Capitalization of Digital Assets
Over there years there has been some discussion about valuing digital assets and registering them on the balance sheet like physical assets. Michael Moon discussed this as a sort of holy grail for DAM a number of years back. He posits that the weakest purchase motivator for systems is cost reduction and the strongest is an increase to the balance sheet with anything generating revenues a close second.
I read a blog of Jeremy Wilker's on hidden costs of DAM and noticed a comment posted by Kristin Maija Peterson where she asked the question "What would it do to an organization’s balance sheet if their digital assets were insured by a third party? Would it increase the value of their digital assets, thereby increasing the value of the organization?"
This is a very interesting consideration for anyone who creates, sells or uses DAM. Certainly these digital assets have value. They have a fully burdened cost. They usually have some internal value whether past, current and future use. They potentially have a market value. Even from a common sense perspective, if you have decided to keep it, it must have some value (consideration of hoarding aside).
I recall that there were consideration to make allowances for this to GAAP that would easily allow companies rocognize digital assets on the balance sheet. In 2003, CIOinsight interviewed Michael Moon who had this to say:
Needless to say, a system would have to follow some accepted guidelines for tracking a digital asset to be able to capitalize it on the balance sheet. This is where DAM systems would shine but I haven't really herard a lot lately about companies valuing their assets to enrich their balance sheet. I'm sure there could be concerns about a company like say, CBS or Time-Warner, suddenly appreciating in value by several billion because of a recalculation on digital file value. In many cases this would be entirely valid. For example, if LucasFilm had the Star Wars franchise, when they released the more recent trilogy of movies, every asset associated with the previous three would undoubtedly increase in value. However, if shareholders didn't believe this value was real, they would start selling the stock which would actually drive down the market value of the company.
I'm getting into areas too complicated for me to speak cogently on but I am still interested in the valuation and capitalization of digital assets. After all this discussion, there is much I still don't know:
I read a blog of Jeremy Wilker's on hidden costs of DAM and noticed a comment posted by Kristin Maija Peterson where she asked the question "What would it do to an organization’s balance sheet if their digital assets were insured by a third party? Would it increase the value of their digital assets, thereby increasing the value of the organization?"
This is a very interesting consideration for anyone who creates, sells or uses DAM. Certainly these digital assets have value. They have a fully burdened cost. They usually have some internal value whether past, current and future use. They potentially have a market value. Even from a common sense perspective, if you have decided to keep it, it must have some value (consideration of hoarding aside).
I recall that there were consideration to make allowances for this to GAAP that would easily allow companies rocognize digital assets on the balance sheet. In 2003, CIOinsight interviewed Michael Moon who had this to say:
- "Any digital object that follows generally accepted accounting practice for asset recognition. So if you have any kind of digital object that you can show that you have reused for a period of greater than 18 months; have captured the development expenses associated with that particular object; and can directly link the reuse of that object to a discrete sale for a revenue event or a discrete cost savings; and have taken prudent measures to protect this asset, then generally accepted accounting practices will support you recognizing that as a financial asset on the balance sheet."
Needless to say, a system would have to follow some accepted guidelines for tracking a digital asset to be able to capitalize it on the balance sheet. This is where DAM systems would shine but I haven't really herard a lot lately about companies valuing their assets to enrich their balance sheet. I'm sure there could be concerns about a company like say, CBS or Time-Warner, suddenly appreciating in value by several billion because of a recalculation on digital file value. In many cases this would be entirely valid. For example, if LucasFilm had the Star Wars franchise, when they released the more recent trilogy of movies, every asset associated with the previous three would undoubtedly increase in value. However, if shareholders didn't believe this value was real, they would start selling the stock which would actually drive down the market value of the company.
I'm getting into areas too complicated for me to speak cogently on but I am still interested in the valuation and capitalization of digital assets. After all this discussion, there is much I still don't know:
- Are companies doing it and to what degree i.e. just high quality images or are they valuing PowerPoint docs at any significant value?
- What are the guidelines for valuation?
- For companies that have done this, what has been teh market reaction to increasing asset value (you would think it would be positive but there is an element of trust here)?
- Are most current DAM offerings sufficiently tracking assets to allow for easy valuation?
posted by Jim Jezioranski at
5:21 PM
1 Comments:
As far as I know, this article had never been read until yesterday when I received an e-mail from David Harris on it. I won't post his e-mail here but it did spur me to think more on it and respond to some of his thoughts which I will post here:
Very interesting to hear from David so long after the posting. I too found this subject very interesting and like him found that it seemed to have very little traction despite the massive swing to digital consumption by both business and consumers.
First off, I am a technologist, not an MBA or accountant so some of the information below is actually assumptions when related to accounting practices.
I think valuation is the providence of accountants and the like as far as asset value is concerned. The existing metrics for consumption are in place - price, both of product and of company stock. This likely explains why investors are in a bit of a conundrum as to stock valuations. P/E ratio has historically been the most accurate line drawn in the sand but most advisers have indicated this is no longer a valid metric. I think this is precisely because they have not been able to come up with a valuation of digital assets that could correspond to the valuations of inventory, pipeline and capital equipment which provide valuations indicating the availability of sales for more traditional business.
Digital assets are reused at a rapid rate providing untold value based on the medium in which they are used but can still be viewed as an asset or simply a cost saving. Their reuse is rampant in advertising which is classified as cost of sales from an accounting point of view.
Regarding you examples for possible valuation, I think you need to take sales out of the valuation equation since it is largely dependent on market demand, marketing and advertising, not raw materials. Digital assets are essentially raw materials or inventory in the traditional business sense so their value would be dependent on a number of other factors such as current market value of comparable items. Having a large inventory of Rubiks cubes today is not worth what it was 6 months after it hit the market. Similarly, having a stockpile of copper could be an appreciating asset or a depreciating one depending on the prevailing price of copper.
The market demand for a movie today, does not necessarily appreciate the value of the digital assets which went into it or even the final product itself. The value would likely remain on the cost side. An expensive animation would really have its main value tied to its potential for reuse. If it couldn't be reused, its value would largely be fully vested. If it could be sold to video game makers and used in sequels, its value might be significant, depending on how easy it was to recreate.
This has been the case since DAM systems were new. Production Managers back then were best served weighing the costs of storing an image versus the cost of reshooting it. An expensive shot like a fashion shoot would be worth keeping but a small product shot might not. This is all moot with the current cost of storage but these are the types of decision trees in digital asset valuation.
Each industry would have its own factors. I'm not in the movie industry so I can't speak to the relative costs of set scenes versus on location scenes or even actor contracts versus the cost on animations. I would guess that kids shows like Paw Patrol would have the greatest chance for re-use because they bare entirely animated and the players in the animation could likely be re-used for years until kids moved on to something else.
By
Jim Jezioranski, at 6:02 PM
Post a Comment
<< Home