Leases in Bundled Contracts: Separating Lease and Non-Lease Components

Many equipment businesses do not sell or lease a machine on its own. They offer bundles: the equipment, maintenance, consumables, software, and sometimes financing – all in one contract with one monthly fee. For the customer, that is convenient. For accounting, it means one contract that falls under two standards: lease accounting (ASC 842 / IFRS 16) and revenue recognition (ASC 606 / IFRS 15).

Step 1: Does the Contract Contain a Lease?

A contract contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Two questions are key:

• Is there an identified asset? The asset is specified, explicitly or implicitly, and the supplier has no substantive right to substitute it.

• Does the customer control its use? The customer obtains substantially all economic benefits from use and directs how and for what purpose the asset is used.

Leases are not always labeled as such. Service, placement, or "as-a-service" agreements can contain embedded leases – for example, when a device is installed at the customer's site for exclusive use.

Step 2: Identify the Components

Typical components in equipment contracts:

• Right to use the equipment: Lease component (ASC 842 / IFRS 16)

• Maintenance and repair services: Non-lease component (ASC 606 / IFRS 15)

• Consumables and spare parts: Non-lease component

• Software or digital services: Non-lease component, unless part of the leased asset

• Training, installation: Non-lease component, if distinct

Activities that do not transfer a good or service to the customer – such as administrative tasks – are not separate components. Under ASC 842, reimbursements of lessor costs such as property taxes and insurance are also not components of the contract.

Step 3: Allocate the Consideration

Lessors allocate the consideration in the contract to lease and non-lease components in accordance with the revenue standard – based on relative standalone selling prices. The same principles and challenges apply as in any multi-element revenue arrangement: SSP determination, discounts, and variable consideration.

Example: A device is provided for five years with full maintenance for a fixed monthly fee. Part of the fee is allocated to the lease component (and accounted for as an operating or finance lease), the rest to maintenance (recognized as revenue over time under ASC 606 / IFRS 15).

The ASC 842 Practical Expedient for Lessors

Under ASC 842, lessors can elect, by class of underlying asset, not to separate lease and non-lease components if:

• the timing and pattern of transfer of the components are the same, and

• the lease component, if accounted for separately, would be classified as an operating lease.

If the non-lease component is predominant, the combined component is accounted for under ASC 606; otherwise under ASC 842.

IFRS 16 does not offer this expedient to lessors. Separation is required.

For companies reporting under both frameworks, this means the same contract may be combined under US GAAP and separated under IFRS.

Common Challenges

• Bundled pricing: One monthly fee with no price breakdown requires a reliable SSP basis for each component.

• Different recognition patterns: Lease income, interest income, and service revenue follow different rules.

• Contract changes: Adding services, upgrading equipment, or terminating early affects both lease and revenue accounting.

• Data from multiple systems: Equipment, service contracts and billing often come from different source systems.

What This Means for SAP

Bundled contracts require a solution that can process lease and non-lease components in one contract while applying different accounting logic to each. SAP Revenue Accounting and Reporting is well suited for this: lease and non-lease components can be represented as separate performance obligations in one revenue accounting contract, the transaction price is allocated based on SSP, and each component follows its own recognition pattern – including the interest and principal split for finance leases, if designed accordingly.

Related Articles

• Operating vs. Finance Lease: How Classification Drives Accounting

• IFRS 16 vs. ASC 842: Key Differences for Lessors

• Designing Bundles in CPQ with ASC 606 in Mind

The Bottom Line

Bundled equipment contracts sit at the intersection of lease accounting and revenue recognition. Identifying embedded leases, separating components, and allocating consideration consistently are the basis for correct accounting – and for a system design that handles both standards in one process.

Managing bundled equipment, service and financing contracts? Talk to our experts.