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The Undisclosed Value of Information

 10 min read / 

Today tech companies are dominating the stock markets. Their shares are the most valuable and have overtaken the market capitalisation of “industrial titans” such as GE and Ford. These companies constitute such an elite group, with analysts using the acronym FAANG (namely, Facebook, Apple, Amazon, Netflix and Google/Alphabet) to refer to them. However, FAANG companies are just a subgroup of an industry that includes other heavyweights, such as Twitter, Snap, eBay, Alibaba, but also VISA, MasterCard and Bloomberg (the only non-public firm).

As in every industry, investors do not value all the companies at the same level.

Source: Bloomberg

The graph above shows the trend of the stock price (expressed in dollars) of Facebook, Twitter, Snap and LinkedIn in the period from January 2013 to December 2017 (however, LinkedIn was delisted in December 2016, while Twitter and Snap went public in November 2013 and March 2017, respectively). Even if the main product of all these companies is a social network, their market values are different. In particular, both Facebook and LinkedIn (before its delisting) were able to overcome the threshold of $150 per share, while Twitter and Snap traded below $50.

However, if these companies have the same kind of business, what can justify such a different market valuation?

Information as a Value Driver

Excluding Apple and despite their different characteristics – for example, Facebook is a social network, while Alphabet is a conglomerate – all the above-mentioned entities are (or have started) as platforms providing users with a service. At the same time, they collect data from users to provide additional services (advertising, market insights, recommendations etc.) to other customers and, quite often, the collection of data and the subsequent production of information is their main source of revenues.

Indeed in its 10-K for the Fiscal Year 2017, eBay reports that:

“Leveraging the foundation of structured data – our initiative to better understand, organize and leverage inventory on eBay – we are delivering more personalised, discovery-based user experiences and making it easier for customers to find inventory both on and off eBay.”

In this respect, the different market valuations of LinkedIn and Facebook shares compared to Twitter and Snap ones can be linked to the poor usage of data collected from users. In addition, this assumption seems to be corroborated by the boost in revenues – and resulting rise in shares price – that characterised Q4 results of Twitter and Snap. In fact, both companies have enhanced their earnings from advertising services thanks to the improvements made in the analysis of users’ information, and then in matching advertisers with the proper audience.

Therefore, information is not just a set of facts provided or learned about something or someone; rather it is a resource that companies can use for their business. Consequently, an ineffective use of information collected from users can make these companies unappealing to markets, since they would not generate substantial revenues.

Is Information an Asset?

In their paper, Moody and Walsh state:

“Information provides the capability to deliver services, make better decisions, improve performance, achieve competitive advantage and can also be sold as a product in its own right.”

This statement recalls the definition of an intangible asset provided by Accounting Standard IAS 38:

“An asset is a resource: (a) controlled by an entity as a result of past events; and (b) from which future economic benefits are expected to flow to the entity.”

Hence, can information be considered an asset? The answer is yes. Indeed, an asset:

  1. Has service potential or future economic benefits: something is only an asset from an accounting viewpoint if it is expected to provide future services or economic benefits. Those benefits may arise from either the use or sale of the assets. Clearly, information satisfies this requirement, because it provides the capability to deliver services and to make effective decisions.
  2. Is controlled by the organisation: “control” in this sense means the organisation is entitled to benefit from the asset and to deny or regulate the access of others to that benefit. Information also correctly satisfies this requirement if the organisation, on a stand-alone basis, has access to it, unless it sells or shares it to another party.
  3. Is the result of past transactions: this means that control over the asset has already been obtained as a result of past transactions such as purchases, internal development or discovery. Similarly, also information satisfies this requirement. Information is usually collected as the by-product of transactions which have occurred (internal development) or may be the result of a purchase (e.g. a proprietary mailing database) or discovery (e.g. through analysis of data).

Given the aforementioned definition, why has information not been accounted for as an asset yet? Three main reasons can be considered.

First, there is apparently no need for recording information as an asset. According to some literature, the earnings related to this asset are already accounted for on the company’s income statement. Additionally, many experts argue that a company’s stock price reflects the market’s appraisal of those assets. However, these circumstances would imply that stakeholders (e.g. executives or investors) would not be aware whether the data held by a company are actually generating revenues or are completely fruitless since no clue about the worth of the data will be disclosed.

For example, Amazon YE17 expenses for Marketing are about $10bln. Among these expenses, some are related to the targeting of online advertising. It means that every year Amazon spends money entering customer information and keeping it up to date, but these costs are hidden in the salary budgets of marketing departments. Therefore, the company would account as an expense what is actually the main source of its revenues.

Second, it can be argued that information is an internally generated asset and therefore not recognisable on financial reporting according to current International Financial Reporting Standards (i.e. IFRS). Nevertheless, the process that actually generates information contradicts this assumption. Indeed, the information production process can be assimilated to one of the manufacturing products; in fact:

  • Data collected from users is the raw material
  • Software and hardware are the plant and equipment used for elaborating data
  • Information is the end product that is delivered to the customer.

Considering the process above, it seems clear that the composition of both the cost and value of an information system resides in the information stored rather than the hardware and software used to store it.

Finally, the intrinsic characteristics of information make it different from all the other kinds of (intangible) assets and, perhaps, more difficult to measure. Indeed:

  • Information is infinitely shareable: it can be given away and retained at the same time. Sharing of information increases its value. Replicated data leads to no additional value.
  • The value increases with use: information is valuable only when people use it.
  • Information is perishable: the value of information tends to depreciate over time. However, the speed of depreciation depends on the type of information.
  • The value increases with accuracy: the more accurate information is, the more it can be used (and therefore the more valuable it is).
  • Combination of information increases the overall value: information becomes more valuable when it can be compared and combined with other information.
  • More is not necessarily better: an overabundance of information can lead to several issues related to information management.
  • Information is unlimited: resources usually deplete while using them. Information is self-generating. The more you use it, the more you have.

Despite the complexity, an attempt to define a measurement methodology can be made.

Measuring the Value of Information

The first step is to identify the relevant asset class for information. It is quite intuitive that information is an intangible asset with an indefinite useful life since there is no foreseeable limit to the period over which it is expected to generate net cash inflows for the company. At the same time, information is a perishable asset. As data ages, it loses its relevance and its value. For example, once a customer has changed his/her address, the old address may be of little or no importance. On the other hand, historic product sales figures may be relevant to help spot trends and patterns. Therefore companies would have to figure out the future worth of data and track and report any changes in its value.

Moreover, there is actually no consensus on how to measure data’s value. International standards state that an intangible asset shall be measured initially at the cost required for purchasing or building that asset. In the circumstance of information, this would imply for a company to consider the hours spent on collecting, refining, and enriching data, as well as the personnel recruiting costs, storage and computing costs, facility costs, and any other cost factors that go into data asset development. Nevertheless, this approach would lead to undesirable results. For example, it would incentivise the creation of more and more information because all the costs would be capitalised, consequently increasing the asset side of the balance sheet. However, as mentioned above, replicated data leads to no additional value and quantity does not prevail over quality.

Therefore, some adjustments to the cost measurement shall be made in order to avoid any misrepresentation. In particular:

  • The collection cost should represent the baseline for measurement of value for operational data. This should be standardised by using a standard data entry cost for each data item. The value will always be the same regardless of whether a business area is more efficient in capturing this information.
  • Management information should be valued based on the cost of the processes used to extract the data from operational systems.
  • In order to avoid ‘double counting’, redundant data should be considered to have zero value. Unused data should be considered to have zero value too.
  • When information is used for the first time, it will be valued at cost of collection. Each subsequent use will add to this value.
  • The value should be discounted by its accuracy relative to what is considered to be acceptable

To make an example of this approach, if a client asks VISA to provide market insights on the spending behaviour of millennials, any information regarding the spending habits of another market segment will be worthless. Hence, using these modifications to the historical cost method will help to highlight which information is most valuable (most highly used) and has the best return on investment (cost compared to value). Indeed, generating information that is not used will have a cost but no value.

Afterwards, any subsequent assessment of information value can be executed by using current valuation models (e.g. the Multi-Period Excess Earnings Method or the Incremental Cash Flow Method).

Conclusion

In a period in which Big Data has been turned into a fundamental resource in several fields (e.g. management, security, healthcare etc.) and as more companies traffic in information and use big-data analytic tools to find ways to generate revenue, it is important for companies to evaluate the patrimony of information they held and disclose that value to stakeholders. Indeed, for a company it is difficult to manage what is not measured; at the same time, accounting for information would provide stakeholders with a better idea of how companies are investing in growth.

As a matter of fact, information has all the elements for being considered, and then accounted, as an asset. Nevertheless, that would not be an immediate process, but some changes would be required both in the methodology currently applied for asset measurement as well as in companies’ internal control and reporting systems in order to comply with the peculiar features of information.

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