Data assets on the balance sheet: when company data may be capitalised

Company data have a market value: for the datasets of companies with 50 to 250 employees, buyers quote US$100,000 to US$1 million.^[1] Yet they almost never appear on the balance sheet. Whether a dataset may be capitalised as an intangible asset depends on whether it was internally generated or acquired, and on the accounting framework. It is often said that German GAAP generally prohibits capitalising internally generated data. That is not accurate: § 248(2) HGB contains an option, and a prohibition only for customer lists and comparable items.

Are company data assets?

Yes, they can be. The German Federal Fiscal Court (BFH) has classified digital data collections as intangible assets, because their economic value lies in the content and not in the storage medium.

Its order of 2 June 2014 (III B 7/14) concerned a digital aerial photo map and an elevation model on CD, DVD and hard disk. The BFH looked at the economic interest, i.e. what the purchase price is paid for. The storage media merely served to transport the data; the value lay in the content.^[2] The same reasoning applies to email archives, ERP or CRM datasets: they are intangible goods.

To be recognised in the commercial balance sheet, a dataset must also be separately realisable and belong to fixed assets. Under § 247(2) HGB, fixed assets are only items intended to serve the business permanently.^[3] Datasets used in operations are usually classified as fixed assets. The fact that they can be licensed to third parties supports their separate realisability.

May internally generated data be capitalised under the HGB?

Yes, with restrictions. There is an option to capitalise internally generated intangible fixed assets, and a prohibition for customer lists and comparable items.

§ 248(2) sentence 1 HGB allows internally generated intangible fixed assets to be recognised as assets on the balance sheet. Sentence 2 expressly excludes internally generated brands, mastheads, publishing rights, customer lists or comparable intangible fixed assets.^[4] A CRM containing the customer base is therefore covered by the prohibition. For other datasets, such as process, ticket or engineering data, it depends on whether they are comparable to a customer list. There is no settled demarcation for this yet.

If capitalised, only the production costs of the development phase may be recognised. Research costs remain expenses, and if research and development cannot be reliably distinguished, capitalisation is excluded (§ 255(2a) HGB).^[5] This is the practical hurdle: emails, bookings and tickets arise as a by-product of day-to-day business. There are then usually no separable production costs for the dataset.

Corporations that capitalise must also observe the distribution block: profits may only be distributed if the freely available reserves remaining afterwards at least equal the capitalised amounts less the related deferred tax liabilities (§ 268(8) HGB).^[6]

What applies in the tax balance sheet?

Internally generated datasets may not be recognised in the tax balance sheet. Intangible fixed assets are only capitalised if they were acquired for consideration.

This is laid down in § 5(2) EStG.^[7] The costs incurred in creating a dataset are therefore immediately deductible business expenses. If a company capitalises under § 248(2) HGB for commercial purposes, the commercial and tax balance sheets diverge, giving rise to deferred tax liabilities.

How narrowly the BFH interprets acquisition for consideration is shown by its judgment of 6 September 2018 (IV R 26/16): a telecommunications company had paid a sales partner compensation for the early termination of an open-ended distribution agreement. According to the BFH, the customer base had already become part of the company's goodwill; the payment did not acquire an intangible asset and was immediately deductible.^[8]

What applies under IFRS?

Under IAS 38, internally generated intangible assets are only recognised from the development phase, and only if the criteria are met. Internally generated customer lists and similar items never.

Like the HGB, IAS 38 distinguishes between research, which is expensed, and development, which is capitalised once certain criteria are met. Unlike under the HGB, this is not an option. Internally generated brands, mastheads, publishing titles, customer lists and similar items are not recognised as intangible assets.^[9]

In a business combination under IFRS 3, the acquirer allocates the purchase price to the identifiable assets acquired and liabilities assumed at their fair values; the remainder is goodwill.^[10] In this purchase price allocation, datasets that were never on the seller's balance sheet can appear as a separate asset.

What applies to purchased datasets?

Anyone who acquires a dataset for consideration capitalises it at acquisition cost, in the commercial and in the tax balance sheet, and amortises it over its useful life.

The option and the prohibition in § 248(2) HGB only concern internally generated items; for tax purposes, acquisition for consideration is precisely the condition for recognition.^[4][7] Whether a buyer capitalises a data licence as an asset or records it as an expense or a prepayment depends on the contract, for example on whether a right of use is acquired for a one-off payment or granted on an ongoing basis.

What does this mean for a sale or an insolvency?

The value of internally generated datasets is usually not on the balance sheet. It only becomes visible on licensing or sale.

Because datasets are usually carried at zero, no book value is derecognised when they are licensed; the proceeds are income. For companies with 50 to 250 employees, the buyer Replay quotes US$100,000 to US$1 million.^[1] These are hidden reserves that only a realisation brings to light.

In an insolvency, the balance sheet plays no role here: the insolvency estate comprises all of the debtor's assets, regardless of whether they are capitalised (§ 35 InsO).^[11] Company data are therefore realisable estate assets even if they do not appear in any financial statements. More in the article Data in German insolvency proceedings. Prices and value drivers are covered in What is company data worth?