Essential key element to any dematerialized data flow exchange, the domain name became a strategic intangible asset of great value. Depending on the academic works, there is a real correlation between the intangible assets’ quality and the companies’ economic performance. Identifying and valuating domain names becomes necessary for the financial director. Explanations in La revue de la Société Française des Analystes Financiers – SFAF (the journal of the French Society of Financial Analysts) of Jean-Manuel Gaget, Strategy and Consulting director of Nameshield and administrator of the Institut de Comptabilité de l’Immatériel (Intangible Accounting Institute).
In the 90’s, the domain name was an accessory element of the brand. During its world expansion, it became the principal element of the brand, in particular in the e-commerce’s world. You only need to look at how Amazon or Easyjet have developed their logo to consider it as a unique communication medium.
The domain name has this unique particularity to be an intangible asset with four dimensions. It is simultaneously:
- An IT object allowing to access services on the Internet by being the link between the IP address (a suite of numbers) of a physical object [computer, server, smartphone…] and a literal name (role of the Domain Name Server or DNS);
- A communication tool allowing to establish its identity on the Internet and gain a digital territory;
- A legal element through a temporary contract with an Internet Registry;
- A financial asset, accountable as an intangible asset under certain conditions.
Now an essential key element to any dematerialized data flow exchange, be it for email sending, the access to websites, social networks and connected objects, any data exchange on the Internet passes by the use of a domain name and any service disruption has important consequences on the organizations’ activity.
Why and how to rate your domain name capital?
Today, the academic works, in particular carried by the French referential of the intangible capital’s measure “Thesaurus Capital Immatériel” (Thesaurus Intangible Capital) show a real correlation between the intangible assets’ quality and the companies’ economic performance. The higher the quality of the intangible assets is (human capital, information system capital, customer capital…), the stronger, more sustainable and economically efficient in the medium and long term the company’s fundamentals are. Hence the importance to measure the intangible capital and its evolution over time.
However, as much as literature is rich regarding methods of brands valuation, it is near non-existent regarding domain names. That is why in 2019, the Intangible Accounting Institute wished to enrich the Thesaurus Intangible Capital with a specific section on the rating of the domain name capital. In the same way that clients, Human, IT, knowledge… assets are evaluated, we searched to evaluate the domain name capital in association with the brand capital. Because brands and domain names are now inseparable!
Accounting principles applicable to domain names
In a decision of the French Council of State of December 7th, 2016 (ebay.fr case), it is reminded that if the use of a domain name:
- Represents a constant source of profits;
- Has a sufficient sustainability (particularly if it can be regularly renewed);
- Is likely to be transferred;
Then it is an intangible asset of the company and must follow the associated accounting and tax rules. As such, the domain names have to be accounted either at their creation cost, at their acquisition value, or at their current value (market value) for the ones acquired free of charge. The domain names are then not to be considered as a simple IT workload, but as real assets that should be managed at fair value. As such, further attention on tax issues related to domain names’ value must be given within the context of the transfer prices.
Which financial valuation methods to use?
Inspired by the ISO 10668 standard regarding the monetary valuation of the brands, we have developed a reliable scientific corpus by financing the CIFRE thesis of Mr. Clement GENTY (2016-2019), covering the subject: “Internet governance and global economy: proposal of a valuation model of a domain name’s value as intangible asset“. It is in this context that three approaches regarding the monetary valuation of domain names have been studied:
- A historical costs approach;
- A market approach (on semantics);
- A loss approach (replacement cost).
The market approach aims to measure the semantic value of a domain name by reference to the monetary transactions passed. To that end, we have developed a database of more than 1.4 million transactions passed. This approach allows to give a price value by comparable.
Aim: to measure the digital performance of the organizations
These three approaches of domain names valuation by historical costs, the market and the loss, combined to the domain name capital rating are tools that should be at the disposal of the financial directions so they can better measure the digital performance of their organizations.