There are many factors that need to be considered when contemplating MSTs. FINANCIAL WATCH By John Bober, Amie Sweeney and Scott Thacker Accounting for Managed Service Transactions M its members learn more about the implications of these bundled arrangements. 1 Th e Equipment Leasing & Finance Foundation recently published a study prepared by Th e Alta Group, Managed Solutions: Evolutionary or Revolution-ary , that sheds further light on this topic. Th e study covers the major business considerations surrounding MSTs, and it dives into the major accounting questions that arise for service providers and their customers. With the publication of the study, available at www.LeaseFoundation.org , it is time for a deep dive into the accounting for MSTs. rangement that includes an embedded lease. If an MST con-tains an embedded lease, both the customer and the service provider need to separately account for the lease and service components of the transaction. 2 Accounting for these elements is in a state of fl ux as two new standards have recently been issued. Th e criteria used to identify an embedded lease is contained within Leases (Topic 842) . Th e accounting for the service components of these transaction is contained within Revenue from Contracts with Customers (Topic 606) . 3 ANAGED SERVICE TRANSACTIONS (MSTS) have been on the mind of many companies, and ELFA has been helping What are MSTs? MSTs encompass a wide range of transactions and are com-monly thought of as bundled arrangements that may include equipment, services and soft ware. An MST includes a series of responsibilities and parties, including the: ● ● customer/end-user, ● ● service and service provider, ● ● fi nancing entity, ● ● underlying equipment and ● ● bundler. Th e service, the fi nancing, the equipment and the bundler may be separate off erings or the components may be com-bined and delivered by one provider. MSTs represent a broad range of transactions. Th e study places them into four classes for purposes of analysis: not bundled, partially bundled, bundled appear-ance and true service off erings. Further information on these arrangements is presented in Table 1. Accounting under the New Leases Standard Under Topic 842 a lease must be separated from a service if there is an identifi ed asset and if the customer: a. has the right to substantially all the economic benefi t from use of the asset during the contract and b. directs the use of the asset. Th ere are other factors to consider. Th e asset must be physically distinct, rather than just a portion of capacity. Also, if the supplier has a substantive right and practi-cal ability to substitute the asset and benefi ts from the substitution, there is no identifi ed asset and no lease to account for. (Continued on page 44) Accounting for MSTs While MSTs are a continuum of commercial arrangements, the accounting for them is essentially binary. In the account-ing model, these transactions are either wholly a service (which may include a fi nancing component) or a service ar-42 MARCH/APRIL 2017 EQUIPMENT LEASING & FINANCE MAGAZINE SFIO CRACHO/ SHUTTERSTOCK