Accounting Practices for the Circular Economy and Product-as-a-Service Models

Let’s be honest—the way we account for stuff is built for a world of straight lines. You buy a raw material, you make a thing, you sell the thing, and you record the profit. End of story. But what happens when the story doesn’t end? When that thing comes back to be refurbished, leased, or taken apart to become something new?

That’s the circular economy in a nutshell. And its star business model, Product-as-a-Service (PaaS), is turning traditional accounting on its head. Here’s the deal: if your revenue comes from performance or access, not ownership, your balance sheet starts to look… well, weird. This isn’t just an environmental shift; it’s a fundamental financial one. Let’s dive into the new ledger.

The Core Accounting Challenge: Who Owns What?

In a classic sale, asset transfer is clean. The product leaves your books and becomes the customer’s problem. With PaaS—think lighting-as-a-service, or mobility-as-a-service—you, the provider, retain ownership of the physical asset for years. Maybe decades.

This creates a massive, lingering question for your financial statements: Is that asset sitting at the client’s site your property, plant, and equipment (PP&E)? And if so, how on earth do you value it over its strange, circular life?

Asset Recognition & The Depreciation Dilemma

First things first. Under standards like IFRS and GAAP, if you control the asset and it provides you future economic benefits, it’s probably going on your balance sheet. That means a fleet of leased office chairs or industrial machinery you maintain stays in your name.

But depreciation gets tricky. Straight-line depreciation over 10 years assumes a steady decline to zero. In a circular model, an asset’s value isn’t just about age; it’s about its remanufacturing potential. A well-designed motor might have 80% of its core value intact after its first “life.” Do you depreciate it to zero, or to its estimated residual value as a future core component? Honestly, this requires a blend of accounting policy and crystal-ball-like engineering estimates.

Revenue Recognition: It’s a Stream, Not a Waterfall

This is where the rubber meets the road. You can’t book the entire contract value upfront. Revenue must be recognized over time as you fulfill your performance obligation—keeping the lights on, providing the agreed-upon mobility. It’s a subscription model for physical goods.

The accounting standards (think IFRS 15) push you to identify distinct performance obligations within a contract. For example, a “managed print service” contract might include:

• The physical printers (the asset).
• Maintenance and repairs.
• Supply of ink/toner.
• End-of-life takeback and recycling.

You have to allocate the transaction price to each of these pieces and recognize revenue as each is delivered. It’s complex, sure, but it mirrors the actual economic reality of the service.

Cost Accounting in a Loop: Tracking the “Circular” Costs

Traditional cost accounting tracks a linear flow. Circular cost accounting? It’s more like a spiral. You need new cost pools and drivers.

Capturing these costs accurately is crucial. Otherwise, you might see a profitable contract on paper that’s actually bleeding cash because you underestimated the cost of taking things back and making them new again. It’s a common pain point for companies making the transition.

Valuing the “Circular” Asset: Beyond Purchase Price

Okay, let’s get into the weeds for a second. When an asset returns, it’s not scrap. It’s an “asset in transition.” You might need to create new sub-ledger categories:

• Assets in Service (with Customer A)
• Assets in Refurbishment (in your workshop)
• Component Bank Inventory (harvested, tested parts)

The valuation of that Component Bank is a frontier. Is it at lower of cost or market? Or do you use a form of standard costing based on its future utility? There’s no perfect answer yet—which means finance teams need to work hand-in-glove with operations to build a sensible, auditable method.

Key Performance Indicators (KPIs) That Actually Matter

You can’t manage what you don’t measure. Old KPIs like sales volume become almost misleading. New metrics emerge:

• Asset Utilization Rate: Is your fleet of products actually earning its keep?
• Cost per Service Hour/Unit: Blends all those circular costs into a true unit economics measure.
• Circularity Rate: Percentage of materials/components recovered and reused.
• Customer Lifetime Value (CLV) in a PaaS context: It’s not about one sale; it’s about the total contract value and retention.

These KPIs tell the real story of your circular business health. They shift the focus from moving boxes to maximizing asset life and customer relationships.

The Path Forward: Embracing the Messy Transition

Look, adopting these practices isn’t about finding a perfect textbook solution. The standards are still catching up. It’s about building an accounting function that is as agile and forward-thinking as the business model itself.

That means cross-functional teams. It means investing in systems that can track an asset’s unique journey—its births, its deaths, its rebirths. It means accepting that your financial statements will initially confuse some investors, requiring clear narrative explanations.

In fact, the real opportunity here is to use accounting not just as a record-keeping tool, but as a strategic lens. The numbers will show you, brutally and clearly, where your circular model is efficient and where it’s leaking value. They force you to design better products, plan smarter logistics, and build deeper customer ties.

So, the ledger is no longer just a history book. In the circular economy, it becomes a blueprint—a map of flows, cycles, and enduring value. And that, you know, is a story worth telling.