Capita shares drop as it restates 2016 accounts

Capita shares were under pressure on Thursday after the outsourcer restated its accounts to adapt to new accounting standards.

As it adopted International Financial Reporting Standards 15, Capita’s restated operating profit for 2106 was £335m versus £481m previously, while net liabilities came in at £553m compared to net asset of £483m. Meanwhile, underlying revenues were cut from £4.6bn to £4.4bn.

The shift means revenue will be more evenly spread over the life of contracts, which entails lower profits or losses recognised earlier.

Group finance director Nick Greatorex said: “We believe early adoption of IFRS 15 is a sensible step to take in this transitional year for Capita. Adoption in 2017 immediately provides a consistent basis for our investors to evaluate our business going forwards. It ensures we have embedded the new standard well in advance of the 2018 deadline and is in line with our strategy of simplifying the business and improving transparency.

“The new standard more closely aligns our revenue recognition with the commercial substance of our contracts. The application of IFRS 15 has no impact on the lifetime profitability or cash flow of our contracts, or the majority of our transactional businesses. Instead, the resulting changes in the timing of revenue and cost recognition more closely aligns our financial results with the timing of the delivery of our valued outcomes to clients.”

Neil Wilson, senior market analyst at ETX Capital, said: “While a bitter pill for investors to swallow, this is good medicine. The shift to IFRS should help give better visibility on the true value of contracts. For example, one-off restructuring costs like last year’s £59m charge will be included in underlying profits.

“But investors might be overreacting. The changes don’t affect the profitability of contracts or cash flows. Indeed the business remains unchanged - the restatement of 2016’s results is really to make it easier to compare with this year’s numbers. Half year results due this month are still expected to be in line with previous guidance. Taken together, the selloff this morning might be overdone.”

At 0850 BST, the shares were down 4.5% to 614p.