Grant Thornton Hong Kong’s “Unlocking the Value of Data Asset: Challenges and Opportunities” Report (the “Report”) reveals that China’s implementation of new accounting rules for corporate data resources sets the stage for data asset financing and trading, thereby unlocking the value of data asset and opening up new funding opportunities for enterprises. While recognising data assets on balance sheet could enrich corporate assets and boost enterprise valuations, corporates face challenges relating to the valuation of data assets and protection of personal data and sensitive information if those assets are pledged or traded.

Starting from 1 January 2024, under the Interim Provisions on Accounting Treatment of Enterprise Data Resources released by the Ministry of Finance, corporate data could be classified as intangible assets when meeting relevant accounting standards, while data resources held for sale in business activities could be recognised as inventories.

The new accounting rules are part of China’s attempt to build a vast market for data, dubbed the “new oil of the digital economy”. Data is also classified as a “new production factor”, which is in the same category as land, capital and human labour. Through the utilisation of data asset, businesses are empowered to forecast customer behaviour, devise effective business strategies, streamline operations management and generate revenues.

Wiley Pun, advisory partner at Grant Thornton Hong Kong, said “We believe the new accounting regulations will allow the corporates to unlock the intrinsic value of their data asset, thus help enhance profitability and improve health of financial position. Data asset-intensive enterprises such as Internet, fintech and telecommunications companies are expected to benefit the most from the new accounting regulations.”

Mr. Pun added, “However, value creation and financing opportunities are accompanied by challenges in the aspects of data asset accounting, valuation and management. There is ambiguity in data ownership. For example, whether personal privacy data in a membership system is controlled by business entities. It is difficult to define and measure the value of data if they are not already generating economic benefits. Unstable factors such as data timeliness, product technology advancements and suitability of data also make it difficult to estimate the useful life of data assets. Given the lack of active data asset market and lack of homogeneity across data asset at present, it is difficult to find comparable data asset for valuation. In addition, ethical and privacy concerns arise with the data collection, analysis and usage such as excessive personal data collection beyond lawful purpose.”

Grant Thornton notes that the new accounting regulations will incentivise Chinese enterprises to allocate more resources towards accelerating data assetisation and monetisation. The Report finds that data asset financing has been gaining momentum in China. In June 2023, Guiyang Rural Commercial Bank disbursed the first financing loan based on data asset in Guizhou province by evaluating the forecasting model, with a financing amount of RMB 10 million. On 5 July 2023, the first asset backed security that included data intellectual property right was successfully issued in Hangzhou. It had a total value of RMB 102 million, a coupon rate of 2.8% and a maturity period of 358 days, which was pledged by 145 pieces of intellectual property rights.

Compared to traditional unsecured corporate debt, using data as security reduces the risks involved to lender. In the event of default, the lender retains a copy of the data asset to sell, while the borrower keeps the original version, ensuring uninterrupted operations. A good example of businesses using their data asset as a form of financing is the US airlines using their customer loyalty data as security for incurring new debt during the COVID-19 pandemic. US carriers including United Airlines and Delta Airlines collateralised the future cash flows of their loyalty programs to raise billions in loans.