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

Let’s be honest. For decades, accounting has been the language of the linear economy. You know the one: take, make, use, dispose. It’s straightforward, predictable. You buy raw materials (an asset), you manufacture a product (another asset), you sell it (revenue!), and you move on. The books are clean. The rules are set.

But what happens when the model itself flips? When a company doesn’t sell you a washing machine, but instead sells you clean clothes? When a lighting manufacturer retains ownership of every LED bulb and simply sells you “light as a service”?

Welcome to the world of the circular economy and Product-as-a-Service (PaaS). It’s a smarter, more sustainable way of doing business. But for accountants and finance teams, it can feel like trying to fit a square peg into a very round, constantly evolving hole. The old playbook just doesn’t cut it.

The Core Challenge: When an Asset Isn’t an Asset Anymore

Here’s the deal. In a traditional sale, the moment a product leaves the warehouse, it’s the customer’s problem. Depreciation, maintenance, end-of-life disposal—that’s on them. For the seller, it’s a clean break.

In a PaaS or circular model, that relationship is turned inside out. The company keeps ownership of the physical product. They’re responsible for its performance, its upkeep, and ultimately, its recovery and refurbishment for the next cycle. The customer pays for an outcome—like hours of operation, units of output, or a performance guarantee.

This creates a fundamental accounting headache. That washing machine on a customer’s floor? It’s still your asset. But it’s not sitting in your warehouse. It’s out in the field, being used, wearing down. How do you value it? How do you account for its gradual decay and the cost of its eventual return? Suddenly, your balance sheet is scattered across the country.

Rethinking Revenue and the Balance Sheet

This shift from product sales to service subscriptions forces a complete rethink of core accounting principles. Let’s break down the big three.

1. Revenue Recognition: The Slow Drip, Not the Waterfall

Gone is the one-time revenue spike. You can’t book the entire value of a 5-year “mobility as a service” contract for a fleet of vehicles on day one. Under standards like IFRS 15 and ASC 606, revenue must be recognized as you fulfill your performance obligation—which is ongoing.

It becomes a steady stream. This is great for predictable cash flow, sure, but it demands sophisticated systems to track usage, performance, and time to allocate that revenue accurately. Miss the mark, and you’re facing serious compliance issues.

2. Asset Valuation & Depreciation: The “Living” Asset

This is where it gets really interesting. A circular economy asset has multiple lives. A returned smartphone isn’t scrap; it’s a source of components for refurbished units.

Traditional straight-line depreciation? It assumes an asset moves in one direction: to zero. But what if its value dips during its first use, then is partially restored after refurbishment? You need models that account for:

• Residual Value Forecasting: Estimating what a product will be worth when it comes back.
• Costs of Reverse Logistics: The expense of taking things back, testing, and sorting them.
• Refurbishment & Remanufacturing Costs: Capitalizing these costs adds value back onto the balance sheet. It’s a new kind of calculus.

3. Cost Accounting: A Web of New Inputs

Your cost structure does a 180. Upfront material costs might be higher because you’re designing for durability and disassembly. But then you have this whole new category of operational costs.

Traditional Linear Model Costs	Circular/PaaS Model Costs
Raw Materials	Higher-Quality, Traceable Materials
Manufacturing Labor	Design for Disassembly (DfD) Engineering
Sales & Distribution	Reverse Logistics & Collection Networks
Warranty Reserves	Predictive Maintenance & In-Field Servicing
Waste Disposal	Asset Recovery, Refurbishment & Remarketing

Tracking and allocating these new costs accurately is crucial. Otherwise, you can’t price your service profitably. You might be losing money on every contract and not even know it until years in.

The Hidden Opportunity: Better Data, Better Decisions

Okay, so it’s complex. But here’s the flip side—the silver lining. Adopting this new accounting mindset forces you to understand your products and your business at a depth you never did before.

To account for an asset’s lifecycle, you need data on its lifecycle. Real, granular data. How long does a component truly last? What fails first? What’s the actual cost of a service call? This isn’t just accounting data; it’s R&D gold. It feeds directly back into product design, making future generations more durable, easier to repair, and more valuable in their next life.

In fact, your finance team becomes central to the sustainability strategy. They’re not just reporting on past sales; they’re modeling future circularity. They can quantify the financial benefit of keeping materials in play—reduced virgin material purchases, lower waste processing fees, new revenue streams from secondary markets. That’s powerful stuff.

Moving Forward: Steps to Start the Shift

Feeling overwhelmed? Don’t be. You don’t overhaul everything overnight. Think iteration.

1. Pilot with a Single Product Line. Choose one offering where a PaaS or circular model makes sense. Run the numbers in parallel with your traditional books.
2. Invest in Asset-Tracking Tech. IoT sensors and asset management software aren’t optional. You need to know where your stuff is and what condition it’s in.
3. Collaborate Early. Get finance, product design, and operations in a room from the start. Design the business model and the accounting for it simultaneously.
4. Revisit Your KPIs. Stop measuring just sales volume. Start tracking asset utilization rates, lifecycle profitability per unit, and customer retention on service contracts.
5. Engage with Your Auditors. Talk to them early about your models for asset valuation and revenue recognition. It’s better to build consensus than to face a nasty surprise later.

Look, accounting for the circular economy is messy. It’s ambiguous. The standards are still catching up. But that’s because it’s reflecting a more complex, more realistic, and ultimately more resilient way of doing business. It’s accounting not for a world of endless consumption, but for a world of thoughtful use and renewal.

The bottom line? The numbers are finally starting to tell the whole story—one where value is maintained, not just created and destroyed. And that’s a story worth balancing the books for.