The domain name is an integral intangible asset

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:

  1. 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);
  2. A communication tool allowing to establish its identity on the Internet and gain a digital territory;
  3. A legal element through a temporary contract with an Internet Registry;
  4. 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 ( 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.

Nameshield proposes a valuation model of a domain name’s value – CIFRE thesis of Clement Genty

Nameshield proposes a valuation model of a domain name’s value – CIFRE thesis of Clement Genty

At a time of a growing awareness by companies that domain names have become strategic intangible assets, sometimes having a higher value than brands, Nameshield is happy to inform you that it has overseen and financed, during three years, the CIFRE thesis of Mr. Clement GENTY, who received his PhD, covering the subject: Internet governance and global economy: proposal of a valuation model of a domain name’s value as intangible asset.

Publicly defended on April, 23rd  2019, at Angers’ Laboratory of engineering, processes and innovation of the “Ecole Nationale Supérieure d’Arts et Métiers of Paris Tech”, first, the thesis compiles a state of the art and a historical overview of the domain name diffusion in the World since the Domain Name System’s creation (DNS) in 1983. It demonstrates the loss of the link between identification/trust by the abolition of the initial naming rules for the benefit of an unbridled and mercantile economic development from the registries.

The second part of the thesis is dedicated to an analysis of the technical and semantic parameters allowing to define the domain names’ average value.

The third part of the thesis presents a monetary valuation tool for domain names, developed by Nameshield as part of the research work, and based on a database of more than 1.4 million transactions passed.

This scientific research work, validated by this thesis, falls within a vast process initiated by Nameshield for many years in order to raise awareness of the value of the domain names’ strategic intangible assets, and to evaluate them. This work led by Jean-Manuel GAGET, Nameshield’s Strategy and Consulting Director, focuses in particular on:

  • A consulting activity regarding the optimization of a domain names’ portfolio management, through a naming and defense strategy adapted to the real issues;
  • A process of extra-financial rating and valuation of the capital domain name, integrated to the “Thesaurus Capital immatériel”, which measures intangible assets of all kinds, promoted by the “Institut de comptabilité de l’immatériel” (Intangible accounting Institute);
  • A method of domain names analysis and a domain names monetary valuation tool, scientifically validated today by this thesis.

The decision of the Council of State at the end of 2016, which focuses on the taxation applicable to the domain name has strengthened the obligation of the companies to monetarily valuate their domain names well, in order to account them as intangible assets under some conditions. As such, the tax experts are highly interested in the domain names’ issues in the constitution of the transfer price. This first world thesis on the economy of the domain names and their valuation will serve without a doubt as a useful material to the reflection of the financial world’s actors on this subject.

Nameshield proposes a valuation model of a domain name’s value – CIFRE thesis of Clement Genty