Answer commentary

　　The first thing I would advise you，before we get into the answer proper，is be realistic. In the exam you would have 45 minutes to complete your answer. That includes reading time，momentary panicking time and thinking time. So do not think you are going to be able to deliver the perfect answer that covers all the issues.

　　It can be daunting to look at past exam answers. The volume and detail included can lead you to think that this is what is expected from you in the exam. This is simply not true. The exam answers are teaching answers. They are idealised answers that are there to instruct. In order to score full marks，you do not need a perfect answer. You simply need a clear concise answer that covers the appropriate number of key points.

　　Let us move to requirement （a）to further explain what I mean. Clearly，if you had time you could write a book about the problems with existing revenue recognition. Do not try. Just produce at least seven points as quickly as you can that address the principal problems.

　　Do not be afraid of putting down what you really think. The examiner frequently gives full marks to a narrative answer that is not the same as his own so long as that answer has the appropriate number of ideas clearly expressed.

　　Next I would like to remind you of the marking guide used extensively throughout Section B. It is one mark for one relevant point well expressed. It is the marking guide that is the driver behind the style of answer that you see below. Each idea is delivered in one or two sentences and capped by one heading. This is of enormous assistance to your marker who can now see instantly each point you are trying to deliver.

　　My exam answer：

　　（a）Current revenue recognition IAS18 distinguishes two types of revenue：‘At’ revenue is recognised at the point risks and rewards for transferred（sale of goods） and ‘Over’revenue which is recognised over the period （sale of services）.

　　Intuitive

　　There is very little else in IAS 18. It is left to the user to interpret the revenue recognition from there. The great strength of IAS 18 is that it is intuitive - but that has now become its weakness.

　　Distinction

　　In many sales situations it is obvious whether the revenue should be recognised ‘At’ or ‘Over’. But in other situations one revenue stream could be recognised either‘At’or ‘Over’.

　　Example：Film making

　　A good example is film making. This could be interpreted as providing a service over a period or it could be interpreted as delivering intellectual property at a point in time.

　　Unbundling

　　Then IAS 18 has the problem of unbundling. Unbundling is the process of splitting a compound revenue stream into its component parts. The IAS requires unbundling but does not say when or how.

　　Example：Furniture and finance

　　For example，the bundled sale of furniture with hidden finance must be unbundled but IAS 18 gives no guidance to the retailer.

　　Other IFRS

　　Another irritation in existing revenue guidance is that it is mostly in IAS 18 but there are other IFRS that give（sometime contradictory） guidance：

　　Industry IFRS

　　Construction Construction Contracts （IAS 11）

　　Leasing Leasing （IAS 17）

　　Insurance Insurance Contracts （IFRS 4）

　　US

　　The IASB may have made do with existing IFRS guidance on revenue had the US not made improved revenue recognition a condition of convergence.

　　（b）Introduction

　　As explained in part （a）above，existing revenue reporting is intuitive；it is interpretive. The result is that when revenue becomes more complex，as it does in these two examples，there are various ways of recognising the revenue. So I cannot say that the revenue recognition suggested is right or wrong. I can only comment on its reasonableness.

　　Assumption （1） （X） 90%

　　Restoration is not construction but it is very similar so I think using construction contract accounting and therefore 90% is reasonable.

　　Assumption （2） （X） Time value

　　Construction contract accounting does ignore the time value of money so this assumption also seems reasonable.

　　Revenue （X）

　　So based on the above assumptions the revenue would be：

　　Revenue = （$1m） 90% = $900k

　　Assumption （1） （Y） Hut

　　Ramification has assumed that the sales proceeds relate exclusively to the hut. Personally，I do not see the contract this way but the assumption is acceptable. In fact，this is the existing culture for the recognition of a sale with a warranty.

　　Assumption （2） （Y） Provision

　　Ramification also assumes that the warranty gives rise to an obligation and not revenue. I suppose this is acceptable.

　　Revenue （Y）

　　The assumptions result in the following in the current financial statement：

　　Sales = $20k

　　Provision = $3k

　　（c） Comprehensive

　　The first proposal is that new revenue rules should be comprehensive and，therefore，all industries would be using the same one rule.

　　Framework

　　More importantly the proposal is to create revenue guidance based on the framework and the key elements of assets/liabilities.

　　As explained in part （a），existing revenue reporting is intuitive；it is interpretive. The result is that when revenue becomes more complex，as it does in these two examples，there are vari ous ways of recognising the revenue.