Microsoft historically followed the practice of recognizing 25% of revenue from its Windows software over three or four years as it promises future upgrades and add- ons. With the launch of Vista in 2008, it changed the policy to record most of the revenue in the period in which the software was sold. In the third quarter for fiscal year 2008, Microsoft reported an increase in earnings of 65%. The increase came from sales of the new Vista program and also from the acceleration in revenue recognition.

Required:

1) Critically evaluate the revenue recognition policy adopted by Microsoft in accordance with AASB15 Revenue from Contracts with Customers. (5 marks)

2) Explain the decision of management to change the revenue recognition policy in terms of the debt hypothesis of Positive Accounting Theory. (5 marks)