Capitalizing the Data Warehouse

Information Management Magazine, July 2005

Sid Adelman, Suzan Dennis

"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 (if it is any good) certainly fits into that definition. Companies capitalize their enterprise resource planning (ERP) systems and the guys with the green eyeshades don't object. Why not do the same for the data warehouse? A number of us have long maintained that the data warehouse (DW) is a real asset that has significant value to an organization -- some of us even believe that the DW will make the difference between a company living and dying. Because the DW provides value in future periods, it represents an intangible asset that should be capitalized on a company's balance sheet along with the tangible assets of cash, accounts receivable, inventory plant and machinery.

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 ERP systems and data warehouses. Under the current rules of the Financial Accounting Standards 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.

Today, a company with 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 internally developed. 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) is working on a new standard to address the comparability issue between companies that have purchased data warehouses and 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 up 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, to address our interests, for companies to accurately reflect the asset value of a data warehouse.

The FASB is also integrating the U.S. accounting rules to the International Accounting Standards (IAS). More than 90 countries have moved to the IAS standards in the past year, including all of Europe. The IAS standard No. 39 requires the company to currently book the data warehouse at the fair value of the assets, and now 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.

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 how well the system is supported and maintained.

It's necessary to understand how costs will be accounted for. 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: For the data warehouse, you will need CPUs, disks, networks and workstations. Some vendors, such as Teradata, usually bundle the hardware along with the relational database management system (RDBMS), and the DW appliances bundle the hardware, operating system and RDBMS. If existing desktops and laptops are adequate to support end users, no additional costs should be charged; however, 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 often used as the expected life, even though the system will probably 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 an RDBMS. Most installations employ end-user access and analysis tools such as BusinessObjects, Cognos and MicroStrategy. Many installations choose an extract, transform and load (ETL) tool such as Informatica or DataStage rather than writing their own ETL code. Add-ons with 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.

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