “probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.”14
- Similarly, per the International Accounting Standards Board (IASB) International Financial Reporting Standards (IFRS) framework, an asset is “a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.”15
However, the lack of mainstream appreciation for the concepts of “future economic benefit” and “control and ownership” has manifested in organizations neglecting to quantify information’s future potential.
Moreover, it seems clear that information meets the formal criteria of an intangible asset as defined by accounting standards. The International Accounting Standards (IAS)16 defines the critical attributes of an intangible asset as:
- Lacking physical substance (and non-monetary),
- Identifiability (capable of being separated and sold, transferred, licensed, rented, or exchanged),
- Control (rights and power to use the asset), and
- Having probable future economic benefit (such as revenue or reduced future costs).
Information clearly meets these criteria, and similar IFRS criteria.171819 Information certainly is salable and generates future economic benefits. There is however the question as to whether information “development expenses” may be determined reliably. We’ll deal with that in chapter 11, but suffice it to say that we can do so just as reliably as other kinds of reported intangibles.
Should You Be Reporting the Value of Your Information Assets on Your Balance Sheet?
If information clearly meets the criteria of an accounting asset, why aren’t we accounting for it? It’s a vexing question that really has not been adequately addressed officially by the accounting profession—other than in one small sweeping statement which appears almost as an afterthought in International Accounting Standard 38 (IAS 38), which after suggesting the criteria for reportable assets (specifically those internally generated) states:
Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognised as intangible assets.20
In this single short sentence, the accounting aristocracy basically says, “Although these valuable things may meet the criteria of an asset, we are not going to allow you to recognize them.”21
There is one small exception. IFRS Standard 3 requires that customer lists acquired as part of a merger or acquisition, under certain circumstances, are separately recognized rather than lumped into goodwill.22 Therefore, it would seem there exists some precedence for recognizing information assets after all.
Is Information a Liability?
Occasionally, I come across someone who suggests that information is both an asset and liability. It’s clear in these circumstances that they are using those terms casually, not in a true accounting sense. In a casual sense, a liability equates to a risk or something that has negative impacts. There’s no doubt information can have dire consequences. Just ask any of the executives at companies whose data has been hacked, especially those in which the data stolen (or more precisely, copied) has been used against them either reputationally or to inhibit business performance outright.
But in a formal accounting and economic sense, a liability is an asset owed to another entity. In this case, information fails the definition of a liability. Although information is increasingly liquid, it rarely if ever is something owed to someone else.
One lesson in all of this discussion of assets and liabilities is that we need to be more careful and considerate of how we use these terms. They have different meanings in different contexts, and all too often people using them casually merely confound matters. Language matters. Business people and information professionals alike must learn to be more mindful of the words and phrases they use to discuss information-related concepts, as argued in chapter 6.
When Will the Accountants Catch Up?
In a response to The Great Depression, a committee chartered by the nascent Securities and Exchange Commission (SEC) was tasked with standardizing financial statements. Until that time, both public and private companies could disclose what they wanted, however they wanted. This lack of consistency was blamed in-part for investor confusion leading to the market crash. Part of these new standards included homogenizing the set of recognized asset classes to be reported.
Information was not one of these asset classes. It wasn’t until some fif-teen years later that the inklings of the Information Age emerged when the accounting firm, Arthur Andersen, computerized the payroll system for a General Electric plant. Only then was the idea hatched that information could be an item separable from its physical manifestation—the paper (e.g., book, magazine, ledger) it was printed upon.
Now, five or six decades since the beginning of the Information Age, the namesake of this age, and the major asset driving today’s economy, is still not considered an accounting asset. Somewhat ironically, while information is at the crux of accounting and has been for millennia, even in today’s information economy it is not something accounted for itself.
However, there is some movement on the issue. Both FASB and IAS recently have issued discussion papers for open comment, and have met on the topic of how to recognize, value, and report internally generated intangibles. Presumably these include information assets as well.2324 But even after laborious discussions, over 15 years after the accounting gentry were called before the U.S. Senate, don’t expect any new significant regulatory changes any time soon. As a stepping stone to GAAP recognition, it seems organizations will be encouraged to include non-GAAP footnotes regarding the valuation of certain intangibles.
One of the key items of contention regards proving the ownership and/or control of certain intangible assets. This is not just an accounting issue—it’s one of serious legal and operational concern to many organizations. Who owns the information you generate or collect? And do you actually control it? These are essential questions we’ll deal with in the next chapter.
Notes
1 “U.S. Senate Committee on Banking, Housing, and Urban Affairs, Subcommittee on Securities, Hearing on Adapting a 1930’s Financial Reporting Model to the 21st Century, Wednesday,” Witness List and Prepared Testimony, 19 July 2000, www.banking.senate.gov/00_07hrg/071900/witness.htm.
2 Ironically, it costs $350 to purchase the full transcript of this hearing on the websites of two icons of today’s digitalized economy, Google and Amazon, while the Senate.gov site only has limited details.
3 “U.S. Senate Committee on Banking, Housing, and Urban Affairs, Subcommittee on Securities, Hearing on Adapting a 1930’s Financial Reporting Model to the 21st Century, Wednesday,” Prepared Testimony of Mr. Steve M. Samek, Partner, Arthur Andersen, 19 July 2000, http://banking.senate.gov/00_07hrg/071900/samek.htm.
4 “U.S. Senate Committee on Banking, Housing, and Urban Affairs, Subcommittee on Securities, Hearing on Adapting a 1930’s Financial Reporting Model to the 21st Century, Wednesday,” Prepared Testimony of Mr. Robert K. Elliott, Chairman, American Institute of Certified Public Accountants, July 19, 2000, www.banking.senate.gov/00_07hrg/071900/elliott.htm.
5 Tom Linsmeier, “FASB, Financial Accounting Standards Board: Tom Lins-meier Looks to the Future as He Leaves the Board,” FASB, Q2 2016, www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176168083404.
6 Tom Linsmeier, interview with author, 13 December 2016.
7 Throughout 2011 and 2012.
8 “Maverick* Research: The Birth of Infonomics, the New Economics of Information,” Douglas Laney, 03 October 2012, www.gartner.com/doc/2186116. (Analysis updated May 2017.)
9 Doug Laney, “To Facebook You’re Worth $80.95,” The Wall Street Journal, 03 May 2012, accessed 09 February 2017, http://blogs.wsj.com/cio/2012/05/03/to-facebook-youre-worth-80-95/.
10 As of Q3 2016, Facebook’s net assets less goodwill was $314 billion. With 1.49 billion active monthly users, the value of each active account is about $211.
11 “Ocean Tomo Releases 2015 Annual Study of Intangible Asset Market Value,” Ocean Tomo Insights Blog, 05 March 2015, www.oceantomo.com/blog/2015/03-05-ocean-tomo-2015-intangible-asset-market-value/.
12 “Asset,” Merriam-Webster, accessed 09 February 2017, www.merriam-webster.com/ C:UsersdlaneyGoogle DriveInfonomicsBookManuscriptMerriam-Webster. http:www.merriam-webster.comdictionaryasset.
13 Investopedia Staff, “Asset,” Investopedia, 01 April 2016, www.investopedia.com/terms/a/asset.asp.
14 “Statement of Financial Accounting, Concepts No. 6, Elements of Financial Statements, a Replacement of FASB Concepts Statement No. 3 (Incorporating an Amendment of FASB Concepts Statement No. 2),” Financial Accounting Standards Board, December 1985, www.fasb.org/resources/ccurl/792/293/CON6.pdf.
15 “The Conceptual Framework for Financial Reporting,” IFRS Foundational Staff, 01 January 2014, www.ifrs.org/IFRSs/Documents/Technical-summaries-2014/Conceptual%20Framework.pdf.
16 “IAS 38—Intangible Assets,” IASPlus, Deloitte, www.iasplus.com/en/standards/ias/ias38.
17 Additionally, information meets each of the IFRS criteria for intangible assets.
18 “Technical Summary, IAS 38 Intangible Assets,” IFRS, 01 January 2014, www.ifrs.org/IFRSs/Documents/Technical-summaries-2014/IAS%2038.pdf.
19 IFRS criteria for intangible assets include: a) an intention to complete and use or sell it, b) an ability to use or sell it, c) it will generate probable future economic benefits and/or there is a market for it, d) an ability to measure reliably the expenditure attributable to it during its development.
20 “Technical Summary, IAS 38 Intangible Assets,” IFRS, 01 January 2014, www.ifrs.org/IFRSs/Documents/Technical-summaries-2014/IAS%2038.pdf.
21 It is generally understood that “similar items in substance” includes information assets.
22 “International Financial Reporting Standard 3, Business Combinations,” IFRS, 18 February 2011, http://ec.europa.eu/internal_market/accounting/docs/consolidated/ifrs3_en.pdf.
23 “Discussion Paper, Initial Accounting for Internally Generated Intangible Assets,” The Office of the Australian Accounting Standards Board, 2008, www.saica.co.za/Portals/0/Trainees/documents/DPInitialAccountingInternallyGeneratedIntangibleAssets.pdf.
24 “FASB Invitation to Comment, Agenda Consultation: Financial Accounting Standards Board,” FASB, 04 August 2016, www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FNewsPage&cid=1176168356245.