Every organization should identify how to represent the costs and benefits of data warehousing, data marts, business intelligence, and analytical initiatives
“Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.”FASB Concept Statement No. 6
An asset is something that will have value in future periods and the data warehouse and analytical applications (DW) certainly fit that definition. Companies capitalize their Enterprise Resource Programs (ERP) without objections from accounting and finance staff. Why not capitalize the data warehouse and the associated business intelligence (BI) and analytical initiatives? A variety of experts has long maintained that the DW is a real asset that has significant value to an organization. Since the DW provides value in future periods, the DW represents an intangible asset that should be capitalized on a company’s balance sheet along with the tangible assets: cash, accounts receivable, inventory, plant and machinery.
Capitalization is an accounting method in which a cost is included in the value of an asset and expensed over the useful life of that asset, rather than being expensed in the period the cost was originally incurred. In finance, capitalization refers to the cost of capital in the form of a corporation’s stock, long-term debt, and retained earnings.
In accounting, the matching principle requires companies to record expenses in the same accounting period in which the related revenue is incurred.
Capitalized assets are not expensed in full against earnings in the current accounting period. A company can make a large purchase but expense it over many years, depending on the type of property, plant, or equipment involved. As the assets are used up over time to generate revenue for the company, a portion of the cost is allocated to each accounting period. This process is known as depreciation or amortization.
Current and Future Accounting Rules
The current financial accounting rules are heavily criticized as not reflecting the true value of IT assets such as those of the ERPs and data warehouses. Under the current rules of the Financial Accounting Standards Board, article number 141 and 142, a data warehouse, as an intangible asset could be capitalized at its fair value only when a company with an internally built data warehouse is acquired by another corporation. Thus, the CIO would be rewarded for managing a high value asset only when the data warehouse has been purchased.
Under current statutes, an internally created data warehouse would be shown as an intangible asset only at its capitalized historical cost. This historical cost probably does not capture the fair value of the completed project nor does it capture all the costs associated with the data warehouse. The current accounting system in the United States allows one company to show a high value on the data warehouse that was purchased and a second company to have a lower value on a data warehouse that was developed internally. Thus, the company is not able to reflect the fair value created by the successful implementation of an internally developed data warehouse.
The Financial Accounting Standards Board (FASB) has been working on a new standard to address the comparability issue between companies that have purchased data warehouses with companies that have built a data warehouse internally. The first step is a proposal to disclose in the footnotes of the financial statements the quantitative value of the substantially built intangibles in a business. The eventual goal is to book the intangible assets at their fair value, to allow the financial statements of different entities to be comparable and for companies to reflect the asset value of a data warehouse or other capital technology expense accurately.
In addition, the FASB is integrating the US accounting rules to the International Accounting Standards (IAS). The IAS standard No 39 requires the company to book the data warehouse at the fair value of the assets, so the data warehouse must be carried on the company’s books. In most situations, this rewards management for successful efforts in creating and maintaining a data warehouse or long-term analytical environment.
What Did The DW Cost?
The expenses for any DW will vary widely. The cost will be dependent on the size of the database, the number of users, the complexity and quality of the source data, the software tools employed the need for consultants and contractors, the capabilities of the team, and the quality of the system’s support and maintenance.
It is necessary to understand how costs will be accounted. Some costs will be expensed immediately, and others amortized over the expected life of the system. Costs will appear in different accounts and all these factors will become important when the actual total costs are tabulated and the DW is capitalized.
The accounting approach to classifying the costs as current expenses or capitalized as assets is a three characteristic definition. If the associated costs fail any of the characteristics, then the cost should be expensed under current accounting rules. The first characteristic is future benefits. The future benefits are defined as the capacity, singly or in combination with other assets, to contribute directly or indirectly to future net cash inflows. The second characteristic is whether the enterprise has control. Control is defined as the ability to both derive future benefits and to deny that ability to others. The third characteristic is that the cost accumulation is based on a past event or transaction that gives rise to the future benefit.
Hardware – The data warehouse requires CPUs, disks, networks, and workstations. Some vendors bundle the hardware along with the database management system (DBMS). DW Appliances bundle the hardware, operating system, DBMS, and sometimes include related software for business intelligence / analytics. If existing desktops and laptops are adequate to support end users, no additional costs should be charged, but if upgrades or new machines are required, the additional costs should be assigned and depreciated over the expected life of the system. Three years is used as the expected life, even though the system should last longer. The calculation is the cost to purchase or upgrade times the number of anticipated users. The cost of the hardware should always be capitalized.
Software – The data warehouse always needs a database management system (DBMS). Most installations employ end user access and analysis tools as necessary applications. Many installations choose an extract, transform, and load (ETL) tool rather than writing their own ETL code. The ETL tools could include additional costs for each different type of source file or target database. These tools are often priced based on the operating system and size of the machine. Additional tools are often needed for data cleansing and performance monitoring. Initial software costs should always be capitalized.
Internal Staff – The fully burdened rate (salary plus taxes, benefits, support costs, etc.) for the IT staff associated with the project should be included in the project cost. Business personnel are usually not included in calculations for personnel costs, but any help desk staff in the business organization should be part of this calculation. Include the fully burdened costs of the internal staff involved and capitalize these costs.
Consultants and Contractors – Consultants are engaged to help determine requirements, help plan the project, create the scope agreement, cost justify the project, help select the software, and establish the initial and long-term architectures. Typically, consultants are more expensive than contractors, but usually do not remain on projects as long. Contractors are brought in to supplement technical skills, specifically for software such as the DBMS and access applications. The cost for contractors will depend on how deficient the organization is in the required skills, how fast the organization needs the system implemented, and how long it will take to transfer skills once the implementation is complete. The costs of the consultants and contractors for the initial implementation and for any major enhancements (not maintenance) should be capitalized.
Training – A case could be made for the value of training, the intellectual capital acquired and shared, the knowledge and the increased capability and asset value of those who were trained. Nevertheless, because of employee turnover and other factors, accountants are reticent to claim the value of training as an asset. Training costs should be expensed as they are incurred and should not be capitalized.
Training fails the control test for being a capitalized asset. There are past expenditures for training and probable future benefits, but without enforceable work contracts there is no entity control of specifically trained labor.
Operations and System Administration – This is a collection of roles and costs including monitoring the system performance, executing backups, administering security, administering the metadata repository, dealing with the vendors, and assigning charge-backs. The initial costs for operations and systems administration should be capitalized. The continuing costs of operations and system administration should not be capitalized unless there are major enhancements that represent a future benefit.
Capitalizing Data Quality Improvements – Every data warehouse implementation demands improvements in the quality of the data. The source files contain data elements that are outside the valid values, data that is missing, incorrect data types, data that violates business rules, non-unique values for primary keys, and incorrect data types. Most of this data must be cleansed before it is loaded into the data warehouse.
Software is available to profile the data which would provide information on most aspects of the quality of the data and some software is specific to cleaning up names and addresses. Commonly found data could be de-duplicated, names and addresses would be corrected, deceased customers would be deleted, and transactions would have correct activity codes. This is an expensive process but the result is data that is much more valuable to the organization. The value comes from fewer wasted mailings, fewer customer interactions that cannot result in accurate transactions, more customized and more appropriate marketing, and a much better image of the organization.
The improvements in data quality should result in more sales / transactions, more cross-selling, greater profitability per customer interaction, and lower mailing and printing costs. For the DW, the improvements in data quality will mean less checking and rechecking of results. The improved data quality will allow the organization’s strategic and tactical decisions to be supported by better information and those making the decisions will be more likely to take action on results they trust. The value of the improved common / master data will be realized in future periods. Therefore, these items should be considered as an asset and the following costs should be capitalized.
- Data quality software purchase
- Consulting services
- Internal personnel costs
Capitalizing Metadata – Capturing and maintaining metadata is an expensive effort but it is generally recognized as a critical success factor for a data warehouse. Business metadata should include data definitions, domains (valid values), business rules, uniqueness, data source, security, timeliness, and the owner of the data.
Some technical metadata can be generated automatically from the modeling tools, the ETL tools, and the BI tools, but designing how the metadata will be captured and maintained is not simple. It will require smart internal people or perhaps consulting help. In addition, an organization may choose to purchase metadata products.
Metadata will be valuable to analysts, developers and BI / analytics users since the metadata will reduce their efforts to gather the data and research its actual meaning. The metadata from master data / reference data capture codes indicating a wealth of information. Metadata will have value in future periods if it is properly maintained, and should be considered an asset. The following costs should be capitalized:
- Metadata software purchase
- Internal personnel costs
Data Modeling – The effort to develop the data models to support the DW should be capitalized but not the continuing maintenance of the models.
Performance and Availability – The ability to support for the Service Level Agreements for performance and availability will require new processes and procedures, possibly new monitoring software, possibly more hardware, and possibly some consulting and contracting effort. The costs for this area should be capitalized but not the continuing maintenance.
What Costs Can Be Capitalized And Disclosed?
Cost accumulations that have probable future benefit, controlled by the enterprise, and are based on a past transaction or event can be capitalized under the current accounting rules.
What should be disclosed in the footnotes to the financial statements about the intangible asset? Possible qualitative and quantitative disclosures about unrecognized intangibles are:
- Major classes of intangibles assets and their characteristics
- Expenditures to develop and maintain
- Values of these assets
- Significant events that change the anticipated future benefits arising from intangible assets
Is The Value Of The DW Greater Than Its Cost?
The real value (the accountants may call it fair value) of the database can be significantly greater than the costs. The proposals for fair value measurements create a means to value an asset or liability fairly for accounting purposes.
If observable (quoted) market prices for identical or similar assets or liabilities are not available, the estimate of fair value should be determined based on the results of multiple other valuation techniques. Valuation techniques consistent with a market approach (for example, multiples based on prices from market transactions involving reasonably comparable items), an income approach (for example, a present value technique or option-pricing model), and, if applicable, a cost approach (current replacement or reproduction cost, adjusted to reflect the current condition of an asset) should be used whenever information necessary to apply those techniques is available.
For a data warehouse, the market approach would use the purchase price of other acquired data warehouses. The income approach would use present value of an estimated cash stream attributed to the data warehouse. The cost approach would use an estimated recreation cost.
The objective of fair value measurement for accounting purposes is to estimate the single agreed-upon exchange price between willing parties in a transaction other than a forced liquidation or distress sale. The willing parties are all hypothetical marketplace participants (buyers and sellers) that have utility for the item being measured and that are willing and able to transact, having the legal and financial ability to do so. For a company’s data warehouse, potential participants would be companies that are knowledgeable and not affiliated with the company owning the data warehouse, with financial means and qualifications to buy the property and having full knowledge of the data warehouse. An outside and disinterested party, possibly a data warehouse consultant, could provide an analysis of what the data warehouse is worth.
Amortizing the DW
The data warehouse is amortized over the remaining useful life of the asset. Amortization is defined as the reduction in a capital account to reflect the decrease in value of an asset. The offset of this account is an expense item on the income statement. The life of the data warehouse is not an item of certainty. Like many uncertain lives of assets such as oil deposits and the life of a utility plant, the life of a data warehouse could be determined using actuarial methods. The inputs into the calculation will be the lifecycle of the products, customers, vendors, and industry. However, it is more likely that an organization would use an amortization schedule that would conform to the norms they use for application package or ERP amortization.
Capitalizing the Cost of Expanding and Maintaining the DW
Expansion could include adding new source databases, adding additional data warehouse subject areas, new applications, adding new departments of users, or expanding toward an enterprise data warehouse. The costs of expanding the data warehouse should be evaluated under the same capitalization tests as the original implementation. If the expansion does provide future benefits – and the example above surely would, then the costs should be capitalized.
Maintenance would include running the ETL processes, monitoring the quality of the data and ongoing data cleansing, monitoring and tuning the databases, supporting the security requirements, adding and deleting users, user support, installing new releases of software, and addressing software bugs and installing fixes. If the maintenance just supports the original implementation and adds no new value, these costs cannot be capitalized.
Selling the Concept of Fair Valuation to an Organization
Why should senior management be interested in fairly valuing the DW or in capitalizing it as an asset? As mentioned above, the current accounting rules actually require this capitalization but in addition, by capitalizing the DW assets, corporations are much more likely to commit the resources and the management attention that are so critical to the success of a data warehouse.
For corporations that want to minimize their expenses in the current period, capitalizing allows them to amortize the value of the DW over future periods and not have to absorb all the expenses right away. By capitalizing and amortizing the cost of the DW, organizations are forced to capture the true costs of each major DW project and are able to compare the estimated with the actual costs. This leads to a more exact and repeatable method of DW cost estimation with fewer valuable projects that are not cost justified. The idea of capitalizing the DW should appeal to the CIO who wants to be able to get the budget needed for the DW projects and infrastructure, to the CFO who wants to represent the corporation’s expenses fairly, profits, and assets, and to the CEO who wants the company’s stock price to include value that could otherwise be underestimated.
All major Information Technology (IT) initiatives, especially data warehouses, business intelligence and analytics initiatives, should be examined for their suitability against capitalization in accounting for costs and benefits. The future value and beneficial results should not be overlooked or hidden.
- Financial Accounting Standards Board, Concept No. 6
- Financial Accounting Standards No. 141 and 142
- Exposure Draft No. 1201-100, June 23, 2004 for Fair Value Measurements
- Goodwill, Fair Value and Impairment Statement