In a regulatory statement the company said the changes reflected in the 2016 results under IFRS 15 predominantly relate to the timing of revenue recognition, with revenues now recognised later across the life of contracts as valued outcomes are delivered to clients.

‘Revenue, under IFRS 15, in 2016 therefore reflects changes in the timing of recognition of transformation revenue and price step downs across some major contracts, the impact of recognising revenue over time for certain clients within our software business rather than at the point of sale of licences, and additionally an adjustment in moving from principal to agency accounting in certain transactional businesses,’ Capita said.

Capita said that in 2016 the impact of applying IFRS 15 was a reduction in underlying revenue from £4.6bn to £4.4bn, approximately three fifths of which is due to the re-profiling of long-term contracted revenue.

There was also a reduction in underlying operating profit from £481m to £335m, while the group’s net assets move from £483m to net liabilities of £553m.

Capita stated: ‘The £1bn swing can be summarised as follows.  Under IFRS 15 Capita ended 2016 with deferred income of £1.6bn, an increase of £1.3bn. This represents cash received in 2016 which is for services delivered or to be delivered but not recognised as revenue until 2017 or later.

‘Furthermore, accrued income reduces by some £250m with the re-profiling of when revenue is recognised. These were partially offset by contract fulfilment assets of some £300m at the end of the year, being costs incurred on improving services for the long term which have been capitalised under IFRS 15 and will be released over the relevant contract term, and the recognition of a net deferred tax asset of some £200m.’

The company’s balance sheet now includes new ‘contract fulfilment assets’ created in the process of transforming services, plus deferred income in relation to contracts where payments have been received from clients to undertake transformation prior to the planned outcomes being delivered.

Nick Greatorex, Capita group finance director, 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.

‘For comparative purposes, we have applied the new standard to our 2016 financial results with support from EY and these financial results have been reviewed by KPMG.’

Report by Pat Sweet