| Office | | Southwark, London, England. We own or lease approximately 650 properties in more than 50 countries worldwide, the majority of which are located in the United Kingdom and the United States. All of the properties owned and leased by us are suitable for their respective purposes and are in good operating condition.
We own the following principal properties:
| | | | | | | General Use of Property | | Location | | Area in Square Feet | | | | | | | | Warehouse | | Pittstown, Pennsylvania, USA | | | 510,000 | | Warehouse | | Kirkwood, New York, USA | | | 409,000 | | Offices | | Iowa City, Iowa, USA | | | 310,000 | | Offices | | Old Tappan, New Jersey, USA | | | 210,100 | | Warehouse/ office | | Cedar Rapids, Iowa, USA | | | 205,000 | | Offices | | Reading, Massachusetts, USA | | | 177,800 | | Offices | | London, UK | | | 155,000 | | Printing/ ProcessingUK | | | 155,000 | | | Office | | Hadley, Massachusetts, USA | | | 136,570 | | | Printing | | Owatonna, Minnesota, USA | | | 128,000 | | Printing/ Processing | | Columbia, Pennsylvania, USA | | | 121,400 |
We lease the following principal properties at December 31, 2008: | | | | | | | General use of property | | Location | | Area in square feet | | | | Warehouse/Office | | Lebanon, Indiana, USA | | | 1,091,435 | | | Warehouse/Office | | Cranbury, New Jersey, USA | | | 886,747 | | | Warehouse/Office | | Indianapolis, Indiana, USA | | | 737,850 | | | Warehouse/Office | | San Antonio, Texas, USA | | | 559,258 | | | Warehouse/Office | | Newmarket, Ontario, Canada | | | 518,128 | | | Office | | Upper Saddle River, New Jersey, USA | | | 474,801 | | | Warehouse/Office | | Rugby, UK | | | 446,077 | | | Office | | New York City, New York, USA | | | 430,738 | | | Office | | London, UK | | | 282,917 | | | Office | | Harlow, UK | | | 231,850 | | | Warehouse/Office | | Austin, Texas, USA | | | 226,076 | | | Office | | Boston, Massachusetts, USA | | | 225,299 | | | Warehouse | | Scoresby, Victoria, Australia | | | 197,255 | | | Office | | Boston, Massachusetts, USA | | | 191,360 | * | | Office | | Glenview, Illinois, USA | | | 187,500 | | | Warehouse/Office | | Bedfordshire, UK | | | 187,248 | | | Office | | Bloomington, Minnesota, USA | | | 153,240 | | | Office | | Parsippany, New Jersey, USA | | | 143,777 | | | Office | | Chandler, Arizona, USA | | | 135,460 | | | Office | | New York City, New York, USA | | | 116,039 | | | Warehouse | | San Antonio Zomeyucan, Mexico | | | 113,638 | | | Office | | London, UK | | | 112,000 | | | Warehouse | | Cape Town, South Africa | | | 111,259 | | | Call Center | | Lawrence, Kansas, USA | | | 105,000 | | Offices | | Eagan, Minnesota, USA | | | 109,500 | | Offices | | Mesa, Arizona, USA | | | 96,000 | |
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We lease the following principal properties:
| | | | | | | General Use of Property | | Location | | Area in Square Feet | | | | | | | | Warehouses/ Offices | | Lebanon, Indiana, USA | | | 1,091,400 | | Warehouse/ Offices | | Cranbury, New Jersey, USA | | | 886,700 | | Warehouse | | Indianapolis, Indiana, USA | | | 737,850 | | Warehouse/ Offices | | Newmarket, Ontario, Canada | | | 518,128 | | Offices | | Upper Saddle River, New Jersey, USA | | | 474,801 | | Warehouse/ Offices | | Rugby, UK | | | 446,000 | | Offices | | London, UK | | | 375,000 | | Offices | | Hudson St., New York, USA | | | 302,000 | | Warehouse/ Offices | | Austin, Texas, USA | | | 226,100 | | Offices | | Boston, Massachusetts, USA | | | 225,299 | | Warehouse | | Scoresby, Victoria, Australia | | | 215,820 | | Offices | | Boston, Massachusetts, USA | | | 191,360 | | Offices | | Glenview, Illinois, USA | | | 187,500 | | Offices | | Bloomington, Minnesota, USA | | | 151,056 | | Offices | | Parsippany, New Jersey, USA | | | 143,800 | | Offices | | Harlow, UK | | | 137,900 | | Offices | | Chester, Virginia, USA | | | 123,200 | | Warehouse | | San Antonio Zomeyucan, Mexico | | | 113,638 | | Offices | | London, UK | | | 112,000 | | Offices | | New York, New York, USA | | | 107,939 | |
| | ITEM 4A. | UNRESOLVED STAFF COMMENTS |
There are no unresolved staff comments.
| | ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
The following discussion and analysis is based on and should be read in conjunction with the consolidated financial statements, including the related notes, appearing elsewhere in this Annual Report. The financial statements have been prepared in accordance with IFRS, which differs in certain significant respects from US GAAP. Note 35 to our consolidated financial statements, included in “Item 17. Financial Statements”, provides a description of the significant differences between IFRS and US GAAP as they relate to our business and provides a reconciliation to US GAAP. These consolidated financial statements are the Group’s first financial statements to be prepared in accordance with IFRS, as adopted by the EU. Consolidated financial statements of Pearson up to and including December 31, 2004 had been prepared in accordance with UK GAAP. UK GAAP differs in certain respects from IFRS. When preparing the Group’s 2005 consolidated financial statements, management has amended certain accounting, valuation and consolidation methods applied in the UK GAAP financial statements to comply with IFRS. The comparative figures in respect of 2004 and 2003 were restated to reflect these adjustments. Note 34 included in “Item 17. Financial Statements”, describes how, in preparing the consolidated financial statements, the Group has applied accounting standards as adopted for use in the EU under the first-time adoption provisions as set out in IFRS 1.
General Overview
Sales increased from £3,696 million in 2004 to £4,096 million in 2005, an increase of 11%. The increase reflected growth across all the businesses with a particularly strong performance at Pearson Education. The year on year growth was impacted by exchange rates but less so than in previous years. The average US dollar exchange rate strengthened slightly in 2005, which had the effect of increasing reported sales in 2005 by £46 million when compared to the equivalent figure at constant 2004 rates. Reported operating profit increased by 33% from £404 million in 2004 to £536 million in 2005. Pearson Education benefited from strong sales growth and improved margins in the School and Higher Education businesses. FT Group benefited from improved profits largely as a result of increases in advertising revenues at FT Publishing and IDC’s continued strong organic growth and synergies from the integration of recent acquisitions. Penguin profits benefited from
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the effect of exchange rates but still improved from the prior year, with margins increasing despite only a small increase in sales. Included within operating profit in 2005 was the profit on the sale of MarketWatch of £40 million. Equivalent sales of businesses and investments in 2004 saw a profit of £9 million. Reported operating profit in 2005 was £12m higher than the equivalent figure reported at constant 2004 exchange rates.
Profit before taxation in 2005 of £466 million compares to a profit before taxation of £325 million in 2004. The increase of £141 million reflects the improved operating performance and a reduction in net finance costs. Net finance costs reduced from £79 million in 2004 to £70 million in 2005. Net interest payable benefited from the reduction in average net debt following receipt of the proceeds from the sale of Recoletos and MarketWatch and good cash generation from the businesses. Partially offsetting this effect was an increase in the group’s average net interest rate payable driven principally by the strong rise in US dollar interest rates in the year. As at January 1, 2005 we adopted IAS 39‘Financial Instruments: Recognition and Measurement’ in our financial statements. This has had the effect of introducing increased volatility into the net finance cost and in 2005 the adoption of IAS 39 reduced net finance costs by £14 million. There was no equivalent benefit in 2005 to the one-off credit of £9 million for interest on a repayment of tax that occurred in 2004.
In April 2005, Pearson sold its 79% interest in Recoletos Grupo de Comunicacion S.A. to Retos Cartera, a consortium of investors, as part of a tender offer for all of Recoletos. The transaction became unconditional on approval from the Spanish regulatory authorities in February 2005. The results of Recoletos have been consolidated for the period to February 28, 2005 and have been shown as discontinued operations in the consolidated income statement for 2005, 2004 and 2003.
Net cash generated from operating activities increased to £709 million in 2005 from £562 million in 2004 with very strong cash generation across all the businesses. Cash flow in 2004 benefited from collection of the $151 million receivable in respect of the Transportation Security Administration (“TSA”) contract, a contract to create a qualification, assessment, staffing and placement system for security screeners at airports in the US. The relative strength of the US dollar also increased the value of our cash flows in Sterling. Capital expenditure was down from 2004 following the up-front expenditure on professional testing contracts in that year but investment in pre-publication increased. On an average basis, the use of working capital continued to improve. The net cash inflow from disposals net of acquisitions was £175 million in 2005 compared to a net cash outflow of £4 million in 2004. Dividends paid of £222 million in 2005 (including £17 million paid to minority interests) compares to £197 million in 2004 and, after an adverse currency movement of £121 million, overall net borrowings fell 18% from £1,221 million at the end of 2004 to £996 million at the end of 2005.
We expect 2006 to be another good year for Pearson as we anticipate increasing margins and growth ahead of our markets. We expect to achieve strong earnings growth, good cash generation and a further significant improvement in return on invested capital.
We expect Pearson Education to achieve sales growth in the 3-5% range, with similar rates of growth in each of its three worldwide businesses (School, Higher Education and Professional). We expect margins to improve in School and Professional and remain stable in the Higher Education business. School testing is strengthened by 2005 contract wins with a lifetime value of $700 million (including Texas, Virginia, Michigan and Minnesota) and the US School new adoption market is expected to grow strongly over the period 2007 to 2009.
We expect our US Higher Education business to continue to benefit from its scale, the strength of its publishing and its lead in technology. 2006 is expected to be a strong year for first editions, with major new titles in statistics, algebra, psychology, economics, health and writing. We plan to launch online homework and assessment programs in new curriculum areas including economics, psychology and development writing and to extend our highly successful customized print publishing model to online curriculum and course management programs.
We expect our Professional business to deliver sustained growth on the basis of long-term contracts in Government Solutions and Professional Testing and to improve margins after the successful start-up of major new contracts in 2004 and 2005. We also expect to maintain our leading market share in professional
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publishing with a stronger schedule of releases in the professional and consumer technology market in 2006 and a strong list within the business publishing imprints.
We expect further profit improvement at the FT Group. TheFinancial Times continues to show good momentum with circulation up 4% and advertising revenues continue to show double digit growth in the early part of 2006. IDC expects another good year, benefiting from similar business conditions to 2005, strong organic growth and the contribution of recent acquisitions.
Penguin is expected to grow at a similar rate in 2006 to 2005 with continued investment in new markets and international talent and with a strong list of new titles from best selling authors. Margins are expected to improve steadily as we benefit from efficiency gains.
We generate around two-thirds of total sales in the US and a five cent change in the average exchange rate for the full year (which in 2005 was £1: $1.81) will have an impact of approximately 1p on earnings per share.
| | | Sales Information by Operating Division |
The following table shows sales information for each of the past three years by operating division:
| | | | | | | | | | | | | | | | | | Year Ended December 31 | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | £m | | | £m | | | £m | | | Education: | | | | | | �� | | | | | | | | | School | | | 1,295 | | | | 1,087 | | | | 1,149 | | | | Higher Education | | | 779 | | | | 729 | | | | 770 | | | | Professional | | | 589 | | | | 507 | | | | 503 | | | FT Group: | | | | | | | | | | | | | | | FT Publishing | | | 332 | | | | 318 | | | | 315 | | | | IDC | | | 297 | | | | 269 | | | | 273 | | | Penguin | | | 804 | | | | 786 | | | | 840 | | | | | | | | | | | | | | Total | | | 4,096 | | | | 3,696 | | | | 3,850 | | | | | | | | | | | | |
| | | Sales Information by Geographic Market supplied |
The following table shows sales information for each of the past three years by geographic region:
| | | | | | | | | | | | | | | | | Year Ended December 31 | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | £m | | | £m | | | £m | | | European countries | | | 963 | | | | 835 | | | | 768 | | | North America | | | 2,717 | | | | 2,504 | | | | 2,742 | | | Asia Pacific | | | 300 | | | | 263 | | | | 255 | | | Other countries | | | 116 | | | | 94 | | | | 85 | | | | | | | | | | | | | | Pearson Group | | | 4,096 | | | | 3,696 | | | | 3,850 | | | | | | | | | | | | |
| | | Exchange Rate Fluctuations |
We earn a significant proportion of our sales and profits in overseas currencies, principally the US dollar. Sales and profits are translated into sterling in the consolidated financial statements using average rates. The average rate used for the US dollar was $1.81 in 2005, $1.83 in 2004 and $1.63 in 2003. Fluctuations in exchange rates can have a significant impact on our reported sales and profits. The Group generates approximately 65% of its sales in US dollars and a five cent change in the average exchange rate for the full year has an impact of approximately 1 pence on earnings per share. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk” for more information.
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| | | Critical Accounting Policies |
Our consolidated financial statements, included in Item 17. “Financial Statements”, are prepared based on the accounting policies described in note 1 to the consolidated financial statements which are in accordance with IFRS, which differs in certain significant respects from US GAAP.
The preparation of our consolidated financial statements in accordance with IFRS, and the reconciliation of these financial statements to US GAAP as described in note 35, requires management to make estimates and assumptions that affect the carrying value of assets and liabilities at the date of the consolidated financial statements and the reported amount of sales and expenses during the periods reported in these financial statements. Certain of our accounting policies require the application of management judgment in selecting assumptions when making significant estimates about matters that are inherently uncertain. Management bases its estimates on historical experience and other assumptions that it believes are reasonable.
We believe that the following are the more critical accounting policies used in the preparation of our consolidated financial statements that could have a significant impact on our future consolidated results of operations, financial position and cash flows. Actual results could differ from estimates.
Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services net of value-added tax and other sales taxes, rebates and discounts, and after eliminating sales within the Group. Revenue is recognized as follows:
Revenue from the sale of books is recognized when title passes. A provision for anticipated returns is made based primarily on historical return rates. If these estimates do not reflect actual returns in future periods then revenues could be understated or overstated for a particular period.
Circulation and advertising revenue is recognized when the newspaper or other publication is published. Subscription revenue is recognized on a straight-line basis over the life of the subscription.
Where a contractual arrangement consists of two or more separate elements that can be provided to customers either on a stand-alone basis or as an optional extra, such as the provision of supplementary materials with textbooks, revenue is recognized for each element as if it were an individual contractual arrangement.
Revenue from multi-year contractual arrangements, such as contracts to process qualifying tests for individual professions and government departments, is recognized as performance occurs. Certain of these arrangements, either as a result of a single service spanning more than one reporting period or where the contract requires the provision of a number of services that together constitute a single project, are treated as long-term contracts with revenues recognized on a percentage of completion basis. Losses on contracts are recognized in the period in which the loss first becomes foreseeable. Contract losses are determined to be the amount by which estimated direct and indirect costs of the contract exceed the estimated total revenues that will be generated by the contract. The assumptions, risks and uncertainties inherent in long-term contract accounting can affect the amounts and timing of revenue and related expenses reported.
On certain contracts, where the Group acts as agent, only commissions and fees receivable for services rendered are recognized as revenue. Any third party costs incurred on behalf of the principal that are rechargeable under the contractual arrangement are not included in revenue.
Pre-publication costs represent direct costs incurred in the development of educational programs and titles prior to their publication. These costs are carried forward in current intangible assets where the title will generate probable future economic benefits and costs can be measured reliably. These costs are amortized upon publication of the title over estimated economic lives of five years or less, being an estimate of the expected life cycle of the title, usually with a higher proportion of the amortization taken in the earlier years. The investment in pre-publication has been disclosed as part of the investing activities in the cash flow statement. The assessment of useful life and the calculation of amortization involve a significant amount of estimation and management judgment based on historical trends and management estimation of their future potential sales. The overstatement of useful lives could result in excess amounts being carried forward in
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intangible assets that would otherwise have been written off to the profit and loss account in an earlier period. Reviews are performed regularly to estimate recoverability of pre-publication costs.
Advances of royalties to authors are included within trade and other receivables when the advance is paid less any provision required to bring the amount down to its net realizable value. The royalty advance is expensed at the contracted royalty rate as the related revenues are earned. Royalty advances which will be consumed within one year are held in current assets. This represents the operating cycle of consumer publishing titles. Royalty advances which will be consumed after one year are held in non-current assets. The realizable value of royalty advances relies on a degree of management judgement in determining the profitability of individual author contracts. If the estimated realizable value of author contracts is overstated then this will have an adverse effect on operating profits as these excess amounts will be written off.
| | | Defined Benefit Pension Obligations |
The liability in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date minus the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting estimated future cash flows using yields on high quality corporate bonds which have terms to maturity approximating the terms of the related liability.
Actuarial gains and losses arising from differences between actual and expected returns on plan assets, experience adjustments on liabilities and changes in actuarial assumptions are recognized immediately in the statement of recognized income and expense.
The service cost, representing benefits accruing over the year, is included as an operating cost and the unwinding of the discount rate on the scheme liabilities and the expected return on scheme assets as a financing charge or financing income.
Obligations for contributions to defined contribution pension plans are recognized as an expense in the income statement as incurred.
The determination of the pension cost and defined benefit obligation of the Group’s defined benefit pension schemes depends on the selection of certain assumptions (see note 24 in “Item 17 — Financial Statements”) which include the discount rate, inflation rate, salary growth, longevity and expected return on scheme assets. Differences arising from actual experience or future changes in assumptions will be reflected in subsequent periods.
The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the estimates in relation to the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
Deferred income tax is provided, using the liability method on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realized or the deferred income tax liability is settled.
Deferred tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.
Deferred income tax is provided in respect of the undistributed earnings of subsidiaries, other than where it is intended that those undistributed earnings will not be remitted in the foreseeable future.
Deferred tax is recognized in the income statement, except when the tax relates to items charged or credited directly to equity, in which case the tax is also recognized in equity.
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Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary or associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of associates is included in investments in associates. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
We prepare our financial statements in accordance with IFRS, which differs in certain significant respects from US GAAP. Profit attributable to equity holders of the Company and equity shareholders’ funds under IFRS and US GAAP were as follows for the respective period:
| | | | | | | | | | | | | | | | | | December 31, 2005 | | | December 31, 2004 | | | December 31, 2003 | | | | | | | | | | | | | | | | £m | | | £m | | | £m | | Profit for the financial year | | | | | | | | | | | | | | | IFRS | | | 624 | | | | 262 | | | | 252 | | | | US GAAP | | | 411 | | | | 182 | | | | 173 | | Equity shareholders’ funds | | | | | | | | | | | | | | | IFRS | | | 3,564 | | | | 2,800 | | | | | | | | US GAAP | | | 3,838 | | | | 3,218 | | | | | |
The main differences between IFRS and US GAAP relate to goodwill and intangible assets, acquisition and disposal adjustments, derivatives, pensions, stock based compensation and taxation. These differences are discussed in further detail under “— Accounting Principles” and in note 35 to the consolidated financial statements.
Results of Operations
| | | Year ended December 31, 2005 compared to year ended December 31, 2004 |
| | | | * | Reduced to 53,248 square feet subsequent to year end | | Consolidated Results of Operations |
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Capital Expenditures See Item 5. “Operating and Financial Review and Prospects — Liquidity and Capital Resources” for description of the Company’s capital expenditure. ITEM 4A. UNRESOLVED STAFF COMMENTS The Company has not received, 180 days or more before the end of the 2008 fiscal year, any written comments from the Securities and Exchange Commission staff regarding its periodic reports under the Exchange Act which remain unresolved. ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS The following discussion and analysis is based on and should be read in conjunction with the consolidated financial statements, including the related notes, appearing elsewhere in this Annual Report. The financial statements have been prepared in accordance with IFRS as issued by the IASB. General overview Introduction Sales from continuing operations increased from £4,162m in 2007 to £4,811m in 2008, an increase of 16%. The majority of the increase was in the North American and International Education businesses which benefited from acquisitions made in 2007 and 2008. The year on year growth was also significantly impacted by exchange rates, in particular the US dollar. The average US dollar exchange rate strengthened in comparison to sterling in 2008, which had the effect of increasing reported sales in 2008 by £320m when compared to the equivalent figure at constant 2007 rates. When measured at constant 2007 exchange rates, all of Pearson’s businesses reported year on year growth. Reported operating profit increased by 18% from £574m in 2007 to £676m in 2008. Acquisitions and the relative strength of the US dollar contributed to this increase and operating profit would have been £71m lower if translated at constant 2007 exchange rates. When measured at constant rates, the main contributors to the increase were the International Education and Interactive Data businesses which together with an increased contribution from acquisitions more than offset an increased charge for intangible amortization. Profit before taxation in 2008 of £585m compares to a profit before taxation of £468m in 2007. The increase of £117m reflects the improved operating performance and reduced net finance costs. Net finance costs decreased from £106m in 2007 to £91m in 2008. The Group’s net interest payable decreased by £6m in 2008 as although our fixed rate policy reduces the impact of changes in market interest rates, we were still able to benefit from a fall in average US dollar and sterling interest rates during the year. Exchange losses of £11m in 2008 compare to a net exchange loss of £17m in 2007. The losses in 2008 mainly relate to the retranslation of foreign currency bank accounts together with other net losses on inter-company items. The losses in 2007 principally relate to exchange losses on legacy euro denominated debt held to hedge euro denominated proceeds from the sale of Les Echos. Partially offsetting interest payable and exchange is finance income relating to post retirement plans of £8m in 2008 compared to an income of £10m in 2007. On February 22, 2008 the Group completed the sale of its Data Management business and this business has been included in discontinued operations for the period to February 22 in 2008, and the full years in 2007 and 2006. In 2007, the Group completed the sale of its French newspaper business, Les Echos and its Government contracting business, Government Solutions. The results of Les Echos and Government Solutions have been shown as discontinued operations in the consolidated income statement for 2007 and 2006. Net cash generated from operations increased to £894m in 2008 from £659m in 2007. The improved cash generation in 2008 was partly due to exchange but also represents strong cash conversion of operating profits from all of the Pearson businesses. On an average basis, the ratio of working capital to sales deteriorated slightly in the year largely as a result of higher working capital balances at new acquisitions. Average working capital comprises the average of the monthly carrying values over the relevant 12 month period for inventory, pre-publication costs,
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debtors and creditors. Net interest paid at £76m in 2008 was £14m below the previous year as the net interest charge in the income statement fell and the timing of payments was more favorable. Tax paid in 2008 remained consistent with the previous year at £89m compared to £87m in 2007. Net capital expenditure on property, plant and equipment after proceeds from sales increased from £72m in 2007 to £73m in 2008. The net cash outflow in respect of businesses acquired decreased from £472m in 2007 to £395m in 2008 whilst net proceeds from the disposal of businesses decreased from £469m in 2007 to £111m in 2008. Dividends from joint ventures and associates decreased by £9m largely due to smaller special dividends received from the Economist in 2008 compared to 2007. Dividends paid of £285m in 2008 (including £28m paid to minority interests) compares to £248m in 2007. After an unfavorable currency movement of £410m, overall net borrowings increased by 50% from £973m at the end of 2007 to £1,460m at the end of 2008. Outlook Pearson achieved a strong performance in 2008 against the backdrop of a sharp deterioration in the global economy. Though the company performed well, market conditions became more difficult for some of our businesses as the year went on. In the fourth quarter, trading momentum remained strong for our education business. The Financial Times Group continued to achieve good growth — in particular at Interactive Data and Mergermarket — but FT Publishing saw a decline in advertising revenues (which now account for 4% of Pearson’s sales). Consumer publishing markets in the US and the UK were challenging, but Penguin performed well in the key holiday selling season. We are planning on the basis that the tough market conditions we saw for some of our businesses towards the end of 2008 are likely to persist throughout 2009. We expect to benefit from a range of early actions to revise products and supply lines, reduce costs and sustain investment. Pearson Education In Education, we are planning for weak conditions in the US School publishing market but expect continued growth in our Testing, Higher Education and International Education businesses. We expect the new US administration’s emphasis on education, reflected in both the economic stimulus package and the focus on reform, to provide a significant boost to education institutions. The extent and timing of the impact on our business is unclear at this stage, so we have not included these factors in our guidance. FT Group At the FT Group, we anticipate continued strong demand for high-quality analysis of global business, finance, politics and economics; a tough year for advertising; strong renewal rates in our subscription businesses; and continued growth at Interactive Data. The Penguin Group At Penguin, we expect another good competitive performance in challenging trading conditions for book publishers and booksellers.
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Sales information by operating division The following table shows sales information for each of the past three years by operating division: | | | | | | | | | | | | | | | | | Year Ended December 31 | | | | | 2008 | | | 2007 | | | 2006 | | | | | £m | | | £m | | | £m | | | | | Education: | | | | | | | | | | | | | | North American | | | 2,002 | | | | 1,667 | | | | 1,679 | | | International | | | 866 | | | | 735 | | | | 640 | | | Professional | | | 244 | | | | 226 | | | | 211 | | | FT Group: | | | | | | | | | | | | | | FT Publishing | | | 390 | | | | 344 | | | | 280 | | | Interactive Data | | | 406 | | | | 344 | | | | 332 | | | Penguin | | | 903 | | | | 846 | | | | 848 | | | | | | | | | | | | | | | | | Total | | | 4,811 | | | | 4,162 | | | | 3,990 | | | | | | | | | | | | | | | |
Our total sales increased by £400 million, or 11%, to £4,096 million in 2005, from £3,696 million in 2004. Sales growth was due to strong performance in our markets, helped in part by a favourable exchange rate impact. We estimate that had the 2004 average rates prevailed in 2005, sales would have been approximately £4,050 million.
Pearson Education had a strong year with an increase in sales of 15%. The School and Professional businesses were the biggest contributors to this growth with increases of 19% and 16% respectively. Higher Education growth was 5% in total and 6% in the US. Pearson’s US Higher Education business has grown faster than the industry for seven straight years. The School publishing business benefited from a large share of the new adoption market in the US and testing sales were up more than 20% as the business made significant market share gains and benefited from mandatory state testing in the US under No Child Left Behind. In the Professional business, Professional testing and Government Solutions sales were both up by more than a third on last year with the successful start-up of major new contracts. Worldwide sales of technology-related books were again lower than the previous year although weakness in the professional markets was partly offset by growth in consumer technology publishing.
The FT Group sales were 7% ahead of last year. FT Publishing sales were up by 4% driven by higher advertising revenues at theFinancial Times and IDC sales were up by 10% with organic growth at all its businesses aided by a full year contribution from FutureSource, acquired in September 2004, and the strength of the US dollar. Penguin’s sales grew by 2% with successful format innovation helping to offset the weakness in the mass market category in the US, down a further 4% for the industry in 2005.
Pearson Education, our largest business sector, accounted for 65% of our sales in 2005, compared to 63% in 2004. North America continued to be the most significant source of our sales although sales there decreased, as a proportion of total sales, to 66% in 2005, compared to 68% in 2004.
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Sales information by geographic market supplied The following table shows sales information for each of the past three years by geographic region: | | | | | | | | | | | | | | | | | Year Ended December 31 | | | | | 2008 | | | 2007 | | | 2006 | | | | | £m | | | £m | | | £m | | | | | European countries | | | 1,217 | | | | 1,102 | | | | 1,003 | | | North America | | | 3,028 | | | | 2,591 | | | | 2,585 | | | Asia Pacific | | | 415 | | | | 351 | | | | 295 | | | Other countries | | | 151 | | | | 118 | | | | 107 | | | | | | | | | | | | | | | | | Total | | | 4,811 | | | | 4,162 | | | | 3,990 | | | | | | | | | | | | | | | |
| | | Cost of Sales and Operating Expenses |
The following table summarizes our cost of sales and net operating expenses: | | | | | | | | | | | | | Year Ended | | | | | December 31 | | | | | | | | | | 2005 | | | 2004 | | | | | | | | | | | | | £m | | | £m | | | Cost of goods sold | | | 2,022 | | | | 1,789 | | | | | | | | | | | Distribution costs | | | 249 | | | | 201 | | | Administrative and other expenses | | | 1,384 | | | | 1,365 | | | Other operating income | | | (41 | ) | | | (46 | ) | | | | | | | | | | Total operating expenses | | | 1,592 | | | | 1,520 | | | | | | | | | |
Cost of Sales.Cost of sales consists of costs for raw materials, primarily paper, printing costs, amortization of pre-publication costs and royalty charges. Our cost of sales increased by £233 million, or 13%, to £2,022 million in 2005, from £1,789 million in 2004. The increase mainly reflected the increase in sales over the period although the overall gross margin declined slightly from 52% in 2004 to 51% in 2005.
Distribution Costs.Distribution costs consist primarily of shipping costs, postage and packing and are typically a fairly constant percentage of sales.
Administration and Other Expenses.Our administration and other expenses increased by £19 million, or 1%, to £1,384 million in 2005, from £1,365 million in 2004, although as a percentage of sales they decreased to 34% in 2005, from 37% in 2004. The increase in administration and other costs comes principally from additional employee benefit expense, but cost savings and more modest increases in other administration expenses has enabled overall operating margins to improve.
Other operating Income.Other operating income mainly consists of sub-rights and licensing income and distribution commissions. Other operating income decreased 11% to £41 million in 2005 from £46 million in 2004, with the decrease mainly representing the continued decline in commissions received for distribution of third party books.
Exchange rate fluctuations We earn a significant proportion of our sales and profits in overseas currencies, principally the US dollar. Sales and profits are translated into sterling in the consolidated financial statements using average rates. The average rate used for the US dollar was $1.85 in 2008, $2.00 in 2007 and $1.84 in 2006. Fluctuations in exchange rates can have a significant impact on our reported sales and profits. In 2008, Pearson generated 59% of its sales in the US (2007: 59%; 2006: 61%). We estimate that a five cent change in the closing exchange rate between the US dollar and sterling in any year could affect our reported earnings per share by 1p and shareholders’ funds by approximately £100m. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk” for more information. The year-end US dollar rate for 2008 was £1:$1.44 compared to £1:$1.99 for 2007. In terms of the year end rate, the weakening of sterling in comparison to the US dollar in 2008 was much more significant than in previous years and the relatively strong US dollar had the effect of increasing shareholders’ funds. The net effect of movement in all currencies in 2008 was an increase in our shareholders’ funds of £1,050m (see also note 29 of “Item 18. Financial Statements”). The year-end rate for the US dollar in 2007 was £1:$1.99 compared to £1:$1.96 for 2006. The comparative weakness of the US dollar was less significant in 2007 and the decrease in shareholders funds due to the US dollar was outweighed by the strength of other currencies principally the Canadian dollar and the Euro which contributed to an overall increase in shareholders’ funds due to exchange movements of £25m in 2007. Critical accounting policies Our consolidated financial statements, included in “Item 18. Financial Statements”, are prepared based on the accounting policies described in note 1 to the consolidated financial statements.
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Certain of our accounting policies require the application of management judgment in selecting assumptions when making significant estimates about matters that are inherently uncertain. Management bases its estimates on historical experience and other assumptions that it believes are reasonable. These policies are described in note 1a(3) in “Item 18. Financial Statements”. Results of operations Year ended December 31, 2008 compared to year ended December 31, 2007 Consolidated results of operations Sales Our total sales from continuing operations increased by £649m, or 16%, to £4,811m in 2008, from £4,162m in 2007. The increase reflected growth, on a constant exchange rate basis, across all the businesses together with additional contributions from acquisitions made in both 2007 and 2008. The year on year growth was impacted by movements in exchange rates, particularly in the US dollar. 2008 sales, translated at 2007 average exchange rates, would have been £4,491m. Pearson Education increased sales by £484m or 18% from £2,628m to £3,112m. The North American business was the major contributor to the increase and although much of the increase was due to exchange and a contribution from the Harcourt Assessment acquisition in 2008, we estimate that after excluding acquisitions there was growth of 3% at constant last year exchange rates. The North American Education business saw growth ahead of the market in its US Higher Education business and strong performances in state testing, catalogue tests and clinical assessment in its US Assessment and Information division. These businesses offset some decline in the US School Curriculum business which faced a decline in the overall US school publishing market of 4.4% (source: Association of American Publishers). International Education sales also benefitted from exchange and a full year contribution from the Harcourt Publishing acquisition in 2007. After excluding the effect of acquisitions we estimate that there was growth of 2% at constant last year exchange rates. Although there was good growth in the International Publishing business, the loss of a key school testing contract held back growth in the International Assessment business. Professional sales increased in 2008 by 8% or 1% at constant last year exchange rates. Growth in professional testing and certification was partially offset by some decline in the professional publishing markets. FT Group sales were 16% ahead of last year with growth at FT Publishing and Interactive Data. FT Publishing sales were up by 13% or 4% after excluding the contribution from acquisitions made in 2007 and 2008 and the effect of exchange. FT Publishing’s sales growth was driven by a shift toward subscription and service based revenues. The newspaper maintained circulation but advertising revenues fell by 3% as the advertising market weakened in the fourth quarter of 2008. Interactive Data sales were up by 18% (9% at constant last year exchange rates and before the contribution from acquisitions) driven by strong sales to both existing and new institutional customers and the maintenance of renewal rates at approximately 95% within the institutional services sector. Penguin’s sales were up 7% in 2008 (3% at constant last year exchange rates and before the effect of portfolio changes) as a result of a strong publishing performance in all its markets in a year where the business continued to publish bestsellers and win awards. Pearson Education, our largest business sector, accounted for 65% of our continuing business sales in 2008 compared to 63% in 2007. North America continued to be the most significant source of our sales and as a proportion of total continuing sales contributed 63% in 2008 and 62% in 2007.
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Cost of goods sold and operating expenses The following table summarizes our cost of sales and net operating expenses: | | | | | | | | | | | | | Year Ended December 31 | | | | | 2008 | | | 2007 | | | | | £m | | | £m | | | | | Cost of goods sold | | | 2,174 | | | | 1,910 | | | Distribution costs | | | 198 | | | | 202 | | | Administration and other expenses | | | 1,890 | | | | 1,600 | | | Other operating income | | | (102 | ) | | | (101 | ) | | | | | | | | | | | | Total | | | 1,986 | | | | 1,701 | | | | | | | | | | | |
| | | Other Net Gains and Losses |
Profits or losses on the sale of businesses, associates and investments that are included in our continuing operations are reported as “other net gains and losses”. In 2005 the only item in this category was the £40 million profit on the sale of our associate interest in MarketWatch. In 2004, other gains and losses amounted to £9 million, with the principal items being profits on the sale of stakes in Capella and Business.com. Cost of goods sold. Cost of sales consists of costs for raw materials, primarily paper, printing and binding costs, amortization of pre-publication costs and royalty charges. Our cost of sales increased by £264m, or 14%, to £2,174m in 2008, from £1,910m in 2007. The increase corresponds to the increase in sales with cost of sales at 45.2% of sales in 2008 compared to 45.9% in 2007. Distribution costs. Distribution costs consist primarily of shipping costs, postage and packing and have typically declined as the business moves more to online delivery of products. Administration and other expenses. Our administration and other expenses increased by £290m, or 18%, to £1,890m in 2008, from £1,600m in 2007. As a percentage of sales they increased slightly to 39% in 2008 from 38% in 2007. Other operating income. Other operating income mainly consists of freight recharges, sub-rights and licensing income and distribution commissions together with income from sale of assets. Other operating income remained fairly consistent at £102m in 2008 compared to £101m in 2007. Share of results of joint ventures and associates The contribution from our joint ventures and associates increased slightly from £23m in 2007 to £25m in 2008. The majority of the profit comes from our 50% interest in the Economist. Operating profit The total operating profit increased by £102m, or 18%, to £676m in 2008 from £574m in 2007. 2008 operating profit, translated at 2007 average exchange rates, would have been £71m lower. Operating profit attributable to Pearson Education increased by £45m, or 12%, to £406m in 2008, from £361m in 2007. The increase was mainly due to exchange which offset the effect of increased intangible amortization and the cost of integrating Harcourt Assessment with the existing Assessment businesses. Operating profit attributable to the FT Group increased by £39m, or 28%, to £179m in 2008, from £140m in 2007. The increase reflects exchange differences and a contribution from new acquisitions but also reflects improved margins at Interactive Data which offset some reorganization costs at the Financial Times. Operating profit attributable to the Penguin Group increased by £18m, or 25%, to £91m in 2008, from £73m in 2007. Although Penguin benefitted from exchange there was also continued progress on margin improvement. Net finance costs Net finance costs decreased from £106m in 2007 to £91m in 2008. Net interest payable in 2008 was £89m, down from £95m in 2007. Although our fixed rate policy reduces the impact of changes in market interest rates, we were still able to benefit from a fall in average US dollar and sterling interest rates during the year. Year on year, average three month LIBOR (weighted for the Group’s net borrowings in US dollars and sterling at each year end) fell by 2.3% to 3.1%. This reduction in floating market interest rates was partially offset by higher fixed bond coupons prevailing at the time of our 2008 bond issue. The overall result was a decrease in the Group’s average net
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interest rate payable by 1.4% to 5.9%. In 2008 the net finance income relating to post-retirement plans was an income of £8m compared to an income of £10m in the previous year. Other net finance costs relating to foreign exchange and short-term fluctuations in the market value of financial instruments included a net foreign exchange loss of £11m in 2008 compared to a loss of £17m in 2007. In 2008 the loss related to the retranslation of foreign currency bank overdrafts and a variety of inter-company items. In 2007 the loss mainly related to losses on Euro denominated debt used to hedge the receipt of proceeds from the sale of Les Echos. For a more detailed discussion of our borrowings and interest expenses see “— Liquidity and Capital Resources — Capital Resources” and “— Borrowings” below and “Item 11. Quantitative and Qualitative Disclosures About Market Risk”. Taxation The total tax charge in 2008 of £172m represents 29% of pre-tax profits compared to a charge of £131m or 28% of pre-tax profits in 2007. Our overseas profits, which arise mainly in the US are largely subject to tax at higher rates than the UK corporation tax rate (28.5% in 2008 compared to 30% in 2007). Higher tax rates were offset by releases from provisions reflecting continuing progress in agreeing our tax affairs with the authorities. Minority interests This comprises mainly the minority share in Interactive Data. Our share of Interactive Data remained at 62% throughout 2008, leaving the minority interest unchanged at 38%. Discontinued operations Discontinued operations relate to the disposal of Government Solutions (in February 2007), Les Echos (in December 2007), Datamark (in July 2007) and the Data Management business (in February 2008). The results of Government Solutions and Les Echos have been included in discontinued operations for 2007 and have been consolidated up to the date of sale. Operating profit for Government Solutions in 2007 was £2m and the loss on disposal after tax recorded in 2007 was £112m after a tax charge of £93m. Les Echos’ operating profit in 2007 amounted to £1m and the profit on sale recorded in 2007 was £165m. There was no tax payable on the Les Echos sale. Datamark was bought with the eCollege acquisition in 2007 and immediately sold. The only profit or loss recognized relating to Datamark was a £7m tax benefit arising from the taxable loss on sale. The Data Management business was included in discontinued operations in 2007 and 2008. In 2007 the operating profit before impairment charges was £12m compared to £nil in 2008. The Data Management business was formerly part of the Group’s Other Assessment and Testing cash-generating unit (CGU) and was carved out of this CGU in preparation for disposal. As a result, the Group recognized a goodwill impairment charge of £97m in 2007 in anticipation of the loss on disposal. The loss before tax on disposal in 2008 was £53m, mainly relating to the cumulative translation adjustment. There was a tax charge of £37m on the sale. Profit for the year The profit for the financial year in 2008 was £323m compared to a profit in 2007 of £310m. The overall increase of £13m was mainly due to the improved operating performance with a contribution from reduced net finance costs. Offsetting this was the increased tax charge and increased loss from the disposal of discontinued businesses. Earnings per ordinary share The basic earnings per ordinary share, which is defined as the profit for the financial year divided by the weighted average number of shares in issue, was 36.6p in 2008 compared to 35.6p in 2007 based on a weighted average number of shares in issue of 797.0m in 2008 and 796.8m in 2007. The increase in earnings per share was due to the increase in profit for 2008 described above and was not significantly affected by the movement in the weighted average number of shares.
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The diluted earnings per ordinary share of 36.6p in 2008 and 35.6p in 2007 was not significantly different from the basic earnings per share in those years as the effect of dilutive share options was again not significant. Exchange rate fluctuations The strengthening of the US dollar and other currencies against sterling on an average basis had a positive impact on reported sales and profits in 2008 compared to 2007. 2008 sales, translated at 2007 average exchange rates, would have been lower by £320m and operating profit, translated at 2007 average exchange rates, would have been lower by £71m. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk” for a discussion regarding our management of exchange rate risks. Sales and operating profit by division The following tables summarize our sales and operating profit for each of Pearson’s divisions. Adjusted operating profit is a non-GAAP financial measure and is included as it is a key financial measure used by management to evaluate performance and allocate resources to business segments. See also note 2 of “Item 18. Financial Statements”. In our adjusted operating profit we have excluded amortization and adjustment of acquired intangibles. The amortization and adjustment of acquired intangibles is the amortization or subsequent adjustment of intangible assets acquired through business combinations. The charge is not considered to be fully reflective of the underlying performance of the Group. Adjusted operating profit enables management to more easily track the underlying operational performance of the Group. A reconciliation of operating profit to adjusted operating profit for continuing operations is included in the tables below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2008 | | | | | North American
| | | International
| | | | | | FT
| | | Interactive
| | | | | | | | £m | | Education | | | Education | | | Professional | | | Publishing | | | Data | | | Penguin | | | Total | | | | | Sales | | | 2,002 | | | | 866 | | | | 244 | | | | 390 | | | | 406 | | | | 903 | | | | 4,811 | | | | | | 42% | | | | 18% | | | | 5% | | | | 8% | | | | 8% | | | | 19% | | | | 100% | | | Total operating profit | | | 258 | | | | 113 | | | | 35 | | | | 67 | | | | 112 | | | | 91 | | | | 676 | | | | | | 38% | | | | 17% | | | | 5% | | | | 10% | | | | 17% | | | | 13% | | | | 100% | | | Add back: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortization and adjustment of acquired Intangibles | | | 45 | | | | 22 | | | | 1 | | | | 7 | | | | 9 | | | | 2 | | | | 86 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjusted operating profit: continuing Operations | | | 303 | | | | 135 | | | | 36 | | | | 74 | | | | 121 | | | | 93 | | | | 762 | | | Adjusted operating profit: discontinued Operations | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total adjusted operating profit | | | 303 | | | | 135 | | | | 36 | | | | 74 | | | | 121 | | | | 93 | | | | 762 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 40% | | | | 17% | | | | 5% | | | | 10% | | | | 16% | | | | 12% | | | | 100% | |
| | | Share of results of joint ventures and associates |
The contribution from our joint ventures and associates increased from £8 million in 2004 to £14 million in 2005. The increase was due to profit improvement at The Economist Group and a reduction in losses at FT Deutschland.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2007 | | | | | North American
| | | International
| | | | | | FT
| | | Interactive
| | | | | | | | £m | | Education | | | Education | �� | | Professional | | | Publishing | | | Data | | | Penguin | | | Total | | | | | Sales | | | 1,667 | | | | 735 | | | | 226 | | | | 344 | | | | 344 | | | | 846 | | | | 4,162 | | | | | | 40% | | | | 18% | | | | 5% | | | | 8% | | | | 8% | | | | 21% | | | | 100% | | | Total operating profit | | | 253 | | | | 82 | | | | 26 | | | | 50 | | | | 90 | | | | 73 | | | | 574 | | | | | | 44% | | | | 14% | | | | 4% | | | | 9% | | | | 16% | | | | 13% | | | | 100% | | | Add back: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortization and adjustment of acquired Intangibles | | | 20 | | | | 10 | | | | 1 | | | | 6 | | | | 7 | | | | 1 | | | | 45 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjusted operating profit: continuing Operations | | | 273 | | | | 92 | | | | 27 | | | | 56 | | | | 97 | | | | 74 | | | | 619 | | | Adjusted operating profit: discontinued Operations | | | — | | | | — | | | | 14 | | | | 1 | | | | — | | | | — | | | | 15 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total adjusted operating profit | | | 273 | | | | 92 | | | | 41 | | | | 57 | | | | 97 | | | | 74 | | | | 634 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 43% | | | | 15% | | | | 6% | | | | 9% | | | | 15% | | | | 12% | | | | 100% | |
The total operating profit increased by £132 million, or 32.7%, to £536 million in 2005 from £404��million in 2004. This £132 million or 33% increase was due to increases across all the businesses, the one-off gain from the sale of MarketWatch of £40 million and a beneficial impact of exchange. We estimate that had the 2004 average rates prevailed in 2005, operating profit would have been £12 million lower. Operating profit attributable to Pearson Education increased by £56 million, or 20%, to £343 million in 2005, from £287 million in 2004. The increase was due to strong sales and improved margins in both the School and Higher Education businesses. Operating profit attributable to the FT Group increased by £63 million, or 90%, to £133 million in 2005, from £70 million in 2004. £40 million of the increase was due to the profit from the sale of MarketWatch but there were also increases at IDC of £13 million and FT Publishing of £10 million. Operating profit attributable to the Penguin Group increased by £13 million, or 28%, to £60 million in 2005, from £47 million in 2004. The increase at Penguin was due in part to increased efficiencies and improved margins and also due to exchange gains and one-off items in 2004. Penguin’s
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operating profit in 2004 was reduced by costs associated with disruption in UK distribution following the move to a new warehouse and closure costs associated with Penguin TV.
North American Education North American Education sales increased by £335m, or 20%, to £2,002m in 2008, from £1,667m in 2007 and adjusted operating profit increased by £30m, or 11%, to £303m in 2008 from £273m in 2007. The results were significantly affected by the weakening of sterling, which we estimate increased sales by £156m and adjusted operating profit by £17m when compared to the equivalent figures at constant 2007 exchange rates. At constant exchange and after taking account of the contribution from acquisitions there was underlying growth in sales but some decline in profits as the contribution from the US school curriculum business declined in a falling market and we expensed costs on the integration of Harcourt Assessment. In the US school market, the Association of American Publishers’ estimate that there was an overall decrease for the industry of 4.4% as state budget issues caused particular industry-wide weakness in the supplementary publishing segment and the open territories (those territories that do not have a state-wide adoption process). New adoption market share was 31% in the adoptions where Pearson competed (and 28% of the total new adoption market). The US School business launched enVisionMATH, an integratedprint-and-digital elementary mathematics program (and the next generation of the innovative and highly successful California social studies program). enVisionMATH helped to gain a market-leading 38% share of all math adoptions, including 50% in Texas. The program also sold strongly across the Open Territories. During the year the U.S. Department of Defense awarded the US school business a five-year contract to provide elementary-school reading programs, including Pearson’s Reading Street, for its schools around the world. In the US Assessment and Information business, the integration of Harcourt Assessment progressed well with strong performances in state testing, catalogue tests and clinical assessments. The market-leading state assessments division continued to gain share, winning almost half of the contracts competed for by value and the business now provides major state-wide testing services to 30 states. The business took the lead in online testing with over 3.8 million secure tests delivered across 13 states during the year, up from 2.5 million in 2007. The National Assessments division benefited from new long-term contracts including the American Diploma Project (a three-year contract to deliver Algebra II exams to a consortium of fifteen states); the College Board’s Accuplacer program (a seven-year contract to deliver computer-adaptive reading, writing and maths test to assess college readiness); and the National Board for Professional Teaching Standards (a five-year contract to develop, administer and score its National Board Certification program for accomplished teachers, covering 25 certificate areas). The leading position in teacher certification was boosted by a three-year renewal in California, a six-year renewal in Oklahoma, a four-year renewal in New Mexico and a two-year contract to manage California’s certification testing for teachers of English as a foreign language. The Clinical Assessments division benefited from the strong growth of our AimsWeb data management and progress monitoring service for the Response to Intervention (RTI) market (which 28
monitors children who are having learning difficulty) and the publication of WAIS-IV and MMPI-RF, new editions of the leading products for assessing intelligence and personality. There were major contract wins in Student Information Systems including South Carolina (709,000 students), Dallas (165,000 students) and Baltimore (83,000 students). There were also continued gains by our new Edustructures business with State Education Agencies, and it successfully implemented proof-of-concept projects in Kansas and Alaska, and expanded projects in Virginia, South Carolina and Wyoming. The US Higher Education publishing market was up 3.6% in 2008, according to the Association of American Publishers, benefiting from healthy enrolments, even in tougher economic conditions, and federal government action to support student funding. The industry continues to see strong demand for instructional materials that are enhanced by technology and customization. Our US Higher Education business grew significantly faster than the industry and outperformed the market for the tenth straight year. There was continued investment in established and new author franchises, such as Campbell and Reece’sBiology, Tro’sChemistry,Lilienfeld, Lynn, Namy and Woolf’sPsychologyand Wysocki and Lynch’sDK Handbook. There was also rapid growth in ‘MyLab’ digital learning, homework and assessment programs, which now span the curriculum. MyLab products are now used by more than 4.3m students globally, with student registrations 48% higher than in 2007. Evaluation studies show that the use of the MyLab programs can significantly improve student test scores and institutional productivity. We saw strong growth in Custom Solutions with our expansion beyond custom textbooks to educational solutions including on-demand authoring of original content, customized technology, and on-demand curriculum, assessments and courseware. The Higher Education business formed new strategic partnerships to provide materials and online learning services to educational institutions. These included Rio Salado College in Arizona, which has 450 online classes and 48,000 students; the Colorado Community College system, providing digital textbooks for 17 courses; and the Louisiana Community & Technical College System, providing students with a customised online learning program across 47 campuses through the combination of custom textbooks, eCollege and MyLabs. eCollege, the platform for fully-online distance learning in higher education, increased enrolments by 34% to 2.5m and benefited from continued strong renewal rates. It achieved good new business performance in both the US and internationally, most notably in Brazil. Overall margins in the North American Education business were lower at 15.1% in 2008 compared to 16.4% in 2007 with the majority of the decline attributable to the Harcourt Assessment integration costs. International Education International Education sales increased by £131m, or 18%, to £866m in 2008, from £735m in 2007 and adjusted operating profit increased by £43m, or 47%, to £135m in 2008 from £92m in 2007. The results benefit from exchange gains and a full year contribution in 2008 from the acquisition of Harcourt International. In the UK, Edexcel received over 1.3 million registrations for vocational assessment which, when combined with more than 2.1 million registrations for general qualifications, made it one of the UK’s largest assessment organisations. Edexcel marked 4.3m ’A’-level and GCSE (national secondary school examinations) scripts onscreen, representing 88% of all student work marked by their examiners. Edexcel also made a significant investment in supporting the growth of academic and vocational qualifications both in the UK and internationally including the UK’s new Diploma qualification for14-19 year-olds, the IGCSE qualifications to meet the needs of International schools and colleges and BTEC, Edexcel’s flagship vocational qualification where registrations have grown from about 70,000 to 250,000 in the last two years. The UK school publishing business grew ahead of the market, with Harcourt International making a significant contribution. This was driven by curriculum reform and market share gains in the secondary market, helped by strong publishing, innovative technology and integrated assessment for learning. The combination of Pearson content, customisation capabilities and technology supported strong performances in Higher Education and ELT across the European markets including France, Benelux and Central and Eastern Europe. The ‘MyLab’ digital learning, homework and assessment programmes were used internationally by more than 237,000 students, up 82% on 2007, and are now sold in more than 65 countries worldwide. MyLabs and Mastering Physics, two of Pearson’s online education programmes, continue to win international adoptions, increasingly with localised versions for individual markets.
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In the Middle East, the business won a contract to deliver the Abu Dhabi Education Council’s external assessment program over three years starting in 2009. The tests cover English, Arabic, mathematics and science for students in grades 3 to 11. Pearson worked with Jordan’s Ministry of Education to build a test development system which has been enhanced to support the creation of test items and tests in Arabic, replacing a paper-based system. In India, International Education saw rapid sales growth underpinned by strong local publishing of titles includingMacroeconomicsby Errol D’Sousa of IIM Ahmedabad and Upinder Singh’s book on Ancient and Medieval Indian History. Two books published by Pearson Education won the First and Third Prize in the Delhi Management Association’s DMA-NTPC Awards. In Thailand, Pearson secured its largest adoption of MyITLab outside North America at Sripatum University accompanied by the Go! Office 2007 series of textbooks. International Education saw rapid growth in Mexico, the business’ largest market in the Latin America region, with particularly strong growth in custom publishing. In English Language Teaching, we won an integrated custom publishing, academic support and services solutions contract with CONALEP, the national vocational/technical secondary program. We developed a custom publishing program for a leading test prep academy, CONAMAT, which includedSimplified Mathematics, the best selling title of the program, selling over 20,000 units. In Panama, the Ministry of Education adopted Prentice Hall’s Virtual Labs and Lab Manuals for Chemistry and Biology for 75,000 high school students. In Brazil, which has Latin America’s largest and fastest-growing university population, Pearson provided custom publishing services to five leading universities in business, math, science, engineering and several other fields. There was growing success in Government tenders including a new local math series for middle schools in Mexico and the adoption of two levels of our primary Science program in Chile, adapted from our US Scott Foresman 5th/6th Grade program, to support local curriculum standards in Spanish. Strong growth of English Language Teaching materials across Latin America was underpinned by the performance in Mexico, Argentina, Colombia, Peru and Central America. International Education margins continued to improve and the increase in the overall margin from 12.5% in 2007 to 15.6% in 2008 continued to reflect increases in both publishing and testing margins. Professional Professional sales increased by £18m, or 8%, to £244m in 2008 from £226m in 2007. Adjusted operating profit from continuing operations increased by £9m or 33% to £36m in 2008, from £27m in 2007. Sales were affected by the weakness of sterling, which increased sales by £15m when compared to the equivalent figures at constant 2007 exchange rates. In professional testing (Pearson VUE), approximately 6m secure online tests were delivered in more than 4,000 test centers worldwide in 2008, an increase of 2% over 2007. Registration volumes for the Graduate Management Admissions Council test rose 12% worldwide in 2008, including a 22% increase outside the US. New business included contracts to provide certification exams for the Health Authority of Abu Dhabi, end of course exams for Maryland University College, certification exams for the Institute of Supply Management, the development and administration of tests for the Colorado Office of Barber and Cosmetology Licensure and an exclusive contract with Adobe. Renewals included contracts with the Georgia Insurance Licensing Board, the Virginia Board of Nursing, the Law National Admissions Consortium, Measurement Research Associates Inc., and the Kentucky Real Estate Commission. Pearson VUE also announced the transition of The Institute of Internal Auditors certification exam, the Certified Internal Auditor, frompaper-and-pencil to computer-based test delivery. The Certified Internal Auditor designation is the only globally accepted certification for internal auditors and will be delivered in English, Japanese, French, Spanish and Italian. The business also agreed a partnership with NIIT Ltd. of India to expand Pearson VUE’s certification network in India, extending a range of tests for students throughout the country. In a first phase, Pearson VUE and NIIT will set up testing facilities in Bangalore, Chennai, New Delhi, Hyderabad and Pune. In Professional publishing, TheiPhone Developer’s Cookbookby Erica Sadun initially published online as a DRM-free ebook, became the number one computer book for Amazon Kindle and the number one book on Safari. And, when published in print form, became the number one Computers & Internet Book on Amazon. Scott Kelby, an author at our technology imprint Peachpit, was the top-selling author of computer books in the United States for the fifth consecutive year with titles such asThe iPhone Book,Mac OS X Leopard BookandThe Adobe CS4 Book
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for Digital Photographers. The Professional publishing business created nearly 200 video based educational lessons (230 hours of video) including Aarron Walter’sSEO And Beyond, and Deitel & Associates’C# 2008 Fundamentals I and II and built new distribution channels for video via our web sites, and via Safari Books Online. The business developed a new iterative publishing programme called Rough Cuts which allows authors and customers to interact ahead of publication, building awareness and capturing customer contributions. Almost 25% of the print books published in 2008 entered the Rough Cuts program, benefiting from comments prior to print publication. There was also strong growth in eBooks, videos and other digital assets sold directly (via our websites and our joint venture, Safari Books Online) and through other digital retail outlets (such as the Amazon Kindle and Sony eReader). Sales of English and local language technology books saw good growth in international markets including the Middle East, South Africa, India and South America with best-sellers includingCCNA Exam Certification Libraryby Wendell Odom,Presentation Zenby Garr Reynolds andEffective Java 2Eby Josh Bloch. Titles by Pearson’s business imprints, including FTPress and Wharton School Publishing, includedFinancial Shockby Mark Zandi, Chief Economist at Moody’s and an advisor to the White House, on the causes of the credit crunch with particular emphasis on the sub-prime mortgage market. Overall margins in the Professional business continued their rapid improvement and were higher at 14.8% in 2008 compared to 11.9% in 2006 as margins improved again in both the testing and professional publishing businesses. FT Publishing Sales at FT Publishing increased by £46m or 13%, from £344m in 2007 to £390m in 2008. Adjusted operating profit from continuing operations increased by £18m, from £56m in 2007 to £74m in 2008. The sales and profit increase is mainly generated by Mergermarket, which continued to perform strongly. FT Publishing benefited from the shift towards subscription and service-based revenues despite a tough advertising market, particularly in the fourth quarter.Financial Timesmaintained worldwide newspaper circulation at approximately 435,000 (434,196 average for the June-December ABC period) and won both major UK press awards: Newspaper of the Year at the 2008 British Press Awards and Newspaper Awards. In the UK National Readership Survey, readership rose more than 16% to 418,000.Financial Timescirculation revenues were up 16% as investment in content and demand for high-quality analysis of the global financial crisis supported increases in pricing and quality of circulation. FT Publishing advertising revenues were 3% lower for the full year, with a significantly weaker advertising market in the fourth quarter as financial institutions, technology companies and recruiters reduced their marketing investment. During 2008 we took a series of actions to reduce cost and prepare for more difficult trading conditions in 2009. The Financial Times continued to invest in international expansion and fast-growing markets. It successfully launched a new edition for the Middle East, andRui, a lifestyle and wealth-management magazine for China’s fast-growing business elite. FT.com benefited from the launch of an innovative new access model involving registration for access to more than three articles per month. Subscribers grew 9% to 109,609, while registered users increased more than five-fold from about 150,000 at the end of 2007 to 966,000 at the end of 2008. There was a strong performance from Mergermarket, benefiting from its digital subscription model, with contract renewal rates of almost 85%. The Mergermarket and Debtwire products performed particularly well, emphasising that the services remain valuable to customers throughout the cycle. Mergermarket launched two new products, Debtwire ABS and Debtwire Restructuring Database, in response to growing levels of distressed asset sales and restructuring funds. It continued to expand and acquire new customers geographically in the US, Europe and Asia, launching its M&A event-driven product, dealReporter, in Russia, Poland, Turkey, the UAE and South Africa. Mergermarket also continued to build its Pharmawire product for financial institutions that support the pharmaceutical industry. Mergermarket’s conference business, Remark, had a strong year, with significant growth in the number of events, attendees and newsletter publications. It also increased its digital offering in this business through video, podcasts and live webcasts. In January 2008, FT acquired Money-Media, which provides online news and commentary for the fund-management industry. During the year, Money-Media rolled out Ignites Europe, an online news service for people working with the European cross-border fund industry.
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At The Economist, in which Pearson owns a 50% stake, global weekly circulation increased by 6.4% to 1.39 m (for the July-December 2008 ABC period). FTSE, in which Pearson also owns a 50% stake, announced several new indices including expansion of the FTSE Environmental Opportunities Index and introduction, in partnership with the Athens Exchange, of the FTSE/ATHEX Liquid Mid Index. Our share of the profits of the Economist and FTSE totaled £18m in 2008 compared to £17m in 2007. Overall margins at FT Publishing continued to increase driven by the online businesses and in 2008 were 19.0% compared to 16.3% in 2007. Interactive Data Interactive Data, grew its sales by 18% from £344m in 2007 to £406m in 2008. Adjusted operating profit grew by 25% from £97m in 2007 to £121m in 2008. Interactive Data margins increased from 28.2% in 2007 to 29.8% in 2008. Both sales and adjusted operating profit were affected by the relative strength of the US dollar, which we estimate increased sales by £28m and adjusted operating profit by £9m when compared to the equivalent figures at constant 2007 exchange rates. Interactive Data revenue growth was driven by strong new sales and approximately 95% renewal rates within its Institutional Services segment. Pricing and Reference Data continued to generate good growth in North America and Europe. Growth was primarily organic, providing additional services to customers; but it also benefited from bolt-on acquisitions, most recently the purchase of NDF, a leading provider of securities pricing, reference data and related services to most of the major financial institutions in Japan. Real-Time Services saw strong growth in its real-time data feeds business and continued expansion of its Managed Solutions business in the United States. Real-Time Services added a number of new market sources in North America and the Middle East. The Managed Solutions business announced that it had doubled the number of clients in the United States during the past year to 80. There was continued investment in expanding the breadth and depth of the data covered and products offered, including a new alliance to provide complex derivatives and structured product valuation services; and in the capacity of its real-time infrastructure to allow for the anticipated growth in real-time market data volumes. Interactive Data continued to benefit from growth trends, including heightened scrutiny around the valuation of securities, increasing regulation, increasing adoption of low latency data for algorithmic trading and continuing need to differentiate wealth management offerings with bespoke client interface solutions. The Penguin Group Penguin Group sales increased to £903m in 2008 from £846m in 2007 and adjusted operating profit was up 26% to £93m in 2008 from £74m in 2007. Both sales and adjusted operating profit were affected by the stronger US dollar which we estimate increased sales by £54m and adjusted operating profit by £16m when compared to the equivalent figures at constant 2007 exchange rates. In the US, Penguin had a number oneNew York Timesbestseller for 49 weeks of the year, including Patricia Cornwell’sScarpetta, Eckhart Tolle’sA New Earthand Greg Mortenson’sThree Cups of Tea. Penguin authors won the major industry awards. Junot Díaz won The Pulitzer Prize for Fiction and the National Book Critics Circle Award for Fiction forThe Brief Wondrous Life of Oscar Wao, and Barton Gellman won the Pulitzer Prize for National Reporting. In the UK, Penguin had 67 top ten bestsellers versus 52 in 2007, according to BookScan. The number one bestsellerDevil May Care, the new James Bond novel by Sebastian Faulks, was the fastest-selling hardback fiction title in Penguin UK’s history and third-bestselling in the UK in 2008. Other bestsellers includedThis Charming Manby Marian Keyes,The Beach Houseby Jane Green andJamie’s Ministry of Foodby Jamie Oliver. Penguin UK also published many more paperback originals, including Judith O’Reilly’sA Wife in the North. In Australia, Penguin was named Publisher of the Year at the Australian Book Industry Awards (and won four of the seven awards for individual books) and grew sales ahead of its markets with bestsellers including titles from Australian authors Bryce Courtenay and Tim Winton alongside international authors Marian Keyes and Eckhart Tolle. In India, Penguin is the largest trade publisher and continued to grow rapidly with authors such as Shobhaa
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De, Amitav Ghosh and Nandan Nilekani. It also won the major English language prizes in India’s national book awards. Penguin’s eBook publishing and sales expanded significantly in 2008, with nearly five-fold growth in eBook sales in the US. Penguin worldwide now has 8,500 eBook titles available, more than double the number available in 2007 and during the year Penguin US launched an Enriched eBook Classics series with Jane Austen’sPride and Prejudice, which debuted in the top 10 on the Amazon Kindle bestseller list. The series is now sold via online stores on both Amazon.com and Penguin.com. Traffic for all Penguin’s web sites increased 37% to 17 million unique users. Year ended December 31, 2007 compared to year ended December 31, 2006 Consolidated results of operations Sales Our total sales from continuing operations increased by £172m, or 4%, to £4,162m in 2007, from £3,990m in 2006. The increase reflected growth, on a constant exchange rate basis, across all the businesses together with additional contributions from acquisitions made in both 2006 and 2007. The year on year growth was impacted by movements in exchange rates, particularly in the US dollar. 2007 sales, translated at 2006 average exchange rates, would have been £4,385m. Pearson Education had another year of growth with an increase in sales of 4%. The International Education business was the biggest contributor to this growth with an increase of 15%. Some of the Pearson Education increase was due to a full year contribution from acquisitions made in 2006 and to additional contribution from the Harcourt acquisition in 2007. We estimate that after excluding these acquisitions the growth would have been 6% at constant last year exchange rates. In North America, US School publishing sales were up 3.5% compared to an industry increase of 2.7% (source: Association of American Publishers) as the business benefited from sustained investment in new basal programs and innovative digital services. US School testing grew in double digits and although US Higher Education sales were 1% behind the previous year on a headline basis, they would have been 6% ahead of the previous year at constant 2006 exchange rates and after taking account of portfolio changes. This increase meant that the US Higher Education business grew faster than the industry for the ninth successive year. There was also faster growth in international school publishing and international testing sales, principally in the UK, where sales were up in double digits after benefiting from further contract wins, market share gains and strength in on-line assessment. In the Professional business, Professional testing sales were up by 10% in 2007 as approximately 5.8m secure online tests were delivered in more than 5,000 testing centers worldwide. Professional publishing sales increased in 2007 by 7%, after a number of years of decline in the professional publishing markets, as it benefited from a focused and refreshed front list, a favorable software release schedule and sales from Safari Books Online, our electronic publishing platform (a joint venture with O’Reilly Media). The FT Group sales were 12% ahead of 2006 with a full year contribution from Mergermarket acquired in the second half of 2006. FT Publishing sales were up by 23% or 12% after excluding the contribution from acquisitions made in 2006 and 2007. FT Publishing growth was driven by a 10% increase in advertising revenues, circulation up 2% and a strong contribution from FT.com. Interactive Data sales were up by 4% (8% at constant 2006 exchange rates and before the contribution from acquisitions) driven by strong sales to both existing and new institutional customers and a renewal rate of approximately 95% within the institutional services sector. Penguin’s sales were flat year on year but would have increased by 3% translated at 2006 average exchange rates as a result of its successful global publishing performance and another outstanding year for bestsellers in the US and UK.
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Pearson Education, our largest business sector, accounted for 63% of our continuing business sales in both 2007 and 2006. North America continued to be the most significant source of our sales and as a proportion of total continuing sales contributed 62% in 2007 and 65% in 2006. Cost of goods sold and operating expenses The following table summarizes our cost of sales and net operating expenses: | | | | | | | | | | | | | Year Ended December 31 | | | | | 2007
| | | 2006
| | | | | £m | | | £m | | | | | Cost of goods sold | | | 1,910 | | | | 1,841 | | | Distribution costs | | | 202 | | | | 232 | | | Administration and other expenses | | | 1,600 | | | | 1,518 | | | Other operating income | | | (101 | ) | | | (99 | ) | | | | | | | | | | | | Total | | | 1,701 | | | | 1,651 | | | | | | | | | | | |
Net finance costs reduced from £79 million in 2004 to £70 million in 2005. Net interest payable in 2005 was £77 million, up from £74 million in 2004. The group’s net interest rate payable rose by 0.9% to 5.9%. Although we were partly protected by our fixed rate policy, the strong rise in US dollar floating interest rates had an adverse effect. Year on year, average three month LIBOR (weighted for the Group’s borrowings in US dollars, euro and sterling) rose by 1.9% to 3.4%. This was largely offset by the £260m fall in average net debt, reflecting in particular the proceeds from the disposal of Recoletos and good cash generation. In addition, in 2005 we did not benefit from a one-off credit of £9m for interest on a repayment of tax that occurred in 2004. As at January 1, 2005 we adopted IAS 39‘Financial Instruments: Recognition and Measurement’ in our financial statements. This has had the effect of introducing increased volatility into the net finance cost and in 2005 the adoption of IAS 39 reduced net finance costs by £14 million. For a more detailed discussion of our borrowings and interest expenses see “— Liquidity and Capital Resources — Capital Resources” and “— Borrowing”Cost of goods sold. Cost of sales consists of costs for raw materials, primarily paper, printing and binding costs, amortization of pre-publication costs and royalty charges. Our cost of sales increased by £69m, or 4%, to £1,910m in 2007, from £1,841m in 2006. The increase corresponds to the increase in sales with cost of sales at 45.9% of sales in 2007 compared to 46.1% in 2006. Distribution costs. Distribution costs consist primarily of shipping costs, postage and packing and have typically declined as the business moves more to online delivery of products. Administration and other expenses. Our administration and other expenses increased by £82m, or 5%, to £1,600m in 2007, from £1,518m in 2006. As a percentage of sales they remained at 38% in both 2007 and 2006. Other operating income. Other operating income mainly consists of freight recharges, sub-rights and licensing income and distribution commissions together with income from sale of assets. Other operating income increased marginally by 2% to £101m in 2007 from £99m in 2006. Share of results of joint ventures and associates The contribution from our joint ventures and associates decreased slightly from £24m in 2006 to £23m in 2007. Our share of profit from the Economist in 2006 included a one-off gain of £4m from the sale of its interest in Commonwealth Business Media Inc which was not repeated in 2007. Operating profit The total operating profit increased by £52m, or 10%, to £574m in 2007 from £522m in 2006. 2007 operating profit, translated at 2006 average exchange rates, would have been £34m higher. Operating profit attributable to Pearson Education increased by £9m, or 3%, to £361m in 2007, from £352m in 2006. The increase was due to continued improvement in School and Professional margins, but was offset by an increase in intangible amortization from £18m in 2006 to £31m in 2007. Operating profit attributable to the FT Group increased by £28m, or 25%, to £140m in 2007, from £112m in 2006. The increase reflects the increase in revenues from both established businesses and an increased contribution from new acquisitions but also reflects improvements in margins particularly at FT Publishing. Operating profit attributable to the Penguin Group increased by £15m, or 26%, to £73m in 2007, from £58m in 2006 although the 2006 result included a one off goodwill charge of £7m relating to the recognition of pre-acquisition tax losses at Dorling Kindersley. Net finance costs Net finance costs increased from £74m in 2006 to £106m in 2007. Net interest payable in 2007 was £95m, up from £94m in 2006. Although we were partly protected by our fixed rate policy, the strong rise in average US dollar
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floating interest rates had an adverse effect. Year on year, average three month LIBOR (weighted for the Group’s borrowings in US dollars, euros and sterling at the year end) rose by 0.5% to 5.4%, reflecting a rise in interest rates and a change in the currency mix of year end debt. These two factors, partly offset by a decrease in the Group’s average net debt of £90m, increased the Group’s average net interest rate payable by 0.3% to 7.3%. In 2007 the net finance income relating to post-retirement plans was an income of £10m compared to an income of £4m in the previous year. Other net finance income relating to foreign exchange and short-term fluctuations in the market value of financial instruments included a net foreign exchange loss of £17m in 2007 compared to a gain of £19m in 2006. In 2007 the loss mainly related to losses on Euro denominated debt used to hedge the receipt of proceeds from the sale of Les Echos. In 2006 the exchange gains mainly relate to the unhedged exposure on Euro borrowings and swaps that could not be designated as a net investment under IAS 39. For a more detailed discussion of our borrowings and interest expenses see “— Liquidity and Capital Resources — Capital Resources” and “— Borrowings” below and “Item 11. Quantitative and Qualitative Disclosures About Market Risk”. Taxation The total tax charge in 2007 of £131m represents 28% of pre-tax profits compared to a charge of just £4m or less than 1% of pre-tax profits in 2006. The low tax rate in 2006 was mainly accounted for by two factors. First, in anticipation of the disposal of Government Solutions, we recognized a deferred tax asset in relation to capital losses in the US where previously we were not confident that the benefit of the losses would be realized prior to their expiry. Second, in the light of our trading performance in 2006 and our strategic plans, together with the expected utilization of US net operating losses in the Government Solutions sale, we re-evaluated the likely utilization of operating losses both in the US and the UK; this enabled us to increase the amount of the deferred tax asset carried forward in respect of such losses. The combined effect of these two factors was to create a non-recurring credit of £127m in 2006 which was not repeated in 2007. Minority interests This comprises mainly the minority share in Interactive Data. Our share of Interactive Data remained at 62% throughout 2007, leaving the minority interest unchanged at 38%. Discontinued operations Discontinued operations relate to the disposal of Government Solutions (in February 2007), Les Echos (in December 2007), Datamark (in July 2007) and the Data Management business (in February 2008). The results of Government Solutions and Les Echos have been included in discontinued operations for 2007 and 2006 and have been consolidated up to the date of sale. Operating profit for Government Solutions in 2007 was £2m compared to £22m in 2006 and the loss on disposal after tax recorded in 2007 was £112m after a tax charge of £93m. Les Echos’ operating profit in 2007 amounted to £1m compared to £5m in 2006 and the profit on sale recorded in 2007 was £165m. There was no tax payable on the Les Echos sale. Datamark was bought with the eCollege acquisition and immediately sold. The only profit or loss recognized relating to Datamark was a £7m tax benefit arising from the loss on sale. The Data Management business was held throughout 2006 and 2007 and the operating profit before impairment charges in 2007 was £12m compared to £13m in 2006. The Data Management business was formerly part of the Group’s Other Assessment and Testing cash-generating unit (CGU) and was carved out of this CGU in preparation for disposal. As a result, the Group has recognized a goodwill impairment charge of £97m in 2007 in anticipation of the loss on disposal. Profit for the year The total profit for the financial year in 2007 was £310m compared to a profit in 2006 of £469m. The overall decrease of £159m was mainly due to the absence of the non-recurring tax credit of £127m recorded in 2006, the decrease in contribution from discontinued businesses of £52m and the increase in net finance costs of £32m, largely due to exchange losses. These items more than offset the increase in operating profit in 2007.
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Earnings per ordinary share The basic earnings per ordinary share, which is defined as the profit for the financial year divided by the weighted average number of shares in issue, was 35.6p in 2007 compared to 55.9p in 2006 based on a weighted average number of shares in issue of 796.8m in 2007 and 798.4m in 2006. The decrease in earnings per share was due to the decrease in profit for 2007 described above and was not significantly affected by the movement in the weighted average number of shares. The diluted earnings per ordinary share of 35.6p in 2007 and 55.8p in 2006 was not significantly different from the basic earnings per share in those years as the effect of dilutive share options was again not significant. Exchange rate fluctuations The weakening of the US dollar against sterling on an average basis had a negative impact on reported sales and profits in 2007 compared to 2006. 2007 sales, translated at 2006 average exchange rates, would have been higher by £223m and operating profit, translated at 2006 average exchange rates, would have been higher by £34m. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk” for a discussion regarding our management of exchange rate risks. Sales and operating profit by division The following tables summarize our sales and operating profit for each of Pearson’s divisions. Adjusted operating profit is a non-GAAP financial measure and is included as it is a key financial measure used by management to evaluate performance and allocate resources to business segments. See also note 2 of “Item 18. Financial Statements”. In our adjusted operating profit we have excluded amortization and adjustment of acquired intangibles, other gains and losses and other net finance costs of associates. The amortization and adjustment of acquired intangibles is the amortization or subsequent adjustment of intangible assets acquired through business combinations. The charge is not considered to be fully reflective of the underlying performance of the Group. Other gains and losses represent profits and losses on the sale of subsidiaries, joint ventures, associates and investments that are included within continuing operations but which distort the performance for the year. Adjusted operating profit enables management to more easily track the underlying operational performance of the Group. A reconciliation of operating profit to adjusted operating profit for continuing operations is included in the tables below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2007 | | | | | North
| | | | | | | | | | | | | | | | | | | | | | | American
| | | International
| | | | | | FT
| | | Interactive
| | | | | | | | £m | | Education | | | Education | | | Professional | | | Publishing | | | Data | | | Penguin | | | Total | | | | | Sales | | | 1,667 | | | | 735 | | | | 226 | | | | 344 | | | | 344 | | | | 846 | | | | 4,162 | | | | | | 40% | | | | 18% | | | | 5% | | | | 8% | | | | 8% | | | | 21% | | | | 100% | | | Total operating profit | | | 253 | | | | 82 | | | | 26 | | | | 50 | | | | 90 | | | | 73 | | | | 574 | | | | | | 44% | | | | 14% | | | | 4% | | | | 9% | | | | 16% | | | | 13% | | | | 100% | | | Add back: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortization and adjustment of acquired intangibles | | | 20 | | | | 10 | | | | 1 | | | | 6 | | | | 7 | | | | 1 | | | | 45 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjusted operating profit: continuing operations | | | 273 | | | | 92 | | | | 27 | | | | 56 | | | | 97 | | | | 74 | | | | 619 | | | Adjusted operating profit: discontinued operations | | | — | | | | — | | | | 14 | | | | 1 | | | | — | | | | — | | | | 15 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total adjusted operating profit | | | 273 | | | | 92 | | | | 41 | | | | 57 | | | | 97 | | | | 74 | | | | 634 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 43% | | | | 15% | | | | 6% | | | | 9% | | | | 15% | | | | 12% | | | | 100% | |
The total tax charge for the year was £124 million, representing a 27% rate on pre-tax profits of £466 million. This compares with a 2004 rate of 19% (or £63m on a pre-tax profit of £325m). In 2004, the tax charge reflected credits of £48m relating to previous years, a substantial element of which was non-recurring; adjustments relating to previous years in 2005 resulted in a credit of £18m. The 2005 rate benefited from the fact that the profit of £40m on the sale of Marketwatch.com was free of tax.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2006 | | | | | North
| | | | | | | | | | | | | | | | | | | | | | | American
| | | International
| | | | | | FT
| | | Interactive
| | | | | | | | £m | | Education | | | Education | | | Professional | | | Publishing | | | Data | | | Penguin | | | Total | | | | | Sales | | | 1,679 | | | | 640 | | | | 211 | | | | 280 | | | | 332 | | | | 848 | | | | 3,990 | | | | | | 42% | | | | 16% | | | | 5% | | | | 7% | | | | 8% | | | | 22% | | | | 100% | | | Total operating profit | | | 266 | | | | 70 | | | | 16 | | | | 30 | | | | 82 | | | | 58 | | | | 522 | | | | | | 51% | | | | 13% | | | | 3% | | | | 6% | | | | 16% | | | | 11% | | | | 100% | | | Add back: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortization and adjustment of acquired intangibles | | | 14 | | | | 3 | | | | 1 | | | | 2 | | | | 7 | | | | 8 | | | | 35 | | | Other net gains and losses including associates | | | — | | | | — | | | | — | | | | (4) | | | | — | | | | — | | | | (4) | | | Other net finance costs of associates | | | — | | | | — | | | | — | | | | (1) | | | | — | | | | — | | | | (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjusted operating profit: continuing operations | | | 280 | | | | 73 | | | | 17 | | | | 27 | | | | 89 | | | | 66 | | | | 552 | | | Adjusted operating profit: discontinued Operations | | | — | | | | — | | | | 35 | | | | 5 | | | | — | | | | — | | | | 40 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total adjusted operating profit | | | 280 | | | | 73 | | | | 52 | | | | 32 | | | | 89 | | | | 66 | | | | 592 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 47% | | | | 12% | | | | 9% | | | | 6% | | | | 15% | | | | 11% | | | | 100% | |
Following the disposal of our 79% holding in Recoletos in April 2005 and the purchase of the 25% minority stake in Edexcel in February 2005, our minority interests now mainly comprise the 39% minority share in IDC. | | | Discontinued OperationsNorth American Education |
The results of Recoletos have been consolidated for the period up to February 28, 2005 and included in discontinued operations in 2005 and 2004. The results for 2005 include an operating loss for the two months to February 28, 2005 of £3 million compared to an operating profit in the full year to December 31, 2004 of £26 million. The profit on disposal of Recoletos reported in 2005 was £306 million.
| | | Profit for the Financial Year |
The total profit for the financial year in 2005 was £644 million compared to a profit in 2004 of £284 million. The overall increase of £360 million was mainly due to the profit on disposal of Recoletos and MarketWatch together with significant improvement in operating profits reported across all the Pearson businesses. These increases were only partially offset by the increase in the tax charge in 2005. | | | Earnings per Ordinary Share |
The basic earnings per ordinary share, which is defined as the profit for the financial year divided by the weighted average number of shares in issue, was 78.2 pence in 2005 compared to 32.9 pence in 2004 based on a weighted average number of shares in issue of 797.9 million in 2005 and 795.6 million in 2004. This increase in earnings per share was due to the additional profit for the financial year described above and was not significantly affected by the movement in the weighted average number of shares.
The diluted earnings per ordinary share of 78.1 pence in 2005 and 32.9 pence in 2004 was not significantly different from the basic earnings per share in those years as the effect of dilutive share options was again not significant.
North American Education sales decreased by £12m, or 1%, to £1,667m in 2007, from £1,679m in 2006 and adjusted operating profit decreased by £7m, or 2%, to £273m in 2007 from £280m in 2006. The results were significantly affected by the weakening of the US dollar, which we estimate reduced sales by £135m and adjusted operating profit by £22m when compared to the equivalent figures at constant 2006 exchange rates. At constant exchange there was strong underlying growth in sales and profits, the School results in 2007 benefited from a full year contribution from the acquisitions of National Evaluation Systems (NES), Chancery and PowerSchool made in 2006. | | | Exchange Rate Fluctuations |
The strengthening of the US dollar against sterling on an average basis had a positive impact on reported sales and profits in 2005 compared to 2004. We estimate that if the 2004 average rates had prevailed in 2005, sales would have been lower by £46 million and operating profit would have been lower by £12 million. See 26
“Item 11. Quantitative and Qualitative Disclosures About Market Risk” for a discussion regarding our management of exchange rate risks.
| | | Sales and Operating Profit by Division |
The following table summarizes our operating profit and results from operations for each of Pearson’s divisions. Adjusted operating profit is included as it is a key financial measure used by management to evaluate performance and allocate resources to business segments, as reported under SFAS 131. Since 1998 we have reshaped the Pearson portfolio by divesting of non-core interests and investing in educational publishing and testing, consumer publishing and business information companies. During this period of transformation management has used adjusted operating profit to track underlying core business performance.
In our adjusted operating profit we have excluded amortization of acquired intangibles, other gains and losses and other net finance costs of associates. The amortization of acquired intangibles is not considered to be fully reflective of the underlying performance of the group. Other gains and losses represent profits and losses on the sale of subsidiaries, joint ventures, associates and investments that are included within continuing operations but which distort the performance for the year. Other net finance costs of associates are foreign exchange and other gains and losses that represent short-term fluctuations in market value and are subject to significant volatility. These gains and losses may not be realized in due course as it is normally the intention to hold these instruments to maturity. Increased volatility has been introduced as a result of adopting IAS 39 ’Financial Instruments: Recognition and Measurement’ as at January 1, 2005. Finance costs and income of joint ventures and associates are reported within the share of results of joint ventures and associates that is included within operating profit. Group finance costs and income are reported separately in the income statement below the operating profit line.
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Adjusted operating profit enables management to more easily track the underlying operational performance of the group. A reconciliation of operating profit to adjusted operating profit is included in the table below:
| | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31 | | | | | | | | | | 2005 | | | 2004 | | | | | | | | | | | | | £m | | | % | | | £m | | | % | | | | | | | | | | | | | | | | Total operating profit | | | | | | | | | | | | | | | | | | Pearson Education: | | | | | | | | | | | | | | | | | | | School | | | 142 | | | | 27 | | | | 112 | | | | 27 | | | | Higher Education | | | 156 | | | | 29 | | | | 133 | | | | 33 | | | | Professional | | | 45 | | | | 8 | | | | 42 | | | | 10 | | | FT Group: | | | | | | | | | | | | | | | | | | | FT Publishing | | | 58 | | | | 11 | | | | 8 | | | | 2 | | | | IDC | | | 75 | | | | 14 | | | | 62 | | | | 16 | | | Penguin | | | 60 | | | | 11 | | | | 47 | | | | 12 | | | | | | | | | | | | | | | | | Total | | | 536 | | | | 100 | | | | 404 | | | | 100 | | | | | | | | | | | | | | | | | | | Add back: | | | | | | | | | | | | | | | | | | | | Amortization of acquired intangibles | | | | | | | | | | | | | | | | | | | | School | | | 5 | | | | | | | | — | | | | | | | | | Higher Education | | | — | | | | | | | | — | | | | | | | | | Professional | | | — | | | | | | | | — | | | | | | | | | Penguin | | | — | | | | | | | | — | | | | | | | | | FT Publishing | | | 1 | | | | | | | | — | | | | | | | | | IDC | | | 5 | | | | | | | | 5 | | | | | | | | | | | | | | | | | | | | | | | Total | | | 11 | | | | | | | | 5 | | | | | | | | | | | | | | | | | | | | | | | Other net gains and losses | | | | | | | | | | | | | | | | | | | | School | | | — | | | | | | | | (4 | ) | | | | | | | | Higher Education | | | — | | | | | | | | (4 | ) | | | | | | | | Professional | | | — | | | | | | | | (2 | ) | | | | | | | | Penguin | | | — | | | | | | | | 5 | | | | | | | | | FT Publishing | | | (40 | ) | | | | | | | (4 | ) | | | | | | | | IDC | | | — | | | | | | | | — | | | | | | | | | | | | | | | | | | | | | | | Total | | | (40 | ) | | | | | | | (9 | ) | | | | | | | | | | | | | | | | | | | | | | Other net finance costs of associates | | | | | | | | | | | | | | | | | | | | School | | | — | | | | | | | | — | | | | | | | | | Higher Education | | | — | | | | | | | | — | | | | | | | | | Professional | | | — | | | | | | | | — | | | | | | | | | Penguin | | | — | | | | | | | | — | | | | | | | | | FT Publishing | | | 2 | | | | | | | | — | | | | | | | | | IDC | | | — | | | | | | | | — | | | | | | | | | | | | | | | | | | | | | | | Total | | | 2 | | | | | | | | — | | | | | | | | | | | | | | | | | | | | Adjusted operating profit | | | | | | | | | | | | | | | | | | Pearson Education: | | | | | | | | | | | | | | | | | | | School | | | 147 | | | | 29 | | | | 108 | | | | 27 | | | | Higher Education | | | 156 | | | | 31 | | | | 129 | | | | 32 | | | | Professional | | | 45 | | | | 9 | | | | 40 | | | | 10 | | | FT Group: | | | | | | | | | | | | | | | | | | | FT Publishing | | | 21 | | | | 4 | | | | 4 | | | | 1 | | | | IDC | | | 80 | | | | 15 | | | | 67 | | | | 17 | | | Penguin | | | 60 | | | | 12 | | | | 52 | | | | 13 | | | | | | | | | | | | | | | | | Total | | | 509 | | | | 100 | | | | 400 | | | | 100 | | | | | | | | | | | | | | | |
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In the US school market, Pearson’s school publishing revenues grew 3.5% against the Association of American Publishers’ estimate of an increase for the industry of 2.7%. New adoption market share was 31% in the adoptions where Pearson competed (and 30% of the total new adoption market). The School business now has the number one or number two market share in reading, math, science and social studies. US School testing sales were up in double digits after high single digit growth in 2006 and growth in excess of 20% in 2005. School testing benefited from further contract wins, market share gains and strength in online assessment. US School margins improved again in 2007 with savings from the integration of acquired businesses and efficiency gains from the use of software platforms. School business sales increased by £208 million, or 19%, to £1,295 million in 2005, from £1,087 million in 2004 and adjusted operating profit increased by £39 million, or 36%, to £147 million in 2005 from £108 million in 2004. The School results in 2005 benefit from the inclusion of AGS Publishing, acquired in July 2005 and the strengthening of the US dollar, which we estimate added £34 million to sales and £2 million to adjusted operating profit when compared to the equivalent figures at constant 2004 exchange rates.
In the US school market, Pearson’s school publishing business grew 12% ahead of the Association of American Publishers’ estimate of industry growth of 10.5%. New adoption market share was 33% in the adoptions where Pearson competed (and 24% of the total new adoption market). The School business now has leading positions in math, science, literature and foreign languages. School testing sales were up more than 20%, benefiting from significant market share gains and mandatory state testing under No Child Left Behind. School software also had a strong year with good sales and profit growth on curriculum and school administration services.
Outside the US, the School publishing sales increased in high single digits. The worldwide English Language Teaching business benefited from strong demand for English language learning and investments in new products,In US Higher Education sales were up by 6% (in US dollars) ahead of the Association of American Publishers’ estimate of industry growth for the ninth year in succession with rapid growth in online learning and custom publishing. In the US, investment in established and new author franchises, such as Campbell’sBiology, Kotler’sMarketing Management, Hubbard’sEconomicsand Cicarrelli’sPsychology, continued to underpin the strong performance. The ‘MyLab’ digital homework and assessment programs were launched in 22 new subject disciplines in 2007, increasing the total number of disciplines covered to 38. These programs support over 2,000 textbooks and were used globally by 2.9 million students in 2007 (up more than 30% on 2006). In corporate 37
finance, one of the largest global markets in business education, Pearson published the successful first edition bestseller, Berk/DeMarzo’sCorporate Finance, together with MyFinanceLab and Pearson’s share of this market increased from 4% to 11% in the US. It is the most successful launch of a first edition in this discipline in more than a decade and one of Pearson’s most successful global launches ever, winning university adoptions in 22 countries. In World History, the first edition of Fernandez-Armesto’sThe World: A Historywith MyHistoryLab increased Pearson’s market share from 25% to 35%. In July 2007, we acquired eCollege which builds on Pearson’s position as an education services provider. eCollege works with partner educational institutions to design, build and support online degree, certificate, diploma and professional development programs. Student enrollments increased by 44% in 2007 to 1.9 million. There was continued strong double digit growth in our custom solutions business which builds customized textbooks and online services and has become a leader in the creation of courseware and curricula fore-learning institutions. Overall margins in the North American Education business were slightly lower at 16.4% in 2007 compared to 16.7% in 2006 as small declines in US publishing margins offset the improvement in US assessment and testing and Canadian margins. International Education International Education sales increased by £95m, or 15%, to £735m in 2007, from £640m in 2006 and adjusted operating profit increased by £19m, or 26%, to £92m in 2007 from £73m in 2006. The results benefit from the first contribution in 2007 from the acquisition of Harcourt International. The International School business continued to grow with strong performances from the publishing businesses in South Africa and Australia. In Italy, the integration of PBM was completed and produced integration savings, margin improvement and market share gains in 2007. In School publishing, the acquisition of Harcourt International increased scale in our international education businesses bringing leading content for school and vocational customers in many markets including the UK, South Africa, Australia and New Zealand. The international testing business was again able to benefit from technology leadership. In the UK, we marked 9.6 million GCSE, AS and A-Level scripts, 4.6 million of which were on screen. Successful global English Language Teaching franchises in all major market franchises (primary, secondary, adult, business and exam preparation) drove strong growth.English Adventure (with Disney), developed with Disney, grew successfully and has sold more than six million units in less than three years since launch. International Higher Education publishing sales grew by 2%, benefiting from organic and acquisition investment. Particular areas of strength included local language editions of our major authors and custom publishing including the successful launch of “local language” science publishing in Germany. The “MyLab” and “Mastering” technology platforms are being successfully adapted for international markets and the primary school market,SkyMyLab programs are now being used in almost 50 countries with almost 160,000 student registrations for secondary schools,Total English for adult learnersonline courses in Europe, the Middle East andIntelligent Business (withThe Economist) for Africa. International Education margins continued to improve and the business markets. There was also strong growthincrease in the international schooloverall margin from 11.4% in 2006 to 12.5% in 2007 reflected increases in both publishing and testing markets. Four million UK GCSE, AS andA-Level scripts were marked onscreen and 2005 saw the first year of running the UK National Curriculum tests and a new contract for a national school testing pilot in Australia.margins. School margins were up by 1.5% points to 11.4% with efficiency gains in central costs, production, distribution Professional After excluding sales and software development. Sales in Higher Educationadjusted operating profit from Government Solutions and the Data Management businesses (reported as discontinued), Professional sales increased by £50 million,£15m, or 7%, to £779 million£226m in 2005,2007 from £729 million£211m in 2004.2006. Adjusted operating profit increased by £27 million,£10m or 21%,59% to £156 million£27m in 20052007, from £129 million£17m in 2004. Both sales and adjusted operating profit benefited from2006. Sales were affected by the strengtheningweakening US dollar, which we estimate added £14 million toreduced sales and £3 million to adjusted operating profitby £14m when compared to the equivalent figures at constant 20042006 exchange rates.
In the US, the Higher Education Professional Testing sales were up by 6% ahead10% in 2007. Approximately 5.8 million secure online tests were delivered in more than 5,000 test centers across the world in 2007. There was strong margin improvement as test volumes rose, driven by higher demand from existing customers such as GMAC (for business school applicants), NCLEX (for nurses) and the DSA/DVTA driving theory test. Additional contributions from new contracts included
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the American Board of Internal Medicine and the National Association Boards of Pharmacy. There were also strong renewals, including the Institute of Financial Services and the American Publishers’ estimateRegistry of industryRadiological Technologists. Technology Publishing achieved good sales growth of 5%and significantly improved profitability, benefiting from a focused and refreshed front list, a favorable software release schedule and Safari Books Online, our electronic publishing platform (a joint venture with O’Reilly Media). 2005Scott Kelby, a Peachpit author, is the seventhtop-selling US computer book author for the fourth consecutive year thatwith titles includingThe iPod Book; The Digital Photography Book;andThe Adobe Photoshop Lightroom Book for Digital Photographers. Good growth in Europe was helped by publishing for the new Windows Vista launch, a new partnership with Microsoft Press in the Netherlands and a successful move into digital publishing and training in Germany. Our business imprints Wharton School Publishing and FTPress, aided by Pearson’s US Higher Educationglobal distribution and strong retail relationships, had a successful year. Wharton School Publishing was recognized by the Amazon.com Best Business Books of 2007 withWe Are Smarter Than Me: How to Unleash the Power of Crowds in Your Business, by Barry Libert and Jon Spector, andFirms of Endearment: How World-Class Companies Profit from Passion and Purpose, by Rajendra S. Sisodia, David B. Wolfe and Jaqdish N. Sheth. Overall margins in the Professional business has grown faster thanwere higher at 11.9% in 2007 compared to 8.1% in 2006 as margins continued to improve in both the industry.testing and professional publishing businesses. FT Publishing Sales at FT Publishing increased by £64m or 23%, from £280m in 2006 to £344m in 2007. Adjusted operating profit from continuing operations increased by £29m, from £27m in 2006 to £56m in 2007. The US business benefitedsales and profit increase benefits from continued growtha full year contribution from market-leading authorsMergermarket, acquired in key academic disciplines including biology (Campbell & Reece)the second half of 2006. After excluding additional sales from a full year of ownership of Mergermarket, FT Publishing sales were up by 12% with advertising revenues up by 10%. FT newspaper circulation was up 2% to almost 440,000 (for the July-December 2007 Audit Bureau of Circulation, or ABC, measuring period), chemistry (Brown & LeMay), sociology (Macionis), marketing (Kotler & Keller), math (Tobey & Slater), developmental math (Martin-Gay)with a 19% increase in subscriptions. Digital subscribers to the FT were up 13% to 101,000 and English composition (Faigley’sPenguin Handbook).monthly unique users were up 30% to 5.7 million. Monthly page views were up 33% to 48.2 million. FT.com attracted 150,000 new registered users since the launch of its innovative new access model in October 2007. There was also expansion ina strong trading performance at FT Business as integration with the careerFT Newspaper helped to generate additional revenue and workforce education sector,reduce costs. Mergermarket experienced rapid revenue growth with major publishing initiatives gaining market share in allied health, criminal justice, paralegal, homeland security90%+ subscription renewal rates and hospitality. The online learning and custom publishing businesses saw rapid growth. Approximately 3.6 million US college students are studying through onea series of our online programs, an increase of 20% on 2004; and custom publishing, which builds customized textbooks and online servicesnew product launches around the courses of individual faculties or professors, hadworld includingPharmawire,Debtwire in Asia Pacific anddealReporterin emerging markets in Europe, Middle East and Africa. The Economist, in which Pearson owns a 50% stake, increased its circulation by 9% to 1.3 million (for the July-December 2007 ABC period). FTSE, in which Pearson also owns a 50% stake, achieved double digit sales growth. International Higher Education publishing sales grew by 4%,growth, benefiting from the local adaptation of global authors, including Campbella strong new business performance, a joint venture with Xinhua Finance in China and Kotler, and the introduction of custom publishing and online learning capabilities into new marketsstrong growth in Asia and the Middle East.Exchange Traded Fund (ETF) licenses.
Higher Education Small acquisitions of complementary subscription-based and digital businesses made their first contribution to FT Publishing’s results including: Infinata, a provider of research and business information to life science and financial services companies; and Exec-Appointments, a well-established global job site that focuses on the high-earning executive sector with approximately 200,000 registered executive users. Overall margins were up by 2.3% pointsat FT Publishing continued to 20%. Good margin improvement inincrease as the USnewspaper becomes more profitable and in international publishing was helped2007 were 16.3% compared to 9.6% in 2006. Interactive Data Interactive Data, grew its sales by shared services and savings4% from £332m in central costs, technology, production and manufacturing. Professional sales increased by £82 million, or 16%,2006 to £589 million£344m in 2005 from £507 million in 2004.2007. Adjusted operating profit grew by 9% from £89m in 2006 to £97m in 2007. Interactive Data margins increased from 26.8% in 2006 to 28.2% in 2007. Both sales and adjusted operating profit were affected by £5 million, or 13%, to £45 million in 2005, from £40 million in 2004. Sales benefited from the strengtheningweakening US dollar, which we estimate added £8 million toreduced sales by £20m and adjusted operating profit by £6m when compared to the equivalent figures at constant 20042006 exchange rates.
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Professional testingSales growth at Interactive Data was driven primarily by strong sales were up more than 40% in 2005 benefiting fromto both existing and new institutional customers and a renewal rate of approximately 95% within the successful start-up of major new contracts including the Driving Standards Agency, National Association of Securities DealersInstitutional Services business. The business continued to focus on high value services and the Graduate Management Admissions Council. Government Solutions grew salesPricing and Reference Data business continued to generate good growth in North America and Europe. The business continues to broaden its coverage of complex securities by 38%, helped byexpanding its universe of European asset-backed and mortgage-backed securities. The business also launched a new contractsweb-based offering, the Basket Calculation Service, designed to provide clients with the US Department of Educationindicative optimized portfolio value for equity and the Social Security Administration worth over $800 million, together withfixed income exchange traded funds. The Real-Time Services business achieved strong growth from add-ons to existing programs,with new institutional sales in its two core product areas of real-time data feeds and managed solutions. There was growing adoption of the PlusFeed data service for algorithmic trading applications, a successful introduction of DirectPlus, a new ultra low latency direct exchange data service and excellent sales momentum for managed solutions in North America with new customers including those withmedia companies, online brokerages, stock exchanges and financial institutions. Fixed Income Analytics completed 30 new BondEdge® installations during the US Department of Healthyear and Human Services. Overall marginsmade good progress in the Professionaldevelopment of its next-generation BondEdge® platform. In the Active Trader Services business, were a little lowereSignal experienced modest expansion of its direct subscriber base, delivered numerous innovations across its suite of Active Trader Services, and added new content and capabilities on its financial websites.
The Penguin Group Penguin Group sales decreased slightly to £846m in 2005 compared to 2004 mainly due to new contract start-up costs at Government Solutions. Margins2007 from £848m in the Professional publishing businesses were maintained despite falling sales. Sales at FT Publishing (excluding discontinued businesses) increased by £14 million or 4%, from £318 million in 2004 to £332 million in 2005. Adjusted operating profit increased by £17 million, from £4 million in 2004 to £21 million in 2005. Much of the sales2006 and profit increase was at the FT newspaper; sales at the other business newspapers were broadly level with 2004 with a small increase in adjusted operating profit compared to 2004.
FT newspaper sales were up 6% while adjusted operating profit increased £14 million to register a profit of £2 million in 2005 compared to a loss of £12 million in 2004. FT advertising revenues were up 9% for the year with sustained growth in luxury goods and worldwide display advertising. FT.com advertising sales were up 27% as some of the FT’s biggest advertisers shifted to integrated print and online advertising. The FT’s worldwide circulation was 2% lower for the year at 426,453 average copies per day although the second half of the year showed improvement to 430,635 average copies per day. FT.com’s paying subscribers increased by 12% to 84,000 and the average unique monthly users was up 7% to 3.2 million.
Les Echos advertising and circulation revenues for 2005 were level with 2004 despite tough trading conditions. FT Business improved margins with growth£74m in its international finance titles. Our share of the results of the FT’s joint ventures and associates improved asFT Deutschland reduced its losses and increased its average circulation despite a weak advertising market2007 from £66m in Germany andThe Economist increased profits helped by an increase in circulation (10% to an average weekly circulation of 1,038,519 for the January-June ABC period).
Interactive Data, grew its sales by 10% from £269 million in 2004 to £297 million in 2005. Adjusted operating profit grew by 19% from £67 million in 2004 to £80 million in 2005.2006. Both sales and adjusted operating profit benefited fromwere affected by the strengtheningweakening US dollar which we estimate added £2 million toreduced sales by £37m and £1 million to adjusted operating profit by £4m when compared to the equivalent figures at constant 20042006 exchange rates.
FT Interactive Data, IDC’s largest business (approximately two-thirds Penguin maintained its competitive performance in major markets with a successful global publishing performance led by Alan Greenspan’sThe Age of IDC revenues) generated strong growth in North AmericaTurbulence, with almost 1 million hard cover copies shipped worldwide, and returned to growth in Europe. There was more modest growth at Comstock, IDC’s business providing real-time dataKim Edwards’ first novel,The Memory Keeper’s Daughter, a global number one bestseller for global financial institutions, and at CMS BondEdge, its fixed income analytics business. Renewal rates for IDC’s institutional businesses remain at around 95%. eSignal, IDC’s active trader services business, increased sales by 27% with continued growthPenguin in the subscriber baseUS, UK, Australia and a fullCanada. It was an outstanding year contribution from FutureSource, acquired in September 2004. The Penguin Group sales were up 2% to £804 million in 2005 from £786 million in 2004 and adjusted operating profit up 15% to £60 million in 2005 from £52 million in 2004. Both sales and adjusted operating profit benefited from the strengthening US dollar which we estimate added £9 million to sales and £6 million to adjusted operating profit when compared to the equivalent figures at constant 2004 exchange rates. 2005 adjusted operating profit also benefited from reduced operating costs at our UK distribution center.
In the US, successful format innovation helped to address weakness in the mass market category that saw a further decline of 4% for the industry in 2005. The first seven Penguin Premium paperbacks were published in 2005, priced at $9.99, and all became bestsellers, with authors including Nora Roberts, Clive Cussler and Catherine Coulter.
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Penguin authors received a number of awards during the year: A Pulitzer Prize (for Steve Coll’sGhost Wars), a National Book Award (William T. Vollman’sEurope Central), the Whitbread Book of the Year (Hilary Spurling’sMatisse the Master), the Whitbread Novel of the Year (Ali Smith’sThe Accidental) and the FT & Goldman Sachs Business Book of the Year Award (Thomas Friedman’sThe World is Flat). In 2005, there were 129 New York Times bestsellers and 54 top 10 bestsellers in the UK. Major bestselling authors include Patricia Cornwell, John Berendt, Sue Grafton, Jared Diamond,US with titles including Elizabeth Gilbert’sEat, Pray, Love, Khaled Hosseini’sA Thousand Splendid Sunsand Ken Follett’sWorld Without End. UK bestsellers included Marian Keyes’Anybody Out There?, Jamie Oliver, Gillian McKeith,Oliver’sJamie at Home, Jeremy Clarkson Clarkson’sDon’t Stop Me Nowand Gloria Hunniford.
In 2005, there was also a strong contribution from new imprints and first-time authors. The new imprint strategy continued to gather pace and Penguin published more than 150 new authorsCharlie Higson’sDouble or Die. Also in the US and approximately 250 worldwide — its largest ever investment in new talent. Sue Monk Kidd’s first novel,The Secret Life of Bees, has been a New York Times bestseller for almost two years; her second,The Mermaid Chair, reached number one in 2005.The Kite Runner, Khaled Hosseini’s first book, stayed on the New York Times bestseller list for all of 2005, selling an additional two million copies (three million in total). In the UK, thereit was also strong performance from new fiction authors including Jilliane Hoffman, PJ Tracy, Karen Joy Fowler and Marina Lewycka.
Results of Operations
| | | Year ended December 31, 2004 compared to year ended December 31, 2003 |
| | | Consolidated Results of Operations |
Our total sales decreased by £154 million to £3,696 million in 2004, from £3,850 million in 2003. This decrease of 4% was attributable to the effect of foreign currency exchange. The strength of sterling compared to the US dollar had a significant negative effect on sales, and we estimate that had the 2003 average rates prevailed in 2004, sales would have been higher by £301 million. In constant exchange rate terms Pearson Education had a strong year with an increase in sales of 5%. The Higher Education and Professional businesses were the main contributors to this growth with the Higher Education business growing faster than its market for the sixth straight yearBrands & Licensing division driven byThe Dr Who Annual(the second bestselling children’s book of 2007) and ProfessionalbestsellingIn the Night Gardentitles. DK delivered a strong global performance in traditional, custom and digital publishing, benefiting from newinnovative formats includingThe Human Body Book, personalized travel guides via traveldk.com and the first DK textbooks for higher education markets.
In Australia, sales growth was generated from a publishing schedule including Bryce Courtenay withThe Persimmon Treeand Dr. Manny Noakes withCSIRO Total Wellbeing Diet Book 2. In India, Penguin India celebrated its 20th anniversary in 2007 with continued rapid growth. Penguin authors won all the major English language prizes in India’s national book awards: Vikram Chandra in fiction forSacred Games, Vikram Seth in non-fiction forTwo Livesand Kiran Desai in readers’ choice forThe Inheritance of Loss. In China, Jiang Rong and Howard Goldblatt won the inaugural Man Asian Literary prize forWolf Totem, to be published in English around the world by Penguin in 2008, and in South Africa, another strong year was led by John van de Ruit’sSpud:The Madness Continues. Penguin continued to focus on efficiency and improvement in operating margins continues to benefit from the Pearson-wide renegotiation of major global paper, print and binding contracts and add-ons to existing contracts at Pearson Government Solutions. The School business was helped by a full year contributionthe integration of warehouse and back office operations in Australia and New Zealand. These efficiencies together with improved gross margins principally from Edexcel, the UK testing business, but otherwise sales were flatinnovation in formats such as new adoption spending in the US fell by approximately $200 million. The FT Group sales were ahead of last year after another good year at Interactive Data and a returnpremium paperback have helped to sales growth for the Financial Times newspaperimprove margins from 7.8% in a more stable business advertising environment. Penguin’s results were disappointing with sales down 6% as reported, but flat on a constant currency basis after disruption2006 to UK distribution and a weakness8.7% in the US consumer publishing market.2007. Pearson Education, our largest business sector, accounted for 63% of our sales in 2004 and in 2003. North America continued to be the most significant source of our sales although sales in the region decreased, as a proportion of total sales, to 68% in 2004, compared to 71% in 2003. This decrease in 2004, however, reflects the comparative strength of sterling and the euro compared to the US dollar.
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| | | Cost of Sales and Net Operating Expenses |
The following table summarizes our cost of sales and net operating expenses:
| | | | | | | | | | | | | Year Ended | | | | | December 31 | | | | | | | | | | 2004 | | | 2003 | | | | | | | | | | | | | £m | | | £m | | | Cost of goods sold | | | 1,789 | | | | 1,846 | | | | | | | | | | | Distribution costs | | | 201 | | | | 206 | | | Administrative and other expenses | | | 1,365 | | | | 1,439 | | | Other income | | | (46 | ) | | | (51 | ) | | | | | | | | | | Total operating expenses | | | 1,520 | | | | 1,594 | | | | | | | | | |
Cost of Sales.Cost of sales consists of costs for raw materials, primarily paper, printing costs, amortization of pre-publication costs and royalty charges. Our cost of sales decreased by £57 million, or 3%, to
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£1,789 million in 2004, from £1,846 million in 2003. The decrease mainly reflected the decrease in sales over the period with overall gross margin remaining constant.Liquidity and capital resources Distribution Costs.Distribution costs consist primarily of shipping costs, postageCash flows and packing.financing
Administration and Other Expenses.Our administration and other expenses decreased by £74 million, or 5%, to £1,365 million in 2004, from £1,439 million in 2003. Administration and other expenses as a percentage of sales remained constant at 37%. The decrease in administration and other expenses comes from both the effect of exchange and increased efficiencies, in particular from the cost actions taken at the Financial Times in recent years. Other Operating Income.Other operating income mainly consists of sub-rights and licensing income and distribution commissions. Other operating income decreased 10% to £46 million in 2004 from £51 million in 2003 with the decrease mainly representing the continued decline in distribution commissions received for distribution of third party books.
| | | Other Net Gains and Losses |
Profits or losses on the sale of businesses, associates and investments that are included in our continuing operations are reported as other net gains and losses. In 2004, other gains and losses amounted to £9 million with the principal items being profits on the sale of stakes in Capella and Business.com. In 2003 there were small losses on a number of items totaling £6 million.
| | | Share of results of joint ventures and associates |
The contribution from our joint ventures and associates increased from £2 million in 2003 to £8 million in 2004. The increase was largely due to a reduction in losses at FT Deutschland together with some improvement in profit at the Economist.
The total operating profit in 2004 of £404 million compares to a profit of £406 million in 2003. This marginal decrease was due to the impact of exchange rates. We estimate that had the 2003 average rates prevailed in 2004, operating profit would have been £51 million greater. Operating profit attributable to Pearson Education remained constant at £287 million in both 2004 and 2003. There was an estimated reduction in profit of £29 million from exchange. After accounting for exchange rates, operating profit was ahead in each of the School, Higher Education and Professional businesses. Operating profit attributable to the FT Group increased by £33 million, or 89%, to £70 million in 2004, from £37 million in 2003. The increase was largely due to another strong performance from Interactive Data and significant cost savings at the Financial Times newspaper. Operating profit attributable to the Penguin Group decreased by £35 million, or 43%, to £47 million in 2004, from £82 million in 2003. The biggest single factor in the profit decline was exchange rates, which are estimated to have accounted for £14 million of the difference. There were also a number of other factors, including disruption in UK distribution following the move to a new warehouse and the weakness of the US consumer publishing market.
Net finance costs decreased by £14 million to £79 million in 2004 from £93 million in 2003. Net interest payable decreased by £10 million, or 12%, to £74 million in 2004, from £84 million in 2003. The reduction is due to lower average net debt levels in 2004, which more than offset the effect of a general increase in floating interest rates, and a one-off credit of £9 million for interest on a repayment of tax in France which reduced the net interest cost in 2004. Year end indebtedness decreased to £1,221 million in 2004 compared to £1,376 million in 2003 due to fundscash generated from operations and foreign exchange movements. The weighted average three month London Interbank Offered (“LIBOR”increased by £235m (or 36%) rate, reflecting our borrowings, to £894m in US dollars, euros and sterling, rose by 40 basis points, or 0.4%. The company is partially protected2008 from these increases by our treasury policy, which put £736 million of the year end debt on a fixed rate basis. As a result the net interest rate payable (excluding the £9 million credit referred to above) rose by only 25 basis points or 0.25% to 5%£659m in 2004. For a more detailed discussion of our borrowings and interest expenses see “— Liquidity and Capital Resources — Capital Resources” and “— Borrowing” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk”. 32
The overall taxation charge for 2004 was £63 million, compared to a charge of £61 million in 2003. In 2004 the Group recorded a total pre-tax profit of £325 million giving a tax rate of 19% compared to a similar rate of 19% on total pre-tax profits of £313 million in 2003. These low rates of tax were mainly a result credits of £56 million and £48 million respectively relating to prior year items; these reflect a combination of settlements2007. This increase reflected strong cash contributions from all businesses, together with the Inland Revenue authorities and changes to deferred tax balances.
Minority interests principally consist of the public’s 39% interest in Interactive Data.
Following the disposal of Recoletos in 2005, the results of Recoletos have been included in discontinued operations in 2004 and 2003. The results for 2004 include an operating profit of £26 million compared to an operating profit in 2003 of £43 million. The profit in 2003 includes a profit of £12 million on the sale of the Recoletos interest in El Mundo.
| | | Profit for the Financial Year |
The total profit for the financial year in 2004 was £284 million compared to a profit in 2003 of £275 million. The overall increase of £9 million was mainly due to the decrease in net finance costs in 2004 after adverse movements in exchange had eroded the underlying increase in operating profit.
| | | Earnings per Ordinary Share |
The basic earnings per ordinary share, which is defined as the profit for the financial year divided by the weighted average number of shares in issue, was 32.9 pence in 2004 compared to 31.7 pence in 2003 based on a weighted average number of shares in issue of 795.6 million in 2004 and 794.4 million in 2003. This increase in earnings per share was due to the additional profit for the financial year described above and was not significantly affected by the movement in the weighted average number of shares.
The diluted earnings per ordinary share of 32.9 pence in 2004 and 31.7 pence in 2003 was not significantly different from the basic earnings per share in those years as the effect of dilutive share options was again not significant.
| | | Exchange Rate Fluctuations |
The weakeningsignificant strengthening of the US dollar against sterling on an average basis had a negative impact on reported sales and profits in 2004 compared to 2003. We estimate that if the 2003 average rates had prevailed in 2004, sales would have been higher by £301 million and operating profit would have been higher by £51 million. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk” for a discussion regarding our management ofsterling. The exchange rate risks.
| | | Sales and Operating Profit by Division |
for translation of dollar cash flows was $1.56 in 2008 and $1.99 in 2007. In 2008, the headline average working capital to sales ratio for our book publishing businesses deteriorated to 26.1% from 25.6% in 2007, reflecting the higher levels of working capital in Harcourt Assessments (purchased at the end of January 2008). The following table summarizes our operating profit and results from operations for each of Pearson’s divisions. Adjusted operating profit is included as it is a key financial measure used by managementunderlying working capital to evaluate performance and allocate resources to business segments, as reported under SFAS 131. Since 1998 we have reshaped the Pearson portfolio by divesting of non-core interests and investing in educational publishing and testing, consumer publishing and business information companies. During this period of transformation management has used adjusted operating profit to track underlying core business performance. In our adjusted operating profit we have excluded amortization of acquired intangibles, other gains and losses and other net finance costs of associates. The amortization of acquired intangibles is not considered to be fully reflective of the underlying performance of the group. Other gains and losses represent profits and losses on the sale of subsidiaries, joint ventures, associates and investments that are included within continuing operations but which distort the performance for the year.
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Adjusted operating profit enables management to more easily track the underlying operational performance of the group. A reconciliation of operating profit to adjusted operating profit is included in the table below:
| | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31 | | | | | | | | | | 2004 | | | 2003 | | | | | | | | | | | | | £m | | | % | | | £m | | | % | | | | | | | | | | | | | | | | Total operating profit | | | | | | | | | | | | | | | | | | Pearson Education: | | | | | | | | | | | | | | | | | | | School | | | 112 | | | | 27 | | | | 114 | | | | 28 | | | | Higher Education | | | 133 | | | | 33 | | | | 140 | | | | 35 | | | | Professional | | | 42 | | | | 10 | | | | 33 | | | | 8 | | | FT Group: | | | | | | | | | | | | | | | | | | | FT Publishing | | | 8 | | | | 2 | | | | (29 | ) | | | (7 | ) | | | IDC | | | 62 | | | | 16 | | | | 66 | | | | 16 | | | Penguin | | | 47 | | | | 12 | | | | 82 | | | | 20 | | | | | | | | | | | | | | | | | Total | | | 404 | | | | 100 | | | | 406 | | | | 100 | | | | | | | | | | | | | | | | | | | Add back: | | | | | | | | | | | | | | | | | | | | Amortization of acquired intangibles | | | | | | | | | | | | | | | | | | | | School | | | — | | | | | | | | — | | | | | | | | | Higher Education | | | — | | | | | | | | — | | | | | | | | | Professional | | | — | | | | | | | | — | | | | | | | | | Penguin | | | — | | | | | | | | — | | | | | | | | | FT Publishing | | | — | | | | | | | | — | | | | | | | | | IDC | | | 5 | | | | | | | | 4 | | | | | | | | | | | | | | | | | | | | | | | Total | | | 5 | | | | | | | | 4 | | | | | | | | | | | | | | | | | | | | | | | Other net gains and losses | | | | | | | | | | | | | | | | | | | | School | | | (4 | ) | | | | | | | 2 | | | | | | | | | Higher Education | | | (4 | ) | | | | | | | 2 | | | | | | | | | Professional | | | (2 | ) | | | | | | | 1 | | | | | | | | | Penguin | | | 5 | | | | | | | | 1 | | | | | | | | | FT Publishing | | | (4 | ) | | | | | | | — | | | | | | | | | IDC | | | — | | | | | | | | — | | | | | | | | | | | | | | | | | | | | | | | Total | | | (9 | ) | | | | | | | 6 | | | | | | | | | | | | | | | | | | | | | | | Other net finance costs of associates | | | | | | | | | | | | | | | | | | | | School | | | — | | | | | | | | — | | | | | | | | | Higher Education | | | — | | | | | | | | — | | | | | | | | | Professional | | | — | | | | | | | | — | | | | | | | | | Penguin | | | — | | | | | | | | — | | | | | | | | | FT Publishing | | | — | | | | | | | | — | | | | | | | | | IDC | | | — | | | | | | | | — | | | | | | | | | | | | | | | | | | | | | Total | | | — | | | | | | | | — | | | | | | | | | | | | | | | | | | | | Adjusted operating profit | | | | | | | | | | | | | | | | | | Pearson Education: | | | | | | | | | | | | | | | | | | | School | | | 108 | | | | 27 | | | | 116 | | | | 28 | | | | Higher Education | | | 129 | | | | 32 | | | | 142 | | | | 34 | | | | Professional | | | 40 | | | | 10 | | | | 34 | | | | 8 | | | FT Group: | | | | | | | | | | | | | | | | | | | FT Publishing | | | 4 | | | | 1 | | | | (29 | ) | | | (7 | ) | | | IDC | | | 67 | | | | 17 | | | | 70 | | | | 17 | | | Penguin | | | 52 | | | | 13 | | | | 83 | | | | 20 | | | | | | | | | | | | | | | | | Total | | | 400 | | | | 100 | | | | 416 | | | | 100 | | | | | | | | | | | | | | | |
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The School business sales decreased by £62 million, or 5%, to £1,087 million in 2004, from £1,149 million in 2003 and adjusted operating profit decreased by £8 million, or 7%, to £108 million in 2004 from £116 million in 2003. Both sales and adjusted operating profit were adversely affected by the weakening US dollar and we estimate that had 2003 average rates prevailed in 2004 then sales would have been approximately £93 million higher than reported and results from operations £8 million higher. The School results include a full year contribution from Edexcel, 75% of which was acquired in 2003. The extra Edexcel contribution increased sales growth in 2004 but reduced profit growth as the business is loss making in the first half.
In the US school market, adoption spending in 2004 fell by some $200 million to approximately $500 million. Our school businesses took the largest share (27%) of the new adoption opportunities. We benefited from strength across a wide range of subjects and grade levels, with a decline in elementary sales (after particularly strong market share growth in 2003) mitigated by a strong performance in the secondary market. We returned to growth in the open territories and in supplementary publishing, helped by restructuring actions taken in 2003 and by the sharp recovery in US state budgets. Our US school testing business benefited from growth in new and existing state contracts, including Texas, Ohio, Virginia and Washington. We continued to win new multi-year contracts including Tennessee, New Jersey and California ahead of implementation of the No Child Left Behind Act testing requirements, which become mandatory in the school year starting in September 2005. Our digital learning business showed a further profit improvement on slightly lower sales as we continued to integrate our content, testing and technology in a more focused way.
Outside the US, the School business sales increased with continued growth in English Language Teaching (ELT) helped by a very significant investment in ELT and in school testing we won $200 million of multi-year contracts.
Higher Education sales decreased by £41 million, to £729 million in 2004, from £770 million in 2003. Adjusted operating profit decreased by £13 million, or 9%, to £129 million in 2004 from £142 million in 2003. Both sales and adjusted operating profit were adversely affected by the weakening US dollar, and we estimate that had 2003 average rates prevailed in 2004 then sales would have been approximately £69 million higher than reported and results from operations £16 million higher than reported. In the US we grew faster than the market for the sixth consecutive year in US dollar terms, up 4% while the industry without Pearson was up 2% according to the Association of American Publishers.
In the US, our Higher Education business benefited from strength in two-year career colleges, a fast growing segment, with vocational programs in allied health, technology and graphic arts, and elsewhere in math and modern languages. Margins reduced a little as we achieved good growth outside the US and continued to invest to make our technology central to the teaching and learning process. Our custom publishing business, which creates specific programs built around the curricula of individual faculties or professors, grew strongly. Pearson Custom has now increased its sales in dollar terms eight-fold over the past six years and we have introduced our first customized online resources for individual college courses.
Sales and profit from operations in our Professional business improved in spite of the weakening dollar. Sales increased by £4 million, or 1%, to £507 million in 2004 from £503 million in 2003. Adjusted operating profit increased by £6 million, or 18%, to £40 million in 2004, from £34 million in 2003. We estimate that had 2003 average rates prevailed in 2004 then sales would have been approximately £60 million higher than reported and results from operations £5 million higher than reported.
After taking outratio (excluding the effect of exchange rates, Pearson Government Solutions grew sales by 25%year on year portfolio changes) improved to 25.8% in 2008 from 25.9% in 2007. Average working capital is the average month end balance in the year of inventory (including pre-publication), with strong growthreceivables and payables. Net cash generated from add-ons to existing programs. We also won some important new contracts, including multi-year contracts worth $500 million from customers such as the US Department of Health and Human Services and the London Borough of Southwark. Our professional testing business grew sales (before exchange impacts) by 31% as we benefited from the start-up of major new contracts, although we continued to operate at a small loss as we invested in building up the infrastructure for our 150-strong UK test center
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network. Markets remained tough for our technology publishing titles, where although sales were lower, profits were broadly level as a result of further cost actions.
Sales at the FT Publishing (excluding discontinued businesses)operations increased by £3 million,£38m (or 6%), to £659m in 2007 from £315 million£621m in 2003 to £318 million in 2004 and adjusted operating profit increased by £33 million from2006, even after a lossone-off special contribution of £29 million in 2003 to a profit of £4 million in 2004. Sales were boosted by a return to growth at theFinancial Times newspaper (“FT”) for the first year since 2000. The FT returned to profit in the seasonally strong fourth quarter of 2004 with both advertising and circulation revenues ahead for the full year.
Advertising performance across all categories and regions at the FT were mixed throughout the year. While the recruitment and luxury goods categories increased by more than 20%, the business-to-business and technology sectors showed few signs of recovery. In terms of geography, good growth in Europe and Asia offset a very weak US corporate advertising market. Average circulation for 2004 was 3% lower than in 2003, whilst FT.com now has 76,000 paying subscribers and 3.0 million average unique monthly users. Adjusted operating profit at the FT improved by £24 million over 2003 as we continued to reduce the FT’s cost base, which is now £110 million lower than it was in 2000.
Les Echos achieved euro sales growth of 4% and profits grew strongly despite a volatile advertising market. Average circulation grew 3% to 119,800, while competitors saw falling sales. FT Business posted significant sales growth of 8%, with progress in all its main markets. Profits improved 25% following a continued emphasis on cost management. Adjusted operating profit at the FT’s associates and joint ventures showed a profit of £6 million compared to £2 million in 2003. Losses narrowed at FT Deutschland as circulation and advertising revenue grew strongly. FT Deutschland reached the 100,000 copy sales mark in December and circulation averaged 96,600, up 6% on the previous year. The Economist Group again increased adjusted operating profit with The Economist’s circulation passing the 1 million mark with an average weekly circulation of 1,009,759(January-June Audit Bureau of Circulations period).
Interactive Data, our 61%-owned financial information business saw a decrease in sales of £4 million, from £273 million in 2003 to £269 million in 2004 and adjusted operating profit decreased by £3 million from £70 million in 2003 to £67 million in 2004. We estimate that had 2003 average rates prevailed in 2004 then sales would have been approximately £22 million higher than reported and results from operations £7 million higher than reported.
FT Interactive Data and e-Signal (Interactive Data’s real-time financial market information and decision support tool business) performed well particularly in the US in 2004 where there were some signs of improvement in market conditions. Worldwide renewal rates among institutional clients remained at or above 95%. Demand for Interactive Data’s value-added services remained strong, with the signing of our 100th customer for our Fair Value Information Service product in December 2004. IDC had a first full year contribution from acquisitions made in 2003, ComStock and Hyperfeed Technologies, and acquired FutureSource in September 2004 to expand and compliment e-Signal.
The Penguin Group had a difficult 2004 with sales down 6% to £786 million from £840 million in 2003 and adjusted operating profit down 37% to £52 million in 2004 from £83 million in 2003. Both sales and adjusted operating profit were adversely affected by the weakening US dollar, and we estimate that had 2003 average rates prevailed in 2004 then sales would have been approximately £57 million higher than reported and results from operations £14 million higher than reported. In addition to exchange, the decline in results from operations was caused by a number of factors including disruption at the new UK warehouse and a weakening in the US consumer publishing market.
In the UK, our move to a new warehouse, to be shared with Pearson Education, disrupted supply of our books and had a particular impact on backlist titles. Although we traded well in the second half of 2004, and shipped more books£100m to our UK customers thanpension fund (over and beyond the normal funding requirement). This increase reflected stronger cash contributions from all businesses, together with further improvements in the previous year, we incurred some £9 million of additional costs as we took special measures to deliver books, including the costs of running two warehouses, shipping
36
books direct and additional marketing support. By the end of the year we had eliminated the order backlog in the warehouse and the new management team has continued to make good progress in the early part of 2005.
After a good start to the year, the US consumer publishing market deteriorated sharply in the second half and full year industry sales were 1% lower than in 2003, according to the Association of American Publishers. The adult mass market segment, which accounts for approximately one-third of Penguin’s US sales, was down 9% for the industry for the full year, and 13% in the second half.
Despite the problems outlined above, Penguin had another great publishing year in 2004. We benefited from our new imprint strategy, with a further four imprints published for the first time. Non-fiction performed particularly well, with a 40% increase in our titles on the New York Times bestseller list, including Lynne Truss’sEats, Shoots & Leaves (now with over one million copies in print), Ron Chernow’sAlexander Hamilton and Maureen Dowd’sBushworld. Best selling UK titles included Jamie Oliver’sJamie’s Dinners, Sue Townsend’sAdrian Mole and the Weapons of Mass Destruction and Gillian McKeith’sYou Are What You Eat.
Liquidity and Capital Resources
Net cash inflow from operating activities increased by £170 million, or 24%, to £875 million in 2005, from £705 million in 2004, even though the 2004 cash inflow included collection of the $151 million receivable in respect of the TSA contract. Cash flows within the education businesses and IDC in particular continued to grow strongly and cash flows at Penguin recovered significantly from their lower levels in 2004 and 2003. Underlying working capital efficiency improved considerably. On anmanagement. In 2007, the average basis (excluding the impact of the TSA receivable), the working capital to sales ratio for our book publishing businesses improved to 25.6% from 29.4%26.3% in 2006.
Net interest paid decreased to 27.4%. Compared£76m in 2008 from £90m in 2007. The decrease was due to 2003, the net cash inflowreduction in US and UK interest rates, with some offset from operating activities in 2004 increased by £174 million, or 33%, to £705 million from £531 million. Although the 2004 performance was helped byhigher level of debt following the receiptacquisition of Harcourt Assessments and the strength of the $151 million receivable in respect of the TSA contract, growth within the education businesses and IDC underpinned the underlying improvement. US dollar relative to sterling. Net interest paid was £72 million£90m in 20052007 compared to £85 million£82m in 2004 and £76 million2006. The 10% increase in 2003. The 7% decrease in 20052007 over 2004 reflected the reduction in debt following receipt of the proceeds from the disposals of Recoletos and MarketWatch (offset in part by the impact of the year on year increases in interest rates), while the 2004 increase compared to 20032006 was entirelyprimarily due to higher average interest rates in the year on year increases in interest rates.UK and US. Capital expenditure on property, plant and equipment was £76 million£75m in 20052008, £86m in 2007 and £68m in 2006. The reduction in spend in 2008 reflects reduced infrastructure spend compared to £101 million2007, although the Group continued to invest in 2004digital technology. The increase in 2007 over 2006 reflects investment to update infrastructure, particularly at Penguin and £79 million in 2003. The higher spending in 2004, compared to both 2005 and 2003, reflected up-front expenditure on our Professional testing contracts.FT Group. The acquisition of subsidiaries, joint ventures and associates accounted for a cash outflow of £253 million£400m in 20052008 against £51 million£476m in 20042007 and £65 million£367m in 2003.2006. The principal acquisitions in 20052008 were of AGSHarcourt Assessments for £161 million within the School business£321m and IS. TeledataMoney Media for £29 million by Interactive Data.£33m. The principal acquisitions in 20042007 were of KATHarcourt Education International for £155m and Dominie PresseCollege for £10 million within our education businesses and FutureSource by Interactive Data for £9 million. The£266m. In 2006, the principal acquisition in 2003 was of ComStock by Interactive DataMergermarket for net cash£109m. The balance related to various smaller bolt-on acquisitions (primarily in the school segment) including those of £68 million. National Evaluation Systems and Paravia Bruno Mondadori. The sale of subsidiaries and associates produced a cash inflow of £430 million£111m in 20052008 against £31 million£469m in 20042007 and £56 million£10m in 2002.2006. All the proceeds in 2008 relate to the sale of the Data Management business. The principal disposals in 20052007 were of RecoletosGovernment Solutions for net cash proceeds of £371 million£278m and MarketWatchLes Echos for net cash proceeds of £54 million.£156m. The proceedsdisposal in 2004 relate primarily2006 relates entirely to the saleproceeds from thetake-up of Argentaria Cartera by Recoletos. The principal disposal in 2003 was the sale of Unedisa by Recoletos.share options issued to minority shareholders. The cash outflow from financing of £321 million£149m in 20052008 reflects the improvedrepayment of one £100m bond, the repayment of borrowings against a short-term bridge financing facility and a further increase in the group dividend. Offsetting this, the Group successfully issued $900m of US Dollar bonds in the year in spite of the challenging credit markets. The cash outflow from financing activities of £444m in 2007 represented the higher Group dividend (as the Group sought to match dividend growth more closely with earnings growth) and the repayment of bank borrowings followingone €591m bond, offset in part by drawings on the sale of Recoletos.Group’s revolving credit facility. The cash outflow from financing of £261 million£348m in 20042006 primarily reflects the payment of the groupGroup dividend (at a higher dividend per share than 2005) and the repayment of one€550 milliona $250m bond offset by the proceeds from the issue of new $350 million and $400 million bonds. The cash outflow from financing of £142 million in 2003 again reflects the group dividend and the issue in the year of a $300 million bond as we took advantage of favorable market conditions, offset by the repayment of a€250 million bond. Bonds are issued as part of our overall financing program to support general corporate expenditure.at its maturity date. 37
Capital resources Our borrowings fluctuate by season due to the effect of the school year on the working capital requirements in the educational materials business. Assuming no acquisitions or disposals, our maximum level of net debt normally occurs in July, and our minimum level of net debt normally occurs in December. Based on a review of historical trends in working capital requirements and of forecast monthly balance sheets for the next 12 months, we believe that we have sufficient funds available for the group’sGroup’s present requirements, with an appropriate level of headroom
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given our portfolio of businesses and current plans. Our ability to expand and grow our business in accordance with current plans and to meet long-term capital requirements beyond this12-month period will depend on many factors, including the rate, if any, at which our cash flow increases and the availability of public and private debt and equity financing, including our ability to secure bank lines of credit. We cannot be certain that additional financing, if required, will be available on terms favorable to us, if at all. At December 31, 2005,2008, our net debt was £996 million£1,460m compared to net debt of £1,221 million£973m at December 31, 2004.2007. Net debt is defined as all short-term, medium-term and long-term borrowing (including finance leases), less all cash, cash equivalents and liquid resources. LiquidCash equivalents comprise short-term deposits with a maturity of up to 90 days, while liquid resources comprise short-term deposits with maturities of more than 90 days and investments thatother marketable instruments which are readily realizable and held on a short-term basis. Short-term, medium-term and long-term borrowing amounted to £1,959 million£2,363m at December 31, 2005,2008, compared to £1,823 million£1,608m at December 31, 2004.2007 reflecting the impact of the strengthening of the US dollar relative to sterling and the additional US dollar bonds issued in the year. At December 31, 2005,2008, cash and liquid resources were £902 million,£685m, compared to £461 million£560m at December 31, 2004.2007. Contractual obligations The following table summarizes the maturity of our borrowings and our obligations under non-cancelable operating leases.leases, exclusive of anticipated interest payments. | | | | | | | | | | | | | | | | | | | | | | | | | | At December 31, 2005 | | | | | | | | | | | | Less Than | | | One to | | | Two to | | | After Five | | | | | Total | | | One Year | | | Two Years | | | Five Years | | | Years | | | | | | | | | | | | | | | | | | | | | | £m | | | £m | | | £m | | | £m | | | £m | | | Gross borrowings: | | | | | | | | | | | | | | | | | | | | | | | Bank loans, overdrafts and commercial paper | | | 102 | | | | 102 | | | | — | | | | — | | | | — | | | | Variable rate loan notes | | | — | | | | — | | | | — | | | | — | | | | — | | | | Bonds | | | 1,854 | | | | 152 | | | | 436 | | | | 310 | | | | 956 | | | Lease obligations | | | 1,395 | | | | 129 | | | | 115 | | | | 288 | | | | 863 | | | | | | | | | | | | | | | | | | | Total | | | 3,351 | | | | 383 | | | | 551 | | | | 598 | | | | 1,819 | | | | | | | | | | | | | | | | | | |
The group | | | | | | | | | | | | | | | | | | | | | | | | | At December 31, 2008 | | | | | | | | Less than
| | | One to
| | | Two to
| | | After five
| | | | | Total | | | one year | | | two years | | | five years | | | years | | | | | £m | | | £m | | | £m | | | £m | | | £m | | | | | Gross borrowings: | | | | | | | | | | | | | | | | | | | | | | Bank loans, overdrafts and commercial paper | | | 228 | | | | — | | | | — | | | | 228 | | | | — | | | Variable rate loan notes | | | — | | | | — | | | | — | | | | — | | | | — | | | Bonds | | | 2,128 | | | | 244 | | | | — | | | | 626 | | | | 1,258 | | | Finance lease obligations | | | 7 | | | | 4 | | | | 2 | | | | 1 | | | | — | | | Operating lease obligations | | | 1,612 | | | | 149 | | | | 138 | | | | 355 | | | | 970 | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 3,975 | | | | 397 | | | | 140 | | | | 1,210 | | | | 2,228 | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2008 the Group had capital commitments for fixed assets, including finance leases already under contract, of £1 million.£7m (2007: £9m). There are contingent liabilities in respect of indemnities, warranties and guarantees in relation to former subsidiaries and in respect of guarantees in relation to subsidiaries and associates. In addition there are contingent liabilities in respect of legal claims. None of these claims or guarantees is expected to result in a material gain or loss. The groupGroup is committed to a quarterly fee of 0.125% on the unused amount of the group’sGroup’s bank facility. | | | Off-Balance Sheet arrangements |
Off-Balance sheet arrangements The Group does not have any off-balance sheet arrangements, as defined by the SEC Final Rule 67(FR-67),“Disclosure “Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations”, that have or are reasonably likely to have a material current or future effect on the Group’s financial position or results of operations. We have in place a $1.35 billion term revolving credit facility, which matures in July 2009. At December 31, 2005, approximately $1.35 billion was available under this facility. This included allocations to
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refinance short-term borrowings not directly drawn under the facility. The credit facility contains two key covenants measured for each 12 month period ending June 30 and December 31:
We must maintain the ratio of our profit before interest and tax to our net interest payable at no less than 3:1; and We must maintain the ratio of our net debt to our EBITDA, which we explain below, at no more than 4:1.
“EBITDA” refers to earnings before interest, taxes, depreciation and amortization. We are currently in compliance with these covenants.
We hold financial instruments for two principal purposes: to finance our operations and to manage the interest rate and currency risks arising from our operations and from our sources of financing.
We finance ourThe Group finances its operations by a mixture of cash flows from operations, short-term borrowings from banks and commercial paper markets, and longer term loans from banks and capital markets.
We borrow principallyhave in US dollars, sterlingplace a committed revolving credit facility of $1.75bn, of which $92m matures in May 2011 and eurothe balance of $1.658bn matures in May 2012. At December 31, 2008, approximately $1.56bn was available under
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this facility. This credit facility contains two key covenants measured for each 12 month period ending June 30 and December 31: We must maintain the ratio of our profit before interest, tax and amortization to our net interest payable at both floatingno less than 3:1; and fixed rates We must maintain the ratio of our net debt to our EBITDA, which we explain below, at no more than 4:1. “EBITDA” refers to earnings before interest, using derivatives, where appropriate, to generate the desired effective currency profiletaxes, depreciation and interest rate basis. The derivatives used for this purposeamortization. We are principally interest rate swaps, interest rate caps and collars, currency swaps and forward foreign exchange contracts.currently in compliance with these covenants. Treasury policy Our treasury policy is described in note 19 of “Item 18. Financial Statements”. For a more detailed discussion of our borrowing and use of derivatives, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk”. Related parties There were no significant or unusual related party transactions in 2005, 20042008, 2007 or 2003.2006. Refer to note 3236 in “Item 17.18. Financial Statements”. Accounting principles For a description of our principal accounting policies used refer to note 1 in “Item 18. Financial Statements”. Accounting Principles
The following summarizes the principal differences between IFRS and US GAAP in respect of our financial statements. For further details refer to note 35 in “Item 17. Financial Statements”.
Before the adoption of IFRS 3 on 1 January 2003 and before the adoption of FAS 142 on 1 January 2002, goodwill was recognized as an asset and amortization expense was recorded over useful lives ranging between 3 and 20 years. Under IFRS 3 and FAS 142 goodwill is no longer amortized but tested annually for impairment. Before the adoption of IFRS, the Group’s intangible assets were not recognized as they did not meet the requirements under UK GAAP. Under IFRS and US GAAP, intangible assets are recognized separately from goodwill when they arise from separate contractual or legal rights or can be separately identified and be sold, transferred, licensed, rented or exchanged regardless of intent. Therefore, intangible assets such as publishing rights, non-compete agreements, software, databases, patents and non-contractual customer relationships such as advertising relationships have been recognized and are being amortized over a range of useful lives between 2 and 25 years. A difference between US GAAP and IFRS arises in goodwill and intangible assets due to the different adoption dates of IFRS 3 and FAS 142 as well as the impact of foreign exchange on the translation of those underlying assets that are denominated in a foreign currency. This difference also creates a difference in the gain or loss recognized on the disposal of a business.
Under IFRS, the Group reviews the recoverability of goodwill annually. These reviews are based on comparing the fair value of the Group’s cash-generating units determined by discounting future cash flows to their carrying value. Under US GAAP, a two stage impairment test is required at least annually under FAS 142. The Group performed the transitional impairment test under FAS 142 by comparing the carrying value of each reporting unit with its fair value as determined by discounted future cash flows. The Group also completed the annual impairment tests required by FAS 142 in 2005, 2004 and 2003. The Group has determined that its reporting units under FAS 142 are consistent with its cash-generating units under IAS.
IAS 12“Income Taxes” requires a full provision to be made for deferred taxes. Deferred taxes are to be accounted for on all temporary differences, with deferred tax assets recognized to the extent that they are more likely than not recoverable against future taxable profits. Under US GAAP, deferred tax assets not considered recoverable are adjusted through a separate valuation allowance in the balance sheet. There are no separate valuation allowances under IFRS. Under US GAAP, deferred taxes are accounted for in accordance with FAS 109,“Accounting for Income Taxes,” with a full provision also made for deferred taxes on all temporary
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differences and a valuation allowance is established when it is more likely than not that they will not be realised. This is similar to the treatment required under IAS 12.
Using the transitional exceptions of IAS 39, derivatives were accounted for in accordance with UK GAAP for the years ended 31 December 2003 and 2004. Under UK GAAP, there are no specific criteria, which must be fulfilled in order to record derivative contracts such as interest rate swaps, currency swaps and forward currency contracts as a hedging instrument. Accordingly, based upon our intention and stated policy with respect to entering into derivative transactions, they have been recorded as hedging instruments for UK GAAP. This means that unrealized gains and losses on these instruments are typically deferred and recognized when realized. From 1 January 2005, the Group has adopted IAS 39“Financial Instruments: Recognition and Measurement” and IAS 32“Financial Instruments: Disclosure and Presentation”. Under US GAAP, we have adopted FAS 133,“Accounting for Derivative Instruments and Hedging Activities” and its related guidance. In 2003, our derivative contracts did not meet the prescribed criteria for hedge accounting, and have been recorded at market value at each period end, with changes in their fair value being recorded in the profit and loss account. In 2004 the Group met the prescribed designation requirements and hedge effectiveness tests under US GAAP for certain of its derivative contracts. As a result, the movements in the fair value of the effective portion of fair value hedges and net investment hedges have been offset in earnings and other comprehensive income respectively by the corresponding movement in the fair value of the underlying bond or asset.
Finance lease rentals are capitalized at the net present value of the total amount of rentals payable under the leasing agreement (excluding finance charges) and depreciated over the period of the lease (if in respect of property) or the useful economic life of the asset (if in respect of plant and equipment). Finance charges are written off over the period of the lease in reducing amounts in relation to the written down carrying cost. Operating lease rentals are charged to the profit and loss on a straight-line basis over the duration of each lease term.
Under IFRS and US GAAP, the annual pension is determined in accordance with IAS 19 “Employee Benefits” and FAS 87 “Employers Accounting for Pensions”. Actuarial assumptions are adjusted annually to reflect current market and economic conditions. Under IFRS the difference between the fair value of the assets and the defined benefit obligation is recognized as a prepayment/ liability. Actuarial gains and losses are recognized in the statement of recognized income and expenses. Under US GAAP, if the fair value of a pension plan’s assets is below the plan’s accumulated benefit obligation, a minimum pension liability is required to be recognized in the balance sheet. Unrecognized gains or losses outside the 10% corridor are spread over the employees’ remaining service lifetimes.
Under IFRS and US GAAP, we account for options and restricted shares granted to employees using their fair value. Compensation expense is determined based upon the fair value at the grant date, and has been estimated using the Black Scholes, Binomial or Monte Carlo model as appropriate. Compensation cost is recognized over the service life of the awards, which is normally equal to the vesting period. Differences between the US GAAP and IFRS charges are mainly due to the different treatment of options with graded vesting features. Under IFRS, the charge is recognized as the options gradually vest. Under US GAAP, the charge is recognized on a straight line basis over the vesting period. Other noteable differences include the treatment of forfeitures.
For a further explanation of the differences between IFRS and US GAAP see note 35 to the consolidated financial statements.
| | | Recent U.S. Accounting Pronouncements |
In November 2004, the FASB issued FASB Statement No. 151“Inventory Costs — An Amendment of ARB No. 43, Chapter 4” (“FAS 151”). FAS 151 amends the guidance in ARB No. 43, Chapter 4 “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. Additionally, FAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. FAS 151 is effective for fiscal years beginning after June 15, 2005.
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The Group will adopt FAS 151 in 2006 but does not expect the adoption of the new standard to have a material impact.
In December 2004, the FASB issued FASB Statement No. 153“Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions” (“FAS 153”). FAS 153 eliminates the exception from fair value measurement for non monetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance. FAS 153 specifies that a non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. FAS 153 is effective for the fiscal periods beginning after June 15, 2005. The Group will adopt FAS 153 in 2006 but does not expect the adoption of the new standard to have a material impact.
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004)“Share-Based Payment” (“FAS 123(R)”), which replaces FAS No. 123“Accounting for Stock-Based Compensation” (“FAS 123”) and supersedes APB Opinion No. 25“Accounting for Stock Issued to Employees.” FAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under FAS 123 no longer will be an alternative to financial statement recognition. The Group will adopt FAS 123(R) in 2006 but does not expect the adoption of the new standard to have a material impact as it already recognizes share-based payment cost in its income statement in accordance with FAS 123.
In March 2005, the FASB issued FASB Interpretation No. 47“Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 clarifies the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset when the timing and/or settlement are conditional on a future event. FIN 47 is effective for the fiscal periods ending after December 15, 2005. The adoption of FIN 47 did not have a material impact on the Group.
In May 2005, the FASB issued Statement No. 154,“Accounting Changes and Error Corrections — A replacement of APB Opinion No. 20 and FASB Statement No. 3” (“FAS 154”). This statement requires retrospective application to prior periods’ financial statements of changes in accounting principles unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This statement applies to all voluntary changes in accounting principles and changes required by an accounting pronouncement that does not include specific transition provisions. FAS 154 is required to be adopted in fiscal years beginning after December 15, 2005. FAS 154 would not have had a material effect on the financial position, results of operations or cash flows of the Group under US GAAP as at December 31, 2005.
In October 2005, the FASB issued FASB Staff Position (FSP) 13-1“Accounting for Rental Costs Incurred during a Construction Period” (“FSP 13-1”). FSP 13-1 requires rental costs associated with ground or building operating leases that are incurred during a construction period to be recognized as rental expense and included in income from continuing operations. FSP 13-1 is effective for the fiscal periods beginning after December 15, 2005. The Group will adopt FSP 13-1 in 2006 but does not expect the adoption of the new standard to have a material impact.
In January 2006 the FASB issued FASB Statement No. 155“Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140” (“FAS 155”). FAS 155 provides entities with relief from having to separately determine the fair value of an embedded derivative that would otherwise be required to be bifurcated from its host contract. FAS 155 is effective for all financial instruments acquired, issued or subject to a remeasurement event occurring after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Group is currently evaluating the impact the adoption of FAS 155 will have, but does not expect it to have a material impact.
| | | Recent International Accounting Pronouncements |
IFRS 7 “Financial Instruments: Disclosures”. IFRS 7 introduces new disclosures of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk. IFRS 7 is effective for accounting
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periods beginning on or after 1 January 2007. The Group is currently assessing the impact of IFRS 7 on the Group’s financial statements, but does not expect it to be significant.
A complementary amendment of IAS 1“Presentation of Financial Statements — Capital Disclosures”. The amendment to IAS 1 introduces disclosures about the level of an entity’s capital and how it manages capital. The amendment to IAS 1 is effective for accounting periods beginning on or after 1 January 2007. The Group is currently assessing the impact of the amendment to IAS 1, but does not expect it to be significant.
IFRIC 4“Determining whether an Arrangement contains a Lease”. IFRIC 4 requires the determination if whether an arrangement is or contains a lease to be based on the substance of the arrangement. IFRIC 4 is effective for accounting periods beginning on or after 1 January 2006. The Group will implement IFRIC 4 from 1 January 2006 but does not expect it to have a significant impact on the Group’s operations.
IAS 21 (Amendment)“Net investment in a foreign operation”. This amendment deals with the requirement for a monetary item that forms part of a reporting entity’s net investment in a foreign operation to be denominated in the functional currency of either the reporting entity or the foreign operation. The amendment also clarifies the accounting treatment of exchange differences arising on a loan made between two “sister companies” within a group. The exchange differences would be taken to equity in the parent’s consolidated financial statements, irrespective of the currency in which the loan is made, provided that the nature of the loan is similar to an equity investment, that is, settlement of the loan is neither planned nor expected to occur in the foreseeable future.
IFRIC 8“Scope of IFRS 2”. IFRIC 8 clarifies that transactions within the scope of IFRS 2“Share-based payment”, include those in which the entity cannot specifically identify some or all of the goods or services received. If the identifiable consideration given appears to be less than the fair value of the equity instruments granted or liability incurred, this situation generally indicates that other consideration has been or will be received.
| | | ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
Directors and Senior Managementsenior management We are managed by a board of directors and a chief executive who reports to the board and manages through a management committee. We refer to the board of directors and the chairman of the board of directors as our “senior management”. The following table sets forth information concerning senior management, as of April 2006.March 2009. | | | | | | | | Name | | Age | | | Position | | | | | | | | Glen Moreno | | | 6265 | | | Chairman | | Marjorie Scardino | | | 5962 | | | Chief Executive | | David Arculus | | | 62 | | | Non-executive Director | | David Bell | | | 5962 | | | Director for People and Chairman of the FT Group | | Terry Burns | | | 6265 | | | Non-executive Director | | Patrick Cescau | | | 5760 | | | Non-executive Director | | Will Ethridge | | | 57 | | | Chief Executive, Pearson Education North America | | Rona Fairhead | | | 4447 | | | Chairman and Chief Executive, The FT Group | | Robin Freestone | | | 50 | | | Chief Financial Officer | | Susan Fuhrman | | | 6264 | | | Non-executive Director | | Ken Hydon | | | 64 | | | Non-executive Director | | John Makinson | | | 5154 | | | Chairman and Chief Executive, Officer, Penguin Group | Reuben MarkCK Prahalad | | | 67 | | | Non-executive Director | Vernon Sankey | | | 56 | | | Non-executive Director | Rana Talwar | | | 58 | | | Non-executive Director | David Arculus | | | 59 | | | Non-executive Director | Ken Hydon | | | 61 | | | Non-executive Director |
Glen Morenowas appointed chairman of Pearson on October 1, October 2005. He is the senior independent non-executive director of Man Group plc and also a director of Fidelity International Limited. He was recently made acting chairman of UK Financial Investments Limited, and a trustee of The Prince of Liechtenstein Foundation and of The Liechtenstein Global Trust.the company set up by HM Treasury to manage the government’s shareholdings in UK banks.
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Marjorie Scardinojoined the board and became chief executive in January 1997. She is a member of Pearson’s nomination committee. She trained and practiced as a lawyer and was chief executive of The Economist Group from 1993 until joining Pearson. She is also vice chairman of Nokia Corporation and a director of several charitable organizations. David Arculusbecame a non-executive director in February 2006 and currently serves on the audit and nomination committees and as chairman of the personnel committee. He is a non-executive director of Nokia Corporation.Telefonica SA, and was previously chairman of O2 plc from 2004 until it was acquired by Telefonica at the beginning of 2006. His previous roles include chairman of Severn Trent plc and IPC Group, chief operating officer of United Business Media plc and group managing director of EMAP plc. 42
David Bellbecame a director in March 1996. He is chairman of the FT Group, having been chief executive of theFinancial Times from 1993 to 1998. In July 1998, he was appointed Pearson’s director for people with responsibility for the recruitment, motivation, developmentfinding, keeping, rewarding and reward ofinspiring our employees across the Pearson Group. He is also a non-executive director of VITEC Group plc and chairman of the International Youth Foundation.Financial Timesand Sadler’s Wells Theatre. He is also chairman of Crisis, a charity for the homeless, Roehampton University, The Institute for War and Peace Reporting and the London Transport Museum. Terry Burnsbecame a non-executive director in May 1999 and the senior independent director in February 2004. He currently serves on the nomination and personnel committees. He was the UK government’s chief economic advisor from 1980 until 1991 and Permanent Secretary of HM Treasury from 1991 until 1998. He is non-executive chairman of Alliance & Leicester plc, Abbey National plc and Glas Cymru Limited and is a non-executive director of Banco Santander Central Hispano. On 1 October 2005, heHe was appointed deputypreviously chairman of Marks and Spencer Group plc. Patrick Cescaubecame a non-executive director in April 2002. He joined the audit committee in January 2005, and is also a member of the nomination committee. He joined Unilever in 1973, latterly serving as Finance Director until January 2001, at which time he was appointed Director of Unilever’s Foods Division. He is currentlypreviously group chief executive of Unilever.Unilever and currently serves as a non-executive director of Tesco plc. Rona FairheadWill Ethridgebecame a director in May 2008 and was appointed chief executive of Pearson’s North American education business, spanning School, Higher Education and Professional publishing, assessment, technology and services. He previously held a number of senior positions within Pearson Education. He is chairman of CourseSmart, a publishers’ consortium, vice chairman of the Association of American Publishers and a director of Interactive Data.
Rona Fairheadbecame a director in June 2002, originally as chief financial officer. She was appointed chairman and chief financial officerexecutive of the FT Group in June 2002. She had served as deputy finance director from October 2001.2006 and became responsible for Pearson VUE in March 2008. From 1996 until 2001, she worked at ICI plc, where she served as executive vice president, group control and strategy, and as a member of the executive committee from 1998. Prior to that, she worked for Bombardier Inc. in finance, strategy and operational roles.strategy. She is also chairman of Interactive Data, a non-executive director of HSBC Holdings plc.plc and chairs the HSBC audit committee. Robin Freestonebecame a director of Pearson and was appointed chief financial officer in June 2006, having previously served as deputy chief financial officer since 2004. He was previously group financial controller of Amersham plc (now part of GE). He qualified as a chartered accountant with Touche Ross (now Deloitte). He is also a non-executive director and founder shareholder of eChem Limited. Susan Fuhrmanbecame a non-executive director in July 2004. She is a member of the audit and nomination committees. She is deanpresident of Teachers College at Columbia University, America’s oldest and largest graduate school of education having previously been Dean of the Graduate school of Education at the University of Pennsylvania. She is a member of the Board of Trustees of the Carnegie Foundation for the Advancement of Teaching and a memberan officer of the Council for CorporateNational Academy of Education. Ken Hydonbecame a non-executive director in February 2006 and School Partnershipscurrently serves on the personnel and nomination committees and as chairman of the Coca-Cola Foundation.audit committee. He is a non-executive director of Tesco plc, Reckitt Benckiser Group plc and Royal Berks NHS Foundation Trust. He was previously finance director of Vodafone Group plc and of subsidiaries of Racal Electronics. John Makinsonbecame chairman of the Penguin Group in May 2001 and its chief executive officer in June 2002. He was appointed chairman of Interactive Data in December 2002. He served as Pearson Finance DirectorPearson’s finance director from March 1996 until June 2002. From 1994 to 1996 he was managing director of theFinancial Times, and prior to that he founded and managed the investor relations firm Makinson Cowell. He is also chairman of the Institute of Public Policy Research and a non-executive director of George Weston Limited in Canada.The National Theatre and The International Rescue Committee (UK).
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Reuben MarkCoimbatore Krishnarao Prahaladbecame a non-executive director in 1988May 2008 and served onis a distinguished university professor of corporate strategy and international business at the audit and nomination committees and as chairmanUniversity of the personnel committee.Michigan Business School. He became chief executive of the Colgate Palmolive Company in 1984, and chairman in 1986. He has held these positions since then. He is also a director of Time Warner Inc. He retired fromNCR, Hindustan Unilever Corporation, World Resources Institute and the board at the 2006 AGM.Indus Entrepreneurs.
Vernon Sankey became a non-executive director in 1993 and served as chairman of the audit committee and as a member of the treasury and nomination committees. He was previously chief executive of Reckitt & Colman plc and is chairman of Photo-Me International plc. He is also a non-executive director of Taylor Woodrow plc and Zurich Financial Services AG. He retired from the board at the 2006 AGM.
Rana Talwar became a non-executive director in March 2000 and currently serves on the personnel, nomination and treasury committees. He is currently chairman of Sabre Capital Worldwide and Centurion Bank and a non-executive director of Schlumberger Limited and Fortis Bank. He served as group chief executive of Standard Chartered plc from 1998 until 2001, and was at Citicorp from 1969 to 1997, where he held a numberCompensation of senior international management roles.
David Arculus became a non-executive director in February 2006 and currently serves on the audit and nomination committees and as chairman of the personnel committee. He is a non-executive director of Telefonica SA, and was chairman of O2 plc from 2004 until it was acquired by Telefonica in early 2006. His previous roles include chairman of Severn Trent plc, chairman of IPC Group, chief operating officer of United Business Media plc, group managing director of EMAP plc andnon-executive director of Barclays Bank plc.
Ken Hydon became a non-executive director in February 2006 and currently serves on the nomination committee and as chairman of the audit committee. He is a non-executive director of Tesco plc and Reckitt Benckiser plc. He was previously finance director of Vodafone Group plc and of subsidiaries of Racal Electronics.
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Compensation of Senior Management
It is the role of the personnel committee (the Committee) to approve the remuneration and benefits packages of the executive directors, the chief executives of the principal operating companies and other members of the Pearson Management Committee, as well as to ensure senior management receives the development they need and that succession plans are being made.Committee. The committeeCommittee also takes note of the remuneration for those executives with base pay over a certain level, representing approximately the top 50 executives of the company. Remuneration policy Pearson seeks to generate We want a performance culture by operatingthat supports our strategy and goals and incentive programmesprograms that support its business goals and reward their achievement. It isPerformance conditions for the company’s policyvarious performance-related annual or long-term incentive plans are linked to the company’s strategic objectives and aligned with the interests of shareholders Our starting point continues to be that total remuneration (base compensation plus short-annual and long-term incentives) should reward both short-short and long-term results, delivering competitive rewards for target performance, but outstanding rewards for exceptional company performance. The company’s policy is that base compensation should provide the appropriate rate of remuneration for the job, taking into account relevant recruitment markets and business sectors and geographic regions. Benefit programmes should ensure that Pearson retains a competitive recruiting advantage. Share ownership is encouraged throughout the company. Equity-based reward programmes align the interests of directors, and employees in general, with those of shareholders by linking rewards directly to Pearson’s financial performance.
Total remuneration is made up of fixed and performance-linked elements, with each element supporting different objectives. Base salary and other fixed remuneration (such as benefits and pension) reflectreflects competitive market level, role and individual contribution. Annual incentives motivate the achievement of annual strategic goals. Bonus share matching encourages executive directors and operational goals.other senior executives to acquire and hold Pearson shares and aligns executives’ and shareholders’ interests. Long-term incentives focus ondrive long-term earnings and share price growth improvement in returns and value creation and align withexecutives’ and shareholders’ interests through ownership and retention of shares.interests. Consistent with its policy, the committeeCommittee places considerable emphasis on the performance-linked elements i.e. annual incentive,incentives, bonus share matching and long-term incentives. The Committee will continue to review the mix of fixed and performance-linked remuneration on an annual basis, consistent with its overall philosophy. Our policy is that the We want our executive directors’ remuneration of the executive directors shouldto be competitive with those of directors and executives in similar positions in comparable companies. We use a range of UK and US companies in different sectors including the media sector. Some are of a similar size to Pearson, some smaller,while others are larger, but the method which the committee’sCommittee’s independent advisers use to make comparisons on remuneration takes this into account. In addition, allAll have very substantial overseas operations. We also use selected media companies in North America as well as the UKAmerica. We use these companies because they represent the wider executive talent pool from which we might expect to recruit externally and the pay market to which we might be vulnerable if our remuneration was not competitive. Base salary Our normal policy is to review salaries annually considering levels ofconsistent with the way we benchmark pay and taking into account the approach to pay increases throughoutacross the company. Other emoluments may include benefits suchcompany as company car, healthcare, and, where relevant, amounts paid in respect of housing or other costs.a whole.
Allowances and benefits It is the company’s policy is that its benefit programmesprograms should be competitive in the context of the local labourlabor market, but as an international company we require executives to operate worldwide and recognize that recruitment also operates worldwide. Annual incentives The committeeCommittee establishes the annual incentive plans for the executive directors and the chief executives of the company’s principal operating companies, including performance measures and targets. The committee also establishesThese plans then become the target and maximum levelsbasis of individualthe annual incentive opportunity based on an assessment byplans below the committee’s independent adviserslevel of market practice for comparablethe principal operating companies, and jobs. The perform-particularly with regard
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ance measures relate to the company’s main drivers of business performance at both the corporate and operating company level. With the exception of the CEO, 10% of the total annual incentive opportunity for the executive directors and other members of the Pearson Management Committee is based on performance against personal objectives. For the CEO, all measures are financial. For 2006, the financial performance measures for Pearson plc are sales, growth in underlying adjusted earnings per share for continuing operations at constant exchange rates, average working capital as a ratio to sales and operating cash flow.
There have been no changes to the executive directors’ individual incentive opportunities. For the CEO, the target annual incentive opportunity is 100% of base salaryused and the maximum is 150%. Forrelationship between the other executive directors and other members of the Pearson Management Committee, the target is up to a maximum of 75% of salaryincentive plan targets and the maximum is twice target.relevant business unit operating plans.
The committee may award individual discretionary payments or exercise discretion in the payment of bonuses under the plan. The committeeCommittee will continue to review the annual incentive plans each year and to revise the performance measures, targets and individual incentive opportunities in light of current conditions.
Annual incentive payments do not form part of pensionable earnings. The financial performance measures relate to the company’s main drivers of business performance at both the corporate, operating company and business unit level. Performance is measured separately for each item. For each performance measure, the Committee establishes thresholds, target and maximum levels of performance for different levels of payout. The company encourages With the exception of the chief executive, normally 10% of the total annual incentive opportunity for the executive directors and other senior executivesmembers of the Pearson Management Committee is based on performance against personal objectives as agreed with the chief executive. These may includeinter alia objectives relating to acquirecorporate social responsibility. For 2009, the financial performance measures for Pearson plc are sales, operating profit (for the operating companies) and holdgrowth in underlying earnings per share for continuing operations at constant exchange rates (for Pearson shares.plc), average working capital as a ratio to sales and operating cash flow. The selection and weighting of the performance measures takes into account the strategic objectives and the business priorities relevant to each operating company and to Pearson overall each year. Since 2008, the individual annual incentive opportunities for the executive directors other than the chief executive have been expressed as absolute cash amounts. The Committee with the advice of the chief executive determines the aggregate level of annual incentives and individual incentive opportunities taking into account all relevant factors. These factors may include the profitability of the company, individual roles and responsibilities, market annual incentive levels, and the level of stretch in the performance targets. For 2009, there is no change to the incentive opportunity for the chief executive which remains at 100% of base salary at target and 150% at maximum. There is also no change to the average target individual incentive opportunity for the other executive directors which is £396,000 (the same as in 2008 on a like-for-like basis at constant exchange rates). The maximum opportunity remains at twice target (as in 2008). The annual incentive plans are discretionary and the Committee reserves the right to make adjustments to payouts up or down if it believes exceptional factors warrant doing so. The committee may also award individual discretionary incentive payments and did so in 2008 for Will Ethridge in recognition of his contributions in such areas as his leadership efforts on the Google settlement and his oversight of Pearson’s global content management programme. | | | | | | | | | | | | | | Name | | Pearson plc | | | Operating company | | | Personal objectives | | | | | Marjorie Scardino | | | 100 | % | | | — | | | | — | | | David Bell | | | 90 | % | | | — | | | | 10 | % | | Will Ethridge | | | 45 | % | | | 35 | % | | | 20 | % | | Rona Fairhead | | | 30 | % | | | 60 | % | | | 10 | % | | Robin Freestone | | | 90 | % | | | — | | | | 10 | % | | John Makinson | | | 30 | % | | | 60 | % | | | 10 | % |
For Pearson plc, the performance measures were sales, earnings per share growth, average working capital to sales ratio and operating cash flow. Sales and underlying growth in adjusted earnings per share at constant exchange rates were above target but below maximum. Average working capital as a ratio to sales was above threshold but below target. Operating cash flow was above maximum.
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For Higher Education and Professional, the performance measures were sales, operating profit, average working capital as a ratio to sales and operating cash flow. Operating profit, average working capital as a ratio to sales and operating cash flow were all above maximum. Sales were above target but below maximum. For FT Publishing, the performance measures were sales, operating profit and operating cash flow. Sales were below threshold. Operating profit was above threshold but below target. Operating cash flow was above maximum. For Pearson VUE, the performance measures were sales, operating profit, average working capital as a ratio to sales and operating cash flow. Sales were above target but below maximum. Performance across all other measures was above maximum. For Penguin Group, the performance measures were sales, operating margin, average working capital as a ratio to sales and operating cash flow. Sales were above target but below maximum. Operating margin was above threshold but below target. Average working capital as a ration to sales and operating cash flow were above maximum. Bonus share matching In 2008, shareholders approved the renewal of the annual bonus share matching plan, which permits executive directors and senior executives around the company to invest up to 50% of any after-tax annual bonus in Pearson shares. For awards to be made in 2006 and thereafter, if these If the participant’s invested shares are held, andthey will be matched subject to earnings per share growth over the three-year performance period on a gross basis up to a maximum of one matching share for every one held i.e. the number of matching shares will be equal to the number of shares that could have been acquired with the amount of the pre-tax annual bonus taken in invested shares. One matching share for every two invested shares held i.e. 50% of the maximum matching award, will be released if the company’s adjusted earnings per share increase in real terms by at least 3% per annum compound over the company will match them on a gross basis of onethree-year performance period. One matching share for every twoone invested share held after three years,i.e. 100% of the maximum matching award, will be released if the company’s adjusted earnings per share increase in real terms by 5% per annum compound over the same period. For real growth in adjusted earnings per share of between 3% and another one for two held (i.e.5% per annum compound, the rate at which the participant’s invested shares will be matched will be calculated according to a total of one-for-one) after five years.straight-line sliding scale. Real growth is measured againstcalculated by reference to the UK Government’s Index of Retail Prices (All Items). We choose to test our earnings per share growth against UK inflation over three and five years to measure the company’s financial progress over the period to which the entitlement to matching shares relates. | | | The Long-Term Incentive Plan |
Where matching shares vest in accordance with the plan, a participant will also receive ‘dividend’ shares representing the gross value of dividends that would have been paid on the matching shares during the holding period and re-invested. Shareholders at Long-term incentives At the AGMannual general meeting in April 2006, shareholders approved the renewal of the long-term incentive plan first introduced in 2001. The committee has reviewed the operation of this plan in the light of the company’s strategic goals and concluded that it is operating satisfactorily and achieving its objectives. We have therefore sought and received approval of its renewal on broadly its original terms. Executive directors, senior executives and other managers will be eligible tocan participate in the plan which can deliver restricted stockand/or stock options. Approximately 5% of the company’s employees currently hold awards under the plan. The aim as before is to give the committeeCommittee a range of tools with which to link corporate performance to management’s long-term reward in a flexible way. It is not the Committee’s intention to grant stock options in 2009. Restricted stock granted to executive directors will vestvests only when stretching corporate performance targets over a specified period have been met. Awards will vest on a sliding scale based on performance over the period. There will beis no retesting. The committee will determineCommittee determines the performance measures and targets governing an award of restricted stock prior to grant.
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The performance measures that have applied since 2006 and that will apply for 2009 and subsequent awards for the executive directors are focused on delivering and improving returns to shareholders. These are relative total shareholder return, return on invested capital and earnings per share growth. It is Restricted stock may be granted without performance conditions to satisfy recruitment and retention objectives. Restricted stock awards that are not the committee’s intentionsubject to grant stock options in 2006. Should the committee decide to grant them in future, optionsperformance conditions will not be granted to any of the current executive directors would come with a minimum three-year vesting period and would vest on a sliding scale based on stretching performance over the three-year period with no retesting.directors. The committee’sCommittee’s independent advisers calculateverify each year the expected value of both restricted stock and stock optionsindividual awards i.e. their net present value after taking into account all the conditionsvesting schedule, risk of forfeiture and in particular, the probability that any performance conditionstargets will be met. TakingThe level of individual awards takes into account three factors: their expected values; the assessments by the Committee’s independent advisors’ values and assessmentsadvisers of market practice for comparable companies and of directors’ total remuneration relative to the committee establishes guidelines eachmarket and the face value of individual awards and their potential value should the performance targets be met in full. Pearson wishes to encourage executives and managers to build up a long-term holding of shares so as to demonstrate their commitment to the company. To achieve this, for awards of restricted stock that are subject to performance conditions over a three-year period, 75% of the award vests at the end of the three-year period. The remaining 25% of the award only vests if the participant retains the after-tax number of shares that vest at year three for a further two years. Where shares vest, participants receive additional shares representing the maximumgross value of dividends that would have been paid on these shares during the performance period and reinvested. The expected value of individual awards.awards made on this basis take this into account. There are limits on the amount of new-issue equity we can use. In any rolling 10-yearten-year period, no more than 10% of Pearson equity will be issued, or available for issue,be capable of being issued, under all Pearson’s share plans, and no more than 5% of Pearson equity will be issued, or available for issue,be capable of being issued, under executive or discretionary plans. In addition, for existing shares no more than 5% of Pearson equity may be held in trust at any time. 45
As previously noted, in line with the Shareholding policy of encouraging employee ownership, the company encourages We encourage executive directors to build up a substantial shareholding in the company. Givencompany in line with the policy of encouraging widespread employee share retention features of the annual bonus share matching and long-term incentive plans and the volatility of the stock market, weownership. We do not think it is necessary to specify a particular relationship of shareholding to salary.salary because of the volatility of the stock market and the share retention features that already exist in the annual bonus share matching plan and long-term incentive plans. Service agreements In accordance with long established policy, all continuing executive directors have rolling service agreements under which, other than by termination in accordance with the terms of these agreements, employment continues until retirement. These The committee reviewed the policy on executive employment agreements in 2008. For future executive directors, service agreements should provide that the company may terminate these agreements by giving no more than 12 months’ notice. As an alternative to giving notice, the company may pay salary, target annual incentive and they specifythe cost of pension and other benefits in lieu, subject to mitigation. In the case of the longer serving directors with legacy employment agreements, the compensation payable by way of liquidated damages in circumstances where the company terminates the agreements without notice or cause. We feel that these notice periods andcause takes the form of liquidated damages. There are no special provisions for notice, pay in lieu of notice or liquidated damages in the event of termination of employment in the event of a change of control of Pearson. On termination of employment, executive directors’ entitlements to any vested or unvested awards under Pearson’s discretionary share plans are adequate compensation for loss of office andtreated in lineaccordance with the market. The compensation payable in these circumstances is typically 100% of annual salary, 100% of other benefits, and a proportion of potential bonus. Peter Jovanovich stood down as a directorterms of the company for health reasons on 31 January 2005, but remained entitled to contractual short- and long-term disability and other benefits. These arrangements are set out in an agreement dated 28 January 2005. Dennis Stevenson retired as chairman and director on 1 October 2005. Glen Moreno was appointed chairman and director on 1 October 2005.relevant plan.
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| | | Retirement BenefitsRetirement benefits |
Following are the retirement benefits for each of the executive directors.
Executive directors participate in the approved pension arrangements set up for Pearson employees. Marjorie Scardino, Will Ethridge, John Makinson, Rona Fairhead and Peter JovanovichRobin Freestone will also receive benefits under unapprovedhave other retirement arrangements because of the cap on the amount of benefits that can be provided from the approved arrangements in the US and the UK. The differences in the arrangements for the current executive directors reflect the different arrangements in the UK and the US and the changes in pension arrangements generally over the periods of their employment. The pension arrangements for all the executive directors include life insurance cover while in employment, and entitlement to a pension in the event of ill-health or disability. A pension for their spouseand/or dependants is also available on death. In the US, the approved defined benefit arrangement is the Pearson Inc. Pension Plan. This plan provides a lump sum convertible to a pension on retirement. The lump sum accrued at 6% of capped compensation until 31 December 2001 when further benefit accruals ceased. Normal retirement age is age 65 although early retirement is possible subject to a reduction for early payment. No increases are guaranteed for pensions in payment. There is a spouse’s pension on death in service and the option to provide a death in retirement pension by reducing the member’s pension. The approved defined contribution arrangement in the US is a 401(k) plan. At retirement, the account balances will be used to provide benefits. In the event of death before retirement, the account balances will be used to provide benefits for dependants. In the UK, the approvedpension plan is the Pearson Group Pension Plan and some executive directors participate in either the Final Pay or the Money Purchase 2003 section. Normal retirement age is 62, but, subject to company consent, retirement is currently possible after age 50. The50 (age 55 from April 2010). In the Final Pay section, the accrued pension is reduced on retirement prior to age 60. Pensions in payment are guaranteed to increase each year at 5% or the increase in the Index of Retail Prices, if lower. Pensions for a member’s spouse, dependentdependant childrenand/or nominated financial dependant are payable in the event of death. In the Money Purchase 2003 section the account balances are used to provide benefits at retirement. In the event of death before retirement pensions for a member’s spouse, dependant childrenand/or nominated financial dependant are payable. In response Members of the Pearson Group Pension Plan who joined after May 1989 are subject to an upper limit of earnings that can be used for pension purposes, known as the earnings cap. This limit, £108,600 as at 6 April 2006, was abolished by the Finance Act 2004. However the Pearson Group Pension Plan has retained its own ’cap’, which will increase annually in line with the UK Government’s plans for pensions simplification and so-called ’A-Day’Index of Retail Prices (All Items). The cap was £117,600 as at 6 April 2008. As a result of the UK Government’sA-Day changes effective from April 2006, UK executive directors and other members of the Pearson Group Pension Plan who are, or become, affected by the lifetime allowance will be offeredare provided with a cash supplement as an alternative to further accrual of pension benefits on a basis that is broadly cost neutral to the company. Further details will be set out in the report on directors’ remuneration for 2006. Marjorie Scardino Marjorie Scardino participates in the Pearson Inc. Pension Plan and the approved 401(k) plan. Additional pension benefits will beare provided through an unfunded unapproved defined contribution plan and a 46
funded defined contribution plan approved by HM Revenue and Customs as a corresponding plan to replace part of the unfunded plan. The account balance of the unfunded unapproved defined contribution plan is determined by reference to the value of a notional cash account that increases annually by a specified notional interest rate. This plan provides the opportunity to convert a proportion of this notional cash account into a notional share account reflecting the value of a number of Pearson ordinary shares. The number of shares in the notional share account is determined by reference to the market value of Pearson shares at the date of conversion. David Bell David Bell is a member of the Pearson Group Pension Plan. He iswas eligible for a pension of two-thirds of his final base salary at age 62 due to his long service. Early retirement with a reduced pension before that date is possible, subject to company consent.
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Will Ethridge Rona Fairhead is a member of the Pearson Group Pension Plan. Her pension accrual rate is 1/30th of pensionable salary per annum, restricted to the earnings cap introduced by the Finance Act 1989. The company also contributes to a Funded Unapproved Retirement Benefits Scheme (FURBS) on her behalf. In the event of death before retirement, the proceeds of the FURBS account will be used to provide benefits for her dependants.
Peter JovanovichWill Ethridge is a member of the Pearson Inc. Pension Plan and the approved 401(k) plan. He also participates in an unfunded, unapproved Supplemental Executive Retirement Plan (SERP) that provides an annual accrual of 2% of final average earnings, less benefits accrued in the Pearson Inc. Pension Plan and US Social Security. He ceased to build up further benefits in the SERP at 31 December 2002. Additional defined contribution benefits are provided through a funded, unapproved 401(k) excess plan.
Rona Fairhead Rona Fairhead is a member of the Pearson Group Pension Plan. Her pension accrual rate is 1/30th of pensionable salary per annum, restricted to the plan earnings cap. Until April 2006, the company also contributed to a Funded Unapproved Retirement Benefits Scheme (FURBS) on her behalf. Since April 2006, she has received a taxable and an unfunded, unapproved arrangement. Innon-pensionable cash supplement in replacement of the eventFURBS. Robin Freestone Robin Freestone is a member of death whilethe Money Purchase 2003 section of the Pearson Group Pension Plan. Company contributions are 16% of pensionable salary per annum, restricted to the plan earnings cap. Until April 2006, the company also contributed to a Funded Unapproved Retirement Benefits Scheme (FURBS) on his behalf. Since April 2006, he has received a taxable and non-pensionable cash supplement in receiptreplacement of disability benefits, the account balances in the defined contribution arrangements will be used to provide benefits for dependants. The SERP arrangement provides a spouse’s pension on death while in receipt of disability benefits and the option of a death in retirement pension by reducing the member’s pension.FURBS. John Makinson John Makinson is a member of the Pearson Group Pension Plan under which his pensionable salary is restricted to the plan earnings cap. The company ceased contributions on 31 December 2001 to his FURBS arrangement. During 2002 it set up an Unfunded Unapproved Retirement Benefits Scheme (UURBS) for him. The UURBS tops up the pensionspension payable from the Pearson Group Pension Plan and the closed FURBS to target a pension of two-thirds of a revalued base salary on retirement at age 62. The revalued base salary is defined as £450,000 effective at 1 June 2002, increased at 1 January each year by reference to the increase in the UK Government’s Index of Retail Prices.Prices (All Items). In the event of his death a pension from the Pearson Group Pension Plan, the FURBS and the UURBS will be paid to his spouse or nominated financial dependant. Early retirement is possible from age 50 (age 55 from April 2010), with company consent. The pension is reduced to reflect the shorter service, and before age 60, further reduced for early payment. Chairman’s RemunerationExecutive directors’ non-executive directorships
Our policy is that executive directors may, by agreement with the board, serve as non-executives of other companies and retain any fees payable for their services. The following executive directors served as non-executive directors elsewhere and received fees or other benefits for the period covered by this report as follows: Marjorie Scardino (Nokia Corporation and MacArthur Foundation); Rona Fairhead (HSBC Holdings plc) and Robin Freestone (eChem). Chairman’s remuneration Our policy is that the chairman’s pay should be set at a level that is competitive with those of chairmen in similar positions in comparable companies. He is not entitled to any annual or long-term incentive, retirement or other benefits. The committee’s view is that, taking into account There were no changes in the chairman’s remuneration of chairmen in comparable positions, the appropriate total pay level is £425,0002008. With effect from 1 January 2007, his remuneration was £450,000 per year. Non-executive DirectorsNon-Executive directors
Fees for non-executive directors are determined by the full board having regard to market practice and within the restrictions contained in the company’sPearson’s articles of association. Non-executive directors receive no other pay or
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benefits (other than reimbursement for expenses incurred in connection with their directorship of the company)Pearson) and do not participate in the company’sPearson’s equity-based incentive plans. 47
For 2005, There were no changes in the chairmanstructure and the executive directors of the board reviewed the level and structure of non-executive directors’ fees which had not been changed since January 2000. After reviewing external benchmarks, they agreed an increase in the basic fee to £45,000, an increase in the fee for the audit and personnel committee chairmen to £10,000, the introduction of separate fees of £5,000 for audit and personnel committee membership and of £10,000 for the senior independent director and the replacement of the fee for non-UK based directors with a fee of £2,500 for overseas meetings.2008. With effect from 1 July 2007, these were as follows: One-third | | | | | | | Fees payable from
| | | | July 1, 2007 (£) | | | | Non-executive director fee | | | 60,000 | | | Chairmanship of audit committee | | | 20,000 | | | Chairmanship of personnel committee | | | 15,000 | | | Membership of audit committee | | | 10,000 | | | Membership of personnel committee | | | 5,000 | | | Senior independent director | | | 15,000 | |
A minimum of 25% of the basic fee or the entire fee in the case of Rana Talwar, is paid in Pearson shares that the non-executive directors have committed to retain for the period of their directorships. In the case Terry Burns also receives a fee in respect of Patrick Cescau, his fee was paid over to his employer.non-executive directorship at Edexcel. Non-executive directors serve Pearson under letters of appointment and do not have service contracts. There is no entitlement to compensation on the termination of their directorships.
Remuneration of Senior Managementsenior management Excluding contributions to pension funds and related benefits, senior management remuneration for 20052008 was as follows: | | | | | | | | | | | | | | | | | | | | | Salaries/Fees | | | Bonus(1) | | | Other(2) | | | Total | | | | | | | | | | | | | | | | | | | £’000 | | | £’000 | | | £’000 | | | £’000 | | Chairman | | | | | | | | | | | | | | | | | | Dennis Stevenson (retired 1 October 2005) | | | 281 | | | | — | | | | — | | | | 281 | | | Glen Moreno (appointed 1 October 2005) | | | 106 | | | | — | | | | — | | | | 106 | | Executive directors | | | | | | | | | | | | | | | | | | Marjorie Scardino | | | 710 | | | | 1,038 | | | | 62 | | | | 1,810 | | | David Bell | | | 395 | | | | 560 | | | | 17 | | | | 972 | | | Rona Fairhead | | | 420 | | | | 608 | | | | 16 | | | | 1,044 | | | Peter Jovanovich | | | 41 | | | | — | | | | 373 | | | | 414 | | | John Makinson | | | 475 | | | | 564 | | | | 211 | | | | 1,250 | | | | | | | | | | | | | | | | Senior management as a group | | | 2,428 | | | | 2,770 | | | | 679 | | | | 5,877 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | Salaries/
| | | Annual
| | | | | | | | | | | | | | Fees(1) | | | Incentive(2) | | | Allowances(3) | | | Benefits(4) | | | Total(5) | | | | | £000 | | | £000 | | | £000 | | | £000 | | | £000 | | | | Non-executive Chairman | | | | | | | | | | | | | | | | | | | | | | Glen Moreno | | | 450 | | | | — | | | | — | | | | — | | | | 450 | | Executive directors | | | | | | | | | | | | | | | | | | | | | | Marjorie Scardino | | | 950 | | | | 1,017 | | | | 55 | | | | 35 | | | | 2,057 | | | David Bell | | | 469 | | | | 493 | | | | — | | | | 21 | | | | 983 | | | Will Ethridge (appointed 1 May 2008) | | | 361 | | | | 810 | | | | — | | | | — | | | | 1,171 | | | Rona Fairhead | | | 506 | | | | 494 | | | | — | | | | 36 | | | | 1,036 | | | Robin Freestone | | | 450 | | | | 491 | | | | — | | | | 16 | | | | 957 | | | John Makinson | | | 525 | | | | 500 | | | | 183 | | | | 32 | | | | 1,240 | | | | | | | | | | | | | | | | | | | | | | | | Senior management as a group | | | 3,711 | | | | 3,805 | | | | 238 | | | | 140 | | | | 7,894 | | | | | | | | | | | | | | | | | | | | | | | |
| | | (1) | For Marjorie Scardino, David Bell and Rona Fairhead, annual incentives were based onThere will be no increase in base salary for the financial performance of Pearson plc. In the case of John Makinson, 70% of his annual incentive was based on the performance of Penguin Group and 20% on the financial performance of Pearson plc. In the case of David Bell, Rona Fairhead and John Makinson, 10% of their annual incentives was based on performance against personal objectives.executive directors for 2009. |
For Pearson plc, the performance measures were earnings per share growth, operating cash flow, sales and average working capital as a ratio to sales. Actual underlying growth in adjusted earnings per share at constant exchange rates consistent with the reported adjusted earnings per share (pre-intangibles) of 34.1p, operating cash flow of £570m and average working capital as a ratio to sales were each better than the level of performance required for maximum payout. Actual sales at £4,096m were above target but below maximum.
For Penguin Group, the performance measures were operating profit, operating cash flow and average working capital as a ratio to sales. For operating cash flow and working capital as a ratio to sales actual performance was better than that required for maximum payout and for operating profit was above target but below maximum.
| | | (2) | Other emoluments include company carWill Ethridge’s annual incentive includes a special award of Pearson shares in recognition of his contributions in such areas as his leadership efforts on the Google settlement and healthcare benefits. Inhis oversight of Pearson’s global content management programme. The after-tax amount will be invested in Pearson shares, which will be acquired and held under the case ofannual bonus share matching plan in 2009. | | | (3) | Allowances for Marjorie Scardino these include £39,245£43,560 in respect of housing costs and a cash US payroll supplement of £8,372.£11,804. John Makinson is entitled to a location and market premium in relation to the management of the business of the Penguin Group in the US. HeUS and received £186,279 in cash£182,824 for 2005.2008. | | | (4) | Benefits include company car, car allowance and UK health care premiums. US health and welfare benefits for Marjorie Scardino and Will Ethridge are self-insured and the company cost, after employee contributions, is |
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| | | tax free to employees. For Marjorie Scardino, benefits include £20,233 pension planning and financial advice. Marjorie Scardino, Rona Fairhead, David Bell and John Makinson have the use of a chauffeur. In accordance with |
| | | (5) | No amounts as compensation for loss of office and no expense allowances chargeable to UK income tax were paid during the agreement dated 28 January 2005 referred to on page 26 of this report, Peter Jovanovich received short-and long-term disability payments in cash for the period 1 February 2005 to 31 December 2005.year. |
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Share Optionsoptions of Senior Managementsenior management This table sets forth for each director the number of share options held as of December 31, 20052008 as well as the exercise price, rounded to the nearest whole penny/pence/cent, and the range of expiration dates of these options. | | | | | | | | | | | | | | | Number of
| | | | Exercise
| | Earliest
| | | Director | | Options | | (1) | | Price | | Exercise Date | | Expiry Date | | | | Marjorie Scardino(2) | | 37,583 | | c* | | 1372.4p | | 06/08/02 | | 06/08/09 | | | | 37,583 | | c* | | 1647.5p | | 06/08/02 | | 06/08/09 | | | | 41,550 | | d* | | 1421.0p | | 05/09/02 | | 05/09/11 | | | | 41,550 | | d* | | 1421.0p | | 05/09/03 | | 05/09/11 | | | | 41,550 | | d* | | 1421.0p | | 05/09/04 | | 05/09/11 | | | | 41,550 | | d* | | 1421.0p | | 05/09/05 | | 05/09/11 | | | | | | | | | | | | | Total | | 241,366 | | | | | | | | | | | | | | | | | | | | | | David Bell | | 297 | | b | | 629.6p | | 08/01/09 | | 02/01/10 | | | | 821 | | b | | 690.4p | | 08/01/10 | | 02/01/11 | | | | 18,705 | | c* | | 1372.4p | | 06/08/02 | | 06/08/09 | | | | 18,705 | | c* | | 1647.5p | | 06/08/02 | | 06/08/09 | | | | 16,350 | | d* | | 1421.0p | | 05/09/02 | | 05/09/11 | | | | 16,350 | | d* | | 1421.0p | | 05/09/03 | | 05/09/11 | | | | 16,350 | | d* | | 1421.0p | | 05/09/04 | | 05/09/11 | | | | 16,350 | | d* | | 1421.0p | | 05/09/05 | | 05/09/11 | | | | | | | | | | | | | Total | | 103,928 | | | | | | | | | | | | | | | | | | | | | | Will Ethridge | | 10,802 | | c* | | 1372.4p | | 06/08/02 | | 08/06/09 | | | | 10,802 | | c* | | 1647.5p | | 06/08/02 | | 08/06/09 | | | | 11,010 | | d* | | $21.00 | | 05/09/02 | | 09/05/11 | | | | 11,010 | | d* | | $21.00 | | 05/09/03 | | 09/05/11 | | | | 11,010 | | d* | | $21.00 | | 05/09/04 | | 09/05/11 | | | | 11,010 | | d* | | $21.00 | | 05/09/05 | | 09/05/11 | | | | 14,680 | | d* | | $11.97 | | 11/01/02 | | 11/01/11 | | | | 14,680 | | d* | | $11.97 | | 11/01/03 | | 11/01/11 | | | | 14,680 | | d* | | $11.97 | | 11/01/04 | | 11/01/11 | | | | | | | | | | | | | Total | | 109,684 | | | | | | | | | | | | | | | | | | | | | | Rona Fairhead | | 2,371 | | b | | 690.4p | | 08/01/12 | | 02/01/13 | | | | 20,000 | | d* | | 822.0p | | 11/01/02 | | 11/01/11 | | | | 20,000 | | d* | | 822.0p | | 11/01/03 | | 11/01/11 | | | | 20,000 | | d* | | 822.0p | | 11/01/04 | | 11/01/11 | | | | | | | | | | | | | Total | | 62,371 | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | Number of |
| | | | Exercise |
| | Earliest |
| | | Director | | Options | | | (1) | | | Price | | | Exercise Date | | | Expiry Date | | | | | Robin Freestone | | | | | | | | | | | | | | | Dennis Stevenson | | | 3,556 | | 1,757 | | b | | 534.8p | | 494.8p | | | | 08/01/08/11 | | | | 02/01/02/12 | | | | | | | | | | | | | | | | | | Total | | | 3,556 | | | | | | | | — | 1,757 | | | | | | | | | | | | | | | | | | | | | | John Makinson | | | | | Marjorie Scardino | | | 176,556 | | | | a | * | | | 973.3p | | | | 14/09/01 | | | | 14/09/08 | | | | | 5,660 | | | | a | * | | | 1090.0p | | | | 14/09/01 | | | | 14/09/08 | | | | | 2,224 | | 4,178 | | b | | | | 424.8p | | 08/01/10 | | 02/01/08/06 | | | | 01/02/07 | 11 | | | | | 37,58321,477 | | | | c | * | c* | | 1372.4p | | | | 06/08/06/02 | | | | 06/08/06/09 | | | | | | 37,58321,477 | | | | c | * | c* | | 1647.5p | | | | 06/08/06/02 | | | | 06/08/06/09 | | | | | | 37,58319,785 | | | | c | | | | 1921.6p | | | | 08/06/02 | | | | 08/06/09 | | | | | 36,983 | | | | c | | | | 3224.3p | | | | 03/05/03 | | | | 03/05/10 | | | | | 41,550 | | | | d | * | d* | | 1421.0p | | | | 05/09/05/02 | | | | 05/09/05/11 | | | | | | 41,55019,785 | | | | d | * | d* | | 1421.0p | | | | 05/09/05/03 | | | | 05/09/05/11 | | | | | | 41,55019,785 | | | | d | * | d* | | 1421.0p | | | | 05/09/05/04 | | | | 05/09/05/11 | | | | | | 41,55019,785 | | | | d | * | d* | | 1421.0p | | | | 05/09/05/05 | | | | 05/09/05/11 | | | | | | | | | | | | | | | | | | Total | | | 500,372 | | | | | | | | — | 126,272 | | | | | | | | | | | | | | | | | | | | |
| | | | | David BellNotes: | | | 20,496 | | | | a | * | | | 973.3p | | | | 14/09/01 | | | | 14/09/08 | | | | | 272 | | | | b | | | | 696.0p | | | | 01/08/05 | | | | 01/02/06 | | | | | 444 | | | | b | | | | 424.8p | | | | 01/08/06 | | | | 01/02/07 | | | | | 1,142 | | | | b | | | | 494.8p | | | | 01/08/07 | | | | 01/02/08 | | | | | 373 | | | | b | | | | 507.6p | | | | 01/08/08 | | | | 01/02/09 | | | | | 18,705 | | | | c | * | | | 1372.4p | | | | 08/06/02 | | | | 08/06/09 | | | | | 18,705 | | | | c | * | | | 1647.5p | | | | 08/06/02 | | | | 08/06/09 | | | | | 18,705 | | | | c | | | | 1921.6p | | | | 08/06/02 | | | | 08/06/09 | | | | | 18,686 | | | | c | | | | 3224.3p | | | | 03/05/03 | | | | 03/05/10 | | | | | 16,350 | | | | d | * | | | 1421.0p | | | | 09/05/02 | | | | 09/05/11 | | | | | 16,350 | | | | d | * | | | 1421.0p | | | | 09/05/03 | | | | 09/05/11 | | | | | 16,350 | | | | d | * | | | 1421.0p | | | | 09/05/04 | | | | 09/05/11 | | | | | 16,350 | | | | d | * | | | 1421.0p | | | | 09/05/05 | | | | 09/05/11 | | | | | | | | | | | | | | | | | | Total
| | | 162,928 | | | | | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | Rona Fairhead | | | 1,904 | | | | b | | | | 494.8p | | | | 01/08/07 | | | | 01/02/08 | | | | | 20,000 | | | | d | * | | | 822.0p | | | | 01/11/02 | | | | 01/11/11 | | | | | 20,000 | | | | d | * | | | 822.0p | | | | 01/11/03 | | | | 01/11/11 | | | | | 20,000 | | | | d | * | | | 822.0p | | | | 01/11/04 | | | | 01/11/11 | | | | | | | | | | | | | | | | | | Total
| | | 61,904 | | | | | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | Number of | | | | | Exercise | | | Earliest | | | | | Director | | Options | | | (1) | | | Price | | | Exercise Date | | | Expiry Date | | | | | | | | | | | | | | | | | | | | Peter Jovanovich | | | 8,250 | | | | a | * | | | 757.5p | | | | 12/09/00 | | | | 12/09/07 | | | | | | 102,520 | | | | a | * | | | 676.4p | | | | 12/09/00 | | | | 12/09/07 | | | | | | 32,406 | | | | c | * | | | 1372.4p | | | | 08/06/02 | | | | 08/06/09 | | | | | | 32,406 | | | | c | * | | | 1647.5p | | | | 08/06/02 | | | | 08/06/09 | | | | | | 32,406 | | | | c | | | | 1921.6p | | | | 08/06/02 | | | | 08/06/09 | | | | | | 33,528 | | | | c | | | | 3224.3p | | | | 03/05/03 | | | | 03/05/10 | | | | | | 31,170 | | | | d | * | | $ | 21.00 | | | | 09/05/02 | | | | 09/05/11 | | | | | | 31,170 | | | | d | * | | $ | 21.00 | | | | 09/05/03 | | | | 09/05/11 | | | | | | 31,170 | | | | d | * | | $ | 21.00 | | | | 09/05/04 | | | | 09/05/11 | | | | | | 31,170 | | | | d | * | | $ | 21.00 | | | | 09/05/05 | | | | 09/05/11 | | | | | | 20,000 | | | | d | * | | $ | 11.97 | | | | 01/11/02 | | | | 01/11/11 | | | | | | 20,000 | | | | d | * | | $ | 11.97 | | | | 01/11/03 | | | | 01/11/11 | | | | | | 20,000 | | | | d | * | | $ | 11.97 | | | | 01/11/04 | | | | 01/11/11 | | | | | | | | | | | | | | | | | | | Total | | | 426,196 | | | | | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | John Makinson | | | 36,736 | | | | a | * | | | 584.0p | | | | 08/08/99 | | | | 08/08/06 | | | | | | 73,920 | | | | a | * | | | 676.4p | | | | 12/09/00 | | | | 12/09/07 | | | | | | 30,576 | | | | a | * | | | 973.3p | | | | 14/09/01 | | | | 14/09/08 | | | | | | 4,178 | | | | b | | | | 424.8p | | | | 01/08/10 | | | | 01/02/11 | | | | | | 21,477 | | | | c | * | | | 1372.4p | | | | 08/06/02 | | | | 08/06/09 | | | | | | 21,477 | | | | c | * | | | 1647.5p | | | | 08/06/02 | | | | 08/06/09 | | | | | | 21,477 | | | | c | | | | 1921.6p | | | | 08/06/02 | | | | 08/06/09 | | | | | | 21,356 | | | | c | | | | 3224.3p | | | | 03/05/03 | | | | 03/05/10 | | | | | | 19,785 | | | | d | * | | | 1421.0p | | | | 09/05/02 | | | | 09/05/11 | | | | | | 19,785 | | | | d | * | | | 1421.0p | | | | 09/05/03 | | | | 09/05/11 | | | | | | 19,785 | | | | d | * | | | 1421.0p | | | | 09/05/04 | | | | 09/05/11 | | | | | | 19,785 | | | | d | * | | | 1421.0p | | | | 09/05/05 | | | | 09/05/11 | | | | | | | | | | | | | | | | | | | Total | | | 310,337 | | | | | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (1) | Shares under option are designated as:aexecutive;bworldwide save for shares;cpremium priced; anddlong-term incentive; and*where options are exercisable. |
| | | Subject to any performance condition being met, executive options become exercisable on the third anniversary of the date of grant and lapse if they remain unexercised at the tenth. | | | Options granted prior to 1996 are not subject to performance conditions representing market best practice at that time. | | | The exercise of options granted since 1996 is subject to a real increase in the company’s adjusted earnings per share over any three-year period prior to exercise. |
The plans under which these options were granted were replaced with the introduction of the long-term incentive plan in 2001. No executive options have been granted to the directors since 1998. All options have now lapsed, having been unexercised at the tenth anniversary of the date of grant. | | | b | Worldwide save for shares |
| | | The acquisition of shares under the worldwide save for shares plan is not subject to the satisfaction of a performance target. |
The acquisition of shares under the worldwide save for shares plan is not subject to the satisfaction of a performance target. | | | Subject to the performance conditions being met, Premium Priced Options (PPOs) become exercisable on the third anniversary of the date of grant and lapse if they remain unexercised at the tenth. | | | PPOs were granted in three tranches. For these to become exercisable, the Pearson share price has to stay above the option price for 20 consecutive days within three, five and seven years respectively. In addition, for options to be exercisable, the company’s adjusted earnings per share have to increase in real terms by at least 3% per annum over the three-year period prior to exercise. |
The plan under which these options were granted was replaced with the introduction of the long-term incentive plan in 2001. No Premium Priced Options (PPOs) have been granted to the directors since 1999. The share price targets for the three-year and five-year tranches of PPOs granted in 1999 have already been met prior to 2008. The share price target for the seven-year tranche of PPOs granted in 2000 was not met in 2008 and the options lapsed. The secondary real growth in earnings per share target for any PPOs to become exercisable has already been met prior to 2008. All PPOs that remain outstanding lapse if they remain unexercised at the tenth anniversary of the date of grant. 50
| | | Options granted in 2001 were based on pre-grant earnings per share growth of 75% against a target of 16.6% over the period 1997 to 2000 and are not subject to further performance conditions on exercise. | | | Long-term incentive options granted on May 9, 2001 become exercisable in tranches on the first, second, third and fourth anniversary of the date of grant and lapse if they remain unexercised at the tenth. The fourth tranche lapses if any of the options in the first, second or third tranche are exercised prior to the fourth anniversary of the date of grant. | | | Long-term incentive options granted on November 1, 2001 become exercisable in tranches on the first, second and third anniversary of the date of grant and lapse if they remain unexercised at the tenth. |
All options that remain outstanding are exercisable and lapse if they remain unexercised at the tenth anniversary of the date of grant. | | | (2) | In addition, Marjorie Scardino contributes US$1,000 per month (the maximum allowed) to the above listed optionsUS employee stock purchase plan. The terms of this plan allow participants to make monthly contributions for one year and to acquire shares at the end of that period at a price that is the lower of the market price at the beginning or the end of the period, both Marjorie Scardino and Peter Jovanovich participate in the Pearson US Employee Stock Purchase Plan saving the maximum amount of US$12,000 per annum.less 15%. |
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Share Ownershipownership of Senior Managementsenior management The table below sets forth the number of ordinary shares and restricted shares held by each of our directors as at March 31, 2006.February 28, 2009. Additional information with respect to share options held by, and bonus awards for, these persons is set out above in “Remuneration of Senior Management” and “Share Options for Senior Management”. The total number of ordinary shares held by senior management as of March 31, 2006February 28, 2009 was 626,1521,916,299 representing less than 1% of the issued share capital on March 31, 2006.February 28, 2009. | | | | | | | | | | | As at March 31, 2006 | | Ordinary Shares(1) | | | Restricted Shares(2) | | | | | | | | | | | Glen Moreno | | | 100,000 | | | | — | | | Marjorie Scardino | | | 184,889 | | | | 1,336,015 | | | David Bell | | | 103,158 | | | | 587,829 | | | Terry Burns | | | 5,717 | | | | — | | | Patrick Cescau | | | — | | | | — | | | Rona Fairhead | | | 43,209 | | | | 637,936 | | | Susan Fuhrman | | | 2,681 | | | | — | | | John Makinson | | | 149,466 | | | | 642,756 | | | Reuben Mark | | | 16,908 | | | | — | | | Vernon Sankey | | | 5,563 | | | | — | | | Rana Talwar | | | 14,561 | | | | — | |
| | | | | | | | | | | | | Ordinary
| | | Restricted
| | As at March 31, 2009 | | shares(1) | | | shares(2) | | | | | Glen Moreno | | | 210,000 | | | | — | | | Marjorie Scardino | | | 632,755 | | | | 1,957,861 | | | David Arculus | | | 11,740 | | | | — | | | David Bell | | | 250,348 | | | | 593,970 | | | Terry Burns | | | 10,290 | | | | — | | | Patrick Cescau | | | 4,144 | | | | — | | | Will Ethridge | | | 128,758 | | | | 490,192 | | | Rona Fairhead | | | 209,259 | | | | 699,460 | | | Robin Freestone | | | 44,379 | | | | 400,216 | | | Susan Fuhrman | | | 7,365 | | | | — | | | Ken Hydon | | | 8,559 | | | | — | | | John Makinson | | | 397,733 | | | | 668,469 | | | CK Prahalad | | | 969 | | | | — | |
| | | (1) | Amounts include shares acquired by individuals under the annual bonus share matching plan and amounts purchased in the market by individuals. | | | | (2) | Restricted shares comprise awards made under the reward, annual bonus share matching and long-term incentive plans. The number of shares shown represents the maximum number of shares which may vest, subject to the performance conditions being fulfilled. |
Employee Share Ownership Plansshare ownership plans | | | Worldwide Save for Shares & US Employee Share Purchase Plans |
Worldwide save for shares and US employee share purchase plans In 1998, we introduced a worldwide save for shares plan. Under this plan, our employees around the world have the option to save a portion of their monthly salary over periods of three, five or seven years. At the end of this period, the employee has the option to purchase ordinary shares with the accumulated funds at a purchase price equal to 80% of the market price prevailing at the commencement of the employee’s participation in the plan. In the United States, this plan operates as a stock purchase plan under Section 423 of the US Internal Revenue Code of 1986. This plan was introduced in 2000 following Pearson’s listing on the New York Stock Exchange. Under it, participants save a portion of their monthly salary over six month periods, at the end of which they have the option to purchase ADRs with their accumulated funds at a purchase price equal to 85% of the lower of the market price prevailing at the beginning or end of the period. Board Practices Our board currently comprises the chairman, who is a part-timenon-executive four director, six executive directors and six non-executive directors. Our articles of association provide that at every annual general meeting, one-third of the board of directors, or the number nearest to one-third, shall retire from office. The directors to 51
retire each year are the directors who have been longest in office since their last election or appointment. A retiring director is eligible for re-election. If at any annual general meeting, the place of a retiring director is not filled, the retiring director, if willing, is deemed to have been re-elected, unless at or prior to such meeting it is expressly resolved not
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to fill the vacated office, or unless a resolution for the re-election of that director has been put to the meeting and lost. Our articles of association also provide that every director be subject to re-appointment by shareholders at the next annual general meeting following their appointment. However this year, and in future years, in accordance with good corporate governance, the board have resolved that all directors should offer themselves for re-election on an annual basis at the company’s annual general meeting. Accordingly, all of the directors will offer themselves for re-election, (or reappointment in the case of directors who were appointed since the last meeting), at the forthcoming AGM on 1 May 2009. Details of our approach to corporate governance and an account of how we comply with NYSE requirements can be found on our website (www.pearson.com/investor/corpgov.htm). The board of directors has established the following committees, all of which havereport to the board. Each committee has its own written terms of reference setting out their authority and duties:duties. These can be found on our website (www.pearson.com/investor/governance) Audit committee This committee provides the board with a vehicle to appraise our financial management and reporting and to assess the integrity of our accounting procedures and financial controls. Until April 21, 2006, Vernon Sankey chairedKen Hydon chairs this committee and Terry Burns,its other members are David Arculus, Patrick Cescau and Reuben Mark were members. Vernon Sankey wasSusan Fuhrman. Ken Hydon is also the designated audit committee financial expert within the meaning of the applicable rules and regulations of the US Securities and Exchange Commission. Vernon Sankey and Reuben Mark retired from the committee on April 21, 2006 and Terry Burns stepped down from the committee on April 27, 2006. Ken Hydon, David Arculus and Susan Fuhrman have now joined the committee, with Ken Hydon as both the chairman and designated audit committee financial expert. Our internal and external auditors have direct access to the committee to raise any matter of concern and to report the results of work directed by the committee. The Personnel committee reports to the full board of directors. This committee meets regularly to decide the remuneration and benefits of the executive directors and the chief executives of our three operating divisions. The committee also recommends the chairman’s remuneration to the board of directors for its decision and reviews management development and succession plans. Until April 21, 2006, Reuben Mark chairedDavid Arculus chairs this committee and its other members are Terry Burns, Glen Moreno and Rana Talwar were members. Reuben Mark retired from theKen Hydon. Nomination committee on April 21, 2006. David Arculus has now joined the committee as chairman. All the three members are non-executive directors. This committee meets from time to time as necessary to consider the appointment of new directors. The committee is chaired by Glen Moreno and comprises Marjorie Scardino and all of the non-executive directors. This committee sets the policies for our treasury department and reviews its procedures on a regular basis. Dennis Stevenson was chairman of the committee until his retirement on October 1, 2005 and Rona Fairhead, Vernon Sankey and Rana Talwar were members. Vernon Sankey retired from the committee on April 21, 2006. The constitution of the committee will be reviewed later in the year. Employees The average numbersnumber of persons employed by us during each of the three fiscal years ended 20052008 were as follows: | | | | | • | 32,20333,680 in fiscal 20052008, | | | | | • | 33,08632,692 in fiscal 2004,2007, and | | | | | • | 30,58434,341 in fiscal 2003.2006. |
We, through our subsidiaries, have entered into collective bargaining agreements with employees in various locations. Our management has no reason to believe that we would not be able to renegotiate any such agreements on satisfactory terms. We encourage employees to contribute actively to the business in the context of their particular job roles and believe that the relations with our employees are generally good.
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The table set forth below shows for 2005, 20042008, 2007 and 20032006 the average number of persons employed in each of our operating divisions. | | | | | | | | | | | | | | | Average number employed | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | School | | | 10,133 | | | | 10,403 | | | | 9,348 | | | Higher Education | | | 4,196 | | | | 4,087 | | | | 3,912 | | | Professional | | | 8,342 | | | | 7,491 | | | | 6,434 | | | Penguin | | | 4,051 | | | | 4,085 | | | | 4,318 | | | FT Publishing | | | 1,952 | | | | 1,989 | | | | 2,283 | | | IDC | | | 1,956 | | | | 1,826 | | | | 1,628 | | | Other | | | 1,573 | | | | 1,365 | | | | 928 | | | Continuing operations | | | 32,203 | | | | 31,246 | | | | 28,851 | | | | | | | | | | | | | | Discontinued operations | | | — | | | | 1,840 | | | | 1,733 | | | | | | | | | | | | | | Total | | | 32,203 | | | | 33,086 | | | | 30,584 | | | | | | | | | | | | |
| | | | | | | | | | | | | | Average number employed | | 2008 | | | 2007 | | | 2006 | | | | | North American Education | | | 15,412 | | | | 14,327 | | | | 12,710 | | | International Education | | | 5,718 | | | | 5,291 | | | | 4,472 | | | Professional | | | 2,641 | | | | 2,540 | | | | 2,223 | | | Penguin | | | 4,112 | | | | 4,163 | | | | 3,943 | | | FT Publishing | | | 2,379 | | | | 2,083 | | | | 1,766 | | | Interactive Data | | | 2,413 | | | | 2,300 | | | | 2,200 | | | Other | | | 909 | | | | 918 | | | | 900 | | | | | | | | | | | | | | | | | Continuing operations | | | 33,584 | | | | 31,622 | | | | 28,214 | | | | | | | | | | | | | | | | | Discontinued operations | | | 96 | | | | 1,070 | | | | 6,127 | | | | | | | | | | | | | | | | | Total | | | 33,680 | | | | 32,692 | | | | 34,341 | | | | | | | | | | | | | | | |
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS | | ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
To our knowledge, as of February 26, 2006,28, 2009, the only beneficial owners of 3% or more of our issued and outstanding ordinary share capital were Franklin Resources Inc.Legal & General Group plc which owned 104,485,80833,336,528 ordinary shares representing 13.0% of our outstanding ordinary shares and The Capital Group Companies Inc. which owned 55,653,209 ordinary shares representing 6.9%4.12% of our outstanding ordinary shares. On February 26, 2006,28, 2009, record holders with registered addresses in the United States held 34,992,60333,008,366 ADRs, which represented 4.4%4.08% of our outstanding ordinary shares. Because someSome of these ADRs are held by nominees and so these numbers may not accurately represent the number of beneficial owners in the United States. Loans and equity advanced to joint ventures and associates during the year and as at December 31, 20052008 are shown in note 1312 in “Item 17.18. Financial Statements.” Amounts due from joint ventures and associates are set out in note 1722 and dividends receivable from joint ventures and associates are set out in note 1312 in “Item 17.18. Financial Statements”. There were no other related party transactions in 2005.2008. ITEM 8. FINANCIAL INFORMATION | | ITEM 8. | FINANCIAL INFORMATION |
The financial statements filed as part of this Annual Report are included on pages F-1 throughF-80 F-70 hereof. Other than those events described in note 3337 in “Item 17.18. Financial Statements” of thisForm 20-F and seasonal fluctuations in borrowings, there has been no significant change to our financial condition or results of operations since December 31, 2005.2008. Our borrowings fluctuate by season due to the effect of the school year on the working capital requirements of the educational book business. Assuming no acquisitions or disposals, our maximum level of net debt normally occurs in July, and our minimum level of net debt normally occurs in December. Our policy with respect to dividend distributions is described in response to “Item 3. Key Information” above. Legal ProceedingsITEM 9. THE OFFER AND LISTING
We and our subsidiaries are defendants in a number of legal proceedings including, from time to time, government and arbitration proceedings, which are incidental to our and their operations. We do not expect that the outcome of pending proceedings, either individually or in the aggregate, will have a significant effect on our financial position or profitability nor have any such proceedings had any such effect in the recent past. To our knowledge, there are no material proceedings in which any member of senior management or any of our affiliates is a party adverse to us or any of our subsidiaries or in respect of which any of those persons has a material interest adverse to us or any of our subsidiaries. | | ITEM 9. | THE OFFER AND LISTING |
The principal trading market for our ordinary shares is the London Stock Exchange. Our ordinary shares also trade in the United States in the form of ADSs evidenced by ADRs under a sponsored ADR facility with The Bank of New York as depositary. We established this facility in March 1995 and amended it in August 2000 in connection with our New York Stock Exchange listing. Each ADS represents one ordinary share. 53
The ADSs trade on the New York Stock Exchange under the symbol “PSO”. The following table sets forth the highest and lowest middle market quotations, which represent the average of closing bid and asked prices, for the ordinary shares, as derived from the Daily Official List of the London Stock Exchange and the average daily trading volume on the London Stock Exchange: | | | | | • | on an annual basis for our five most recent fiscal years, |
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| | | | | • | on a quarterly basis for our most recent quarter and two most recent fiscal years, and | | | | | • | on a monthly basis for the six most recent months. |
| | | | | | | | | | | | | | | | | | Ordinary Shares | | | | | | | | | | Average Daily | | | Reference Period | | High | | | Low | | | Trading Volume | | | | | | | | | | | | | | | | | | (Ordinary | | | | | (In pence) | | | shares) | | Five Most Recent Fiscal Years | | | | | | | | | | | | | | | 2005 | | | 695 | | | | 608 | | | | 5,296,700 | | | | 2004 | | | 682 | | | | 579 | | | | 6,219,200 | | | | 2003 | | | 680 | | | | 430 | | | | 6,631,800 | | | | 2002 | | | 922 | | | | 505 | | | | 6,164,500 | | | | 2001 | | | 1,726 | | | | 645 | | | | 5,245,000 | | Most Recent Quarter and Two Most Recent Fiscal Years | | | | | | | | | | | | | | 2006 First quarter | | | 811 | | | | 671 | | | | 6,395,400 | | | 2005 Fourth quarter | | | 692 | | | | 616 | | | | 4,947,900 | | | Third quarter | | | 695 | | | | 652 | | | | 4,860,700 | | | Second quarter | | | 668 | | | | 628 | | | | 5,823,300 | | | First quarter | | | 662 | | | | 608 | | | | 5,626,100 | | | 2004 Fourth quarter | | | 640 | | | | 590 | | | | 5,020,800 | | | Third quarter | | | 657 | | | | 579 | | | | 5,864,300 | | | Second quarter | | | 682 | | | | 623 | | | | 6,993,900 | | | First quarter | | | 657 | | | | 584 | | | | 7,039,600 | | Most Recent Six Months | | | | | | | | | | | | | | April 2006 | | | 798 | | | | 756 | | | | 7,614,100 | | | March 2006 | | | 811 | | | | 720 | | | | 7,055,300 | | | February 2006 | | | 737 | | | | 706 | | | | 4,336,400 | | | January 2006 | | | 734 | | | | 671 | | | | 7,577,400 | | | December 2005 | | | 692 | | | | 674 | | | | 3,912,900 | | | November 2005 | | | 673 | | | | 636 | | | | 6,524,000 | |
| | | | | | | | | | | | | | | | | Ordinary shares | | | Average daily
| | Reference period | | High | | | Low | | | trading volume | | | | | (In pence) | | | | | | | | | | | | | | (Ordinary shares) | | | | Five most recent fiscal years | | | | | | | | | | | | | | 2008 | | | 733 | | | | 519 | | | | 4,758,300 | | | 2007 | | | 915 | | | | 695 | | | | 6,405,600 | | | 2006 | | | 811 | | | | 671 | | | | 5,004,500 | | | 2005 | | | 695 | | | | 608 | | | | 5,296,700 | | | 2004 | | | 682 | | | | 579 | | | | 6,219,200 | | Most recent quarter and two most recent fiscal years | | | | | | | | | | | | | | 2008 Fourth quarter | | | 651 | | | | 520 | | | | 5,603,400 | | | Third quarter | | | 705 | | | | 570 | | | | 4,748,000 | | | Second quarter | | | 710 | | | | 611 | | | | 3,590,800 | | | First quarter | | | 733 | | | | 682 | | | | 5,083,300 | | | 2007 Fourth quarter | | | 798 | | | | 695 | | | | 5,156,300 | | | Third quarter | | | 843 | | | | 729 | | | | 6,481,400 | | | Second quarter | | | 915 | | | | 825 | | | | 7,390,600 | | | First quarter | | | 872 | | | | 762 | | | | 6,632,100 | | Most recent six months | | | | | | | | | | | | | | February 2009 | | | 677 | | | | 627 | | | | 4,575,200 | | | January 2009 | | | 674 | | | | 584 | | | | 6,426,800 | | | December 2008 | | | 651 | | | | 593 | | | | 4,387,800 | | | November 2008 | | | 622 | | | | 567 | | | | 4,736,800 | | | October 2008 | | | 633 | | | | 520 | | | | 7,449,400 | | | September 2008 | | | 705 | | | | 580 | | | | 5,560,800 | |
ITEM 10. ADDITIONAL INFORMATION | | ITEM 10. | ADDITIONAL INFORMATION |
Memorandum and Articlesarticles of Associationassociation We summarize below the material provisions of our memorandum and articles of association, as amended, which have been filed as an exhibit to our annual report onForm 20-F for the year ended December 31, 2003.2008. The summary below is qualified entirely by reference to the Memorandum and Articles of Association. We have multiple business objectives and purposes and are authorized to do such things as the board may consider fit to further our interests or incidental or conducive to the attainment of our objectives and purposes. Directors’ Powerspowers Our business shall be managed by the board of directors and the board may exercise all such of our powers as are not required by law or by the Articles of Association to be exercised by resolution of the shareholders in general meeting. Interested Directorsdirectors For the purposes of section 175 of the Companies Act 2006 the board may authorise any matter proposed to it which would, if not so authorised, involve a breach of duty by a Director under that section, including, without
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limitation, any matter which relates to a situation in which a Director has, or can have, an interest which conflicts, or possibly may conflict, with the interests of the Company. Any such authorisation will be effective only if: | | | | (a) | any requirement as to quorum at the meeting at which the matter is considered is met without counting the Director in question or any other interested Director; and |
| | | | (b) | the matter was agreed to without their voting or would have been agreed to if their votes had not been counted. |
The board may (whether at the time of the giving of the authorisation or subsequently) make any such authorisation subject to any limits or conditions it expressly imposes but such authorisation is otherwise given to the fullest extent permitted. The board may vary or terminate any such authorisation at any time. Provided that he has disclosed to the board the nature and extent of his interest, a Director notwithstanding his office: | | | | (a) | may be a party to, or otherwise interested in, any transaction or arrangement with the Company or in which the Company is otherwise (directly or indirectly) interested; |
| | | | (b) | may act by himself or his firm in a professional capacity for the Company (otherwise than as auditor) and he or his firm shall be entitled to remuneration for professional services as if he were not a Director; |
| | | | (c) | may be a director or other officer of, or employed by, or a party to a transaction or arrangement with, or otherwise interested in, any body corporate in which the Company is otherwise (directly or indirectly) interested. |
A Director shall not, by reason of his office, be accountable to the Company for any remuneration or other benefit which he derives from any office or employment or from any transaction or arrangement or from any interest in any body corporate: | | | | (a) | the acceptance, entry into or existence of which has been approved by the board (subject, in any such case, to any limits or conditions to which such approval was subject); or |
| | | | (b) | which he is permitted to hold or enter into by virtue of paragraph (a), (b) or (c) above; |
nor shall the receipt of any such remuneration or other benefit constitute a breach of his duty under section 176 of the Act. A Director shall be under no duty to the Company with respect to any information which he obtains or has obtained otherwise than as a director of the Company and in respect of which he owes a duty of confidentiality to another person. However, to the extent that his relationship with that other person gives rise to a conflict of interest or possible conflict of interest, which has been approved by the board: the director shall not be disqualified from contracting with usin breach of the general duties he owes to the Company by virtue of his or her office or from having any other interest, whether direct or indirect, in any contract or arrangement entered into by or on behalf of us. An interested director must declare the nature of his or her interest in any contract or arrangement entered into by or on behalf of us in accordance with the Companies Act 1985. Provided that the director has declared 54
his interest and acted in accordance with law, no such contract or arrangement shall be avoided and no director so contracting or being interested shall be liablesections 171 to account to us for any profit realized by him from the contract or arrangement by reason177 of the director holdingAct because he fails:
| | | | (a) | to disclose any such information to the board or to any Director or other officer or employee of the Company; and/or |
| | | | (b) | to use or apply any such information in performing his duties as a Director of the Company. |
Where the existence of a Director’s relationship with another person has been approved by the board and his officerelationship with that person gives rise to a conflict of interest or possible conflict of interest, the fiduciary relationship thereby established. A director mayDirector shall not vote on any contract or arrangement or any other proposalbe in whichbreach of the general duties he or she has, together with any interest of any person connected with him or her, an interest which is,owes to his or her knowledge, a material interest, otherwise thanthe Company by virtue of his or her interests in shares, debentures or other securitiessections 171 to 177 of or otherwise in or through us. If a question arisesthe Act because he: | | | | (a) | absents himself from meetings of the board at which any matter relating to the conflict of interest or possible conflict of interest will or may be discussed or from the discussion of any such matter at a meeting or otherwise; and/or |
| | | | (b) | makes arrangements not to receive documents and information relating to any matter which gives rise to the conflict of interest or possible conflict of interest sent or supplied by the Companyand/or for such documents and information to be received and read by a professional adviser, |
for so long as to the materialityhe reasonably believes such conflict of a director’s interest or his or her entitlement to vote and the director does not voluntarily agree to abstain from voting, that question will be referred to the chairmanpossible conflict of the board or, if the chairman also is interested, to a person appointed by the other directors who is not interested. The ruling of the chairman or that other person, as the case may be, will be final and conclusive. A director will not be counted in the quorum at a meeting in relation to any resolution on which he or she is prohibited from voting.interest subsists.
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Notwithstanding the foregoing, a director will be entitled to vote, and be counted in the quorum, on any resolution concerning any of the following matters: | | | | | • | the giving of any guarantee, security or indemnity in respect of money lent or obligations incurred by him or her or by any other person at the request of or for the benefit of usthe Company or any of ourits subsidiaries; | | | | | • | the giving of any guarantee, security or indemnity to a third party in respect of a debt or obligation of oursthe Company or any of ourits subsidiaries for which he or shehimself has assumed responsibility in whole or in part and whether alone or jointly with others under a guarantee or indemnity or by the giving of security; | | | | | • | any proposal relating to usthe Company or any of our subsidiariesits subsidiary undertakings where we areit is offering securities in which offer a directorDirector is or may be entitled to participate as a holder of securities or in the underwriting or sub-underwriting of which a directorDirector is to participate; | | | • | any proposal relating to another company in which he and any persons connected with him do not to his knowledge hold an interest in shares (as that term is used in sections 820 to 825 of the Companies Act 2006) representing one per cent. or more of either any class of the equity share capital, or the voting rights, in such company; | | | | | • | any proposal relating to an arrangement for the benefit of ourthe employees of the Company or any of our subsidiaries thatits subsidiary undertakings which does not award him or her any privilege or benefit not generally awarded to the employees to whom such arrangement relates; and | | | | | • | any proposal concerning insurance that we propose to maintain or purchase for the benefit of directors or for the benefit of persons, including directors. |
Where proposals are under consideration concerning the appointment of two or more directors to offices or employment with us or any company in which we are interested, these proposals may be divided and considered separately and each of these directors, if not prohibited from voting under the proviso of the fourth clause above, will be entitled to vote and be counted in the quorum with respect to each resolution except that concerning his or her own appointment. Borrowing Powerspowers The board of directors may exercise all powers to borrow money and to mortgage or charge our undertaking, property and uncalled capital and to issue debentures and other securities, whether outright or as collateral security for any of our or any third party’s debts, liabilities or obligations. The board of directors must restrict the borrowings in order to secure that the aggregate amount of undischarged monies borrowed by us (and any of our subsidiaries), but excluding any intra-group debts, shall not at any time exceed a sum equal to twice the aggregate of the adjusted capital and reserves, unless the shareholders in general meeting sanction an excession of this limitation. Other Provisions Relatingprovisions relating to Directorsdirectors Under the articles of association, directors are paid out of our funds for their services as we may from time to time determine by ordinary resolution and, in the case of non-executive directors, up to an aggregate of £500,000£750,000 or such other amounts as resolved by the shareholders at a general meeting. Directors currently are not required to be qualified by owning our shares. WhileChanges to the Companies Act, 1985 states that nowhich came into force on April 7, 2007, now permit the appointment of a director may be appointed after he reaches the age of 70 our articles of association provide for the reappointment, after retirement, of directors attaining the age of 70. This is permissible under the Companies Act 1985.or over. 55
Annual General Meetings and Extraordinary General Meetingsgeneral meetings Shareholders’ meetings maycould previously be either annual general meetings or extraordinary general meetings. However the concept of an extraordinary meeting has not been retained by the Companies Act 2006 and shareholder meetings can now only be annual general meetings. The following matters are ordinarilyusually transacted at an annual general meeting: | | | | | • | sanctioning or declaringapproving dividends; |
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| | | | | • | consideration of the accounts and balance sheet; | | | | | • | ordinary reports of the board of directors and auditors and any other documents required to be annexed to the balance sheet; | | | | | • | as holders of ordinary shares vote for the election of one-third of the members of the board of directors at every annual general meeting, the appointment or election of directors in the place of those retiring by rotation or otherwise; | | | | | • | appointment or reappointment of, and determination of the remuneration of, the auditors; and | | | | | • | the renewal, limitation, extension, variation or grant of any authority of or to the board, pursuant to the Companies Act 1985, to allot securities. |
Business transacted at an extraordinary general meeting may also be transacted at an annual general meeting. We hold a general meeting as our annual general meeting within fifteen months after the date of the preceding annual general meeting, at a place and time determined by the board. The board may call an extraordinarya general meeting whenever it thinks fit. If at any time and forthere are not within the United Kingdom sufficient directors capable of acting to form a quorum, any reason. The board mustdirector or any two members may convene an extraordinarya general meeting if requestedin the same manner as nearly as possible as that in which meetings may be convened by the board. No business shall be dealt with at any general meeting unless a quorum is present when the meeting proceeds to do so by shareholders holding not less than one-tenth of our issued share capital. business. Three shareholdersmembers present in person and entitled to vote will constituteshall be a quorum for any general meeting. all purposes. A corporation being a member shall be deemed to be personally present if represented by its duly authorized representative. If a quorum for a meeting convened at the request of shareholders is not present within fifteen minutes of the appointed time, the meeting will be dissolved. In any other case, the general meeting will be adjourned to the same day in the next week, at the same time and place, or to a time and place that the chairman fixes. If at that rescheduled meeting a quorum is not present within fifteen minutes from the time appointed for holding the meeting, the shareholders present in person or by proxy will be a quorum. The chairman or, in his absence, the deputy chairman or any other director nominated by the board, will preside as chairman at every general meeting. If no director is present at the general meeting or no director consents to act as chairman, the shareholders present shall elect one of their number to be chairman of the meeting. Ordinary Sharesshares Certificates representing ordinary shares are issued in registered form and, subject to the terms of issue of those shares, are issued following allotment or receipt of the form of transfer bearing the appropriate stamp duty by our registrar, Lloyds Bank Registrars, the Causeway, Worthing,registrars, Equiniti, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA,6TH, United Kingdom, telephone number +44-1903-502-541.+44-845-607-6838. Share Capitalcapital Any share may be issued with such preferred, deferred or other special rights or other restrictions as we may determine by way of a shareholders’ vote in general meeting. Subject to the Companies Act 1985,2006, any shares may be issued on terms that they are, or at our or the shareholders’ option are, liable to be redeemed on such terms and in such manner as we, before the issue of the shares, may determine by special resolution of the shareholders, determine.shareholders. There are no provisions in the Articles of Association which discriminate against any existing or prospective shareholder as a result of such shareholder owning a substantial number of shares. Subject to the terms of the shares which have been issued, the directors may from time to time make calls upon the shareholders in respect of any moneys unpaid on their shares, provided that (subject to the terms of the shares so issued) no call on any share shall be payable at less than fourteen clear days from the last call. The directors may, if they see fit, receive from any shareholder willing to advance the same, all and any part of the moneys uncalled and unpaid upon any shares held by him.
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Changes in Capitalcapital We may from time to time, by ordinary resolution: | | | | | • | consolidate and divide our share capital into shares of a larger amount than its existing shares; or | | | | | • | sub-divide all of or any of our existing shares into shares of smaller amounts than is fixed by the Memorandum of Association, subject to the Companies Act 1985;2006; or | | | | | • | cancel any shares which, at the date of passing of the resolution, have not been taken, or agreed to be taken, by any person and diminish the amount of our share capital by the amount of the shares so cancelled. |
We may, from time to time, by ordinary resolution increase our share capital and, by special resolution, decrease our share capital, capital redemption reserve fund and any share premium account in any way. Voting Rightsrights Every holder of ordinary shares present in person at a meeting of shareholders has one vote on a vote taken by a show of hands. On a poll, every holder of ordinary shares who is present in person or by proxy has one vote for every ordinary share of which he or she is the holder. Voting at any meeting of shareholders is by a show of hands unless a poll is properly demanded before the declaration of the results of a show of hands. A poll may be demanded by: | | | | | • | the chairman of the meeting; | | | | | • | at least three shareholders present in person or by proxy and entitled to vote; | | | | | • | any shareholder or shareholders present in person or by proxy representing not less than one-tenth of the total voting rights of all shareholders having the right to vote at the meeting; or | | | | | • | any shareholder or shareholders present in person or by proxy holding shares conferring a right to vote at the meeting being shares on which the aggregate sum paid up is equal to not less than one-tenth of the total sum paid up on all shares conferring that right. |
Dividends Holders of ordinary shares are entitled to receive dividends out of our profits that are available by law for distribution, as we may declare by ordinary resolution, subject to the terms of issue thereof. However, no dividends may be declared in excess of an amount recommended by the board of directors. The board may pay interim dividends to the shareholders as it deems fit. We may invest or otherwise use all dividends left unclaimed for six months after having been declared for our benefit, until claimed. All dividends unclaimed for a period of twelve years after having been declared will be forfeited and revert to us. The directors may, with the sanction of a resolution of the shareholders, offer any holders of ordinary shares the right to elect to receive ordinary shares credited as fully paid, in whole or in part, instead of cash in respect of such dividend. The directors may deduct from any dividend payable to any shareholder all sums of money (if any) presently payable by that shareholder to us on account of calls or otherwise in relation to our shares. Liquidation Rightsrights In the event of our liquidation, after payment of all liabilities, our remaining assets would be used to repay the holders of ordinary shares the amount they paid for their ordinary shares. Any balance would be divided among the holders of ordinary shares in proportion to the nominal amount of the ordinary shares held by them. Other Provisionsprovisions of the Articlesarticles of Associationassociation Whenever our capital is divided into different classes of shares, the special rights attached to any class may, unless otherwise provided by the terms of the issue of the shares of that class, be varied or abrogated, either with the
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written consent of the holders of three-fourths of the issued shares of the class or with the sanction of an extraordinary resolution passed at a separate meeting of these holders. In the event that a shareholder or other person appearing to the board of directors to be interested in ordinary shares fails to comply with a notice requiring him or her to provide information with respect to their interest in voting shares pursuant to section 212820 of the Companies Act 1985,2006, we may serve that shareholder with a notice of default. After service of a default notice, that shareholder shall not be entitled to attend or vote 57
at any general meeting or at a separate meeting of holders of a class of shares or on a poll until he or she has complied in full with our information request. If the shares described in the default notice represent at least one-fourth of 1% in nominal value of the issued ordinary shares, then the default notice may additionally direct that in respect of those shares: | | | | | • | we will not pay dividends (or issue shares in lieu of dividends); and | | | | | • | we will not register transfers of shares unless the shareholder is not himself in default as regards supplying the information requested and the transfer, when presented for registration, is in such form as the board of directors may require to the effect that after due and careful inquiry, the shareholder is satisfied that no person in default is interested in any of the ordinary shares which are being transferred or the transfer is an approved transfer, as defined in our articles of association. |
No provision of our articles of association expressly governs the ordinary share ownership threshold above which shareholder ownership must be disclosed. Under the Companies Act 1985,2006, any person who acquires, either alone or, in specified circumstances, with others: | | | | | • | a material interest in our voting share capital equal to or in excess of 3%; or | | | | | • | a non-material interest equal to or in excess of 10%, |
comes under an obligation to disclose prescribed particulars to us in respect of those ordinary shares. A disclosure obligation also arises where a person’s notifiable interests fall below the notifiable percentage, or where, above that level, the percentage of our voting share capital in which a person has a notifiable interest increases or decreases. Limitations Affecting Holdersaffecting holders of Ordinary Sharesordinary shares or ADSs Under English law and our memorandum and articles of association, persons who are neither UK residents nor UK nationals may freely hold, vote and transfer ordinary shares in the same manner as UK residents or nationals. With respect to the items discussed above, applicable UK law is not materially different from applicable US law. Material Contractscontracts The following summaries are Pearson has not intended to be complete and reference is made to the contracts themselves, which are included, or incorporated by reference, as exhibits to this annual report. We have entered into the followingany contracts outside the ordinary course of business during the two year period immediately preceding the date of this annual report:report. Issuance of $350,000,000 4.70% Guaranteed Senior Notes due 2009 and $400,000,000 5.70% Guaranteed Senior Notes due 2014Executive employment contracts
Our wholly-owned subsidiary, Pearson Dollar Finance plc, issued $350 million principal amount of 4.70% senior notes due 2009 and $400 million principal amount of 5.70% senior notes due 2014, in each case fully and unconditionally guaranteed by Pearson plc, under an indenture dated May 25, 2004 between Pearson Dollar Finance plc, Pearson plc and The Bank of New York, as trustee. The first semi-annual interest payment was made on December 1, 2004. Pearson Dollar Finance may redeem the notes at any time, in whole or in part, at its option. The indenture describes the circumstances that would be considered events of default. If an event of default occurs, other than an insolvency or bankruptcy of Pearson Dollar Finance plc, Pearson plc or a principal subsidiary of Pearson plc (as defined in the indenture), the holders of at least 25% of the principal amount of the then outstanding notes may declare the notes, along with accrued but unpaid interest and other amounts described in the indenture, as immediately due and payable. In the event of an insolvency or bankruptcy of Pearson Dollar Finance plc, Pearson plc or a principal subsidiary of Pearson plc (as defined in the indenture), the principal of all outstanding notes shall become due and payable immediately.
The indenture limits our ability to create liens to secure certain types of debt intended to be listed or traded on an exchange.
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Issuance of $300,000,000 4.625% Senior Notes due 2018
We issued $300 million principal amount of 4.625% senior notes due 2018 under an indenture dated June 23, 2003 between us and The Bank of New York, as trustee. The first semi-annual interest payment was made on December 15, 2003. We may redeem the notes at any time, in whole or in part, at our option.
The indenture describes the circumstances that would be considered events of default. If an event of default occurs, other than the insolvency or bankruptcy of us or a principal subsidiary (as defined in the indenture), the holders of at least 25% of the principal amount of the then outstanding notes may declare the notes, along with accrued, but unpaid, interest and other amounts described in the indenture, as immediately due and payable.
The indenture limits our ability to create liens to secure certain types of debt intended to be listed or traded on an exchange.
Executive Employment Contracts
We have entered into agreements with each of our executive directors pursuant to which such executive director is employed by us. These agreements describe the duties of such executive director and the compensation to be paid by us. See “Item 6. Directors, Senior Management &and Employees — Compensation of Senior Management”. Each agreement may be terminated by us on 12 months’ notice or by the executive director on six months’ notice. In the event we terminate any executive director without giving the full 12 months’ advance notice, the executive director is entitled to receive liquidated damages equal to 12 monthsmonths’ base salary and benefits together with a proportion of potential bonus.
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Agreement with Peter JovanovichExchange controls
On January 28, 2005, we entered into a letter agreement with Peter Jovanovich with respect to his employment with Pearson Education and its affiliates. Due to poor health, Mr. Jovanovich terminated his employment with us. The letter agreement sets forth the terms of his disability leave and confirms his existing disability benefits, including benefits under our short term disability plan, long-term disability plan, and supplemental long-term disability plan. Under the terms of the agreement, Mr. Jovanovich will receive standard benefits (except awards under Pearson plc stock plans), and thereafter, will receive coverage under our medical, dental and vision plans and our life insurance plan, plus a payment for unused vacation days. We have agreed to continue to credit Mr. Jovanovich’s individual defined contribution arrangement. We also agreed to pay him his 2004 annual bonus. The value of Mr. Jovanovich’s disability package, and his total remuneration for our 2004 financial year, is included in “Item 6. Directors and Senior Management”. Exchange Controls
There are no UK government laws, decrees, regulations or other legislation which restrict or which may affect the import or export of capital, including the availability of cash and cash equivalents for use by us or the remittance of dividends, interest or other payments to nonresident holders of our securities, except as otherwise described under “— Tax Considerations” below. Tax Considerationsconsiderations The following is a discussion of the material US federal income tax considerations and UK tax considerations arising from the acquisition, ownership and disposition of ordinary shares and ADSs by a US holder. A US holder is: | | | | | • | an individual citizen or resident of the US, or | | | | | • | a corporation created or organized in or under the laws of the United StatesUS or any of its political subdivisions, or | | | | | • | an estate or trust the income of which is subject to US federal income taxation regardless of its source. |
This discussion deals only with ordinary shares and ADSs that are held as capital assets by a US holder, and does not address tax considerations applicable to US holders that may be subject to special tax rules, such as: | | | | | • | dealers or traders in securities or currencies, | | | | | • | financial institutions or other US holders that treat income in respect of the ordinary shares or ADSs as financial services income, |
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| | | | | • | insurance companies, | | | | | • | tax-exempt entities, | | | | | • | US holders that hold the ordinary shares or ADSs as a part of a straddle or conversion transaction or other arrangement involving more than one position, | | | | | • | US holders that own, or are deemed for US tax purposes to own, 10% or more of the total combined voting power of all classes of our voting stock, | | | | | • | US holders that have a principal place of business or “tax home” outside the United States, or | | | | | • | US holders whose “functional currency” is not the US dollar. |
For US federal income tax purposes, holders of ADSs will be treated as the owners of the ordinary shares represented by those ADSs. The discussion below is based upon current UK law and the provisions of the US Internal Revenue Code of 1986, or the Code, and regulations, rulings and judicial decisions as of the date of this Annual Report; any such authority may be repealed, revoked or modified, perhaps with retroactive effect, so as to result in tax consequences different from those discussed below. This discussion is also based on the Income Tax Treaty between the United Kingdom and the United States, which came into force in March 2003 (the “ Income Tax Treaty”). The discussions below regarding US residents are based on the articles of the New Income Tax Treaty. In addition, the following discussion assumes that The Bank of New York will perform its obligations as depositary in accordance with the terms of the depositary agreement and any related agreements. Because US and UK tax consequences may differ from one holder to the next, the discussion set out below does not purport to describe all of the tax considerations that may be relevant to you and your particular situation. Accordingly, you are advised to consult your own tax advisor as to the US federal, state and local, UK and other, including foreign, tax consequences of investing in the ordinary shares or ADSs. The statements of US and UK tax law set out below are based on the laws and interpretations in force as of the date of this Annual Report, and are subject to any changes occurring after that date. UK Income Taxationincome taxation of Distributionsdistributions The United KingdomUK does not impose dividend withholding tax on dividends paid to US holders. US Income Taxationincome taxation of Distributionsdistributions Distributions that we make with respect to the ordinary shares or ADSs, other than distributions in liquidation and distributions in redemption of stock that are treated as exchanges, will be taxed to US holders as ordinary dividend income to the extent that the distributions do not exceed our current and accumulated earnings and profits.
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The amount of any distribution will equal the amount of the cash distribution. Distributions, if any, in excess of our current and accumulated earnings and profits will constitute a non-taxable return of capital to a US holder and will be applied against and reduce the US holder’s tax basis in its ordinary shares or ADSs. To the extent that these distributions exceed the tax basis of the US holder in its ordinary shares or ADSs, the excess generally will be treated as capital gain. Dividends that we pay will not be eligible for the dividends received deduction generally allowed to US corporations under Section 243 of the Code. In the case of distributions in pounds, the amount of the distributions generally will equal the US dollar value of the pounds distributed, determined by reference to the spot currency exchange rate on the date of receipt of the distribution by the US holder in the case of shares or by The Bank of New York in the case of ADSs, regardless of whether the US holder reports income on a cash basis or an accrual basis. The US holder will realize separate foreign currency gain or loss only to the extent that this gain or loss arises on the actual disposition of pounds received. For US holders claiming tax credits on a cash basis, taxes withheld from the distribution are translated into US dollars at the spot rate on the date of the distribution; for US holders claiming tax credits on an accrual basis, taxes withheld from the distribution are translated into US dollars at the average rate for the taxable year. A distribution by the Company to noncorporate shareholders before 20092011 will be taxed as net capital gain at a maximum rate of 15%, provided certain holding periods are met, to the extent such distribution is treated as a dividend under U.S.US federal income tax principles. 60
UK Income Taxationincome taxation of Capital Gainscapital gains Under the Income Tax Treaty, each country generally may tax capital gains in accordance with the provisions of its domestic law. Under present UK law, a US holder that is not a resident, and, in the case of an individual, not ordinarily resident, in the United KingdomUK for UK tax purposes and who (in the case of an individual) does not carry on a trade, profession or vocation in the United KingdomUK through a branch or agency, or (in the case of a company) does not carry on a trade in the UK through a UK permanent establishment, to which ordinary shares or ADSs are attributable will not be liable for UK taxation on capital gains or eligible for relief for allowable losses, realized on the sale or other disposal (including redemption) of these ordinary shares or ADSs. US Income Taxationincome taxation of Capital Gainscapital gains Upon a sale or exchange of ordinary shares or ADSs to a person other than Pearson, a US holder will recognize gain or loss in an amount equal to the difference between the amount realized on the sale or exchange and the US holder’s adjusted tax basis in the ordinary shares or ADSs. Any gain or loss recognized will be capital gain or loss and will be long-term capital gain or loss if the US holder has held the ordinary shares or ADSs for more than one year. Long-term capital gain of a noncorporate US holder is generally taxed at a maximum rate of 15%. This long-term capital gain rate is scheduled to expire in 2009.2011. Gain or loss realized by a US holder on the sale or exchange of ordinary shares or ADSs generally will be treated asUS-source gain or loss for US foreign tax credit purposes. Estate and Gift Taxgift tax The current Estate and Gift Tax Convention, or the Convention, between the United StatesUS and the United KingdomUK generally relieves from UK Inheritance Tax (the equivalent of US Estate and Gift Tax) the transfer of ordinary shares or of ADSs where the transferor is domiciled in the United States,US, for the purposes of the Convention. This relief will not apply if the ordinary shares or ADSs are part of the business property of an individual’s permanent establishment in the United KingdomUK or pertain to the fixed base in the United KingdomUK of a person providing independent personal services. If no relief is given under the Convention, inheritance tax may be charged on the amount by which the value of the transferor’s estate is reduced as a result of any transfer made by way of gift or other gratuitous transfer by an individual, in general within seven years of death, or on the death of an individual. In the unusual case where ordinary shares or ADSs are subject to both UK Inheritance Tax and US Estate or Gift Tax, the Convention generally provides for tax paid in the United KingdomUK to be
64
credited against tax payable in the US or for tax paid in the US to be credited against tax payable in the United States or for tax paid in the United States to be credited against tax payable in the United KingdomUK based on priority rules set forth in the Convention. Stamp Dutyduty No stamp duty or stamp duty reserve tax (SDRT) will be payable in the United KingdomUK on the purchase or transfer of an ADS, provided that the ADS, and any separate instrument or written agreement of transfer, remain at all times outside the United KingdomUK and that the instrument or written agreement of transfer is not executed in the United Kingdom.UK. Stamp duty or SDRT is, however, generally payable at the rate of 1.5% of the amount or value of the consideration or, in some circumstances, the value of the ordinary shares, where ordinary shares are issued or transferred to a person whose business is or includes issuing depositary receipts, or to a nominee or agent for such a person. A transfer for value of the underlying ordinary shares will generally be subject to either stamp duty or SDRT, normally at the rate of 0.5% of the amount or value of the consideration. A transfer of ordinary shares from a nominee to its beneficial owner, including the transfer of underlying ordinary shares from the Depositary to an ADS holder, under which no beneficial interest passes iswill not be subject to stamp duty at the fixed rate of £5.00 per instrument of transfer.or SDRT. Close Company Statuscompany status We believe that the close company provisions of the UK Income and Corporation Taxes Act 1988 do not apply to us. Documents on Displaydisplay Copies of our Memorandum and Articles of Association the material contracts described above and filed as exhibits to this Annual Report and certain other documents referred to in this Annual Report are available for inspection at our registered office at 80 Strand, London WC2R 0RL (c/(c/o the Company Secretary), or, in 61
the United States,US, at the registered office of Pearson Inc. at 1330 Avenue of the Americas, 7th Floor, New York, New York, during usual business hours upon reasonable prior request. | | | ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Introduction Our principal market risks are changes in interest rates and currency exchange rates. Following an evaluation of these positions, we selectively enter into derivative financial instruments to manage our risk exposure. For this purpose, we primarily use interest rate swaps, interest rate caps and collars, forward rate agreements, currency swaps and forward foreign exchange contracts. Managing market risks is the responsibility of the Chief Financial Officer,chief financial officer, who acts pursuant to policies approved by a Treasury Committee of ourthe board of directors. ThisThe Audit Committee receives regular reports on our treasury activities, which outsideand we periodically meet with external advisers alsoto review periodically.our activities. We have a policy of not undertaking any speculative transactions, and we do not hold theour derivative and other financial instruments for purposes other than trading.trading purposes. We have formulated our policies for hedging exposures to interest rate and foreign exchange risk, and have used derivatives to ensure compliance with these policies. Although the majority of our derivative contracts were transacted without regard to existing US GAAPIFRS requirements on hedge accounting, during 20052008 and 2004 (but not 2003)2007 we qualified for hedge accounting under US GAAPIFRS on a limited number of our key derivative contracts. The following discussion addresses market risk only and does not present other risks that we face in the normal course of business, including country risk, credit risk and legal risk. Adoption of International Financial Reporting StandardsInterest rates
From 1 January 2005 the Group adopted IAS 39 “Financial Instruments: Recognition and Measurement” and IAS 32 “Financial Instruments: Disclosure and Presentation”. The market values of the Group’s derivatives were recognized in the balance sheet at the date of adoption. Subsequent changes in their market value will change the carrying values on the balance sheet and create movements in the finance cost section of the income statement, unless they have been designated (and passed the prescribed tests) for hedge accounting treatment. In addition, IAS 39 requires to value the Group’s derivatives at 1 January 2005 as if the standard had been in place at the start date of each individual contract. This has given rise to transition adjustments, which in some cases are being amortised over the remaining life of the relevant transaction. Also, where the Group qualifies for hedge accounting on a derivative, the carrying value of the relevant bond is adjusted to reflect this (in addition to the requirement under IFRS that accrued interest should be included in the carrying value of the bond or derivative). As the Group elected to adopt IAS 39 from 1 January 2005 as permitted by the transitional provisions in IFRS 1, the effects described above are not reflected in the 2004 and 2003 comparatives. A detailed description on the effects of the adoption of IAS 39 is included in note 1 and note 34 in “Item 17. Financial Statements”.
Interest Rates
The Group’s financial exposure to interest rates arises primarily from its borrowings, particularly those in US dollars.borrowings. The Group manages its exposure by borrowing at fixed and variable rates of interest, and by entering into derivative instruments.transactions. Objectives approved by the Treasury Committee of the board concerning the proportion of debt outstanding at fixed rates govern the use of these financial instruments.
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The Group’s objectives are applied to core net debt, which is measured at the year-end and comprises borrowings net of year-end cash and other liquid funds. Since September 2005 theOur objective has beenis to maintain a proportion of forecast core net debt in fixed or capped form for the next four years, subject to a maximum of 65% and a minimum that starts at 40% and falls by 10% each year. Within this target range the proportion that is hedged is triggered by a formula based on historical interest rate frequencies. Previously the minimum was 40%. The principal method to hedgeof hedging interest rate risk is to enter into an agreement with a bank counterparty to pay a fixed-ratefixed rate and receive a variable rate, known as a swap. Under interest rate swaps, the Group agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and variable-rate amounts calculated by reference to an agreed notional principal amount. The majority of thesethe Group’s swap contracts are US dollar denominated, 62
and some of them have deferred start dates, in order to maintain the desired risk profile as other contracts mature. The variable rates received are normally based on three-month andor six-month LIBOR, and the dates on which these rates are set do not necessarily exactly match those of the hedged borrowings. Management believes that our portfolio of these types of swaps is an efficient hedge of our portfolio of variable rate borrowings. In addition, from time to time, the Group issues bonds or other capital market instruments to refinance existing debt. To avoid the fixed rate on a single transaction unduly influencing our overall net interest expense, itour typical practice is practice to enter into a related derivative contract effectively converting the interest rate profile of the bond transaction to that of the debt which it is refinancing. Most often this is a variable interest rate denominated in US dollars.rate. In severalsome cases, the bond issue wasis denominated in a different currency thanto the debt being refinancedGroup’s desired borrowing risk profile and the Group has enteredenters into a related cross currency interest rate and currency swap in order to maintain an unchanged borrowingthis risk profile.profile, which is predominantly borrowings denominated in US dollars. The Group’s accounting objective in its use of interest rate derivatives is to minimize the impact on the income statement of changes in themark-to-market value of its derivative portfolio as a whole. It uses duration calculations to estimate the sensitivity of the derivatives to movements in market rates. The Group also identifies which derivatives are eligible for fair value hedge accounting (which reduces sharplysignificantly the income statement impact of changes in the market value of a derivative). The Group then divides the total portfolio between hedge-accounted and pooled segments, so that the expected movement on the pooled segment is minimal.minimized. Currency Exchange Ratesexchange rates Although the Group is based in the United Kingdom,UK, it has significant investments in overseas operations. The most significant currency in which the Group trades is the US dollar. The Group’s policy is to align approximately the currency composition of its core net borrowings with its forecast operating profit.profit before depreciation and amortization. This policy aims to dampen the impact of changes in foreign exchange rates on consolidated interest cover and earnings. In September 2005 thisThis policy was modified to applyapplies only to currencies that accountedaccount for more than 15% of group operating profit, which is currently onlyare the US dollar. Previously, the policy applied specifically to US dollars, Eurodollar and Sterling.sterling. However, the Group still borrows small amounts in other currencies, typically for seasonal working capital needs. In addition, the Group currently expects to hold its legacy borrowings in Euros and Sterling to their maturity dates: the Group’s policy does not require existing currency debt to be terminated to match declines in that currency’s share of groupGroup operating profit. Following the board’s approval of a policy change in October 2008, currencies that account for less than 15% of Group operating profit before depreciation and amortisation may now be included in the above hedging process at the request of the chief financial officer. At the balance sheet date, no hedging transactions had been undertaken under that authority. At December 31, 20052008 the Group’s net borrowings/ (cash)borrowings in the threeour main currencies above (taking into account the effect of cross currency rate swaps) were: US dollar £1114 million, euro £78 million£1,777m, and sterling £(93) million£127m. The Group uses both currency denominated debt and derivative instruments to implement the above policy. Its intention is that gains/losses on the derivatives and debt offset the losses/gains on the foreign currency assets and income. Each quarter the value of hedging instruments is monitored against the assets in the relevant currency and, where practical, a decision is made whether to treat the debt or derivative as a net investment hedge (permitting foreign exchange movements on it to be taken to reserves) for the purposes of reporting under IFRS and US GAAP.IFRS. Investments in overseas operations are consolidated for accounting purposes by translating values in one currency to another currency, in particular from US dollars to Sterling.sterling. Fluctuations in currency exchange rates affect the currency values recorded in our accounts, although they do not give rise to any realized gain or loss, nor to any currency cash flows.
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The Group is also exposed to currency exchange rates in its cash transactions and its investments in overseas operations. Cash transactions — typically for purchases, sales, interest or dividends — require cash conversions between currencies. Fluctuations in currency exchange rates affect the cash amounts that the Group pays or receives. Forward Foreign Exchange Contractsforeign exchange contracts The Group sometimes uses forward foreign exchange contracts where a specific major project or forecasted cash flow, including acquisitions and disposals, arises from a business decision that has used a specific foreign 63
exchange rate. The Group’s policy is to effect routine transactional conversions between currencies, for example to collect receivables or settle payables, at the relevant spot exchange rate. The Group seeks to offset purchases and sales in the same currency, even if they do not occur simultaneously. In addition, its debt and cash portfolios management gives rise to temporary currency shortfalls and surpluses. Both of these activities require using short-dated foreign exchange swaps between currencies. Although the Group prepares its consolidated financial statements in Sterling,sterling, significant sums have been invested in overseas assets, particularly in the United States.US. Therefore, fluctuations in currency exchange rates, particularly between the US dollar and Sterling,sterling, and alsoto a lesser extent between the Euroeuro and Sterling,sterling, are likely to affect shareholders’ funds and other accounting values. Derivatives Under both IFRS, and US GAAP, the Group is required to record all derivative instruments on the balance sheet at fair value. Derivatives not classified as hedges are adjusted to fair value through earnings. Changes in fair value of the derivatives that the Group has designated and that qualify as effective hedges are either recorded in either other comprehensive incomereserves or earnings.are offset in earnings by the corresponding movement in the fair value of the underlying hedged item. Any ineffective portion of derivatives that are classified as hedges is immediately recognized in earnings. Using the transitional exceptions of IAS 39, derivatives were accounted for in accordance with UK GAAP for the years ended December 31, 2003 In 2008 and 2004. Under UK GAAP, there are no specific criteria, which must be fulfilled in order to record derivative contracts such as interest rate swaps, currency swaps and forward currency contracts as a hedging instrument. Accordingly, based upon our intention and stated policy with respect to entering into derivative transactions, they have been recorded as hedging instruments for UK GAAP. This means that unrealized gains and losses on these instruments are typically deferred and recognized when realized. From January 1, 2005, the Group has adopted IAS 39“Financial Instruments: Recognition and Measurement” and IAS 32“Financial Instruments: Disclosure and Presentation”, which resulted in a transitional adjustment in reserves of £12 million. Under US GAAP, in 2003 our derivative contracts did not meet the prescribed criteria for hedge accounting, and have been recorded at market value at each period end, with changes in their fair value being recorded in the profit and loss account. In 2005 and 20042007 the Group met the prescribed designation requirements and hedge effectiveness tests under US GAAPIFRS for certainsome of its derivative contracts. As a result, the movements in the fair value of the effective portion of fair value hedges and net investment hedges have been offset in earnings and other comprehensive incomereserves respectively by the corresponding movement in the fair value of the underlying bond or asset.hedged item.
In line with the Group’s treasury policy, none of these instruments were considered trading instruments and each instrument was transacted solely to match an underlying financial exposure. ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIESQuantitative information about market risk
Not applicable. The sensitivity of the Group’s derivative portfolio to changes in interest rates is found in note 19 of “Item 18. Financial Statements”. PART II
| | ITEM 13.12. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIESDESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
None. Not applicable.
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PART II | | | ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
None. | | | ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
Not applicable. None. | | | ITEM 15. | CONTROLS AND PROCEDURES |
ITEM 15. CONTROLS AND PROCEDURESDisclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 20052008 was carried out by us under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation the Chief Executive Officer and Chief Financial Officer concluded that Pearson’s disclosure controls and procedures have been designed to provide, and are effective in providing, reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and 64
Exchange Commission’s rules and forms.forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow such timely decision regarding required disclosures. A controls system, no matter how well designed and operated cannot provide absolute assurance to achieve its objectives. Management’s Annual Report on Internal Control Over Financial Reporting The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management has assessed the effectiveness of internal control over financial reporting, as at December 31, 2008, and has concluded that allsuch internal control issues and instancesover financial reporting was effective. PricewaterhouseCoopers LLP, which has audited the consolidated financial statements of fraud, if any, within a company have been detected. the Company for the year ended December 31, 2008, has also audited the effectiveness of the Company’s internal control over financial reporting under Auditing Standard No. 5 of the Public Company Accounting Oversight Board (United States). Their audit report may be found onpage F-2. Change in Internal Control Over Financial Reporting During the period covered by this Annual Report onForm 20-F, Pearson has made no significant changes to its internal controlcontrols over financial reporting that have materially affected or are reasonably likely to materially affect Pearson’s internal control over financial reporting. | | | ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT |
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
The members of the Board of Directors of Pearson plc have determined that Vernon Sankey was an audit committee financial expert within the meaning of the applicable rules and regulations of the US Securities and Exchange Commission for the period until April 21, 2006. The members of the Board of Directors of Pearson plc have determined that Ken Hydon is an audit committee financial expert for subsequent periods.within the meaning of the applicable rules and regulations of the US Securities and Exchange Commission.
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ITEM 16B. CODE OF ETHICS
Pearson has adopted a code of ethics (the Pearson code of business conduct) which applies to all employees including the Chief Executive Officer and Chief Financial Officer and other senior financial management. This code of ethics is available on our website (www.pearson.com/investor/corpgov.htm). The information on our website is not incorporated by reference into this report. | | | ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
In 2003, the audit committee adopted a revised policy for external auditor services.services, which is re-approved annually. The policy requires all audit engagements undertaken by our external auditors, PricewaterhouseCoopers LLP, to be approved by the audit committee. The policy permits the auditors to be engaged for other services provided the engagement is specifically approved in advance by the committee or alternatively meets the detailed criteria of specific pre-approved services and is notified to the committee. The Group Chief Financial Officer or Deputy Chief Financial Officer can procure pre-approved services, as defined in the audit committee’s policy for auditor services, of up to an amount of £100,000 per engagement, subject to a cumulative limit of £500,000 per year. The limit of £100,000 will be subject to annual review by the audit committee. Where pre-approval has not been granted for a service or where the amount is above these limits, specific case by case approval must be obtained from the audit committee prior to the engagement of our auditor. | | | | | | | | | | | | | | | Auditors’ Remuneration | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | £m | | | £m | | | £m | | | Statutory audit | | | 4 | | | | 3 | | | | 3 | | | Audit-related regulatory reporting services | | | 1 | | | | 1 | | | | — | | | Non-audit services | | | 2 | | | | 2 | | | | 2 | | | Non-audit services are analysed as follows: | | | | | | | | | | | | | | Tax compliance services | | | 1 | | | | 1 | | | | 1 | | | Tax advisory services | | | — | | | | 1 | | | | 1 | | | Other non-audit services | | | 1 | | | | — | | | | — | |
| | | | | | | | | | Auditors’ Remuneration | | 2008 | | | 2007 | | | | | £m | | | £m | | | | | Audit fees | | | 5 | | | | 4 | | | Tax fees | | | 2 | | | | 2 | | | All other fees | | | 1 | | | | 1 | |
Audit fees include £35,000 (2007: £35,000) of audit fees relating to the audit of the parent company. Fees for attestation under section 404 of the Sarbanes-Oxley Act are allocated to audit fees paid. Tax services include services related to tax planning and various other tax advisory services. Other services include due diligence on acquisitions and services related to the disposal of the Data Management business. | | Note | Included in statutory audit fees are amounts relating to the parent company of £30,000 (2004: £20,000; 2003: £20,000). Audit-related regulatory reporting fees are £225,000 (2004: £225,000; 2003: £200,000). Non-audit fees in the UK in 2005 are £1,000,000 (2004: £1,000,000; 2003: £341,000) and are in respect of tax advisory and tax compliance services and other advisory services. The remainder of the non-audit fees relate to overseas subsidiaries. |
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| | | ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
Not applicable. | | | ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Maximum number | | | Maximum
| | | | | | | | | Total number of | | | of shares that | | | number
| | | | | | | | | units purchased | | | may yet beTotal number of
| | | of shares that
| | | | | | | | | as part of publicly | | | units purchased under
| | | | | Total number of | may yet be
| | Average price | | | announced plans | | | the plans or | | Period | | shares purchased | | | paid per share | | | or programs | | | programs | | | | | | | | | | | as part of publicly
| | | purchased under
| | | | Total number of
| | | | September 1, 2005 - September 30, 2005Average price
| | | 625,000announced plans
| | | the plans or
| | Period | | shares purchased | | | paid per share | | | or programs | | | programs | | | | February 1, 2007 - February 28, 2007 | | | 1,000,000 | | | | £6.638.19 | | | | N/A | | | | N/A | | | June 1, 2007 - June 30, 2007 | | | 2,500,000 | | | | £8.39 | | | | N/A | | | | N/A | | | December 1, 2007 - December 31, 2007 | | | 1,400,000 | | | | £7.31 | | | | N/A | | | | N/A | | | June 1, 2008 - June 30, 2008 | | | 2,000,000 | | | | £6.14 | | | | N/A | | | | N/A | |
Purchases of shares were made to satisfy obligations under Pearson employee share award programs. All purchases were made in open-market transactions. None of the foregoing share purchases was made as part of a publicly announced plan or program. | | | ITEM 16F. | CHANGE IN REGISTRANT’S CERTIFYING AUDITOR |
Not applicable.
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| | | ITEM 16G. | CORPORATE GOVERNANCE |
In November 2003, the US Securities and Exchange Commission approved changes to the New York Stock Exchange’s listing standards related to the corporate governance practices of listed companies. As a listed non-US issuer, Pearson is required to comply with some of the rules, and otherwise must disclose any significant ways in which our corporate governance practices differ from those followed by US companies under the NYSE listing standards. At this time, the Company believes that it is in compliance in all material respects with all the NYSE rules except that the Nomination Committee is not composed entirely of independent directors, and that it is the full board, not the Nomination Committee, that develops and recommends corporate governance principles. PART III ITEM 17. FINANCIAL STATEMENTS
| | | ITEM 17. | FINANCIAL STATEMENTS |
Not applicable. | | | ITEM 18. | FINANCIAL STATEMENTS |
The financial statements filed as part of this Annual Report are included on pages F-1 throughF-79 F-70 hereof. ITEM 18. FINANCIAL STATEMENTS
We have elected to respond to Item 17. ITEM 19. EXHIBITS
| | | | | 1.1 | | Memorandum and Articles of Association of Pearson plc.† | 2.1 | | Indenture dated June 23, 2003 between Pearson plc and The Bank of New York, as trustee.† | 2.2 | | Indenture dated May 25, 2004 among Pearson Dollar Finance plc, as Issuer, Pearson plc, Guarantor, and the Bank of New York, as Trustee, Paying Agent and Calculation Agent.# | 4.1 | | Letter Agreement dated January 28, 2005 between Pearson plc and Peter Jovanovich.# | 4.2 | | Irrevocable undertakings in respect of an offer by Retos Cartera, for the shares of Recoletos Grupo de Communicación, dated December 14, 2004 between Pearson plc and Retos Cartera.# | | 8.1 | | List of Significant Subsidiaries. | | 12.1 | | Certification of Chief Executive Officer. | | 12.2 | | Certification of Chief Financial Officer. | | 13.1 | | Certification of Chief Executive Officer. | | 13.2 | | Certification of Chief Financial Officer. | | 15 | | Consent of PricewaterhouseCoopers LLP. |
| | † | Incorporated by reference from the Form 20-F of Pearson plc for the year ended December 31, 2003 and filed May 7, 2004. |
| | # | Incorporated by reference from the Form 20-F of Pearson plc for the year ended December 31, 2004 and filed June 27, 2005. |
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS | | | | | | | | Page | | | | | F-2 | | | | | F-3 | | | | | F-4 | | | | F-5 | F-4 | | | | | F-6 | | | | | F-7 | Notes to the Accounts | | F-8 |
F-1
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Pearson plc:plc In our opinion, the accompanying consolidated balance sheets and the related consolidated income statements, consolidated statements of recognisedincome, of cash flows and of recognized income and expense and consolidated cash flow statements present fairly, in all material respects, the financial position of Pearson plc and its subsidiaries (the “Group”) at December 31, 2008 and December 2005, 2004 and 2003,31, 2007 and the results of their operations and their cash flows for each of the three years in the period ended December 31, December 2005,2008, in conformity withEU-adopted International Financial Reporting Standards. TheseStandards (IFRSs) as issued by the International Accounting Standards Board. Also, in our opinion the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008 based on criteria established in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Group’s management are responsible for these financial statements, are the responsibilityfor maintaining effective internal control over financial reporting and for its assessment of the Company’s management; oureffectiveness of internal control over financial reporting, included in “Management’s Annual Report on Internal Control Over Financial Reporting” appearing under Item 15 of thisForm 20-F. Our responsibility is to express an opinionopinions on these financial statements and on the Group’s internal control over financial reporting based on our integrated audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.opinions. As discussed in Note 1, A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the Company adopted International Accounting Standards (IAS) 32 “Financial Instruments: Disclosurereliability of financial reporting and Presentation” and IAS 39 “Financial Instruments: Recognition and Measurement”the preparation of financial statements for external purposes in accordance with International Financial Reporting Standardsgenerally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as adopted by the European Union. The change has been accounted for prospectively from 1 January 2005. EU-adopted International Financial Reporting Standards varynecessary to permit preparation of financial statements in certain significant respects fromaccordance with generally accepted accounting principles, generally acceptedand that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the United Statescompany; and (iii) provide reasonable assurance regarding prevention or timely detection of America. Information relatingunauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the nature and effectrisk that controls may become inadequate because of such differences is presentedchanges in Note 35 toconditions, or that the consolidated financial statements.degree of compliance with the policies or procedures may deteriorate. PricewaterhouseCoopers LLP London, England
May 5, 2006
London United Kingdom March 26, 2009
F-2
F-2
CONSOLIDATED INCOME STATEMENTYEAR ENDEDConsolidated Income Statement
Year ended 31 DECEMBER 2005
(December 2008
All figures in £ millions)millions
| | | | | | | | | | | | | | | | | | | | | Notes | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | Continuing operations | | | | | | | | | | | | | | | | | Sales | | | 2 | | | | 4,096 | | | | 3,696 | | | | 3,850 | | | Cost of goods sold | | | | | | | (2,022 | ) | | | (1,789 | ) | | | (1,846 | ) | | | | | | | | | | | | | | | | Gross profit | | | | | | | 2,074 | | | | 1,907 | | | | 2,004 | | | Operating expenses | | | 5 | | | | (1,592 | ) | | | (1,520 | ) | | | (1,594 | ) | | Other net gains and losses | | | 4 | | | | 40 | | | | 9 | | | | (6 | ) | | Share of results of joint ventures and associates | | | | | | | 14 | | | | 8 | | | | 2 | | | | | | | | | | | | | | | | Operating profit | | | 2 | | | | 536 | | | | 404 | | | | 406 | | | Finance costs | | | 7 | | | | (132 | ) | | | (96 | ) | | | (100 | ) | | Finance income | | | 7 | | | | 62 | | | | 17 | | | | 7 | | | | | | | | | | | | | | | | Profit before tax | | | | | | | 466 | | | | 325 | | | | 313 | | | Income tax | | | 8 | | | | (124 | ) | | | (63 | ) | | | (61 | ) | | | | | | | | | | | | | | | Profit for the year from continuing operations | | | | | | | 342 | | | | 262 | | | | 252 | | | Profit for the year from discontinued operations | | | 3 | | | | 302 | | | | 22 | | | | 23 | | | | | | | | | | | | | | | | Profit for the year | | | | | | | 644 | | | | 284 | | | | 275 | | | | | | | | | | | | | | | | Attributable to: | | | | | | | | | | | | | | | | | | Equity holders of the Company | | | | | | | 624 | | | | 262 | | | | 252 | | | Minority interest | | | | | | | 20 | | | | 22 | | | | 23 | | | | | | | | | | | | | | | | Earnings per share for profit from continuing and discontinued operations attributable to the equity holders of the Company during the year (expressed in pence per share) | | | | | | | | | | | | | | | | | | — basic | | | 9 | | | | 78.2 | p | | | 32.9 | p | | | 31.7 | p | | — diluted | | | 9 | | | | 78.1 | p | | | 32.9 | p | | | 31.7 | p | Earnings per share for profit from continuing operations attributable to the equity holders of the Company during the year (expressed in pence per share) | | | | | | | | | | | | | | | | | | — basic | | | 9 | | | | 40.4 | p | | | 30.8 | p | | | 29.4 | p | | — diluted | | | 9 | | | | 40.3 | p | | | 30.8 | p | | | 29.4 | p | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Notes | | | 2008 | | | 2007 | | | 2006 | | | | Continuing operations | | | | | | | | | | | | | | | | | | Sales | | | 2 | | | | 4,811 | | | | 4,162 | | | | 3,990 | | | Cost of goods sold | | | 4 | | | | (2,174 | ) | | | (1,910 | ) | | | (1,841 | ) | | | | | | | | | | | | | | | | | | | Gross profit | | | | | | | 2,637 | | | | 2,252 | | | | 2,149 | | | Operating expenses | | | 4 | | | | (1,986 | ) | | | (1,701 | ) | | | (1,651 | ) | | Share of results of joint ventures and associates | | | 12 | | | | 25 | | | | 23 | | | | 24 | | | | | | | | | | | | | | | | | | | | Operating profit | | | 2 | | | | 676 | | | | 574 | | | | 522 | | | Finance costs | | | 6 | | | | (136 | ) | | | (150 | ) | | | (133 | ) | | Finance income | | | 6 | | | | 45 | | | | 44 | | | | 59 | | | | | | | | | | | | | | | | | | | | Profit before tax | | | | | | | 585 | | | | 468 | | | | 448 | | | Income tax | | | 7 | | | | (172 | ) | | | (131 | ) | | | (4 | ) | | | | | | | | | | | | | | | | | | | Profit for the year from continuing operations | | | | | | | 413 | | | | 337 | | | | 444 | | | (Loss)/gain for the year from discontinued operations | | | 3 | | | | (90 | ) | | | (27 | ) | | | 25 | | | | | | | | | | | | | | | | | | | | Profit for the year | | | | | | | 323 | | | | 310 | | | | 469 | | | | | | | | | | | | | | | | | | | | Attributable to: | | | | | | | | | | | | | | | | | | Equity holders of the company | | | | | | | 292 | | | | 284 | | | | 446 | | | Minority interest | | | | | | | 31 | | | | 26 | | | | 23 | | | | | | | | | | | | | | | | | | | | Earnings per share for profit from continuing and discontinued operations attributable to the equity holders of the company during the year(expressed in pence per share) | | | | | | | | | | | | | | | | | | — basic | | | 8 | | | | 36.6p | | | | 35.6p | | | | 55.9p | | | — diluted | | | 8 | | | | 36.6p | | | | 35.6p | | | | 55.8p | | | | | | | | | | | | | | | | | | | | Earnings per share for profit from continuing operations attributable to the equity holders of the company during the year(expressed in pence per share) | | | | | | | | | | | | | | | | | | — basic | | | 8 | | | | 47.9p | | | | 39.0p | | | | 52.7p | | | — diluted | | | 8 | | | | 47.9p | | | | 39.0p | | | | 52.6p | | | | | | | | | | | | | | | | | | | |
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CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSEYEAR ENDED 3 DECEMBER 2005
(Consolidated Statement of Recognised Income and Expense
Year ended 31 December 2008
All figures in £ millions)millions
| | | | | | | | | | | | | | | | | | | | | Notes | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | | Net exchange differences on translation of foreign operations | | | 26 | | | | 327 | | | | (203 | ) | | | (288 | ) | | Actuarial gains/(losses)on defined benefit pension and post-retirement medical schemes | | | 24 | | | | 26 | | | | (61 | ) | | | (28 | ) | | Taxation on items taken directly to equity | | | 8 | | | | 12 | | | | 9 | | | | — | | | | | | | | | | | | | | | | Net income/(expense) recognised directly in equity | | | | | | | 365 | | | | (255 | ) | | | (316 | ) | | Profit for the year | | | | | | | 644 | | | | 284 | | | | 275 | | | | | | | | | | | | | | | | Total recognised income and expense for the year | | | | | | | 1,009 | | | | 29 | | | | (41 | ) | | | | | | | | | | | | | | | Attributable to: | | | | | | | | | | | | | | | | | | Equity holders of the Company | | | | | | | 989 | | | | 7 | | | | (64 | ) | | Minority interest | | | | | | | 20 | | | | 22 | | | | 23 | | | | | | | | | | | | | | | | Effect of transition adjustment on adoption of IAS 39 | | | | | | | | | | | | | | | | | Attributable to: | | | | | | | | | | | | | | | | | | Equity holders of the Company | | | 34 | | | | (12 | ) | | | | | | | | | | | | | | | | | | | | | | |
F-4
| | | | | | | | | | | | | | | | | | | | | Notes | | | 2008 | | | 2007 | | | 2006 | | | | | Net exchange differences on translation of foreign operations | | | 29 | | | | 1,050 | | | | 25 | | | | (417 | ) | | Actuarial (losses)/gains on retirement benefit obligations — Group | | | 25 | | | | (71 | ) | | | 80 | | | | 107 | | | Actuarial losses on retirement benefit obligations — associate | | | 12 | | | | (3 | ) | | | — | | | | — | | | Taxation on items charged to equity | | | 7 | | | | 2 | | | | 29 | | | | 12 | | | | | | | | | | | | | | | | | | | | Net income recognised directly in equity | | | | | | | 978 | | | | 134 | | | | (298 | ) | | Profit for the year | | | | | | | 323 | | | | 310 | | | | 469 | | | | | | | | | | | | | | | | | | | | Total recognised income and expense for the year | | | | | | | 1,301 | | | | 444 | | | | 171 | | | | | | | | | | | | | | | | | | | | Attributable to: | | | | | | | | | | | | | | | | | | Equity holders of the company | | | | | | | 1,270 | | | | 418 | | | | 148 | | | Minority interest | | | | | | | 31 | | | | 26 | | | | 23 | | | | | | | | | | | | | | | | | | | |
CONSOLIDATED BALANCE SHEET
AS ATConsolidated Balance Sheet
At 31 DECEMBER 2005
(December 2008
All figures in £ millions)millions
| | | | | | | | | | | | | | | | | | | | | Notes | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | Assets | | | | | | | | | | | | | | | | | Non-current assets | | | | | | | | | | | | | | | | | | Property, plant and equipment | | | 11 | | | | 384 | | | | 355 | | | | 402 | | | Intangible assets | | | 12 | | | | 3,854 | | | | 3,278 | | | | 3,550 | | | Investments in joint ventures and associates | | | 13 | | | | 36 | | | | 47 | | | | 64 | | | Deferred income tax assets | | | 14 | | | | 385 | | | | 359 | | | | 342 | | | Financial assets — Derivative financial instruments | | | 16 | | | | 79 | | | | — | | | | — | | | Other financial assets | | | 15 | | | | 18 | | | | 15 | | | | 21 | | | Other receivables | | | 19 | | | | 108 | | | | 102 | | | | 100 | | | | | | | | | | | | | | | | | | | | | | | | 4,864 | | | | 4,156 | | | | 4,479 | | Current assets | | | | | | | | | | | | | | | | | | Intangible assets — pre-publication | | | 17 | | | | 426 | | | | 356 | | | | 362 | | | Inventories | | | 18 | | | | 373 | | | | 314 | | | | 319 | | | Trade and other receivables | | | 19 | | | | 1,031 | | | | 933 | | | | 1,025 | | | Financial assets — Derivative financial instruments | | | 16 | | | | 4 | | | | — | | | | — | | | Cash and cash equivalents (excluding overdrafts) | | | 20 | | | | 902 | | | | 461 | | | | 551 | | | | | | | | | | | | | | | | | | | | | | | | 2,736 | | | | 2,064 | | | | 2,257 | | | Non-current assets classified as held for sale | | | | | | | — | | | | 358 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | 2,736 | | | | 2,422 | | | | 2,257 | | | | | | | | | | | | | | | | Total assets | | | | | | | 7,600 | | | | 6,578 | | | | 6,736 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Notes | | | 2008 | | | 2007 | | | | Assets | | | | | | | | | | | | | Non-current assets | | | | | | | | | | | | | | Property, plant and equipment | | | 10 | | | | 423 | | | | 355 | | | Intangible assets | | | 11 | | | | 5,353 | | | | 3,814 | | | Investments in joint ventures and associates | | | 12 | | | | 23 | | | | 20 | | | Deferred income tax assets | | | 13 | | | | 372 | | | | 328 | | | Financial assets — Derivative financial instruments | | | 16 | | | | 181 | | | | 23 | | | Retirement benefit assets | | | 25 | | | | 49 | | | | 62 | | | Other financial assets | | | 15 | | | | 63 | | | | 52 | | | Other receivables | | | 22 | | | | 152 | | | | 129 | | | | | | | | | | | | | | | | | | | | | | | | 6,616 | | | | 4,783 | | Current assets | | | | | | | | | | | | | | Intangible assets — Pre-publication | | | 20 | | | | 695 | | | | 450 | | | Inventories | | | 21 | | | | 501 | | | | 368 | | | Trade and other receivables | | | 22 | | | | 1,342 | | | | 946 | | | Financial assets — Derivative financial instruments | | | 16 | | | | 3 | | | | 28 | | | Financial assets — Marketable securities | | | 14 | | | | 54 | | | | 40 | | | Cash and cash equivalents (excluding overdrafts) | | | 17 | | | | 685 | | | | 560 | | | | | | | | | | | | | | | | | | | | | | | | 3,280 | | | | 2,392 | | | Non-current assets classified as held for sale | | | 31 | | | | — | | | | 117 | | | | | | | | | | | | | | | | | | | | | | | | 3,280 | | | | 2,509 | | | | | | | | | | | | | | | | Total assets | | | | | | | 9,896 | | | | 7,292 | | | | | | | | | | | | | | | |
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F-5
CONSOLIDATED BALANCE SHEET (CONTINUED)
AS ATConsolidated Balance Sheet (Continued)
At 31 DECEMBER 2005
(December 2008
All figures in £ millions)millions
| | | | | | | | | | | | | | | | | | | | | Notes | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | | Non-current liabilities | | | | | | | | | | | | | | | | | | Financial liabilities—Borrowings | | | 21 | | | | (1,703 | ) | | | (1,714 | ) | | | (1,349 | ) | | Financial liabilities—Derivative financial instruments | | | 16 | | | | (22 | ) | | | — | | | | — | | | Deferred income tax liabilities | | | 14 | | | | (204 | ) | | | (139 | ) | | | (140 | ) | | Retirement benefit obligations | | | 24 | | | | (389 | ) | | | (408 | ) | | | (364 | ) | | Provisions for other liabilities and charges | | | 22 | | | | (31 | ) | | | (43 | ) | | | (59 | ) | | Other liabilities | | | 23 | | | | (151 | ) | | | (99 | ) | | | (70 | ) | | | | | | | | | | | | | | | | | | | | | | | (2,500 | ) | | | (2,403 | ) | | | (1,982 | ) | Current liabilities | | | | | | | | | | | | | | | | | | Trade and other liabilities | | | 23 | | | | (974 | ) | | | (868 | ) | | | (943 | ) | | Financial liabilities — Borrowings | | | 21 | | | | (256 | ) | | | (109 | ) | | | (578 | ) | | Current income tax liabilities | | | | | | | (104 | ) | | | (89 | ) | | | (54 | ) | | Provisions for other liabilities and charges | | | 22 | | | | (33 | ) | | | (14 | ) | | | (18 | ) | | | | | | | | | | | | | | | | | | | | | | | (1,367 | ) | | | (1,080 | ) | | | (1,593 | ) | | Liabilities directly associated with non-current assets classified as held for sale | | | | | | | — | | | | (81 | ) | | | — | | | | | | | | | | | | | | | | Total liabilities | | | | | | | (3,867 | ) | | | (3,564 | ) | | | (3,575 | ) | | | | | | | | | | | | | | | Net assets | | | | | | | 3,733 | | | | 3,014 | | | | 3,161 | | | | | | | | | | | | | | | | Equity | | | | | | | | | | | | | | | | | | Share capital | | | 25 | | | | 201 | | | | 201 | | | | 201 | | | Share premium | | | 25 | | | | 2,477 | | | | 2,473 | | | | 2,469 | | | Other reserves | | | 26 | | | | (328 | ) | | | (623 | ) | | | (410 | ) | | Retained earnings | | | 26 | | | | 1,214 | | | | 749 | | | | 709 | | | | | | | | | | | | | | | | Total equity attributable to equity holders of the Company | | | | | | | 3,564 | | | | 2,800 | | | | 2,969 | | | Minority interest | | | | | | | 169 | | | | 214 | | | | 192 | | | | | | | | | | | | | | | | Total equity | | | | | | | 3,733 | | | | 3,014 | | | | 3,161 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Notes | | | 2008 | | | 2007 | | | | Liabilities | | | | | | | | | | | | | Non-current liabilities | | | | | | | | | | | | | | Financial liabilities — Borrowings | | | 18 | | | | (2,019 | ) | | | (1,049 | ) | | Financial liabilities — Derivative financial instruments | | | 16 | | | | (15 | ) | | | (16 | ) | | Deferred income tax liabilities | | | 13 | | | | (447 | ) | | | (287 | ) | | Retirement benefit obligations | | | 25 | | | | (167 | ) | | | (95 | ) | | Provisions for other liabilities and charges | | | 23 | | | | (33 | ) | | | (44 | ) | | Other liabilities | | | 24 | | | | (221 | ) | | | (190 | ) | | | | | | | | | | | | | | | | | | | | | | | (2,902 | ) | | | (1,681 | ) | Current liabilities | | | | | | | | | | | | | | Trade and other liabilities | | | 24 | | | | (1,429 | ) | | | (1,050 | ) | | Financial liabilities — Borrowings | | | 18 | | | | (344 | ) | | | (559 | ) | | Financial liabilities — Derivative financial instruments | | | 16 | | | | (5 | ) | | | — | | | Current income tax liabilities | | | | | | | (136 | ) | | | (96 | ) | | Provisions for other liabilities and charges | | | 23 | | | | (56 | ) | | | (23 | ) | | | | | | | | | | | | | | | | | | | | | | | (1,970 | ) | | | (1,728 | ) | | Liabilities directly associated with non-current assets classified as held for sale | | | 31 | | | | — | | | | (9 | ) | | | | | | | | | | | | | | | Total liabilities | | | | | | | (4,872 | ) | | | (3,418 | ) | | | | | | | | | | | | | | | Net assets | | | | | | | 5,024 | | | | 3,874 | | | | | | | | | | | | | | | | Equity | | | | | | | | | | | | | | Share capital | | | 27 | | | | 202 | | | | 202 | | | Share premium | | | 27 | | | | 2,505 | | | | 2,499 | | | Treasury shares | | | 28 | | | | (222 | ) | | | (216 | ) | | Other reserves | | | 29 | | | | 586 | | | | (514 | ) | | Retained earnings | | | 29 | | | | 1,679 | | | | 1,724 | | | | | | | | | | | | | | | | Total equity attributable to equity holders of the company | | | | | | | 4,750 | | | | 3,695 | | | Minority interest | | | | | | | 274 | | | | 179 | | | | | | | | | | | | | | | | Total equity | | | | | | | 5,024 | | | | 3,874 | | | | | | | | | | | | | | | |
These financial statements have been approved for issue by the board of directors on 26 February 20066 March 2009 and signed on its behalf by Robin FreestoneRona Fairhead, Chief financial officer
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CONSOLIDATED CASH FLOW STATEMENTYEAR ENDEDConsolidated Cash Flow Statement
Year ended 31 DECEMBER 2005
(December 2008
All figures in £ millions)millions
| | | | | | | | | | | | | | | | | | | | | Notes | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | Cash flows from operating activities | | | | | | | | | | | | | | | | | | Cash generated from operations | | | 29 | | | | 875 | | | | 705 | | | | 531 | | | Interest paid | | | | | | | (101 | ) | | | (98 | ) | | | (87 | ) | | Tax paid | | | | | | | (65 | ) | | | (45 | ) | | | (44 | ) | | | | | | | | | | | | | | | Net cash generated from operating activities | | | | | | | 709 | | | | 562 | | | | 400 | | | | | | | | | | | | | | | | Cash flows from investing activities | | | | | | | | | | | | | | | | | | Acquisition of subsidiaries, net of cash acquired | | | 27 | | | | (246 | ) | | | (41 | ) | | | (60 | ) | | Acquisition of joint ventures and associates | | | | | | | (7 | ) | | | (10 | ) | | | (5 | ) | | Purchase of property, plant and equipment (PPE) | | | | | | | (76 | ) | | | (101 | ) | | | (79 | ) | | Proceeds from sale of PPE | | | 29 | | | | 3 | | | | 4 | | | | 8 | | | Purchase of intangible assets | | | | | | | (24 | ) | | | (24 | ) | | | (26 | ) | | Investment in pre-publication | | | | | | | (222 | ) | | | (181 | ) | | | (173 | ) | | Purchase of other financial assets | | | | | | | (2 | ) | | | (1 | ) | | | (3 | ) | | Disposal of subsidiaries, net of cash disposed | | | 28 | | | | 376 | | | | 7 | | | | (3 | ) | | Disposal of joint ventures and associates | | | | | | | 54 | | | | 24 | | | | 57 | | | Disposal of other financial assets | | | | | | | — | | | | 17 | | | | — | | | Interest received | | | | | | | 29 | | | | 13 | | | | 11 | | | Dividends received from joint ventures and associates | | | | | | | 14 | | | | 12 | | | | 10 | | | | | | | | | | | | | | | | Net cash used in investing activities | | | | | | | (101 | ) | | | (281 | ) | | | (263 | ) | | | | | | | | | | | | | | | Cash flows from financing activities | | | | | | | | | | | | | | | | | | Proceeds from issue of ordinary shares | | | 25 | | | | 4 | | | | 4 | | | | 5 | | | Purchase of treasury shares | | | | | | | (21 | ) | | | (10 | ) | | | (1 | ) | | Proceeds from borrowings | | | | | | | — | | | | 414 | | | | 235 | | | Short-term investments (acquired)/repaid | | | | | | | — | | | | (5 | ) | | | 1 | | | Other borrowings | | | | | | | — | | | | 59 | | | | (13 | ) | | Repayments of borrowings | | | | | | | (79 | ) | | | (524 | ) | | | (159 | ) | | Finance lease principal payments | | | | | | | (3 | ) | | | (2 | ) | | | (3 | ) | | Dividends paid to Company’s shareholders | | | 10 | | | | (205 | ) | | | (195 | ) | | | (188 | ) | | Dividends paid to minority interests | | | | | | | (17 | ) | | | (2 | ) | | | (19 | ) | | | | | | | | | | | | | | | Net cash used in financing activities | | | | | | | (321 | ) | | | (261 | ) | | | (142 | ) | | Effects of exchange rate changes on cash and cash equivalents | | | | | | | 13 | | | | (4 | ) | | | 45 | | | | | | | | | | | | | | | | Net increase in cash and cash equivalents | | | | | | | 300 | | | | 16 | | | | 40 | | | | | | | | | | | | | | | | | Cash and cash equivalents at beginning of year | | | | | | | 544 | | | | 528 | | | | 488 | | | | | | | | | | | | | | | | Cash and cash equivalents at end of year | | | 20 | | | | 844 | | | | 544 | | | | 528 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Notes | | | 2008 | | | 2007 | | | 2006 | | | | Cash flows from operating activities | | | | | | | | | | | | | | | | | | Net cash generated from operations | | | 33 | | | | 894 | | | | 659 | | | | 621 | | | Interest paid | | | | | | | (87 | ) | | | (109 | ) | | | (106 | ) | | Tax paid | | | | | | | (89 | ) | | | (87 | ) | | | (59 | ) | | | | | | | | | | | | | | | | | | | Net cash generated from operating activities | | | | | | | 718 | | | | 463 | | | | 456 | | | | | | | | | | | | | | | | | | | | Cash flows from investing activities | | | | | | | | | | | | | | | | | | Acquisition of subsidiaries, net of cash acquired | | | 30 | | | | (395 | ) | | | (472 | ) | | | (363 | ) | | Acquisition of joint ventures and associates | | | | | | | (5 | ) | | | (4 | ) | | | (4 | ) | | Purchase of investments | | | | | | | (1 | ) | | | — | | | | — | | | Purchase of property, plant and equipment (PPE) | | | | | | | (75 | ) | | | (86 | ) | | | (68 | ) | | Proceeds from sale of investments | | | | | | | 5 | | | | — | | | | — | | | Proceeds from sale of PPE | | | 33 | | | | 2 | | | | 14 | | | | 8 | | | Purchase of intangible assets | | | | | | | (45 | ) | | | (33 | ) | | | (29 | ) | | Disposal of subsidiaries, net of cash disposed | | | 32 | | | | 111 | | | | 469 | | | | 10 | | | Interest received | | | | | | | 11 | | | | 19 | | | | 24 | | | Dividends received from joint ventures and associates | | | | | | | 23 | | | | 32 | | | | 45 | | | | | | | | | | | | | | | | | | | | Net cash used in investing activities | | | | | | | (369 | ) | | | (61 | ) | | | (377 | ) | | | | | | | | | | | | | | | | | | | Cash flows from financing activities | | | | | | | | | | | | | | | | | | Proceeds from issue of ordinary shares | | | 27 | | | | 6 | | | | 12 | | | | 11 | | | Purchase of treasury shares | | | | | | | (47 | ) | | | (72 | ) | | | (36 | ) | | Proceeds from borrowings | | | | | | | 455 | | | | 272 | | | | 84 | | | Liquid resources acquired | | | | | | | — | | | | (15 | ) | | | (24 | ) | | Repayment of borrowings | | | | | | | (275 | ) | | | (391 | ) | | | (145 | ) | | Finance lease principal payments | | | | | | | (3 | ) | | | (2 | ) | | | (3 | ) | | Dividends paid to company’s shareholders | | | 9 | | | | (257 | ) | | | (238 | ) | | | (220 | ) | | Dividends paid to minority interest | | | | | | | (28 | ) | | | (10 | ) | | | (15 | ) | | | | | | | | | | | | | | | | | | | Net cash used in financing activities | | | | | | | (149 | ) | | | (444 | ) | | | (348 | ) | | Effects of exchange rate changes on cash and cash equivalents | | | | | | | (103 | ) | | | 3 | | | | (44 | ) | | | | | | | | | | | | | | | | | | | Net increase/(decrease) in cash and cash equivalents | | | | | | | 97 | | | | (39 | ) | | | (313 | ) | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents at beginning of year | | | | | | | 492 | | | | 531 | | | | 844 | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents at end of year | | | 17 | | | | 589 | | | | 492 | | | | 531 | | | | | | | | | | | | | | | | | | | |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSGeneral informationNotes to the Consolidated Financial Statements
General information Pearson plc (the Company)company) and its subsidiaries (together the Group) are involved in the provision ofinternational media businesses covering education, business information for the educational sector,and consumer publishing and business information.publishing. The Companycompany is a limited liability company incorporated and domiciled in England. The address of its registered office is 80 Strand, London WC2R 0RL. The Companycompany has its primary listing on the London Stock Exchange but is also listed on the New York Stock Exchange. These consolidated financial statements were approved for issue by the Boardboard of Directorsdirectors on 26 February 2006.6 March 2009. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These consolidated financial statements have been prepared in accordance with EU-adopted International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations Committee (IFRIC) interpretations as adopted by the European Union (EU) and with those parts of the Companies Act 1985and/or the Companies Act 2006 (as applicable) applicable to companies reporting under IFRS. IFRS 1 ‘First-time Adoption of International Financial Reporting Standards’ has been applied in preparing these financial statements. These consolidated financial statements are the Group’s first financial statements to bealso prepared in accordance with IFRS as adoptedissued by the EU.
International Accounting Standards Board (IASB). In respect of the accounting standards applicable to the Group there is no difference between EU-adopted and IASB-adopted IFRS. The policies set out below have been consistently appliedGroup transitioned from UK GAAP to all the years presented, with the exception of IAS 32 ‘Financial Instruments: Disclosure and Presentation’ and IAS 39 ‘Financial Instruments: Recognition and Measurement’ which have been applied with effect fromIFRS on 1 January 2005.2003. Consolidated financial statements of Pearson plc until 31 December 2004 had been prepared in accordance with UK GAAP. UK GAAP differs in certain respects from IFRS. When preparing the Group’s 2005 consolidated financial statements, management has amended certain accounting, valuation and consolidation methods applied in the UK GAAP financial statements to comply with IFRS. The comparative figures in respect of 2004 and 2003 were restated to reflect these adjustments.
Note 34 describes how, in preparing these consolidated financial statements, the Directors have applied accounting standards as adopted for use in the EU under the first-time adoption provisions as set out in IFRS 1.
These consolidated financial statements have been prepared under the historical cost convention.convention as modified by the revaluation of financial assets and liabilities (including derivative financial instruments) at fair value. (1) Interpretations and amendments to published standards effective in 2008 The Group adopted IFRIC 14 ‘IAS 19 — The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’, effective for annual reporting periods beginning on or after 1 January 2008, in the prior accounting period. IFRIC 14 resulted in no change to the full recognition of the pension asset as disclosed in note 25. The Group has adopted Reclassification Amendments to IAS 39 ‘Financial Instruments: Recognition and Measurement’ and IFRS 7 ‘Financial Instruments: Disclosures,’ issued in October 2008 but effective from 1 July 2008. The amendments allow additional reclassifications of certain classifications of financial instruments in rare circumstances, and management determined this was not relevant to the Group. IFRIC 11 ‘Group and Treasury Share Transactions’ is effective for annual reporting periods beginning on or after 1 March 2007. This addresses how to apply IFRS 2 ‘Share-based Payment’ to arrangements involving an entity’s own equity instruments, or equity instruments of another entity in the same group, in the stand alone accounts of the parent and group companies. Management have assessed that this interpretation has no impact on the Group’s financial statements. IFRIC 12 ‘Service Concession Arrangements’ is effective for annual reporting periods beginning on or after 1 January 2008. This addresses the accounting by private sector entities that, by contract with a government, participate in developing, financing, operating and maintaining infrastructure assets relating to public services traditionally provided by governments. As none of the Group entities participate in these activities, IFRIC 12 is not relevant to the Group. (2) Standards, interpretations and amendments to published standards that are not yet effective — The Group has decided to early adopt IFRS 8 ‘Operating Segments’ which is effective for annual reporting periods
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Notes to the Consolidated Financial Statements (Continued) beginning on or after 1 January 2009. The new standard requires a management approach to reporting segmental information. After changes in the organisational structure within the Education business, six revised reporting segments were identified under IFRS 8 as detailed in note 2. The impact of the standard has been to revise the disclosure for the reported segments. Comparatives for 2007 have been restated. The Group has not early adopted the following new pronouncements that are not yet effective: Amendments to IFRS 2 ‘Share-based Payment’ (effective for annual reporting periods beginning on or after 1 January 2009). The amendment clarifies that only service and performance conditions are vesting conditions, and that all cancellations whether Group or counterparty, should be accounted for the same way. | | | | • | IAS 1 (Revised) ‘Presentation of Financial Statements’ (effective for annual reporting periods beginning on or after 1 January 2009). The amendments provide a number of presentational changes to the financial statements including prohibiting the presentation of items of income and expense in the statement of changes in equity and requiring them to be shown in a performance statement, the option to present the performance statement as a single statement of comprehensive income and the requirement to include a balance sheet as at the beginning of the earliest comparative period when an entity applies a retrospective change in accounting policy or makes a retrospective restatement. | | | • | IFRS 3 (Revised) ‘Business Combinations’ and amendments to IAS 27 ‘Consolidated and Separate Financial Statements’, (effective for annual reporting periods beginning on or after 1 July 2009). The amendments affect the accounting for business combinations including the requirement to remeasure the fair value of previously held interests in step acquisitions with any gain or loss arising being recognised in the income statement, the requirement to expense acquisition costs and to recognise adjustments to contingent consideration in the income statement. | | | • | Amendments to IAS 39 ‘Financial Instruments: Recognition and Measurement’ (effective for annual reporting periods beginning on or after 1 July 2009). The amendments clarify that inflation may only be hedged where changes in inflation are a specified portion of cash flows of a financial instrument, and also clarify hedging with options. | | | • | ‘Improvements to Financial Reporting Standards 2008’ (mostly effective for annual reporting periods beginning on or after 1 January 2009). This is the first standard published under the IASB’s annual improvements process which is designed to deal with non-urgent minor amendments to standards. Thirty five amendments were issued, 24 resulting in changes in presentation, recognition or measurement, and 11 are expected to have no or minimal effect on accounting. | | | • | IFRIC 16 ‘Hedges of a Net Investment in Foreign Operations’ (effective for annual reporting periods beginning on or after 1 October 2008). IFRIC 16 provides guidance on net investment hedging including which foreign currency risks within the Group qualify for hedging, and where the hedging instruments can be held within the Group. |
Management is currently assessing the impact of these new standards and interpretations on the Group’s financial statements. In addition, management has assessed the relevance of the following amendments and interpretations with respect to the Group’s operations: | | | | • | Amendments to IAS 23 ‘Borrowing Costs’ (effective for annual reporting periods beginning on or after 1 January 2009). The amendment requires capitalisation of borrowing costs that relate to qualifying assets (ones that take a substantial amount of time to get ready for use or sale, with the exception of assets measured at fair value or inventories manufactured in large quantities or on a repetitive basis). Management assessed the relevance of this amendment with respect to Group operations and concluded that it is not currently applicable to the Group as there are no material qualifying assets. |
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Notes to the Consolidated Financial Statements (Continued) | | | | • | Amendments to IAS 32 ‘Financial Instruments: Presentation’ and IAS 1 ‘Presentation of Financial Statements’ — Puttable Financial Instruments and Obligations arising on liquidation (effective for annual reporting periods beginning on or after 1 January 2009). The amendment requires puttable financial instruments, or instruments that impose on the entity an obligation to another party in respect of a share of net assets only on liquidation, to be classified as equity. Management assessed the relevance of this amendment with respect to the Group and concluded it is not relevant. | | | • | IFRIC 13 ‘Customer Loyalty Programmes’ (effective for annual reporting periods beginning on or after 1 July 2008). IFRIC 13 explains how entities that grant loyalty award credits to customers should account for their obligations to provide free or discounted goods or services to customers who redeem award credits. As no Group entities operate a customer loyalty programme IFRIC 13 is not relevant to the Group. | | | • | IFRIC 15 ‘Agreements for the Construction of Real Estate’ (effective for annual reporting periods beginning on or after 1 January 2009). IFRIC 15 addresses the accounting by entities that undertake the construction of real estate, with guidance on determining whether an agreement for the construction of real estate falls within the scope of IAS 11 ‘Construction Contracts’ or IAS 18 ‘Revenue’. As no Group entities undertake the construction of real estate IFRIC 15 is not relevant to the Group. | | | • | IFRIC 17 ‘Distributions of Non-cash Assets to Owners’ (effective for annual reporting periods beginning on or after 1 July 2009). IFRIC 17 provides guidance on the appropriate accounting treatment when an entity distributes assets other than cash as dividends, including recognition upon authorisation and measurement at fair value of assets distributed, with any difference between fair value and carrying value of these assets being recognised in the income statement when an entity settles the dividend payable. This does not apply to distributions of non-cash assets under common control. This interpretation will have no impact on the Group financial statements as the Group does not currently distribute non-cash assets. |
(3) Critical accounting assumptions and judgements — The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates.assumptions. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involvingrequiring a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed belowdiscussed in ‘Criticalthe relevant accounting assumptions and judgements’. F-8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Interpretations and amendments to published standards effective in 2005policies under the following headings:
The following amendments and interpretations to standards are mandatory for the Group’s accounting periods beginning on or after 1 January 2005: | | | | | • | IFRIC 2 ‘Members’ Shares in Co-operative Entities and Similar Instruments’; | | |
• Intangible assets: | | Goodwill | | • Intangible assets: | SIC 12 (Amendment) ‘Consolidation — Special Purpose Entities’; and | Pre-publication assets | | • Royalty advances | | | | • Taxation | IAS 39 (Amendment) ‘Transition and Recognition of Financial Assets and Financial Liabilities’. |
Management assessed the relevance of these amendments and interpretations with respect to the Group’s operations and concluded that they are not relevant to the Group.
Standards, interpretations and amendments to published standards that are not yet effective
Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the Group’s accounting periods beginning on or after 1 January 2006 or later periods but which the Group has not early adopted. These are as follows:
| | | | | • | IFRS 7 ‘Financial Instruments: Disclosures’ (effective from 1 January 2007). IFRS 7 introduces new disclosures of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk. | | | | • Employee benefits: | • | A complementary amendment to IAS 1 ‘Presentation of Financial Statements — Capital Disclosures’(effective from 1 January 2007). The amendment to IAS 1 introduces disclosures about the level of an entity’s capital and how it manages capital. Management is currently assessing the impact of IFRS 7 and the complementary amendment to IAS 1 on the Group’s financial statements; andPension obligations | | • Revenue recognition | | | • | IFRIC 4 ‘Determining whether an Arrangement contains a Lease’ (effective from 1 January 2006). IFRIC 4 requires the determination whether an arrangement is or contains a lease to be based on the substance of the arrangement. Management is currently assessing the impact of IFRIC 4 on the Group’s operations, but does not expect it to be significant. |
In addition, management assessed the relevance of the following amendments and interpretations with respect to the Group’s operations and concluded that they are not relevant to the Group:
| | | | • | IAS 39 (Amendment) ‘Cash Flow Hedge Accounting of Forecast Intragroup Transactions’ (effective from 1 January 2006); | | | • | IAS 39 (Amendment) ‘The Fair Value Option’ (effective from 1 January 2006); | | | • | IAS 39 (Amendment) and IFRS 4 (Amendment) ‘Financial Guarantee Contracts’ (effective from 1 January 2006); | | | • | IFRS 1 (Amendment) ‘First-time Adoption of International Financial Reporting Standards’ (effective from 1 January 2006); | | | • | IFRS 6 ‘Exploration for and Evaluation of Mineral Resources’ (effective from 1 January 2006); | | | • | IFRIC 5 ‘Rights of Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds’ (effective from 1 January 2006); and | | | • | IFRIC 6 ‘Liabilities arising from Participating in a Specific Market — Waste Electrical and Electronic Equipment’ (effective from 1 December 2005). |
b. Consolidation (1) SubsidiariesBusiness combinations — Subsidiaries are entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. F-9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Subsidiaries are fully consolidated from the date on which control is transferred to the Group and are de-consolidated from the date that control ceases.
The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. Acquisitions made prior to the date of transition to IFRS were accounted for in accordance with UK GAAP (see note 34). The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Where the settlement of consideration payable is deferred, or contingent on future events, the fair value of the deferred component is determined by discounting the amount payable or probable to be paid to its present value using an appropriate discount rate. Identifiable assets and contingent assets acquired and identifiable liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. For material acquisitions, the fair value of the acquired intangible assets is determined by an external, independent valuer. The excess of the
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Notes to the Consolidated Financial Statements (Continued) cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired after the identification of purchased intangible assets, is recorded as goodwill. See note 1e(1)1e(1) for the accounting policy on goodwill. (2) Subsidiaries — Subsidiaries are entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and are de-consolidated from the date that control ceases. (3) Joint ventures and associates — Joint ventures are entities in which the Group holds an interest on a long-term basis and which are jointly controlled, with one or more other ventures,venturers, under a contractual arrangement. Associates are entities over which the Group has significant influence but not the power to control the financial and operating policies, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in joint ventures and associates are accounted for by the equity method of accounting and are initially recognised at cost. The Group’s investment in associates includes related goodwill. The Group’s share of its joint ventures’ and associates’ post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The Group’s share of its joint ventures’ and associates’ results is recognised as a component of operating profit as these operations form part of the core publishing business of the Group and an integral part of existing wholly owned businesses. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in a joint venture or associate equals or exceeds its interest in the joint venture or associate, the Group does not recognise further losses, unless the Group has incurred obligations or made payments on behalf of the joint venture or associate. | | c. | Foreign currency translation |
c. Foreign currency translation (1) Functional and presentation currency — Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the ‘functional currency’). The consolidated financial statements are presented in Sterling,sterling, which is the Company’scompany’s functional and presentation currency. (2) Transactions and balances — Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying net investment hedges. Translation differences on other non-monetary items such as equities held at fair value are reported as part of the fair value gain or loss through the income statement. Fair value adjustments on non-monetary items such as equities classified as available for sale financial assets, are included in the fair value reserve in equity as from 1 January 2005.equity. (3) Group companies — The results and financial position of all Group entitiescompanies that have a functional currency different from the presentation currency are translated into the presentation currency as follows: | | | i) assets and liabilities are translated at the closing rate at the date of the balance sheet; | | | ii) income and expenses are translated at average exchange rates; | | | iii) all resulting exchange differences are recognised as a separate component of equity. |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
ii) income and expenses are translated at average exchange rates; iii) all resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders’ equity. The Group treats specific intercompanyinter-company loan balances, which are not intended to be repaid forin the foreseeable future, as part of its net investment. When a foreign entity is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale.
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Notes to the Consolidated Financial Statements (Continued) At the date of transition to IFRS the cumulative translation differences forin respect of foreign operations have been deemed to be zero. Any gains and losses on disposals of foreign operations will exclude translation differences arisingthat arose prior to the transition date. The principal overseas currency for the Group is the US Dollar.dollar. The average rate for the year against Sterlingsterling was $1.81 (2004: $1.83; 2003: $1.63)$1.85 (2007: $2.00; 2006: $1.84) and the year end rate was $1.72 (2004: $1.92; 2003: $1.79)$1.44 (2007: $1.99; 2006: $1.96). | | d. | Property, plant and equipment |
d. Property, plant and equipment Property, plant and equipment is stated at historical cost less depreciation. Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives as follows: | | | Buildings (freehold) 20–50 years | | | Buildings (leasehold) 50 years (or over the period of the lease if shorter) | | | Plant and equipment 3–20 years | | | The asset’s residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. |
Buildings (freehold): 20-50 years Buildings (leasehold): over the period of the lease Plant and equipment: 3-10 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. The carrying value of an asset is written down to its recoverable amount if the carrying value of the asset is greater than its estimated recoverable amount. e. Intangible assets (1) Goodwill — Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary or associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of associates and joint ventures is included in investments in associates. associates and joint ventures. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. An impairment loss is recognised to the extent that the carrying value of goodwill exceeds the recoverable amount. The recoverable amount is the higher of fair value less costs to sell and value in use. These calculations require the use of estimates and significant management judgement. A description of the key assumptions and sensitivities is included in note 11. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units that are expected to benefit from the business combination in which the goodwill arose. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. IFRS 3 ‘Business Combinations’ has not been applied retrospectively to business combinations before the date of transition to IFRS. Subject to the transition adjustments to IFRS required by IFRS 1, the accounting for business combinations before the date of transition has been grandfathered. (2) Software development costsAcquired software — Costs directly associated withSoftware separately acquired for internal use is capitalised at cost. Software acquired in material business combinations is capitalised at its fair value as determined by an independent valuer. Acquired software is amortised on a straight-line basis over its estimated useful life of between three and eight years. (3) Internally developed software — Internal and external costs incurred during the productionpreliminary stage of identifiabledeveloping computer software for internal use are expensed as incurred. Internal and uniqueexternal costs incurred to develop computer software products, where it is probable that they will generatefor internal use during the application development stage are capitalised if the Group expects economic benefits exceeding costs, are recognised asfrom the development. Capitalisation in the application development stage begins once the Group can reliably measure the expenditure attributable to the software development and has demonstrated its
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Notes to the Consolidated Financial Statements (Continued) intention to complete and use the software. Internally developed software is amortised on a straight-line basis over its estimated useful life of between three and eight years. (4) Acquired intangible assets — Acquired intangible assets include customer lists and relationships, trademarks and brands, publishing rights, content and technology. These assets are capitalised on acquisition at cost and included in intangible assets. Intangible assets acquired in material business combinations are capitalised at their fair value as determined by an independent valuer. Intangible assets are amortised over their estimated useful lives not exceeding ten years from when the software is available for use. (3) Acquired intangible assets — Acquired intangible assets comprise publishing rights, customer lists and relationships, technology, trade names and trademarks. These assets are capitalised on acquisition and included in intangible assets and amortised over their estimated useful livesof between two and 30 years.20 years, using a depreciation method that reflects the pattern of their consumption.
(4)(5) Pre-publication costsassets — Pre-publication costs represent direct costs incurred in the development of educational programmes and titles prior to their publication. These costs are carried forward inrecognised as current intangible assets where the title will generate probable future economic benefits and costs can be measured reliably. These costsPre-publication assets are amortizedamortised upon publication of the title over estimated economic lives of five years or less, being an estimate of the expected operating life cycle of the title, with a higher proportion of the amortizationamortisation taken in the earlier years. The investment in pre-publication assets has been disclosed as part of the investing activitiescash generated from operations in the cash flow statement.statement (see note 33).
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The assessment of the recoverability of pre-publication assets and the determination of the amortisation profile involve a significant degree of judgement based on historical trends and management estimation of future potential sales. An incorrect amortisation profile could result in excess amounts being carried forward as intangible assets that would otherwise have been written off to the income statement in an earlier period. Reviews are performed regularly to estimate recoverability of pre-publication assets. The carrying amount of pre-publication assets is set out in note 20. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Up to 31 December 2004 — Other financial assets include investments in companies other than subsidiaries and associates and other securities. Financial fixed assets are recorded at historical cost less provisions for diminution in value.
From 1 January 2005 — Other financial assets, designated as available for sale investments, are non-derivative financial assets measured at estimated fair value. Changes in the fair value are recorded in equity in the fair value reserve. On the subsequent disposal of the asset, the net fair value gains or losses are taken throughto the income statement. g. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first in first out (FIFO) method. The cost of finished goods and work in progress comprises raw materials, direct labour, and other direct costs and related production overheads. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs necessary to make the sale. Provision isProvisions are made for slow moving and obsolete stock. h. Royalty advances Advances of royalties to authors are included within trade and other receivables when the advance is paid less any provision required to bringadjust the amount downadvance to its net realisable value. The realisable value of royalty advances relies on a degree of management judgement in determining the profitability of individual author contracts. If the estimated realisable value of author contracts is overstated then this will have an adverse effect on operating profits as these excess amounts will be written off. The recoverability of royalty advances is based upon an annual detailed management review of the age of the advance, the future sales projections for new authors and prior sales history of repeat authors. The royalty advance is expensed at the contracted or effective royalty rate as the related revenues are earned. Royalty advances which will be consumed within one year are held in current assets. This represents the operating cycle of consumer publishing titles. Royalty advances which will be consumed after one year are held in non-current assets. | | i. | Newspaper development costs |
i. Newspaper development costs Investment in the development of newspaper titles consists of measures to increase the volume and geographical spread of circulation. The measures include additional and enhanced editorial content, extended
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Notes to the Consolidated Financial Statements (Continued) distribution and remote printing. These extra costs arising are expensed as incurred as they do not meet the criteria under IAS 38 to be capitalised as intangible assets. | | j. | Cash and cash equivalents |
j. Cash and cash equivalents Cash and cash equivalents in the statement of cash flowsflow statement include cash in hand, deposits held at call with banks, other short termshort-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown withinincluded in borrowings in current liabilities in the balance sheet. Short-term deposits and marketable securities with maturities of greater than three months do not qualify as cash and cash equivalents. Movements on these financial instruments are classified as cash flows from financing activities in the cash flow statement as these amounts are used to offset the borrowings of the Group. k. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where any Group company purchases the Company’scompany’s equity share capital (Treasury shares) the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company’scompany’s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company’scompany’s equity holders. F-12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)l. Borrowings
Borrowings are recognised initially at fair value, which is proceeds received net of transaction costs incurred. Borrowings are subsequently stated at amortised cost with any difference between the proceeds (net of transaction costs) and the redemption value being recognised in the income statement over the period of the borrowings using the effective interest method. From 1 January 2005, accruedAccrued interest is also included as part of the borrowing.borrowings. Where a debt instrument is in a fair value hedging relationship, an adjustment is made to the bondits carrying value to reflect the hedged risk. | | m. | Derivative financial instruments |
Upto 31 December 2004 — Amounts payable or receivable in respect of interest rate derivatives are accrued within net interest payable over the period of the contract. Where the derivative instrument Interest on borrowings is terminated early, the gain or loss is spread over the remaining maturity of the original instrument. Where the underlying exposure ceases to exist, any termination gain or loss is taken to the income statement. Foreign currency borrowings together with their related cross currency derivatives are carried in the balance sheet at the relevant exchange rates at the balance sheet date. Gains or losses in respect of the hedging of overseas subsidiaries are taken to reserves. Gains or losses arising from foreign exchange contracts are taken to the income statement in line with the transactions which they are hedging.expensed as incurred.
From 1 January 2005m. Derivative financial instruments —
Derivatives are initially recognised at fair value at the date of transition to IAS 39 or, if later, on the date a derivative is entered into. Derivatives are subsequentlyand remeasured at their fair value.each balance sheet date. The fair value of derivatives has beenis determined by using market data and the use of established estimation techniques such as discounted cashflowcash flow and option valuation models. The Group designates certain of the derivative instruments within its portfolio to be hedges of the fair value of its bonds (fair value hedges) or hedges of net investments in foreign operations (net investment hedges). Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The effective portion of changes in the fair value of derivatives that are designated and qualify as net investment hedges are recognised in equity. Gains and losses accumulated in equity are included in the income statement when the corresponding foreign operation is disposed of. Gains or losses relating to the ineffective portion are recognised immediately in finance income or finance costs in the income statement. Certain derivatives do not qualify or are not designated as hedging instruments. Such derivatives are classified at fair value and any movement in their fair value is recognised immediately in finance income or finance costs in the income statement immediately.statement.
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Notes to the Consolidated Financial Statements (Continued) n. Taxation Current tax is recognizedrecognised on the amounts expected to be paid or recovered under the tax rates and laws that have been enacted or substantively enacted at the balance sheet date. Deferred income tax is provided, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements.amounts. Deferred income tax is determined using tax rates (and laws)and laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided in respect of the undistributed earnings of subsidiaries other than where it is intended that those undistributed earnings will not be remitted in the foreseeable future. F-13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Current and deferred tax are recognised in the income statement, except when the tax relates to items charged or credited directly to equity, in which case the tax is also recognizedrecognised in equity. (1) Retirement benefit obligations — The Group has elected to early adopt the amendment to IAS 19 “Employee Benefits’ with effect from the date of transition to IFRS. The liability in respect of defined benefit pension plans is the present value of the defined benefit obligations at the balance sheet date minus the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting estimated future cash flows using yields on high quality corporate bonds which have terms to maturity approximating the terms of the related liability.
Actuarial gains and losses arising from differences between actual and expected returns on plan assets, experience adjustments on liabilities and changes in actuarial assumptions are recognised immediately in the statement of recognised income and expense.
The service cost, representing benefits accruing over the year, is included as an operating cost and the unwinding of the discount rate on the scheme liabilities and the expected return on scheme assets as a financing charge or financing income.
Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement as incurred.
(2) Other post-retirement obligations — The Group provides certain healthcare and life assurance benefits. The principal plans are unfunded. The expected costs of these benefits are accrued over the period of employment, using an accounting methodology which is the same as that for defined benefit pension plans. The liabilities and costs relating to other post-retirement obligations are assessed annually by independent qualified actuaries.
(3) Share-based compensation — The Group has a number of employee option and performance share schemes. The fair value of options granted is recognised as an employee expense after taking into account the Company’s best estimate of the number of awards expected to vest. Fair value is measured at the date of grant and is spread over the vesting period of the instrument. The fair value of the options granted is measured using whichever of the Black-Scholes, Binomial and Monte Carlo model is most appropriate to the award. Any proceeds received are credited to share capital and share premium when the options are exercised. The Group has applied IFRS 2 ‘Share-based Payment’ retrospectively to all options granted but not fully vested at the date of transition to IFRS.
Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are discounted to present value where the effect is material.
The Group recognises a provision for deferred consideration in the period that an acquisition is made and the Group becomes legally committed to making the payment.
The Group recognises a provision for integration and reorganisation costs in the period in which the Group becomes legally or constructively committed to making the payment.
The Group recognises a provision for onerous lease contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract. The provision is based on the present value of future payments for surplus leased properties under non-cancellable operating leases, net of estimated sub-leasing revenue.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services net of value-added tax and other sales taxes, rebates and discounts, and after eliminating sales within the Group. Revenue is recognized as follows:
Revenue from the sale of books is recognized when title passes. Anticipated returns are estimated based primarily on historical return rates. Circulation and advertising revenue is recognised when the newspaper or other publication is published. Subscription revenue is recognised on a straight-line basis over the life of the subscription.
Where a contractual arrangement consists of two or more separate elements that can be provided to customers either on a stand-alone basis or as an optional extra, such as the provision of supplementary materials with textbooks, revenue is recognised for each element as if it were an individual contractual arrangement.
Revenue from multi-year contractual arrangements, such as contracts to process qualifying tests for individual professions and government departments, is recognised as performance occurs. Certain of these arrangements, either as a result of a single service spanning more than one reporting period or where the contract requires the provision of a number of services that together constitute a single project, are treated as long-term contracts with revenue recognised on a percentage of completion basis. Losses on contracts are recognised in the period in which the loss first becomes foreseeable. Contract losses are determined to be the amount by which estimated total costs of the contract exceed the estimated total revenues that will be generated by the contract.
On certain contracts, where the Group acts as agent, only commissions and fees receivable for services rendered are recognised as revenue. Any third party costs incurred on behalf of the principal that are rechargeable under the contractual arrangement are not included in revenue.
Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the commencement of the lease at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in other long-term payables. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases is depreciated over the shorter of the useful life of the asset or the lease term.
Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases by the lessee. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.
Dividends are recorded in the Group’s financial statements in the period in which they are approved by the Company’s shareholders. Interim dividends are recorded in the period in which they are approved and paid.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | t. | Non-current assets held for sale and discontinued operations |
Non-current assets are classified as assets held for sale and stated at the lower of carrying amount and fair value less costs to sell if it is intended to recover their carrying amount principally through a sale transaction rather than through continuing use. No depreciation is charged in respect of non-current assets classified as held for sale.
Trade receivables are recognised at fair value less provision for bad and doubtful debts and anticipated future sales returns (see also note 1q).
Critical accounting assumptions and judgements
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting assumptions. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas requiring a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are discussed below.
| | | Critical accounting estimates and assumptions |
(1) Revenue recognition — Revenue from the sale of books is recognized when title passes. A provision for anticipated returns is made based primarily on historical return rates. If these estimates do not reflect actual returns in future periods then revenues could be understated or overstated for a particular period. The provision for sales returns is set out in note 19.
(2) Pre-publication costs — The assessment of the useful life of pre-publication costs and the calculation of amortisation involve a significant amount of judgement based on historical trends and management estimation of their future potential sales, in accordance with the accounting policy stated in note 1e(4). The overstatement of useful lives could result in excess amounts being carried forward as intangible assets that would otherwise have been written off to the income statement in an earlier period. Reviews are performed regularly to estimate recoverability of pre-publication costs. The carrying amount of pre-publication costs is set out in note 17.
(3) Royalty advances — The realisable value of royalty advances relies on a degree of management judgement in determining the profitability of individual author contracts, in accordance with the accounting policy stated in note 1h. If the estimated realisable value of author contracts is overstated then this will have an adverse effect on operating profits as these excess amounts will be written off. The carrying amount of royalty advances is set out in note 19.
(4) Income taxes — The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the estimates in relation to the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
(5) Goodwill — The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in note 1e(1). The recoverable amounts of cash generating units have been determined based on value in use calculations. These calculations require the use of estimates (see note 12). F-16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | Critical judgements in applying the Group’s accounting policies |
(1) Revenue recognition — Revenue from multi-year contractual arrangements is recognised as performance occurs. The assumptions, risks, and uncertainties inherent in long-term contract accounting can affect the amounts and timing of revenue and related expenses reported.
(2) Retirement benefit obligations — The determination of the pension cost and defined benefit obligation of the Group’s defined benefit pension schemes depends on the selection of certain assumptions, which include the discount rate, inflation rate, salary growth, longevity and expected return on scheme assets. Differences arising from actual experience or future changes in assumptions will be reflected in subsequent periods.
(3) Deferred income tax — Deferred tax assets and liabilities require management judgement in determining the amounts to be recognised. In particular, significant judgement is used when assessing the extent to which deferred tax assets should be recognised with consideration given to the timing and level of future taxable income together with any future tax planning strategies.
Financial risk managemento. Employee benefits
The Group’s treasury policy governs the management of financial risks within the Group. The policy, which is approved by the treasury committee, covers interest rate risk, liquidity and refinancing risk, counterparty risk and foreign currency risk. In accordance with the treasury policy, the Group actively monitors and manages its financial risk exposures. The policy permits the use of financial instruments such as derivatives, where appropriate. The policy only permits transactions related to underlying positions and speculative transactions are not permitted. Interest rate risk — A change in market interest rates can cause fluctuations in the Group’s net income or financial position. The Group is predominantly funded through bonds issued at fixed rates and nearly all of these bonds have been swapped to a floating rate for the term of the debt. The Group’s policy (as updated in September 2005) requires that interest rates on its net debt position are fixed for the next four years such that the fixed rate portion is within a range of 65% to 40% in the first year, with the lower end of the range declining by 10% each year such that the fixed rate portion falls within a range of 65% to 10% in year four. The Group also uses derivatives to change the currency profile of its debt and to alter the timing of floating interest rate resets in order to comply with its policy. The Group manages the derivatives and debt to achieve policy objectives on a portfolio basis. The Group designates derivatives as hedges under IAS 39 where hedge accounting is possible, so long as a designation will not have an adverse effect on the balancing of the portfolio.
Liquidity and refinancing risk(1) Pension obligations — The Group’s funding objective is to ensure that committed funding is available to the Group at a reasonable cost, with an extended maturity profileretirement benefit asset and that funding is available from diverse sources. To assist with the diversity of funding objective, the Group has ratings with Moody’s and Standard & Poor’s, which provides greater access to international capital markets.
Counterparty risk — The Group’s risk of loss on deposits or derivative contracts with individual banks is managed in part through the use of counterparty limits reflecting published credit ratings. Exposures to individual counterparties are monitored on a regular basis. Where appropriate, ISDA Master Agreements permitting the netting of transactionsobligation recognised in the eventbalance sheet represents the net of counterparty failure are entered into with derivative counterparties.
Foreign currency risk — The Group has operations overseasthe present value of the defined benefit obligation and is therefore exposed to movements in foreign currencies, particularly the US dollar. For transactional foreign exchange exposure, the policy allows the usefair value of derivatives where appropriate. The Group mainly converts foreign currencies at spot rate and had no cash flow hedges in placeplan assets at the balance sheet date. Translational foreign exchange exposureThe defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of more significancethe defined benefit obligation is determined by discounting estimated future cash flows using yields on high quality corporate bonds which have terms to maturity approximating the terms of the related liability.
The determination of the pension cost and defined benefit obligation of the Group’s defined benefit pension schemes depends on the selection of certain assumptions, which include the discount rate, inflation rate, salary growth, longevity and expected return on scheme assets. Actuarial gains and losses arising from differences between actual and expected returns on plan assets, experience adjustments on liabilities and changes in actuarial assumptions are recognised immediately in the statement of recognised income and expense. The service cost, representing benefits accruing over the year, is included in the income statement as an operating cost. The unwinding of the discount rate on the scheme liabilities and the expected return on scheme assets are presented as finance costs or finance income. Obligations for contributions to defined contribution pension plans are recognised as an operating expense in the income statement as incurred.
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Notes to the Group. It seeksConsolidated Financial Statements (Continued) (2) Other post-retirement obligations — The expected costs of post-retirement healthcare and life assurance benefits are accrued over the period of employment, using a similar accounting methodology as for defined benefit pension obligations. The liabilities and costs relating to offset this exposure through its policymaterial other post-retirement obligations are assessed annually by independent qualified actuaries. (3) Share-based payments — The fair value of aligning approximatelyoptions or shares granted under the currency compositionGroup’s share and option plans is recognised as an employee expense after taking into account the Group’s best estimate of its corethe number of awards expected to vest. Fair value is measured at the date of grant and is spread over the vesting period of the option or share. The fair value of the options granted is measured using an option model that is most appropriate to the award. The fair value of shares awarded is measured using the share price at the date of grant unless another method is more appropriate. Any proceeds received are credited to share capital and share premium when the options are exercised. The Group has applied IFRS 2 ‘Share-based Payment’ retrospectively to all options granted but not fully vested at the date of transition to IFRS. p. Provisions Provisions are recognised if the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are discounted to present value where the effect is material. The Group recognises a provision for deferred consideration when the payment of the deferred consideration is probable. The Group recognises a provision for onerous lease contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract. The provision is based on the present value of future payments for surplus leased properties under non-cancellable operating leases, net borrowingsof estimatedsub-leasing revenue. q. Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services net of value-added tax and other sales taxes, rebates and discounts, and after eliminating sales within the Group. Revenue from the sale of books is recognised when title passes. A provision for anticipated returns is made based primarily on historical return rates. If these estimates do not reflect actual returns in future periods then revenues could be understated or overstated for a particular period. Circulation and advertising revenue is recognised when the newspaper or other publication is published. Subscription revenue is recognised on a straight-line basis over the life of the subscription. Where a contractual arrangement consists of two or more separate elements that can be provided to customers either on a stand-alone basis or as an optional extra, such as the provision of supplementary materials with its forecast operating profit. This policy only applies wheretextbooks, revenue is recognised for each element as if it were an individual contractual arrangement. Revenue from multi-year contractual arrangements, such as contracts to process qualifying tests for individual professions and government departments, is recognised as performance occurs. The assumptions, risks, and uncertainties inherent in long-term contract accounting can affect the amounts and timing of revenue and related expenses reported. Certain of these arrangements, either as a currency accounts forresult of a single service spanning more than 15%one reporting period or where the contract requires the provision of Group operating profit and currently is only applicablea number of services that together constitute a single project, are treated as long-term contracts with revenue recognised on a percentage of completion basis. Losses on contracts are recognised in the period in which the loss first becomes foreseeable. Contract losses are determined to be the amount by which estimated total costs of the contract exceed the estimated total revenues that will be generated by the contract.
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F-17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
US dollar. The
On certain contracts, where the Group uses its dollar denominated debtacts as agent, only commissions and fees receivable for services rendered are recognised as revenue. Any third-party costs incurred on behalf of the foreign exchange portion of certain cross currency rate derivatives as net investment hedges of foreign operations. Unremitted profitsprincipal that are rechargeable under the contractual arrangement are not hedged with foreign exchange contracts, asincluded in revenue. Income from recharges of freight and other activities which are incidental to the Company judges it inappropriate to hedge non-cash flow translational exposure with cash flow instruments.normal revenue generating activities is included in other income. 2 Segment informationr. Leases
Due to Leases of property, plant and equipment where the differingGroup has substantially all the risks and rewards associatedof ownership are classified as finance leases. Finance leases are capitalised at the commencement of the lease at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in financial liabilities — borrowings. The interest element of the finance cost is charged to the income statement over the lease period to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases is depreciated over the shorter of the useful life of the asset or the lease term. Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases by the lessee. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. s. Dividends Dividends are recorded in the Group’s financial statements in the period in which they are approved by the company’s shareholders. Interim dividends are recorded in the period in which they are approved and paid. t. Non-current assets and liabilities held for sale Assets and liabilities are classified as held for sale and stated at the lower of carrying amount and fair value less costs to sell if it is intended to recover their carrying amount principally through a sale transaction rather than through continuing use. No depreciation is charged in respect of non-current assets classified as held for sale. Amounts relating to non-current assets and liabilities held for sale are classified as discontinued operations in the income statement where appropriate. u. Trade receivables Trade receivables are stated at fair value after provision for bad and doubtful debts and anticipated future sales returns (see also note 1q). 2. Segment information Following the adoption of IFRS 8 ‘Operating Segments’ and changes in the organisational structure of the Education business, the Group has revised its reporting segments. The Group is now organised into six segments: North American Education — Educational publishing and testing for the school and higher education market within the USA and Canada; International Education — Educational publishing and testing for the school and higher education market outside of North America; Professional — Business and technology publishing and testing and certification for professional bodies; FT Publishing — Publisher of theFinancial Times, business magazines and specialist information;
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Notes to the Consolidated Financial Statements (Continued) Interactive Data — Provider of financial and business information to financial institutions and retail investors; Penguin — Publisher with brand imprints such as Penguin, Putnam, Berkley, Viking, Dorling Kindersley. For more detail on the services and products included in each business segment refer to Item 4 of thisForm 20-F. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2008 | | | | | | | North
| | | | | | | | | | | | | | | | | | | | | | | | | | | | American
| | | International
| | | | | | FT
| | | Interactive
| | | | | | | | | | | | | | Notes | | Education | | | Education | | | Professional | | | Publishing | | | Data | | | Penguin | | | Corporate | | | Group | | | | | | | All figures in £ millions | | Continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sales (external) | | | | | | | 2,002 | | | | 866 | | | | 244 | | | | 390 | | | | 406 | | | | 903 | | | | — | | | | 4,811 | | | Sales (inter-segment) | | | | | | | — | | | | — | | | | 4 | | | | — | | | | — | | | | 22 | | | | — | | | | 26 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjusted operating profit | | | | | | | 303 | | | | 135 | | | | 36 | | | | 74 | | | | 121 | | | | 93 | | | | — | | | | 762 | | | Amortisation of acquired intangibles | | | | | | | (45 | ) | | | (22 | ) | | | (1 | ) | | | (7 | ) | | | (9 | ) | | | (2 | ) | | | — | | | | (86 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit | | | | | | | 258 | | | | 113 | | | | 35 | | | | 67 | | | | 112 | | | | 91 | | | | — | | | | 676 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Finance costs | | | 6 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (136 | ) | | Finance income | | | 6 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 45 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit before tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 585 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income tax | | | 7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (172 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit for the year from continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 413 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Segment assets | | | | | | | 4,952 | | | | 1,358 | | | | 423 | | | | 482 | | | | 524 | | | | 1,211 | | | | 923 | | | | 9,873 | | | Joint ventures | | | 12 | | | | — | | | | 8 | | | | — | | | | 2 | | | | — | | | | 3 | | | | — | | | | 13 | | | Associates | | | 12 | | | | — | | | | 4 | | | | — | | | | 6 | | | | — | | | | — | | | | — | | | | 10 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Assets — continuing operations | | | | | | | 4,952 | | | | 1,370 | | | | 423 | | | | 490 | | | | 524 | | | | 1,214 | | | | 923 | | | | 9,896 | | | Assets — discontinued operations | | | | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total assets | | | | | | | 4,952 | | | | 1,370 | | | | 423 | | | | 490 | | | | 524 | | | | 1,214 | | | | 923 | | | | 9,896 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other segment items | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Share of results of joint ventures and associates | | | 12 | | | | — | | | | 5 | | | | — | | | | 19 | | | | — | | | | 1 | | | | — | | | | 25 | | | Capital expenditure | | | 10, 11, 20 | | | | 224 | | | | 82 | | | | 22 | | | | 17 | | | | 25 | | | | 51 | | | | — | | | | 421 | | | Depreciation | | | 10 | | | | 25 | | | | 12 | | | | 8 | | | | 13 | | | | 13 | | | | 9 | | | | — | | | | 80 | | | Amortisation | | | 11, 20 | | | | 219 | | | | 69 | | | | 12 | | | | 12 | | | | 12 | | | | 36 | | | | — | | | | 360 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-17
Notes to the Consolidated Financial Statements (Continued) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2007 | | | | | | | | North
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | American
| | | International
| | | | | | FT
| | | Interactive
| | | | | | | | | | | | | | Notes | | | Education | | | Education | | | Professional | | | Publishing | | | Data | | | Penguin | | | Corporate | | | Group | | | | | | | | All figures in £ millions | | | | Continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sales (external) | | | | | | | 1,667 | | | | 735 | | | | 226 | | | | 344 | | | | 344 | | | | 846 | | | | — | | | | 4,162 | | | Sales (inter-segment) | | | | | | | 1 | | | | — | | | | — | | | | — | | | | — | | | | 19 | | | | — | | | | 20 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjusted operating profit | | | | | | | 273 | | | | 92 | | | | 27 | | | | 56 | | | | 97 | | | | 74 | | | | — | | | | 619 | | | Amortisation of acquired intangibles | | | | | | | (20 | ) | | | (10 | ) | | | (1 | ) | | | (6 | ) | | | (7 | ) | | | (1 | ) | | | — | | | | (45 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit | | | | | | | 253 | | | | 82 | | | | 26 | | | | 50 | | | | 90 | | | | 73 | | | | — | | | | 574 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Finance costs | | | 6 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (150 | ) | | Finance income | | | 6 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 44 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit before tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 468 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income tax | | | 7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (131 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit for the year from continuing
operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 337 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Segment assets | | | | | | | 3,536 | | | | 1,013 | | | | 291 | | | | 397 | | | | 330 | | | | 937 | | | | 651 | | | | 7,155 | | | Joint ventures | | | 12 | | | | — | | | | 5 | | | | — | | | | 4 | | | | — | | | | 2 | | | | — | | | | 11 | | | Associates | | | 12 | | | | 1 | | | | 3 | | | | — | | | | 5 | | | | — | | | | — | | | | — | | | | 9 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Assets — continuing operations | | | | | | | 3,537 | | | | 1,021 | | | | 291 | | | | 406 | | | | 330 | | | | 939 | | | | 651 | | | | 7,175 | | | Assets — discontinued operations | | | | | | | — | | | | — | | | | 117 | | | | — | | | | — | | | | — | | | | — | | | | 117 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total assets | | | | | | | 3,537 | | | | 1,021 | | | | 408 | | | | 406 | | | | 330 | | | | 939 | | | | 651 | | | | 7,292 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other segment items | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Share of results of joint ventures and associates | | | 12 | | | | — | | | | 6 | | | | 1 | | | | 16 | | | | — | | | | — | | | | — | | | | 23 | | | Capital expenditure | | | 10, 11, 20 | | | | 136 | | | | 109 | | | | 20 | | | | 28 | | | | 19 | | | | 44 | | | | — | | | | 356 | | | Depreciation | | | 10 | | | | 26 | | | | 7 | | | | 9 | | | | 9 | | | | 10 | | | | 7 | | | | — | | | | 68 | | | Amortisation | | | 11, 20 | | | | 159 | | | | 45 | | | | 11 | | | | 9 | | | | 8 | | | | 30 | | | | — | | | | 262 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-18
Notes to the Consolidated Financial Statements (Continued) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2006 | | | | | | | | North
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | American
| | | International
| | | | | | FT
| | | Interactive
| | | | | | | | | | | | | | Notes | | | Education | | | Education | | | Professional | | | Publishing | | | Data | | | Penguin | | | Corporate | | | Group | | | | | | | | All figures in £ millions | | | | Continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sales (external) | | | | | | | 1,679 | | | | 640 | | | | 211 | | | | 280 | | | | 332 | | | | 848 | | | | — | | | | 3,990 | | | Sales (inter-segment) | | | | | | | — | | | | — | | | | 1 | | | | — | | | | — | | | | 18 | | | | — | | | | 19 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjusted operating profit | | | | | | | 280 | | | | 73 | | | | 17 | | | | 27 | | | | 89 | | | | 66 | | | | — | | | | 552 | | | Amortisation of acquired intangibles | | | | | | | (14 | ) | | | (3 | ) | | | (1 | ) | | | (2 | ) | | | (7 | ) | | | (8 | ) | | | — | | | | (35 | ) | | Other net gains and losses of associates | | | | | | | — | | | | — | | | | — | | | | 4 | | | | — | | | | — | | | | — | | | | 4 | | | Other net finance costs of associates | | | | | | | — | | | | — | | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | 1 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit | | | | | | | 266 | | | | 70 | | | | 16 | | | | 30 | | | | 82 | | | | 58 | | | | — | | | | 522 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Finance costs | | | 6 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (133 | ) | | Finance income | | | 6 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 59 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit before tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 448 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income tax | | | 7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit for the year from continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 444 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Segment assets | | | | | | | 3,401 | | | | 795 | | | | 415 | | | | 317 | | | | 314 | | | | 954 | | | | 703 | | | | 6,899 | | | Joint ventures | | | | | | | — | | | | 5 | | | | — | | | | 4 | | | | — | | | | 3 | | | | — | | | | 12 | | | Associates | | | | | | | — | | | | 4 | | | | — | | | | 4 | | | | — | | | | — | | | | — | | | | 8 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Assets — continuing operations | | | | | | | 3,401 | | | | 804 | | | | 415 | | | | 325 | | | | 314 | | | | 957 | | | | 703 | | | | 6,919 | | | Assets — discontinued operations | | | | | | | — | | | | — | | | | 294 | | | | — | | | | — | | | | — | | | | — | | | | 294 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total assets | | | | | | | 3,401 | | | | 804 | | | | 709 | | | | 325 | | | | 314 | | | | 957 | | | | 703 | | | | 7,213 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other segment items | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Share of results of joint ventures and associates | | | | | | | — | | | | 6 | | | | 1 | | | | 17 | | | | — | | | | — | | | | — | | | | 24 | | | Capital expenditure | | | | | | | 141 | | | | 71 | | | | 30 | | | | 19 | | | | 20 | | | | 38 | | | | — | | | | 319 | | | Depreciation | | | | | | | 15 | | | | 14 | | | | 19 | | | | 9 | | | | 13 | | | | 7 | | | | — | | | | 77 | | | Amortisation | | | | | | | 136 | | | | 59 | | | | 21 | | | | 4 | | | | 7 | | | | 34 | | | | — | | | | 261 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
In 2008, sales from the provision of goods were £3,411m (2007: £3,053m; 2006: £2,996m) and sales from the different customer focusprovision of each segment, business isservices were £1,400m (2007: £1,109m; 2006: £994m). Sales from the Group’s primary reporting segment. At 31 December 2005educational publishing, consumer publishing and newspaper business are classified as being from the Group is organised into five primary business segments, School, Higher Education, Penguin, FT Publishingprovision of goods and Interactive Data Corporation (IDC).The remaining business group, Professional, brings together a numbersales from its assessment and testing, market pricing, corporate training and management service businesses are classified as being from the provision of education publishing, testing and services businesses and does not meet the criteria for classification as a “segment” under IFRS.services. | | | Primary reporting format — business segments |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Higher | | | | | | | FT | | | | | | | 2005 | | | | | School | | | Education | | | Professional | | | Penguin | | | Publishing | | | IDC | | | Corporate | | | Group | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | Continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sales (external) | | | 1,295 | | | | 779 | | | | 589 | | | | 804 | | | | 332 | | | | 297 | | | | — | | | | 4,096 | | | Sales (inter-segment) | | | — | | | | — | | | | — | | | | 16 | | | | — | | | | — | | | | — | | | | 16 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit before joint ventures and associates | | | 138 | | | | 156 | | | | 44 | | | | 60 | | | | 49 | | | | 75 | | | | — | | | | 522 | | | Share of results of joint ventures and associates | | | 4 | | | | — | | | | 1 | | | | — | | | | 9 | | | | — | | | | — | | | | 14 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit | | | 142 | | | | 156 | | | | 45 | | | | 60 | | | | 58 | | | | 75 | | | | — | | | | 536 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Finance costs | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (132 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Finance income | | | | | | | | | | | | �� | | | | | | | | | | | | | | | | | | | 62 | | Profit before tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 466 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (124 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit for the year from continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 342 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Reconciliation to adjusted operating profit | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit | | | 142 | | | | 156 | | | | 45 | | | | 60 | | | | 58 | | | | 75 | | | | — | | | | 536 | | | Amortisation of acquired intangibles | | | 5 | | | | — | | | | — | | | | — | | | | 1 | | | | 5 | | | | — | | | | 11 | | | Other net gains and losses | | | — | | | | — | | | | — | | | | — | | | | (40 | ) | | | — | | | | — | | | | (40 | ) | | Other net finance costs of associates | | | — | | | | — | | | | — | | | | — | | | | 2 | | | | — | | | | — | | | | 2 | | | Adjusted operating profit — continuing operations | | | 147 | | | | 156 | | | | 45 | | | | 60 | | | | 21 | | | | 80 | | | | — | | | | 509 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Segment assets | | | 2,067 | | | | 1,402 | | | | 1,705 | | | | 960 | | | | 154 | | | | 291 | | | | 985 | | | | 7,564 | | | Joint ventures | | | 6 | | | | — | | | | — | | | | 2 | | | | 4 | | | | — | | | | — | | | | 12 | | | Associates | | | 6 | | | | — | | | | — | | | | — | | | | 18 | | | | — | | | | — | | | | 24 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total assets | | | 2,079 | | | | 1,402 | | | | 1,705 | | | | 962 | | | | 176 | | | | 291 | | | | 985 | | | | 7,600 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities | | | (557 | ) | | | (341 | ) | | | (263 | ) | | | (280 | ) | | | (336 | ) | | | (109 | ) | | | (1,981 | ) | | | (3,867 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Other segment items | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital expenditure (notes 11, 12 and 17) | | | 114 | | | | 96 | | | | 43 | | | | 34 | | | | 14 | | | | 19 | | | | — | | | | 320 | | | Depreciation (note 11) | | | 26 | | | | 8 | | | | 17 | | | | 7 | | | | 11 | | | | 11 | | | | — | | | | 80 | | | Amortisation (notes 12 and 17) | | | 91 | | | | 78 | | | | 20 | | | | 24 | | | | 3 | | | | 5 | | | | — | | | | 221 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Higher | | | | | | | FT | | | | | | | 2004 | | | | | School | | | Education | | | Professional | | | Penguin | | | Publishing | | | IDC | | | Corporate | | | Group | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | Continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sales (external) | | | 1,087 | | | | 729 | | | | 507 | | | | 786 | | | | 318 | | | | 269 | | | | — | | | | 3,696 | | | Sales (inter-segment) | | | — | | | | — | | | | — | | | | 15 | | | | — | | | | — | | | | — | | | | 15 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit before joint ventures and associates | | | 109 | | | | 133 | | | | 42 | | | | 46 | | | | 4 | | | | 62 | | | | — | | | | 396 | | | Share of results of joint ventures and associates | | | 3 | | | | — | | | | — | | | | 1 | | | | 4 | | | | — | | | | — | | | | 8 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit | | | 112 | | | | 133 | | | | 42 | | | | 47 | | | | 8 | | | | 62 | | | | — | | | | 404 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Finance costs | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (96 | ) | | Finance income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 17 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit before tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 325 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (63 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit for the year from continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 262 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Reconciliation to adjusted operating profit | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit | | | 112 | | | | 133 | | | | 42 | | | | 47 | | | | 8 | | | | 62 | | | | — | | | | 404 | | | Amortisation of acquired intangibles | | | — | | | | — | | | | — | | | | — | | | | — | | | | 5 | | | | — | | | | 5 | | | Other net gains and losses | | | (4 | ) | | | (4 | ) | | | (2 | ) | | | 5 | | | | (4 | ) | | | — | | | | — | | | | (9 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjusted operating profit — continuing operations | | | 108 | | | | 129 | | | | 40 | | | | 52 | | | | 4 | | | | 67 | | | | — | | | | 400 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Segment assets | | | 1,860 | | | | 1,224 | | | | 1,345 | | | | 892 | | | | 502 | | | | 247 | | | | 461 | | | | 6,531 | | | Joint ventures | | | 7 | | | | — | | | | — | | | | 5 | | | | 2 | | | | — | | | | — | | | | 14 | | | Associates | | | 5 | | | | — | | | | — | | | | — | | | | 28 | | | | — | | | | — | | | | 33 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total assets | | | 1,872 | | | | 1,224 | | | | 1,345 | | | | 897 | | | | 532 | | | | 247 | | | | 461 | | | | 6,578 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities | | | (439 | ) | | | (286 | ) | | | (212 | ) | | | (259 | ) | | | (435 | ) | | | (110 | ) | | | (1,823 | ) | | | (3,564 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Other segment items | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital expenditure (notes 11,12 and 17) | | | 104 | | | | 79 | | | | 62 | | | | 36 | | | | 15 | | | | 12 | | | | — | | | | 308 | | | Depreciation (note 11) | | | 25 | | | | 9 | | | | 16 | | | | 9 | | | | 16 | | | | 9 | | | | — | | | | 84 | | | Amortisation (notes 12 and 17) | | | 74 | | | | 65 | | | | 18 | | | | 29 | | | | 2 | | | | 5 | | | | — | | | | 193 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Higher | | | | | | | FT | | | | | | | 2003 | | | | | School | | | Education | | | Professional | | | Penguin | | | Publishing | | | IDC | | | Corporate | | | Group | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | Continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sales (external) | | | 1,149 | | | | 770 | | | | 503 | | | | 840 | | | | 315 | | | | 273 | | | | — | | | | 3,850 | | | Sales (inter-segment) | | | — | | | | — | | | | 1 | | | | 15 | | | | — | | | | — | | | | — | | | | 16 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit before joint ventures and associates | | | 112 | | | | 140 | | | | 33 | | | | 81 | | | | (28 | ) | | | 66 | | | | — | | | | 404 | | | Share of results of joint ventures and associates | | | 2 | | | | — | | | | — | | | | 1 | | | | (1 | ) | | | — | | | | — | | | | 2 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit | | | 114 | | | | 140 | | | | 33 | | | | 82 | | | | (29 | ) | | | 66 | | | | — | | | | 406 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Finance costs | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (100 | ) | | Finance income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit before tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 313 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (61 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Profit for the year from continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 252 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Reconciliation to adjusted operating profit | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit | | | 114 | | | | 140 | | | | 33 | | | | 82 | | | | (29 | ) | | | 66 | | | | — | | | | 406 | | | Amortisation of acquired intangibles | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4 | | | | — | | | | 4 | | | Other net gains and losses | | | 2 | | | | 2 | | | | 1 | | | | 1 | | | | — | | | | — | | | | — | | | | 6 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjusted operating profit — continuing operations | | | 116 | | | | 142 | | | | 34 | | | | 83 | | | | (29 | ) | | | 70 | | | | — | | | | 416 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Segment assets | | | 2,072 | | | | 1,157 | | | | 1,387 | | | | 907 | | | | 358 | | | | 240 | | | | 551 | | | | 6,672 | | | Joint ventures | | | 6 | | | | — | | | | — | | | | 4 | | | | 2 | | | | — | | | | — | | | | 12 | | | Associates | | | 5 | | | | — | | | | — | | | | — | | | | 47 | | | | — | | | | — | | | | 52 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total assets | | | 2,083 | | | | 1,157 | | | | 1,387 | | | | 911 | | | | 407 | | | | 240 | | | | 551 | | | | 6,736 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities | | | (458 | ) | | | (318 | ) | | | (158 | ) | | | (398 | ) | | | (203 | ) | | | (113 | ) | | | (1,927 | ) | | | (3,575 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Other segment items | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital expenditure (notes 11, 12 and 17) | | | 101 | | | | 65 | | | | 21 | | | | 47 | | | | 26 | | | | 17 | | | | — | | | | 277 | | | Depreciation (note 11) | | | 26 | | | | 9 | | | | 13 | | | | 6 | | | | 19 | | | | 12 | | | | — | | | | 85 | | | Amortisation (notes 12 and 17) | | | 68 | | | | 58 | | | | 18 | | | | 39 | | | | 2 | | | | 5 | | | | — | | | | 190 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate costs are allocated to business segments on an appropriate basis depending on the nature of the cost and therefore the segment result is equal to the Group result.operating profit. Inter-segment pricing is determined on an arm’s lengtharm’s-length basis. Segment assets consist primarily of property, plant and equipment, intangible assets, inventories, receivables, retirement benefit assets and deferred taxation and exclude cash and cash equivalents and derivative assets. Segment liabilities comprise operating liabilities and exclude borrowings and derivative liabilities. Corporate assets and liabilities comprise cash and cash equivalents, borrowingsmarketable securities and derivative financial instruments. Capital expenditure comprises additions to property, plant and equipment and intangible assets, including pre-publication but excluding goodwill (see notes 10, 11 12 and 17)20). Property, plant and equipment and intangible assets acquired through business combinationscombination were £111m (2004: £16m; 2003: £54m)(see notes 11, 12 and 17)£253m (2007: £226m) (see note 30). Capital expenditure, depreciation and amortisation F-20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
includes include amounts relating to discontinued operations. In April 2005, Pearson sold its 79% interestDiscontinued operations relate to the Data Management business in Recoletos Grupo de Communicación S.A. This operation is now disclosed as a ‘discontinued’ operation. 2008 and to the Data Management business, Government Solutions, Datamark and Les Echos in 2007 (see note 3).
F-19
Notes to the Consolidated Financial Statements (Continued) The related assets and liabilities are disclosed within the FT Publishing segment in 2004 and 2003. | | | Secondary reporting format — geographical segments |
Although the Group’s business segments are managed on a worldwide basis, they all operateGroup operates in the following main geographicalgeographic areas:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sales | | | Total assets | | | Capital expenditure | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | 2005 | | | 2004 | | | 2003 | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | Continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | European countries | | | 963 | | | | 835 | | | | 768 | | | | 1,711 | | | | 1,112 | | | | 1,003 | | | | 60 | | | | 79 | | | | 63 | | | North America | | | 2,717 | | | | 2,504 | | | | 2,742 | | | | 5,476 | | | | 4,716 | | | | 5,015 | | | | 242 | | | | 208 | | | | 188 | | | Asia Pacific | | | 300 | | | | 263 | | | | 255 | | | | 325 | | | | 302 | | | | 301 | | | | 13 | | | | 10 | | | | 11 | | | Other countries | | | 116 | | | | 94 | | | | 85 | | | | 52 | | | | 43 | | | | 37 | | | | 2 | | | | 3 | | | | 4 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 4,096 | | | | 3,696 | | | | 3,850 | | | | 7,564 | | | | 6,173 | | | | 6,356 | | | | 317 | | | | 300 | | | | 266 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Discontinued operations (European countries) | | | 27 | | | | 190 | | | | 169 | | | | — | | | | 358 | | | | 316 | | | | 3 | | | | 8 | | | | 11 | | | Joint ventures and associates | | | — | | | | — | | | | — | | | | 36 | | | | 47 | | | | 64 | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 4,123 | | | | 3,886 | | | | 4,019 | | | | 7,600 | | | | 6,578 | | | | 6,736 | | | | 320 | | | | 308 | | | | 277 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Sales | | | Non-current assets | | | | | 2008 | | | 2007 | | | 2006 | | | 2008 | | | 2007 | | | 2006 | | | | | All figures in £ millions | | | | Continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | | UK | | | 754 | | | | 721 | | | | 659 | | | | 701 | | | | 724 | | | | 545 | | | Other European countries | | | 463 | | | | 381 | | | | 344 | | | | 224 | | | | 140 | | | | 142 | | | USA | | | 2,861 | | | | 2,448 | | | | 2,443 | | | | 4,624 | | | | 3,146 | | | | 3,115 | | | Canada | | | 167 | | | | 143 | | | | 142 | | | | 209 | | | | 183 | | | | 163 | | | Asia Pacific | | | 415 | | | | 351 | | | | 295 | | | | 179 | | | | 114 | | | | 97 | | | Other countries | | | 151 | | | | 118 | | | | 107 | | | | 14 | | | | 11 | | | | 11 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total continuing | | | 4,811 | | | | 4,162 | | | | 3,990 | | | | 5,951 | | | | 4,318 | | | | 4,073 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Discontinued operations | | | | | | | | | | | | | | | | | | | | | | | | | | UK | | | — | | | | 1 | | | | 17 | | | | — | | | | — | | | | — | | | Other European countries | | | — | | | | 82 | | | | 86 | | | | — | | | | — | | | | — | | | USA | | | 8 | | | | 78 | | | | 314 | | | | — | | | | 117 | | | | 294 | | | Canada | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | Other countries | | | — | | | | 6 | | | | 16 | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total discontinued | | | 8 | | | | 167 | | | | 433 | | | | — | | | | 117 | | | | 294 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 4,819 | | | | 4,329 | | | | 4,423 | | | | 5,951 | | | | 4,435 | | | | 4,367 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sales are allocated based on the country in which the customer is located. This does not differ materially from the location where the order is received. Total assets and capital expenditure are allocated to where theNon-current assets are located. F-21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)based on the subsidiaries country of domicile. This is not materially different to the location of the assets. Non-current assets comprise property, plant and equipment, intangible assets, investments in joint ventures and associates, other receivables and non-current assets classified as held for sale.
| | 33. | Discontinued operations |
In April 2005, Pearson sold its 79% Discontinued operations relate to the Group’s interest in Recoletos Grupo de Communicación S.A. to Retos Cartera, a consortium of investors. This operation is disclosed as a ‘discontinued’ operation (see note 28)Government Solutions (sold on 15 February 2007), Datamark (sold on 31 July 2007), Les Echos (sold on 24 December 2007) and the Data Management business (sold on 22 February 2008). The results of the Data Management business (previously included in the Professional segment) have been included in discontinued operations for 2006, 2007 and 2008. In anticipation of the loss on sale, an impairment to held for sale goodwill was charged to the income statement in 2007. The assets and liabilities of the Data Management business were reported as held for sale in the 31 December 2007 balance sheet. The results of Government Solutions (previously included in the Professional segment) and Les Echos (previously included in the FT Publishing segment) were included in discontinued operations for 2006 and 2007 and were consolidated up to the date of sale. Datamark was sold immediately following its acquisition as part of the eCollege transaction and consequently none of the results for this business were consolidated.
F-20
Notes to the Consolidated Financial Statements (Continued) An analysis of the resultresults and cash flows of discontinued operations isare as follows: | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Sales | | | 27 | | | | 190 | | | | 169 | | | | | | | | | | | | | | Operating (loss)/profit | | | (3 | ) | | | 26 | | | | 43 | | | Net finance income | | | — | | | | 3 | | | | 3 | | | | | | | | | | | | | (Loss)/profit before tax | | | (3 | ) | | | 29 | | | | 46 | | | | | | | | | | | | | | Attributable tax benefit/(expense) | | | 1 | | | | (7 | ) | | | (23 | ) | | | | | | | | | | | | (Loss)/profit after tax | | | (2 | ) | | | 22 | | | | 23 | | | Profit on disposal of discontinued operations (note 28) | | | 306 | | | | — | | | | — | | | Attributable tax expense | | | (2 | ) | | | — | | | | — | | | | | | | | | | | | | Profit for the year from discontinued operations | | | 302 | | | | 22 | | | | 23 | | | | | | | | | | | | | | Operating cash flows | | | (6 | ) | | | 12 | | | | 11 | | | Investing cash flows | | | — | | | | 17 | | | | 47 | | | Financing cash flows | | | — | | | | — | | | | (92 | ) | | | | | | | | | | | | Total cash flows | | | (6 | ) | | | 29 | | | | (34 | ) | | | | | | | | | | | |
| | | | | | | 2008 | | | | Data
| | | | Management | | | | All figures
| | | | in £ millions | | | | Sales | | | 8 | | | | | | | | Operating profit | | | — | | | | | | | Profit before tax | | | — | | | | | | | | Attributable tax expense | | | — | | | | | | | Profit after tax | | | — | | | Loss on disposal of discontinued operations before tax | | | (53 | ) | | Attributable tax expense | | | (37 | ) | | | | | | Loss for the year from discontinued operations | | | (90 | ) | | | | | | | Operating cash flows | | | — | | | Investing cash flows | | | — | | | Financing cash flows | | | — | | | | | | | Total cash flows | | | — | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | 2007 | | | | | Data
| | | | | | | | | Government
| | | | | | | | Management | | | Les Echos | | | Datamark | | | Solutions | | | Total | | | | | All figures in £ millions | | | | | Sales | | | 56 | | | | 82 | | | | — | | | | 29 | | | | 167 | | | | | | | | | | | | | | | | | | | | | | | | | Operating profit | | | 12 | | | | 1 | | | | — | | | | 2 | | | | 15 | | | | | | | | | | | | | | | | | | | | | | | | | Goodwill impairment | | | (97 | ) | | | — | | | | — | | | | — | | | | (97 | ) | | | | | | | | | | | | | | | | | | | | | | | (Loss)/profit before tax | | | (85 | ) | | | 1 | | | | — | | | | 2 | | | | (82 | ) | | | | | | | | | | | | | | | | | | | | | | | | Attributable tax expense | | | (4 | ) | | | — | | | | — | | | | (1 | ) | | | (5 | ) | | | | | | | | | | | | | | | | | | | | | | | (Loss)/profit after tax | | | (89 | ) | | | 1 | | | | — | | | | 1 | | | | (87 | ) | | Profit/(loss) on disposal of discontinued operations before tax | | | — | | | | 165 | | | | — | | | | (19 | ) | | | 146 | | | Attributable tax (expense)/benefit | | | — | | | | — | | | | 7 | | | | (93 | ) | | | (86 | ) | | | | | | | | | | | | | | | | | | | | | | | (Loss)/profit for the year from discontinued operations | | | (89 | ) | | | 166 | | | | 7 | | | | (111 | ) | | | (27 | ) | | | | | | | | | | | | | | | | | | | | | | | | Operating cash flows | | | 11 | | | | 4 | | | | — | | | | (8 | ) | | | 7 | | | Investing cash flows | | | (1 | ) | | | 4 | | | | — | | | | — | | | | 3 | | | Financing cash flows | | | (10 | ) | | | (7 | ) | | | — | | | | (4 | ) | | | (21 | ) | | | | | | | | | | | | | | | | | | | | | | | Total cash flows | | | — | | | | 1 | | | | — | | | | (12 | ) | | | (11 | ) | | | | | | | | | | | | | | | | | | | | | | |
F-21
Notes to the Consolidated Financial Statements (Continued) | | | | | | | | | | | | | | | | | | | | | 2006 | | | | | Government
| | | Data
| | | | | | | | | | | Solutions | | | Management | | | Les Echos | | | Total | | | | | All figures in £ millions | | | | | Sales | | | 286 | | | | 61 | | | | 86 | | | | 433 | | | | | | | | | | | | | | | | | | | | | Operating profit | | | 22 | | | | 13 | | | | 5 | | | | 40 | | | | | | | | | | | | | | | | | | | | Profit before tax | | | 22 | | | | 13 | | | | 5 | | | | 40 | | | | | | | | | | | | | | | | | | | | | Attributable tax expense | | | (8 | ) | | | (5 | ) | | | (2 | ) | | | (15 | ) | | | | | | | | | | | | | | | | | | | Profit after tax | | | 14 | | | | 8 | | | | 3 | | | | 25 | | | Profit on disposal of discontinued operations before tax | | | — | | | | — | | | | — | | | | — | | | Attributable tax (expense)/benefit | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | Profit for the year from discontinued operations | | | 14 | | | | 8 | | | | 3 | | | | 25 | | | | | | | | | | | | | | | | | | | | | Operating cash flows | | | 20 | | | | 9 | | | | 4 | | | | 33 | | | Investing cash flows | | | (8 | ) | | | (2 | ) | | | — | | | | (10 | ) | | Financing cash flows | | | (1 | ) | | | (7 | ) | | | (7 | ) | | | (15 | ) | | | | | | | | | | | | | | | | | | | Total cash flows | | | 11 | | | | — | | | | (3 | ) | | | 8 | | | | | | | | | | | | | | | | | | | |
| | 44. | Other net gains and lossesOperating expenses |
| | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ | | | | | millions) | | | Profit on sale of interest in MarketWatch | | | 40 | | | | — | | | | — | | | Other items | | | — | | | | 9 | | | | (6 | ) | | | | | | | | | | | | Total other net gains and losses | | | 40 | | | | 9 | | | | (6 | ) | | | | | | | | | | | |
Other net gains and losses represent profits and losses on the sale of subsidiaries, joint ventures, associates and other financial assets that are included within continuing operations. | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | 2006 | | | | | All figures in £ millions | | | | By function: | | | | | | | | | | | | | | Cost of goods sold | | | 2,174 | | | | 1,910 | | | | 1,841 | | | | | | | | | | | | | | | | Operating expenses | | | | | | | | | | | | | | Distribution costs | | | 198 | | | | 202 | | | | 232 | | | Administrative and other expenses | | | 1,890 | | | | 1,600 | | | | 1,518 | | | Other income | | | (102 | ) | | | (101 | ) | | | (99 | ) | | | | | | | | | | | | | | | Total operating expenses | | | 1,986 | | | | 1,701 | | | | 1,651 | | | | | | | | | | | | | | | | Total | | | 4,160 | | | | 3,611 | | | | 3,492 | | | | | | | | | | | | | | | |
F-22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | By function: | | | | | | | | | | | | | | Cost of goods sold | | | 2,022 | | | | 1,789 | | | | 1,846 | | | | | | | | | | | | | Operating expenses | | | | | | | | | | | | | | Distribution costs | | | 249 | | | | 201 | | | | 206 | | | Administrative and other expenses | | | 1,384 | | | | 1,365 | | | | 1,439 | | | Other income | | | (41 | ) | | | (46 | ) | | | (51 | ) | | | | | | | | | | | | Total operating expenses | | | 1,592 | | | | 1,520 | | | | 1,594 | | | | | | | | | | | | | Total | | | 3,614 | | | | 3,309 | | | | 3,440 | | | | | | | | | | | | | By nature: | | | | | | | | | | | | | | Utilisation of inventory | | | 768 | | | | 700 | | | | 710 | | | Depreciation of property, plant and equipment (note 11) | | | 80 | | | | 78 | | | | 79 | | | Amortisation of intangible assets — pre-publication (note 17) | | | 192 | | | | 168 | | | | 158 | | | Amortisation of intangible assets — other (note 12) | | | 29 | | | | 25 | | | | 32 | | | Employee benefit expense (note 6) | | | 1,273 | | | | 1,154 | | | | 1,156 | | | Operating lease rentals | | | 119 | | | | 126 | | | | 148 | | | Other property costs | | | 88 | | | | 73 | | | | 61 | | | Royalties expensed | | | 363 | | | | 331 | | | | 354 | | | Advertising, promotion and marketing | | | 202 | | | | 181 | | | | 193 | | | Information technology costs | | | 84 | | | | 76 | | | | 85 | | | Other costs | | | 457 | | | | 443 | | | | 515 | | | Other income | | | (41 | ) | | | (46 | ) | | | (51 | ) | | | | | | | | | | | | Total | | | 3,614 | | | | 3,309 | | | | 3,440 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Notes | | | 2008 | | | 2007 | | | 2006 | | | | | | | | All figures in £ millions | | | | By nature: | | | | | | | | | | | | | | | | | | Utilisation of inventory | | | 21 | | | | 832 | | | | 732 | | | | 702 | | | Depreciation of property, plant and equipment | | | 10 | | | | 80 | | | | 65 | | | | 68 | | | Amortisation of intangible assets — Pre-publication | | | 20 | | | | 244 | | | | 192 | | | | 210 | | | Amortisation of intangible assets — Other | | | 11 | | | | 116 | | | | 70 | | | | 48 | | | Employee benefit expense | | | 5 | | | | 1,553 | | | | 1,288 | | | | 1,225 | | | Operating lease rentals | | | | | | | 134 | | | | 129 | | | | 122 | | | Other property costs | | | | | | | 116 | | | | 122 | | | | 121 | | | Royalties expensed | | | | | | | 415 | | | | 365 | | | | 360 | | | Advertising, promotion and marketing | | | | | | | 244 | | | | 195 | | | | 190 | | | Information technology costs | | | | | | | 76 | | | | 70 | | | | 71 | | | Other costs | | | | | | | 452 | | | | 484 | | | | 474 | | | Other income | | | | | | | (102 | ) | | | (101 | ) | | | (99 | ) | | | | | | | | | | | | | | | | | | | Total | | | | | | | 4,160 | | | | 3,611 | | | | 3,492 | | | | | | | | | | | | | | | | | | | |
During the year the Group obtained the following services from the Group’s auditor: | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Statutory audit | | | 4 | | | | 3 | | | | 3 | | | Audit-related regulatory reporting services | | | 1 | | | | 1 | | | | — | | | Non-audit services: | | | | | | | | | | | | | | Tax compliance | | | 1 | | | | 1 | | | | 1 | | | Tax advisory | | | — | | | | 1 | | | | 1 | | | Other non-audit services | | | 1 | | | | — | | | | — | | | | | | | | | | | | |
Audit-related regulatory reporting services were £700,000 (2004: £600,000; 2003: £nil). This relates to services in respect | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | 2006 | | | | | All figures in £ millions | | | | | Fees payable to the company’s auditor for the audit of parent company and consolidated financial statements | | | 3 | | | | 3 | | | | 5 | | | The audit of the company’s subsidiaries pursuant to legislation | | | 2 | | | | 1 | | | | 4 | | | Tax services | | | 2 | | | | 2 | | | | 1 | | | Other services | | | 1 | | | | 1 | | | | 1 | | | | | | | | | | | | | | | | Total | | | 8 | | | | 7 | | | | 11 | | | | | | | | | | | | | | | |
Reconciliation between audit and non-audit service fees is shown below: | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | 2006 | | | | | All figures in £ millions | | | | | Group audit fees including fees for attestation under section 404 of the Sarbanes-Oxley Act | | | 5 | | | | 4 | | | | 9 | | | Non-audit fees | | | 3 | | | | 3 | | | | 2 | | | | | | | | | | | | | | | | Total | | | 8 | | | | 7 | | | | 11 | | | | | | | | | | | | | | | |
Fees for attestation under section 404 of the transitionSarbanes-Oxley Act are allocated between fees payable for the audits of consolidated and subsidiary accounts. Tax services include services related to IFRStax planning and Sarbanes-Oxley section 404 compliance services. various other tax advisory matters. Other non-audit services were £700,000 (2004: £100,000; 2003: £400,000) and mainly relate toinclude due diligence work performed at IDC. Non-audit fees inon acquisitions and services related to the UK were £1.0m (2004: £1.0m; 2003: £300,000) and were in respect of tax advisory, tax compliance and other advisory services. The remainderdisposal of the non-audit fees related to overseas subsidiaries.Data Management business.
F-23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | Employee benefit expense | | | | | | | | | | | | | | Wages and salaries (including termination benefits and restructuring costs) | | | 1,088 | | | | 983 | | | | 988 | | | Social security costs | | | 101 | | | | 89 | | | | 87 | | | Share-based payment costs (note 24) | | | 23 | | | | 25 | | | | 29 | | | Pension costs — defined contribution plans (note 24) | | | 35 | | | | 32 | | | | 28 | | | Pension costs — defined benefit plans (note 24) | | | 25 | | | | 24 | | | | 23 | | | Other post-retirement benefits (note 24) | | | 1 | | | | 1 | | | | 1 | | | | | | | | | | | | | | | | | 1,273 | | | | 1,154 | | | | 1,156 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Notes | | | 2008 | | | 2007 | | | 2006 | | | | | | | | All figures in £ millions | | | | Employee benefit expense | | | | | | | | | | | | | | | | | | Wages and salaries (including termination benefits and restructuring costs) | | | | | | | 1,317 | | | | 1,087 | | | | 1,035 | | | Social security costs | | | | | | | 119 | | | | 100 | | | | 101 | | | Share-based payment costs | | | 26 | | | | 33 | | | | 30 | | | | 25 | | | Pension costs — defined contribution plans | | | 25 | | | | 41 | | | | 39 | | | | 36 | | | Pension costs — defined benefit plans | | | 25 | | | | 37 | | | | 31 | | | | 29 | | | Other post-retirement benefits | | | 25 | | | | 6 | | | | 1 | | | | (1 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,553 | | | | 1,288 | | | | 1,225 | | | | | | | | | | | | | | | | | | | |
The details of the emoluments of the directors of Pearson plc are shown in the report on pages 21 to 37.directors’ remuneration. | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (Average number employed) | | | School | | | 10,133 | | | | 10,403 | | | | 9,348 | | | Higher Education | | | 4,196 | | | | 4,087 | | | | 3,912 | | | Professional | | | 8,342 | | | | 7,491 | | | | 6,434 | | | Penguin | | | 4,051 | | | | 4,085 | | | | 4,318 | | | FT Publishing | | | 1,952 | | | | 1,989 | | | | 2,283 | | | IDC | | | 1,956 | | | | 1,826 | | | | 1,628 | | | Other | | | 1,573 | | | | 1,365 | | | | 928 | | | | | | | | | | | | | Continuing operations | | | 32,203 | | | | 31,246 | | | | 28,851 | | | | | | | | | | | | | Discontinued operations | | | — | | | | 1,840 | | | | 1,733 | | | | | | | | | | | | | | | | | 32,203 | | | | 33,086 | | | | 30,584 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | 2006 | | | | | Average number employed | | | | Employee numbers | | | | | | | | | | | | | | North American Education | | | 15,412 | | | | 14,327 | | | | 12,710 | | | International Education | | | 5,718 | | | | 5,291 | | | | 4,472 | | | Professional | | | 2,641 | | | | 2,540 | | | | 2,223 | | | FT Publishing | | | 2,379 | | | | 2,083 | | | | 1,766 | | | Interactive Data | | | 2,413 | | | | 2,300 | | | | 2,200 | | | Penguin | | | 4,112 | | | | 4,163 | | | | 3,943 | | | Other | | | 909 | | | | 918 | | | | 900 | | | | | | | | | | | | | | | | Continuing operations | | | 33,584 | | | | 31,622 | | | | 28,214 | | | | | | | | | | | | | | | | Discontinued operations | | | 96 | | | | 1,070 | | | | 6,127 | | | | | | | | | | | | | | | | | | | | 33,680 | | | | 32,692 | | | | 34,341 | | | | | | | | | | | | | | | |
F-24
F-24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Interest payable | | | (98 | ) | | | (91 | ) | | | (91 | ) | | Finance costs re employee benefits | | | (7 | ) | | | (5 | ) | | | (9 | ) | | Net foreign exchange losses | | | (9 | ) | | | — | | | | — | | | Other losses on financial instruments in a hedging relationship: | | | | | | | | | | | | | | — fair value hedges | | | (1 | ) | | | — | | | | — | | | — net investment hedges | | | — | | | | — | | | | — | | | Other losses on financial instruments not in a hedging relationship: | | | | | | | | | | | | | | — derivatives | | | (17 | ) | | | — | | | | — | | | | | | | | | | | | | Finance costs | | | (132 | ) | | | (96 | ) | | | (100 | ) | | | | | | | | | | | | | Interest receivable | | | 21 | | | | 17 | | | | 7 | | | Net foreign exchange gains | | | 21 | | | | — | | | | — | | | Other gains on financial instruments in a hedging relationship: | | | | | | | | | | | | | | — fair value hedges | | | 1 | | | | — | | | | — | | | — net investment hedges | | | 3 | | | | — | | | | — | | | Other gains on financial instruments not in a hedging relationship: | | | | | | | | | | | | | | — amortisation of transitional adjustment on bonds | | | 7 | | | | — | | | | — | | | — derivatives | | | 9 | | | | — | | | | — | | | | | | | | | | | | | Finance income | | | 62 | | | | 17 | | | | 7 | | | | | | | | | | | | | Net finance costs | | | (70 | ) | | | (79 | ) | | | (93 | ) | | | | | | | | | | | | Analysed as: | | | | | | | | | | | | | | Net interest payable | | | (77 | ) | | | (74 | ) | | | (84 | ) | | Finance costs re employee benefits | | | (7 | ) | | | (5 | ) | | | (9 | ) | | | | | | | | | | | | | Net finance costs reflected in adjusted earnings | | | (84 | ) | | | (79 | ) | | | (93 | ) | | Other net finance income | | | 14 | | | | — | | | | — | | | | | | | | | | | | | Total net finance costs | | | (70 | ) | | | (79 | ) | | | (93 | ) | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Notes | | | 2008 | | | 2007 | | | 2006 | | | | | | | | All figures in £ millions | | | | | Interest payable | | | | | | | (106 | ) | | | (114 | ) | | | (117 | ) | | Net foreign exchange losses | | | | | | | (11 | ) | | | (25 | ) | | | (2 | ) | | Other losses on financial instruments in a hedging relationship: | | | | | | | | | | | | | | | | | | — fair value hedges | | | | | | | (7 | ) | | | (1 | ) | | | — | | | — net investment hedges | | | | | | | — | | | | (1 | ) | | | (2 | ) | | Other losses on financial instruments not in a hedging relationship: | | | | | | | | | | | | | | | | | | — derivatives | | | | | | | (12 | ) | | | (9 | ) | | | (12 | ) | | | | | | | | | | | | | | | | | | | Finance costs | | | | | | | (136 | ) | | | (150 | ) | | | (133 | ) | | | | | | | | | | | | | | | | | | | | Interest receivable | | | | | | | 17 | | | | 19 | | | | 23 | | | Finance income in respect of employee benefits | | | 25 | | | | 8 | | | | 10 | | | | 4 | | | Net foreign exchange gains | | | | | | | — | | | | 8 | | | | 21 | | | Other gains on financial instruments in a hedging relationship: | | | | | | | | | | | | | | | | | | — fair value hedges | | | | | | | 2 | | | | — | | | | — | | | — net investment hedges | | | | | | | 1 | | | | — | | | | — | | | Other gains on financial instruments not in a hedging relationship: | | | | | | | | | | | | | | | | | | — amortisation of transitional adjustment on bonds | | | | | | | 1 | | | | 1 | | | | 8 | | | — derivatives | | | | | | | 16 | | | | 6 | | | | 3 | | | | | | | | | | | | | | | | | | | | Finance income | | | | | | | 45 | | | | 44 | | | | 59 | | | | | | | | | | | | | | | | | | | | Net finance costs | | | | | | | (91 | ) | | | (106 | ) | | | (74 | ) | | | | | | | | | | | | | | | | | | |
The £5m (2007: £1m) net loss on fair value hedges comprises a £156m (2007: £20m) loss on the underlying bonds offset by a £151m (2007: £19m) gain on the related derivative financial instruments. | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | Current tax | | | | | | | | | | | | | | Charge in respect of current year | | | (76 | ) | | | (65 | ) | | | (45 | ) | | Adjustments in respect of prior years | | | (1 | ) | | | 25 | | | | 13 | | | | | | | | | | | | | Total current tax charge | | | (77 | ) | | | (40 | ) | | | (32 | ) | | | | | | | | | | | | Deferred tax | | | | | | | | | | | | | | In respect of timing differences | | | (66 | ) | | | (46 | ) | | | (72 | ) | | Adjustments in respect of prior years | | | 19 | | | | 23 | | | | 43 | | | | | | | | | | | | | Total deferred tax charge (note 14) | | | (47 | ) | | | (23 | ) | | | (29 | ) | | | | | | | | | | | | Total tax charge | | | (124 | ) | | | (63 | ) | | | (61 | ) | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Notes | | | 2008 | | | 2007 | | | 2006 | | | | | | | | All figures in £ millions | | | | Current tax | | | | | | | | | | | | | | | | | | Charge in respect of current year | | | | | | | (89 | ) | | | (71 | ) | | | (81 | ) | | Recognition of previously unrecognised trading losses | | | | | | | — | | | | — | | | | 23 | | | Other adjustments in respect of prior years | | | | | | | 10 | | | | 27 | | | | 35 | | | | | | | | | | | | | | | | | | | | Total current tax charge | | | | | | | (79 | ) | | | (44 | ) | | | (23 | ) | | | | | | | | | | | | | | | | | | | Deferred tax | | | | | | | | | | | | | | | | | | In respect of timing differences | | | | | | | (97 | ) | | | (96 | ) | | | (73 | ) | | Recognition of previously unrecognised capital losses | | | | | | | — | | | | — | | | | 76 | | | Recognition of previously unrecognised trading losses | | | | | | | — | | | | — | | | | 37 | | | Other adjustments in respect of prior years | | | | | | | 4 | | | | 9 | | | | (21 | ) | | | | | | | | | | | | | | | | | | | Total deferred tax charge | | | 13 | | | | (93 | ) | | | (87 | ) | | | 19 | | | | | | | | | | | | | | | | | | | | Total tax charge | | | | | | | (172 | ) | | | (131 | ) | | | (4 | ) | | | | | | | | | | | | | | | | | | |
F-25
F-25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the UK tax rate as follows: | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Profit before tax | | | 466 | | | | 325 | | | | 313 | | | Tax calculated at UK rate | | | (140 | ) | | | (97 | ) | | | (94 | ) | | Effect of overseas tax rates | | | (22 | ) | | | (8 | ) | | | (6 | ) | | Joint venture and associate income reported net of tax | | | 5 | | | | 2 | | | | — | | | Income not subject to tax | | | 16 | | | | 6 | | | | 11 | | | Expenses not deductible for tax purposes | | | (9 | ) | | | (5 | ) | | | (7 | ) | | Utilisation of previously unrecognised tax losses | | | 11 | | | | 5 | | | | 15 | | | Unutilised tax losses | | | (3 | ) | | | (14 | ) | | | (36 | ) | | Prior year adjustments | | | 18 | | | | 48 | | | | 56 | | | | | | | | | | | | | Total tax charge | | | (124 | ) | | | (63 | ) | | | (61 | ) | | | | | | | | | | | | | UK | | | (26 | ) | | | 5 | | | | (13 | ) | | Overseas | | | (98 | ) | | | (68 | ) | | | (48 | ) | | | | | | | | | | | | Total tax charge | | | (124 | ) | | | (63 | ) | | | (61 | ) | | | | | | | | | | | | | Add back: tax benefit on other gains and losses | | | (4 | ) | | | (36 | ) | | | (35 | ) | | Add back: tax benefit on amortisation of acquired intangibles | | | (4 | ) | | | (2 | ) | | | (1 | ) | | Add back: tax charge on other finance income | | | 3 | | | | — | | | | — | | | | | | | | | | | | | | Adjusted income tax charge — continuing operations | | | (129 | ) | | | (101 | ) | | | (97 | ) | | Adjusted income tax charge — discontinued operations | | | 1 | | | | (7 | ) | | | (19 | ) | | | | | | | | | | | | Total adjusted income tax charge | | | (128 | ) | | | (108 | ) | | | (116 | ) | | | | | | | | | | | | Tax rate reflected in adjusted earnings | | | 30.3 | % | | | 30.9 | % | | | 32.5 | % | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | 2006 | | | | | All figures in £ millions | | | | | Profit before tax | | | 585 | | | | 468 | | | | 448 | | | Tax calculated at UK rate (2008: 28.5%, 2007: 30%) | | | (167 | ) | | | (141 | ) | | | (135 | ) | | Effect of overseas tax rates | | | (29 | ) | | | (25 | ) | | | (17 | ) | | Joint venture and associate income reported net of tax | | | 7 | | | | 7 | | | | 7 | | | Net expense not deductible for tax purposes | | | (1 | ) | | | (9 | ) | | | (13 | ) | | Utilisation of previously unrecognised tax losses | | | 4 | | | | 3 | | | | 7 | | | Recognition of previously unrecognised tax losses | | | — | | | | — | | | | 136 | | | Unutilised tax losses | | | — | | | | (2 | ) | | | (3 | ) | | Prior year adjustments | | | 14 | | | | 36 | | | | 14 | | | | | | | | | | | | | | | | Total tax charge | | | (172 | ) | | | (131 | ) | | | (4 | ) | | | | | | | | | | | | | | | | UK | | | (53 | ) | | | (42 | ) | | | (15 | ) | | Overseas | | | (119 | ) | | | (89 | ) | | | 11 | | | | | | | | | | | | | | | | Total tax charge | | | (172 | ) | | | (131 | ) | | | (4 | ) | | | | | | | | | | | | | | |
The tax benefit on items charged to equity is as follows: | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Deferred tax on stock options | | | 3 | | | | 4 | | | | — | | | Current tax on foreign exchange gains and losses | | | 9 | | | | 5 | | | | — | | | | | | | | | | | | | | | | | 12 | | | | 9 | | | | — | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | 2006 | | | | | All figures in £ millions | | | | | Share-based payments | | | (7 | ) | | | 7 | | | | 2 | | | Pension contributions and actuarial gains and losses | | | 10 | | | | 28 | | | | 9 | | | Net investment hedges and other foreign exchange gains and losses | | | (1 | ) | | | (6 | ) | | | 1 | | | | | | | | �� | | | | | | | | | | | | 2 | | | | 29 | | | | 12 | | | | | | | | | | | | | | | |
Basic Basic earnings per share is calculated by dividing the profit attributable to equity shareholders of the Companycompany by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the Companycompany and held as treasury shares.
F-26
Notes to the Consolidated Financial Statements (Continued) Diluted Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares to take account of all dilutive potential ordinary shares and adjusting the profit attributable, if applicable, to account for any tax consequences that might arise from conversion of those shares. F-26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Earnings | | | 624 | | | | 262 | | | | 252 | | | Adjustments to exclude profit for the year from discontinued operations: | | | | | | | | | | | | | | Profit for the year from discontinued operations | | | (302 | ) | | | (22 | ) | | | (23 | ) | | Minority interest share of above | | | — | | | | 5 | | | | 5 | | | | | | | | | | | | | Earnings — continuing operations | | | 322 | | | | 245 | | | | 234 | | | | | | | | | | | | | | Earnings | | | 624 | | | | 262 | | | | 252 | | | | | | | | | | | | | | Weighted average number of shares (millions) | | | 797.9 | | | | 795.6 | | | | 794.4 | | | Effect of dilutive share options (millions) | | | 1.1 | | | | 1.1 | | | | 0.9 | | | | | | | | | | | | | | Weighted average number of shares (millions) for diluted earnings | | | 799.0 | | | | 796.7 | | | | 795.3 | | | | | | | | | | | | | Earnings per share from continuing and discontinued operations | | | | | | | | | | | | | | Basic | | | 78.2 | p | | | 32.9 | p | | | 31.7 | p | | Diluted | | | 78.1 | p | | | 32.9 | p | | | 31.7 | p | | | | | | | | | | | | Earnings per share from continuing operations | | | | | | | | | | | | | | Basic | | | 40.4 | p | | | 30.8 | p | | | 29.4 | p | | Diluted | | | 40.3 | p | | | 30.8 | p | | | 29.4 | p | | | | | | | | | | | | Earnings per share from discontinued operations | | | | | | | | | | | | | | Basic | | | 37.8 | p | | | 2.1 | p | | | 2.3 | p | | Diluted | | | 37.8 | p | | | 2.1 | p | | | 2.3 | p | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Notes | | | 2008 | | | 2007 | | | 2006 | | | | | | | | All figures in £ millions | | | | | Profit for the year from continuing operations | | | | | | | 413 | | | | 337 | | | | 444 | | | Minority interest | | | | | | | (31 | ) | | | (26 | ) | | | (23 | ) | | | | | | | | | | | | | | | | | | | Earnings from continuing operations | | | | | | | 382 | | | | 311 | | | | 421 | | | | | | | | | | | | | | | | | | | | | (Loss)/profit for the year from discontinued operations | | | 3 | | | | (90 | ) | | | (27 | ) | | | 25 | | | | | | | | | | | | | | | | | | | | Earnings | | | | | | | 292 | | | | 284 | | | | 446 | | | | | | | | | | | | | | | | | | | | | Weighted average number of shares (millions) | | | | | | | 797.0 | | | | 796.8 | | | | 798.4 | | | Effect of dilutive share options (millions) | | | | | | | 0.5 | | | | 1.3 | | | | 1.5 | | | Weighted average number of shares (millions) for diluted earnings | | | | | | | 797.5 | | | | 798.1 | | | | 799.9 | | | | | | | | | | | | | | | | | | | | Earnings per share from continuing and discontinued operations | | | | | | | | | | | | | | | | | | Basic | | | | | | | 36.6p | | | | 35.6p | | | | 55.9p | | | Diluted | | | | | | | 36.6p | | | | 35.6p | | | | 55.8p | | | | | | | | | | | | | | | | | | | | Earnings per share from continuing operations | | | | | | | | | | | | | | | | | | Basic | | | | | | | 47.9p | | | | 39.0p | | | | 52.7p | | | Diluted | | | | | | | 47.9p | | | | 39.0p | | | | 52.6p | | | | | | | | | | | | | | | | | | | | Earnings per share from discontinued operations | | | | | | | | | | | | | | | | | | Basic | | | | | | | (11.3p | ) | | | (3.4p | ) | | | 3.2p | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Final paid in respect of prior year 15.7p (2004: 14.8p; 2003: 14.3p) | | | 125 | | | | 119 | | | | 115 | | | Interim paid in respect of current year 10p (2004: 9.7p; 2003: 9.4p) | | | 80 | | | | 76 | | | | 73 | | | | | | | | | | | | | | | | | 205 | | | | 195 | | | | 188 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | 2006 | | | | | All figures in £ millions | | | | | Final paid in respect of prior year 20.5p (2007: 18.8p; 2006: 17p) | | | 163 | | | | 150 | | | | 136 | | | Interim paid in respect of current year 11.8p (2007: 11.1p; 2006: 10.5p) | | | 94 | | | | 88 | | | | 84 | | | | | | | | | | | | | | | | | | | | 257 | | | | 238 | | | | 220 | | | | | | | | | | | | | | | |
The directors are proposing a final dividend in respect of the financial year endingended 31 December 20052008 of 17.0p22p per share which will absorb an estimated £136m£176m of shareholders’ funds. It will be paid on 58 May 20062009 to shareholders who are on the register of members on 714 April 2006.2009. These financial statements do not reflect this dividend payable (see note 34k).dividend.
F-27
F-27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
| | 1110. | Property, plant and equipment |
| | | | | | | | | | | | | | | | | | | | | | | | | Assets in | | | | | | | Land and | | | Plant and | | | course of | | | | | | | buildings | | | equipment | | | construction | | | Total | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | Cost | | | | | | | | | | | | | | | | | At 1 January 2003 | | | 319 | | | | 619 | | | | 20 | | | | 958 | | | Exchange differences | | | (19 | ) | | | (28 | ) | | | (3 | ) | | | (50 | ) | | Additions | | | 12 | | | | 52 | | | | 14 | | | | 78 | | | Disposals | | | (15 | ) | | | (55 | ) | | | — | | | | (70 | ) | | Acquisition through business combination | | | 5 | | | | 19 | | | | — | | | | 24 | | | Disposal through business disposal | | | (2 | ) | | | (6 | ) | | | — | | | | (8 | ) | | Reclassifications | | | 1 | | | | 9 | | | | (10 | ) | | | — | | | | | | | | | | | | | | | | At 31 December 2003 | | | 301 | | | | 610 | | | | 21 | | | | 932 | | | | | | | | | | | | | | | | | Exchange differences | | | (9 | ) | | | (10 | ) | | | (1 | ) | | | (20 | ) | | Additions | | | 14 | | | | 81 | | | | 8 | | | | 103 | | | Disposals | | | (13 | ) | | | (39 | ) | | | — | | | | (52 | ) | | Acquisition through business combination | | | 1 | | | | 4 | | | | — | | | | 5 | | | Disposal through business disposal | | | (4 | ) | | | — | | | | — | | | | (4 | ) | | Reclassifications | | | — | | | | 13 | | | | (13 | ) | | | — | | | Transfer to non-current assets held for sale | | | (14 | ) | | | (81 | ) | | | (2 | ) | | | (97 | ) | | | | | | | | | | | | | | | At 31 December 2004 | | | 276 | | | | 578 | | | | 13 | | | | 867 | | | | | | | | | | | | | | | | | Exchange differences | | | 18 | | | | 40 | | | | — | | | | 58 | | | Transfers | | | — | | | | 13 | | | | — | | | | 13 | | | Additions | | | 32 | | | | 41 | | | | 1 | | | | 74 | | | Disposals | | | (5 | ) | | | (28 | ) | | | — | | | | (33 | ) | | Acquisition through business combination | | | 3 | | | | 6 | | | | — | | | | 9 | | | Reclassifications | | | — | | | | 7 | | | | (7 | ) | | | — | | | | | | | | | | | | | | | | At 31 December 2005 | | | 324 | | | | 657 | | | | 7 | | | | 988 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Assets in
| | | | | | | | Land and
| | | Plant and
| | | course of
| | | | | | | | buildings | | | equipment | | | construction | | | Total | | | | | All figures in £ millions | | | | Cost | | | | | | | | | | | | | | | | | | At 1 January 2007 | | | 313 | | | | 631 | | | | 11 | | | | 955 | | | Exchange differences | | | (2 | ) | | | — | | | | — | | | | (2 | ) | | Additions | | | 20 | | | | 62 | | | | 11 | | | | 93 | | | Disposals | | | (24 | ) | | | (65 | ) | | | — | | | | (89 | ) | | Acquisition through business combination | | | — | | | | 27 | | | | — | | | | 27 | | | Disposal through business disposal | | | (1 | ) | | | (25 | ) | | | — | | | | (26 | ) | | Reclassifications | | | — | | | | 6 | | | | (6 | ) | | | — | | | Transfer to non-current assets held for sale | | | (8 | ) | | | (14 | ) | | | — | | | | (22 | ) | | | | | | | | | | | | | | | | | | | | At 31 December 2007 | | | 298 | | | | 622 | | | | 16 | | | | 936 | | | | | | | | | | | | | | | | | | | | | Exchange differences | | | 54 | | | | 138 | | | | 6 | | | | 198 | | | Additions | | | 6 | | | | 67 | | | | 6 | | | | 79 | | | Disposals | | | (7 | ) | | | (38 | ) | | | — | | | | (45 | ) | | Acquisition through business combination | | | 2 | | | | 29 | | | | 2 | | | | 33 | | | Reclassifications | | | 2 | | | | 21 | | | | (23 | ) | | | — | | | | | | | | | | | | | | | | | | | | At 31 December 2008 | | | 355 | | | | 839 | | | | 7 | | | | 1,201 | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Assets in
| | | | | | | | Land and
| | | Plant and
| | | course of
| | | | | | | | buildings | | | equipment | | | construction | | | Total | | | | | All figures in £ millions | | | | Depreciation | | | | | | | | | | | | | | | | | | At 1 January 2007 | | | (128 | ) | | | (479 | ) | | | — | | | | (607 | ) | | Exchange differences | | | — | | | | 1 | | | | — | | | | 1 | | | Charge for the year | | | (14 | ) | | | (54 | ) | | | — | | | | (68 | ) | | Disposals | | | 11 | | | | 63 | | | | — | | | | 74 | | | Acquisition through business combination | | | — | | | | (16 | ) | | | — | | | | (16 | ) | | Disposal through business disposal | | | — | | | | 20 | | | | — | | | | 20 | | | Transfer to non-current assets held for sale | | | 5 | | | | 10 | | | | — | | | | 15 | | | | | | | | | | | | | | | | | | | | | At 31 December 2007 | | | (126 | ) | | | (455 | ) | | | — | | | | (581 | ) | | | | | | | | | | | | | | | | | | | | Exchange differences | | | (30 | ) | | | (102 | ) | | | — | | | | (132 | ) | | Charge for the year | | | (19 | ) | | | (61 | ) | | | — | | | | (80 | ) | | Disposals | | | 6 | | | | 36 | | | | — | | | | 42 | | | Acquisition through business combination | | | (1 | ) | | | (26 | ) | | | — | | | | (27 | ) | | | | | | | | | | | | | | | | | | | At 31 December 2008 | | | (170 | ) | | | (608 | ) | | | — | | | | (778 | ) | | | | | | | | | | | | | | | | | | | Carrying amounts | | | | | | | | | | | | | | | | | | At 1 January 2007 | | | 185 | | | | 152 | | | | 11 | | | | 348 | | | At 31 December 2007 | | | 172 | | | | 167 | | | | 16 | | | | 355 | | At 31 December 2008 | | | 185 | | | | 231 | | | | 7 | | | | 423 | | | | | | | | | | | | | | | | | | | |
F-28
F-28
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | Assets in | | | | | | | Land and | | | Plant and | | | course of | | | | | | | buildings | | | equipment | | | construction | | | Total | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | Depreciation | | | | | | | | | | | | | | | | | | At 1 January 2003 | | | (104 | ) | | | (419 | ) | | | — | | | | (523 | ) | | Exchange differences | | | 10 | | | | 17 | | | | — | | | | 27 | | | Charge for the year | | | (16 | ) | | | (69 | ) | | | — | | | | (85 | ) | | Disposals | | | 7 | | | | 53 | | | | — | | | | 60 | | | Acquisition through business combination | | | — | | | | (14 | ) | | | — | | | | (14 | ) | | Disposal through business disposal | | | 1 | | | | 4 | | | | — | | | | 5 | | | | | | | | | | | | | | | | At 31 December 2003 | | | (102 | ) | | | (428 | ) | | | — | | | | (530 | ) | | | | | | | | | | | | | | | | Exchange differences | | | 4 | | | | 5 | | | | — | | | | 9 | | | Charge for the year | | | (16 | ) | | | (68 | ) | | | — | | | | (84 | ) | | Disposals | | | 6 | | | | 38 | | | | — | | | | 44 | | | Acquisition through business combination | | | — | | | | (4 | ) | | | — | | | | (4 | ) | | Disposal through business disposal | | | 4 | | | | — | | | | — | | | | 4 | | | Transfer to non-current assets held for sale | | | 2 | | | | 47 | | | | — | | | | 49 | | | | | | | | | | | | | | | | At 31 December 2004 | | | (102 | ) | | | (410 | ) | | | — | | | | (512 | ) | | | | | | | | | | | | | | | | Exchange differences | | | (7 | ) | | | (33 | ) | | | — | | | | (40 | ) | | Charge for the year | | | (17 | ) | | | (63 | ) | | | — | | | | (80 | ) | | Disposals | | | — | | | | 30 | | | | — | | | | 30 | | | Acquisition through business combination | | | — | | | | (2 | ) | | | — | | | | (2 | ) | | | | | | | | | | | | | | | At 31 December 2005 | | | (126 | ) | | | (478 | ) | | | — | | | | (604 | ) | | | | | | | | | | | | | | | Carrying amounts | | | | | | | | | | | | | | | | | | At 1 January 2003 | | | 215 | | | | 200 | | | | 20 | | | | 435 | | | At 31 December 2003 | | | 199 | | | | 182 | | | | 21 | | | | 402 | | | At 31 December 2004 | | | 174 | | | | 168 | | | | 13 | | | | 355 | | At 31 December 2005 | | | 198 | | | | 179 | | | | 7 | | | | 384 | | | | | | | | | | | | | | | |
Depreciation expense of £19m (2004: £17m; 2003: £15m)£12m (2007: £13m) has been included in the income statement in cost of goods sold, £7m (2004: £6m; 2003: £6m)£6m (2007: £5m) in distribution expenses and £54m (2004: £55m; 2003: £58m)£61m (2007: £50m) in administrative and other expenses. In 2004 £6m (2003: £6m) relatesThere was no depreciation expense relating to discontinued operations.operations in 2008 (2007: £3m). The Group leases certain equipment under a number of finance lease agreements. The net carrying amount of leased plant and equipment included within property, plant and equipment was £3m (2004: £3m; 2003: £5m)£7m (2007: £6m). F-29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Acquired | | | Other | | | Total | | | | | | | | | | | publishing | | | intangibles | | | intangibles | | | | | | | Goodwill | | | Software | | | rights | | | acquired | | | acquired | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | Cost | | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January 2003 | | | 3,610 | | | | 146 | | | | — | | | | — | | | | — | | | | 3,756 | | | Exchange differences | | | (275 | ) | | | (10 | ) | | | — | | | | — | | | | — | | | | (285 | ) | | Additions | | | 113 | | | | 26 | | | | — | | | | — | | | | — | | | | 139 | | | Disposals | | | (4 | ) | | | (2 | ) | | | — | | | | — | | | | — | | | | (6 | ) | | Acquisition through business combination | | | — | | | | — | | | | — | | | | 44 | | | | 44 | | | | 44 | | | | | | | | | | | | | | | | | | | | | | At 31 December 2003 | | | 3,444 | | | | 160 | | | | — | | | | 44 | | | | 44 | | | | 3,648 | | | | | | | | | | | | | | | | | | | | | | | Exchange differences | | | (201 | ) | | | (8 | ) | | | — | | | | (3 | ) | | | (3 | ) | | | (212 | ) | | Additions | | | 22 | | | | 24 | | | | — | | | | — | | | | — | | | | 46 | | | Disposals | | | (4 | ) | | | (11 | ) | | | — | | | | — | | | | — | | | | (15 | ) | | Acquisition through business combination | | | — | | | | — | | | | 10 | | | | 5 | | | | 15 | | | | 15 | | | Transfer to non-current assets held for sale | | | (101 | ) | | | — | | | | — | | | | — | | | | — | | | | (101 | ) | | | | | | | | | | | | | | | | | | | | | At 31 December 2004 | | | 3,160 | | | | 165 | | | | 10 | | | | 46 | | | | 56 | | | | 3,381 | | | | | | | | | | | | | | | | | | | | | | | Exchange differences | | | 345 | | | | 15 | | | | 2 | | | | 4 | | | | 6 | | | | 366 | | | Transfers | | | — | | | | (13 | ) | | | — | | | | — | | | | — | | | | (13 | ) | | Additions | | | 155 | | | | 24 | | | | — | | | | — | | | | — | | | | 179 | | | Disposals | | | (6 | ) | | | (10 | ) | | | — | | | | — | | | | — | | | | (16 | ) | | Acquisition through business combination | | | — | | | | — | | | | 56 | | | | 33 | | | | 89 | | | | 89 | | | | | | | | | | | | | | | | | | | | | | At 31 December 2005 | | | 3,654 | | | | 181 | | | | 68 | | | | 83 | | | | 151 | | | | 3,986 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Acquired
| | | | | | | | | | | | | | | | | | | | | | | customer
| | | Acquired
| | | Acquired
| | | Other
| | | | | | | | | | | | | | lists &
| | | trademarks
| | | publishing
| | | intangibles
| | | | | | | | Goodwill | | | Software | | | relationships | | | & brands | | | rights | | | acquired | | | Total | | | | | All figures in £ millions | | | | Cost | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January 2007 | | | 3,271 | | | | 201 | | | | 113 | | | | 26 | | | | 96 | | | | 53 | | | | 3,760 | | | Exchange differences | | | (4 | ) | | | (2 | ) | | | — | | | | 1 | | | | 3 | | | | — | | | | (2 | ) | | Additions — internal development | | | — | | | | 20 | | | | — | | | | — | | | | — | | | | — | | | | 20 | | | Additions — purchased | | | — | | | | 13 | | | | — | | | | — | | | | — | | | | — | | | | 13 | | | Disposals | | | (34 | ) | | | (19 | ) | | | (2 | ) | | | — | | | | (3 | ) | | | 2 | | | | (56 | ) | | Acquisition through business combination | | | 304 | | | | 4 | | | | 76 | | | | 35 | | | | 40 | | | | 44 | | | | 503 | | | Transfer to non-current assets held for sale | | | (194 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (194 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 31 December 2007 | | | 3,343 | | | | 217 | | | | 187 | | | | 62 | | | | 136 | | | | 99 | | | | 4,044 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exchange differences | | | 1,082 | | | | 71 | | | | 77 | | | | 24 | | | | 31 | | | | 62 | | | | 1,347 | | | Additions — internal development | | | — | | | | 29 | | | | — | | | | — | | | | — | | | | — | | | | 29 | | | Additions — purchased | | | — | | | | 16 | | | | — | | | | — | | | | — | | | | — | | | | 16 | | | Disposals | | | (8 | ) | | | (27 | ) | | | — | | | | — | | | | — | | | | — | | | | (35 | ) | | Acquisition through business combination | | | 153 | | | | 17 | | | | 77 | | | | 42 | | | | — | | | | 97 | | | | 386 | | | Disposal through business disposal | | | — | | | | (1 | ) | | | — | | | | — | | | | (2 | ) | | | — | | | | (3 | ) | | Transfer to Pre-publication | | | — | | | | (12 | ) | | | — | | | | — | | | | — | | | | — | | | | (12 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 31 December 2008 | | | 4,570 | | | | 310 | | | | 341 | | | | 128 | | | | 165 | | | | 258 | | | | 5,772 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-29
F-30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Acquired | | | Other | | | Total | | | | | | | | | | | publishing | | | intangibles | | | intangibles | | | | | | | Goodwill | | | Software | | | rights | | | acquired | | | acquired | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | Amortisation | | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January 2003 | | | — | | | | (75 | ) | | | — | | | | — | | | | — | | | | (75 | ) | | Exchange differences | | | — | | | | 7 | | | | — | | | | — | | | | — | | | | 7 | | | Charge for the year | | | — | | | | (28 | ) | | | — | | | | (4 | ) | | | (4 | ) | | | (32 | ) | | Disposals | | | — | | | | 2 | | | | — | | | | — | | | | — | | | | 2 | | | Acquisition through business combination | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | At 31 December 2003 | | | — | | | | (94 | ) | | | — | | | | (4 | ) | | | (4 | ) | | | (98 | ) | | | | | | | | | | | | | | | | | | | | | | Exchange differences | | | — | | | | 8 | | | | — | | | | 1 | | | | 1 | | | | 9 | | | Charge for the year | | | — | | | | (20 | ) | | | — | | | | (5 | ) | | | (5 | ) | | | (25 | ) | | Disposals | | | — | | | | 11 | | | | — | | | | — | | | | — | | | | 11 | | | Acquisition through business combination | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | At 31 December 2004 | | | — | | | | (95 | ) | | | — | | | | (8 | ) | | | (8 | ) | | | (103 | ) | | | | | | | | | | | | | | | | | | | | | | Exchange differences | | | — | | | | (10 | ) | | | — | | | | — | | | | — | | | | (10 | ) | | Charge for the year | | | — | | | | (18 | ) | | | (5 | ) | | | (6 | ) | | | (11 | ) | | | (29 | ) | | Disposals | | | — | | | | 10 | | | | — | | | | — | | | | — | | | | 10 | | | Acquisition through business combination | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | At 31 December 2005 | | | — | | | | (113 | ) | | | (5 | ) | | | (14 | ) | | | (19 | ) | | | (132 | ) | | | | | | | | | | | | | | | | | | | | | Carrying amounts | | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January 2003 | | | 3,610 | | | | 71 | | | | — | | | | — | | | | — | | | | 3,681 | | | At 31 December 2003 | | | 3,444 | | | | 66 | | | | — | | | | 40 | | | | 40 | | | | 3,550 | | | At 31 December 2004 | | | 3,160 | | | | 70 | | | | 10 | | | | 38 | | | | 48 | | | | 3,278 | | | | | | | | | | | | | | | | | | | | | | At 31 December 2005 | | | 3,654 | | | | 68 | | | | 63 | | | | 69 | | | | 132 | | | | 3,854 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Acquired
| | | | | | | | | | | | | | | | | | | | | | | customer
| | | Acquired
| | | Acquired
| | | Other
| | | | | | | | | | | | | | lists &
| | | trademarks
| | | publishing
| | | intangibles
| | | | | | | | Goodwill | | | Software | | | relationships | | | & brands | | | rights | | | acquired | | | Total | | | | | All figures in £ millions | | | | Amortisation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January 2007 | | | — | | | | (135 | ) | | | (15 | ) | | | (1 | ) | | | (15 | ) | | | (13 | ) | | | (179 | ) | | Exchange differences | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | 1 | | | | 2 | | | Charge for the year | | | — | | | | (25 | ) | | | (13 | ) | | | (3 | ) | | | (17 | ) | | | (12 | ) | | | (70 | ) | | Disposals | | | — | | | | 19 | | | | — | | | | — | | | | — | | | | — | | | | 19 | | | Acquisition through business combination | | | — | | | | (2 | ) | | | — | | | | — | | | | — | | | | — | | | | (2 | ) | | Transfer to non-current assets held for sale | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 31 December 2007 | | | — | | | | (142 | ) | | | (28 | ) | | | (4 | ) | | | (32 | ) | | | (24 | ) | | | (230 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exchange differences | | | — | | | | (50 | ) | | | (15 | ) | | | (3 | ) | | | (13 | ) | | | (12 | ) | | | (93 | ) | | Charge for the year | | | — | | | | (30 | ) | | | (24 | ) | | | (10 | ) | | | (25 | ) | | | (27 | ) | | | (116 | ) | | Disposals | | | — | | | | 27 | | | | — | | | | — | | | | — | | | | — | | | | 27 | | | Acquisition through business combination | | | — | | | | (13 | ) | | | — | | | | — | | | | — | | | | — | | | | (13 | ) | | Disposal through business disposal | | | — | | | | 1 | | | | — | | | | — | | | | 1 | | | | — | | | | 2 | | | Transfer to Pre-publication | | | — | | | | 4 | | | | — | | | | — | | | | — | | | | — | | | | 4 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 31 December 2008 | | | — | | | | (203 | ) | | | (67 | ) | | | (17 | ) | | | (69 | ) | | | (63 | ) | | | (419 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Carrying amounts | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January 2007 | | | 3,271 | | | | 66 | | | | 98 | | | | 25 | | | | 81 | | | | 40 | | | | 3,581 | | | At 31 December 2007 | | | 3,343 | | | | 75 | | | | 159 | | | | 58 | | | | 104 | | | | 75 | | | | 3,814 | | At 31 December 2008 | | | 4,570 | | | | 107 | | | | 274 | | | | 111 | | | | 96 | | | | 195 | | | | 5,353 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Goodwill The goodwill carrying value of £4,570m relates to acquisitions completed after 1 January 1998. Prior to 1 January 1998 all goodwill was written off to reserves on the date of acquisition. £3,309m of the carrying value relates to acquisitions completed between 1 January 1998 and 31 December 2002 and £1,261m relates to acquisitions completed after 1 January 2003 (the date of transition to IFRS). For acquisitions completed between 1 January 1998 and 31 December 2002 no value was ascribed to intangibles other than goodwill and the goodwill on each acquisition was amortised over a period of up to 20 years. On adoption of IFRS on 1 January 2003, the Group chose not to restate the goodwill balance and at that date the balance was frozen (i.e. amortisation ceased). If goodwill had been restated then a significant value would have been ascribed to other intangible assets, which would be subject to amortisation, and the carrying value of goodwill would be significantly lower. For acquisitions completed after 1 January 2003 value has been ascribed to other intangible assets, which are amortised, with only the remaining difference between the purchase price and the fair value of net assets acquired being allocated to goodwill. F-30
Notes to the Consolidated Financial Statements (Continued) Other intangible assets Other intangibles acquired include customer listscontent, technology and relationships, technology, trade names and trademarks.software rights. Amortisation of £4m (2004: £3m; 2003: £5m)£5m (2007: £3m) is included in the income statement in cost of salesgoods sold and £25m (2004: £22m; 2003: £27m)£111m (2007: £67m) in administrative and other expenses.
Impairment tests for cash-generating units containing goodwill Impairment tests have been carried out where appropriate as described below. The recoverable amount for each unit tested exceeds its carrying value. Goodwill is allocated to the Group’s14 cash-generating units identified according(CGUs) within the business segments as follows: | | | | | | | | | | | | | | | | | Notes | | | 2008 | | | 2007 | | | | | | | | All figures in £ millions | | | | | US School Curriculum | | | | | | | 937 | | | | 677 | | | US School Assessment and Information | | | | | | | 722 | | | | 414 | | | US Higher Education | | | | | | | 1,164 | | | | 839 | | | Canada | | | | | | | 173 | | | | 155 | | | International Education Publishing | | | | | | | 315 | | | | 270 | | | International Education Assessment and Testing | | | | | | | 241 | | | | 194 | | | Professional Publishing | | | | | | | 15 | | | | 10 | | | Professional Assessment and Testing | | | | | | | 254 | | | | 181 | | | | | | | | | | | | | | | | Pearson Education total | | | | | | | 3,821 | | | | 2,740 | | | | | | | | | | | | | | | | | Financial Times | | | | | | | 46 | | | | 12 | | | Mergermarket | | | | | | | 130 | | | | 126 | | | Interactive Data | | | | | | | 208 | | | | 147 | | | FT Group total | | | | | | | 384 | | | | 285 | | | Penguin US | | | | | | | 216 | | | | 155 | | | Penguin UK | | | | | | | 95 | | | | 111 | | | Pearson Australia | | | | | | | 54 | | | | 52 | | | | | | | | | | | | | | | | Penguin total | | | | | | | 365 | | | | 318 | | | | | | | | | | | | | | | | Total goodwill — continuing operations | | | | | | | 4,570 | | | | 3,343 | | | | | | | | | | | | | | | | | Goodwill held for sale | | | 31 | | | | — | | | | 96 | | | | | | | | | | | | | | | | Total goodwill | | | | | | | 4,570 | | | | 3,439 | | | | | | | | | | | | | | | |
During 2008, after the change in organisational structure the CGUs were reorganised and goodwill reallocated to the business segment. F-31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill has been allocated as follows:
| | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Higher Education | | | 1,106 | | | | 950 | | | | 1,007 | | | School Book | | | 861 | | | | 739 | | | | 783 | | | School Assessment and Testing | | | 271 | | | | 232 | | | | 246 | | | School Technology | | | 385 | | | | 330 | | | | 350 | | | Other Assessment and Testing | | | 245 | | | | 211 | | | | 223 | | | Other Government Solutions | | | 234 | | | | 201 | | | | 213 | | | Other Book | | | 70 | | | | 60 | | | | 63 | | | | | | | | | | | | | Pearson Education total | | | 3,172 | | | | 2,723 | | | | 2,885 | | | | | | | | | | | | | | Penguin US | | | 149 | | | | 122 | | | | 138 | | | Penguin UK | | | 146 | | | | 146 | | | | 146 | | | Pearson Australia | | | 45 | | | | 42 | | | | 44 | | | | | | | | | | | | | Penguin total | | | 340 | | | | 310 | | | | 328 | | | | | | | | | | | | | IDC | | | 138 | | | | 123 | | | | 127 | | | | | | | | | | | | | FT Publishing | | | 4 | | | | 4 | | | | 4 | | | | | | | | | | | | | Recoletos | | | — | | | | — | | | | 100 | | | | | | | | | | | | | Total goodwill | | | 3,654 | | | | 3,160 | | | | 3,444 | | | | | | | | | | | | |
The Group has adopted IFRS 3 ‘Business Combinations’ with effect from the date of transition to IFRS. In accordance with IFRS 3, goodwill is no longer amortised but rather tested for impairment on an annual basis. Goodwill has been allocated for impairment purposes to twelve cash generating units.units affected. The recoverable amount of each cash generating unitCGU is based on value in use calculations,calculations. Goodwill is tested for impairment annually. Other than goodwill there are no intangible assets with indefinite lives. The goodwill is generally denominated in the exceptioncurrency of IDC whichthe relevant cash flows and therefore the impairment review is assessed on a market value basis.not materially sensitive to exchange rate fluctuations.
Key assumptions The value in use calculations use cash flow projections based on financial budgets approved by management covering a five yearfive-year period. The key assumptions used by management in the value in use calculations were: Discount rate — The discount rate is based on the risk-free rate for government bonds, adjusted for a risk premium to reflect the increased risk in investing in equities. The risk premium adjustment is assessed for each specific CGU. The average pre-tax discount rates used are in the range of 10.2% to 11.7% for the Pearson
F-31
Notes to the Consolidated Financial Statements (Continued) Education businesses (2007: 10.5% to 12.0%), 10.8% to 20.5% for the FT Group businesses (2007: 10.4% to 17.2%) and 8.8% to 10.4% for the Penguin businesses (2007: 8.9% to 11.7%). Perpetuity growth rates — The cash flows subsequent to the approved budget period are based upon the long-term historic growth rates of the underlying territories in which the CGU operates and reflect the long-term growth prospects of the sectors in which the CGU operates. A perpetuity growth rate of 2.0% was used for all CGUs in 2008 (a range from 2.5% to 3.5% in 2007). The perpetuity growth rates are consistent with appropriate external sources for the relevant markets. Cash flow growth rates — The cash flow growth rates are derived from management’s latest estimates of forecast sales taking into consideration past experience of operating margins achieved in the CGU. Historically, such forecasts have been reasonably accurate. Sensitivities The Group’s impairment review is sensitive to a change in the key assumptions used, most notably the discount rates, the perpetuity growth rates and expected future cash flows. Based on the Group’s sensitivity analysis, a reasonably possible change in the discount rate or perpetuity growth rate could cause an impairment in either the US School Curriculum or Penguin UK CGUs. The fair value of US School Curriculum is 8% or approximately £77m above its carrying value, but an increase of 0.5 percentage points in the discount rate or a reduction of 0.6 percentage points in the perpetuity growth rate would cause the value in use to fall below the carrying value. The fair value of Penguin UK is 24% or approximately £44m above its carrying value, but an increase of 1.4 percentage points in the discount rate or a reduction of 1.7 percentage points in the perpetuity growth rate would cause the value in use to fall below the carrying value. | | | 12. | Discount rate — The discount rate is based on the risk-free rate for government bonds, adjusted for a risk premium to reflect the increased risk in investing in equities. The risk premium adjustment is assessed for each specific cash generating unit. The average pre-tax discount rates used are in the range of 8.5% to 11.5% for the Pearson Education businesses, 8% to 13% for the Penguin businesses and 8.5% to 11.5% for the FT Publishing businesses. | | | Perpetuity growth rates — The cash flows subsequent to the approval budget period are based upon the long-term historic growth rates of the underlying territories in which the cash generating unit operates and reflect the long-term growth prospects of the sectors in which the cash generating unit operates. The perpetuity growth rates used vary between 3.0% to 4.0%. The perpetuity growth rates are consistent with appropriate external sources for the relevant markets. | | | Cash flow growth rates — The cash flow growth rates are derived from forecast sales growth taking into consideration past experience of operating margins achieved in the cash generating unit. Historically, such forecasts have been reasonably accurate. |
The valuation of IDC is determined using an observable market price for each share. Other than goodwill there are no intangible assets with indefinite lives.
F-32
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | 13 | Investments in joint ventures and associates |
Joint ventures | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | | At beginning of year | | | 14 | | | | 12 | | | | 12 | | | Exchange differences | | | (3 | ) | | | 1 | | | | 4 | | | Share of loss after tax | | | (1 | ) | | | (5 | ) | | | (9 | ) | | Dividends | | | (4 | ) | | | (3 | ) | | | (2 | ) | | Additions or further investment | | | 6 | | | | 9 | | | | 7 | | | | | | | | | | | | | At end of year | | | 12 | | | | 14 | | | | 12 | | | | | | | | | | | | |
| | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | | At beginning of year | | | 11 | | | | 12 | | | Exchange differences | | | (4 | ) | | | — | | | Share of profit after tax | | | 6 | | | | 4 | | | Dividends | | | (5 | ) | | | (8 | ) | | Additions and further investment | | | 5 | | | | 3 | | | | | | | | | | | | At end of year | | | 13 | | | | 11 | | | | | | | | | | | |
Investments in joint ventures are accounted for byusing the equity method of accounting and are initially recognised at cost.
F-32
Notes to the Consolidated Financial Statements (Continued) The aggregate of the Group’s share in its joint ventures, none of which are individually significant, are as follows: | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | Assets | | | | | | | | | | | | | | Non-current assets | | | 3 | | | | 3 | | | | — | | | Current assets | | | 26 | | | | 19 | | | | 18 | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | Current liabilities | | | (17 | ) | | | (8 | ) | | | (6 | ) | | | | | | | | | | | | Net assets | | | 12 | | | | 14 | | | | 12 | | | | | | | | | | | | | | Income | | | 46 | | | | 37 | | | | 33 | | | Expenses | | | (47 | ) | | | (42 | ) | | | (42 | ) | | | | | | | | | | | | Loss after income tax | | | (1 | ) | | | (5 | ) | | | (9 | ) | | | | | | | | | | | |
| | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | Assets | | | | | | | | | | Non-current assets | | | 6 | | | | 3 | | | Current assets | | | 21 | | | | 23 | | | | | | | | | | | | Liabilities | | | | | | | | | | Current liabilities | | | (14 | ) | | | (15 | ) | | | | | | | | | | | Net assets | | | 13 | | | | 11 | | | | | | | | | | | | | Income | | | 36 | | | | 61 | | | Expenses | | | (30 | ) | | | (57 | ) | | | | | | | | | | | Profit after income tax | | | 6 | | | | 4 | | | | | | | | | | | |
Associates | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | | At beginning of year | | | 33 | | | | 52 | | | | 94 | | | Share of profit after tax | | | 15 | | | | 15 | | | | 13 | | | Dividends | | | (10 | ) | | | (9 | ) | | | (8 | ) | | Loan repayment | | | — | | | | — | | | | (2 | ) | | Additions | | | — | | | | 1 | | | | — | | | Disposals | | | (14 | ) | | | (24 | ) | | | (45 | ) | | Transfer to non-current assets held for sale | | | — | | | | (2 | ) | | | — | | | | | | | | | | | | | At end of year | | | 24 | | | | 33 | | | | 52 | | | | | | | | | | | | |
| | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | | At beginning of year | | | 9 | | | | 8 | | | Exchange differences | | | (5 | ) | | | (1 | ) | | Share of profit after tax | | | 19 | | | | 19 | | | Dividends | | | (16 | ) | | | (24 | ) | | Additions | | | — | | | | 1 | | | Distribution from associate in excess of carrying value | | | 6 | | | | 6 | | | Actuarial losses on retirement benefit obligations | | | (3 | ) | | | — | | | | | | | | | | | | At end of year | | | 10 | | | | 9 | | | | | | | | | | | |
Investments in associates at 31 December 2005 includeare accounted for using the equity method of accounting. There is no acquisition goodwill of £nil (2004: £6m; 2003: £7m). The share of profit after tax includes £nil (2004: £2m; 2003: £2m)relating to the Group’s investments in respect of discontinued operations. F-33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)associates.
The Group’s interests in its principal associates, all of which are unlisted, wereare as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | 2005 | | Country of incorporation | | | Interest held | | | Assets | | | Liabilities | | | Revenues | | | Profit | | | | | | | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | | The Economist Newspaper Ltd | | | England | | | | 50 | | | | 79 | | | | (67 | ) | | | 105 | | | | 12 | | | Other | | | | | | | | | | | 42 | | | | (30 | ) | | | 49 | | | | 3 | | | | | | | | | | | | | | | | | | | | | | Total | | | | | | | | | | | 121 | | | | (97 | ) | | | 154 | | | | 15 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | 2004 | | Country of incorporation | | | Interest held | | | Assets | | | Liabilities | | | Revenues | | | Profit | | | | | | | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | | The Economist Newspaper Ltd | | | England | | | | 50 | | | | 71 | | | | (62 | ) | | | 98 | | | | 11 | | | Other | | | | | | | | | | | 42 | | | | (18 | ) | | | 192 | | | | 4 | | | | | | | | | | | | | | | | | | | | | | Total | | | | | | | | | | | 113 | | | | (80 | ) | | | 290 | | | | 15 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | 2003 | | Country of incorporation | | | Interest held | | | Assets | | | Liabilities | | | Revenues | | | Profit | | | | | | | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | | The Economist Newspaper Ltd | | | England | | | | 50 | | | | 103 | | | | (101 | ) | | | 95 | | | | 9 | | | Other | | | | | | | | | | | 81 | | | | (31 | ) | | | 139 | | | | 4 | | | | | | | | | | | | | | | | | | | | | | Total | | | | | | | | | | | 184 | | | | (132 | ) | | | 234 | | | | 13 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | %
| | | | | | | | | | | | | | 2008 | | Country of incorporation | | | Interest held | | | Assets | | | Liabilities | | | Revenues | | | Profit | | | | | All figures in £ millions | | | | | The Economist Newspaper Ltd | | | England | | | | 50 | | | | 86 | | | | (86 | ) | | | 149 | | | | 16 | | | Other | | | | | | | | | | | 35 | | | | (25 | ) | | | 42 | | | | 3 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | | | | | | | | 121 | | | | (111 | ) | | | 191 | | | | 19 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | %
| | | | | | | | | | | | | | 2007 | | Country of incorporation | | | Interest held | | | Assets | | | Liabilities | | | Revenues | | | Profit | | | | | All figures in £ millions | | | | | The Economist Newspaper Ltd | | | England | | | | 50 | | | | 63 | | | | (63 | ) | | | 131 | | | | 15 | | | Other | | | | | | | | | | | 30 | | | | (21 | ) | | | 56 | | | | 4 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | | | | | | | | 93 | | | | (84 | ) | | | 187 | | | | 19 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The interest held in associates is equivalent to voting rights.
F-33
Notes to the Consolidated Financial Statements (Continued) | | 1413. | Deferred income tax |
| | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | Deferred tax assets | | | | | | | | | | | | | | Deferred tax asset to be recovered after more than 12 months | | | 343 | | | | 318 | | | | 313 | | | Deferred tax asset to be recovered within 12 months | | | 42 | | | | 41 | | | | 29 | | | | | | | | | | | | | | | | | 385 | | | | 359 | | | | 342 | | | | | | | | | | | | | Deferred tax liabilities | | | | | | | | | | | | | | Deferred tax liability to be settled after more than 12 months | | | (204 | ) | | | (139 | ) | | | (140 | ) | | Deferred tax liability to be settled within 12 months | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | (204 | ) | | | (139 | ) | | | (140 | ) | | | | | | | | | | | | Net deferred tax | | | 181 | | | | 220 | | | | 202 | | | | | | | | | | | | |
| | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | Deferred income tax assets | | | | | | | | | | Deferred income tax assets to be recovered after more than 12 months | | | 341 | | | | 262 | | | Deferred income tax assets to be recovered within 12 months | | | 31 | | | | 66 | | | | | | | | | | | | | | | | 372 | | | | 328 | | | | | | | | | | | | Deferred income tax liabilities | | | | | | | | | | Deferred income tax liabilities to be settled after more than 12 months | | | (447 | ) | | | (287 | ) | | Deferred income tax liabilities to be settled within 12 months | | | — | | | | — | | | | | | | | | | | | | | | | (447 | ) | | | (287 | ) | | | | | | | | | | | Net deferred income tax | | | (75 | ) | | | 41 | | | | | | | | | | | |
Deferred income tax assets to be recovered within 12 months relate to the utilisation of losses in the US. Deferred income tax assets and liabilities may be offset when there is a legally enforceable right to offset current tax assets against current income tax liabilities and when the deferred income taxes relate to the same fiscal authority. The Group has unprovidedunrecognised deferred income tax assets at 31 December 20052008 in respect of UK losses (£32m) and US losses (£37m) and has not recognised aof £28m (2007: £34m). None of these unrecognised deferred income tax asset on the net pension deficit on the basis that it is not sufficiently certain that suitable future profits will arise against which to offset the liability. The related unprovided deferred tax asset is £96m.assets have expiry dates associated with them. The recognition of the deferred income tax assets is supported by management’s forecasts of the future profitability of the relevant business units. F-34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The gross movement on the net deferred income tax account is as follows: | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ | | | | | millions) | | | At beginning of year | | | 220 | | | | 202 | | | | 255 | | | Transition adjustment on adoption of IAS 39 | | | 5 | | | | — | | | | — | | | Exchange differences | | | 21 | | | | (13 | ) | | | (34 | ) | | Acquisition through business combination | | | (21 | ) | | | — | | | | (15 | ) | | Transfer between current and deferred taxation | | | — | | | | 41 | | | | 25 | | | Income statement charge (note 8) | | | (47 | ) | | | (23 | ) | | | (29 | ) | | Tax benefit to equity (note 8) | | | 3 | | | | 4 | | | | — | | | Transfer to non-current assets held for sale | | | — | | | | 9 | | | | — | | | | | | | | | | | | | At end of year | | | 181 | | | | 220 | | | | 202 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Notes | | | 2008 | | | 2007 | | | | | | | | All figures in £ millions | | | | | At beginning of year | | | | | | | 41 | | | | 172 | | | Exchange differences | | | | | | | (12 | ) | | | (4 | ) | | Income statement charge | | | 7 | | | | (93 | ) | | | (87 | ) | | Acquisition through business combination | | | 30 | | | | (4 | ) | | | (45 | ) | | Disposal through business disposal | | | 32 | | | | — | | | | 2 | | | Tax (charge)/benefit to equity | | | | | | | (7 | ) | | | 3 | | | | | | | | | | | | | | | | At end of year | | | | | | | (75 | ) | | | 41 | | | | | | | | | | | | | | | |
F-34
Notes to the Consolidated Financial Statements (Continued) The movement in deferred income tax assets and liabilities during the year is as follows: | | | | | | | | | | | | | | | | | | | | | | | Goodwill | | | | | | | | | Tax | | | and | | | | | | | | | losses | | | intangibles | | | Other | | | Total | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | Deferred income tax assets | | | | | | | | | | | | | | | | | | At 1 January 2003 | | | 131 | | | | 57 | | | | 186 | | | | 374 | | | Exchange differences | | | (16 | ) | | | (4 | ) | | | (22 | ) | | | (42 | ) | | Transfer between current and deferred taxation | | | 25 | | | | — | | | | (17 | ) | | | 8 | | | Income statement (charge)/release | | | (27 | ) | | | (7 | ) | | | 36 | | | | 2 | | | | | | | | | | | | | | | | At 31 December 2003 | | | 113 | | | | 46 | | | | 183 | | | | 342 | | | | | | | | | | | | | | | | | Exchange differences | | | (10 | ) | | | (3 | ) | | | (11 | ) | | | (24 | ) | | Transfer between current and deferred taxation | | | 41 | | | | — | | | | (11 | ) | | | 30 | | | Income statement release/(charge) | | | 6 | | | | (6 | ) | | | 7 | | | | 7 | | | Tax benefit to equity | | | — | | | | — | | | | 4 | | | | 4 | | | | | | | | | | | | | | | | At 31 December 2004 | | | 150 | | | | 37 | | | | 172 | | | | 359 | | | | | | | | | | | | | | | | | Transition adjustment on adoption of IAS 39 | | | — | | | | — | | | | 5 | | | | 5 | | | Exchange differences | | | 16 | | | | 4 | | | | 18 | | | | 38 | | | Acquisition through business combination | | | — | | | | — | | | | 1 | | | | 1 | | | Transfer between current and deferred taxation | | | — | | | | — | | | | 23 | | | | 23 | | | Income statement charge | | | (32 | ) | | | (6 | ) | | | (6 | ) | | | (44 | ) | | Tax benefit to equity | | | — | | | | — | | | | 3 | | | | 3 | | | | | | | | | | | | | | | | At 31 December 2005 | | | 134 | | | | 35 | | | | 216 | | | | 385 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital
| | | Trading
| | | Goodwill and
| | | Returns
| | | | | | | | | | | losses | | | losses | | | intangibles | | | provisions | | | Other | | | Total | | | | | All figures in £ millions | | | | Deferred income tax assets | | | | | | | | | | | | | | | | | | | | | | | | | | At 1 January 2007 | | | 76 | | | | 129 | | | | 25 | | | | 66 | | | | 121 | | | | 417 | | | Exchange differences | | | — | | | | (5 | ) | | | — | | | | (1 | ) | | | (2 | ) | | | (8 | ) | | Acquisition through business combination | | | — | | | | 10 | | | | — | | | | — | | | | 1 | | | | 11 | | | Income statement (charge)/benefit | | | (76 | ) | | | (47 | ) | | | (5 | ) | | | 14 | | | | 19 | | | | (95 | ) | | Tax benefit to equity | | | — | | | | — | | | | — | | | | — | | | | 3 | | | | 3 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | At 31 December 2007 | | | — | | | | 87 | | | | 20 | | | | 79 | | | | 142 | | | | 328 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exchange differences | | | — | | | | 19 | | | | 6 | | | | 28 | | | | 40 | | | | 93 | | | Acquisition through business combination | | | — | | | | 2 | | | | — | | | | — | | | | — | | | | 2 | | | Income statement charge | | | — | | | | (35 | ) | | | (6 | ) | | | (1 | ) | | | (3 | ) | | | (45 | ) | | Tax charge to equity | | | — | | | | — | | | | — | | | | — | | | | (6 | ) | | | (6 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | At 31 December 2008 | | | — | | | | 73 | | | | 20 | | | | 106 | | | | 173 | | | | 372 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other deferred income tax assets include temporary differences on share-based payments, inventory, sales returnsretirement benefit obligations and other provisions. F-35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | Goodwill and | | | | | | | | | intangibles | | | Other | | | Total | | | | | | | | | | | | | | | | (All figures in £ millions) | | Deferred income tax liabilities | | | | | | | | | | | | | | At 1 January 2003 | | | (25 | ) | | | (94 | ) | | | (119 | ) | | Exchange differences | | | — | | | | 8 | | | | 8 | | | Acquisition through business combination | | | (15 | ) | | | — | | | | (15 | ) | | Transfer between current and deferred taxation | | | — | | | | 17 | | | | 17 | | | Income statement charge | | | (19 | ) | | | (12 | ) | | | (31 | ) | | | | | | | | | | | | At 31 December 2003 | | | (59 | ) | | | (81 | ) | | | (140 | ) | | | | | | | | | | | | | Exchange differences | | | 8 | | | | 3 | | | | 11 | | | Transfer between current and deferred taxation | | | — | | | | 11 | | | | 11 | | | Income statement charge | | | (8 | ) | | | (22 | ) | | | (30 | ) | | Transfer to non-current assets held for sale | | | — | | | | 9 | | | | 9 | | | | | | | | | | | | | At 31 December 2004 | | | (59 | ) | | | (80 | ) | | | (139 | ) | | | | | | | | | | | | | Exchange differences | | | (8 | ) | | | (9 | ) | | | (17 | ) | | Acquisition through business combination | | | (24 | ) | | | 2 | | | | (22 | ) | | Transfer between current and deferred taxation | | | — | | | | (23 | ) | | | (23 | ) | | Income statement (charge)/release | | | (26 | ) | | | 23 | | | | (3 | ) | | | | | | | | | | | | At 31 December 2005 | | | (117 | ) | | | (87 | ) | | | (204 | ) | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Goodwill and
| | | | | | | | | | | intangibles | | | Other | | | Total | | | | | All figures in £ millions | | | | Deferred income tax liabilities | | | | | | | | | | | | | | At 1 January 2007 | | | (149 | ) | | | (96 | ) | | | (245 | ) | | Exchange differences | | | 3 | | | | 1 | | | | 4 | | | Acquisition through business combination | | | (56 | ) | | | — | | | | (56 | ) | | Disposal through business disposal | | | — | | | | 2 | | | | 2 | | | Income statement (charge)/benefit | | | (12 | ) | | | 20 | | | | 8 | | | Tax benefit to equity | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | At 31 December 2007 | | | (214 | ) | | | (73 | ) | | | (287 | ) | | | | | | | | | | | | | | | | Exchange differences | | | (73 | ) | | | (32 | ) | | | (105 | ) | | Acquisition through business combination | | | (5 | ) | | | (1 | ) | | | (6 | ) | | Income statement charge | | | (26 | ) | | | (22 | ) | | | (48 | ) | | Tax charge to equity | | | — | | | | (1 | ) | | | (1 | ) | | | | | | | | | | | | | | | At 31 December 2008 | | | (318 | ) | | | (129 | ) | | | (447 | ) | | | | | | | | | | | | | | |
Other deferred income tax liabilities include temporary differences on capital allowancesin respect of depreciation and royalty advances.
F-35
Notes to the Consolidated Financial Statements (Continued) | | 1514. | OtherClassification of financial assetsinstruments |
| | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ | | | | | millions) | | | At beginning of year | | | 15 | | | | 21 | | | | 22 | | | Exchange differences | | | 1 | | | | (1 | ) | | | (3 | ) | | Additions | | | 4 | | | | 5 | | | | 3 | | | Disposals | | | (2 | ) | | | (8 | ) | | | (1 | ) | | Transfer to non-current assets held for sale | | | — | | | | (2 | ) | | | — | | | | | | | | | | | | | At end of year | | | 18 | | | | 15 | | | | 21 | | | | | | | | | | | | |
Other The accounting classification of each class of the Group’s financial assets are non-current unlisted securities.and financial liabilities, together with their fair values, is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2008 | | | | | | | | Fair value | | | | | | | | | | | | | | | | | | | | | | | Derivatives
| | | Derivatives
| | | Amortised cost | | | Total
| | | Total
| | | | | | | | Available
| | | deemed held
| | | in hedging
| | | Loans and
| | | Other
| | | carrying
| | | market
| | | | | Notes | | | for sale | | | for trading | | | relationships | | | receivables | | | liabilities | | | value | | | value | | | | | | | | All figures in £ millions | | | | | Investments in unlisted securities | | | 15 | | | | 63 | | | | — | | | | — | | | | — | | | | — | | | | 63 | | | | 63 | | | Cash and cash equivalents | | | 17 | | | | — | | | | — | | | | — | | | | 685 | | | | — | | | | 685 | | | | 685 | | | Marketable securities | | | | | | | 54 | | | | — | | | | — | | | | — | | | | | | | | 54 | | | | 54 | | | Derivative financial instruments | | | 16 | | | | — | | | | 23 | | | | 161 | | | | — | | | | — | | | | 184 | | | | 184 | | | Trade receivables | | | 22 | | | | — | | | | — | | | | — | | | | 1,030 | | | | — | | | | 1,030 | | | | 1,030 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total financial assets | | | | | | | 117 | | | | 23 | | | | 161 | | | | 1,715 | | | | — | | | | 2,016 | | | | 2,016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivative financial instruments | | | 16 | | | | — | | | | (20 | ) | | | — | | | | — | | | | — | | | | (20 | ) | | | (20 | ) | | Trade payables | | | 24 | | | | — | | | | — | | | | — | | | | — | | | | (450 | ) | | | (450 | ) | | | (450 | ) | | Bank loans and overdrafts | | | 18 | | | | — | | | | — | | | | — | | | | — | | | | (228 | ) | | | (228 | ) | | | (228 | ) | | Borrowings due within one year | | | 18 | | | | — | | | | — | | | | — | | | | — | | | | (248 | ) | | | (248 | ) | | | (247 | ) | | Borrowings due after more than one year | | | 18 | | | | — | | | | — | | | | — | | | | — | | | | (1,887 | ) | | | (1,887 | ) | | | (1,620 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total financial liabilities | | | | | | | — | | | | (20 | ) | | | — | | | | — | | | | (2,813 | ) | | | (2,833 | ) | | | (2,565 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-36
F-36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2007 | | | | | | | | Fair value | | | | | | | | | | | | | | | | | | | | | | | Derivatives
| | | Derivatives
| | | Amortised cost | | | Total
| | | Total
| | | | | | | | Available
| | | deemed held
| | | in hedging
| | | Loans and
| | | Other
| | | carrying
| | | market
| | | | | Notes | | | for sale | | | for trading | | | relationships | | | receivables | | | liabilities | | | value | | | value | | | | | All figures in £ millions | | | | | Investments in unlisted securities | | | 15 | | | | 52 | | | | — | | | | — | | | | — | | | | — | | | | 52 | | | | 52 | | | Cash and cash equivalents | | | 17 | | | | — | | | | — | | | | — | | | | 560 | | | | — | | | | 560 | | | | 560 | | | Marketable securities | | | | | | | 40 | | | | — | | | | — | | | | — | | | | — | | | | 40 | | | | 40 | | | Derivative financial instruments | | | 16 | | | | — | | | | 16 | | | | 35 | | | | — | | | | — | | | | 51 | | | | 51 | | | Trade receivables | | | 22 | | | | — | | | | — | | | | — | | | | 750 | | | | — | | | | 750 | | | | 750 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total financial assets | | | | | | | 92 | | | | 16 | | | | 35 | | | | 1,310 | | | | — | | | | 1,453 | | | | 1,453 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivative financial instruments | | | 16 | | | | — | | | | (8 | ) | | | (8 | ) | | | — | | | | — | | | | (16 | ) | | | (16 | ) | | Trade payables | | | 24 | | | | — | | | | — | | | | — | | | | — | | | | (342 | ) | | | (342 | ) | | | (342 | ) | | Bank loans and overdrafts | | | 18 | | | | — | | | | — | | | | — | | | | — | | | | (444 | ) | | | (444 | ) | | | (444 | ) | | Borrowings due within one year | | | 18 | | | | — | | | | — | | | | — | | | | — | | �� | | (115 | ) | | | (115 | ) | | | (112 | ) | | Borrowings due after more than one year | | | 18 | | | | — | | | | — | | | | — | | | | — | | | | (1,049 | ) | | | (1,049 | ) | | | (1,046 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total financial liabilities | | | | | | | — | | | | (8 | ) | | | (8 | ) | | | — | | | | (1,950 | ) | | | (1,966 | ) | | | (1,960 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Certain of the Group’s derivative financial instruments are deemed to be held for trading either as they do not meet the hedge accounting criteria specified in IAS 39 or the Group has chosen not to seek hedge accounting for these instruments. None of these derivatives are held for speculative trading purposes. Transactions in derivative financial instruments are only undertaken to manage risks arising from underlying business activity, in accordance with the Group’s treasury policy as described in note 19. The Group designates certain qualifying derivative financial instruments as hedges of the fair value of its bonds (fair value hedges). Changes in the fair value of these derivative financial instruments are recorded in the income statement, together with any change in the fair value of the hedged liability attributable to the hedged risk. The Group also designates certain of its borrowings and derivative financial instruments as hedges of its investments in foreign operations (net investment hedges). Movements in the fair value of these financial instruments (to the extent they are effective) are recognised in equity. None of the Group’s financial assets or liabilities are designated at fair value through the income statement upon initial recognition. More detail on the Group’s accounting for financial instruments is included in the Group’s accounting policies. The Group’s approach to managing risks in relation to financial instruments is included in note 19: Financial instruments and risk management. F-37
Notes to the Consolidated Financial Statements (Continued) | | 1615. | Other financial assets |
| | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | | At beginning of year | | | 52 | | | | 17 | | | Exchange differences | | | 18 | | | | — | | | Acquisition of investments | | | 1 | | | | — | | | Disposal of investments | | | (8 | ) | | | — | | | Equity interest received on sale of Government Solutions | | | — | | | | 35 | | | | | | | | | | | | At end of year | | | 63 | | | | 52 | | | | | | | | | | | |
Other financial assets comprise non-current unlisted securities. | | | 16. | Derivative financial instruments |
| | | | | | | | | | | | | 2005 | | | 2005 | | | | | Assets | | | Liabilities | | | | | | | | | | | | | (All figures in £ | | | | | millions) | | | Interest rate derivatives — in a fair value hedging relationship | | | 31 | | | | (16 | ) | | Interest rate derivatives — not in a hedging relationship | | | 18 | | | | (6 | ) | | Cross currency rate derivatives — in a net investment hedging relationship | | | 13 | | | | — | | | Cross currency rate derivatives — not in a hedging relationship | | | 21 | | | | — | | | | | | | | | | | | | | 83 | | | | (22 | ) | | | | | | | | | Analysed as: | | | | | | | | | | Non-current | | | 79 | | | | (22 | ) | | Current (expiring in less than 1 year) | | | 4 | | | | — | | | | | | | | | | | | | | 83 | | | | (22 | ) | | | | | | | | |
The fairGroup’s approach to the management of financial risks is set out in note 19. The Group’s outstanding derivative financial instruments are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | | | Gross notional
| | | | | | | | | Gross notional
| | | | | | | | | | | amounts | | | Assets | | | Liabilities | | | amounts | | | Assets | | | Liabilities | | | | | All figures in £ millions | | | | | Interest rate derivatives — in a fair value hedge relationship | | | 1,232 | | | | 161 | | | | — | | | | 522 | | | | 18 | | | | (8 | ) | | Interest rate derivatives — not in a hedge relationship | | | 1,033 | | | | 23 | | | | (20 | ) | | | 796 | | | | 7 | | | | (8 | ) | | Cross currency rate derivatives — in a net investment hedge relationship | | | — | | | | — | | | | — | | | | 100 | | | | 17 | | | | — | | | Cross currency rate derivatives — not in a hedge relationship | | | — | | | | — | | | | — | | | | 50 | | | | 9 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 2,265 | | | | 184 | | | | (20 | ) | | | 1,468 | | | | 51 | | | | (16 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Analysed as expiring: | | | | | | | | | | | | | | | | | | | | | | | | | | In less than one year | | | 487 | | | | 3 | | | | (5 | ) | | | 320 | | | | 28 | | | | — | | | Later than one year and not later than five years | | | 859 | | | | 47 | | | | (15 | ) | | | 796 | | | | 13 | | | | (8 | ) | | Later than five years | | | 919 | | | | 134 | | | | — | | | | 352 | | | | 10 | | | | (8 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 2,265 | | | | 184 | | | | (20 | ) | | | 1,468 | | | | 51 | | | | (16 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | |
The carrying value of the above derivative financial instruments isequals their fair value. Fair values are determined by using market data and the sameuse of established estimation techniques such as the carrying value.discounted cash flow and option valuation models. At the end of 2008, the currency split of themark-to-market values of rate derivatives, including the exchange of principal on cross currency rate derivatives, was US dollar £161m and sterling £3m (2007: US dollar £(119)m and sterling £154m). The fixed interest rates on outstanding rate derivative contracts at the end of 2008 range from 4.45% to 7.0% (2007: 4.45% to 7.00%) and the floating rates are based on LIBOR in US dollar and sterling.
F-38
Notes to the Consolidated Financial Statements (Continued) The Group’s portfolio of rate derivatives is diversified by maturity, counterparty and type. Natural offsets between transactions within the portfolio and the designation of certain derivatives as hedges significantly reducesreduce the risk of income statement volatility. The sensitivity of the portfolio to changes in market rates is set out in note 19. Counterparty exposure from all derivatives is managed, together with that from deposits and bank account balances, within credit limits that reflect published credit ratings and by reference to other market measures (e.g. market prices for credit default swaps) to ensure that there is no significant risk to any one counterparty. No single derivative transaction had a market value (positive or negative) at the balance sheet date that exceeded 3% of the Group’s consolidated total equity. At the year end the Group had received an amount of £43m equivalent as collateral under amark-to-market agreement. This reflected the amount, at market rates prevailing at the end of October 2005, owed to the Group by the counterparty for a set of three related derivatives. Under these the Group is due to exchange $209m for€204m in February 2007. There are no restrictions on the Group’s use of these funds, which have been recorded in borrowings as a current bank loan. In accordance with IAS 39 ‘Financial Instruments: Recognition and Measurement’, the Group has reviewed all of its material contracts for embedded derivatives that are required to be separately accounted for if they do not meet certain requirements, and has concluded that there are no material embedded derivatives. F-37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | 1717. | Intangible assets — pre-publication |
| | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | Cost | | | | | | | | | | | | | | At beginning of year | | | 1,109 | | | | 1,104 | | | | 1,189 | | | Exchange differences | | | 112 | | | | (63 | ) | | | (90 | ) | | Acquisition through business combination | | | 27 | | | | — | | | | — | | | Additions | | | 222 | | | | 181 | | | | 173 | | | Disposals | | | (113 | ) | | | (113 | ) | | | (168 | ) | | | | | | | | | | | | At end of year | | | 1,357 | | | | 1,109 | | | | 1,104 | | | | | | | | | | | | | Amortisation | | | | | | | | | | | | | | At beginning of year | | | (753 | ) | | | (742 | ) | | | (809 | ) | | Exchange differences | | | (87 | ) | | | 44 | | | | 57 | | | Acquisition through business combination | | | (12 | ) | | | — | | | | — | | | Charge for the year | | | (192 | ) | | | (168 | ) | | | (158 | ) | | Disposals | | | 113 | | | | 113 | | | | 168 | | | | | | | | | | | | | At end of year | | | (931 | ) | | | (753 | ) | | | (742 | ) | | | | | | | | | | | | Carrying amounts | | | | | | | | | | | | | At end of year | | | 426 | | | | 356 | | | | 362 | | | | | | | | | | | | |
Amortisation is included in the income statement in cost of goods sold.
| | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Raw materials | | | 23 | | | | 23 | | | | 19 | | | Work in progress | | | 43 | | | | 35 | | | | 30 | | | Finished goods | | | 307 | | | | 256 | | | | 270 | | | | | | | | | | | | | | | | | 373 | | | | 314 | | | | 319 | | | | | | | | | | | | |
The cost of inventories recognised as an expense and included in the income statement in cost of goods sold amounted to £768m (2004: £700m; 2003: £710m). In 2005 £42m (2004: £41m; 2003: £37m) of inventory provisions were charged in the income statement. None of the inventory is pledged as security.
F-38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | 19 | Trade and other receivables |
| | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | Current | | | | | | | | | | | | | | Trade receivables | | | 825 | | | | 725 | | | | 814 | | | Royalty advances | | | 124 | | | | 114 | | | | 110 | | | Prepayments and accrued income | | | 38 | | | | 41 | | | | 38 | | | Other receivables | | | 42 | | | | 51 | | | | 62 | | | Receivables from related parties | | | 2 | | | | 2 | | | | 1 | | | | | | | | | | | | | | | | | 1,031 | | | | 933 | | | | 1,025 | | | | | | | | | | | | | Non-current | | | | | | | | | | | | | | Royalty advances | | | 67 | | | | 70 | | | | 83 | | | Prepayments and accrued income | | | 4 | | | | 1 | | | | 1 | | | Other receivables | | | 37 | | | | 31 | | | | 16 | | | | | | | | | | | | | | | | | 108 | | | | 102 | | | | 100 | | | | | | | | | | | | |
Trade receivables are stated net of provisions for bad and doubtful debts and sales returns of £313m (2004: £354m; 2003: £339m). The carrying amounts are stated at their fair value. Concentrations of credit risk with respect to trade receivables are limited due to the Group’s large number of customers, who are internationally dispersed.
| | 20 | Cash and cash equivalents (excluding overdrafts) |
| | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Cash at bank and in hand | | | 393 | | | | 338 | | | | 302 | | | Short-term bank deposits | | | 509 | | | | 123 | | | | 249 | | | | | | | | | | | | | | | | | 902 | | | | 461 | | | | 551 | | | | | | | | | | | | |
| | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | | Cash at bank and in hand | | | 528 | | | | 439 | | | Short-term bank deposits | | | 157 | | | | 121 | | | | | | | | | | | | | | | | 685 | | | | 560 | | | | | | | | | | | |
Short-term bank deposits are invested with banks and earn interest at the prevailing short-term deposit rates. The At the end of 2008 the currency split of cash and cash equivalents in 2005 is 31%was US dollars (2004: 38%36% (2007: 37%), 38% Sterling (2004: 31%sterling 22% (2007: 29%), 24% Euro (2004: 12%euros 20% (2007: 16%) and other 7% (2004: 19%22% (2007: 18%). The fair value of cash Cash and cash equivalents is the same as thehave fair values that approximate to their carrying value.amounts due to their short-term nature. Cash and cash equivalents include the following for the purpose of the cash flow statement: | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Cash and cash equivalents | | | 902 | | | | 461 | | | | 551 | | | Cash and cash equivalents included in assets classified as held for sale | | | — | | | | 141 | | | | — | | | Bank overdrafts | | | (58 | ) | | | (58 | ) | | | (23 | ) | | | | | | | | | | | | | | | | 844 | | | | 544 | | | | 528 | | | | | | | | | | | | |
| | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | | Cash and cash equivalents | | | 685 | | | | 560 | | | Bank overdrafts | | | (96 | ) | | | (68 | ) | | | | | | | | | | | | | | | 589 | | | | 492 | | | | | | | | | | | |
F-39
F-39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
| | 2118. | Financial liabilities — Borrowings |
The Group’s current and non-current borrowings are as follows: | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | Non-current | | | | | | | | | | | | | | Bank borrowings | | | — | | | | 62 | | | | 85 | | | 7.375% US Dollar notes 2006 (nominal amount $250m) | | | — | | | | 130 | | | | 139 | | 6.125% Euro Bonds 2007 (nominal amount€591m) | | | 436 | | | | 390 | | | | 343 | | | 10.5% Sterling Bonds 2008 (nominal amount £100m) | | | 107 | | | | 100 | | | | 100 | | | 4.7% US Dollar Bonds 2009 (nominal amount $350m) | | | 203 | | | | 181 | | | | — | | | 7% Global Dollar Bonds 2011 (nominal amount $500m) | | | 307 | | | | 260 | | | | 278 | | | 7% Sterling Bonds 2014 (nominal amount £250m) | | | 250 | | | | 226 | | | | 235 | | | 5.7% US Dollar Bonds 2014 (nominal amount $400m) | | | 238 | | | | 207 | | | | — | | | 4.625% US Dollar notes 2018 (nominal amount $300m) | | | 161 | | | | 156 | | | | 167 | | | Finance lease liabilities | | | 1 | | | | 2 | | | | 2 | | | | | | | | | | | | | | | | | 1,703 | | | | 1,714 | | | | 1,349 | | | | | | | | | | | | |
| | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | Non-current | | | | | | | | | | Bank loans and overdrafts | | | 132 | | | | — | | | 4.7% US Dollar Bonds 2009 (nominal amount $350m) | | | — | | | | 176 | | | 7% Global Dollar Bonds 2011 (nominal amount $500m) | | | 368 | | | | 264 | | | 5.5% Global Dollar Bonds 2013 (nominal amount $350m) | | | 258 | | | | — | | | 5.7% US Dollar Bonds 2014 (nominal amount $400m) | | | 322 | | | | 211 | | | 7% Sterling Bonds 2014 (nominal amount £250m) | | | 254 | | | | 251 | | | 6.25% Global Dollar Bonds 2018 (nominal amount $550m) | | | 445 | | | | — | | | 4.625% US Dollar notes 2018 (nominal amount $300m) | | | 237 | | | | 143 | | | Finance lease liabilities | | | 3 | | | | 4 | | | | | | | | | | | | | | | | 2,019 | | | | 1,049 | | | | | | | | | | | | Current | | | | | | | | | Due within one year or on demand: | | | | | | | | | | Bank loans and overdrafts | | | 96 | | | | 444 | | | 10.5% Sterling Bonds 2008 (nominal amount £100m) | | | — | | | | 105 | | | 4.7% US Dollar Bonds 2009 (nominal amount $350m) | | | 244 | | | | — | | | Loan notes | | | — | | | | 8 | | | Finance lease liabilities | | | 4 | | | | 2 | | | | | | | | | | | | | | | | 344 | | | | 559 | | | | | | | | | | | | Total borrowings | | | 2,363 | | | | 1,608 | | | | | | | | | | | |
Included in the non-current borrowings above is £35m£12m of accrued interest in 2005. | | | | | | | | | | | | | | Current | | | | | | | | | | | | | Due within one year or on demand: | | | | | | | | | | | | | | Bank loans and overdrafts | | | 102 | | | | 107 | | | | 119 | | | 7.375% US Dollar notes 2006 | | | 152 | | | | — | | | | — | | | 9.5% Sterling Bonds 2004 | | | — | | | | — | | | | 108 | | | 4.625% Euro Bonds 2004 | | | — | | | | — | | | | 348 | | | Finance lease liabilities | | | 2 | | | | 2 | | | | 3 | | | | | | | | | | | | | | | | | 256 | | | | 109 | | | | 578 | | | | | | | | | | | | | Total borrowings | | | 1,959 | | | | 1,823 | | | | 1,927 | | | | | | | | | | | | |
(2007: £6m). Included in the current borrowings above is £3m£1m of accrued interest in 2005.(2007: £7m). The Group has elected to apply the provisions of IAS 32 and IAS 39 with effect from 1 January 2005. The comparative financial information is prepared in accordance with UKGAAP. The nature of the main adjustments that would make the information comply with IAS 32 and IAS 39 are set out in note 34. The 2004 and 2003 figures for the 2007 Euro Bonds and 2014 Sterling Bonds (together with the 2004 Sterling and Euro Bonds which have now been redeemed) include the effect of accounting for the foreign exchange element of the related derivatives.
All of the Group’s borrowings are unsecured. In respect of finance lease obligations (£3m in 2005; £4m in 2004 and £5m in 2003) the rights to the leased asset revert to the lessor in the event of default.
F-40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The maturity of the Group’s non-current borrowing is as follows: | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Between one and two years | | | 437 | | | | 131 | | | | 86 | | | Between two and five years | | | 310 | | | | 734 | | | | 583 | | | Over five years | | | 956 | | | | 849 | | | | 680 | | | | | | | | | | | | | | | | | 1,703 | | | | 1,714 | | | | 1,349 | | | | | | | | | | | | |
As at 31 December 2005 | | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | | Between one and two years | | | 2 | | | | 178 | | | Between two and five years | | | 759 | | | | 266 | | | Over five years | | | 1,258 | | | | 605 | | | | | | | | | | | | | | | | 2,019 | | | | 1,049 | | | | | | | | | | | |
F-40
Notes to the exposure of the borrowings of the Group to interest changes when the borrowings re-price is as follows:Consolidated Financial Statements (Continued) | | | | | | | | | | | | | | | | | | | | | | | | | One to | | | More than | | | | | Total | | | One year | | | five years | | | five years | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Carrying value of borrowings | | | 1,959 | | | | 256 | | | | 747 | | | | 956 | | | Effect of interest rate swaps | | | — | | | | 1,161 | | | | (473 | ) | | | (688 | ) | | | | | | | | | | | | | | | | | | | 1,959 | | | | 1,417 | | | | 274 | | | | 268 | | | | | | | | | | | | | | | |
The carrying amounts and fairmarket values of non-current borrowings are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Carrying | | | | | Carrying | | | | | Carrying | | | | | | | Effective | | | amount | | | Fair value | | | amount | | | Fair value | | | amount | | | Fair value | | | | | interest Rate | | | 2005 | | | 2005 | | | 2004 | | | 2004 | | | 2003 | | | 2003 | | | | | | | | | | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Bank borrowings | | | n/a | | | | — | | | | — | | | | 62 | | | | 62 | | | | 85 | | | | 85 | | | 7.375% US Dollar notes 2006 | | | 7.75 | % | | | — | | | | — | | | | 130 | | | | 138 | | | | 139 | | | | 157 | | | 6.125% Euro Bonds 2007 | | | 6.18 | % | | | 436 | | | | 419 | | | | 390 | | | | 409 | | | | 343 | | | | 448 | | | 10.5% Sterling Bonds 2008 | | | 10.53 | % | | | 107 | | | | 113 | | | | 100 | | | | 116 | | | | 100 | | | | 120 | | | 4.7% US Dollar Bonds 2009 | | | 4.86 | % | | | 203 | | | | 200 | | | | 181 | | | | 185 | | | | — | | | | — | | | 7% Global Dollar Bonds 2011 | | | 7.16 | % | | | 307 | | | | 310 | | | | 260 | | | | 293 | | | | 278 | | | | 317 | | | 7% Sterling Bonds 2014 | | | 7.20 | % | | | 250 | | | | 282 | | | | 226 | | | | 255 | | | | 235 | | | | 275 | | | 5.7% US Dollar Bonds 2014 | | | 5.88 | % | | | 238 | | | | 234 | | | | 207 | | | | 217 | | | | — | | | | — | | | 4.625% US Dollar notes 2018 | | | 4.69 | % | | | 161 | | | | 155 | | | | 156 | | | | 142 | | | | 167 | | | | 151 | | | Finance lease liabilities | | | n/a | | | | 1 | | | | 1 | | | | 2 | | | | 2 | | | | 2 | | | | 2 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,703 | | | | 1,714 | | | | 1,714 | | | | 1,819 | | | | 1,349 | | | | 1,555 | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | | | Effective
| | | Carrying
| | | | | | Carrying
| | | | | | | | interest rate | | | value | | | Market value | | | value | | | Market value | | | | | Bank loans and overdrafts | | | n/a | | | | 228 | | | | 228 | | | | 444 | | | | 444 | | | Loan notes | | | n/a | | | | — | | | | — | | | | 8 | | | | 8 | | | 10.5% Sterling Bonds 2008 | | | 10.53 | % | | | — | | | | — | | | | 105 | | | | 102 | | | 4.7% US Dollar Bonds 2009 | | | 4.86 | % | | | 244 | | | | 243 | | | | 176 | | | | 176 | | | 7% Global Dollar Bonds 2011 | | | 7.16 | % | | | 368 | | | | 349 | | | | 264 | | | | 267 | | | 5.5% Global Dollar Bonds 2013 | | | 5.76 | % | | | 258 | | | | 227 | | | | — | | | | — | | | 5.7% US Dollar Bonds 2014 | | | 5.88 | % | | | 322 | | | | 262 | | | | 211 | | | | 203 | | | 7% Sterling Bonds 2014 | | | 7.20 | % | | | 254 | | | | 258 | | | | 251 | | | | 261 | | | 6.25% Global Dollar Bonds 2018 | | | 6.46 | % | | | 445 | | | | 352 | | | | — | | | | — | | | 4.625% US Dollar notes 2018 | | | 4.69 | % | | | 237 | | | | 169 | | | | 143 | | | | 135 | | | Finance lease liabilities | | | n/a | | | | 7 | | | | 7 | | | | 6 | | | | 6 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,363 | | | | 2,095 | | | | 1,608 | | | | 1,602 | | | | | | | | | | | | | | | | | | | | | | | |
The fairmarket values are based on clean market prices at the year end or, where these are not available, on the quoted market prices of comparable debt issued by other companies. The effective interest rates above relate to the underlying debt instruments. The carrying amounts of current borrowings approximate their fair value. The carrying amounts of the Group’s borrowings are denominated in the following currencies: | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | | US dollar | | | 1,165 | | | | 1,335 | | | | 1,432 | | | Sterling | | | 357 | | | | 202 | | | | 201 | | | Euro | | | 437 | | | | 284 | | | | 292 | | | Other currencies | | | — | | | | 2 | | | | 2 | | | | | | | | | | | | | | | | | 1,959 | | | | 1,823 | | | | 1,927 | | | | | | | | | | | | |
F-41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | | US dollar | | | 2,081 | | | | 1,251 | | | Sterling | | | 277 | | | | 357 | | | Euro | | | 5 | | | | — | | | | | | | | | | | | | | | | 2,363 | | | | 1,608 | | | | | | | | | | | |
The maturity of the Group’s finance lease obligations is as follows: | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | Finance lease liabilities — minimum lease payments | | | | | | | | | | | | | | Not later than one year | | | 2 | | | | 2 | | | | 3 | | | Later than one year and not later than five years | | | 1 | | | | 2 | | | | 3 | | | Later than five years | | | — | | | | — | | | | — | | | Future finance charges on finance leases | | | — | | | | — | | | | (1 | ) | | Present value of finance lease liabilities | | | 3 | | | | 4 | | | | 5 | |
The present value of finance lease liabilities is as follows:
| | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Not later than one year | | | 2 | | | | 2 | | | | 3 | | | Later than one year and not later than five years | | | 1 | | | | 2 | | | | 2 | | | Later than five years | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | 3 | | | | 4 | | | | 5 | | | | | | | | | | | | |
The carrying amount of the Group’s lease obligations approximates their fair value.
The Group has the following undrawn capacity on its committed borrowing facilities as at 31 December: | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | Floating rate | | | | | | | | | | | | | | — expiring within one year | | | — | | | | — | | | | — | | | — expiring beyond one year | | | 786 | | | | 641 | | | | 950 | | | | | | | | | | | | | | | | | 786 | | | | 641 | | | | 950 | | | | | | | | | | | | |
| | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | Floating rate | | | | | | | | | | — expiring within one year | | | — | | | | — | | | — expiring beyond one year | | | 1,085 | | | | 1,007 | | | | | | | | | | | | | | | | 1,085 | | | | 1,007 | | | | | | | | | | | |
In addition to the above facilities, there are a number of short-term facilities that are utilised in the normal course of business. All of the Group’s borrowings are unsecured. In respect of finance lease obligations, the rights to the leased asset revert to the lessor in the event of default.
F-41
Notes to the Consolidated Financial Statements (Continued) | | 2218. | ProvisionsFinancial liabilities — Borrowings continued |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deferred | | | | | Re- | | | | | | | | | | | consideration | | | Integration | | | organisations | | | Leases | | | Other | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | | At 1 January 2005 | | | 20 | | | | 5 | | | | 11 | | | | 14 | | | | 7 | | | | 57 | | | Exchange differences | | | 2 | | | | — | | | | 1 | | | | 1 | | | | — | | | | 4 | | Charged to consolidated income statement | | | | | | | | | | | | | | | | | | | | | | | | | | — Additional provisions | | | — | | | | — | | | | — | | | | 1 | | | | 13 | | | | 14 | | | — Unused amounts reversed | | | — | | | | — | | | | (1 | ) | | | (3 | ) | | | (1 | ) | | | (5 | ) | | On acquisition/disposal | | | 5 | | | | — | | | | — | | | | — | | | | — | | | | 5 | | | Utilised during year | | | (1 | ) | | | (2 | ) | | | (6 | ) | | | (1 | ) | | | (1 | ) | | | (11 | ) | | | | | | | | | | | | | | | | | | | | | At 31 December 2005 | | | 26 | | | | 3 | | | | 5 | | | | 12 | | | | 18 | | | | 64 | | | | | | | | | | | | | | | | | | | | | |
The maturity of the Group’s finance lease obligations is as follows: | | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | Finance lease liabilities — minimum lease payments | | | | | | | | | | Not later than one year | | | 4 | | | | 2 | | | Later than one year and not later than two years | | | 2 | | | | 2 | | | Later than two years and not later than three years | | | 1 | | | | 1 | | | Later than three years and not later than four years | | | — | | | | 1 | | | Later than four years and not later than five years | | | — | | | | — | | | Later than five years | | | — | | | | — | | | Future finance charges on finance leases | | | — | | | | — | | | | | | | | | | | | | Present value of finance lease liabilities | | | 7 | | | | 6 | | | | | | | | | | | |
The present value of finance lease liabilities is as follows: | | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | | Not later than one year | | | 4 | | | | 2 | | | Later than one year and not later than five years | | | 3 | | | | 4 | | | Later than five years | | | — | | | | — | | | | | | | | | | | | | | | | 7 | | | | 6 | | | | | | | | | | | |
The carrying amounts of the Group’s lease obligations approximate their fair value. | | | 19. | Financial risk management |
The Group’s approach to the management of financial risks together with sensitivity analyses is set out below. Treasury policy The Group holds financial instruments for two principal purposes: to finance its operations and to manage the interest rate and currency risks arising from its operations and its sources of finance. The Group finances its operations by a mixture of cash flows from operations, short-term borrowings from banks and commercial paper markets, and longer term loans from banks and capital markets. The Group borrows principally in US dollars and sterling, at both floating and fixed rates of interest, using derivative financial instruments (‘derivatives’), where appropriate, to generate the desired effective currency profile and interest rate basis. The derivatives used for this purpose are principally rate swaps, rate caps and collars, currency rate swaps and forward foreign exchange contracts. The main risks arising from the Group’s financial instruments are interest rate risk, liquidity and refinancing risk, counterparty risk and foreign currency risk. These risks are managed by the chief financial officer under policies approved by the board, which are summarised below. All the treasury policies remained unchanged throughout 2008, with the exception of a change to the foreign exchange hedging policy made with effect from October 2008, which is explained later in this note. Some minor updates will also be made to treasury policies for 2009, largely to reflect current financial market conditions. The audit committee and a group of external treasury advisers receives reports on the Group’s treasury activities, policies and procedures. The treasury department is not a profit centre and its activities are subject to regular internal audit.
F-42
F-42
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | Analysis of provisions | | | | | | | | | | | | | | Non-current | | | 31 | | | | 43 | | | | 59 | | | Current | | | 33 | | | | 14 | | | | 18 | | | | | | | | | | | | | | | | | 64 | | | | 57 | | | | 77 | | | | | | | | | | | | |
Deferred considerationInterest rate risk management — During
The Group’s exposure to interest rate fluctuations on its borrowings is managed by borrowing on a fixed rate basis and by entering into rate swaps, rate caps and forward rate agreements. The Group’s policy objective has continued to be to set a target proportion of its forecast borrowings (taken at the year additional deferredend, with cash netted against floating rate debt and before certain adjustments for IAS 39) to be hedged (i.e. fixed or capped at the year end) over the next four years, subject to a maximum of 65% and a minimum that starts at 40% and falls by 10% at each year end. At the end of 2008 the hedging ratio, on the above basis, was approximately 49%. A simultaneous 1% change on 1 January in the Group’s variable interest rates in US dollar and sterling, taking into account forecast seasonal debt, would have a £10m effect on profit before tax. Use of interest rate derivatives The policy described in the section above creates a group of derivatives, under which the Group is a payer of fixed rates and a receiver of floating rates. The Group also aims to avoid undue exposure to a single interest rate setting. Reflecting this objective, the Group has swapped its fixed rate bond issues to floating rate at their launch. This creates a second group of derivatives, under which the Group is a receiver of fixed rates and a payer of floating rates. The Group’s accounting objective in its use of interest rate derivatives is to minimise the impact on the income statement of changes in themark-to-market value of its derivative portfolio as a whole. It uses duration calculations to estimate the sensitivity of the derivatives to movements in market rates. The Group also identifies which derivatives are eligible for fair value hedge accounting (which reduces sharply the income statement impact of changes in the market value of a derivative). The Group then balances the total portfolio between hedge-accounted and pooled segments, so that the expected movement on the pooled segment is minimal. Liquidity and refinancing risk management The Group’s objective is to secure continuity of funding at a reasonable cost. To do this it seeks to arrange committed funding for a variety of maturities from a diversity of sources. The Group’s policy objective has been that the weighted average maturity of its core gross borrowings (treating short-term advances as having the final maturity of the facilities available to refinance them) should be between three and ten years. At the end of 2008 the average maturity of gross borrowings was 5.0 years of which bonds represented 90% of these borrowings (up from 4.6 years and up from 72% respectively at the beginning of the year). The Group believes that ready access to different funding markets also helps to reduce its liquidity risk, and that published credit ratings and published financial policies improve such access. All of the Group’s credit ratings remained unchanged during the year. The long-term ratings are Baa1 from Moody’s and BBB+ from Standard & Poor’s, and the short-term ratings are P2 and A2 respectively. The Group’s policy is to strive to maintain a rating of Baa1/BBB+ over the long term. The Group will also continue to use internally a range of ratios to monitor and manage its finances. These include interest cover, net debt to operating profit and cash flow to debt measures. The Group also maintains undrawn committed borrowing facilities. At the end of 2008 the committed facilities amounted to £1,217m and their weighted average maturity was 3.4 years.
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Notes to the Consolidated Financial Statements (Continued) Analysis of Group debt, including the impact of derivatives The following tables analyse the Group’s sources of funding and the impact of derivatives on the Group’s debt instruments. The Group’s net debt position is set out below: | | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | | Cash and cash equivalents | | | 685 | | | | 560 | | | Marketable securities | | | 54 | | | | 40 | | | Derivative financial instruments | | | 164 | | | | 35 | | | Bank loans, overdrafts and loan notes | | | (228 | ) | | | (452 | ) | | Bonds | | | (2,128 | ) | | | (1,150 | ) | | Finance lease liabilities | | | (7 | ) | | | (6 | ) | | | | | | | | | | | | Net debt | | | (1,460 | ) | | | (973 | ) | | | | | | | | | | |
The split of net debt between fixed and floating rate, stated after the impact of rate derivatives, is as follows: | | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | | Fixed rate | | | 781 | | | | 567 | | | Floating rate | | | 679 | | | | 406 | | | | | | | | | | | | | Total | | | 1,460 | | | | 973 | | | | | | | | | | | |
Gross borrowings, after the impact of cross-currency rate derivatives, analysed by currency are as follows: | | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | | US dollar | | | 2,081 | | | | 1,401 | | | Sterling | | | 277 | | | | 207 | | | Euro | | | 5 | | | | — | | | | | | | | | | | | | Total | | | 2,363 | | | | 1,608 | | | | | | | | | | | |
As at 31 December 2008 there were no outstanding cross-currency rate derivatives. As at 31 December 2008 the exposure of the borrowings of the Group to interest rate changes when the borrowings re-price is as follows: | | | | | | | | | | | | | | | | | | | | | Less than
| | | One to
| | | More than
| | | | | | | | one year | | | five years | | | five years | | | Total | | | | | All figures in £ millions | | | | | Re-pricing profile of borrowings | | | 476 | | | | 629 | | | | 1,258 | | | | 2,363 | | | Effect of rate derivatives | | | 1,173 | | | | (254 | ) | | | (919 | ) | | | — | | | | | | | | | | | | | | | | | | | | | Total | | | 1,649 | | | | 375 | | | | 339 | | | | 2,363 | | | | | | | | | | | | | | | | | | | |
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Notes to the Consolidated Financial Statements (Continued) The maturity of contracted cash flows on the Group’s borrowings and all of its derivative financial instruments are as follows: | | | | | | | | | | | | | | | | | | | | | 2008 | | | | | USD | | | GBP | | | EUR | | | Total | | | | | All figures in £ millions | | | | | Not later than one year | | | 311 | | | | 17 | | | | — | | | | 328 | | | Later than one year and not later than five years | | | 884 | | | | 65 | | | | — | | | | 949 | | | Later than five years | | | 954 | | | | 266 | | | | — | | | | 1,220 | | | | | | | | | | | | | | | | | | | | Total | | | 2,149 | | | | 348 | | | | — | | | | 2,497 | | | | | | | | | | | | | | | | | | | | | Analysed as: | | | | | | | | | | | | | | | | | | Revolving credit facilities and commercial paper | | | 141 | | | | — | | | | — | | | | 141 | | | Bonds | | | 2,237 | | | | 355 | | | | — | | | | 2,592 | | | Rate derivatives — inflows | | | (392 | ) | | | (21 | ) | | | — | | | | (413 | ) | | Rate derivatives — outflows | | | 163 | | | | 14 | | | | — | | | | 177 | | | | | | | | | | | | | | | | | | | | Total | | | 2,149 | | | | 348 | | | | — | | | | 2,497 | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | 2007 | | | | | USD | | | GBP | | | EUR | | | Total | | | | | All figures in £ millions | | | | | Not later than one year | | | 153 | | | | (30 | ) | | | — | | | | 123 | | | Later than one year and not later than five years | | | 966 | | | | 70 | | | | — | | | | 1,036 | | | Later than five years | | | 420 | | | | 285 | | | | — | | | | 705 | | | | | | | | | | | | | | | | | | | | Total | | | 1,539 | | | | 325 | | | | — | | | | 1,864 | | | | | | | | | | | | | | | | | | | | | Analysed as: | | | | | | | | | | | | | | | | | | Revolving credit facilities and commercial paper | | | 429 | | | | — | | | | — | | | | 429 | | | Bonds | | | 1,017 | | | | 483 | | | | — | | | | 1,500 | | | Rate derivatives — inflows | | | (268 | ) | | | (160 | ) | | | — | | | | (428 | ) | | Rate derivatives — outflows | | | 361 | | | | 2 | | | | — | | | | 363 | | | | | | | | | | | | | | | | | | | | Total | | | 1,539 | | | | 325 | | | | — | | | | 1,864 | | | | | | | | | | | | | | | | | | | |
All cash flow projections shown above are on an undiscounted basis. Any cash flows based on a floating rate are calculated using interest rates as set at the date of the last rate reset. Where this is not possible, floating rates are based on interest rates prevailing at 31 December in the relevant year. All derivative amounts are shown gross, although the company net settles these amounts wherever possible. Amounts drawn under revolving credit facilities and commercial paper are assumed to mature at the maturity date of the relevant facility, with interest calculated as payable in each calendar year up to and including the date of maturity of the facility. Financial counterparty risk management Counterparty credit limits, which take published credit rating and other factors into account, are set to cover our total aggregate exposure to a single financial institution. The limits applicable to published credit ratings bands are approved by the chief financial officer within guidelines approved by the board. Exposures and limits applicable to each financial institution are reviewed on a regular basis.
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Notes to the Consolidated Financial Statements (Continued) Foreign currency risk management Although the Group is based in the UK, it has its most significant investment in overseas operations. The most significant currency for the Group is the US dollar. The Group’s policy on routine transactional conversions between currencies (for example, the collection of receivables, and the settlement of payables or interest) remains that these should be transacted at the relevant spot exchange rate. The majority of the Group’s operations are domestic within their country of operation. No unremitted profits are hedged with foreign exchange contracts, as the company judges it inappropriate to hedge non-cash flow translational exposure with cash flow instruments. However, the Group does seek to create a natural hedge of this exposure through its policy of aligning approximately the currency composition of its core net borrowings with its forecast operating profit before depreciation and amortisation. This policy aims to dampen the impact of changes in foreign exchange rates on consolidated interest cover and earnings. The policy above applies only to currencies that account for more than 15% of Group operating profit before depreciation and amortisation, which currently are only the US dollar and sterling. However, the Group still borrows small amounts in other currencies, typically for seasonal working capital needs. In addition, our policy does not require existing currency debt to be terminated to match declines in that currency’s share of Group operating profit before depreciation and amortisation. Following the board’s approval of a policy change in October 2008, currencies that account for less than 15% of Group operating profit before depreciation and amortisation may now be included in the above hedging process at the request of the chief financial officer. At the balance sheet date, no hedging transactions had been undertaken under that authority. Included within year end net debt, the net borrowings/(cash) in the two principal currencies above (taking into account the effect of cross currency swaps) were: US dollar £1,777m and sterling £127m. Use of currency debt and currency derivatives The Group uses both currency denominated debt and derivative instruments to implement the above policy. Its intention is that gains/losses on the derivatives and debt offset the losses/gains on the foreign currency assets and income. Each quarter the value of hedging instruments is monitored against the assets in the relevant currency and, where practical, a decision is made whether to treat the debt or derivative as a net investment hedge (permitting foreign exchange movements on it to be taken to reserves) for the purposes of IAS 39. Financial instruments — sensitivity analysis As at 31 December 2008 the sensitivity of the Group’s financial instruments to fluctuations in interest rates and exchange rates is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Impact of 1%
| | | Impact of 1%
| | | Impact of 10%
| | | Impact of 10%
| | | | | Carrying
| | | increase in
| | | decrease in
| | | strengthening in
| | | weakening in
| | | | | value | | | interest rates | | | interest rates | | | sterling | | | sterling | | | | | All figures in £ millions | | | | | Investments in unlisted securities | | | 63 | | | | — | | | | — | | | | (2 | ) | | | 3 | | | Cash and cash equivalents | | | 685 | | | | — | | | | — | | | | (41 | ) | | | 50 | | | Marketable securities | | | 54 | | | | — | | | | — | | | | (5 | ) | | | 6 | | | Derivative financial instruments | | | 164 | | | | (80 | ) | | | 88 | | | | (15 | ) | | | 18 | | | Bonds | | | (2,128 | ) | | | 77 | | | | (84 | ) | | | 155 | | | | (189 | ) | | Other borrowings | | | (235 | ) | | | — | | | | — | | | | 19 | | | | (24 | ) | | Other net financial assets | | | 580 | | | | — | | | | — | | | | (46 | ) | | | 57 | | | | | | | | | | | | | | | | | | | | | | | | | Total financial instruments | | | (817 | ) | | | (3 | ) | | | 4 | | | | 65 | | | | (79 | ) | | | | | | | | | | | | | | | | | | | | | | |
The table shows the sensitivities of the fair values of each class of financial instruments to an isolated change in either interest rates or foreign exchange rates. The class ‘Other net financial assets’ comprises trade assets less trade liabilities.
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Notes to the Consolidated Financial Statements (Continued) The sensitivities of derivative instruments are calculated using established estimation techniques such as discounted cash flow and option valuation models. Where modelling an interest rate decrease of 1% led to negative interest rates, these points on the yield curve were adjusted to 0%. A large proportion of the movements shown above would impact equity rather than the income statement, depending on the location and functional currency of the entity in which they arise and the availability of net investment hedge treatment. The changes in valuations are estimates of the impact of changes in market variables and are not a prediction of future events or anticipated gains or losses. | | | 20. | Intangible assets — Pre-publication |
| | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | Cost | | | | | | | | | | At beginning of year | | | 1,264 | | | | 1,152 | | | Exchange differences | | | 494 | | | | (7 | ) | | Additions | | | 297 | | | | 230 | | | Disposals | | | (345 | ) | | | (125 | ) | | Acquisition through business combination | | | 78 | | | | 19 | | | Transfer from software | | | 12 | | | | — | | | Transfer to non-current assets held for sale | | | — | | | | (5 | ) | | | | | | | | | | | At end of year | | | 1,800 | | | | 1,264 | | | | | | | | | | | | Amortisation | | | | | | | | | | At beginning of year | | | (814 | ) | | | (750 | ) | | Exchange differences | | | (337 | ) | | | 1 | | | Charge for the year | | | (244 | ) | | | (192 | ) | | Disposals | | | 345 | | | | 125 | | | Acquisition through business combination | | | (51 | ) | | | (1 | ) | | Transfer from software | | | (4 | ) | | | — | | | Transfer to non-current assets held for sale | | | — | | | | 3 | | | | | | | | | | | | At end of year | | | (1,105 | ) | | | (814 | ) | | | | | | | | | | | | Carrying amounts | | | | | | | | | At end of year | | | 695 | | | | 450 | | | | | | | | | | | |
Included in the above are pre-publication assets amounting to £462m (2007: £292m) which will be realised in more than 12 months. Amortisation is included in the income statement in cost of goods sold. There was no amortisation relating to discontinued operations in 2008 and 2007.
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Notes to the Consolidated Financial Statements (Continued) | | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | | Raw materials | | | 31 | | | | 24 | | | Work in progress | | | 29 | | | | 30 | | | Finished goods | | | 441 | | | | 314 | | | | | | | | | | | | | | | | 501 | | | | 368 | | | | | | | | | | | |
The cost of inventories relating to continuing operations recognised as an expense and included in the income statement in cost of goods sold amounted to £832m (2007: £732m). In 2008 £56m (2007: £47m) of inventory provisions was charged in the income statement. None of the inventory is pledged as security. | | | 22. | Trade and other receivables |
| | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | Current | | | | | | | | | | Trade receivables | | | 1,030 | | | | 750 | | | Royalty advances | | | 111 | | | | 84 | | | Prepayments and accrued income | | | 62 | | | | 48 | | | Other receivables | | | 135 | | | | 59 | | | Receivables from related parties | | | 4 | | | | 5 | | | | | | | | | | | | | | | | 1,342 | | | | 946 | | | | | | | | | | | | Non-current | | | | | | | | | | Royalty advances | | | 102 | | | | 68 | | | Prepayments and accrued income | | | 3 | | | | 4 | | | Other receivables | | | 47 | | | | 57 | | | | | | | | | | | | | | | | 152 | | | | 129 | | | | | | | | | | | |
Trade receivables are stated at fair value, net of provisions for bad and doubtful debts and anticipated future sales returns. The movements on the provision for bad and doubtful debts are as follows: | | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | | At beginning of year | | | (52 | ) | | | (46 | ) | | Exchange differences | | | (18 | ) | | | (1 | ) | | Income statement movements | | | (27 | ) | | | (19 | ) | | Utilised | | | 27 | | | | 15 | | | Acquisition through business combination | | | (2 | ) | | | (3 | ) | | Disposal through business disposal | | | — | | | | 2 | | | | | | | | | | | | At end of year | | | (72 | ) | | | (52 | ) | | | | | | | | | | |
Concentrations of credit risk with respect to trade receivables are limited due to the Group’s large number of customers, who are internationally dispersed.
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Notes to the Consolidated Financial Statements (Continued) The ageing of the Group’s trade receivables is as follows: | | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | | Within due date | | | 1,110 | | | | 819 | | | Up to three months past due date | | | 248 | | | | 171 | | | Three to six months past due date | | | 60 | | | | 51 | | | Six to nine months past due date | | | 21 | | | | 12 | | | Nine to 12 months past due date | | | 15 | | | | 19 | | | More than 12 months past due date | | | 20 | | | | 19 | | | | | | | | | | | | Total trade receivables | | | 1,474 | | | | 1,091 | | | | | | | | | | | | | Less: provision for bad and doubtful debts | | | (72 | ) | | | (52 | ) | | Less: provision for sales returns | | | (372 | ) | | | (281 | ) | | Transfer to non-current assets held for sale | | | — | | | | (8 | ) | | | | | | | | | | | Net trade receivables | | | 1,030 | | | | 750 | | | | | | | | | | | |
The Group reviews its bad debt provision at least twice a year following a detailed review of receivable balances and historic payment profiles. Management believe all the remaining receivable balances are fully recoverable. | | | 23. | Provisions for other liabilities and charges |
| | | | | | | | | | | | | | | | | | | | | Deferred
| | | | | | | | | | | | | | consideration | | | Leases | | | Other | | | Total | | | | | All figures in £ millions | | | | | | | | At 1 January 2008 | | | 37 | | | | 9 | | | | 21 | | | | 67 | | | Exchange differences | | | 5 | | | | 2 | | | | 9 | | | | 16 | | | Charged to income statement | | | 2 | | | | — | | | | 7 | | | | 9 | | | Released to income statement | | | — | | | | (1 | ) | | | (5 | ) | | | (6 | ) | | Acquisition through business combination — current year | | | 3 | | | | — | | | | 16 | | | | 19 | | | Acquisition through business combination — prior year adjustments | | | (4 | ) | | | — | | | | 7 | | | | 3 | | | Utilised | | | — | | | | (2 | ) | | | (17 | ) | | | (19 | ) | | | | | | | | | | | | | | | | | | | | At 31 December 2008 | | | 43 | | | | 8 | | | | 38 | | | | 89 | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | | Analysis of provisions | | | | | | | | | | Non-current | | | 33 | | | | 44 | | | Current | | | 56 | | | | 23 | | | | | | | | | | | | | | | | 89 | | | | 67 | | | | | | | | | | | |
Deferred consideration of £5m was incurred mainly relatingprimarily relates to the acquisition of Index books.Mergermarket in 2006. These amounts are payable in 2009. Integration — During the year, £2m of this balance has been utilised, primarily in relation to properties, severance and IT systems. The remaining provision should be utilised in the next two years. Reorganisations — There were no additional provisions in 2005 and £5m has been utilised, mainly in respect of redundancies.
Lease commitments — These relate primarily to onerous lease contracts, acquired through business combinations, which have various expiry dates up to 2010.2017. The provision is based on current occupancy estimates.
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Notes to the Consolidated Financial Statements (Continued) | | 2324. | Trade and other liabilities |
| | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Trade payables | | | 348 | | | | 316 | | | | 405 | | | Social security and other taxes | | | 21 | | | | 14 | | | | 4 | | | Accruals and deferred income | | | 600 | | | | 509 | | | | 465 | | | Other liabilities | | | 156 | | | | 128 | | | | 139 | | | | | | | | | | | | | | | | | 1,125 | | | | 967 | | | | 1,013 | | | | | | | | | | | | | Less: non-current portion | | | | | | | | | | | | | | Accruals and deferred income | | | 66 | | | | 21 | | | | 9 | | | Other liabilities | | | 85 | | | | 78 | | | | 61 | | | | | | | | | | | | | | | | | 151 | | | | 99 | | | | 70 | | | | | | | | | | | | | Current portion | | | 974 | | | | 868 | | | | 943 | | | | | | | | | | | | |
| | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | | Trade payables | | | 450 | | | | 342 | | | Social security and other taxes | | | 35 | | | | 23 | | | Accruals | | | 501 | | | | 402 | | | Deferred income | | | 444 | | | | 290 | | | Interest payable | | | 10 | | | | — | | | Dividends payable to minority interest | | | 5 | | | | 12 | | | Other liabilities | | | 205 | | | | 171 | | | | | | | | | | | | | | | | 1,650 | | | | 1,240 | | | | | | | | | | | | Less: non-current portion | | | | | | | | | | Accruals | | | 42 | | | | 30 | | | Deferred income | | | 87 | | | | 58 | | | Interest payable | | | 1 | | | | — | | | Other liabilities | | | 91 | | | | 102 | | | | | | 221 | | | | 190 | | | | | | | | | | | | Current portion | | | 1,429 | | | | 1,050 | | | | | | | | | | | |
The carrying value of the Group’s trade and other liabilitiespayables approximates theirits fair value. The deferred income balances comprise: | | | | • | multi-year obligations to deliver workbooks to adoption customers in school businesses; | | | • | advance payments in assessment and testing businesses; | | | • | subscription income in school, newspaper and market pricing businesses; | | | • | advertising income relating to future publishing days in newspaper businesses; and | | | • | obligations to deliver digital content in future periods. |
| | 2425. | Employee benefitsRetirement benefit and other post-retirement obligations |
Retirement benefit obligationsBackground
The Group operates a number of defined benefit and defined contribution retirement benefit plans throughout the world,world. For the principal ones beingdefined benefit plans, benefits are based on employees’ length of service and final pensionable pay. Defined contribution benefits are based on the amount of contributions paid in respect of an individual member, the UKinvestment returns earned and US. the amount of pension this money will buy when a member retires. The major schemes are self-administered withlargest plan is the schemes’ assets being held independently of the Group. Retirement benefit costs are assessed in accordance with the advice of independent qualified actuaries. The Pearson Group Pension Plan (‘UK Group scheme is a hybrid schemeplan’) with both defined benefit and defined contribution sections. From 1 November 2006, all sections but, predominantly, consisting of defined benefit liabilities. There are a number of defined contribution schemes, principally overseas. The most recent actuarial valuation of the UK Group schemeplan were closed to new members with the exception of a defined contribution section that was completed on 1 January 2004.opened in 2003. This section is available to all new employees of participating companies. The other major defined benefit plans are based in the US.
Other defined contribution plans are operated principally overseas with the largest plan being in the US. The specific features of these plans vary in accordance with the regulations of the country in which employees are located.
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F-43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
Pearson also has several post-retirement medical benefit plans (PRMBs), principally in the US. PRMBs are unfunded but are accounted for and valued similarly to defined benefit pension plans. Assumptions The principal assumptions used for the UK Group schemeplan and the US PRMB are shown below. Weighted average assumptions have been shown for the other schemes. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2005 | | | 2005 | | | 2004 | | | 2004 | | | 2003 | | | 2003 | | | | | UK Group | | | Other | | | UK Group | | | Other | | | UK Group | | | Other | | | % | | scheme | | | schemes | | | scheme | | | schemes | | | scheme | | | schemes | | | | | | | | | | | | | | | | | | | | | | | Inflation | | | 2.80 | | | | 2.95 | | | | 2.80 | | | | 2.98 | | | | 2.75 | | | | 2.98 | | | Expected rate of increase in salaries | | | 4.50 | | | | 4.43 | | | | 4.80 | | | | 4.44 | | | | 4.75 | | | | 4.45 | | | Expected rate of increase for pensions in payment and deferred pensions | | | 2.50 to 4.00 | | | | — | | | | 2.80 to 4.00 | | | | — | | | | 2.75 to 4.00 | | | | — | | | Rate used to discount scheme liabilities | | | 4.85 | | | | 5.54 | | | | 5.40 | | | | 5.84 | | | | 5.50 | | | | 6.11 | | | Expected return on assets | | | 6.40 | | | | 7.31 | | | | 6.60 | | | | 7.23 | | | | 6.81 | | | | 7.75 | | | | | | | | | | | | | | | | | | | | | |
The amounts recognised in the income statement are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | Defined | | | | | | | | | | | UK Group | | | benefit | | | | | Defined | | | 2005 | | | | | scheme | | | other | | | Sub Total | | | contribution | | | Total | | | | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Current service cost | | | (25 | ) | | | (2 | ) | | | (27 | ) | | | (35 | ) | | | (62 | ) | | Past service cost | | | — | | | | — | | | | — | | | | — | | | | — | | | Curtailments | | | — | | | | 2 | | | | 2 | | | | — | | | | 2 | | | | | | | | | | | | | | | | | | | Total operating charge | | | (25 | ) | | | — | | | | (25 | ) | | | (35 | ) | | | (60 | ) | | | | | | | | | | | | | | | | | | | Expected return on plan assets | | | 75 | | | | 6 | | | | 81 | | | | — | | | | 81 | | | Interest on pension scheme liabilities | | | (79 | ) | | | (6 | ) | | | (85 | ) | | | — | | | | (85 | ) | | | | | | | | | | | | | | | | | | Net finance charge | | | (4 | ) | | | — | | | | (4 | ) | | | — | | | | (4 | ) | | | | | | | | | | | | | | | | | | Net income statement charge | | | (29 | ) | | | — | | | | (29 | ) | | | (35 | ) | | | (64 | ) | | | | | | | | | | | | | | | | | | Actual return on plan assets | | | 214 | | | | 7 | | | | 221 | | | | — | | | | 221 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Defined | | | | | | | | | | | UK Group | | | benefit | | | | | Defined | | | 2004 | | | | | scheme | | | other | | | Sub Total | | | contribution | | | Total | | | | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Current service cost | | | (22 | ) | | | (2 | ) | | | (24 | ) | | | (32 | ) | | | (56 | ) | | Past service cost | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | Total operating charge | | | (22 | ) | | | (2 | ) | | | (24 | ) | | | (32 | ) | | | (56 | ) | | | | | | | | | | | | | | | | | | | Expected return on plan assets | | | 71 | | | | 6 | | | | 77 | | | | — | | | | 77 | | | Interest on pension scheme liabilities | | | (72 | ) | | | (6 | ) | | | (78 | ) | | | — | | | | (78 | ) | | | | | | | | | | | | | | | | | | Net finance charge | | | (1 | ) | | | — | | | | (1 | ) | | | — | | | | (1 | ) | | | | | | | | | | | | | | | | | | Net income statement charge | | | (23 | ) | | | (2 | ) | | | (25 | ) | | | (32 | ) | | | (57 | ) | | | | | | | | | | | | | | | | | | Actual return on plan assets | | | 135 | | | | 9 | | | | 144 | | | | — | | | | 144 | | | | | | | | | | | | | | | | | | |
F-44
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | Defined | | | | | | | | | | | UK Group | | | benefit | | | Sub | | | Defined | | | 2003 | | | | | scheme | | | other | | | Total | | | contribution | | | Total | | | | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Current service cost | | | (21 | ) | | | (2 | ) | | | (23 | ) | | | (28 | ) | | | (51 | ) | | Past service cost | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | Total operating charge | | | (21 | ) | | | (2 | ) | | | (23 | ) | | | (28 | ) | | | (51 | ) | | | | | | | | | | | | | | | | | | | Expected return on plan assets | | | 65 | | | | 4 | | | | 69 | | | | — | | | | 69 | | | Interest on pension scheme liabilities | | | (67 | ) | | | (7 | ) | | | (74 | ) | | | — | | | | (74 | ) | | | | | | | | | | | | | | | | | | Net finance charge | | | (2 | ) | | | (3 | ) | | | (5 | ) | | | — | | | | (5 | ) | | | | | | | | | | | | | | | | | | Net income statement charge | | | (23 | ) | | | (5 | ) | | | (28 | ) | | | (28 | ) | | | (56 | ) | | | | | | | | | | | | | | | | | | Actual return on plan assets | | | 145 | | | | 12 | | | | 157 | | | | — | | | | 157 | | | | | | | | | | | | | | | | | | |
The total operating charge is included in administrative and other expenses.plans, which primarily relate to US pension plans.
The amounts recognised in the balance sheet are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2005 | | | 2005 | | | 2005 | | | | | 2004 | | | 2004 | | | 2004 | | | | | 2003 | | | 2003 | | | 2003 | | | | | | | UK | | | Other | | | Other | | | | | UK | | | Other | | | Other | | | | | UK | | | Other | | | Other | | | | | | | Group | | | funded | | | unfunded | | | 2005 | | | Group | | | funded | | | unfunded | | | 2004 | | | Group | | | funded | | | unfunded | | | 2003 | | | | | scheme | | | plans | | | plans | | | Total | | | scheme | | | plans | | | plans | | | Total | | | scheme | | | plans | | | plans | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Fair value of plan assets | | | 1,390 | | | | 110 | | | | — | | | | 1,500 | | | | 1,198 | | | | 82 | | | | — | | | | 1,280 | | | | 1,089 | | | | 75 | | | | — | | | | 1,164 | | | Present value of plan liabilities | | | (1,661 | ) | | | (131 | ) | | | (11 | ) | | | (1,803 | ) | | | (1,502 | ) | | | (104 | ) | | | (9 | ) | | | (1,615 | ) | | | (1,340 | ) | | | (105 | ) | | | (9 | ) | | | (1,454 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net pension liability | | | (271 | ) | | | (21 | ) | | | (11 | ) | | | (303 | ) | | | (304 | ) | | | (22 | ) | | | (9 | ) | | | (335 | ) | | | (251 | ) | | | (30 | ) | | | (9 | ) | | | (290 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other post-retirement medical benefit obligation | | | | | | | | | | | | | | | (60 | ) | | | | | | | | | | | | | | | (58 | ) | | | | | | | | | | | | | | | (61 | ) | | Other pension accruals | | | | | | | | | | | | | | | (26 | ) | | | | | | | | | | | | | | | (15 | ) | | | | | | | | | | | | | | | (13 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total retirement benefit obligations | | | | | | | | | | | | | | | (389 | ) | | | | | | | | | | | | | | | (408 | ) | | | | | | | | | | | | | | | (364 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | 2006 | | | | | UK Group
| | | Other
| | | | | | UK Group
| | | Other
| | | | | | UK Group
| | | Other
| | | | | | | | plan | | | plans | | | PRMB | | | plan | | | plans | | | PRMB | | | plan | | | plans | | | PRMB | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Inflation | | | 2.80 | | | | 2.80 | | | | 2.80 | | | | 3.30 | | | | 2.93 | | | | 3.00 | | | | 3.00 | | | | 2.91 | | | | 3.00 | | | Rate used to discount plan liabilities | | | 6.40 | | | | 6.25 | | | | 6.25 | | | | 5.80 | | | | 6.01 | | | | 6.05 | | | | 5.20 | | | | 5.70 | | | | 5.85 | | | Expected return on assets | | | 6.33 | | | | 7.60 | | | | — | | | | 6.50 | | | | 7.27 | | | | — | | | | 6.40 | | | | 7.18 | | | | — | | | Expected rate of increase in salaries | | | 4.30 | | | | 4.50 | | | | — | | | | 5.00 | | | | 4.36 | | | | — | | | | 4.70 | | | | 4.37 | | | | — | | | Expected rate of increase for pensions in payment and deferred pensions | | | 2.30 to 4.20 | | | | — | | | | — | | | | 2.50 to 4.30 | | | | — | | | | — | | | | 2.10 to 4.60 | | | | — | | | | — | | | Initial rate of increase in healthcare rate | | | — | | | | — | | | | 9.00 | | | | — | | | | — | | | | 9.50 | | | | — | | | | — | | | | 10.00 | | | Ultimate rate of increase in healthcare rate | | | — | | | | — | | | | 5.00 | | | | — | | | | — | | | | 5.00 | | | | — | | | | — | | | | 5.00 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following amounts have been recognised in the statement of recognised income and expense:
| | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in | | | | | £ millions) | | | Amounts recognised for defined benefit schemes | | | 21 | | | | (60 | ) | | | (25 | ) | | Amounts recognised on post-retirement medical benefit schemes | | | 5 | | | | (1 | ) | | | (3 | ) | | | | | | | | | | | | Total recognised in year | | | 26 | | | | (61 | ) | | | (28 | ) | | | | | | | | | | | | Cumulative amounts recognised | | | (63 | ) | | | (89 | ) | | | (28 | ) | | | | | | | | | | | |
The fair value of plan assets comprises the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2005 | | | 2005 | | | | | 2004 | | | 2004 | | | | | 2003 | | | 2003 | | | | | | | UK | | | Other | | | | | UK | | | Other | | | | | UK | | | Other | | | | | | | group | | | funded | | | 2005 | | | Group | | | funded | | | 2004 | | | Group | | | funded | | | 2003 | | | % | | scheme | | | plans | | | Total | | | scheme | | | plans | | | Total | | | scheme | | | plans | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equities | | | 47.4 | | | | 4.3 | | | | 51.7 | | | | 49.7 | | | | 4.2 | | | | 53.9 | | | | 50.5 | | | | 4.2 | | | | 54.7 | | | Bonds | | | 24.7 | | | | 2.0 | | | | 26.7 | | | | 21.5 | | | | 2.1 | | | | 23.6 | | | | 22.5 | | | | 2.1 | | | | 24.6 | | | Properties | | | 8.9 | | | | — | | | | 8.9 | | | | 8.9 | | | | — | | | | 8.9 | | | | 9.2 | | | | — | | | | 9.2 | | | Other | | | 11.7 | | | | 1.0 | | | | 12.7 | | | | 13.5 | | | | 0.1 | | | | 13.6 | | | | 11.4 | | | | 0.1 | | | | 11.5 | |
F-45
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The planUK discount rate is based on the annualised yield on the iBoxx over15-year AA-rated corporate bond index, adjusted to reflect the duration of our liabilities. The US discount rate is set by reference to a US bond portfolio matching model. The expected return on assets do not include anyis based on market expectations of long-term asset returns for the defined portfolio at the end of the Group’s own financial instruments, nor any property occupied by the Group.year. Changes in the values of plan assets and liabilities are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2005 | | | | | | | 2004 | | | | | | | 2003 | | | | | | | | | UK Group | | | 2005 | | | 2005 | | | UK Group | | | 2004 | | | 2004 | | | UK Group | | | 2003 | | | 2003 | | | | | scheme | | | Other | | | Total | | | scheme | | | Other | | | Total | | | scheme | | | Other | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | Fair value of assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Opening fair value of plan assets | | | 1,198 | | | | 82 | | | | 1,280 | | | | 1,089 | | | | 75 | | | | 1,164 | | | | 974 | | | | 57 | | | | 1,031 | | | Exchange differences | | | — | | | | 9 | | | | 9 | | | | — | | | | (5 | ) | | | (5 | ) | | | — | | | | (5 | ) | | | (5 | ) | | Expected return on plan assets | | | 75 | | | | 6 | | | | 81 | | | | 71 | | | | 6 | | | | 77 | | | | 65 | | | | 4 | | | | 69 | | | Actuarial gains and losses | | | 139 | | | | 1 | | | | 140 | | | | 64 | | | | 3 | | | | 67 | | | | 80 | | | | 8 | | | | 88 | | | Contributions by employer | | | 35 | | | | 10 | | | | 45 | | | | 30 | | | | 9 | | | | 39 | | | | 24 | | | | 9 | | | | 33 | | | Contributions by employee | | | 6 | | | | — | | | | 6 | | | | 6 | | | | — | | | | 6 | | | | 6 | | | | — | | | | 6 | | | Benefits paid | | | (63 | ) | | | (6 | ) | | | (69 | ) | | | (62 | ) | | | (6 | ) | | | (68 | ) | | | (60 | ) | | | (6 | ) | | | (66 | ) | | Acquisition through business combination | | | — | | | | 8 | | | | 8 | | | | — | | | | — | | | | — | | | | — | | | | 8 | | | | 8 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Closing fair value of plan assets | | | 1,390 | | | | 110 | | | | 1,500 | | | | 1,198 | | | | 82 | | | | 1,280 | | | | 1,089 | | | | 75 | | | | 1,164 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Present value of defined benefit obligation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Opening defined benefit obligation | | | (1,502 | ) | | | (113 | ) | | | (1,615 | ) | | | (1,340 | ) | | | (114 | ) | | | (1,454 | ) | | | (1,207 | ) | | | (96 | ) | | | (1,303 | ) | | Exchange differences | | | — | | | | (12 | ) | | | (12 | ) | | | — | | | | 6 | | | | 6 | | | | — | | | | 9 | | | | 9 | | | Current service cost | | | (25 | ) | | | (2 | ) | | | (27 | ) | | | (22 | ) | | | (2 | ) | | | (24 | ) | | | (21 | ) | | | (2 | ) | | | (23 | ) | | Curtailment | | | — | | | | 2 | | | | 2 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | Interest cost | | | (79 | ) | | | (6 | ) | | | (85 | ) | | | (72 | ) | | | (6 | ) | | | (78 | ) | | | (67 | ) | | | (7 | ) | | | (74 | ) | | Contributions by employee | | | (6 | ) | | | — | | | | (6 | ) | | | (6 | ) | | | — | | | | (6 | ) | | | (6 | ) | | | — | | | | (6 | ) | | Acquisition through business combination | | | — | | | | (10 | ) | | | (10 | ) | | | — | | | | — | | | | — | | | | — | | | | (10 | ) | | | (10 | ) | | Benefits paid | | | 63 | | | | 6 | | | | 69 | | | | 62 | | | | 6 | | | | 68 | | | | 60 | | | | 6 | | | | 66 | | | Actuarial gains and losses | | | (112 | ) | | | (7 | ) | | | (119 | ) | | | (124 | ) | | | (3 | ) | | | (127 | ) | | | (99 | ) | | | (14 | ) | | | (113 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Closing defined benefit obligation | | | (1,661 | ) | | | (142 | ) | | | (1,803 | ) | | | (1,502 | ) | | | (113 | ) | | | (1,615 | ) | | | (1,340 | ) | | | (114 | ) | | | (1,454 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The history of the defined benefit plans is as follows:
| | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Present value of defined benefit obligation | | | (1,803 | ) | | | (1,615 | ) | | | (1,454 | ) | | Fair value of plan assets | | | 1,500 | | | | 1,280 | | | | 1,164 | | | | | | | | | | | | | Net pension liability | | | (303 | ) | | | (335 | ) | | | (290 | ) | | | | | | | | | | | | | Experience adjustments on plan liabilities | | | (119 | ) | | | (127 | ) | | | (113 | ) | | Experience adjustments on plan assets | | | 140 | | | | 67 | | | | 88 | | | | | | | | | | | | |
F-46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The expected rates of return on categories of plan assets are determined by reference to relevant indices. The overall expected rate of return is calculated by weighting the individual rates in accordance with the anticipated balance in the plan’s investment portfolio. The UK mortality assumptions have been derived by adjusting standard mortality tables (PMFA 92 tables projected forward with medium cohort improvement factors). The Group expectschanged its mortality assumptions in the UK in 2007 to contribute approximately £41mreflect an assumed increased life expectancy of pensioners by adding a 1% floor to its defined benefitthe medium cohort projections. For the US plans, the assumptions used were based on standard US mortality tables. In 2007 GAM94 was used, and in 2006.2008 this was updated to RP2000 to reflect the mortality assumption now more prevalent in the US. Using the above tables, the remaining average life expectancy in years of a pensioner retiring at age 65 on the balance sheet date for the UK and US Group plans is as follows: | | | | | | | | | | | | | | | | | | | | | UK | | | US | | | | | 2008 | | | 2007 | | | 2008 | | | 2007 | | | | | Male | | | 21.5 | | | | 21.3 | | | | 17.6 | | | | 17.9 | | | Female | | | 21.8 | | | | 21.6 | | | | 20.2 | | | | 21.3 | |
The remaining average life expectancy in years of a pensioner retiring at age 65, 20 years after the balance sheet date, for the UK and US Group plans is as follows: | | | | | | | | | | | | | | | | | | | | | UK | | | US | | | | | 2008 | | | 2007 | | | 2008 | | | 2007 | | | | | Male | | | 23.3 | | | | 23.1 | | | | 17.6 | | | | 17.9 | | | Female | | | 23.8 | | | | 23.6 | | | | 20.2 | | | | 21.3 | |
F-51
Other post-retirement obligationsNotes to the Consolidated Financial Statements (Continued)
The Group operates a number of post-retirement medical benefit schemes, principally in the USA. These plans are unfunded. The method of accounting and the frequency of valuations are similar to those used for defined benefit pension schemes. Financial statement information The principal assumptions used are shown below: | | | | | | | | | | | | | | | % | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | Inflation | | | 3.0 | | | | 3.0 | | | | 3.0 | | | Initial rate of increase in healthcare rates | | | 10.0 | | | | 12.0 | | | | 12.0 | | | Ultimate rate of increase in healthcare rates | | | 5.0 | | | | 5.0 | | | | 5.0 | | | Rate used to discount scheme liabilities | | | 5.6 | | | | 6.1 | | | | 6.1 | |
The amounts recognised in the income statement are as follows: | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Current service cost | | | (1 | ) | | | (1 | ) | | | (1 | ) | | Interest cost | | | (3 | ) | | | (4 | ) | | | (4 | ) | | | | | | | | | | | | Net income statement charge | | | (4 | ) | | | (5 | ) | | | (5 | ) | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2008 | | | | | | | | Defined
| | | | | | | | | | | | | | | | | UK Group
| | | benefit
| | | | | | Defined
| | | | | | | | | | | plan | | | other | | | Sub-total | | | contribution | | | PRMB | | | Total | | | | | All figures in £ millions | | | | | Current service cost | | | 33 | | | | 3 | | | | 36 | | | | 41 | | | | 1 | | | | 78 | | | Past service cost | | | — | | | | 1 | | | | 1 | | | | — | | | | 5 | | | | 6 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total operating expense | | | 33 | | | | 4 | | | | 37 | | | | 41 | | | | 6 | | | | 84 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Expected return on plan assets | | | (104 | ) | | | (7 | ) | | | (111 | ) | | | — | | | | — | | | | (111 | ) | | Interest on plan liabilities | | | 93 | | | | 7 | | | | 100 | | | | — | | | | 3 | | | | 103 | | Net finance (income)/expense | | | (11 | ) | | | — | | | | (11 | ) | | | — | | | | 3 | | | | (8 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income statement charge | | | 22 | | | | 4 | | | | 26 | | | | 41 | | | | 9 | | | | 76 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Actual (loss)/return on plan assets | | | (130 | ) | | | (27 | ) | | | (157 | ) | | | — | | | | — | | | | (157 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2007 | | | | | | | | Defined
| | | | | | | | | | | | | | | | | UK Group
| | | benefit
| | | | | | Defined
| | | | | | | | | | | plan | | | other | | | Sub-total | | | contribution | | | PRMB | | | Total | | | | | All figures in £ millions | | | | | Current service cost | | | 29 | | | | 2 | | | | 31 | | | | 39 | | | | 1 | | | | 71 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total operating expense | | | 29 | | | | 2 | | | | 31 | | | | 39 | | | | 1 | | | | 71 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Expected return on plan assets | | | (96 | ) | | | (7 | ) | | | (103 | ) | | | — | | | | — | | | | (103 | ) | | Interest on plan liabilities | | | 84 | | | | 7 | | | | 91 | | | | — | | | | 2 | | | | 93 | | Net finance (income)/expense | | | (12 | ) | | | — | | | | (12 | ) | | | — | | | | 2 | | | | (10 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income statement charge | | | 17 | | | | 2 | | | | 19 | | | | 39 | | | | 3 | | | | 61 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Actual (loss)/return on plan assets | | | 128 | | | | 4 | | | | 132 | | | | — | | | | — | | | | 132 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2006 | | | | | | | | Defined
| | | | | | | | | | | | | | | | | UK Group
| | | benefit
| | | | | | Defined
| | | | | | | | | | | plan | | | other | | | Sub-total | | | contribution | | | PRMB | | | Total | | | | | All figures in £ millions | | | | | Current service cost | | | 27 | | | | 2 | | | | 29 | | | | 36 | | | | 1 | | | | 66 | | | Past service cost | | | — | | | | — | | | | — | | | | — | | | | (2 | ) | | | (2 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Total operating expense | | | 27 | | | | 2 | | | | 29 | | | | 36 | | | | (1 | ) | | | 64 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Expected return on plan assets | | | (85 | ) | | | (7 | ) | | | (92 | ) | | | — | | | | — | | | | (92 | ) | | Interest on plan liabilities | | | 78 | | | | 7 | | | | 85 | | | | — | | | | 3 | | | | 88 | | Net finance (income)/expense | | | (7 | ) | | | — | | | | (7 | ) | | | — | | | | 3 | | | | (4 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income statement charge | | | 20 | | | | 2 | | | | 22 | | | | 36 | | | | 2 | | | | 60 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Actual (loss)/return on plan assets | | | 153 | | | | 13 | | | | 166 | | | | — | | | | — | | | | 166 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The current service cost has beentotal operating charge is included in administrative and other expenses. The UK Group plan current service cost includes £14m (2007: £10m) relating to defined contribution sections. | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Opening obligation | | | (58 | ) | | | (61 | ) | | | (63 | ) | | Exchange differences | | | (7 | ) | | | 6 | | | | 6 | | | Current service cost | | | (1 | ) | | | (1 | ) | | | (1 | ) | | Interest cost | | | (3 | ) | | | (4 | ) | | | (4 | ) | | Benefits paid | | | 4 | | | | 3 | | | | 4 | | | Actuarial gains and losses | | | 5 | | | | (1 | ) | | | (3 | ) | | | | | | | | | | | | Closing obligation | | | (60 | ) | | | (58 | ) | | | (61 | ) | | | | | | | | | | | |
F-52
Notes to the Consolidated Financial Statements (Continued) The amounts recognised in the balance sheet are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | | | | | | Other
| | | Other
| | | | | | | | | Other
| | | Other
| | | | | | | | UK Group
| | | funded
| | | unfunded
| | | | | | UK Group
| | | funded
| | | unfunded
| | | | | | | | plan | | | plans | | | plans | | | Total | | | plan | | | plans | | | plans | | | Total | | | | | All figures in £ millions | | | | | Fair value of plan assets | | | 1,478 | | | | 100 | | | | — | | | | 1,578 | | | | 1,744 | | | | 109 | | | | — | | | | 1,853 | | | Present value of defined benefit obligation | | | (1,429 | ) | | | (149 | ) | | | (16 | ) | | | (1,594 | ) | | | (1,682 | ) | | | (117 | ) | | | (12 | ) | | | (1,811 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net pension (liability)/asset | | | 49 | | | | (49 | ) | | | (16 | ) | | | (16 | ) | | | 62 | | | | (8 | ) | | | (12 | ) | | | 42 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other post-retirement medical benefit obligation | | | | | | | | | | | | | | | (68 | ) | | | | | | | | | | | | | | | (47 | ) | | Other pension accruals | | | | | | | | | | | | | | | (34 | ) | | | | | | | | | | | | | | | (28 | ) | Net retirement benefit obligations | | | | | | | | | | | | | | | (118 | ) | | | | | | | | | | | | | | | (33 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Analysed as: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Retirement benefit assets | | | | | | | | | | | | | | | 49 | | | | | | | | | | | | | | | | 62 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Retirement benefit obligations | | | | | | | | | | | | | | | (167 | ) | | | | | | | | | | | | | | | (95 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following (losses)/gains have been recognised in the statement of recognised income and expense: | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | 2006 | | | | | All figures in £ millions | | | | | Amounts recognised for defined benefit plans | | | (74 | ) | | | 79 | | | | 102 | | | Amounts recognised for post-retirement medical benefit plans | | | 3 | | | | 1 | | | | 5 | | | | | | | | | | | | | | | | Total recognised in year | | | (71 | ) | | | 80 | | | | 107 | | | | | | | | | | | | | | | | Cumulative amounts recognised | | | 53 | | | | 124 | | | | 44 | | | | | | | | | | | | | | | |
The fair value of plan assets comprises the following: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | | | | | | Other
| | | | | | | | | Other
| | | | | | | | UK Group
| | | funded
| | | | | | UK Group
| | | funded
| | | | | | | | plan | | | plans | | | Total | | | plan | | | plans | | | Total | | | | | % | | | | | Equities | | | 28.0 | | | | 3.1 | | | | 31.1 | | | | 34.3 | | | | 3.4 | | | | 37.7 | | | Bonds | | | 40.8 | | | | 2.2 | | | | 43.0 | | | | 34.9 | | | | 2.0 | | | | 36.9 | | | Properties | | | 7.4 | | | | 0.1 | | | | 7.5 | | | | 7.7 | | | | — | | | | 7.7 | | | Other | | | 17.5 | | | | 0.9 | | | | 18.4 | | | | 17.2 | | | | 0.5 | | | | 17.7 | |
The plan assets do not include any of the Group’s own financial instruments, or any property occupied by the Group.
F-53
Notes to the Consolidated Financial Statements (Continued) Changes in the values of plan assets and liabilities of the retirement benefit plans are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | | | UK Group
| | | Other
| | | | | | UK Group
| | | Other
| | | | | | | | plan | | | plans | | | Total | | | plan | | | plans | | | Total | | | | | All figures in £ millions | | | | Fair value of plan assets | | | | | | | | | | | | | | | | | | | | | | | | | | Opening fair value of plan assets | | | 1,744 | | | | 109 | | | | 1,853 | | | | 1,528 | | | | 105 | | | | 1,633 | | | Exchange differences | | | — | | | | 23 | | | | 23 | | | | — | | | | 1 | | | | 1 | | | Expected return on plan assets | | | 104 | | | | 7 | | | | 111 | | | | 96 | | | | 7 | | | | 103 | | | Actuarial gains and (losses) | | | (234 | ) | | | (34 | ) | | | (268 | ) | | | 32 | | | | (3 | ) | | | 29 | | | Contributions by employer | | | 54 | | | | 3 | | | | 57 | | | | 152 | | | | 5 | | | | 157 | | | Contributions by employee | | | 9 | | | | — | | | | 9 | | | | 8 | | | | — | | | | 8 | | | Benefits paid | | | (72 | ) | | | (8 | ) | | | (80 | ) | | | (72 | ) | | | (6 | ) | | | (78 | ) | | Other movements | | | (127 | ) | | | — | | | | (127 | ) | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | Closing fair value of plan assets | | | 1,478 | | | | 100 | | | | 1,578 | | | | 1,744 | | | | 109 | | | | 1,853 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Present value of defined benefit obligation | | | | | | | | | | | | | | | | | | | | | | | | | | Opening defined benefit obligation | | | (1,682 | ) | | | (129 | ) | | | (1,811 | ) | | | (1,683 | ) | | | (127 | ) | | | (1,810 | ) | | Exchange differences | | | — | | | | (38 | ) | | | (38 | ) | | | — | | | | 1 | | | | 1 | | | Current service cost | | | (33 | ) | | | (3 | ) | | | (36 | ) | | | (29 | ) | | | (2 | ) | | | (31 | ) | | Past service cost | | | — | | | | (1 | ) | | | (1 | ) | | | — | | | | — | | | | — | | | Interest cost | | | (93 | ) | | | (7 | ) | | | (100 | ) | | | (84 | ) | | | (7 | ) | | | (91 | ) | | Actuarial gains and (losses) | | | 189 | | | | 5 | | | | 194 | | | | 50 | | | | — | | | | 50 | | | Contributions by employee | | | (9 | ) | | | — | | | | (9 | ) | | | (8 | ) | | | — | | | | (8 | ) | | Benefits paid | | | 72 | | | | 8 | | | | 80 | | | | 72 | | | | 6 | | | | 78 | | | Other movements | | | 127 | | | | — | | | | 127 | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | Closing defined benefit obligation | | | (1,429 | ) | | | (165 | ) | | | (1,594 | ) | | | (1,682 | ) | | | (129 | ) | | | (1,811 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | |
During 2008 changes made to the administration of the plan assets has enabled assets relating to the defined contribution sections of the UK Group plan to be identified separately from those of the defined benefit section, for accounting purposes. Defined contribution assets will no longer be disclosed as part of the UK Group plan assets. The other movements in both the change in value of plan assets and liabilities over the year represent the separation out of these defined contribution assets. Changes in the value of the US PRMB are as follows: | | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | | Opening defined benefit obligation | | | (47 | ) | | | (48 | ) | | Exchange differences | | | (19 | ) | | | — | | | Current service cost | | | (1 | ) | | | (1 | ) | | Past service cost | | | (5 | ) | | | — | | | Interest cost | | | (3 | ) | | | (2 | ) | | Actuarial gains and (losses) | | | 3 | | | | 1 | | | Benefits paid | | | 4 | | | | 3 | | | | | | | | | | | | Closing defined benefit obligation | | | (68 | ) | | | (47 | ) | | | | | | | | | | |
F-54
Notes to the Consolidated Financial Statements (Continued) The history of the defined benefit plans is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | | | | | All figures in £ millions | | | | | Fair value of plan assets | | | 1,578 | | | | 1,853 | | | | 1,633 | | | | 1,500 | | | | 1,280 | | | Present value of defined benefit obligation | | | (1,594 | ) | | | (1,811 | ) | | | (1,810 | ) | | | (1,803 | ) | | | (1,615 | ) | | | | | | | | | | | | | | | | | | | | | | | Net pension asset/(liability) | | | (16 | ) | | | 42 | | | | (177 | ) | | | (303 | ) | | | (335 | ) | | | | | | | | | | | | | | | | | | | | | | | | Experience adjustments on plan assets | | | (268 | ) | | | 29 | | | | 74 | | | | 140 | | | | 67 | | | Experience adjustments on plan liabilities | | | 194 | | | | 50 | | | | 28 | | | | (119 | ) | | | (127 | ) |
Funding The UK Group plan is self-administered with the plan’s assets being held independently of the Group. The trustees of the plan are required to act in the best interest of the plan’s beneficiaries. The most recently completed triennial actuarial valuation for funding purposes was completed as at 1 January 2006 and revealed a funding shortfall. The Group has agreed that the funding shortfall will be eliminated by 31 December 2014. In 2008 the Group contributed £21m (2007: £121m including a special contribution of £100m) and has agreed to contribute £21.9m per annum thereafter in excess of an estimated £30m of regular contributions. The Group expects to contribute $92m in 2009 and $86m in 2010 to its US pension plans. Sensitivities The net retirement benefit obligations are calculated using a number of assumptions, the most significant being the discount rate used to calculate the defined benefit obligation. The effect of a one percentage point increase (and decrease)and decrease in the discount rate on the defined benefit obligation and the total pension expense is as follows: | | | | | | | | | | | | | 2008 | | | | | 1% increase | | | 1% decrease | | | | | All figures in £ millions | | | | Effect on: | | | | | | | | | | (Decrease)/increase in defined benefit obligation — UK Group plan | | | (180.1 | ) | | | 209.6 | | | (Decrease)/increase of aggregate of service cost and interest cost — UK Group plan | | | (2.2 | ) | | | 1.1 | | | (Decrease)/increase in defined benefit obligation — US plan | | | (12.2 | ) | | | 14.5 | |
The effect of a one percentage point increase and decrease in the assumed medical cost trend rates is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2005 | | | 2005 | | | 2004 | | | 2004 | | | 2003 | | | 2003 | | | | | 1% increase | | | 1% decrease | | | 1% increase | | | 1% decrease | | | 1% increase | | | 1% decrease | | | | | | | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | Effect on: | | | | | | | | | | | | | | | | | | | | | | | | | | Aggregate of service cost and interest cost | | | 0.2 | | | | (0.2 | ) | | | 0.2 | | | | (0.2 | ) | | | 0.3 | | | | (0.3 | ) | | Defined benefit obligation | | | 4.7 | | | | 4.1 | | | | 4.1 | | | | (3.7 | ) | | | 4.8 | | | | (4.2 | ) |
| | | | | | | | | | | | | 2008 | | | | | 1% increase | | | 1% decrease | | | | | All figures in £ millions | | | | Effect on: | | | | | | | | | | Increase/(decrease) in post-retirement medical benefit obligation | | | 3.3 | | | | (2.9 | ) | | Increase/(decrease) of aggregate of service cost and interest cost | | | 0.2 | | | | (0.1 | ) |
F-55
F-47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
Share-based compensation
The Group recognised the following charges in the income statement in respect of its equity-settled share-based payment plans: | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Pearson plans | | | 13 | | | | 15 | | | | 20 | | | IDC plans | | | 10 | | | | 10 | | | | 9 | | | | | | | | | | | | | Total share-based payment costs | | | 23 | | | | 25 | | | | 29 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | 2006 | | | | | All figures in £ millions | | | | | Pearson plans | | | 25 | | | | 23 | | | | 18 | | | Interactive Data plans | | | 8 | | | | 7 | | | | 7 | | | | | | | | | | | | | | | | Total share-based payment costs | | | 33 | | | | 30 | | | | 25 | | | | | | | | | | | | | | | |
The Group operates the following equity-settled employee option and performanceshare plans: | | | Profit Sharing Plan — The Group operates a profit sharing plan for all employees, the payment of which is at the discretion of the Pearson board and may be made in cash or Pearson shares. | | | Save for Shares Plans — Since 1994 the Group has operated a Save-As-You-Earn plan for UK employees. In 1998, the Group introduced a Worldwide Save for Shares Plan. Under these plans, employees can save a portion of their monthly salary over periods of three, five or seven years. At the end of this period, the employee has the option to purchase ordinary shares with the accumulated funds at a purchase price equal to 80% of the market price prevailing at the time of the commencement of the employee’s participation in the plan. Options that are not exercised within six months of the third, fifth or seventh anniversary after grant lapse unconditionally. | | | Employee Stock Purchase Plan — In 2000, the Group established an Employee Stock Purchase Plan which allows all employees in the United States to save a portion of their monthly salary over six month periods. At the end of the period the employee has the option to purchase ADRs with their accumulated funds at a purchase price equal to 85% of the lower of the market price prevailing at the beginning or end of the period. | | | Executive Share Option Plan — Under this plan, options were granted to senior management at an exercise price equal to the market price of the shares on the date of grant. Options granted prior to 1996 are not subject to performance conditions. The exercise of options granted since 1996 is subject to growth in the Group’s adjusted earnings per share over a three year period prior to exercise. Options become exercisable on the third anniversary of the date of grant and lapse if they remain unexercised at the tenth. No new awards will be made under this plan. | | | Reward Plan — Awards of premium priced options were made under this plan in 1999 and 2000 with an exercise price above the market value of the shares at the grant date. The exercise of options is subject to Pearson’s share price remaining above certain thresholds for specified periods of time and to growth in the Group’s adjusted earnings per share over the three year period prior to exercise. Options became exercisable on the third anniversary of the date of grant and lapse if they remain unexercised at the tenth. No new awards will be made under this plan. | | | Special Share Option Plan — In 2000, the Group made a special one-off award of share options with an exercise price equal to the market price of the shares on the grant date. They vested in tranches of 50% on the first anniversary of the date of grant and 25% on the second and third anniversaries of the grant date. Options lapse if they remain unexercised at the tenth anniversary of the grant date. No new awards will be made under this plan. |
Worldwide Save for Shares Plan —Since 1994, the Group has operated a Save-As-You-Earn plan for UK employees. In 1998, the Group introduced a Worldwide Save for Shares Plan. Under these plans, employees can save a portion of their monthly salary over periods of three, five or seven years. At the end of this period, the employee has the option to purchase ordinary shares with the accumulated funds at a purchase price equal to 80% of the market price prevailing at the time of the commencement of the employee’s participation in the plan. Options that are not exercised within six months of the end of the savings period lapse unconditionally. Employee Stock Purchase Plan —In 2000, the Group established an Employee Stock Purchase Plan which allows all employees in the US to save a portion of their monthly salary over six month periods. At the end of the period, the employee has the option to purchase ADRs with their accumulated funds at a purchase price equal to 85% of the lower of the market price prevailing at the beginning or end of the period. Long-Term Incentive Plan —This plan was introduced in 2001 and renewed in 2006 and consists of two parts: share optionsand/or restricted shares. Options were granted under this plan in 2001 based on a pre-grant earnings per share growth test and are not subject to further performance conditions on exercise. The options became exercisable in tranches and lapse if they remain unexercised at the tenth anniversary of the date of grant. The vesting of restricted shares is normally dependent on continuing service over a three to five-year period, and in the case of senior management upon the satisfaction of corporate performance targets over a three year period. These targets may be based on marketand/or non-market performance criteria. Restricted shares awarded to senior management in July 2007, March 2008 and July 2008, vest dependent on relative shareholder return, return on invested capital and earnings per share growth. The award was split equally across all three measures. Other restricted shares awarded in 2007 and 2008 vest depending on continuing service over a three-year period. Annual Bonus Share Matching Plan —This plan permits executive directors and senior executives around the Group to invest up to 50% of any after tax annual bonus in Pearson shares. If these shares are held and the Group meets an earnings per share growth target, the company will match them on a gross basis of up to one share for every one held. In addition to the above, share options remain outstanding under Executive Share Option, Reward and Special Share Option Plans. These are legacy plans which were replaced with the introduction of the Long-Term Incentive Plan in 2001.
F-56
F-48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
| | | Long-Term Incentive Plan — This plan was introduced in 2001 and consists of two parts: share options and/or restricted shares. | | | Options were granted under this plan in 2001 based on a pre-grant earnings per share growth test and are not subject to further performance conditions on exercise. The options became exercisable in tranches and lapse if they remain unexercised at the tenth anniversary of the date of grant. | | | The vesting of restricted shares is normally dependent upon the satisfaction of corporate performance targets over a three year period. These targets may be based on market and/or non-market performance criteria. Restricted shares granted in 2001 vested based on Pearson’s three-year cumulative free cash flow per share performance. Awards made in December 2002 and September 2003 vest in tranches. One sixth of the award vests after three years with no performance conditions. The vesting of the balance depends on Pearson’s share price performance over the seven year period following the grants. Restricted shares awarded in December 2004 and September 2005 vest dependent on the following market and non-market performance criteria: relative shareholder return, return on invested capital and a combination of earnings per share and sales growth. The award is split equally across all three measures. | | | Annual Bonus Share Matching Plan — This plan permits executive directors and senior executives around the Group to invest up to 50% of any after tax annual bonus in Pearson shares. If these shares are held and the Group meets an earnings per share growth target, the Company will match them on a gross basis of up to one share for everyone held after three years and another one for two originally held after five years. |
The number and weighted average exercise prices of share options granted under the Group’s schemesplans are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2005 | | | 2005 | | | 2004 | | | 2004 | | | 2003 | | | 2003 | | | | | Number of | | | Weighted | | | Number of | | | Weighted | | | Number of | | | Weighted | | | | | share | | | average | | | share | | | average | | | share | | | average | | | | | options | | | exercise | | | options | | | exercise | | | options | | | exercise | | | | | 000s | | | price £ | | | 000s | | | price £ | | | 000s | | | price £ | | | | | | | | | | | | | | | | | | | | | | | Outstanding at beginning of year | | | 26,179 | | | | 5.93 | | | | 32,284 | | | | 6.93 | | | | 35,608 | | | | 8.84 | | | Granted during the year | | | 606 | | | | 5.06 | | | | 886 | | | | 4.56 | | | | 2,309 | | | | 5.16 | | | Exercised during the year | | | (324 | ) | | | 6.78 | | | | (254 | ) | | | 10.10 | | | | (89 | ) | | | 10.60 | | | Forfeited during the year | | | (4,352 | ) | | | 10.42 | | | | (6,301 | ) | | | 7.49 | | | | (5,053 | ) | | | 16.25 | | | Expired during the year | | | (432 | ) | | | — | | | | (436 | ) | | | — | | | | (491 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | Outstanding at end of year | | | 21,677 | | | | 5.05 | | | | 26,179 | | | | 5.93 | | | | 32,284 | | | | 6.93 | | | | | | | | | | | | | | | | | | | | | | Options exercisable at the end of year | | | 7,634 | | | | 7.80 | | | | 9,071 | | | | 9.23 | | | | 9,882 | | | | 9.44 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | | | | | | Weighted
| | | | | | Weighted
| | | | | Number of
| | | average
| | | Number of
| | | average
| | | | | share
| | | exercise
| | | share
| | | exercise
| | | | | options
| | | price
| | | options
| | | price
| | | | | 000s | | | £ | | | 000s | | | £ | | | | | Outstanding at beginning of year | | | 16,781 | | | | 13.15 | | | | 18,861 | | | | 13.36 | | | Granted during the year | | | 1,437 | | | | 5.35 | | | | 773 | | | | 6.90 | | | Exercised during the year | | | (683 | ) | | | 4.85 | | | | (1,326 | ) | | | 5.80 | | | Forfeited during the year | | | (3,082 | ) | | | 11.56 | | | | (1,434 | ) | | | 19.63 | | | Expired during the year | | | (74 | ) | | | 6.06 | | | | (93 | ) | | | 7.68 | | | | | | | | | | | | | | | | | | | | Outstanding at end of year | | | 14,379 | | | | 13.14 | | | | 16,781 | | | | 13.15 | | | | | | | | | | | | | | | | | | | | Options exercisable at end of year | | | 11,527 | | | | 14.97 | | | | 13,999 | | | | 14.63 | | | | | | | | | | | | | | | | | | | |
Options were exercised regularly throughout the year. The weighted average share price during the year was £6.52 (2004: £6.25; 2003: £5.72)£6.44 (2007: £8.02). Early exercises arising from redundancy, retirement or death are treated as an acceleration of vesting and the remaining charge isGroup therefore recognises in the income statement the amount that otherwise would have been recognised atfor services received over the dateremainder of exercise. F-49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)the original vesting period.
The options outstanding at the end of the year have weighted average remaining contractual lives and exercise prices as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2005 | | | 2005 | | | 2004 | | | 2004 | | | 2003 | | | 2003 | | | | | Number of | | | Weighted | | | Number of | | | Weighted | | | Number of | | | Weighted | | | | | share | | | average | | | share | | | average | | | share | | | average | | | Range of exercise prices | | options | | | contractual | | | options | | | contractual | | | options | | | contractual | | | £ | | 000s | | | life years | | | 000s | | | life years | | | 000s | | | life years | | | | | | | | | | | | | | | | | | | | | | | 0 — 5 | | | 2,773 | | | | 2.08 | | | | 3,251 | | | | 2.97 | | | | 2,740 | | | | 3.66 | | | 5 — 10 | | | 5,555 | | | | 4.48 | | | | 6,538 | | | | 5.44 | | | | 7,797 | | | | 6.02 | | | 10 — 15 | | | 8,237 | | | | 4.63 | | | | 9,604 | | | | 5.57 | | | | 11,758 | | | | 6.63 | | | 15 — 20 | | | 1,168 | | | | 3.80 | | | | 1,469 | | | | 4.81 | | | | 2,210 | | | | 5.78 | | | 20 — 25 | | | 930 | | | | 3.80 | | | | 1,346 | | | | 4.92 | | | | 2,210 | | | | 6.02 | | | >25 | | | 3,014 | | | | 4.22 | | | | 3,971 | | | | 4.65 | | | | 5,569 | | | | 5.79 | | | | | | | | | | | | | | | | | | | | | | | | | | 21,677 | | | | 4.13 | | | | 26,179 | | | | 5.00 | | | | 32,284 | | | | 5.99 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | | | | | | Weighted
| | | | | | Weighted
| | | | | Number of
| | | average
| | | Number of
| | | average
| | | | | share
| | | contractual
| | | share
| | | contractual
| | Range of exercise prices
| | options
| | | life
| | | options
| | | life
| | £ | | 000s | | | Years | | | 000s | | | Years | | | | | 0 — 5 | | | 453 | | | | 1.23 | | | | 930 | | | | 1.56 | | | 5 — 10 | | | 5,113 | | | | 2.84 | | | | 4,909 | | | | 3.22 | | | 10 — 15 | | | 5,481 | | | | 1.97 | | | | 7,257 | | | | 2.62 | | | 15 — 20 | | | 908 | | | | 0.84 | | | | 980 | | | | 1.85 | | | 20 — 25 | | | 350 | | | | 1.19 | | | | 400 | | | | 2.19 | | | >25 | | | 2,074 | | | | 1.19 | | | | 2,305 | | | | 2.19 | | | | | | | | | | | | | | | | | | | | | | | | 14,379 | | | | 2.05 | | | | 16,781 | | | | 2.62 | | | | | | | | | | | | | | | | | | | |
In 2005, 20042008 and 20032007 options were granted under the Worldwide Save for Shares Plan. The weighted average estimated fair value for the options granted was calculated using a Black-Scholes option pricing model.
F-57
The weighted average estimated fair values and the inputs inNotes to the Black-Scholes model are as follows: | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | Weighted | | | Weighted | | | Weighted | | | | | average | | | average | | | average | | | | | | | | | | | | | | Fair value | | | £2.34 | | | | £2.70 | | | | £1.82 | | | | | | | | | | | | | | Weighted average share price | | | £6.54 | | | | £6.58 | | | | £5.15 | | | Weighted average exercise price | | | £5.08 | | | | £4.96 | | | | £4.25 | | | Expected volatility | | | 33.69 | % | | | 41.95 | % | | | 48.74 | % | | Expected life | | | 3.6 years | | | | 3.8 years | | | | 4.0 years | | | Risk free rate | | | 4.48 | % | | | 4.77 | % | | | 3.84 | % | | Expected dividend yield | | | 2.40 | % | | | 2.72 | % | | | 4.55 | % | | Forfeiture rate | | | 20.0 | % | | | 21.1 | % | | | 18.7 | % | | | | | | | | | | | |
The expected volatility is based on the historic volatility of the Company’s share price over the previous 3 — 7 years depending on the vesting term of the options.
During the year the following shares were granted under restricted share arrangements:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2005 | | | 2005 | | | | | 2004 | | | | | 2003 | | | | | Number | | | Weighted | | | 2004 | | | Weighted | | | 2003 | | | Weighted | | | | | of shares | | | average | | | Number | | | average | | | Number | | | average | | | | | 000s | | | fair value | | | of shares | | | fair value | | | of shares | | | fair value | | | | | | | | £ | | | 000s | | | £ | | | 000s | | | £ | | | | | | | | | | | | | | | | | | | | | | Annual Bonus Share Matching Plan | | | 71 | | | | 5.57 | | | | 53 | | | | 5.42 | | | | 108 | | | | 4.36 | | | Long-term Incentive Plan | | | 3,987 | | | | 5.05 | | | | 2,413 | | | | 4.54 | | | | 1,711 | | | | 5.21 | |
F-50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSConsolidated Financial Statements (Continued)
The fair value of shares awarded under the Annual Bonus Share Matching Plan was determined using a Black-Scholes model. Shares awarded under the Long-Term Incentive Plan were also valued using a Black-Scholes model provided the shares vest unconditionally. The weighted average estimated fair values and the inputs into the Black-Scholes model are as follows: | | | | | | | | | | | | | 2005 | | | 2004 | | | | | Weighted | | | Weighted | | | | | Average | | | Average | | | | | | | | | | | Fair value | | | £6.19 | | | | £4.54 | | | | | | | | | | | Weighted average share price | | | £6.69 | | | | £6.13 | | | Weighted average exercise price | | | — | | | | — | | | Expected volatility | | | 32.79 | % | | | 38.39 | % | | Expected life | | | 3.3 years | | | | 3.0 years | | | Risk free rate | | | 4.19 | % | | | 4.59 | % | | Expected dividend yield | | | 2.35 | % | | | 4.00 | % | | Forfeiture rate | | | 9.9 | % | | | 4.5 | % | | | | | | | | |
In 2003, no | | | | | | | | | | | | | 2008
| | | 2007
| | | | | Weighted
| | | Weighted
| | | | | average | | | average | | | | | Fair value | | | £1.67 | | | | £2.53 | | | Weighted average share price | | | £6.96 | | | | £8.91 | | | Weighted average exercise price | | | £5.35 | | | | £6.90 | | | Expected volatility | | | 21.41 | % | | | 19.72 | % | | Expected life | | | 4.1 years | | | | 4.0 years | | | Risk free rate | | | 4.28 | % | | | 5.34 | % | | Expected dividend yield | | | 4.54 | % | | | 3.29 | % | | Forfeiture rate | | | 3.6 | % | | | 3.5 | % |
The expected volatility is based on the historic volatility of the company’s share price over the previous three to seven years depending on the vesting term of the options. The following shares were granted under restricted share arrangements: | | | | | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | | | | | | Weighted
| | | | | | Weighted
| | | | | Number of
| | | average
| | | Number of
| | | average
| | | | | shares
| | | fair value
| | | shares
| | | fair value
| | | | | 000s | | | £ | | | 000s | | | £ | | | | | Annual Bonus Share Matching Plan | | | 253 | | | | 6.73 | | | | 143 | | | | 7.67 | | | Long-Term Incentive Plan | | | 4,152 | | | | 5.78 | | | | 3,377 | | | | 7.12 | |
Restricted shares granted wereunder the Annual Bonus Share Matching Plan are valued using a Black-Scholes model.the share price at the date of grant. Until 31 December 2007, they were discounted by the dividend yield (2007: 3.26%) to take into account any dividends foregone. From 2008, shares granted include the entitlement to dividends during the vesting period and therefore the share price is not discounted. The fair value of restricted shares granted under the Long-Term Incentive Plan that vest conditionally uponunconditionally is determined using the fulfilmentshare price at the date of grant. Participants of the Long-Term Incentive Plan are entitled to dividends during the vesting period. The number of shares to vest has been adjusted, based on historical experience, to account for any potential forfeitures. Restricted shares with a market performance condition were valued by an independent actuary using a Monte Carlo model. SharesRestricted shares with a non-market vestingperformance condition were fair valued based on the share price at the date of grant taking into account any future dividend payments. Thegrant. Non-market performance conditions were considered by adjusting the number of shares expected to vest based on the most likely outcome of the relevant performance criteria. Subsidiary share option plans IDC, Interactive Data, a 61%62% subsidiary of the Group, operates the following share-based payment plans: | | | 2001 Employee Stock Purchase PlanIn 2001, IDC adopted the 2001 Employee Stock Purchase Plan for all eligible employees worldwide. The 2001 Employee Stock Purchase Plan allows employees to purchase stock at a discounted price at specific times. | | | 2000 Long-Term Incentive PlanUnder this plan, the Compensation Committee of the Board of Directors can grant share-based awards representing up to 20% of the total number of shares of common stock outstanding at the date of grant. The plan provides for the discretionary issuance of share-base awards to directors, officers and employees of IDC, as well as persons who provide consulting or other services to IDC. The exercise price for all options granted to date has been equal to the market price of the underlying shares at the date of grant. Options expire ten years from the date of grant and generally vest over a three to four year period without any performance criteria attached. |
2001 Employee Stock Purchase Plan The 2001 Employee Stock Purchase Plan allows all eligible employees worldwide to purchase stock at a discounted price at specific times. 2000 Long-Term Incentive Plan Under this plan, the Compensation Committee of the Board of Directors can grant share-based awards representing up to 20% of the total number of shares of common stock outstanding at the date of grant. The plan provides for the discretionary issuance of share-based awards to directors, officers and employees of Interactive Data, as well as persons who provide consulting or other services to Interactive Data. The exercise price for all options granted to date has been equal to the market price of the underlying shares at the date of
F-58
Notes to the Consolidated Financial Statements (Continued) grant. Options expire ten years from the date of grant and generally vest over a three to four-year period without any performance criteria attached. In addition, grants of restricted stock can be made to certain executives and members of the Board of Directors of IDC.Interactive Data. The awarded shares are available for distribution, at no cost, at the end of a three-year vesting period. No performance criteria are attached to shares granted under this plan. F-51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Interactive Data employees purchased 183,318 shares (2007: 186,343) under the 2001 Employee Stock Purchase Plan at an average share price of $22.95(£15.96) (2007: $17.77; £8.93). The weighted average fair value at the date of grant was $6.59 (£4.58) (2007: $4.76; £2.39). The number and weighted average exercise prices of share options granted under the 2000 Long-Term Incentive Plan isare as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2005 | | | | | | | 2004 | | | | | | | 2003 | | | | | | | 2005 | | | Weighted | | | 2005 | | | 2004 | | | Weighted | | | 2004 | | | 2003 | | | Weighted | | | 2003 | | | | | Number | | | average | | | Weighted | | | Number | | | average | | | Weighted | | | Number | | | average | | | Weighted | | | | | of share | | | exercise | | | average | | | of share | | | exercise | | | average | | | of share | | | exercise | | | average | | | | | options | | | price | | | exercise | | | options | | | price | | | exercise | | | options | | | price | | | exercise | | | | | 000s | | | $ | | | price £ | | | 000s | | | $ | | | price £ | | | 000s | | | $ | | | price £ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at beginning of year | | | 9,832 | | | | 13.46 | | | | 7.36 | | | | 9,358 | | | | 12.15 | | | | 7.44 | | | | 8,619 | | | | 10.43 | | | | 6.38 | | | Granted during the year | | | 1,940 | | | | 21.38 | | | | 11.80 | | | | 1,937 | | | | 17.48 | | | | 9.56 | | | | 2,107 | | | | 16.40 | | | | 10.04 | | | Exercised during the year | | | (1,412 | ) | | | 11.57 | | | | 6.39 | | | | (1,157 | ) | | | 9.59 | | | | 5.24 | | | | (1,195 | ) | | | 7.20 | | | | 4.41 | | | Forfeited during the year | | | (292 | ) | | | 16.86 | | | | 9.31 | | | | (306 | ) | | | 13.32 | | | | 7.28 | | | | (173 | ) | | | 12.36 | | | | 7.57 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at end of year | | | 10,068 | | | | 15.16 | | | | 8.37 | | | | 9,832 | | | | 13.46 | | | | 7.36 | | | | 9,358 | | | | 12.15 | | | | 7.44 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Options exercisable at end of year | | | 6,052 | | | | 12.58 | | | | 6.94 | | | | 5,321 | | | | 11.41 | | | | 6.24 | | | | 4,259 | | | | 9.93 | | | | 6.08 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | | | | | | Weighted
| | | Weighted
| | | | | | Weighted
| | | Weighted
| | | | | Number
| | | average
| | | average
| | | Number
| | | average
| | | average
| | | | | of share
| | | exercise
| | | exercise
| | | of share
| | | exercise
| | | exercise
| | | | | options
| | | price
| | | price
| | | options
| | | price
| | | price
| | | | | 000s | | | $ | | | £ | | | 000s | | | $ | | | £ | | | | | Outstanding at beginning of year | | | 9,827 | | | | 18.21 | | | | 9.15 | | | | 10,506 | | | | 16.33 | | | | 8.34 | | | Granted during the year | | | 1,449 | | | | 24.95 | | | | 17.35 | | | | 1,560 | | | | 27.17 | | | | 13.65 | | | Exercised during the year | | | (895 | ) | | | 15.37 | | | | 10.69 | | | | (1,935 | ) | | | 14.88 | | | | 7.48 | | | Forfeited during the year | | | (99 | ) | | | 22.05 | | | | 15.34 | | | | (293 | ) | | | 20.38 | | | | 10.24 | | | Expired during the year | | | (18 | ) | | | 12.17 | | | | 8.46 | | | | (11 | ) | | | 18.12 | | | | 9.10 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at end of year | | | 10,264 | | | | 19.38 | | | | 13.48 | | | | 9,827 | | | | 18.21 | | | | 9.15 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Options exercisable at end of year | | | 6,865 | | | | 16.89 | | | | 11.75 | | | | 6,199 | | | | 15.27 | | | | 7.67 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The options outstanding at the end of the year have a weighted average remaining contractual life and exercise price as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2005 | | | 2005 | | | 2004 | | | 2004 | | | 2003 | | | 2003 | | | | | Number | | | Weighted | | | Number | | | Weighted | | | Number | | | Weighted | | | | | of share | | | average | | | of share | | | average | | | of share | | | average | | | Range of exercise prices | | options | | | contractual | | | options | | | contractual | | | options | | | contractual | | | $ | | 000s | | | life years | | | 000s | | | life years | | | 000s | | | life years | | | | | | | | | | | | | | | | | | | | | | | 0 — 4.4 | | | 33 | | | | 4.2 | | | | 64 | | | | 4.3 | | | | 143 | | | | 6.1 | | | 4.4 — 7.5 | | | 206 | | | | 3.6 | | | | 287 | | | | 4.5 | | | | 499 | | | | 5.0 | | | 7.5 — 12 | | | 2,685 | | | | 5.3 | | | | 3,398 | | | | 6.3 | | | | 4,117 | | | | 7.3 | | | 12 — 20 | | | 5,243 | | | | 7.4 | | | | 6,083 | | | | 8.4 | | | | 4,599 | | | | 8.8 | | | >20 | | | 1,901 | | | | 9.5 | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | 10,068 | | | | 5.4 | | | | 9,832 | | | | 7.5 | | | | 9,358 | | | | 7.9 | | | | | | | | | | | | | | | | | | | | | |
During | | | | | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | | | | | | Weighted
| | | | | | Weighted
| | | | | Number
| | | average
| | | Number
| | | average
| | | | | of share
| | | contractual
| | | of share
| | | contractual
| | Range of exercise prices
| | options
| | | life
| | | options
| | | life
| | $ | | 000s | | | Years | | | 000s | | | Years | | | | | 0 — 4.4 | | | — | | | | — | | | | — | | | | — | | | 4.4 — 7.5 | | | 47 | | | | 1.3 | | | | 72 | | | | 2.1 | | | 7.5 — 12 | | | 1,502 | | | | 2.4 | | | | 1,745 | | | | 3.4 | | | 12 — 20 | | | 2,987 | | | | 4.6 | | | | 3,464 | | | | 5.6 | | | > 20 | | | 5,728 | | | | 8.0 | | | | 4,546 | | | | 8.5 | | | | | | | | | | | | | | | | | | | | | | | | 10,264 | | | | 6.2 | | | | 9,827 | | | | 6.6 | | | | | | | | | | | | | | | | | | | |
F-59
Notes to the year IDC granted the following shares under restricted share arrangements:Consolidated Financial Statements (Continued) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2005 | | | | | | | | | | | | | | | | | | | 2005 | | | Weighted | | | 2005 | | | | | 2004 | | | 2004 | | | | | 2003 | | | 2003 | | | | | Number | | | average | | | Weighted | | | 2004 | | | Weighted | | | Weighted | | | 2003 | | | Weighted | | | Weighted | | | | | of shares | | | fair value | | | average | | | Number | | | average | | | average | | | Number | | | average | | | average | | | | | 000s | | | $ | | | fair value | | | of shares | | | fair value | | | fair value | | | of shares | | | fair value | | | fair value | | | | | | | | | | | £ | | | 000s | | | $ | | | £ | | | 000s | | | $ | | | £ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2000 Long-Term Incentive Plan | | | 148 | | | | 20.57 | | | | 11.35 | | | | 69 | | | | 17.57 | | | | 9.61 | | | | 76 | | | | 16.97 | | | | 10.39 | | | 2001 Employee Stock Purchase Plan | | | 178 | | | | 3.68 | | | | 2.03 | | | | 124 | | | | 3.24 | | | | 1.77 | | | | 118 | | | | 2.64 | | | | 1.62 | |
Shares awarded under the 2000 Long-Term Incentive Plan were valued based on the share price prevailing at the date of grant. The fair value of the options granted under the Long-Term Incentive Plan and of the shares awarded under the 2001 Employee Stock Purchase Plan was estimated using a Black-Scholes option pricing model. F-52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The weighted average estimated fair values and the inputs into the Black-Scholes model are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Long-Term Incentive Plan | | | Employee Stock Purchase Plan | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | 2005 | | | 2004 | | | 2003 | | | | | Weighted | | | Weighted | | | Weighted | | | Weighted | | | Weighted | | | Weighted | | | | | average | | | average | | | average | | | average | | | average | | | average | | | | | | | | | | | | | | | | | | | | | | | Fair value | | | $ 5.56 | | | | $ 7.50 | | | | $ 8.09 | | | | $ 3.68 | | | | $ 3.24 | | | | $ 2.64 | | | | | | | | | | | | | | | | | | | | | | | Weighted average share price | | | $21.38 | | | | $17.48 | | | | $16.40 | | | | $15.46 | | | | $14.48 | | | | $11.24 | | | Weighted average exercise price | | | $21.38 | | | | $17.48 | | | | $16.40 | | | | $15.46 | | | | $14.48 | | | | $11.24 | | | Expected volatility | | | 24.50 | % | | | 32.20 | % | | | 61.10 | % | | | 20.00 | % | | | 20.00 | % | | | 25.00 | % | | Expected life | | | 4.0 years | | | | 4.0 years | | | | 4.0 years | | | | 0.5 years | | | | 0.5 years | | | | 0.5 years | | | Risk free rate | | | 3.86 | % | | | 3.45 | % | | | 2.00 | % | | | 2.33 | % | | | 1.03 | % | | | 1.20 | % | | Expected dividend yield | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | Forfeiture rate | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Long-Term Incentive Plan | | | Employee Stock Purchase Plan | | | | | 2008
| | | 2007
| | | 2008
| | | 2007
| | | | | Weighted
| | | Weighted
| | | Weighted
| | | Weighted
| | | | | average | | | average | | | average | | | average | | | | | Fair value | | | $ 5.58 | | | | $ 6.60 | | | | $ 6.59 | | | | $ 4.76 | | | Weighted average share price | | | $24.95 | | | | $27.17 | | | | $22.95 | | | | $17.77 | | | Weighted average exercise price | | | $24.95 | | | | $27.17 | | | | $22.95 | | | | $17.77 | | | Expected volatility | | | 24.20 | % | | | 23.40 | % | | | 33.70 | % | | | 20.50 | % | | Expected life | | | 5.7 years | | | | 5.0 years | | | | 0.5 years | | | | 0.5 years | | | Risk free rate | | | 1.5% to 3.5% | | | | 4.2% to 4.9% | | | | 2.0% to 2.4% | | | | 4.3% to 5.1% | | | Expected dividend yield | | | 2.2 | % | | | 1.9 | % | | | 2.1 | % | | | 2.0 | % | | Forfeiture rate | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
The expected volatility is based on the historic volatility of IDC’sInteractive Data’s share price over the vesting term of the options. During the year Interactive Data granted the following shares under restricted share arrangements: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | | | | | | Weighted
| | | Weighted
| | | | | | Weighted
| | | Weighted
| | | | | Number of
| | | average
| | | average
| | | Number of
| | | average
| | | average
| | | | | shares
| | | fair value
| | | fair value
| | | shares
| | | fair value
| | | fair value
| | | | | 000s | | | $ | | | £ | | | 000s | | | $ | | | £ | | | | | 2000 Long-Term Incentive Plan | | | 194 | | | | 25.43 | | | | 17.69 | | | | 185 | | | | 27.07 | | | | 13.60 | |
Shares awarded under the 2000 Long-Term Incentive Plan were valued based on the share price prevailing at the date of grant. | | 2527. | Share capital and share premium |
| | | | | | | | | | | | | | | | | Number of | | | Ordinary | | | Share | | | | | shares | | | shares | | | premium | | | | | (thousands) | | | £m | | | £m | | | | | | | | | | | | | | At 1 January 2003 | | | 801,662 | | | | 200 | | | | 2,465 | | | Issue of shares — share option schemes | | | 726 | | | | 1 | | | | 4 | | | | | | | | | | | | | At 31 December 2003 | | | 802,388 | | | | 201 | | | | 2,469 | | | Issue of shares — share option schemes | | | 862 | | | | — | | | | 4 | | | | | | | | | | | | | At 31 December 2004 | | | 803,250 | | | | 201 | | | | 2,473 | | | Issue of shares — share option schemes | | | 770 | | | | — | | | | 4 | | | | | | | | | | | | | At 31 December 2005 | | | 804,020 | | | | 201 | | | | 2,477 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Number
| | | Ordinary
| | | Share
| | | | | of shares
| | | shares
| | | premium
| | | | | 000s | | | £m | | | £m | | | | | At 1 January 2007 | | | 806,109 | | | | 202 | | | | 2,487 | | | Issue of ordinary shares — share option schemes | | | 1,919 | | | | — | | | | 12 | | | | | | | | | | | | | | | | | At 31 December 2007 | | | 808,028 | | | | 202 | | | | 2,499 | | | | | | | | | | | | | | | | | Issue of ordinary shares — share option schemes | | | 1,248 | | | | — | | | | 6 | | | | | | | | | | | | | | | | At 31 December 2008 | | | 809,276 | | | | 202 | | | | 2,505 | | | | | | | | | | | | | | | |
The total authorised number of ordinary shares is 1,186 million1,198m shares (2004: 1,182 million shares; 2003: 1,178 million(2007: 1,194m shares) with a par value of 25 pence25p per share (2004: 25p per share;2003:(2007: 25p per share). All issued shares are fully paid. All shares have the same rights. The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of debt (see note 18), cash and cash equivalents (see note 17) and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings (see notes 27, 28 and 29).
F-60
F-53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
The Group reviews its capital structure on a regular basis and will balance its overall capital structure through payments of dividends, new share issues as well as the issue of new debt or the redemption of existing debt in line with the financial risk policies outlined in note 19. | | | | | | | | | | | | | | | | | | | | | | | | | Pearson plc | | | Interactive Data | | | Total | | | | | Number
| | | | | | Number
| | | | | | | | | | | of shares
| | | | | | of shares
| | | | | | | | | | | 000s | | | £m | | | 000s | | | £m | | | £m | | | | | At 1 January 2007 | | | 8,761 | | | | 130 | | | | 6,052 | | | | 59 | | | | 189 | | | Purchase of treasury shares | | | 4,900 | | | | 40 | | | | 1,177 | | | | 16 | | | | 56 | | | Release of treasury shares | | | (1,900 | ) | | | (29 | ) | | | — | | | | — | | | | (29 | ) | | | | | | | | | | | | | | | | | | | | | | | | At 31 December 2007 | | | 11,761 | | | | 141 | | | | 7,229 | | | | 75 | | | | 216 | | | | | | | | | | | | | | | | | | | | | | | | | Purchase of treasury shares | | | 2,028 | | | | 12 | | | | 1,976 | | | | 35 | | | | 47 | | | Release of treasury shares | | | (3,341 | ) | | | (41 | ) | | | — | | | | — | | | | (41 | ) | | | | | | | | | | | | | | | | | | | | | | | At 31 December 2008 | | | 10,448 | | | | 112 | | | | 9,205 | | | | 110 | | | | 222 | | | | | | | | | | | | | | | | | | | | | | | |
The Group holds Pearson plc shares in trust to satisfy its obligations under its restricted share plans (see note 26). These shares, representing 1.3% (2007: 1.5%) ofcalled-up share capital, are treated as treasury shares for accounting purposes and have a par value of 25p per share. Interactive Data hold their own shares in respect of share buy-back programmes. These shares are held as treasury shares and have a par value of $0.01. The nominal value of Pearson plc treasury shares amounts to £2.6m (2007: £2.9m). The nominal value of Interactive Data treasury shares amounts to £0.06m (2007: £0.04m). At 31 December 2008 the market value of Pearson plc treasury shares was £67.0m (2007: £86.1m) and the market value of Interactive Data treasury shares was £157.9m (2007: £119.9m).
F-61
Notes to the Consolidated Financial Statements (Continued) | | | 29. | Other reserves and retained earnings |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | | | | Treasury | | | Translation | | | Fair value | | | other | | | Retained | | | | | shares | | | reserve | | | reserve | | | reserves | | | earnings | | | | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | | At 1 January 2003 | | | (121 | ) | | | — | | | | — | | | | (121 | ) | | | 644 | | | Net exchange differences on translation of foreign operations | | | — | | | | (288 | ) | | | — | | | | (288 | ) | | | — | | | Purchase of treasury shares | | | (1 | ) | | | — | | | | — | | | | (1 | ) | | | — | | | Profit for the year attributable to equity holders of the parent | | | — | | | | — | | | | — | | | | — | | | | 252 | | | Dividends paid | | | — | | | | — | | | | — | | | | — | | | | (188 | ) | | Equity settled transactions | | | — | | | | — | | | | — | | | | — | | | | 29 | | | Actuarial gains and losses on defined benefit schemes | | | — | | | | — | | | | — | | | | — | | | | (28 | ) | | Taxation on items taken directly to equity | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | At 31 December 2003 | | | (122 | ) | | | (288 | ) | | | — | | | | (410 | ) | | | 709 | | | | | | | | | | | | | | | | | | | | Net exchange differences on translation of foreign operations | | | — | | | | (203 | ) | | | — | | | | (203 | ) | | | — | | | Purchase of treasury shares | | | (10 | ) | | | — | | | | — | | | | (10 | ) | | | — | | | Profit for the year attributable to equity holders of the parent | | | — | | | | — | | | | — | | | | — | | | | 262 | | | Dividends paid | | | — | | | | — | | | | — | | | | — | | | | (195 | ) | | Equity settled transactions | | | — | | | | — | | | | — | | | | — | | | | 25 | | | Actuarial gains and losses on defined benefit schemes | | | — | | | | — | | | | — | | | | — | | | | (61 | ) | | Taxation on items taken directly to equity | | | — | | | | — | | | | — | | | | — | | | | 9 | | | | | | | | | | | | | | | | | | | At 31 December 2004 | | | (132 | ) | | | (491 | ) | | | — | | | | (623 | ) | | | 749 | | | | | | | | | | | | | | | | | | | | Net exchange differences on translation of foreign operations | | | — | | | | 327 | | | | — | | | | 327 | | | | — | | | Cumulative translation adjustment disposed | | | — | | | | (14 | ) | | | — | | | | (14 | ) | | | — | | | Purchase of treasury shares | | | (21 | ) | | | — | | | | — | | | | (21 | ) | | | — | | | Profit for the year attributable to equity holders of the parent | | | — | | | | — | | | | — | | | | — | | | | 624 | | | Dividends paid | | | — | | | | — | | | | — | | | | — | | | | (205 | ) | | Equity settled transactions | | | — | | | | — | | | | — | | | | — | | | | 23 | | | Actuarial gains and losses on defined benefit schemes | | | — | | | | — | | | | — | | | | — | | | | 26 | | | Taxation on items taken directly to equity | | | — | | | | — | | | | — | | | | — | | | | 12 | | | Transition adjustment on adoption of IAS 39 (note 34) | | | — | | | | 3 | | | | — | | | | 3 | | | | (15 | ) | | | | | | | | | | | | | | | | | | At 31 December 2005 | | | (153 | ) | | | (175 | ) | | | — | | | | (328 | ) | | | 1,214 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total
| | | | | | | | | | | Translation
| | | Fair value
| | | other
| | | Retained
| | | | | Notes | | | reserve | | | reserve | | | reserves | | | earnings | | | | | All figures in £ millions | | | | | At 1 January 2007 | | | | | | | (592 | ) | | | — | | | | (592 | ) | | | 1,568 | | | Net exchange differences on translation of foreign operations | | | | | | | 25 | | | | — | | | | 25 | | | | — | | | Cumulative translation adjustment disposed — subsidiaries | | | 32 | | | | 53 | | | | — | | | | 53 | | | | — | | | Profit for the year attributable to equity holders of the company | | | | | | | — | | | | — | | | | — | | | | 284 | | | Dividends paid to equity holders of the company | | | 9 | | | | — | | | | — | | | | — | | | | (238 | ) | | Equity settled transactions | | | 26 | | | | — | | | | — | | | | — | | | | 30 | | | Actuarial gains on retirement benefit obligations — Group | | | 25 | | | | — | | | | — | | | | — | | | | 80 | | | Treasury shares released under employee share plans | | | 28 | | | | — | | | | — | | | | — | | | | (29 | ) | | Taxation on items charged to equity | | | 7 | | | | — | | | | — | | | | — | | | | 29 | | | | | | | | | | | | | | | | | | | | | | | | At 31 December 2007 | | | | | | | (514 | ) | | | — | | | | (514 | ) | | | 1,724 | | | | | | | | | | | | | | | | | | | | | | | | | Net exchange differences on translation of foreign operations | | | | | | | 1,050 | | | | — | | | | 1,050 | | | | — | | | Cumulative translation adjustment disposed — subsidiaries | | | 32 | | | | 49 | | | | — | | | | 49 | | | | — | | | Cumulative translation adjustment disposed — joint venture | | | | | | | 1 | | | | — | | | | 1 | | | | — | | | Profit for the year attributable to equity holders of the company | | | | | | | — | | | | — | | | | — | | | | 292 | | | Dividends paid to equity holders of the company | | | 9 | | | | — | | | | — | | | | — | | | | (257 | ) | | Equity settled transactions | | | 26 | | | | — | | | | — | | | | — | | | | 33 | | | Actuarial losses on retirement benefit obligations — Group | | | 25 | | | | — | | | | — | | | | — | | | | (71 | ) | | Actuarial losses on retirement benefit obligations — associate | | | | | | | — | | | | — | | | | — | | | | (3 | ) | | Treasury shares released under employee share plans | | | 28 | | | | — | | | | — | | | | — | | | | (41 | ) | | Taxation on items charged to equity | | | 7 | | | | — | | | | — | | | | — | | | | 2 | | | | | | | | | | | | | | | | | | | | | | | | At 31 December 2008 | | | | | | | 586 | | | | — | | | | 586 | | | | 1,679 | | | | | | | | | | | | | | | | | | | | | | | |
The translation reserve includes exchange differences arising from the translation of the net investment in foreign entities,operations and of borrowings and other currency instruments designated as hedges of such investments. F-54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) Included in the translation reserve in 2007 was a £49m loss relating to net assets classified as held for sale.
| | 2730. | Business combinations |
On 22 July 20052 January 2008 the Group acquired 100% of Money-Media, a US based company offering online news and commentary for the voting rightsmoney management industry. On 30 January 2008 the Group completed its acquisition of AGS Publishing, an educational assessments and curriculum materials publisher. In addition, several other businesses were acquired in100% of Harcourt Assessment after receiving clearance from the current and prior years, noneUS Department of which were individually materialJustice.
F-62
Notes to the Group.Consolidated Financial Statements (Continued) The provisional assets and liabilities arising from acquisitions in each of the years are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2005 | | | | | | | | | | | | 2004 | | | 2003 | | | | | AGS | | | AGS | | | AGS | | | Other | | | Total | | | Total | | | Total | | | | | carrying | | | fair value | | | fair | | | fair | | | fair | | | fair | | | fair | | | | | amount | | | adjs | | | value | | | value | | | value | | | value | | | value | | | | | | | | | | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Tangible fixed assets | | | 1 | | | | — | | | | 1 | | | | 6 | | | | 7 | | | | 1 | | | | 10 | | | Intangible assets | | | — | | | | 58 | | | | 58 | | | | 31 | | | | 89 | | | | 15 | | | | 44 | | | Intangible assets — pre-publication | | | 15 | | | | — | | | | 15 | | | | — | | | | 15 | | | | — | | | | — | | | Inventory | | | 3 | | | | — | | | | 3 | | | | 7 | | | | 10 | | | | 2 | | | | — | | | Receivables | | | 7 | | | | — | | | | 7 | | | | 25 | | | | 32 | | | | 3 | | | | 32 | | | Payables | | | (5 | ) | | | (1 | ) | | | (6 | ) | | | (36 | ) | | | (42 | ) | | | (4 | ) | | | (95 | ) | | Provisions | | | (2 | ) | | | — | | | | (2 | ) | | | (1 | ) | | | (3 | ) | | | 1 | | | | (4 | ) | | Deferred taxation | | | — | | | | (20 | ) | | | (20 | ) | | | (1 | ) | | | (21 | ) | | | — | | | | (15 | ) | | Cash and cash equivalents | | | (1 | ) | | | — | | | | (1 | ) | | | 4 | | | | 3 | | | | — | | | | 34 | | | Equity minority interests | | | — | | | | — | | | | — | | | | 8 | | | | 8 | | | | (3 | ) | | | (8 | ) | | | | | | | | | | | | | | | | | | | | | | | | Net assets/(liabilities) acquired at fair value | | | 18 | | | | 37 | | | | 55 | | | | 43 | | | | 98 | | | | 15 | | | | (2 | ) | | | | | | | | | | | | | | | | | | | | | | | | Goodwill | | | 105 | | | | — | | | | 105 | | | | 50 | | | | 155 | | | | 22 | | | | 113 | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | | | | | | | | 160 | | | | 93 | | | | 253 | | | | 37 | | | | 111 | | | | | | | | | | | | | | | | | | | | | | | | | Satisfied by: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash | | | | | | | | | | | (160 | ) | | | (89 | ) | | | (249 | ) | | | (39 | ) | | | (87 | ) | | Deferred cash consideration | | | | | | | | | | | — | | | | (5 | ) | | | (5 | ) | | | — | | | | (24 | ) | | Costs provided for | | | | | | | | | | | — | | | | 1 | | | | 1 | | | | (1 | ) | | | — | | | Net prior year adjustments | | | | | | | | | | | — | | | | — | | | | — | | | | 3 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | Total consideration | | | | | | | | | | | (160 | ) | | | (93 | ) | | | (253 | ) | | | (37 | ) | | | (111 | ) | | | | | | | | | | | | | | | | | | | | | | | | | Book value of net assets/(liabilities acquired) | | | | | | | | | | | 18 | | | | 40 | | | | 58 | | | | 4 | | | | (32 | ) | | Fair value adjustments | | | | | | | | | | | 37 | | | | 3 | | | | 40 | | | | 1 | | | | 30 | | | | | | | | | | | | | | | | | | | | | | | | | Fair value to the Group | | | | | | | | | | | 55 | | | | 43 | | | | 98 | | | | 5 | | | | (2 | ) | | | | | | | | | | | | | | | | | | | | | | | |
The fair value adjustments relating to the acquisition of AGS are provisional and will be finalised during 2006. They include the valuation of intangible assets, the related deferred tax effect and recognition of provisions. Adjustments to 2004 provisional fair values largely relate to the acquisition of Dominie Press. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | | | | | | Harcourt
| | | | | | | | | | | | | | | | | | | | Assessment
| | | Money-Media
| | | Other
| | | Total
| | | Total
| | | | | Notes | | | Fair value | | | Fair value | | | Fair value | | | Fair value | | | Fair value | | | | | All figures in £ millions | | | | | Property, plant and equipment | | | 10 | | | | 6 | | | | — | | | | — | | | | 6 | | | | 11 | | | Intangible assets | | | 11 | | | | 174 | | | | 10 | | | | 36 | | | | 220 | | | | 197 | | | Intangible assets — Pre-publication | | | 20 | | | | 27 | | | | — | | | | — | | | | 27 | | | | 18 | | | Inventories | | | | | | | 7 | | | | — | | | | — | | | | 7 | | | | 15 | | | Trade and other receivables | | | | | | | 48 | | | | 2 | | | | 4 | | | | 54 | | | | 28 | | | Cash and cash equivalents | | | | | | | 5 | | | | — | | | | 11 | | | | 16 | | | | — | | | Trade and other liabilities | | | | | | | (40 | ) | | | (4 | ) | | | (8 | ) | | | (52 | ) | | | (38 | ) | | Financial liabilities — Borrowings | | | | | | | — | | | | — | | | | — | | | | — | | | | (1 | ) | | Current income tax liabilities | | | | | | | — | | | | — | | | | (3 | ) | | | (3 | ) | | | 4 | | | Net deferred income tax liabilities | | | 13 | | | | — | | | | — | | | | (4 | ) | | | (4 | ) | | | (45 | ) | | Provisions for other liabilities and charges | | | 23 | | | | (19 | ) | | | — | | | | (7 | ) | | | (26 | ) | | | (2 | ) | | Minority interest | | | | | | | — | | | | — | | | | (2 | ) | | | (2 | ) | | | — | | | Assets held for sale | | | | | | | 3 | | | | — | | | | — | | | | 3 | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net assets acquired at fair value | | | | | | | 211 | | | | 8 | | | | 27 | | | | 246 | | | | 187 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Goodwill | | | 11 | | | | 113 | | | | 25 | | | | 15 | | | | 153 | | | | 304 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | | | | 324 | | | | 33 | | | | 42 | | | | 399 | | | | 491 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Satisfied by: | | | | | | | | | | | | | | | | | | | | | | | | | | Cash | | | | | | | (321 | ) | | | (33 | ) | | | (40 | ) | | | (394 | ) | | | (468 | ) | | Deferred consideration | | | | | | | — | | | | — | | | | — | | | | — | | | | (12 | ) | | Net prior year adjustments | | | | | | | (3 | ) | | | — | | | | (2 | ) | | | (5 | ) | | | (11 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Total consideration | | | | | | | (324 | ) | | | (33 | ) | | | (42 | ) | | | (399 | ) | | | (491 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | Carrying value of net assets/(liabilities) acquired | | | | | | | 81 | | | | (2 | ) | | | (1 | ) | | | 78 | | | | 41 | | | Fair value adjustments | | | | | | | 130 | | | | 10 | | | | 28 | | | | 168 | | | | 146 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair value | | | | | | | 211 | | | | 8 | | | | 27 | | | | 246 | | | | 187 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net cash outflow on acquisition: | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Cash — current year acquisitions | | | (249 | ) | | | (39 | ) | | | (87 | ) | | Deferred payments for prior year acquisitions and other items | | | — | | | | (2 | ) | | | (7 | ) | | Cash and cash equivalents acquired | | | 3 | | | | — | | | | 34 | | | | | | | | | | | | | Cash outflow on acquisition | | | (246 | ) | | | (41 | ) | | | (60 | ) | | | | | | | | | | | |
F-55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The goodwill arising on the acquisition of AGS is attributableHarcourt Assessment and Money-Media results from substantial cost and revenue synergies and from benefits that cannot be separately recognised, such as the assembled workforce. The fair value adjustments relating to these acquisitions were finalised during 2008.
F-63
Notes to the profitability of the acquired business and the significant synergies expected to arise.Consolidated Financial Statements (Continued) AGS | | | | | | | | | | | | | | | | | Harcourt Assessment | | | | | Carrying
| | | Fair
| | | | | | | | value | | | value adjs | | | Fair value | | | | | All figures in £ millions | | | | | Property, plant and equipment | | | 7 | | | | (1 | ) | | | 6 | | | Intangible assets | | | 10 | | | | 164 | | | | 174 | | | Intangible assets — Pre-publication | | | 35 | | | | (8 | ) | | | 27 | | | Inventories | | | 8 | | | | (1 | ) | | | 7 | | | Trade and other receivables | | | 50 | | | | (2 | ) | | | 48 | | | Cash and cash equivalents | | | 5 | | | | — | | | | 5 | | | Trade and other liabilities | | | (39 | ) | | | (1 | ) | | | (40 | ) | | Provisions for other liabilities and charges | | | (3 | ) | | | (16 | ) | | | (19 | ) | | Assets held for sale | | | 8 | | | | (5 | ) | | | 3 | | | | | | | | | | | | | | | | Net assets acquired at fair value | | | 81 | | | | 130 | | | | 211 | | | | | | | | | | | | | | | | Goodwill | | | | | | | | | | | 113 | | | | | | | | | | | | | | | | Total | | | | | | | | | | | 324 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Money-Media | | | | | Carrying
| | | Fair
| | | | | | | | value | | | value adjs | | | Fair value | | | | | All figures in £ millions | | | | | Intangible assets | | | — | | | | 10 | | | | 10 | | | Trade and other receivables | | | 2 | | | | — | | | | 2 | | | Trade and other liabilities | | | (4 | ) | | | — | | | | (4 | ) | | | | | | | | | | | | | | | Net assets acquired at fair value | | | (2 | ) | | | 10 | | | | 8 | | | | | | | | | | | | | | | | Goodwill | | | | | | | | | | | 25 | | | | | | | | | | | | | | | | Total | | | | | | | | | | | 33 | | | | | | | | | | | | | | | |
Net cash outflow on acquisition: | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | 2006 | | | | | All figures in £ millions | | | | | Cash — Current year acquisitions | | | (394 | ) | | | (468 | ) | | | (382 | ) | | Cash — Acquisitions yet to complete | | | (12 | ) | | | — | | | | — | | | Deferred payments for prior year acquisitions and other items | | | (5 | ) | | | (4 | ) | | | (9 | ) | | Cash and cash equivalents acquired | | | 16 | | | | — | | | | 28 | | | | | | | | | | | | | | | | Cash outflow on acquisition | | | (395 | ) | | | (472 | ) | | | (363 | ) | | | | | | | | | | | | | | |
Harcourt Assessment contributed £21m£150m of sales and £6m£25m to the Group’s profit before tax between the date of acquisition and the balance sheet date. Money-Media contributed £9m of sales and £4m to the Group’s profit before tax between the date of acquisition and the balance sheet date. Other businesses acquired contributed £2m to the Group’s sales and £1m to the Group’s profit before tax between the date of acquisition and the balance sheet date. If the acquisitions had been completed on 1 January 2005, total2008, the Group estimates that sales for the period would have been £4,168m,£4,826m and profit before tax would have been £474m.£587m. F-64
Notes to the Consolidated Financial Statements (Continued) | | 2831. | DisposalsNon-current assets classified as held for sale |
In April 20052007, assets classified as held for sale related to Data Management. The Group recognised an impairment on the Group disposedgoodwill allocated to the Data Management business in anticipation of its 79% interest in Recoletos Grupo de Communicación S.A. | | | | | | | | | | | | | | | | | | | | | | | | | 2005 | | | | | | | | | | | | 2004 | | | 2003 | | | | | Recoletos | | | Other | | | Total | | | Total | | | Total | | | | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | Disposal of subsidiaries | | | | | | | | | | | | | | | | | | | | | | Property, plant and equipment | | | (48 | ) | | | — | | | | (48 | ) | | | — | | | | (3 | ) | | Other financial assets | | | (2 | ) | | | — | | | | (2 | ) | | | — | | | | — | | | Associates | | | (3 | ) | | | — | | | | (3 | ) | | | — | | | | — | | | Inventory | | | (4 | ) | | | — | | | | (4 | ) | | | — | | | | (2 | ) | | Receivables | | | (59 | ) | | | — | | | | (59 | ) | | | (4 | ) | | | (9 | ) | | Payables | | | 68 | | | | 3 | | | | 71 | | | | 2 | | | | 10 | | | Provisions | | | 2 | | | | 1 | | | | 3 | | | | — | | | | — | | | Deferred taxation | | | 8 | | | | — | | | | 8 | | | | — | | | | — | | | Net (cash and cash equivalents)/borrowings | | | (132 | ) | | | (2 | ) | | | (134 | ) | | | 1 | | | | 1 | | | Equity minority interests | | | 60 | | | | (6 | ) | | | 54 | | | | (4 | ) | | | — | | | Attributable goodwill | | | (98 | ) | | | (6 | ) | | | (104 | ) | | | (4 | ) | | | (4 | ) | | Currency translation adjustment | | | 14 | | | | — | | | | 14 | | | | — | | | | — | | | | | | | | | | | | | | | | | | | Net assets disposed of | | | (194 | ) | | | (10 | ) | | | (204 | ) | | | (9 | ) | | | (7 | ) | | | | | | | | | | | | | | | | | | | Proceeds received | | | 503 | | | | 10 | | | | 513 | | | | 8 | | | | 1 | | | Costs | | | (3 | ) | | | — | | | | (3 | ) | | | (2 | ) | | | (1 | ) | | Deferred consideration | | | — | | | | — | | | | — | | | | — | | | | 2 | | | Net prior year adjustments | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | | | | | | | | | | | | | | | | Profit/(loss) on sale | | | 306 | | | | — | | | | 306 | | | | (3 | ) | | | (4 | ) | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | Cash flow from disposals | | | | | | | | | | | | | | Cash — current year disposals | | | 513 | | | | 8 | | | | 1 | | | Costs paid | | | (3 | ) | | | (2 | ) | | | (2 | ) | | Deferred receipts and payments from prior year disposals and other amounts | | | — | | | | — | | | | (3 | ) | | Cash and cash equivalents/net debt disposed of | | | (134 | ) | | | 1 | | | | 1 | | | | | | | | | | | | | Net cash outflow | | | 376 | | | | 7 | | | | (3 | ) | | | | | | | | | | | |
F-56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)the loss on disposal (see note 3). There are no assets or liabilities classified as held for sale at the 2008 balance sheet date.
| | | | | | | | | | | | | | | | | Notes | | | 2008 | | | 2007 | | | | | Property, plant and equipment | | | 10 | | | | — | | | | 7 | | | Intangible assets — Goodwill | | | | | | | — | | | | 96 | | | Intangible assets — Pre-publication | | | 20 | | | | — | | | | 2 | | | Inventories | | | | | | | — | | | | 4 | | | Trade and other receivables | | | | | | | — | | | | 8 | | | | | | | | | | | | | | | | Non-current assets classified as held for sale | | | | | | | — | | | | 117 | | | | | | | | | | | | | | | | | Other liabilities | | | | | | | — | | | | (9 | ) | | | | | | | | | | | | | | | Liabilities directly associated with non-current assets classified as held for sale | | | | | | | — | | | | (9 | ) | | | | | | | | | | | | | | | Net assets classified as held for sale | | | | | | | — | | | | 108 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | 2006 | | | | | Data
| | | | | | | | | | | | | | | | | Management | | | Other | | | Total | | | Total | | | Total | | | | | All figures in £ millions | | | | Disposal of subsidiaries | | | | | | | | | | | | | | | | | | | | | | Property, plant and equipment | | | (7 | ) | | | — | | | | (7 | ) | | | (16 | ) | | | — | | | Intangible assets | | | (1 | ) | | | — | | | | (1 | ) | | | (6 | ) | | | — | | | Intangible assets — Pre-publication | | | (2 | ) | | | — | | | | (2 | ) | | | — | | | | — | | | Inventories | | | (4 | ) | | | (3 | ) | | | (7 | ) | | | (1 | ) | | | — | | | Trade and other receivables | | | (8 | ) | | | — | | | | (8 | ) | | | (95 | ) | | | — | | | Cash and cash equivalents | | | — | | | | — | | | | — | | | | (14 | ) | | | — | | | Net deferred income tax liabilities | | | — | | | | — | | | | — | | | | 2 | | | | — | | | Trade and other liabilities | | | 9 | | | | — | | | | 9 | | | | 73 | | | | (1 | ) | | Retirement benefit obligations | | | — | | | | — | | | | — | | | | 3 | | | | — | | | Provisions for other liabilities and charges | | | — | | | | — | | | | — | | | | 1 | | | | — | | | Minority interest | | | — | | | | (5 | ) | | | (5 | ) | | | (8 | ) | | | (4 | ) | | Attributable goodwill | | | (98 | ) | | | (8 | ) | | | (106 | ) | | | (250 | ) | | | (5 | ) | | Cumulative translation adjustment | | | (49 | ) | | | — | | | | (49 | ) | | | (53 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | | Net assets disposed | | | (160 | ) | | | (16 | ) | | | (176 | ) | | | (364 | ) | | | (10 | ) | | | | | | | | | | | | | | | | | | | | | | | | Cash received | | | 111 | | | | 15 | | | | 126 | | | | 495 | | | | 10 | | | Deferred receipts | | | — | | | | 2 | | | | 2 | | | | — | | | | — | | | Other proceeds received | | | — | | | | — | | | | — | | | | 35 | | | | — | | | Costs | | | (4 | ) | | | (1 | ) | | | (5 | ) | | | (20 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | | (Loss)/profit on sale | | | (53 | ) | | | — | | | | (53 | ) | | | 146 | | | | — | | | | | | | | | | | | | | | | | | | | | | | |
F-65
Notes to the Consolidated Financial Statements (Continued) | | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | 2006 | | | | Cash flow from disposals | | | | | | | | | | | | | | Cash — Current year disposals | | | 126 | | | | 495 | | | | 10 | | | Costs paid | | | (15 | ) | | | (12 | ) | | | — | | | Cash and cash equivalents disposed | | | — | | | | (14 | ) | | | — | | | | | | | | | | | | | | | | Net cash inflow | | | 111 | | | | 469 | | | | 10 | | | | | | | | | | | | | | | |
Further details of the Data Management business disposal are shown in note 3. | | | 33. | Cash generated from operations |
| | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Net profit | | | 644 | | | | 284 | | | | 275 | | Adjustments for: | | | | | | | | | | | | | | Tax | | | 125 | | | | 70 | | | | 84 | | | Depreciation | | | 80 | | | | 84 | | | | 85 | | | Amortisation of purchased intangible assets | | | 11 | | | | 5 | | | | 4 | | | Amortisation of other intangible assets | | | 18 | | | | 20 | | | | 28 | | | Amortisation of pre-publication investment | | | 192 | | | | 168 | | | | 158 | | | Loss on sale of property, plant and equipment | | | — | | | | 4 | | | | 2 | | | (Profit)/loss on sale of other financial assets | | | — | | | | (16 | ) | | | 1 | | | Net finance costs | | | 70 | | | | 76 | | | | 90 | | | Share of results of joint ventures and associates | | | (14 | ) | | | (10 | ) | | | (4 | ) | | (Profit)/loss on sale of subsidiaries and associates | | | (346 | ) | | | 3 | | | | (8 | ) | | Net foreign exchange losses/(gains) from transactions | | | 39 | | | | (15 | ) | | | (51 | ) | | Share-based payments | | | 23 | | | | 25 | | | | 29 | | | Inventories | | | (17 | ) | | | (12 | ) | | | 10 | | | Trade and other receivables | | | (4 | ) | | | (18 | ) | | | (92 | ) | | Trade and other payables | | | 71 | | | | 61 | | | | (50 | ) | | Provisions | | | (17 | ) | | | (24 | ) | | | (30 | ) | | | | | | | | | | | | Cash generated from operations | | | 875 | | | | 705 | | | | 531 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Notes | | | 2008 | | | 2007 | | | 2006 | | | | | | | | All figures in £ millions | | | | | Net profit | | | | | | | 323 | | | | 310 | | | | 469 | | Adjustments for: | | | | | | | | | | | | | | | | | | Income tax | | | | | | | 209 | | | | 222 | | | | 19 | | | Depreciation | | | 10 | | | | 80 | | | | 68 | | | | 77 | | | Amortisation of purchased intangible assets | | | 11 | | | | 86 | | | | 45 | | | | 28 | | | Adjustment on recognition of pre-acquisition deferred tax | | | | | | | — | | | | — | | | | 7 | | | Amortisation of other intangible assets | | | 11 | | | | 30 | | | | 25 | | | | 23 | | | Loss on sale of property, plant and equipment | | | | | | | 1 | | | | 1 | | | | 2 | | | Net finance costs | | | 6 | | | | 91 | | | | 106 | | | | 74 | | | Share of results of joint ventures and associates | | | 12 | | | | (25 | ) | | | (23 | ) | | | (24 | ) | | Loss/(profit) on sale of discontinued operations | | | 3 | | | | 53 | | | | (146 | ) | | | — | | | Goodwill impairment of discontinued operation | | | 3 | | | | — | | | | 97 | | | | — | | | Net foreign exchange adjustment from transactions | | | | | | | 105 | | | | 11 | | | | (37 | ) | | Share-based payment costs | | | 26 | | | | 33 | | | | 30 | | | | 25 | | | Pre-publication | | | | | | | (58 | ) | | | (38 | ) | | | (3 | ) | | Inventories | | | | | | | (12 | ) | | | (1 | ) | | | (16 | ) | | Trade and other receivables | | | | | | | (81 | ) | | | (5 | ) | | | (60 | ) | | Trade and other liabilities | | | | | | | 82 | | | | 80 | | | | 54 | | | Retirement benefit obligations | | | | | | | (14 | ) | | | (126 | ) | | | (17 | ) | | Provisions for other liabilities and charges | | | | | | | (9 | ) | | | 3 | | | | — | | | | | | | | | | | | | | | | | | | | Net cash generated from operations | | | | | | | 894 | | | | 659 | | | | 621 | | | | | | | | | | | | | | | | | | | |
Net cash generated from operations is translated at an exchange rate approximating to the rate at the date of cash flow. In 2008 the difference between this rate and the average rate used to translate profit gives rise to a large currency adjustment in the reconciliation between net profit and net cash generated from operations. This adjustment reflects the timing difference between recognition of profit and the related cash receipts or payments. Included in net cash generated from operations is an amount of £nil (2007: £7m; 2006: £33m) relating to discontinued operations. F-66
Notes to the Consolidated Financial Statements (Continued) In the cash flow statement, proceeds from sale of property, plant and equipment comprise: | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in | | | | | £ millions) | | | Net book amount | | | 3 | | | | 8 | | | | 10 | | | Loss on sale of property, plant and equipment | | | — | | | | (4 | ) | | | (2 | ) | | | | | | | | | | | | Proceeds from sale of property, plant and equipment | | | 3 | | | | 4 | | | | 8 | | | | | | | | | | | | | Non-cash transactions | | | | | | | | | | | | | | The principal non-cash transactions are movements in finance lease obligations | | | — | | | | (1 | ) | | | (1 | ) | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | 2008 | | | 2007 | | | 2006 | | | | | All figures in £ millions | | | | | Net book amount | | | 3 | | | | 15 | | | | 10 | | | Loss on sale of property, plant and equipment | | | (1 | ) | | | (1 | ) | | | (2 | ) | | | | | | | | | | | | | | | Proceeds from sale of property, plant and equipment | | | 2 | | | | 14 | | | | 8 | | | | | | | | | | | | | | | |
The principal other non-cash transactions are movements in finance lease obligations of £2m (2007: £4m; 2006: £4m). There are contingent Group liabilities that arise in the normal course of business in respect of indemnities, warranties and guarantees in relation to former subsidiaries and in respect of guarantees in relation to subsidiaries and associates. In addition there are contingent liabilities of the Group in respect of legal claims. None of these claims isare expected to result in a material gain or loss to the Group. F-57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
31 Commitments
Capital commitments Capital expenditure contracted for at the balance sheet date but not yet incurred is as follows: | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in | | | | | £ millions) | | | Property, plant and equipment | | | 1 | | | | 6 | | | | 1 | | | | | | | | | | | | |
| | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | Property, plant and equipment | | | — | | | | 3 | | | | | | | | | | | |
The Group leases various offices and warehouses under non-cancellable operating lease agreements. The leases have varying terms and renewal rights. The Group also leases various plant and equipment under operating lease agreements, also with varying terms. The lease expenditure charged to the income statement during the year is disclosed in note 5.4. The future aggregate minimum lease payments in respect of operating leases are as follows: | | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Not later than one year | | | 129 | | | | 117 | | | | 123 | | | Later than one year and not later than five years | | | 397 | | | | 353 | | | | 375 | | | Later than five years | | | 869 | | | | 584 | | | | 529 | | | | | | | | | | | | | | | | | 1,395 | | | | 1,054 | | | | 1,027 | | | | | | | | | | | | |
32 Related party transactions
| | | | | | | | | | | | | 2008 | | | 2007 | | | | | All figures in £ millions | | | | | Not later than one year | | | 149 | | | | 123 | | | Later than one year and not later than two years | | | 138 | | | | 116 | | | Later than two years and not later than three years | | | 129 | | | | 102 | | | Later than three years and not later than four years | | | 118 | | | | 93 | | | Later than four years and not later than five years | | | 108 | | | | 85 | | | Later than five years | | | 970 | | | | 834 | | | | | | | | | | | | | | | | 1,612 | | | | 1,353 | | | | | | | | | | | |
| | | 36. | Related party transactions |
Joint ventures and associates — Amounts advanced to joint ventures and associates during the year and at the balance sheet date are set out in note 13.12. Amounts falling due from joint ventures and associates are set out in note 19.22.
F-67
Key management personnelare deemed to be the members of the board of directors of Pearson plc. It is this board which has responsibility for planning, directing and controlling the activities of the Group. Key management personnel compensation is disclosed in the directors’ remuneration report. There were no other material related party transactions. No guarantees have been provided to related parties. 33 Events after the balance sheet date
On 9 January 2006 Pearson announced the purchase of 1,130,739 shares in Interactive Data Corporation (IDC) for $21.67 per share in cash. This purchase brings Pearson’s total holding in IDC to almost 62%. On 23 January 2006 Pearson announced the acquisition of Promissor, a leading professional testing business from Houghton Mifflin Company for $42m in cash. On April 25, 2006 Pearson announced the acquisition of National Evaluation Systems, Inc, a leading teacher certification testing company in the US. On May 5, 2006 Pearson announced the acquisition of an 80% stake in Paravia Bruno Mondadori, one of Italy’s leading educational publishing companies.
34 Explanation of transition to IFRS
These are the Group’s first consolidated financial statements prepared in accordance with IFRS as adopted by the EU.
The accounting policies set out in note 1 have been applied in preparing the financial statements for the year ended 31 December 2005, the comparative information presented in these financial statements for the
F-58
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
years ended 31 December 2004 and 31 December 2003 and the preparation of an opening IFRS balance sheet at 1 January 2003 (the Group’s date of transition). IAS 39 ‘Financial Instruments: Recognition and Measurement’ and IAS 32 ‘Financial Instruments: Disclosure and Presentation’ have not been applied to the comparative periods because the Group has taken a transitional exemption and adopted those standards prospectively from 1 January 2005. The effect of the transitional adjustment on the balance sheet as at 1 January 2005 is set out in the tables below.
In preparing its opening IFRS balance sheet, the Group has made adjustments to amounts previously reported in its financial statements under UK GAAP. An explanation of how the transition from previous UK GAAP to IFRS has affected the Group’s financial position and cash flows is set out in the tables and notes below. These adjustments include some reclassifications of items within the income statement and within the balance sheet in accordance with IFRS disclosure requirements.
F-59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Balance sheet as at 1 January 2003 (date of transition)
| | | | | | | | | | | | | | | | | UK GAAP | | | Adjs | | | IFRS | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Assets | Non-current assets | | | | | | | | | | | | | | Property, plant and equipment | | | 503 | | | | (68 | ) | | | 435 | | | Intangible assets | | | 3,610 | | | | 71 | | | | 3,681 | | | Investments in joint ventures and associates | | | 113 | | | | (7 | ) | | | 106 | | | Deferred income tax assets | | | — | | | | 374 | | | | 374 | | | Other financial assets | | | 22 | | | | — | | | | 22 | | | Other receivables | | | — | | | | 74 | | | | 74 | | | | | | | | | | | | | | | | | 4,248 | | | | 444 | | | | 4,692 | | | | | | | | | | | | | Current assets | | | | | | | | | | | | | | Intangible assets — pre-publication | | | — | | | | 380 | | | | 380 | | | Inventories | | | 734 | | | | (380 | ) | | | 354 | | | Trade and other receivables | | | 1,059 | | | | (79 | ) | | | 980 | | | Deferred income tax assets | | | 174 | | | | (174 | ) | | | — | | | Cash and cash equivalents | | | 575 | | | | (10 | ) | | | 565 | | | | | | | | | | | | | | | | | 2,542 | | | | (263 | ) | | | 2,279 | | | | | | | | | | | | | Total assets | | | 6,790 | | | | 181 | | | | 6,971 | | | | | | | | | | | | | | | | Liabilities | Non-current liabilities | | | | | | | | | | | | | | Financial liabilities — Borrowings | | | (1,734 | ) | | | (2 | ) | | | (1,736 | ) | | Deferred income tax liabilities | | | — | | | | (119 | ) | | | (119 | ) | | Retirement benefit obligations | | | — | | | | (351 | ) | | | (351 | ) | | Provisions for other liabilities and charges | | | (165 | ) | | | 120 | | | | (45 | ) | | Other liabilities | | | (60 | ) | | | (10 | ) | | | (70 | ) | | | | | | | | | | | | | | | | (1,959 | ) | | | (362 | ) | | | (2,321 | ) | | | | | | | | | | | | Current liabilities | | | | | | | | | | | | | | Trade and other liabilities | | | (1,114 | ) | | | 178 | | | | (936 | ) | | Financial liabilities — Borrowings | | | (249 | ) | | | (3 | ) | | | (252 | ) | | Current income tax liabilities | | | — | | | | (52 | ) | | | (52 | ) | | Provisions for other liabilities and charges | | | — | | | | (34 | ) | | | (34 | ) | | | | | | | | | | | | | | | | (1,363 | ) | | | 89 | | | | (1,274 | ) | Total liabilities | | | (3,322 | ) | | | (273 | ) | | | (3,595 | ) | | | | | | | | | | | | Net assets | | | 3,468 | | | | (92 | ) | | | 3,376 | | | | | | | | | | | | | Equity | | | | | | | | | | | | | | Share capital | | | 200 | | | | — | | | | 200 | | | Share premium | | | 2,465 | | | | — | | | | 2,465 | | | Other reserves | | | (121 | ) | | | — | | | | (121 | ) | | Retained earnings | | | 732 | | | | (88 | ) | | | 644 | | | | | | | | | | | | | Total equity attributable to equity holders of the Company | | | 3,276 | | | | (88 | ) | | | 3,188 | | | Minority interest | | | 192 | | | | (4 | ) | | | 188 | | | | | | | | | | | | | Total equity | | | 3,468 | | | | (92 | ) | | | 3,376 | | | | | | | | | | | | |
F-60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Balance sheet as at 31 December 2003
| | | | | | | | | | | | | | | | | UK GAAP | | | Adjs | | | IFRS | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Assets | Non-current assets | | | | | | | | | | | | | | Property, plant and equipment | | | 468 | | | | (66 | ) | | | 402 | | | Intangible assets | | | 3,260 | | | | 290 | | | | 3,550 | | | Investments in joint ventures and associates | | | 64 | | | | — | | | | 64 | | | Deferred income tax assets | | | — | | | | 342 | | | | 342 | | | Other financial assets | | | 21 | | | | — | | | | 21 | | | Other receivables | | | — | | | | 100 | | | | 100 | | | | | | | | | | | | | | | | | 3,813 | | | | 666 | | | | 4,479 | | | | | | | | | | | | | Current assets | | | | | | | | | | | | | | Intangible assets — pre-publication | | | — | | | | 362 | | | | 362 | | | Inventories | | | 683 | | | | (364 | ) | | | 319 | | | Trade and other receivables | | | 1,134 | | | | (109 | ) | | | 1,025 | | | Deferred income tax assets | | | 145 | | | | (145 | ) | | | — | | | Cash and cash equivalents | | | 561 | | | | (10 | ) | | | 551 | | | | | | | | | | | | | | | | | 2,523 | | | | (266 | ) | | | 2,257 | | | | | | | | | | | | | Total assets | | | 6,336 | | | | 400 | | | | 6,736 | | | | | | | | | | | | | | | | Liabilities | Non-current liabilities | | | | | | | | | | | | | | Financial liabilities — Borrowings | | | (1,347 | ) | | | (2 | ) | | | (1,349 | ) | | Deferred income tax liabilities | | | — | | | | (140 | ) | | | (140 | ) | | Retirement benefit obligations | | | — | | | | (364 | ) | | | (364 | ) | | Provisions for other liabilities and charges | | | (152 | ) | | | 93 | | | | (59 | ) | | Other liabilities | | | (45 | ) | | | (25 | ) | | | (70 | ) | | | | | | | | | | | | | | | | (1,544 | ) | | | (438 | ) | | | (1,982 | ) | | | | | | | | | | | | Current liabilities | | | | | | | | | | | | | | Trade and other liabilities | | | (1,129 | ) | | | 186 | | | | (943 | ) | | Financial liabilities — Borrowings | | | (575 | ) | | | (3 | ) | | | (578 | ) | | Current income tax liabilities | | | — | | | | (54 | ) | | | (54 | ) | | Provisions for other liabilities and charges | | | — | | | | (18 | ) | | | (18 | ) | | | | | | | | | | | | | | | | (1,704 | ) | | | 111 | | | | (1,593 | ) | Total liabilities | | | (3,248 | ) | | | (327 | ) | | | (3,575 | ) | | | | | | | | | | | | Net assets | | | 3,088 | | | | 73 | | | | 3,161 | | | | | | | | | | | | | Equity | | | | | | | | | | | | | | Share capital | | | 201 | | | | — | | | | 201 | | | Share premium | | | 2,469 | | | | — | | | | 2,469 | | | Other reserves | | | (122 | ) | | | (288 | ) | | | (410 | ) | | Retained earnings | | | 345 | | | | 364 | | | | 709 | | | | | | | | | | | | | Total equity attributable to equity holders of the Company | | | 2,893 | | | | 76 | | | | 2,969 | | | Minority interest | | | 195 | | | | (3 | ) | | | 192 | | | | | | | | | | | | | Total equity | | | 3,088 | | | | 73 | | | | 3,161 | | | | | | | | | | | | |
F-61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Balance sheet as at 31 December 2004
| | | | | | | | | | | | | | | | | UK GAAP | | | Adjs | | | IFRS | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Assets | Non-current assets | | | | | | | | | | | | | | Property, plant and equipment | | | 473 | | | | (118 | ) | | | 355 | | | Intangible assets | | | 2,890 | | | | 388 | | | | 3,278 | | | Investments in joint ventures and associates | | | 48 | | | | (1 | ) | | | 47 | | | Deferred income tax assets | | | — | | | | 359 | | | | 359 | | | Other financial assets | | | 17 | | | | (2 | ) | | | 15 | | | Other receivables | | | — | | | | 102 | | | | 102 | | | | | | | | | | | | | | | | | 3,428 | | | | 728 | | | | 4,156 | | | | | | | | | | | | | Current assets | | | | | | | | | | | | | | Intangible assets — pre-publication | | | — | | | | 356 | | | | 356 | | | Inventories | | | 676 | | | | (362 | ) | | | 314 | | | Trade and other receivables | | | 1,104 | | | | (171 | ) | | | 933 | | | Deferred income tax assets | | | 165 | | | | (165 | ) | | | — | | | Cash and cash equivalents | | | 613 | | | | (152 | ) | | | 461 | | | | | | | | | | | | | | | | | 2,558 | | | | (494 | ) | | | 2,064 | | | Non-current assets classified as held for sale | | | — | | | | 358 | | | | 358 | | | | | | | | | | | | | | | | | 2,558 | | | | (136 | ) | | | 2,422 | | | | | | | | | | | | | Total assets | | | 5,986 | | | | 592 | | | | 6,578 | | | | | | | | | | | | | | | | Liabilities | Non-current liabilities | | | | | | | | | | | | | | Financial liabilities — Borrowings | | | (1,712 | ) | | | (2 | ) | | | (1,714 | ) | | Deferred income tax liabilities | | | — | | | | (139 | ) | | | (139 | ) | | Retirement benefit obligations | | | — | | | | (408 | ) | | | (408 | ) | | Provisions for other liabilities and charges | | | (123 | ) | | | 80 | | | | (43 | ) | | Other liabilities | | | (60 | ) | | | (39 | ) | | | (99 | ) | | | | | | | | | | | | | | | | (1,895 | ) | | | (508 | ) | | | (2,403 | ) | | | | | | | | | | | | Current liabilities | | | | | | | | | | | | | | Trade and other liabilities | | | (1,168 | ) | | | 300 | | | | (868 | ) | | Financial liabilities — Borrowings | | | (107 | ) | | | (2 | ) | | | (109 | ) | | Current income tax liabilities | | | — | | | | (89 | ) | | | (89 | ) | | Provisions for other liabilities and charges | | | — | | | | (14 | ) | | | (14 | ) | | | | | | | | | | | | | | | | (1,275 | ) | | | 195 | | | | (1,080 | ) | | Liabilities directly associated with non-current assets classified as held for sale | | | — | | | | (81 | ) | | | (81 | ) | | | | | | | | | | | | Total liabilities | | | (3,170 | ) | | | (394 | ) | | | (3,564 | ) | | | | | | | | | | | | Net assets | | | 2,816 | | | | 198 | | | | 3,014 | | | | | | | | | | | | | Equity | | | | | | | | | | | | | | Share capital | | | 201 | | | | — | | | | 201 | | | Share premium | | | 2,473 | | | | — | | | | 2,473 | | | Other reserves | | | (132 | ) | | | (491 | ) | | | (623 | ) | | Retained earnings | | | 61 | | | | 688 | | | | 749 | | | | | | | | | | | | | Total equity attributable to equity holders of the Company | | | 2,603 | | | | 197 | | | | 2,800 | | | Minority interest | | | 213 | | | | 1 | | | | 214 | | | | | | | | | | | | | Total equity | | | 2,816 | | | | 198 | | | | 3,014 | | | | | | | | | | | | |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Adjustments to equity
| | | | | | | | | | | | | | | | | | | | | Notes | | | 1 Jan 2003 | | | 31 Dec 2003 | | | 31 Dec 2004 | | | | | | | | | | | | | | | | | | | | | (All figures in £ millions) | | Total equity UK GAAP | | | | | | | 3,468 | | | | 3,088 | | | | 2,816 | | | Goodwill amortisation | | | a | | | | 66 | | | | 228 | | | | 394 | | | Intangible assets acquired | | | b | | | | — | | | | 40 | | | | 48 | | | Intangible assets — capitalised software costs | | | c | | | | 3 | | | | — | | | | — | | | Intangible assets — pre-publication expenditure | | | d | | | | — | | | | — | | | | — | | | Share-based payments | | | e | | | | 13 | | | | 15 | | | | 22 | | | Employee benefits | | | f | | | | (259 | ) | | | (284 | ) | | | (338 | ) | | Leases | | | g | | | | (12 | ) | | | (22 | ) | | | (33 | ) | | Joint ventures | | | h | | | | (3 | ) | | | (5 | ) | | | (6 | ) | | Associates | | | i | | | | (10 | ) | | | (10 | ) | | | (8 | ) | | Income taxes | | | j | | | | (3 | ) | | | (5 | ) | | | (7 | ) | | Dividends | | | k | | | | 115 | | | | 119 | | | | 125 | | | Other | | | | | | | (2 | ) | | | (3 | ) | | | 1 | | | Discontinued operations | | | l | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | Total adjustments to equity | | | | | | | (92 | ) | | | 73 | | | | 198 | | | | | | | | | | | | | | | | Total equity IFRS | | | | | | | 3,376 | | | | 3,161 | | | | 3,014 | | | | | | | | | | | | | | | |
Income statement for the year to 31 December 2003
| | | | | | | | | | | | | | | | | UK GAAP | | | Adjs | | | IFRS | | | | | | | | | | | | | | | | (All figures in £ millions) | | Continuing operations | | | | | | | | | | | | | | Sales | | | 4,048 | | | | (198 | ) | | | 3,850 | | | Cost of goods sold | | | (1,910 | ) | | | 64 | | | | (1,846 | ) | | | | | | | | | | | | Gross profit | | | 2,138 | | | | (134 | ) | | | 2,004 | | | Operating expenses | | | (1,912 | ) | | | 318 | | | | (1,594 | ) | | Other net gains and losses | | | 6 | | | | (12 | ) | | | (6 | ) | | Share of results of joint ventures and associates | | | — | | | | 2 | | | | 2 | | | | | | | | | | | | | Operating profit | | | 232 | | | | 174 | | | | 406 | | | Net finance costs | | | (80 | ) | | | (13 | ) | | | (93 | ) | | | | | | | | | | | | Profit before tax | | | 152 | | | | 161 | | | | 313 | | | Income tax | | | (75 | ) | | | 14 | | | | (61 | ) | | | | | | | | | | | | Profit for the year from continuing operations | | | 77 | | | | 175 | | | | 252 | | | Profit for the year from discontinued operations | | | — | | | | 23 | | | | 23 | | | | | | | | | | | | | Profit for the year | | | 77 | | | | 198 | | | | 275 | | | | | | | | | | | | |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income statement for the year to 31 December 2004
| | | | | | | | | | | | | | | | | UK GAAP | | | Adjs | | | IFRS | | | | | | | | | | | | | | | | (All figures in £ millions) | | Continuing operations | | | | | | | | | | | | | | Sales | | | 3,919 | | | | (223 | ) | | | 3,696 | | | Cost of goods sold | | | (1,866 | ) | | | 77 | | | | (1,789 | ) | | | | | | | | | | | | Gross profit | | | 2,053 | | | | (146 | ) | | | 1,907 | | | Operating expenses | | | (1,832 | ) | | | 312 | | | | (1,520 | ) | | Other net gains and losses | | | 9 | | | | — | | | | 9 | | | Share of results of joint ventures and associates | | | 10 | | | | (2 | ) | | | 8 | | | | | | | | | | | | | Operating profit | | | 240 | | | | 164 | | | | 404 | | | Net finance costs | | | (69 | ) | | | (10 | ) | | | (79 | ) | | | | | | | | | | | | Profit before tax | | | 171 | | | | 154 | | | | 325 | | | Income tax | | | (62 | ) | | | (1 | ) | | | (63 | ) | | | | | | | | | | | | Profit for the year from continuing operations | | | 109 | | | | 153 | | | | 262 | | | Profit for the year from discontinued operations | | | — | | | | 22 | | | | 22 | | | | | | | | | | | | | Profit for the year | | | 109 | | | | 175 | | | | 284 | | | | | | | | | | | | |
Adjustments to profit
| | | | | | | | | | | | | | | | | Notes | | | 2003 | | | 2004 | | | | | | | | | | | | | | | | | | (All figures in £ | | | | | | | millions) | | Profit for the year UK GAAP | | | | | | | 77 | | | | 109 | | | | | | | | | | | | | | Goodwill amortisation | | | a | | | | 242 | | | | 204 | | | Intangible assets acquired | | | b | | | | (4 | ) | | | (5 | ) | | Intangible assets — capitalised software costs | | | c | | | | (1 | ) | | | (1 | ) | | Intangible assets — pre-publication expenditure | | | d | | | | — | | | | — | | | Share-based payments | | | e | | | | (23 | ) | | | (16 | ) | | Employee benefits | | | f | | | | 1 | | | | 6 | | | Leases | | | g | | | | (10 | ) | | | (12 | ) | | Joint ventures | | | h | | | | (2 | ) | | | (2 | ) | | Associates | | | i | | | | (2 | ) | | | (2 | ) | | Income taxes | | | j | | | | (2 | ) | | | (2 | ) | | Other | | | | | | | (1 | ) | | | 5 | | | Discontinued operations | | | l | | | | — | | | | — | | | | | | | | | | | | | Total adjustments to profit for the year | | | | | | | 198 | | | | 175 | | | | | | | | | | | | | Profit for the year IFRS | | | | | | | 275 | | | | 284 | | | | | | | | | | | | |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash flow for the year to 31 December 2003
| | | | | | | | | | | | | | | | | UK GAAP | | | Adjs | | | IFRS | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Cash flows from operating activities | | | 228 | | | | 172 | | | | 400 | | | Cash flows from investing activities | | | (91 | ) | | | (172 | ) | | | (263 | ) | | Cash flows from financing activities | | | (228 | ) | | | 86 | | | | (142 | ) | | Effects of exchange rate changes on cash and cash equivalents | | | 37 | | | | 8 | | | | 45 | | | | | | | | | | | | | Net (decrease)/increase in cash and cash equivalents | | | (54 | ) | | | 94 | | | | 40 | | | | | | | | | | | | | | Cash and cash equivalents at beginning of year | | | 340 | | | | 148 | | | | 488 | | Cash and cash equivalents at end of year | | | 286 | | | | 242 | | | | 528 | | | | | | | | | | | | |
Cash flow for the year to 31 December 2004
| | | | | | | | | | | | | | | | | UK GAAP | | | Adjs | | | IFRS | | | | | | | | | | | | | | | | (All figures in £ millions) | | | Cash flows from operating activities | | | 387 | | | | 175 | | | | 562 | | | Cash flows from investing activities | | | (102 | ) | | | (179 | ) | | | (281 | ) | | Cash flows from financing activities | | | (255 | ) | | | (6 | ) | | | (261 | ) | | Effects of exchange rate changes on cash and cash equivalents | | | (3 | ) | | | (1 | ) | | | (4 | ) | | | | | | | | | | | | Net increase/(decrease) in cash and cash equivalents | | | 27 | | | | (11 | ) | | | 16 | | | | | | | | | | | | | | Cash and cash equivalents at beginning of year | | | 286 | | | | 242 | | | | 528 | | Cash and cash equivalents at end of year | | | 313 | | | | 231 | | | | 544 | | | | | | | | | | | | |
Effect of IAS 32 and IAS 39 transitional adjustment (note 1m)
| | | | | | | | | | | | | | | | | 31 Dec 2004 | | | Adj | | | 1 Jan 2005 | | | | | | | | | | | | | | | | (All figures in £ millions) | | Non-current assets | | | | | | | | | | | | | | Deferred income tax assets | | | 359 | | | | 5 | | | | 364 | | | Financial assets — Derivative financial instruments | | | — | | | | 145 | | | | 145 | | | | | | | | | | | | | Current assets | | | | | | | | | | | | | | Financial assets — Derivative financial instruments | | | — | | | | 1 | | | | 1 | | | | | | | | | | | | | Non-current liabilities | | | | | | | | | | | | | | Financial liabilities — Borrowings | | | (1,714 | ) | | | (134 | ) | | | (1,848 | ) | | Financial liabilities — Derivative financial instruments | | | — | | | | (40 | ) | | | (40 | ) | | | | | | | | | | | | Current liabilities | | | | | | | | | | | | | | Trade and other liabilities | | | (868 | ) | | | 14 | | | | (854 | ) | | Financial liabilities — Borrowings | | | (109 | ) | | | — | | | | (109 | ) | | Financial liabilities — Derivative financial instruments | | | — | | | | (3 | ) | | | (3 | ) | | | | | | | | | | | | Reserves | | | (126 | ) | | | 12 | | | | (114 | ) | | | | | | | | | | | |
First-time adoption exemptions applied
IFRS 1 ‘First-time Adoption of International Financial Reporting Standards’ sets out the transition rules which must be applied when IFRS is adopted for the first time in reporting IFRS financial information. In
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
general the Group is required to select accounting policies in accordance with IFRS valid at its first IFRS reporting date and apply those polices retrospectively. The standard sets out certain mandatory exceptions to retrospective application and certain optional exemptions. The most significant optional exemptions adopted by the Group are set out below:
| | 137. | Business combinationsEvents after the balance sheet date |
The Group has elected not During 2008 Pearson’s International Education business announced its intention to apply IFRS 3 ‘Business Combinations’ retrospectivelyincrease its stakes in Longman Nigeria from 29% to 51% for £9m and Maskew Miller Longman (MML), its South African publishing business, combinations that occurred before the date of transition. Subjectfrom 50% to the transition adjustments to IFRS required by IFRS 1, the accounting for business combinations before the date of transition is grandfathered at the date of transition from the UK GAAP financial statements. All cumulative actuarial gains and losses have been recognised in full in the period in which they occur in the statement of recognised income and expense in accordance with IAS 19 ‘Employee Benefits’ (as amended on 16 December 2004)85%.
The Group has electedUnder the terms of the MML agreement, Pearson intends to apply IFRS 2 ‘Share-based Payment’ retrospectively to all options granted but not fully vested atcreate a new Southern Africa business and in return for the date of transition. Consequently the share-based payment charge from 2003 represents the charge for all options grantedincreased stake in MML our current joint venture partner will receive £46m in cash and not fully vested at 31 December 2002.
The Group has elected to apply IAS 39 ‘Financial Instruments: Recognitiona 15% interest in Pearson’s Heinemann and Measurement’ and IAS 32 ‘Financial Instruments: Disclosure and Presentation’ from 1 January 2005. After this date, where hedge accounting cannot be applied under IAS 39, changesEdexcel businesses in the market value of financial instruments will be taken to the income statement. No adjustment to the 2003 or 2004 UK GAAP financial statements was required due to the chosen adoption date of IAS 32 and IAS 39.
| | 5 | Cumulative translation differences |
The Group has deemed the cumulative translation differences for foreign operations to be zero at the date of transition. Any gains and losses on disposals of foreign operations will exclude translation differences arising prior to the transition date.
Significant adjustmentsthat region.
a. Goodwill amortisation — IFRS 3 ‘Business Combinations’ requires that goodwill is not amortised but instead is subject to an impairment review annually or when there are indications that the carrying value may not be recoverable. The Group has elected not to apply IFRS 3 retrospectively to In addition Pearson’s International Education business combinations before the date of transition. b. Intangible assets acquired — Business combinations since the date of transition have been accounted for in accordance with IFRS 3 ‘Business Combinations’, with intangible assets recognised and amortised over their useful economic lives where they are separable or arise from a contractual or legal right. As part ofalso announced the acquisition of Comstock IncFronter, a European online learning company based in Oslo, for £16m.
The Longman Nigeria acquisition completed in early January 2009 and the Fronter acquisition in February 2003, certain intangible assets were acquired, mainly relating2009. The MML transaction is expected to customer lists and acquired technology, which are being amortised over periods between two and 30 years. In addition, other less significant intangible assets, mainly relating to publishing rights, have been recognised for some of the smaller acquisitions made during 2004 and amortised over periods of up to 15 years. c. Capitalised software costs — Under IAS 38 ‘Intangible Assets’ computer software which is not integral to a related item of hardware should be classified as an intangible asset. As such, certain computer
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
software costs have been re-classified from property, plant and equipment to intangible assets. In addition, certain costs relating to software development, previously expensed under UK GAAP, have been capitalised under IAS 38 and are being amortised over their estimated useful lives.
d. Pre-publication expenditure — Under IAS 38 ‘Intangible Assets’, intangible assets are required to be recognized if they meet the criteria of identifiability, control over a resource and existence or probability of inflow of future economic benefits. As such pre-publication costs (the direct costs incurredcomplete in the developmentsecond quarter of educational programmes and titles prior to their publication) have been re-classified from inventory to intangible assets. They continue to be amortised upon publication of the title over estimated economic lives of five years or less, being an estimate of the expected operating life cycle of the title, with a higher proportion of the amortisation taken in the earlier years.2009 following regulatory approval.
e. Share-based payments — IFRS 2 ‘Share-based Payment’ requires that the expense incurred for equity instruments granted is recognised in the financial statements at their fair value measured at the date of grant and that the expense is recognised over the vesting period of the instrument. The Group has a number of employee option and performance share schemes. The Group has elected to apply IFRS 2 ‘Share-based Payment’ retrospectively to all options granted but not fully vested at the transition date. Consequently the share-based payment charge from 2003 represents the charge for all options granted and not fully vested at 31 December 2002. f. Employee benefits — IAS 19 ‘Employee Benefits’ was amended on 16 December 2004. The Group has elected to adopt the December 2004 amendments to the standard early and differences between the actual and expected return on assets, changes in the retirement benefit obligation due to experience and changes in actuarial assumptions are included in full in equity in the statement of recognised income and expense. Therefore the amount recognised on the balance sheet in respect of liabilities for defined benefit pension and other post-retirement benefit plans represents the present value of the obligations for past service offset by the fair value of scheme assets.
The service cost of benefits accruing is accounted for as an operating cost and the unwinding of the discount rate on the scheme liabilities and the expected return on scheme assets as a financing charge or financing income. The Group has adopted the same assumptions under IAS 19 as were used for FRS 17 purposes under UK GAAP in 2003 and 2004.
The restated opening IFRS balance sheet reflects the fair value of the plan assets and the present value of the defined benefit obligation of the Group’s defined benefit schemes.
g. Leases — IAS 17 ‘Leases’ sets out additional criteria to be considered in ascertaining whether a lease is a finance or operating lease. Following a review of all lease agreements no properties have been re-classified.
In addition, IAS 17 requires that the expense is recognised on a straight line basis over the lease term, including any rent-free periods given at the inception of a lease. Contracted future lease increments must also be amortised evenly over the full period of the lease rather than the period to which the lease is estimated to revert to market rates. The profit and loss account has been adjusted to take into account the amortisation of lease incentives over longer periods than under UK GAAP and to accelerate the charge in respect of fixed contractual increments in lease payments.
h. Joint ventures — Following a review, the Group has concluded that its 50% holding in Maskew Miller Longman should be accounted for as a joint venture under IFRS rather than its classification as a subsidiary under UK GAAP.
i. Joint ventures and associates — The results of all joint ventures and associates have been adjusted to take into account IFRS adjustments within their own financial statements.
j. Income taxes — IAS 12 ‘Income Taxes’, requires that deferred taxation also be provided on all temporary differences, not just timing differences as required under UK GAAP. Deferred tax is provided, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
their carrying amounts in the financial statements unless the initial recognition exemption applies. Deferred tax is not recognised for temporary differences arising on initial recognition of an asset or liability in a transaction other than a business combination if at the time of transaction neither accounting nor taxable profit is affected. Deferred taxation has been provided on the post-acquisition difference between the book and tax bases of intangible assets and goodwill if its amortisation is tax deductible. A deferred tax liability has also been recognised in respect of the undistributed earnings of subsidiaries other than where it is intended that those undistributed earnings will not be remitted in the foreseeable future.
Deferred taxation has been recognised on the IFRS adjustments at the tax rates that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the asset is realised or the liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.
k. Dividends — IAS 10 ‘Events after the Balance Sheet Date’ requires that dividends declared after the balance sheet date should not be recognised as a liability at the balance sheet date as they do not represent a present obligation at that date as defined by IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’.
The final dividends relating to the years to 31 December 2002, 2003 and 2004 have been reversed and recognised as a liability in the years 2003, 2004 and 2005 respectively.
l. Discontinued operations — Consistent with the UK GAAP treatment, Recoletos has been treated as discontinued as at 31 December 2004 and met the criteria as ‘held for sale’ at that date. Accordingly the results are disclosed in one line in the income statement, ‘Profit for the year from discontinued operations’ for both 2003 and 2004 and, at 31 December 2004, it is disclosed in the balance sheet in two lines — ‘Non-current assets classified as held for sale’ and ‘Liabilities associated with non-current assets classified as held for sale’.
When an asset’s carrying value will be recovered principally through a sale transaction rather than through continuing use and certain criteria regarding probability and proximity of the sale are satisfied, it is classified as held for sale and stated at the lower of carrying value and fair value less costs to sell. No depreciation is charged in respect of non-current assets classified as held for sale.
| | 35. | SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN INTERNATIONAL ACCOUNTING STANDARDS AND UNITED STATES OF AMERICA GENERALLY ACCEPTED ACCOUNTING PRINCIPLES |
The accompanying consolidated financial statements have been prepared in accordance withEU-adopted International Financial Accounting Standards (“IFRS”), which differ in certain significant respects from generally accepted accounting principles in the United States of America (“US GAAP”). Such differences involve methods for measuring the amounts shown in the financial statements.
The following is a summary of the adjustments to consolidated profit for the financial year and consolidated shareholders’ funds that would have been required in applying the significant differences between IFRS and US GAAP.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Reconciliation of consolidated profit for the financial year
| | | | | | | | | | | | | | | | | | | | | | | | Year ended December 31 | | | | | | | | | | | | Note | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | | | | | | £m | | | £m | | | £m | | Profit for the financial year under IFRS | | | | | | | 624 | | | | 262 | | | | 252 | | | US GAAP adjustments: | | | | | | | | | | | | | | | | | | | Intangible amortization | | | (i | ) | | | (60 | ) | | | (75 | ) | | | (97 | ) | | | Discontinued operations | | | (ii | ) | | | — | | | | (1 | ) | | | (3 | ) | | | Disposal adjustments | | | (iii | ) | | | (119 | ) | | | 3 | | | | (6 | ) | | | Pensions and other post-retirement benefits | | | (iv | ) | | | (26 | ) | | | (23 | ) | | | (4 | ) | | | Deferred taxation | | | (v | ) | | | 1 | | | | — | | | | (27 | ) | | | Share based payments | | | (vi | ) | | | (4 | ) | | | (13 | ) | | | (4 | ) | | | Derivative financial instruments | | | (vii | ) | | | (12 | ) | | | (23 | ) | | | 35 | | | | Acquisition adjustments | | | (x | ) | | | 1 | | | | — | | | | — | | | | Partnerships and associates | | | (viii | ) | | | (2 | ) | | | — | | | | (3 | ) | | | Minority interests | | | (ix | ) | | | 2 | | | | — | | | | (1 | ) | | | Other | | | | | | | (9 | ) | | | (1 | ) | | | 4 | | | | Taxation effect of US GAAP adjustments | | | (v | ) | | | 15 | | | | 53 | | | | 27 | | | | | | | | | | | | | | | | | Total US GAAP adjustments | | | | | | | (213 | ) | | | (80 | ) | | | (79 | ) | | | | | | | | | | | | | | | Profit for the financial year under US GAAP | | | | | | | 411 | | | | 182 | | | | 173 | | | | | | | | | | | | | | | | | Profit from continuing operations (less charge for applicable taxes 2005: £107m, 2004: £11m, 2003: £71m) | | | | | | | 174 | | | | 166 | | | | 160 | | | (Loss)/profit from discontinued operations (less charge for/(benefit from) applicable taxes 2005: £(1)m; 2004: £6m, 2003: £22m) | | | | | | | (2 | ) | | | 16 | | | | 16 | | | Profit/(loss) on disposal of discontinued operations (less charge for applicable taxes 2005: £1m; 2004: £nil, 2003: £2m) | | | | | | | 239 | | | | — | | | | (3 | ) | | | | | | | | | | | | | | | Profit for the financial year under US GAAP | | | | | | | 411 | | | | 182 | | | | 173 | | | | | | | | | | | | | | | |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | Year ended December 31 | | | | | | | | | | | | Note | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | Presentation of earnings per equity share under US GAAP | | | (xi | ) | | | | | | | | | | | | | | Earnings per equity share | | | | | | | (p | ) | | | (p | ) | | | (p | ) | | Basic: | | | | | | | | | | | | | | | | | | Continuing operations | | | | | | | 21.8 | | | | 20.9 | | | | 20.1 | | | Discontinued operations | | | | | | | 29.7 | | | | 2.0 | | | | 1.7 | | | | | | | | | | | | | | | | | Total | | | | | | | 51.5 | | | | 22.9 | | | | 21.8 | | | | | | | | | | | | | | | | | Diluted: | | | | | | | | | | | | | | | | | | Continuing operations | | | | | | | 21.7 | | | | 20.8 | | | | 20.1 | | | Discontinued operations | | | | | | | 29.7 | | | | 2.0 | | | | 1.7 | | | | | | | | | | | | | | | | | Total | | | | | | | 51.4 | | | | 22.8 | | | | 21.8 | | | | | | | | | | | | | | | | | Average shares outstanding (millions) | | | | | | | 797.9 | | | | 795.6 | | | | 794.4 | | | Dilutive effect of stock options (millions) | | | | | | | 1.1 | | | | 1.1 | | | | 0.9 | | | | | | | | | | | | | | | | | Average number of shares outstanding assuming dilution (millions) | | | | | | | 799.0 | | | | 796.7 | | | | 795.3 | | | | | | | | | | | | | | | |
Reconciliation of consolidated shareholders’ funds
| | | | | | | | | | | | | | | | | | | | Year ended | | | | | | | December 31 | | | | | | | | | | | | Note | | | 2005 | | | 2004 | | | | | | | | | | | | | | | | | | £m | | | £m | | Shareholders’ funds under IFRS | | | | | | | 3,564 | | | | 2,800 | | | US GAAP adjustments: | | | | | | | | | | | | | | | Goodwill | | | (i | ) | | | 88 | | | | 136 | | | | Intangibles | | | (i | ) | | | 231 | | | | 267 | | | | Discontinued operations | | | (ii | ) | | | — | | | | 49 | | | | Pensions and other post-retirement benefits | | | (iv | ) | | | 61 | | | | 62 | | | | Derivative financial instruments | | | (vii | ) | | | 15 | | | | 11 | | | | Acquisition adjustments | | | (x | ) | | | 26 | | | | 20 | | | | Partnerships and associates | | | (viii | ) | | | 15 | | | | 9 | | | | Minority interests | | | (ix | ) | | | (30 | ) | | | (15 | ) | | | Other | | | | | | | (6 | ) | | | 3 | | | | Taxation effect of US GAAP adjustments | | | (v | ) | | | (126 | ) | | | (124 | ) | | | | | | | | | | | | | Total US GAAP adjustments | | | | | | | 274 | | | | 418 | | | | | | | | | | | | | Shareholders’ funds under US GAAP | | | | | | | 3,838 | | | | 3,218 | | | | | | | | | | | | |
The consolidated financial statements on pages F-3SIGNATURES toF-68 are the Group’s first financial statements to be prepared in accordance withEU-adopted IFRS. Consolidated financial statements of Pearson until December 31, 2004 had been prepared in accordance with UK GAAP. UK GAAP differs in certain respects from IFRS. When preparing the Group’s 2005 consolidated financial statements, management has amended certain accounting, valuation and consolidation methods applied in the UK GAAP financial statements to
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
comply with IFRS. The comparative figures in respect of 2004 and 2003 were restated to reflect these adjustments. Note 34 included in “Item 17. Financial Statements”, describes how, in preparing the consolidated financial statements, the Group has applied IFRS as adopted for use in the EU under the first-time adoption provisions as set out in IFRS 1. The reconciliations between IFRS and US GAAP for the years ended December 31, 2004 and 2003 have been restated accordingly.
A summary of the principal differences and additional disclosures applicable to the Group are set out below:
| | (i) | Goodwill and intangibles |
Both IFRS and US GAAP require purchase consideration to be allocated to the net assets acquired at their fair value on the date of acquisition, with the difference between the consideration and the fair value of the identifiable net assets recorded as goodwill.
Under UK GAAP, before the transition to IFRS on January 1, 2003, goodwill arising on acquisitions prior to January 1, 1998 was written off directly to reserves in the year of acquisition and goodwill arising from January 1, 1998 to December 31, 2002 was capitalized and amortized over its estimated useful life. Following the adoption of IFRS on January 1, 2003, goodwill is no longer required to be amortized but is tested for impairment on an annual basis in accordance with IFRS 3‘Business Combinations’. Goodwill arising on business combinations before January 1, 2003 has been grandfathered under the first time adoption provisions of IFRS 1.
For the purposes of US GAAP, all goodwill written off against reserves before the transition to IFRS has been reinstated as an asset on the balance sheet. Prior to July 1, 2001, goodwill was amortized over its estimated useful life. In July 2001, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard (“FAS”) 142,“Goodwill and Other Intangible Assets” which required that goodwill no longer be amortized. SFAS 142 was effective for the Group on January 1, 2002. As a result, goodwill is no longer subject to amortization subsequent to the date of adoption, but is subject to the annual impairment testing provisions of FAS 142. Impairment reviews were performed and, consistent with IFRS, no cash-generating units were impaired.
Under UK GAAP, before the transition to IFRS on January 1, 2003, intangible assets (other than goodwill) could only be recognized where they could be disposed of separately from the businesses to which they related. Consequently the Group did not recognize any acquired intangible assets prior to January 1, 2003. In accordance with IFRS 3, acquired intangible assets (such as publishing rights, customer relationships, technology and trademarks) in respect of acquisitions after January 1, 2003 have been capitalized and amortized over a range of estimated useful lives between 2 and 30 years. Under US GAAP, acquired intangible assets on all acquisitions have been capitalized and amortized. The identified intangibles have been valued based on independent appraisals and management evaluation and analysis. Under both IFRS and US GAAP pre-publication costs and software development costs (both of which are internally generated) are also recognized as intangible assets. Under US GAAP, all intangible assets would be classified asnon-current.
GAAP differences between IFRS and US GAAP arise from the following factors. In respect of acquisitions prior to January 1, 1998, goodwill has remained as a deduction to reserves under IFRS but has been capitalized under US GAAP. In respect of acquisitions between January 1, 1998 and December 31, 2002, no acquired intangible assets have been recognized under IFRS while they have been fully recognized under US GAAP. Amortization of goodwill ceased on December 31, 2001 under US GAAP but ceased a year later under IFRS. Also, contingent consideration is recognized as a cost of acquisition under IFRS, if it is probable that the contingent consideration will be paid and can be measured reliably. Under US GAAP, contingent consideration is only recognised when paid (see acquisition adjustments (x) below).
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | (ii) | Discontinued operations |
Discontinued operations comprise the differences between IFRS and US GAAP in respect of Recoletos for 2005, 2004 and 2003.
The operating profits, assets and liabilities in respect of discontinued operations under US GAAP are as follows:
| | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | £m | | | £m | | | £m | | | Total operating profit/(loss) in respect of discontinued operations | | | (3 | ) | | | 21 | | | | 27 | | | Assets in respect of discontinued operations | | | — | | | | 413 | | | | | | | Liabilities in respect of discontinued operations | | | — | | | | (148 | ) | | | | |
| | (iii) | Disposal adjustments |
In 2005, 2004 and 2003 gains and losses were recognized under IFRS on the disposal of a number of the Group’s businesses and assets. Adjustments made to reconcile US GAAP and IFRS have an effect on the net assets of these businesses and, accordingly, a corresponding impact on the gain or loss on disposal.
Under IFRS, goodwill previously written off to reserves, which has been grandfathered under the first time adoption provisions of IFRS 1, is not treated as part of the calculation of profit or loss on disposal when the business to which it relates is sold. This usually results in higher profits on disposal than under US GAAP, where the goodwill was capitalized and forms part of the calculation of profit or loss on disposal.
Under both IFRS and US GAAP, it is necessary to factor into the disposal calculation any cumulative translation adjustment associated with the business. However, a GAAP difference arises on disposals of entities acquired before the adoption of IFRS as the translation reserve was reset to zero at the date of the adoption of IFRS in accordance with the transitional provisions in IFRS 1. Under US GAAP, the translation reserve runs from the date of acquisition.
Differences can arise on the treatment of property disposals and sale and leaseback transactions. The timing of recognition of profits or losses on these transactions can differ between IFRS and US GAAP.
The reconciling items between IFRS and US GAAP in respect of disposals are summarised as follows:
| | | | | | | | | | | | | | | | | 2005 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | £m | | | £m | | | £m | | | Difference in carrying value on disposal | | | (86 | ) | | | — | | | | — | | | Cumulative translation adjustment | | | (33 | ) | | | — | | | | — | | | Timing on property disposals | | | — | | | | 3 | | | | (6 | ) | | | | | | | | | | | | Total US GAAP differences in respect of disposals | | | (119 | ) | | | 3 | | | | (6 | ) | | | | | | | | | | | |
| | (iv) | Pensions and other post-retirement benefits |
The Group operates defined benefit pension plans for its employees and former employees throughout the world. The largest defined benefit scheme is a funded scheme operated in the UK.
Under IFRS, the expense of defined benefit pension schemes and other post-retirement benefits is charged to the income statement as an operating expense over the periods benefiting from the employee’s services. The charge is based on actuarial assumptions reflecting market conditions at the beginning of the financial year.
Under US GAAP, the annual pension cost comprises the estimated cost of benefits accruing in the period as determined in accordance with SFAS 87“Employers Accounting for Pensions”. The methodology required is broadly similar to IFRS, however, different assumptions on the expected asset return are used in the
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SFAS 87 pension calculation. Additionally, under US GAAP, where an accumulated benefit obligation exists in excess of the fair value plan assets and is not covered by a liability recognized on the balance sheet, an additional minimum pension liability has been booked with the offset as a reduction to equity through other comprehensive income. Under IFRS, there is no requirement to recognize a minimum pension liability in respect of the unfunded accumulated benefit obligation.
Under IAS 19, the Group has recognized a pension obligation representing the excess of the defined benefit obligation over the fair value of assets as at 31 December 2005. Actuarial gains and losses, i.e. the difference between the expected development of the assets and liabilities and the actual development, are recognized immediately through the statement of recognized income and expenses.
Under SFAS 87, the Group has recognized prepaid pension cost amounting to £57 million and a minimum pension liability of £298 million in respect of pensions. In respect of post-retirement benefit plans the accrued pension cost amounts to £49 million as at December 31, 2005. The difference between the net balance sheet position and the plans’ funded status (the difference between the fair value of the plan assets and liabilities) is held as an unrecognized off-balance sheet item and spread over the employees’ remaining service lifetimes. However, the unrecognized amount attributable to actuarial gains and losses falling within a 10% corridor (i.e. 10% of the greater of the market value of the plan assets or plan liabilities) is deferred and not spread.
IAS 12“Income Taxes” requires a full provision to be made for deferred taxes. Deferred taxes are to be accounted for on all temporary differences with deferred tax assets recognized to the extent that they are more likely than not recoverable against future taxable profits. Under US GAAP deferred tax assets not considered recoverable are adjusted for through a separate valuation allowance in the balance sheet. There are no separate valuation allowances under IFRS. Under US GAAP, deferred taxes are accounted for in accordance with SFAS 109,“Accounting for Income Taxes” with a full provision also made for deferred taxes on all temporary differences and a valuation allowance established for the amount of the deferred tax assets not considered recoverable. This is similar to the treatment required under IAS 12.
The reconciling items in 2005 and 2004 reflect the impact of recording the full provision and deferred tax assets, net of valuation allowance, and are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | Income | | | Equity | | | Income | | | Equity | | | Income | | | | | 2005 | | | 2005 | | | 2004 | | | 2004 | | | 2003 | | | | | | | | | | | | | | | | | | | | | | £m | | | £m | | | £m | | | £m | | | £m | | Tax effect of GAAP adjustments on: | | | | | | | | | | | | | | | | | | | | | | Goodwill and intangible amortization | | | 18 | | | | (121 | ) | | | 17 | | | | (129 | ) | | | 20 | | | Derivative financial instruments | | | 3 | | | | (5 | ) | | | 38 | | | | (3 | ) | | | (21 | ) | | Options, pensions, disposals and other adjustments | | | (6 | ) | | | — | | | | (2 | ) | | | 8 | | | | 28 | | | | | | | | | | | | | | | | | | | Total taxation effect of US GAAP adjustments | | | 15 | | | | (126 | ) | | | 53 | | | | (124 | ) | | | 27 | | | | | | | | | | | | | | | | | | |
Income tax adjustments on the GAAP differences on goodwill and intangible amortization are calculated by reference to each specific acquisition. These adjustments arise on tax deductible goodwill and intangibles primarily on acquisitions prior to January 1, 2003 where intangibles have been recognized under US GAAP which have not been recognized under IFRS. The net effect of the adjustments is to recognize a smaller deferred tax liability under US GAAP.
Adjustments to the deferred tax on derivatives are provided on the gross adjustment to the value of the derivatives at the balance sheet date with the movement on the tax adjustment shown as a reconciling item in the profit and loss account.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The recognized deferred tax asset is based upon the expected future utilization of tax loss carryforwards and the reversal of other temporary differences. For financial reporting purposes, the Group has recognized a valuation allowance for those benefits for which realization does not meet the more likely than not criteria. The valuation allowance has been recognized in respect of the tax loss carryforwards. The Group regularly reviews the adequacy of the valuation allowance and is recognizing these benefits only as reassessment indicates that it is more likely than not that the benefits will be realized.
The deferred tax item in 2003 also incorporates the effect of a change in estimate in respect of deferred tax assets relating to a purchase business combination in prior years, which was recorded through the profit and loss account under IFRS, but which was required to be adjusted against goodwill under US GAAP.
| | (vi) | Share based payments |
Under both IFRS and US GAAP, the share-based payment charge is determined based on the fair value of the award at the grant date and is spread over the vesting period.
Under both IFRS and US GAAP, the fair value of awards is determined at the date of grant using whichever of the Black-Scholes, Binomial and Monte Carlo model is most appropriate to the award. These models require assumptions to be made regarding share price volatility, dividend yield, risk free rate of return and expected option lives. Differences between the US GAAP and IFRS charge are mainly due to the different treatment of options with graded vesting features. Under IFRS the charge is recognized as the options gradually vest, whereas under US GAAP the charge is recognized on a straight line basis over the vesting period resulting in an additional cost of £5.4 million. The remainder of the adjustment relates to the treatment of forfeitures.
| | (vii) | Derivative financial instruments |
Prior to the adoption of IAS 39‘Financial Instruments: Recognition and Measurement’ on January 1, 2005, the Group’s derivatives were recorded as hedging instruments. Amounts payable or receivable in respect of interest rate swaps were accrued with net interest payable over the period of the contract. Unrealized gains and losses on currency swaps and forward currency contracts were deferred and recognized when paid.
Following the adoption of IAS 39, derivatives are required to be recognized at fair value using market prices or established estimation techniques such as discounted cash flow or option valuation models. The transitional effect of recording all the Group’s derivative financial instruments at fair value on January 1, 2005 is shown in note 34 to these financial statements.
For both IFRS and US GAAP, the Group designates certain of the derivative financial instruments in its portfolio to be hedges of the fair value of its bonds (fair value hedges) or hedges of net investment in foreign operations (net investment hedges). Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with the change in fair value of the hedged assets or liability attributable to the hedge risk. The effective portion of changes in the fair value of derivatives that are designated and qualify as net investment hedges are recognized in equity. Gains and losses accumulated in equity are included in the income statement when the corresponding foreign operation is disposed of. Gains or losses relating to the ineffective portion are recognized immediately in the income statement. Changes in the fair value of derivatives not in hedging relationships are recognized in the income statement.
In 2003, under US GAAP, the Group did not meet the prescribed designation requirements and hedge effectiveness tests to obtain hedge accounting. Consequently, for that year, the Group has recorded the changes in the fair values of its derivative contracts through earnings under US GAAP. Certain derivative financial instruments met the designation and testing requirements for hedge accounting for 2004 and 2005.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On adoption of IAS 39 on January 1, 2005, certain of the Group’s derivative financial instruments were deemed to be in fair value hedging relationships for the purposes of calculating the transition adjustment. The Group has elected not to designate all of these derivatives as hedges on an ongoing basis. In this circumstance, the transitional adjustment to the carrying value of those bonds deemed to be in fair value hedging relationships is being amortized over the life of the corresponding derivative financial instrument. This gives rise to a difference between IFRS and US GAAP as this amortization is included in the income statement under IFRS with no corresponding entry under US GAAP.
| | (viii) | Partnerships and associates |
There is no difference between IFRS and US GAAP in the accounting for partnerships and associates. However, the accounts of partnerships and associates must be adjusted from IFRS to US GAAP, which has an impact on the results of the partnerships and associates, as well as the carrying value of the investment in these entities. Principal differences identified with respect to the Group’s investments in partnerships and associates include: historic goodwill, pensions and derivatives.
Under US GAAP, in accordance with Accounting Principles Board Opinion (“APB”) No. 18,“The Equity Method of Accounting for Investments in Common Stock”, the Group periodically reviews its equity method investments for impairment. These reviews are performed to determine whether declines in market values of investments below their carrying values are deemed to be other than temporary.
Under IFRS, when less than 100% of a subsidiary has been acquired, minority interest is stated at the minority’s proportion of the net fair value of acquired assets, liabilities and contingent liabilities assumed. Under US GAAP, the minority interest is valued at historical book value. In the years ended December 31, 2005, 2004 and 2003, there was no difference between IFRS and US GAAP in the recognition of minority interest. In all years, minority interests represent the minority share of US GAAP adjustments.
Under IFRS, minority interest is classified as a component of shareholders’ equity. Under US GAAP, minority interest is classified outside of equity.
| | (x) | Acquisition adjustments |
Under US GAAP, consideration related to the acquisition of businesses contingent on a future event such as achieving specific earnings levels in future periods, is recorded only when the specified conditions are met and the consideration determinable, in accordance withSFAS 141 “Business Combinations.” Under IFRS, contingent consideration is treated as part of the purchase price on the date of acquisition, if it is probable that the contingent consideration will be paid and can be measured reliably. Additionally, certain post-acquisition restructuring costs are capitalized under US GAAP in accordance with Emerging Issues Task Force No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination”, but are charged to the income statement under IFRS.
| | (xi) | Presentation of earnings per equity share |
Under US GAAP an entity that reports a discontinued operation or cumulative effect of an accounting change must present basic and diluted EPS for those line items. Accordingly, the Group has presented EPS for income from continuing operations, discontinued operations and net income.
| | (xii) | Other disclosures required by US GAAP |
The consolidated financial statements include the accounts of the Group and majority-owned and controlled subsidiaries. Under IFRS, the investments in companies in which the Group is unable to exercise
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
control but has the ability to exercise significant influence over operating and financial policies are accounted for by the equity method, which is consistent with the equity method under US GAAP. Accordingly, the Group’s share of the net earnings of these companies is included in the consolidated profit and loss. The investments in other companies are carried at cost. Inter-company accounts and transactions are eliminated upon consolidation.
The Group consolidates variable interest entities where we are deemed to be the primary beneficiary of the entity. Operating results for variable interest entities in which we are deemed the primary beneficiary are included in the profit and loss account from the date such determination is made.
Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Accounting estimates have been used in these financial statements to determine reported amounts, including realizability, useful lives of tangible and intangible assets, income taxes and other items. Actual results could differ from those estimates.
The consolidated financial statements do not constitute “statutory accounts” within the meaning of the Companies Act 1985 of Great Britain for any of the periods presented. Statutory accounts for the years ended December 31, 2005, 2004 and 2003 have been filed with the United Kingdom’s Registrar of Companies. The auditors have reported on these accounts. Their reports were unqualified and did not contain statements under Section 237 (2) or (3) of that Act.
These consolidated financial statements include all material disclosures required by generally accepted accounting principles in the United Kingdom including those Companies Act 1985 disclosures relating to the profit and loss account and balance sheet items.
| | | Recent U.S. Accounting Pronouncements |
In November 2004, the FASB issued FASB Statement No. 151“Inventory Costs — An Amendment of ARB No. 43, Chapter 4” (“FAS 151”). FAS 151 amends the guidance in ARB No. 43, Chapter 4 “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. Additionally, FAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. FAS 151 is effective for fiscal years beginning after June 15, 2005. The Group will adopt FAS 151 in 2006 but does not expect the adoption of the new standard to have a material impact.
In December 2004, the FASB issued FASB Statement No. 153“Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions” (“FAS 153”). FAS 153 eliminates the exception from fair value measurement for non monetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance. FAS 153 specifies that a non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. FAS 153 is effective for the fiscal periods beginning after June 15, 2005. The Group will adopt FAS 153 in 2006 but does not expect the adoption of the new standard to have a material impact.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004)“Share-Based Payment” (“FAS 123(R)”), which replaces FAS No. 123“Accounting for Stock-Based Compensation” (“FAS 123”) and supersedes APB Opinion No. 25“Accounting for Stock Issued to Employees.” FAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under FAS 123 no longer will be an alternative to financial statement recognition. The Group will adopt FAS 123(R) in 2006 but does not expect the adoption of the new standard to have a material impact as it already recognizes share-based payment cost in its income statement in accordance with FAS 123.
In March 2005, the FASB issued FASB Interpretation No. 47“Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 clarifies the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset when the timing and/or settlement are conditional on a future event. FIN 47 is effective for the fiscal periods ending after December 15, 2005. The adoption of FIN 47 did not have a material impact on the Group.
In May 2005, the FASB issued Statement No. 154,“Accounting Changes and Error Corrections — A replacement of APB Opinion No. 20 and FASB Statement No. 3” (“FAS 154”). This statement requires retrospective application to prior periods’ financial statements of changes in accounting principles unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This statement applies to all voluntary changes in accounting principles and changes required by an accounting pronouncement that does not include specific transition provisions. FAS 154 is required to be adopted in fiscal years beginning after December 15, 2005. FAS 154 would not have had a material effect on the financial position, results of operations or cash flows of the Group under US GAAP as at December 31, 2005.
In October 2005, the FASB issued FASB Staff Position (FSP) 13-1“Accounting for Rental Costs Incurred during a Construction Period” (“FSP 13-1”). FSP 13-1 requires rental costs associated with ground or building operating leases that are incurred during a construction period to be recognized as rental expense and included in income from continuing operations. FSP 13-1 is effective for the fiscal periods beginning after December 15, 2005. The Group will adopt FSP 13-1 in 2006 but does not expect the adoption of the new standard to have a material impact.
In January 2006 the FASB issued FASB Statement No. 155“Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140” (“FAS 155”). FAS 155 provides entities with relief from having to separately determine the fair value of an embedded derivative that would otherwise be required to be bifurcated from its host contract. FAS 155 is effective for all financial instruments acquired, issued or subject to a remeasurement event occurring after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Group is currently evaluating the impact the adoption of FAS 155 will have, but does not expect it to have a material impact.
| | | Recent International Accounting Pronouncements |
IFRS 7“Financial Instruments: Disclosures”. IFRS 7 introduces new disclosures of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk. IFRS 7 is effective for accounting periods beginning on or after 1 January 2007. The Group is currently assessing the impact of IFRS 7 on the Group’s financial statements, but does not expect it to be significant.
A complementary amendment of IAS 1“Presentation of Financial Statements — Capital Disclosures”. The amendment to IAS 1 introduces disclosures about the level of an entity’s capital and how it manages capital. The amendment to IAS 1 is effective for accounting periods beginning on or after 1 January 2007. The Group is currently assessing the impact of the amendment to IAS 1, but does not expect it to be significant.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
IFRIC 4“Determining whether an Arrangement contains a Lease”. IFRIC 4 requires the determination of whether an arrangement is or contains a lease to be based on the substance of the arrangement. IFRIC 4 is effective for accounting periods beginning on or after 1 January 2006. The Group will implement IFRIC 4 from 1 January 2006 but does not expect it to have a significant impact on the Group’s operations.
IAS 21 (Amendment)“Net investment in a foreign operation”. This amendment deals with the requirement for a monetary item that forms part of a reporting entity’s net investment in a foreign operation to be denominated in the functional currency of either the reporting entity or the foreign operation. The amendment also clarifies the accounting treatment of exchange differences arising on a loan made between two “sister companies” within a group. The exchange differences would be taken to equity in the parent’s consolidated financial statements, irrespective of the currency in which the loan is made, provided that the nature of the loan is similar to an equity investment, that is, settlement of the loan is neither planned nor expected to occur in the foreseeable future.
IFRIC 8“Scope of IFRS 2”. IFRIC 8 clarifies that transactions within the scope of IFRS 2 “Share-based payment”, include those in which the entity cannot specifically identify some or all of the goods or services received. If the identifiable consideration given appears to be less than the fair value of the equity instruments granted or liability incurred, this situation generally indicates that other consideration has been or will be received.
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SIGNATURES
The registrant hereby certifies that it meets the requirements for filing onForm 20-F and that it has caused and authorized the undersigned to sign this annual report on its behalf. | | | Pearson plc | | | /s/ Rona Fairhead | | | | Rona Fairhead | | Chief Financial Officer |
Pearson plc Robin Freestone Chief Financial Officer Date: May 5, 2006March 26, 2009
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F-79
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