【Data Assets】
How Are Data Assets Listed on Financial Statements Accounted For?
2024 annual report disclosures are nearing completion, and unlike previous years, there is a new member on the financial statements—data assets! This began with the Ministry of Finance’s issuance of the “Interim Regulations on Accounting Treatment Related to Enterprise Data Resources” in August 2023 (hereinafter referred to as the “Interim Regulations”), marking the official start of accounting for data assets, with data assets being incorporated into the financial statements as the 2024 annual reports are disclosed.
Currently, data assets are detailed under three items on the balance sheet: inventory, intangible assets, and development expenditures. Many readers of financial reports are unclear about how the figures for the listed data resources are derived and how they correlate with traditional accounting subjects and related report items. This article aims to answer the question: how are data assets listed on financial statements accounted for?
Currently, it is difficult to find information on this topic, especially regarding the accounting treatment of data assets. Most online resources are procedural documents about the incorporation of data assets into financial statements, and without opening the black box of data asset accounting, it is impossible to clearly demonstrate how the figures for data assets on the statements are derived. Fortunately, a recently published book by the Machinery Industry Press, “A Comprehensive Guide to Data Asset Accounting”, provides a systematic overview, with some excerpts as follows.
Accounting recognition is reflected both in the recognition of data assets on the books and in their representation on the statements. The recognition of data assets on the balance sheet indicates that the enterprise has successfully incorporated data assets into its financial statements.
According to the “Interim Regulations”, data assets are present in three areas on the financial statements: inventory, intangible assets, and development expenditures, and must be separately listed under these three report items.Inventory and intangible assets have complex sub-items, yet data assets are reported separately, which highlights the status of data assets on the balance sheet. Although they are not consolidated into a separate reporting item, this is primarily to avoid a significant impact on the existing standards system.
Although the accounting recognition of data assets at the accounting level only includes two categories: data resource inventory and data resource intangible assets, there is no mention of data resource development expenditures or data resource R&D expenditures. However, before the internal development forms data resource intangible assets, the book value of data resources is reflected in the “R&D Expenditures—Capitalized Expenditures” account, which, when combined with the “Intangible Assets” account, is clearly inappropriate to report under the intangible assets item, thus the data assets listed under development expenditures can be seen as a precursor to data resource intangible assets.
Next, we will interpret the data assets listed under the three report items.
1. Data Assets Listed Under Inventory
The data assets included in inventory are a requirement of the “Interim Regulations”. On the statements, this is reflected as the next line under the inventory item: “Of which: Data Resources”, to separately list the book value of data resource inventory.
The phrase “of which” indicates that the financial statements do not split inventory into two parts, nor do they compare the amounts of non-data resource inventory with data resource inventory, but rather supplement the amount of data resource inventory included in inventory without impacting the original statistical caliber of inventory, which is consistent with the spirit of the “Interim Regulations” to avoid impacting the existing standards system.
The only issue here is how to determine the amount of data resource inventory listed on the statements. The data reported is all derived from the books, and “from the books to the statements” is inherently part of the accounting cycle. Regarding the amount reported for inventory, one complication is that enterprises can have many inventory accounts, sometimes exceeding 10 primary accounting accounts, which need to be summarized and reported. Data resource inventory is even more complicated because the statistical caliber is no longer “raw materials” or “finished goods” but rather “raw materials—data assets” and “finished goods—data assets” as secondary detailed accounting accounts. If the accounting information system used by the enterprise is not advanced enough or the granularity of accounting is not detailed enough, it can be quite troublesome to compile. Of course, if the enterprise has reached this point, it indicates that a series of previous steps have been successfully completed, and only the final step remains. Even if it is troublesome, it can be resolved; it is not a technical difficulty, just a matter of additional accounting costs.
According to the analysis of data resource inventory-related accounting treatments in Chapter 6 of “A Comprehensive Guide to Data Asset Accounting”, the common accounting accounts for data resource inventory include: “Raw Materials—Data Assets”, “Production Costs—Data Assets”, “Finished Goods—Data Assets”, “Entrusted Processing Materials—Data Assets”, and “Inventory Write-down Provision—Data Assets”. It may also exist in accounts such as “Material Purchases—Data Assets”, “Material Cost Variance—Data Assets”, “In-transit Materials—Data Assets”, and “Goods Issued—Data Assets”.
It is important to note that “Inventory Write-down Provision—Data Assets” cannot be overlooked, as the amount listed on the statements should not be the book balance or the book net value, but rather the book net amount, i.e., the book value. If “Inventory Write-down Provision—Data Assets” is omitted, considering that data resource inventory generally is not amortized, even if all other inventory data asset detailed accounts are accounted for, it can only represent the book balance or book net value. Only by deducting the amount of the related provision account “Inventory Write-down Provision—Data Assets” can the amount that should be listed on the statements be the book value. Therefore, in daily accounting for “Inventory Write-down Provisions”, it should also be accounted for in detailed accounts, which is an inherent requirement of the “Interim Regulations”. Otherwise, if only the total amount of “Inventory Write-down Provisions” is guaranteed, it can only ensure the reliability of the inventory report item amount. If the write-down provisions related to data resource inventory cannot be separated out, the reliability of the amount for the separately reported data resource inventory item cannot be guaranteed, failing to meet the requirements of the “Interim Regulations” and the relevant requirements of “Enterprise Accounting Standard No. 30—Financial Statement Presentation”.
In addition to the above inventory accounts, other unmentioned inventory accounts can also be checked for any accounting situations that absorb data resource inventory, as each enterprise’s accounting characteristics may differ while still complying with the enterprise accounting standards system. For example, “Contract Fulfillment Costs”, if the amortization period upon initial recognition does not exceed one year or a normal operating cycle, will also be included in the inventory report item when preparing the balance sheet. This is also referenced in Chapter 6 of “A Comprehensive Guide to Data Asset Accounting” regarding the relevant accounting treatment of data resource inventory. The reason it is not included in the separately reported amount for data resource inventory is that the secondary detailed accounts set up for the primary accounting account “Contract Fulfillment Costs” generally correspond to specific contracts. After all, this account exists to aggregate contract costs and is not intended to separate the various expense elements, including data asset costs, from the contract costs. This differs from the setup style of secondary detailed accounting accounts like “Raw Materials”. Not only is it technically difficult to separate out the amount of data resource inventory included, but from the purpose of establishing this account, it is also unnecessary. Not only data asset costs but also other expense elements included in “Contract Fulfillment Costs” have not been separated out as a matter of practice.
2. Data Assets Listed Under Intangible Assets
The data assets included in intangible assets are a requirement of the “Interim Regulations”. On the statements, this is reflected as the next line under the intangible assets item: “Of which: Data Resources”, to separately list the book value of data resource intangible assets. The reporting caliber for data resource intangible assets is consistent with that of data resource inventory, merely supplementing the amount of data resource intangible assets included in the intangible assets report.
Since intangible assets with determined useful lives must be amortized, the book balance, book net value, and book net amount of intangible assets are not equal, and the relationship among the three is:
Book Net Value of Intangible Assets = Book Balance of Intangible Assets – Accumulated Amortization of Intangible Assets
Book Net Amount of Intangible Assets = Book Net Value of Intangible Assets – Impairment Provision for Intangible Assets
Therefore, for the book value of intangible assets, it is necessary to deduct the balances of the “Accumulated Amortization” and “Impairment Provision for Intangible Assets” accounts from the balance of the “Intangible Assets” account.
Consistent with the logic for calculating the reported amount of data resource inventory, it is also necessary to extract the relevant amounts from the “Accumulated Amortization” and “Impairment Provision for Intangible Assets” accounts related to data assets to offset the balance of the “Intangible Assets—Data Assets” secondary detailed accounting account to calculate the reported amount of data resource intangible assets. Therefore, in Chapter 6 of this book, the relevant accounts for data resource intangible assets are detailed down to the secondary level, such as “Accumulated Amortization—Data Assets” and “Impairment Provision for Intangible Assets—Data Assets”, facilitating the subsequent reporting phase’s data extraction.
Overall, the statistical amount of data resource intangible assets is relatively simpler compared to data resource inventory, as the accounting subjects involved are fewer, unlike the extensive family of inventory accounting subjects for data resource inventory, but the relevant principles are consistent.
3. Data Assets Listed Under Development Expenditures
In addition to data resource inventory and data resource intangible assets, data assets may also be included in the “R&D Expenditures—Capitalized Expenditures” account, thus reported under the “Development Expenditures” report item. Generally, there is no mention of data resource development expenditures, as development expenditures are merely a precursor to intangible assets, but from an accounting perspective, the data resources included in development expenditures are still classified as data assets, just like “Raw Materials—Data Assets” inventory that has not reached a saleable state. As long as they are included in asset accounting accounts, they are recognized as data assets by accountants.
At the accounting level, the balance of “R&D Expenditures—Capitalized Expenditures” will ultimately transfer to the balance of “Intangible Assets”. At the reporting level, the amount of the “Development Expenditures” report item will ultimately transfer to the amount of the “Intangible Assets” report item. Therefore, broadly speaking, the amount of data resources listed under development expenditures can be regarded as equivalent to data resource intangible assets, that is, if data assets can be classified as data resource inventory and data resource intangible assets, then the data resource intangible assets here should also be included in the data resources listed under development expenditures.
The data assets included in development expenditures are also a requirement of the “Interim Regulations”. On the statements, this is reflected as the next line under the development expenditures item: “Of which: Data Resources”, to separately list the book value of data assets included in development expenditures, reflecting the amount of expenditures on data resource R&D projects that meet capitalization conditions as of the balance sheet date.
It is important to note that the accounting account corresponding to the “Development Expenditures” report item is the secondary detailed accounting account “R&D Expenditures—Capitalized Expenditures”, and cannot be directly taken from the primary accounting account “R&D Expenditures”, as only the account amount of “R&D Expenditures—Capitalized Expenditures” can later transfer to the “Intangible Assets” account. It is easy to overlook that if an impairment provision for R&D expenditures has been made, then when calculating the amount reported for development expenditures, the balance of the provision account “Impairment Provision for R&D Expenditures” must be deducted to obtain the book value of development expenditures, that is, at the reporting level, the “Impairment Provision for R&D Expenditures” is treated as “Impairment Provision for Development Expenditures”, because only when R&D enters the development phase can there be a discussion of impairment provisions for capitalized R&D expenditure amounts.
Consistent with the treatment principles for separately listed data resource inventory and data resource intangible assets, the “Impairment Provision for R&D Expenditures” account also needs to be accounted for down to the secondary detailed level for data assets; otherwise, it will be difficult to ensure the reliability of the amount of data resources separately listed under development expenditures.
As for the measurement issues of secondary detailed accounts and other data asset accounting-related issues, please refer to “A Comprehensive Guide to Data Asset Accounting”, co-published by the Machinery Industry Press and the Global Data Asset Council.
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This article is excerpted from “A Comprehensive Guide to Data Asset Accounting”, published with authorization from the Machinery Industry Press. Please retain the source when reprinting.
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