Isoft tumbles on changes to accounting

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Shares in Isoft, which provides healthcare software to the UK’s National Health Service, fell sharply on Thursday as the group announced a major change in accounting policy.

The company made a third revision to its full-year profit forecasts in five months and announced it would reverse significant portions of reported revenues over the past three years. The group said that historically it had recognised revenue from product licences at the time of delivery.

But it was becoming increasingly difficult to distinguish product licences from support as it became involved in more complex and long-term products.

As a result, Isoft said, pre-tax profits for the year to April 30 would be in the range of £3m-£7m ($5.5m-$12.9m), down from the reduced £17m-£22m range it offered at the end of April. Full-year revenues guidance was cut from a range of £210m-£215m to £195m-£200m.

Isoft said the accounting policy restatement would involve reversing revenues of about £70m, £55m and £40m from the years ended April 30 2005, 2004 and 2003 respectively.

Isoft added there would be a ‘material’ impairment charge to the carrying value of goodwill on the balance sheet, which would be included in its full-year results. The charge was not included in the guidance. It had £456m of goodwill on its balance sheet a year ago.

Isoft’s shares slid 38.6 per cent to 51p, with concern in the market that it might have to undertake a deeply-discounted rescue rights issue. The shares were worth nearly 400p at the start of the year.

Isoft first admitted in January that the rescheduling of the NHS contracts meant profits for the year would be slashed by about £45m, knocking 45 per cent off the shares in one day. It delivered a further warning at the end of April for delays to a non-NHS
contract.

The group is preparing to deliver its first full-year results under new auditor Deloitte &
Touche, which took over from RSM Robson Rhodes, Isoft’s auditors since the group floated in July 2000.

Robin Speakman, an analyst at Shore Capital, said the change had clarified the company’s position a little but still left a number of difficulties.

Isoft said “some aspects” of its banking covenants would have to be amended after the accounting change, and it was in discussion with its banks. The current
covenants state net debt may not exceed three times underlying earnings.

The group is expected to release full-year results on July 11.

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