The rise of XaaS models means hardware is rarely sold alone; it is bundled with services, software, and consumables. This is especially true for Hardware-as-a-Service (HaaS), Equipment-as-a-Service (EaaS) and Device-as-a-Service (DaaS), and other recurring models where the lessor provides equipment over time, often bundled with software and services. These arrangements often contain embedded leases and multiple components that have to be untangled for accounting purposes.
From the lessor side, a single customer contract can give rise to two separate economic streams:
- Lease income on the equipment
Under ASC 842, lessors classify leases as operating, sales-type, or direct financing (see above). That classification drives whether profit is recognized up front or spread over time, and whether you carry a receivable or the underlying asset on your balance sheet.
- Revenue from non lease components
Under ASC 606, you recognize revenue for things like:
- Cloud or on-prem software subscriptions
- Maintenance and support
- Professional services
- Usage or outcome-based charges
This blending forces a collision between ASC 842 and the revenue recognition standard, ASC 606. The Financial Accounting Standards Board (FASB) created a regulatory mandate linking these two standards, specifically for lessors offering bundles. For lessors, these standards are designed to work together, not in separate silos.
- Mandatory Separation: ASC 842 requires the lessor to separate the contract into lease components (the hardware) and non-lease components (the services or software).
- Mandatory Allocation: The total contract price must then be allocated to each component using the Standalone Selling Price (SSP) principles of ASC 606. This crucial allocation step must occur before either ASC 842 or ASC 606 recognizes income.
This requirement means that for every EaaS contract, two distinct and complex accounting standards must run in lockstep, often requiring significant complexity and judgment.
