Overdue check-up

The troubled healthcare IT service provider iSoft is due to announce its
delayed preliminary results next Tuesday (11 July) following the departure of
chief executive Tim Whiston last month.

There is no doubt the figures will not look as good under the new accounting
policies, but they should better reflect the nature of the company’s business.

What’s happened

iSoft was forced to issue a profits warning at the beginning of the year due
to delays in implementing a massive NHS IT contract.

At the same time the company was considering a change in its revenue
recognition accounting policy, a move that was confirmed in June and meant that
the expected preliminary results announcement was put back until July.

In the meantime, the company’s share price plummeted and is now roughly a
fifth of its value at its peak in January.

Revenue recognition is a notoriously sensitive area for IT companies as there
is often a large time lag between contracts being signed and IT systems going
live.

In iSoft’s case, a spokesman said the policy needed to reflect the change in
its business so that revenue would be recognised at implementation. ‘The matter
became more urgent,’ he said, ‘as the delays came to a head at the beginning of
the calendar year.’

What’s going to happen?

There has been a lot of speculation that iSoft is being stalked by potential
private equity suitors – certainly the share price makes it a much cheaper
proposition now. Even BT is being tipped.

But that aside, the prelims will be expected to show profits of between £3m
and £7m, down from the previously expected £17m to £22m mark. Chief executive
Whiston has already gone due to the ‘negative speculation and comment’ caused by
his presence.

Finance director Gavin James is still in place and the company has just
announced the appointment of Billy Henry, who has had several years of
turnaround experience at Peoplesoft. With these guys in charge, costs will come
under close scrutiny and around 15% of the workforce is expected to go.

There should also be news of the company’s negotiations with its banks. The
change in accounting policy has put its banking covenants under strain – these
will need to be changed. And of course the NHS iSoft waiting list doesn’t look
like it will get shorter any time soon.

WHAT THE TEXT BOOK SAYS

According to Ernst &Young’s bible International GAAP,‘ The basic issues
that arise surround the question of when to recognise revenue from contracts to
develop software, software licensing fees, customer support services and data
services.

However, these issues have not been addressed in the IFRS literature and,
because of the nature of the products and services involved, applying the
general revenue recognition principles to software transactions can sometimes be
difficult.’
The relevant standard is IAS 18 Revenue.