Should Data Appear on Corporate Balance Sheets? asked the title of a recent Fortune article.

It’s written by Shivaram Rajgopal. Here are some extracts:

• We have known for quite a while now that corporate data can be very valuable. One of the big barriers to mass corporate adoption of AI is the absence of scrubbed and structured data in companies. Many firms continue to rely on legacy systems. I know of one multi-billion-dollar company that has a mind-boggling 16 identifiers for the same customer. Technical debt related to under-investment in data has become a major obstacle to digitization and AI adoption. Consultants, I know, pitch the promise of glitzy AI but get hired to do the mundane but very important job of cleansing the data to become AI ready.
• One potential solution to this under-investment problem may be to allow firms to capitalize the cost of gathering, scrubbing and organizing the data on their balance sheets as assets. By no means is this a silver bullet as investment will continue to depend on the CEO’s awareness of the value of data, her other priorities and alternative uses of cash. But the move might help, on the margin. CEOs still care about earnings as a scorecard of their performance and capitalizing internal costs of acquiring data may increase investments in tracking and using data to learn even more about the firm’s operations and financing opportunities.

I’m not sure that even constitutes a rubber bullet, given that the “what gets measured gets managed” cliché ran out of steam a long time ago. In that regard, the article reports that “In 2023, China took the lead in allowing firms to recognize data as assets – either as intangible assets or inventories, provided (1) data resources are identifiable, (2) the economic benefits of data resources are highly probable and attributable to the firm, and (3) the costs of generating or acquiring data resources can be measured reliably.” So how has that worked?

• Hai Lu, chaired accounting professor at University of Toronto and Peking University, along with his co-authors, reports that the experiment has not worked all that well. Barely 2% of listed Chinese firms have capitalized data on their balance sheets. The primary concerns related to valuation based on cost, which may be over conservative relative to fair value, and property rights issues related to who owns the data (customer or company). On top of that, auditors will object to any rule that makes their verification task harder, regardless of how motivated the investor might be to access that information.
• My take is a bit more optimistic. Both concerns look fixable. How about asking firms to recognize costs but report fair value in footnotes (like SFAS 107 and 157 for financial assets)? Property rights issues are tricky but continued legislative activity will hopefully resolve questions about data ownership.
• My worry is that the FASB has not even resolved R&D capitalization after decades of investor demand for more clarity. Data seems like a bridge too far for our glacially slow rule makers. With the increased focus on crypto and AI, perhaps the new SEC, under President Trump, might consider pushing for rules on when and how to capitalize data on balance sheets.
• On the margin, such a move might accelerate firms’ investment in systems needed to capture the costs and benefits of data in their companies and hence in the eventual faster adoption of AI. If the rule makers don’t act, investors will continue taking wild shots at trying to guess the reliance on data as a new factor of production in companies. Regulators will compound their puzzling refusal to acknowledge that firms increasingly rely on an array of intangible assets such as data, as opposed to brick and mortar, to generate shareholder value.

The notion that the do-nothing Trump SEC might possibly start a push for new accounting rules seems wildly idealistic to me (there’s a better chance of them doing away with accounting altogether). That aside, this is merely the latest iteration of the seemingly endless conversation about the failure of current accounting rules to represent various sources of value. The IASB’s current project on the topic is exploring two “initial streams”:

• assessing user needs for information about recognised and unrecognised intangible assets and expenditure associated with them in the financial statements; and
• considering whether to update the definition of an intangible asset, associated guidance and some aspects of the recognition criteria, by initially using, as test cases, application issues related to newer types of intangible assets and new ways of using them; and then considering the effects of any potential amendments on the broader population of intangible assets.

But as the IASB hasn’t even decided on its project direction yet, any revolution on this front remains a long way away. Even if that happens though, it’s unrealistic to think that the gap between corporate book values and market capitalizations will be significantly narrowed by such a project, or at least, not until it embraces a far greater use of fair values, measurement uncertainty and volatility than anyone has an appetite for…

The opinions expressed are solely those of the author.