Shares in outsourcer Capita (CPI) fell sharply this week following the release of restated results, outlining the group’s performance according to the IFRS 15 accounting standard, which it will soon adopt. The differences are stark. Under the new rules, underlying revenue for the 2016 full year would be 5 per cent lower, operating profit would be 30 per cent lower and the company moves to having net liabilities of £553m, from net assets of £483m before.
IFRS 15 pertains to revenue recognition from contracts with customers. In Capita’s case this means revenue and profit is likely to be recognised later along the life of a contract, with lower profits or even losses in earlier years.
The standard becomes mandatory from 1 January 2018, but some companies are opting to adopt it earlier. This is typically an attempt to make comparisons against past performance easier for investors when the new standard comes in.
Recently, energy services group Utilitywise (UTW) announced it would be adopting the rule early. The group said this would likely leave it in a negative retained earnings position and miss revenue expectations by £4m to £4.5m for the year to July 2017. As a result, it scrapped the final dividend for the year, sending the shares down considerably on the day.
It is reasonable to expect more announcements like this as the implementation of the rule comes closer. Analysts at Liberum issued a note earlier this week warning that a wide range of industries would be susceptible, including aerospace and defence, construction, software, support services and telecoms. The companies most at risk will be those with the highest ratio of long-term receivables to revenue.
