iSoft revamps controversial accounting policies

iSoft, the embattled provider of software for the NHS’s battered National
Programme for IT, has today announced a complete overhaul of its accounting
policies, a move that will reduce revenues from around £215m to £200m and
pre-tax profits from around £22m to £7m.

iSoft has been criticised by analysts for recognising revenues far too early
and using a £70m off balance sheet credit facility. Analysts believe these
accounting concerns have contributed to the two profit warnings issued by the
company this year.

The changes are expected to have a heavy impact on the group’s banking
covenants. The group said it would have to amend covenant rules for its £144m of
debt. It is currently in discussions with it bankers. Profits, meanwhile, could
be reduced even further as a result of a review of the carrying value of
goodwill, which could see result in a heavy impairment charge.

The accounting changes will delay the company’s results until 11 July. These
will be the first set of final results new auditors Deloitte, who replaced RSM
Robson Rhodes, will have to consider.

In today’s announcement iSoft said that from now on revenues will be
recognised as work is performed. Previously, the company would recognise the
value of product revenues at the time of delivery and the value of support
services as they were performed.

In a statement iSoft said the board had changed its accounting policies
because the nature of its business had changed.

‘The Board has conducted a review and concluded that a change of accounting
policy for revenue recognition is needed, to one that more appropriately
reflects the changing nature of the business,’ the company said.

‘Under this policy, licence revenues will typically be recognised over the
same period as implementation revenues, which may range from a few months to a
number of years from contract signature, and over the full duration of a
contract in the case of managed services,’ iSoft added.

The group has also announced that it has taken action to re-align its
operating costs with future revenue expectations. This will see iSoft review its
cost structure in an attempt to cut costs from £210m to £180m. It is expected
that 150 people, 15% of the company’s work force, will be made redundant.

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