FTSE 350: Outsourcers braced for accounting change

But as the new year begins, there may be better times on the horizon for some of the FTSE 350's outsourcers. Serco recently announced that its profits for 2017 would be at the top end of its £65m-£70m guidance and that net debt would be at the lower end of £150m-£200m. G4S is trading in line with expectations, as is Capita, although these were revised down considerably over the course of 2017. Babcock (BAB) has continued to strengthen earnings, although fears over the outsourcing sector have continued to weight on the group, pushing its share price to new five-year lows.

The most likely catalyst for a change in investor sentiment during the year looks likely to be the introduction of the IFRS 15 accounting standard. Balance sheet issues have long been a concern when it comes to outsourcers and indeed the wider support services sector. Levels of accruals or exceptional costs creeping ever higher is as sure a sign as any that trouble lies ahead. IFRS 15 changes the way revenue is recognised on contracts with customers. The rules mean companies need to recognise revenues when it supplies a good or service to the customer, rather than when said contract is signed – that could have come in handy where Carillion was concerned.

Capita was among those who adopted the standard early, making the change in September last year, leading it to restate its underlying revenues and operating profit for 2016 as five and 30 per cent lower than under the previous rules, respectively. The rules become mandatory for companies’ first IFRS statements for periods beginning from January 2018. Outsourcers are among those expected to be worst hit by the rule change, with research from Liberum putting all five in the top 50 FTSE All-Share companies most likely to be impacted. The change is likely to lead to some short-term pain, but may also lay to rest investor anxiety about accounting practices in the support services sector.