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 the board of directors. The Audit Committee receives regular reports on our treasury activities, and we periodically meet with external advisers to review our activities.
We have a policy of not undertaking any speculative transactions, and we do not hold our derivative and other financial instruments for trading purposes.
We have formulated policies for hedging exposures to interest rate and foreign exchange risk, and have used derivatives to ensure compliance with these policies. Although the majoritya large proportion of our derivative contracts were transacted without regard to existing US GAAPIFRS requirements on hedge accounting, during 20062009 and 20052008 we qualified for hedge accounting under US GAAPIFRS on a 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.
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 significantly the income statement impact of changes in the market value of a derivative). The Group then divides the total portfolio betweenhedge-accounted and pooled segments, so that the expected movement on the pooled segment is minimized.
Currency exchange 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 (from February 2007, the policy is amended slightly to align core net borrowings with forecast operating profit before depreciation and amortization).amortization. This policy aims to dampen the impact of
65
changes in foreign exchange rates on consolidated interest cover and earnings. This policy applies only to currencies that account for more than 15% of group operating profit, which currently is onlyare the US dollar.dollar and 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 amortization may now be included in the above hedging process at the request of the chief financial officer. During 2009, one hedging transaction, denominated in South African Rand, had been undertaken under that authority.
At December 31, 20062009 the Group’s net borrowings/(cash)borrowings in our main currencies (taking into account the effect of cross currency rate swaps) were: US dollar £979m, euro £158m£1,314m, sterling £168m, and sterling £30m.South African rand £9m.
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. 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.
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 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 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 usingshort-dated foreign exchange swaps between currencies.
Although the Group prepares its consolidated financial statements in 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, and to a lesser extent between the euro and sterling, are likely to affect shareholders’ funds and other accounting values.
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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.
In 20062009 and 20052008 the Group met the prescribed designation requirements and hedge effectiveness tests under US GAAPIFRS for some 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 hedged item.
66
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.
| |
| Quantitative information about market risk |
Quantitative information about market risk
The sensitivity of the Group’s derivative portfolio to changes in interest rates is found in note 16 to the financial statements.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES19 of “Item 18. Financial Statements”.
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
| |
ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
| |
ITEM 12D. | AMERICAN DEPOSITARY SHARES |
Fees paid by ADR holders
Our ordinary shares trade in the United States under a sponsored ADR facility with The Bank of New York Mellon as depositary.
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal, or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
69
The following table summarizes various fees currently charged by The Bank of New York Mellon:
| | |
Person depositing or withdrawing shares
| | |
must pay to the depositary: | | For: |
|
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) | | • Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property
• Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates |
$.02 (or less) per ADS | | • Any cash distribution to ADS registered holders |
A fee equivalent to the fee that would be payable if securities distributed had been shares and the shares had been deposited for issuance of ADSs | | • Distribution of securities by the depositary to ADS registered holders of deposited securities |
$.02 (or less) per ADS per calendar year | | • Depositary services |
Registration of transfer fees | | • Transfer and registration of shares on the share register to or from the name of the depositary or its agent when shares are deposited or withdrawn |
Expenses of the depositary | | • Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement)
• Converting foreign currency to U.S. dollars |
Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes | | • As necessary |
Any charges incurred by the depositary or its agents for servicing the deposited securities | | • As necessary |
Fees incurred in past annual period and fees to be paid in the future
From January 1, 2009 to February 28, 2010 the Company received payments from the depositary of $700,000, $38,000 and a further $38,000 for continuing annual stock exchange listing fees, standardout-of-pocket maintenance costs for the ADRs (consisting of the expenses of postage and envelopes for mailing the annual and interim financial reports, printing and distributing dividend cheques, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile and telephone calls), any applicable performance indicators relating to the ADR facility, underwriting fees and legal fees.
The depositary has agreed to reimburse the Company for expenses they incur that are related to establishment and maintenance expenses of the ADS programme. The depositary has agreed to reimburse the Company for its continuing annual stock exchange listing fees. The depositary has also agreed to pay the standardout-of-pocket maintenance costs for the ADRs, which consists of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend cheques, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile and telephone calls. It has also agreed to reimburse the Company annually for certain investor relationship programmes or special investor relations promotional activities. In certain instances, the depositary has agreed to provide additional payments to the Company based on any applicable performance indicators relating to the ADR facility. There are limits on the amount of expenses for which the depositary will reimburse the Company, but the amount of reimbursement available to the Company is not necessarily tied to the amount of fees the depositary collects from investors.
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal, or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
70
PART II
| |
ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
None.
| |
ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
None.
| |
ITEM 15. | CONTROLS AND PROCEDURES |
ITEM 15. CONTROLS AND PROCEDURES
Disclosure controlsControls and proceduresProcedures
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 20062009 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 Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the principal executiveChief Executive Officer and financial officers,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 that all control issues and instances of fraud, if any, within a company have been detected, and that such information is accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate, to allow such timely decisions regarding required disclosure.achieve its objectives.
Management’s annual reportAnnual Report on internal control over financial reportingInternal 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 IFRS, including the reconciliations required under US GAAP.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, 2006,2009, and has concluded that such internal control over financial reporting was effective.
67
PricewaterhouseCoopers LLP, which has audited the consolidated financial statements of the Company for the year ended December 31, 2006,2009, has also audited management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of the Company’s internal control over financial reporting under Auditing Standard No. 25 of the Public Company Accounting Oversight Board (United States). Their audit report is included under “Item 17. Financial Statements” may be found onpage F-2.
Change in internal control over financial reportingInternal Control Over Financial Reporting
During the period covered by this Annual Report onForm 20-F, Pearson has made no 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.
71
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 SERVICESIn line with best practice, our relationship with PricewaterhouseCoopers LLP (PwC) is governed by our external auditor policy, which is reviewed and approved annually by the audit committee. The policy establishes procedures to ensure the auditors’ independence is not compromised as well as defining those non-audit services that PwC may or may not provide to Pearson. These allowable services are in accordance with relevant UK and US legislation.
In 2003,
The audit committee approves all audit and non-audit services provided by PwC. Certain categories of allowable non-audit services have been pre-approved by the audit committee adopted a revised policy for external auditor services. The policy requiressubject to the authorities below:
| | |
| • | Pre-approved non-audit services can be authorized by the chief financial officer up to £100,000 per project, subject to a cumulative limit of £500,000 per annum; |
|
| • | Acquisition due diligence services up to £100,000 per transaction; |
|
| • | Tax compliance and related activities up to the greater of £1,000,000 per annum or 50% of the external audit fee; and |
|
| • | For forward-looking tax planning services we use the most appropriate advisor, usually after a tender process. Where we decide to use our independent auditor, authority, up to £100,000 per project subject to a cumulative limit of £500,000 per annum, has been delegated by the audit committee to management. |
Services provided by PwC above these limits and all audit engagements undertaken by our external auditors, PricewaterhouseCoopers LLP, toother allowable non-audit services, irrespective of value, must be approved by the audit committee. The policy permits the auditorsWhere appropriate, services will be tendered prior 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 notifiedawarding this work to the committee.auditor.
The Group Chief Financial Officer can procure pre-approved services, as defined infollowing table sets forth remuneration paid to PwC for 2008 and 2009:
| | | | | | | | |
Auditors’ Remuneration | | 2009 | | 2008 |
| | £m | | £m |
|
Audit fees | | | 6 | | | | 5 | |
Tax fees | | | 2 | | | | 2 | |
All other fees | | | 1 | | | | 1 | |
Audit fees include £35,000 (2008: £35,000) of audit fees relating to the audit committee’s policyof the parent company.
Fees 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 whereof the amount is above these limits, specific case by case approval must be obtained fromeffectiveness of the Group’s internal control over financial reporting are allocated to audit committee priorfees 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 engagementdisposal of our auditor.
| | | | | | | | |
Auditors’ Remuneration | | 2006 | | | 2005 | |
| | | | | | |
| | £m | | | £m | |
Audit fees | | | 5 | | | | 4 | |
Audit-related fees | | | 4 | | | | — | |
Tax fees | | | 1 | | | | 1 | |
All other fees | | | 1 | | | | 2 | |
68
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEESthe Data Management business.
Not applicable.
| |
ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
Not applicable.
72
| |
ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES |
| | | | | | | | | | | | | | | | |
| | | | | | | | Maximum |
|
| | | | | | | | number |
|
| | | | | | Total number of |
| | of shares that |
|
| | | | | | units purchased |
| | may yet be |
|
| | | | | | as part of publicly |
| | purchased under |
|
| | Total number of |
| | Average price |
| | announced plans |
| | the plans or |
|
Period | | shares purchased | | | paid per share | | | or programs | | | programs |
|
June 1, 2008 - June 30, 2008 | | | | | | | | | | | | |
March 1, 2006 - March 31, 2006 | | | 900,0002,000,000 | | | | £ 7.406.14 | | | | N/A | | | | N/A | |
MayJune 1, 20062009 - May 31, 2006June 30, 2009 | | | 900,0002,200,000 | | | | £ 7.67 | | | | N/A | | | | N/A | |
August 1, 2006 - August 31, 2006 | | | 900,000 | | | | £ 7.43 | | | | N/A | | | | N/A | |
December 1, 2006 - December 31, 2006 | | | 2,000,000 | | | | £ 7.736.14 | | | | 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.
| |
ITEM 16G. | CORPORATE GOVERNANCE |
Pearson is listed on the New York Stock Exchange (“NYSE”). As a listed non-US issuer, we are required to comply with some of the NYSE’s corporate governance rules, and otherwise must disclose on our website 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 through F-79F-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.†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,trustee, Paying Agent and Calculation Agent.#Agent. # |
4.12.3 | | Letter AgreementIndenture dated January 28, 2005June 21, 2001 between Pearson plc and Peter Jovanovich.#The Bank of New York, as trustee.† |
2.4 | | Indenture dated March 26, 2009 among Pearson Funding One plc, as the Issuer, Pearson plc, Guarantor, and The Law Debenture Trust Corporation P.L.C., as trustee. |
2.5 | | Indenture dated May 6, 2008 among Pearson Dollar Finance Two plc, as the Issuer, Pearson plc, Guarantor, and The Bank of New York, as trustee, Paying Agent and Calculation Agent. |
2.6 | | Indenture dated October 27, 1999 between Pearson plc, as the Issuer and The Law Debenture Trust Corporation P.L.C., as trustee. |
8.1 | | List of Significant Subsidiaries. |
12.1 | | Certification of Chief Executive Officer. |
73
| | |
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 theForm 20-F of Pearson plc for the year ended December 31, 2003 and filed May 7, 2004. |
| |
# | | Incorporated by reference from theForm 20-F of Pearson plc for the year ended December 31, 2004 and filed June 27, 2005. |
|
† | | Incorporated by reference from the Form 20-F of Pearson plc for the year ended December 31, 2001 and filed June 10, 2002. |
74
69
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | |
| | Page | |
| | | |
Report of Independent Registered Public Accounting Firm | | | F-2 | |
| | | F-3 | |
| | | F-4 | |
| | | F-5 | |
| | | F-5F-6 | |
| | | F-7 | |
Notes to the Consolidated Financial Staetments2007 | | | F-8 | |
| | | F-9 | |
F-1
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Pearson plc
We have completed an integrated audit of Pearson plc’s December 31, 2006 consolidated financial statements and of its internal control over financial reporting as of December 31, 2006 and an audit of its December 31, 2005 and December 31, 2004 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated income statementsbalance sheets and the related consolidated balance sheets, consolidated statements of income, comprehensive income, equity and cash flows and, consolidated statements of recognised income and expense present fairly, in all material respects, the financial position of Pearson plc and its subsidiaries (the “Group”) at December 31, 20062009 and 2005December 31, 2008 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006,2009, in conformity with International Financial Reporting Standards (IFRSs) as adoptedissued by the European Union. TheseInternational Accounting Standards Board. Also in our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, 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 is responsible for these financial statements, are the responsibilityfor maintaining effective internal control over financial reporting and for its assessment of the Group’s management.effectiveness 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 financial 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 auditmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements includesincluded 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 statementsstatement 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.
As discussed in Note 1, the Group adopted International Accounting Standard (IAS) 32 “Financial Instruments: Disclosure and Presentation”, and IAS 39 “Financial Instruments: Recognition and Measurement”, prospectively from 1 January 2005. As discussed in Note 31 to the consolidated financial statements, during the year ended December 31, 2006, the Group reclassified investment in pre-publication assets from cash used in investing activities to cash generated from operations.
IFRSs as adopted by the European Union vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 36 to the consolidated financial statements.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Managements’ annual report on internal control over financial reporting as set out in “Item 15. Controls and Procedures”, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Group’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Group’s internal control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment,
F-2
testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process 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 standards and 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 necessary to permit preparation of financial statements in accordance with generally accepted accounting standards and principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized 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 risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
London
London
United Kingdom
April 30, 2007March 31, 2010
F-2
F-3
CONSOLIDATED INCOME STATEMENTYEAR ENDEDConsolidated Income Statement
Year ended 31 DECEMBER 2006
(December 2009
All figures in £ millions)millions
| | | | | | | | | | | | | | | | |
| | Notes | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | |
Continuing operations | | | | | | | | | | | | | | | | |
Sales | | | 2 | | | | 4,137 | | | | 3,808 | | | | 3,479 | |
Cost of goods sold | | | 5 | | | | (1,917 | ) | | | (1,787 | ) | | | (1,631 | ) |
| | | | | | | | | | | | |
Gross profit | | | | | | | 2,220 | | | | 2,021 | | | | 1,848 | |
Operating expenses | | | 5 | | | | (1,704 | ) | | | (1,559 | ) | | | (1,483 | ) |
Other net gains and losses | | | 4 | | | | — | | | | 40 | | | | 9 | |
Share of results of joint ventures and associates | | | 13 | | | | 24 | | | | 14 | | | | 8 | |
| | | | | | | | | | | | |
Operating profit | | | 2 | | | | 540 | | | | 516 | | | | 382 | |
Finance costs | | | 7 | | | | (133 | ) | | | (132 | ) | | | (96 | ) |
Finance income | | | 7 | | | | 59 | | | | 62 | | | | 17 | |
| | | | | | | | | | | | |
Profit before tax | | | | | | | 466 | | | | 446 | | | | 303 | |
Income tax | | | 8 | | | | (11 | ) | | | (116 | ) | | | (55 | ) |
| | | | | | | | | | | | |
Profit for the year from continuing operations | | | | | | | 455 | | | | 330 | | | | 248 | |
Profit for the year from discontinued operations | | | 3 | | | | 14 | | | | 314 | | | | 36 | |
| | | | | | | | | | | | |
Profit for the year | | | | | | | 469 | | | | 644 | | | | 284 | |
| | | | | | | | | | | | |
Attributable to: | | | | | | | | | | | | | | | | |
Equity holders of the Company | | | | | | | 446 | | | | 624 | | | | 262 | |
Minority interest | | | | | | | 23 | | | | 20 | | | | 22 | |
| | | | | | | | | | | | |
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 | | | | 55.9p | | | | 78.2p | | | | 32.9p | |
— diluted | | | 9 | | | | 55.8p | | | | 78.1p | | | | 32.9p | |
| | | | | | | | | | | | |
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 | | | | 54.1p | | | | 38.9p | | | | 29.0p | |
— diluted | | | 9 | | | | 54.0p | | | | 38.8p | | | | 29.0p | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Notes | | | 2009 | | | 2008 | | | 2007 | |
|
Continuing operations | | | | | | | | | | | | | | | | |
Sales | | | 2 | | | | 5,624 | | | | 4,811 | | | | 4,162 | |
Cost of goods sold | | | 4 | | | | (2,539 | ) | | | (2,174 | ) | | | (1,910 | ) |
| | | | | | | | | | | | | | | | |
Gross profit | | | | | | | 3,085 | | | | 2,637 | | | | 2,252 | |
Operating expenses | | | 4 | | | | (2,360 | ) | | | (1,986 | ) | | | (1,701 | ) |
Share of results of joint ventures and associates | | | 12 | | | | 30 | | | | 25 | | | | 23 | |
| | | | | | | | | | | | | | | | |
Operating profit | | | 2 | | | | 755 | | | | 676 | | | | 574 | |
Finance costs | | | 6 | | | | (122 | ) | | | (136 | ) | | | (150 | ) |
Finance income | | | 6 | | | | 27 | | | | 45 | | | | 44 | |
| | | | | | | | | | | | | | | | |
Profit before tax | | | | | | | 660 | | | | 585 | | | | 468 | |
Income tax | | | 7 | | | | (198 | ) | | | (172 | ) | | | (131 | ) |
| | | | | | | | | | | | | | | | |
Profit for the year from continuing operations | | | | | | | 462 | | | | 413 | | | | 337 | |
Loss for the year from discontinued operations | | | 3 | | | | — | | | | (90 | ) | | | (27 | ) |
| | | | | | | | | | | | | | | | |
Profit for the year | | | | | | | 462 | | | | 323 | | | | 310 | |
| | | | | | | | | | | | | | | | |
Attributable to: | | | | | | | | | | | | | | | | |
Equity holders of the company | | | | | | | 425 | | | | 292 | | | | 284 | |
Minority interest | | | | | | | 37 | | | | 31 | | | | 26 | |
| | | | | | | | | | | | | | | | |
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 | | | | 53.2p | | | | 36.6p | �� | | | 35.6p | |
— diluted | | | 8 | | | | 53.1p | | | | 36.6p | | | | 35.6p | |
| | | | | | | | | | | | | | | | |
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 | | | | 53.2p | | | | 47.9p | | | | 39.0p | |
— diluted | | | 8 | | | | 53.1p | | | | 47.9p | | | | 39.0p | |
| | | | | | | | | | | | | | | | |
F-3
F-4
CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE
YEAR ENDEDConsolidated Statement of Comprehensive Income
Year ended 31 DECEMBER 2006
(December 2009
All figures in £ millions)
| | | | | | | | | | | | | | | | |
| | Notes | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | |
Net exchange differences on translation of foreign operations | | | 27 | | | | (417 | ) | | | 327 | | | | (203 | ) |
Actuarial gains/(losses) on defined benefit pension and post-retirement medical plans | | | 24 | | | | 107 | | | | 26 | | | | (61 | ) |
Taxation on items charged to equity | | | 8 | | | | 12 | | | | 12 | | | | 9 | |
| | | | | | | | | | | | |
Net (expense)/income recognised directly in equity | | | | | | | (298 | ) | | | 365 | | | | (255 | ) |
Profit for the year | | | | | | | 469 | | | | 644 | | | | 284 | |
| | | | | | | | | | | | |
Total recognised income and expense for the year | | | | | | | 171 | | | | 1,009 | | | | 29 | |
| | | | | | | | | | | | |
Attributable to: | | | | | | | | | | | | | | | | |
Equity holders of the Company | | | | | | | 148 | | | | 989 | | | | 7 | |
Minority interest | | | | | | | 23 | | | | 20 | | | | 22 | |
| | | | | | | | | | | | |
Effect of transition adjustment on adoption of IAS 39 | | | | | | | | | | | | | | | | |
Attributable to: | | | | | | | | | | | | | | | | |
Equity holders of the Company | | | | | | | — | | | | (12 | ) | | | — | |
| | | | | | | | | | | | |
CONSOLIDATED BALANCE SHEETmillions
| | | | | | | | | | | | | | | | |
| | Notes | | | 2009 | | | 2008 | | | 2007 | |
|
Profit for the year | | | | | | | 462 | | | | 323 | | | | 310 | |
Net exchange differences on translation of foreign operations | | | | | | | (388 | ) | | | 1,125 | | | | 24 | |
Currency translation adjustment disposed — subsidiaries | | | | | | | — | | | | 49 | | | | 53 | |
Currency translation adjustment disposed — joint venture | | | | | | | — | | | | 1 | | | | — | |
Actuarial (losses)/gains on retirement benefit obligations — Group | | | 25 | | | | (299 | ) | | | (71 | ) | | | 80 | |
Actuarial losses on retirement benefit obligations — associate | | | 12 | | | | (3 | ) | | | (3 | ) | | | — | |
Net increase in fair values of proportionate holding arising on stepped acquisition | | | | | | | 18 | | | | — | | | | — | |
Taxation on items recognised in other comprehensive income | | | 7 | | | | 91 | | | | 9 | | | | 22 | |
| | | | | | | | | | | | | | | | |
Other comprehensive (expense)/income for the year | | | | | | | (581 | ) | | | 1,110 | | | | 179 | |
| | | | | | | | | | | | | | | | |
Total comprehensive (expense)/income for the year | | | | | | | (119 | ) | | | 1,433 | | | | 489 | |
| | | | | | | | | | | | | | | | |
Attributable to: | | | | | | | | | | | | | | | | |
Equity holders of the company | | | | | | | (127 | ) | | | 1,327 | | | | 464 | |
Minority interest | | | | | | | 8 | | | | 106 | | | | 25 | |
| | | | | | | | | | | | | | | | |
F-4
AS ATConsolidated Statement of Changes in Equity
Year ended 31 DECEMBER 2006
(December 2009
All figures in £ millions)millions
| | | | | | | | | | | | |
| | Notes | | | 2006 | | | 2005 | |
| | | | | | | | | |
Assets | | | | | | | | | | | | |
Non-current assets | | | | | | | | | | | | |
Property, plant and equipment | | | 11 | | | | 348 | | | | 384 | |
Intangible assets | | | 12 | | | | 3,581 | | | | 3,854 | |
Investments in joint ventures and associates | | | 13 | | | | 20 | | | | 36 | |
Deferred income tax assets | | | 14 | | | | 417 | | | | 385 | |
Financial assets — Derivative financial instruments | | | 16 | | | | 36 | | | | 79 | |
Other financial assets | | | 15 | | | | 17 | | | | 18 | |
Other receivables | | | 19 | | | | 124 | | | | 108 | |
| | | | | | | | | |
| | | | | | | 4,543 | | | | 4,864 | |
Current assets | | | | | | | | | | | | |
Intangible assets — Pre-publication | | | 17 | | | | 402 | | | | 426 | |
Inventories | | | 18 | | | | 354 | | | | 373 | |
Trade and other receivables | | | 19 | | | | 953 | | | | 1,031 | |
Financial assets — Derivative financial instruments | | | 16 | | | | 50 | | | | 4 | |
Financial assets — Marketable securities | | | | | | | 25 | | | | — | |
Cash and cash equivalents (excluding overdrafts) | | | 20 | | | | 592 | | | | 902 | |
| | | | | | | | | |
| | | | | | | 2,376 | | | | 2,736 | |
Non-current assets classified as held for sale | | | 29 | | | | 294 | | | | — | |
| | | | | | | | | |
| | | | | | | 2,670 | | | | 2,736 | |
| | | | | | | | | |
Total assets | | | | | | | 7,213 | | | | 7,600 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Equity attributable to the equity holders of the company | | | | | | | |
| | Share
| | | Share
| | | Treasury
| | | Translation
| | | Retained
| | | | | | Minority
| | | Total
| |
| | capital | | | premium | | | shares | | | reserve | | | earnings | | | Total | | | interest | | | equity | |
|
At 1 January 2009 | | | 202 | | | | 2,505 | | | | (222 | ) | | | 586 | | | | 1,679 | | | | 4,750 | | | | 274 | | | | 5,024 | |
Total comprehensive (expense)/income | | | — | | | | — | | | | — | | | | (359 | ) | | | 232 | | | | (127 | ) | | | 8 | | | | (119 | ) |
Equity-settled transactions | | | — | | | | — | | | | — | | | | — | | | | 37 | | | | 37 | | | | — | | | | 37 | |
Taxation on equity-settled transactions | | | — | | | | — | | | | — | | | | — | | | | 6 | | | | 6 | | | | — | | | | 6 | |
Issue of ordinary shares under share option schemes | | | 1 | | | | 7 | | | | — | | | | — | | | | — | | | | 8 | | | | — | | | | 8 | |
Purchase of treasury shares | | | — | | | | — | | | | (33 | ) | | | — | | | | — | | | | (33 | ) | | | — | | | | (33 | ) |
Release of treasury shares | | | — | | | | — | | | | 29 | | | | — | | | | (29 | ) | | | — | | | | — | | | | — | |
Put option over minority interest | | | — | | | | — | | | | — | | | | — | | | | (23 | ) | | | (23 | ) | | | — | | | | (23 | ) |
Changes in minority shareholding | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 24 | | | | 24 | |
Dividends | | | — | | | | — | | | | — | | | | — | | | | (273 | ) | | | (273 | ) | | | (15 | ) | | | (288 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At 31 December 2009 | | | 203 | | | | 2,512 | | | | (226 | ) | | | 227 | | | | 1,629 | | | | 4,345 | | | | 291 | | | | 4,636 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At 1 January 2008 | | | 202 | | | | 2,499 | | | | (216 | ) | | | (514 | ) | | | 1,724 | | | | 3,695 | | | | 179 | | | | 3,874 | |
Total comprehensive income | | | — | | | | — | | | | — | | | | 1,100 | | | | 227 | | | | 1,327 | | | | 106 | | | | 1,433 | |
Equity-settled transactions | | | — | | | | — | | | | — | | | | — | | | | 33 | | | | 33 | | | | — | | | | 33 | |
Taxation on equity-settled transactions | | | — | | | | — | | | | — | | | | — | | | | (7 | ) | | | (7 | ) | | | — | | | | (7 | ) |
Issue of ordinary shares under share option schemes | | | — | | | | 6 | | | | — | | | | — | | | | — | | | | 6 | | | | — | | | | 6 | |
Purchase of treasury shares | | | — | | | | — | | | | (47 | ) | | | — | | | | — | | | | (47 | ) | | | — | | | | (47 | ) |
Release of treasury shares | | | — | | | | — | | | | 41 | | | | — | | | | (41 | ) | | | — | | | | — | | | | — | |
Changes in minority shareholding | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 6 | | | | 6 | |
Dividends | | | — | | | | — | | | | — | | | | — | | | | (257 | ) | | | (257 | ) | | | (17 | ) | | | (274 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At 31 December 2008 | | | 202 | | | | 2,505 | | | | (222 | ) | | | 586 | | | | 1,679 | | | | 4,750 | | | | 274 | | | | 5,024 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At 1 January, 2007 | | | 202 | | | | 2,487 | | | | (189 | ) | | | (592 | ) | | | 1,568 | | | | 3,476 | | | | 168 | | | | 3,644 | |
Total comprehensive income | | | — | | | | — | | | | — | | | | 78 | | | | 386 | | | | 464 | | | | 25 | | | | 489 | |
Equity-settled transactions | | | — | | | | — | | | | — | | | | — | | | | 30 | | | | 30 | | | | — | | | | 30 | |
Taxation on equity-settled transactions | | | — | | | | — | | | | — | | | | — | | | | 7 | | | | 7 | | | | — | | | | 7 | |
Issue of ordinary shares under share option schemes | | | — | | | | 12 | | | | — | | | | — | | | | — | | | | 12 | | | | — | | | | 12 | |
Purchase of treasury shares | | | — | | | | — | | | | (56 | ) | | | — | | | | — | | | | (56 | ) | | | — | | | | (56 | ) |
Release of treasury shares | | | — | | | | — | | | | 29 | | | | — | | | | (29 | ) | | | — | | | | — | | | | — | |
Changes in minority shareholding | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 8 | | | | 8 | |
Dividends | | | — | | | | — | | | | — | | | | — | | | | (238 | ) | | | (238 | ) | | | (22 | ) | | | (260 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At 31 December 2007 | | | 202 | | | | 2,499 | | | | (216 | ) | | | (514 | ) | | | 1,724 | | | | 3,695 | | | | 179 | | | | 3,874 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The translation reserve includes exchange differences arising from the translation of the net investment in foreign operations and of borrowings and other currency instruments designated as hedges of such investments.
F-5
F-5
CONSOLIDATED BALANCE SHEET (CONTINUED)AS ATConsolidated Balance Sheet
As at 31 DECEMBER 2006
(December 2009
All figures in £ millions)millions
| | | | | | | | | | | | |
| | Notes | | | 2006 | | | 2005 | |
| | | | | | | | | |
Liabilities | | | | | | | | | | | | |
Non-current liabilities | | | | | | | | | | | | |
Financial liabilities—Borrowings | | | 21 | | | | (1,148 | ) | | | (1,703 | ) |
Financial liabilities—Derivative financial instruments | | | 16 | | | | (19 | ) | | | (22 | ) |
Deferred income tax liabilities | | | 14 | | | | (245 | ) | | | (204 | ) |
Retirement benefit obligations | | | 24 | | | | (250 | ) | | | (389 | ) |
Provisions for other liabilities and charges | | | 22 | | | | (29 | ) | | | (31 | ) |
Other liabilities | | | 23 | | | | (162 | ) | | | (151 | ) |
| | | | | | | | | |
| | | | | | | (1,853 | ) | | | (2,500 | ) |
Current liabilities | | | | | | | | | | | | |
Trade and other liabilities | | | 23 | | | | (998 | ) | | | (974 | ) |
Financial liabilities—Borrowings | | | 21 | | | | (595 | ) | | | (256 | ) |
Current income tax liabilities | | | | | | | (74 | ) | | | (104 | ) |
Provisions for other liabilities and charges | | | 22 | | | | (23 | ) | | | (33 | ) |
| | | | | | | | | |
| | | | | | | (1,690 | ) | | | (1,367 | ) |
Liabilities directly associated with non-current assets classified as held for sale | | | 29 | | | | (26 | ) | | | — | |
| | | | | | | | | |
Total liabilities | | | | | | | (3,569 | ) | | | (3,867 | ) |
| | | | | | | | | |
Net assets | | | | | | | 3,644 | | | | 3,733 | |
| | | | | | | | | |
Equity | | | | | | | | | | | | |
Share capital | | | 25 | | | | 202 | | | | 201 | |
Share premium | | | 25 | | | | 2,487 | | | | 2,477 | |
Treasury shares | | | 26 | | | | (189 | ) | | | (153 | ) |
Other reserves | | | 27 | | | | (592 | ) | | | (175 | ) |
Retained earnings | | | 27 | | | | 1,568 | | | | 1,214 | |
| | | | | | | | | |
Total equity attributable to equity holders of the Company | | | | | | | 3,476 | | | | 3,564 | |
Minority interest | | | | | | | 168 | | | | 169 | |
Total equity | | | | | | | 3,644 | | | | 3,733 | |
| | | | | | | | | |
| | | | | | | | | | | | |
| | Notes | | | 2009 | | | 2008 | |
|
Assets | | | | | | | | | | | | |
Non-current assets | | | | | | | | | | | | |
Property, plant and equipment | | | 10 | | | | 388 | | | | 423 | |
Intangible assets | | | 11 | | | | 5,129 | | | | 5,353 | |
Investments in joint ventures and associates | | | 12 | | | | 30 | | | | 23 | |
Deferred income tax assets | | | 13 | | | | 387 | | | | 372 | |
Financial assets — Derivative financial instruments | | | 16 | | | | 112 | | | | 181 | |
Retirement benefit assets | | | 25 | | | | — | | | | 49 | |
Other financial assets | | | 15 | | | | 62 | | | | 63 | |
Other receivables | | | 22 | | | | 112 | | | | 152 | |
| | | | | | | | | | | | |
| | | | | | | 6,220 | | | | 6,616 | |
Current assets | | | | | | | | | | | | |
Intangible assets — Pre-publication | | | 20 | | | | 650 | | | | 695 | |
Inventories | | | 21 | | | | 445 | | | | 501 | |
Trade and other receivables | | | 22 | | | | 1,284 | | | | 1,342 | |
Financial assets — Derivative financial instruments | | | 16 | | | | — | | | | 3 | |
Financial assets — Marketable securities | | | 14 | | | | 63 | | | | 54 | |
Cash and cash equivalents (excluding overdrafts) | | | 17 | | | | 750 | | | | 685 | |
| | | | | | | | | | | | |
| | | | | | | 3,192 | | | | 3,280 | |
| | | | | | | | | | | | |
Total assets | | | | | | | 9,412 | | | | 9,896 | |
| | | | | | | | | | | | |
F-6
Consolidated Balance Sheet (Continued)
As at 31 December 2009
All figures in £ millions
| | | | | | | | | | | | |
| | Notes | | | 2009 | | | 2008 | |
|
Liabilities | | | | | | | | | | | | |
Non-current liabilities | | | | | | | | | | | | |
Financial liabilities — Borrowings | | | 18 | | | | (1,934 | ) | | | (2,019 | ) |
Financial liabilities — Derivative financial instruments | | | 16 | | | | (2 | ) | | | (15 | ) |
Deferred income tax liabilities | | | 13 | | | | (473 | ) | | | (447 | ) |
Retirement benefit obligations | | | 25 | | | | (339 | ) | | | (167 | ) |
Provisions for other liabilities and charges | | | 23 | | | | (50 | ) | | | (33 | ) |
Other liabilities | | | 24 | | | | (253 | ) | | | (221 | ) |
| | | | | | | | | | | | |
| | | | | | | (3,051 | ) | | | (2,902 | ) |
Current liabilities | | | | | | | | | | | | |
Trade and other liabilities | | | 24 | | | | (1,467 | ) | | | (1,429 | ) |
Financial liabilities — Borrowings | | | 18 | | | | (74 | ) | | | (344 | ) |
Financial liabilities — Derivative financial instruments | | | 16 | | | | (7 | ) | | | (5 | ) |
Current income tax liabilities | | | | | | | (159 | ) | | | (136 | ) |
Provisions for other liabilities and charges | | | 23 | | | | (18 | ) | | | (56 | ) |
| | | | | | | | | | | | |
| | | | | | | (1,725 | ) | | | (1,970 | ) |
| | | | | | | | | | | | |
Total liabilities | | | | | | | (4,776 | ) | | | (4,872 | ) |
| | | | | | | | | | | | |
Net assets | | | | | | | 4,636 | | | | 5,024 | |
| | | | | | | | | | | | |
Equity | | | | | | | | | | | | |
Share capital | | | 27 | | | | 203 | | | | 202 | |
Share premium | | | 27 | | | | 2,512 | | | | 2,505 | |
Treasury shares | | | 28 | | | | (226 | ) | | | (222 | ) |
Translation reserve | | | | | | | 227 | | | | 586 | |
Retained earnings | | | | | | | 1,629 | | | | 1,679 | |
| | | | | | | | | | | | |
Total equity attributable to equity holders of the company | | | | | | | 4,345 | | | | 4,750 | |
Minority interest | | | | | | | 291 | | | | 274 | |
| | | | | | | | | | | | |
Total equity | | | | | | | 4,636 | | | | 5,024 | |
| | | | | | | | | | | | |
These financial statements have been approved for issue by the board of directors on 910 March 20072010 and signed on its behalf by
Robin FreestoneChief financial officer
F-7
F-6
CONSOLIDATED CASH FLOW STATEMENTYEAR ENDEDConsolidated Cash Flow Statement
Year ended 31 DECEMBER 2006
(December 2009
All figures in £ millions)millions
| | | | | | | | | | | | | | | | |
| | Notes | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | |
Cash flows from operating activities | | | | | | | | | | | | | | | | |
Cash generated from operations | | | 31 | | | | 621 | | | | 653 | | | | 524 | |
Interest paid | | | | | | | (106 | ) | | | (101 | ) | | | (98 | ) |
Tax paid | | | | | | | (59 | ) | | | (65 | ) | | | (45 | ) |
| | | | | | | | | | | | |
Net cash generated from operating activities | | | | | | | 456 | | | | 487 | | | | 381 | |
| | | | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | | | | | | | |
Acquisition of subsidiaries, net of cash acquired | | | 28 | | | | (363 | ) | | | (246 | ) | | | (41 | ) |
Acquisition of joint ventures and associates | | | | | | | (4 | ) | | | (7 | ) | | | (10 | ) |
Purchase of property, plant and equipment (PPE) | | | | | | | (68 | ) | | | (76 | ) | | | (101 | ) |
Proceeds from sale of PPE | | | | | | | 8 | | | | 3 | | | | 4 | |
Purchase of intangible assets | | | | | | | (29 | ) | | | (24 | ) | | | (24 | ) |
Purchase of other financial assets | | | | | | | — | | | | (2 | ) | | | (1 | ) |
Disposal of subsidiaries, net of cash disposed | | | 30 | | | | 10 | | | | 376 | | | | 7 | |
Disposal of joint ventures and associates | | | | | | | — | | | | 54 | | | | 24 | |
Disposal of other financial assets | | | | | | | — | | | | — | | | | 17 | |
Interest received | | | | | | | 24 | | | | 29 | | | | 13 | |
Dividends received from joint ventures and associates | | | | | | | 45 | | | | 14 | | | | 12 | |
| | | | | | | | | | | | |
Net cash (used in)/generated from investing activities | | | | | | | (377 | ) | | | 121 | | | | (100 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | | | | | | | |
Proceeds from issue of ordinary shares | | | 25 | | | | 11 | | | | 4 | | | | 4 | |
Purchase of treasury shares | | | 26 | | | | (36 | ) | | | (21 | ) | | | (10 | ) |
Proceeds from borrowings | | | | | | | 84 | | | | — | | | | 473 | |
Short-term investments required | | | | | | | — | | | | — | | | | (5 | ) |
Liquid resources acquired | | | | | | | (24 | ) | | | — | | | | — | |
Repayments of borrowings | | | | | | | (145 | ) | | | (79 | ) | | | (524 | ) |
Finance lease principal payments | | | | | | | (3 | ) | | | (3 | ) | | | (2 | ) |
Dividends paid to Company’s shareholders | | | 10 | | | | (220 | ) | | | (205 | ) | | | (195 | ) |
Dividends paid to minority interests | | | | | | | (15 | ) | | | (17 | ) | | | (2 | ) |
| | | | | | | | | | | | |
Net cash used in financing activities | | | | | | | (348 | ) | | | (321 | ) | | | (261 | ) |
Effects of exchange rate changes on cash and cash equivalents | | | | | | | (44 | ) | | | 13 | | | | (4 | ) |
| | | | | | | | | | | | |
Net (decrease)/increase in cash and cash equivalents | | | | | | | (313 | ) | | | 300 | | | | 16 | |
| | | | | | | | | | | | |
Cash and cash equivalents at beginning of year | | | | | | | 844 | | | | 544 | | | | 528 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of year | | | 20 | | | | 531 | | | | 844 | | | | 544 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Notes | | | 2009 | | | 2008 | | | 2007 | |
|
Cash flows from operating activities | | | | | | | | | | | | | | | | |
Net cash generated from operations | | | 31 | | | | 1,012 | | | | 894 | | | | 659 | |
Interest paid | | | | | | | (90 | ) | | | (87 | ) | | | (109 | ) |
Tax paid | | | | | | | (103 | ) | | | (89 | ) | | | (87 | ) |
| | | | | | | | | | | | | | | | |
Net cash generated from operating activities | | | | | | | 819 | | | | 718 | | | | 463 | |
| | | | | | | | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | | | | | | | |
Acquisition of subsidiaries, net of cash acquired | | | 29 | | | | (208 | ) | | | (395 | ) | | | (472 | ) |
Acquisition of joint ventures and associates | | | | | | | (14 | ) | | | (5 | ) | | | (4 | ) |
Purchase of investments | | | | | | | (10 | ) | | | (1 | ) | | | — | |
Purchase of property, plant and equipment (PPE) | | | | | | | (62 | ) | | | (75 | ) | | | (86 | ) |
Proceeds from sale of investments | | | | | | | — | | | | 5 | | | | — | |
Proceeds from sale of PPE | | | 31 | | | | 1 | | | | 2 | | | | 14 | |
Purchase of intangible assets | | | | | | | (58 | ) | | | (45 | ) | | | (33 | ) |
Disposal of subsidiaries, net of cash disposed | | | 30 | | | | 14 | | | | 111 | | | | 469 | |
Interest received | | | | | | | 3 | | | | 11 | | | | 19 | |
Dividends received from joint ventures and associates | | | | | | | 22 | | | | 23 | | | | 32 | |
| | | | | | | | | | | | | | | | |
Net cash used in investing activities | | | | | | | (312 | ) | | | (369 | ) | | | (61 | ) |
| | | | | | | | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | | | | | | | |
Proceeds from issue of ordinary shares | | | 27 | | | | 8 | | | | 6 | | | | 12 | |
Purchase of treasury shares | | | | | | | (33 | ) | | | (47 | ) | | | (72 | ) |
Proceeds from borrowings | | | | | | | 296 | | | | 455 | | | | 272 | |
Liquid resources acquired | | | | | | | (13 | ) | | | — | | | | (15 | ) |
Repayment of borrowings | | | | | | | (343 | ) | | | (275 | ) | | | (391 | ) |
Finance lease principal payments | | | | | | | (2 | ) | | | (3 | ) | | | (2 | ) |
Dividends paid to company’s shareholders | | | 9 | | | | (273 | ) | | | (257 | ) | | | (238 | ) |
Dividends paid to minority interest | | | | | | | (20 | ) | | | (28 | ) | | | (10 | ) |
| | | | | | | | | | | | | | | | |
Net cash used in financing activities | | | | | | | (380 | ) | | | (149 | ) | | | (444 | ) |
Effects of exchange rate changes on cash and cash equivalents | | | | | | | (36 | ) | | | (103 | ) | | | 3 | |
| | | | | | | | | | | | | | | | |
Net increase/(decrease) in cash and cash equivalents | | | | | | | 91 | | | | 97 | | | | (39 | ) |
| | | | | | | | | | | | | | | | |
Cash and cash equivalents at beginning of year | | | | | | | 589 | | | | 492 | | | | 531 | |
| | | | | | | | | | | | | | | | |
Cash and cash equivalents at end of year | | | 17 | | | | 680 | | | | 589 | | | | 492 | |
| | | | | | | | | | | | | | | | |
F-8
F-7
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 board of directors on 910 March 2007.2010.
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below.
a. Basis of preparation
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. These consolidated financial statements are also prepared in accordance with IFRS as issued by the 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 Group transitioned from UK GAAP to IFRS on 1 January 2003.
These consolidated financial statements have been prepared under the historical cost convention as modified by the revaluation of financial assets and liabilities (including derivative financial instruments) atto fair value.
(1) Interpretations and amendments to published standards effective in 2006 — 2009The following amendments and interpretations to standards are mandatory
IAS 1 (Revised) ‘Presentation of Financial Statements’, effective for the Group’s accountingannual reporting periods beginning on or after 1 January 2006:2009. The amendments require a number of presentational changes including the requirement to present a statement of changes in equity as a primary statement and the introduction of the statement of comprehensive income, which presents all items of recognised income and expense, either in one statement or in two linked statements. Management have elected to present two statements.
| | |
| • | IAS 21 ‘The Effects of Changes in Foreign Currency’; |
|
| • | IAS 39 (Amendment) ‘Cash Flow Hedge Accounting of Forecast Intragroup Transactions’; |
|
| • | IAS 39 (Amendment) ‘The Fair Value Option’; |
|
| • | IAS 39 and IFRS 4 (Amendment) ‘Financial Guarantee Contracts’; |
|
| • | IFRS 6 ‘Exploration for and Evaluation of Mineral Resources’; |
|
| • | IFRIC 4 ‘Determining whether an Arrangement contains a Lease’; |
|
| • | IFRIC 5 ‘Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds’; |
|
| • | IFRIC 6 ‘Liabilities arising from Participating in a Specific Market — Waste Electrical and Electronic Equipment’. |
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 have assessed that this amendment has no impact on the Group’s financial statements as there are currently no material qualifying assets.
Amendments to IFRS 7 ‘Financial Instruments: Disclosures’, effective for annual reporting periods beginning on or after 1 January 2009. The amendments require additional disclosures about fair value measurement and liquidity risk. For financial instruments measured at fair value in the balance sheet disclosure is required, based on observability of inputs, into a three level fair value hierarchy. In addition, a reconciliation between the opening and closing balance for level 3 fair value measurements must be presented, along with significant transfers between the levels of the hierarchy. The amendments also clarify the scope of liquidity risk disclosures. Fair value measurement and liquidity risk disclosures are detailed in note 19.
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. Management assessedhave determined that this does not have any impact on the relevance of these amendments and interpretations with respectfinancial statements for the Group.
F-9
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 amendments require puttable financial instruments or investments 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 have determined that this has no impact on the financial statements of the Group.
Amendments to IFRIC 9 ‘Reassessment of Embedded Derivatives’ and IAS 39 ‘Financial Instruments: Recognition and Measurement’, effective for annual reporting periods ending on or after 30 June 2009. The amendments clarify the position on embedded derivatives following the earlier amendments to IAS 39 regarding reclassification. The amendment to IFRIC 9 requires an entity to assess whether an embedded derivative must be separated from a host contract when the entity reclassifies a hybrid financial asset out of the fair value through profit or loss category. IAS 39 now states that if an embedded derivative cannot be reliably measured, the entire hybrid instrument must remain classified as at fair value through profit and loss. Management have determined this has no impact on the financial statements of the Group.
‘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. Of the 35 amendments issued, the adoption of the following amendment resulted in a change to accounting policy but did not have any significant impact on the Group’s operationsfinancial position or performance.
Amendments to IAS 38 ‘Intangible Assets’ require expenditure on advertising and concludedpromotional activities to be recognised as an expense when the Group either has the right to access the goods or has received the service, rather than when the Group uses the goods or service.
Other amendments did not have any impact on the accounting policies or financial statements of the Group.
In the 2008 accounts the Group early adopted IFRS 8 ‘Operating Segments’, effective for annual reporting periods beginning on or after 1 January 2009.
The standard requires a management approach to reporting segmental information and six reporting segments have been identified under IFRS 8 as detailed in note 2.
IFRIC 13 ‘Customer Loyalty Programmes’, effective for annual reporting periods beginning on or after 1 July 2008. IFRIC 13 explains how entities that they aregrant loyalty award credit 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 management have assessed that IFRIC 13 is not relevant or material 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 management have assessed that IFRIC 15 is not relevant to the Group.
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 investments can be held within the Group. Management have assessed that this has no impact on the Group’s financial statements.
(2) 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
F-8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
mandatory for the Group’s accounting periods beginning on or after 1 January 2007 or later periods.
The Group has not early adopted any of the following new pronouncements whichthat are as follows:not yet effective:
| | |
| • | IFRS 73 (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 |
F-10
Notes to the Consolidated Financial Statements (Continued)
| | |
| | amendments affect the accounting for business combinations, including the requirement to re-measure 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 the requirement to recognise adjustments to contingent consideration in the income statement. |
| | |
| • | Amendments to IAS 39 ‘Financial Instruments: Disclosures’ (effective fromRecognition and Measurement’, effective for annual reporting periods beginning on or after 1 January 2007). IFRS 7 introduces new disclosuresJuly 2009. These amendments clarify that inflation may only be hedged where changes in inflation are a specified portion of qualitativecash flows of a financial instrument, and quantitative information about exposure to risks arising from financial instruments, including specific minimum disclosures about credit risk, liquidity risk and market risk.also clarify hedging with options. |
|
| • | A complementary amendmentAmendments to IAS 1 ‘Presentation of Financial Statements — Capital Disclosures’(24 ‘Related Parties’, effective fromfor annual reporting periods beginning on or after 1 January 2007).2011. The amendments simplify disclosure for government related entities and clarify the definition of a related party. |
|
| • | Amendments to IFRS 2 ‘Share-based Payment’: Group cash-settled share-based payment transactions, effective for annual reporting periods beginning on or after 1 January 2010. This amendment clarifies the scope and accounting for group cash-settled share-based payment transactions. |
|
| • | Amendments to IAS 32 ‘Financial Instruments: Presentation’ — Classification of Rights, effective for annual reporting periods beginning on or after 1 February 2010. The amendment clarifies that rights, options or warrants issued to IAS 1 introduces disclosures abouta acquire a fixed number of an entity’s own non-derivative equity instruments for a fixed amount in any currency are classified as equity instruments provided the level and the managementoffer is made pro-rata to all existing owners of the capitalsame class of an entity.the entity’s own non-derivative equity instruments. |
|
| • | IFRS 8 ‘Operating Segments’ (effective9 ‘Financial Instruments’, effective for annual reporting periods beginning on or after 1 January 2009). IFRS 8 requires an entity to adopt2013. The new standard details the ‘management approach’ to reporting onrequirements for the classification and measurement of financial performance of its operating segments, revise explanations of the basis on which the segment information is prepared and provide reconciliations to the amounts recognised in the income statement and balance sheet.assets. |
|
| • | Management‘Improvements to IFRSs — 2009’ effective dates vary upon the amendment. This is currently assessing the impactsecond set of IFRS 7, IFRS 8amendments published under the IASB’s annual improvements process and incorporates minor amendments to 12 standards and interpretations. |
|
| • | IFRIC 18 ‘Transfers of Assets from Customers’ effective for transfers of assets from customers received on or after 1 July 2009. IFRIC 18 states that when an item of property, plant and equipment is received from a customer and it meets the complementarydefinition of an asset from the perspective of the recipient, the recipient should recognise the asset at its fair value at the date of transfer and recognise the credit in accordance with IAS 18 ‘Revenue’. |
|
| • | IFRIC 19 ‘Extinguishing Financial Liabilities with Equity Instruments’, effective for annual reporting periods beginning on or after 1 July 2010. IFRIC 19 clarifies accounting by entities issuing equity instruments to extinguish all or part of a financial liability. |
|
| • | Amendments to IFRIC 14 ‘Prepayments of a Minimum Funding Requirement,’ effective for annual reporting periods beginning on or after 1 January 2011. This amendment remedies a consequence of IFRIC 14 where, in certain circumstances, an entity was not permitted to IAS 1 on the Group’s financial statements.recognise prepayments of a minimum funding requirement as an asset. |
Management are currently assessing the impact of these new standards, interpretations and amendments on the Group’s financial statements.
In addition, management has assessed the relevance of the following amendments and interpretationsinterpretation with respect to the Group’s operations:
| | |
| • | IFRIC 8 ‘Scope17 ‘Distributions of IFRS 2’ (effective for annual periods beginning on or after 1 May 2006). IFRIC 8 requires consideration of transactions involving the issuance of equity instruments — where the identifiable consideration received is less than the fair value of the equity instruments issued —Non-cash Assets to establish whether or not they fall within the scope of IFRS 2. The Group will apply IFRIC 8 from 1 January 2007, but it is not expected to have any impact on the Group’s accounts; |
|
| • | IFRIC 10 ‘Interim Financial Reporting and Impairment’ (effective for annual periods beginning on or after 1 November 2006). IFRIC 10 prohibits impairment losses recognised in an interim period on goodwill, investments in equity instruments and investments in financial assets carried at cost to be reversed at a subsequent balance sheet date. The Group will apply IFRIC 10 from 1 January 2007; |
|
| • | IFRIC 7 ‘Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies’(Owners’, effective for annual reporting periods beginning on or after 1 March 2006).July 2009. IFRIC 717 provides guidance on how to apply the requirements of IAS 29 in a reporting period in whichappropriate accounting treatment when an entity identifies the existencedistributes assets other than cash as dividends, including recognition upon authorisation and measurement at fair value of hyperinflationassets distributed, with any difference between fair value and carrying value of these assets being recognised in the economy of its functional currency,income statement when an entity settles the economy wasdividend payable. This does not hyperinflationary in the prior period. As none of the Group entities have a currency of a hyperinflationary economy as their functional currency, IFRIC 7 is not relevantapply to the Group’s operations; and |
F-11
Notes to the Consolidated Financial Statements (Continued)
| | |
| • | IFRIC 9 ‘Reassessmentdistributions of Embedded Derivatives’ (effective for annual periods beginningnon-cash assets under common control. This interpretation will have no impact on or after 1 June 2006). IFRIC 9 requires an entity to assess whether an embedded derivative is required to be separated from the host contract and accounted forGroup’s financial statements as a derivative when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. The Group does not expect IFRIC 9 to have a material impact.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 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
F-9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
consolidated financial statements, are discussed in the relevant accounting policies under the following headings:
| | |
• Intangible assets: | | Goodwill |
• Intangible assets: | | Pre-publication assets |
• Royalty advances | | |
• Taxation | | |
• Employee benefits: | | Retirement benefitPension obligations |
• Revenue recognition.recognition | | |
(1) Business combinations —The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. 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 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) Transactions with minority interests — Transactions with minority interests are treated as transactions with shareholders. Any surplus or deficit arising from disposals to a minority interest is recorded in equity. For purchases from a minority interest, the difference between consideration paid and the relevant share acquired of the carrying value of the subsidiary is recorded in equity.
(4) 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 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 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
F-12
Notes to the Consolidated Financial Statements (Continued)
operations form part of the core publishing business of the Group and are an integral part of existing wholly ownedwholly-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 |
(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, 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
F-10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
(3) Group companies — The results and financial position of all Group companies 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. |
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.
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 inter-company loan balances, which are not intended to be repaid in the foreseeable future, as part of its net investment. When a foreign entityoperation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale.
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. The average rate for the year against sterling was $1.84 (2005: $1.81)$1.57 (2008: $1.85) and the year end rate was $1.96 (2005: $1.72)$1.61 (2008: $1.44).
d. Property, plant and equipment
| |
d. | Property, plant and equipment |
Property, plant and equipment isare 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 toless 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 |
Buildings (freehold): 20-50 years
Buildings (leasehold): over the period of the lease
Plant and equipment: 3-10 years
The asset’sassets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
F-13
Notes to the Consolidated Financial Statements (Continued)
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, associate or associatejoint venture 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 amountsamount is the higher of cash generating units have been determined based onfair value less costs to sell and value in use calculations.use. These calculations require the use of estimates (seeand significant management judgement. A description of the key assumptions and sensitivities is included in note 12).11. Goodwill is allocated to cash generatingcash-generating units for the purpose of impairment testing. The allocation is made to those cash
F-11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
generatingcash-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) Acquired software — Software 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 linestraight-line basis over its estimated useful life of between three and fiveeight years.
(3) Internally developed software — Internal and external costs incurred during the preliminary stage of developing computer software for internal use are expensed as incurred. Internal and external costs incurred to develop computer software for internal use during the application development stage are capitalised if the Group expects economic benefits from 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 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 fiveeight years.
(4) Acquired intangible assets — Acquired intangible assets comprise publishing rights,include customer lists and relationships, technology, trade namestrademarks and trademarks.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 of between two and 20 years, using a depreciation method that reflects the pattern of their consumption.
(5) Pre-publication assets — Pre-publication costsassets represent direct costs incurred in the development of educational programmes and titles prior to their publication. These costs are recognised as current intangible assets where the title will generate probable future economic benefits within their normal operating cycle and costs can be measured reliably. Pre-publication assets are amortised upon publication of the title over estimated economic lives of five years or less, being an estimate of the estimated expected operating life cycle of the title, with a higher proportion of the amortisation taken in the earlier years.
The investment in pre-publication assets has been disclosed as part of the cash generated from operations in the cash flow statement(seestatement (see note 31).
The assessment of the recoverability of pre-publication assetassets and the determination of the amortisation profile involve a significant degree of judgement based on historical trends and management estimation of future potential
F-14
Notes to the Consolidated Financial Statements (Continued)
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 17.20.
| |
f. | f. Other financial assets |
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.
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, other direct costs and related production overheads. Net realisable value is the estimated selling price
F-12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
in the ordinary course of business, less estimated costs necessary to make the sale. Provisions 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 adjust the advance 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. 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 distribution and remote printing. These costcosts are expensed as incurred as they do not meet the criteria under IAS 38 ‘Intangible Assets’ to be capitalised as intangible assets.
j. Cash and cash equivalents
| |
j. | Cash and cash equivalents |
Cash and cash equivalents in the cash flow statement include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are included in borrowings in current liabilities in the balance sheet.
k. Share capital
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.
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.
F-15
Notes to the Consolidated Financial Statements (Continued)
Where any Group company purchases the Company’scompany’s equity share capital (Treasury(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.
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. Accrued interest is included as part of borrowings. Where a debt instrument is in a fair value hedging relationship, an adjustment is made to its carrying value in the income statement to reflect the hedged risk. Interest on borrowings is expensed in the income statement as incurred.
F-13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
m. Derivative financial instruments
Derivatives are initially recognised at fair value and re-measured at the date of transition to IAS 39(1 January 2005)or, if later, on the date a derivative is entered into. Derivatives are subsequently 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 cash 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(fairbonds (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.other comprehensive income. 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.
n. Taxationstatement.
Current tax is recognised 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. 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 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.
Current and deferred tax are recognised in the income statement, except when the tax relates to items charged or credited directly to equity or other comprehensive income, in which case the tax is also recognised in equity.equity or other comprehensive income.
F-16
Notes to the Consolidated Financial Statements (Continued)
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 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.
F-14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
o. Employee benefits
(1) Retirement benefitPension obligations— The liabilityretirement benefit asset and obligation recognised in respectthe balance sheet represents the net of defined benefit pension plans is the present value of the defined benefit obligations at the balance sheet date lessobligation and the fair value of plan assets.assets at the balance sheet date. 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.
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 (actuarial gains and losses).
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.other comprehensive income.
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 assetassets 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.
(2) Other post-retirement obligations— The Group provides certain healthcare and life assurance benefits. The principal plans are unfunded. The expected costs of thesepost-retirement healthcare and life assurance benefits are accrued over the period of employment, using ana similar accounting methodology which is the same as that for defined benefit pension plans.obligations. The liabilities and costs relating to material other post-retirement obligations are assessed annually by independent qualified actuaries.
(3) Share-based payments— The Group has a number of employee option and share plans. The fair value of options or shares granted under the Group’s share and option plans is recognised as an employee expense after taking into account the Group’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 option or share. The fair value of the options granted is measured using whichever of the Black-Scholes, Binomial and Monte Carloan 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 whenif 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.
F-17
Notes to the Consolidated Financial Statements (Continued)
The Group recognises a provision for deferred consideration inwhen the period that an acquisitionpayment of the deferred consideration is made and the Group becomes legally committed to making the payment.probable.
The Group recognises a provision fore 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
F-15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The provision is based on the present value of future payments for surplus leased properties under non-cancellable operating leases, net of estimatedsub-leasing revenue.
q. Revenue recognition income.
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 recognised as follows:
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, and fair value exists for each separate element, such as the provision of supplementary materials with textbooks, revenue in such multiple element arrangements is recognised whenfor each product has been delivered and all other relevant revenue recognition criteria are achieved.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 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 partythird-party costs incurred on behalf of the principal that are rechargeable under the contractual arrangement are not included in revenue.
Income from recharges of freight and other activities which are incidental to the normal revenue generating activities is included in other income.
r. Leases
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 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 isare depreciated over the shorter of the useful life of the asset or the lease term.
F-18
Notes to the Consolidated Financial Statements (Continued)
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.
F-16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
s. Dividends
Dividends are recorded in the Group’s financial statements in the period in which they are approved by the Company’scompany’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 discontinued operations
Non-current assetsliabilities 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. Amounts relating to non-current assets and liabilities held for sale are classified as discontinued operations in the income statement.
u. Trade receivablesstatement where appropriate.
Trade receivables are stated at fair value lessafter provision for bad and doubtful debts and anticipated future sales returns (see also note 1q).
2 Segment information
Due to the differing risks and rewards associated with each business segment and the different customer focus of each segment, the Group’s primary segment reporting format is by business. The Group is organised into the following fivesix business segments:
SchoolNorth American Education — publisher, providerEducational publishing, assessment and testing for the school and higher education market within the USA and Canada;
International Education — Educational publishing, assessment and testing for the school and higher education market outside of North America;
Professional — Business and technology publishing and testing and software servicescertification for primary and secondary schools;professional bodies;
Higher Education — publisher of textbooks and related course materials for colleges and universities;
Penguin — publisher with brand imprints such as Penguin, Putnam, Berkley, Viking, Dorling Kindersley;
FT Publishing— publisherPublisher of theFinancial Times other, business newspapers, magazines and specialist information;
Interactive Data Corporation (IDC)— providerProvider of financial and business information to financial institutions and retail investors.investors;
The remaining business group, Professional, brings together a number of education publishing, testing
Penguin — Publisher with brand imprints such as Penguin, Putnam, Berkley, Viking and services businesses that publish texts, reference and interactive products for industry professionals and does not meetDorling Kindersley.
F-19
Notes to the criteria for classification as a ‘segment’ under IFRS. Consolidated Financial Statements (Continued)
For more detail on the services and products included in each business segment refer to the Business Review.Item 4 of thisForm 20-F.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2009 | |
| | | | North
| | | | | | | | | | | | | | | | | | | | | | |
| | | | American
| | | International
| | | | | | FT
| | | Interactive
| | | | | | | | | | |
| | Notes | | Education | | | Education | | | Professional | | | Publishing | | | Data | | | Penguin | | | Corporate | | | Group | |
| | | | All figures in £ millions | |
|
Continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sales (external) | | | | | | | 2,470 | | | | 1,035 | | | | 275 | | | | 358 | | | | 484 | | | | 1,002 | | | | — | | | | 5,624 | |
Sales (inter-segment) | | | | | | | — | | | | — | | | | 7 | | | | — | | | | — | | | | 24 | | | | — | | | | 31 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted operating profit | | | | | | | 403 | | | | 141 | | | | 43 | | | | 39 | | | | 148 | | | | 84 | | | | — | | | | 858 | |
Amortisation of acquired intangibles | | | | | | | (49 | ) | | | (32 | ) | | | (1 | ) | | | (8 | ) | | | (12 | ) | | | (1 | ) | | | — | | | | (103 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit | | | | | | | 354 | | | | 109 | | | | 42 | | | | 31 | | | | 136 | | | | 83 | | | | — | | | | 755 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Finance costs | | | 6 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (122 | ) |
Finance income | | | 6 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 27 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit before tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 660 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income tax | | | 7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (198 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit for the year from continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 462 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Segment assets | | | | | | | 4,382 | | | | 1,635 | | | | 377 | | | | 420 | | | | 471 | | | | 1,173 | | | | 924 | | | | 9,382 | |
Joint ventures | | | 12 | | | | 13 | | | | — | | | | 1 | | | | 1 | | | | — | | | | 3 | | | | — | | | | 18 | |
Associates | | | 12 | | | | — | | | | 5 | | | | — | | | | 7 | | | | — | | | | — | | | | — | | | | 12 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | | | | | | 4,395 | | | | 1,640 | | | | 378 | | | | 428 | | | | 471 | | | | 1,176 | | | | 924 | | | | 9,412 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other segment items | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Share of results of joint ventures and associates | | | 12 | | | | (2 | ) | | | 6 | | | | 1 | | | | 25 | | | | — | | | | — | | | | — | | | | 30 | |
Capital expenditure | | | 10, 11, 20 | | | | 258 | | | | 80 | | | | 20 | | | | 15 | | | | 29 | | | | 46 | | | | — | | | | 448 | |
Depreciation | | | 10 | | | | 24 | | | | 16 | | | | 10 | | | | 5 | | | | 21 | | | | 9 | | | | — | | | | 85 | |
Amortisation | | | 11, 20 | | | | 274 | | | | 89 | | | | 13 | | | | 20 | | | | 16 | | | | 42 | | | | — | | | | 454 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-20
F-17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
Primary reporting format — business segments
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Higher | | | | | | | FT | | | | | | | 2006 | |
| | Notes | | | School | | | Education | | | Professional | | | Penguin | | | Publishing | | | IDC | | | Corporate | | | Group | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (All figures in £ millions) | |
Continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sales (external) | | | | | | | 1,455 | | | | 795 | | | | 341 | | | | 848 | | | | 366 | | | | 332 | | | | — | | | | 4,137 | |
Sales (inter-segment) | | | | | | | 1 | | | | — | | | | — | | | | 18 | | | | — | | | | — | | | | — | | | | 19 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit before joint ventures and associates | | | | | | | 161 | | | | 161 | | | | 36 | | | | 58 | | | | 18 | | | | 82 | | | | — | | | | 516 | |
Share of results of joint ventures and associates | | | | | | | 6 | | | | — | | | | 1 | | | | — | | | | 17 | | | | — | | | | — | | | | 24 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit | | | | | | | 167 | | | | 161 | | | | 37 | | | | 58 | | | | 35 | | | | 82 | | | | — | | | | 540 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Finance costs | | | 7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (133 | ) |
Finance income | | | 7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 59 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit before tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 466 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income tax | | | 8 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (11 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit for the year from continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 455 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reconciliation to adjusted operating profit | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit | | | | | | | 167 | | | | 161 | | | | 37 | | | | 58 | | | | 35 | | | | 82 | | | | — | | | | 540 | |
Adjustment to goodwill on recognition of pre-acquisition deferred tax | | | | | | | — | | | | — | | | | — | | | | 7 | | | | — | | | | — | | | | — | | | | 7 | |
Amortisation of acquired intangibles | | | | | | | 17 | | | | — | | | | 1 | | | | 1 | | | | 2 | | | | 7 | | | | — | | | | 28 | |
Other net gains and losses of associates | | | | | | | — | | | | — | | | | — | | | | — | | | | (4 | ) | | | — | | | | — | | | | (4 | ) |
Other net finance costs of associates | | | | | | | — | | | | — | | | | — | | | | — | | | | (1 | ) | | | — | | | | — | | | | (1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted operating profit — continuing operations | | | | | | | 184 | | | | 161 | | | | 38 | | | | 66 | | | | 32 | | | | 89 | | | | — | | | | 570 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Segment assets | | | | | | | 2,684 | | | | 1,347 | | | | 580 | | | | 954 | | | | 317 | | | | 314 | | | | 703 | | | | 6,899 | |
Joint ventures | | | 13 | | | | 5 | | | | — | | | | — | | | | 3 | | | | 4 | | | | — | | | | — | | | | 12 | |
Associates | | | 13 | | | | 4 | | | | — | | | | — | | | | — | | | | 4 | | | | — | | | | — | | | | 8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets — continuing operations | | | | | | | 2,693 | | | | 1,347 | | | | 580 | | | | 957 | | | | 325 | | | | 314 | | | | 703 | | | | 6,919 | |
Assets — discontinued operations | | | | | | | — | | | | — | | | | 294 | | | | — | | | | — | | | | — | | | | — | | | | 294 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | | | | | | 2,693 | | | | 1,347 | | | | 874 | | | | 957 | | | | 325 | | | | 314 | | | | 703 | | | | 7,213 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities | | | | | | | (662 | ) | | | (268 | ) | | | (177 | ) | | | (269 | ) | | | (300 | ) | | | (131 | ) | | | (1,762 | ) | | | (3,569 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other segment items | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Capital expenditure | | | 11, 12, 17 | | | | 124 | | | | 88 | | | | 30 | | | | 38 | | | | 19 | | | | 20 | | | | — | | | | 319 | |
Depreciation | | | 11 | | | | 21 | | | | 8 | | | | 19 | | | | 7 | | | | 9 | | | | 13 | | | | — | | | | 77 | |
Amortisation | | | 12, 17 | | | | 117 | | | | 78 | | | | 21 | | | | 34 | | | | 4 | | | | 7 | | | | — | | | | 261 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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-21
F-18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Higher | | | | | | | FT | | | | | | | 2005 | |
| | Notes | | | School | | | Education | | | Professional | | | Penguin | | | Publishing | | | IDC | | | Corporate | | | Group | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (All figures in £ millions) | |
Continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sales (external) | | | | | | | 1,295 | | | | 779 | | | | 301 | | | | 804 | | | | 332 | | | | 297 | | | | — | | | | 3,808 | |
Sales (inter-segment) | | | | | | | — | | | | — | | | | — | | | | 16 | | | | — | | | | — | | | | — | | | | 16 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit before joint ventures and associates | | | | | | | 138 | | | | 156 | | | | 24 | | | | 60 | | | | 49 | | | | 75 | | | | — | | | | 502 | |
Share of results of joint ventures and associates | | | | | | | 4 | | | | — | | | | 1 | | | | — | | | | 9 | | | | — | | | | — | | | | 14 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit | | | | | | | 142 | | | | 156 | | | | 25 | | | | 60 | | | | 58 | | | | 75 | | | | — | | | | 516 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Finance costs | | | 7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (132 | ) |
Finance income | | | 7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 62 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit before tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 446 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income tax | | | 8 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (116 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit for the year from continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 330 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reconciliation to adjusted operating profit | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit | | | | | | | 142 | | | | 156 | | | | 25 | | | | 60 | | | | 58 | | | | 75 | | | | — | | | | 516 | |
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 | | | | 25 | | | | 60 | | | | 21 | | | | 80 | | | | — | | | | 489 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Segment assets | | | | | | | 2,347 | | | | 1,648 | | | | 1,179 | | | | 960 | | | | 154 | | | | 291 | | | | 985 | | | | 7,564 | |
Joint ventures | | | 13 | | | | 6 | | | | — | | | | — | | | | 2 | | | | 4 | | | | — | | | | — | | | | 12 | |
Associates | | | 13 | | | | 6 | | | | — | | | | — | | | | — | | | | 18 | | | | — | | | | — | | | | 24 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | | | | | | 2,359 | | | | 1,648 | | | | 1,179 | | | | 962 | | | | 176 | | | | 291 | | | | 985 | | | | 7,600 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities | | | | | | | (557 | ) | | | (341 | ) | | | (263 | ) | | | (280 | ) | | | (336 | ) | | | (109 | ) | | | (1,981 | ) | | | (3,867 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other segment items | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Capital expenditure | | | 11, 12, 17 | | | | 114 | | | | 96 | | | | 43 | | | | 34 | | | | 14 | | | | 19 | | | | — | | | | 320 | |
Depreciation | | | 11 | | | | 26 | | | | 8 | | | | 17 | | | | 7 | | | | 11 | | | | 11 | | | | — | | | | 80 | |
Amortisation | | | 12, 17 | | | | 91 | | | | 78 | | | | 20 | | | | 24 | | | | 3 | | | | 5 | | | | — | | | | 221 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Higher | | | | | | | FT | | | | | | | 2004 | |
| | Notes | | | School | | | Education | | | Professional | | | Penguin | | | Publishing | | | IDC | | | Corporate | | | Group | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (All figures in £ millions) | |
Continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sales (external) | | | | | | | 1,087 | | | | 729 | | | | 290 | | | | 786 | | | | 318 | | | | 269 | | | | — | | | | 3,479 | |
Sales (inter-segment) | | | | | | | — | | | | — | | | | — | | | | 15 | | | | — | | | | — | | | | — | | | | 15 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit before joint ventures and associates | | | | | | | 109 | | | | 133 | | | | 20 | | | | 46 | | | | 4 | | | | 62 | | | | — | | | | 374 | |
Share of results of joint ventures and associates | | | | | | | 3 | | | | — | | | | — | | | | 1 | | | | 4 | | | | — | | | | — | | | | 8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit | | | | | | | 112 | | | | 133 | | | | 20 | | | | 47 | | | | 8 | | | | 62 | | | | — | | | | 382 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Finance costs | | | 7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (96 | ) |
Finance income | | | 7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 17 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit before tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 303 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income tax | | | 8 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (55 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Profit for the year from continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 248 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reconciliation to adjusted operating profit | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating profit | | | | | | | 112 | | | | 133 | | | | 20 | | | | 47 | | | | 8 | | | | 62 | | | | — | | | | 382 | |
Amortisation of acquired intangibles | | | | | | | | | | | — | | | | — | | | | — | | | | — | | | | 5 | | | | — | | | | 5 | |
Other net gains and losses | | | | | | | (4 | ) | | | (4 | ) | | | (2 | ) | | | 5 | | | | (4 | ) | | | — | | | | — | | | | (9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other net finance costs of associates | | | | | | | — | | | | — | | | | — | | | | — | | | | | | | | — | | | | — | | | | | |
Adjusted operating profit — continuing operations | | | | | | | 108 | | | | 129 | | | | 18 | | | | 52 | | | | 4 | | | | 67 | | | | — | | | | 378 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Segment assets | | | | | | | 1,860 | | | | 1,224 | | | | 1,345 | | | | 892 | | | | 502 | | | | 247 | | | | 461 | | | | 6,531 | |
Joint ventures | | | 13 | | | | 7 | | | | — | | | | — | | | | 5 | | | | 2 | | | | — | | | | — | | | | 14 | |
Associates | | | 13 | | | | 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 | | | 11, 12, 17 | | | | 104 | | | | 79 | | | | 62 | | | | 36 | | | | 15 | | | | 12 | | | | — | | | | 308 | |
Depreciation | | | 11 | | | | 25 | | | | 9 | | | | 16 | | | | 9 | | | | 16 | | | | 9 | | | | — | | | | 84 | |
Amortisation | | | 12, 17 | | | | 74 | | | | 65 | | | | 18 | | | | 29 | | | | 2 | | | | 5 | | | | — | | | | 193 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 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 | | | | | | | — | | | | 5 | | | | — | | | | 4 | | | | — | | | | 2 | | | | — | | | | 11 | |
Associates | | | | | | | 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 | | | | | | | — | | | | 6 | | | | 1 | | | | 16 | | | | — | | | | — | | | | — | | | | 23 | |
Capital expenditure | | | | | | | 136 | | | | 109 | | | | 20 | | | | 28 | | | | 19 | | | | 44 | | | | — | | | | 356 | |
Depreciation | | | | | | | 26 | | | | 7 | | | | 9 | | | | 9 | | | | 10 | | | | 7 | | | | — | | | | 68 | |
Amortisation | | | | | | | 159 | | | | 45 | | | | 11 | | | | 9 | | | | 8 | | | | 30 | | | | — | | | | 262 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
In 2006,2009, sales from the provision of goods were £3,117m (2005: £2,956m; 2004: 2,787m)£3,947m (2008: £3,411m; 2007: £3,053m) and sales from the provision of services were £1,020m (2005: £852m; 2004: 692m)£1,677m (2008: £1,400m; 2007: £1,109m). Sales from the Group’s educational publishing, consumer publishing and newspaper business are classified as being from the provision of goods and sales from its assessment and testing, marketpricing, corporate trainingmarket pricing and managementother service businesses are classified as being from the provision of services.
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 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, marketable securities borrowings 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).
F-20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Property, plant and equipment and intangible assets acquired through business combinationscombination were £173m (2005: £111m; 2004: £16m)£153m (2008: £253m) (see notes 11, 12 and 17)note 29). Capital expenditure, depreciation and amortisation 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 disclosed as a discontinued operation2008 and to the Data Management business, Government Solutions, Datamark and Les Echos in 20052007 (see note 3). In December 2006 Pearson announced its intention
F-22
Notes to sell Pearson Government Solutions. This operation is disclosed as a discontinued operation (see note 3) and the assets and liabilities are classified as held for sale (see note 29).
Secondary reporting format — geographic segmentsConsolidated Financial Statements (Continued)
The Group’s business segments are managed on a worldwide basis and operateGroup operates in the following main geographic areas:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Sales | | | Total assets | | | Capital expenditure | |
| | | | | | | | | |
| | 2006 | | | 2005 | | | 2004 | | | 2006 | | | 2005 | | | 2004 | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (All figures in £ millions) | |
Continuing operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
European countries | | | 1,089 | | | | 951 | | | | 820 | | | | 1,608 | | | | 1,711 | | | | 1,112 | | | | 70 | | | | 63 | | | | 79 | |
North America | | | 2,642 | | | | 2,451 | | | | 2,309 | | | | 4,908 | | | | 5,476 | | | | 4,716 | | | | 231 | | | | 242 | | | | 208 | |
Asia Pacific | | | 298 | | | | 300 | | | | 263 | | | | 327 | | | | 325 | | | | 302 | | | | 12 | | | | 13 | | | | 10 | |
Other countries | | | 108 | | | | 106 | | | | 87 | | | | 56 | | | | 52 | | | | 43 | | | | 2 | | | | 2 | | | | 3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 4,137 | | | | 3,808 | | | | 3,479 | | | | 6,899 | | | | 7,564 | | | | 6,173 | | | | 315 | | | | 320 | | | | 300 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Discontinued operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
European countries | | | 17 | | | | 39 | | | | 205 | | | | 9 | | | | — | | | | 358 | | | | 1 | | | | — | | | | 8 | |
North America | | | 257 | | | | 266 | | | | 195 | | | | 281 | | | | — | | | | — | | | | 2 | | | | — | | | | — | |
Other countries | | | 12 | | | | 10 | | | | 7 | | | | 4 | | | | — | | | | — | | | | 1 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 286 | | | | 315 | | | | 407 | | | | 294 | | | | — | | | | 358 | | | | 4 | | | | — | | | | 8 | |
Joint ventures and associates | | | — | | | | — | | | | — | | | | 20 | | | | 36 | | | | 47 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 4,423 | | | | 4,123 | | | | 3,886 | | | | 7,213 | | | | 7,600 | | | | 6,578 | | | | 319 | | | | 320 | | | | 308 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Sales | | | Non-current assets | |
| | 2009 | | | 2008 | | | 2007 | | | 2009 | | | 2008 | | | 2007 | |
| | All figures in £ millions | |
|
Continuing operations | | | | | | | | | | | | | | | | | | | | | | | | |
UK | | | 748 | | | | 754 | | | | 721 | | | | 941 | | | | 701 | | | | 724 | |
Other European countries | | | 474 | | | | 463 | | | | 381 | | | | 242 | | | | 224 | | | | 140 | |
USA | | | 3,462 | | | | 2,861 | | | | 2,448 | | | | 3,811 | | | | 4,624 | | | | 3,146 | |
Canada | | | 201 | | | | 167 | | | | 143 | | | | 204 | | | | 209 | | | | 183 | |
Asia Pacific | | | 519 | | | | 415 | | | | 351 | | | | 340 | | | | 179 | | | | 114 | |
Other countries | | | 220 | | | | 151 | | | | 118 | | | | 121 | | | | 14 | | | | 11 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total continuing | | | 5,624 | | | | 4,811 | | | | 4,162 | | | | 5,659 | | | | 5,951 | | | | 4,318 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Discontinued operations | | | | | | | | | | | | | | | | | | | | | | | | |
UK | | | — | | | | — | | | | 1 | | | | — | | | | — | | | | — | |
Other European countries | | | — | | | | — | | | | 82 | | | | — | | | | — | | | | — | |
USA | | | — | | | | 8 | | | | 78 | | | | — | | | | — | | | | 117 | |
Canada | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Asia Pacific | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Other countries | | | — | | | | — | | | | 6 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total discontinued | | | — | | | | 8 | | | | 167 | | | | — | | | | — | | | | 117 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 5,624 | | | | 4,819 | | | | 4,329 | | | | 5,659 | | | | 5,951 | | | | 4,435 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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.
F-21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) Non-current assets are based on the subsidiary’s 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 and other receivables.
| |
33. | Discontinued operations |
On 11 December 2006, Pearson announced that it had agreed
Discontinued operations relate to sell Pearsonthe Group’s interest in Government Solutions to Veritas Capital, a private equity firm. This operation is disclosed as discontinued(sold on 15 February 2007), Datamark (sold on 31 July 2007), Les Echos (sold on 24 December 2007) and the assets and liabilitiesData Management business (sold on 22 February 2008).
The results of Pearson Government Solutionsthe Data Management business (previously included in the Professional segment) have been reclassifiedincluded in discontinued operations for 2007 and 2008. In anticipation of the loss on sale, an impairment to non-current assets held for sale (see notes 29 and 35).
Discontinued operations in 2005 also relategoodwill was charged to the saleincome statement in 2007.
The results of Pearson’s 79% interestGovernment Solutions (previously included in Recoletos Grupo de Communicación S.A..the Professional segment) and Les Echos (previously included in the FT Publishing segment) were included in discontinued operations for 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-23
Notes to the Consolidated Financial Statements (Continued)
An analysis of the results and cash flows of the discontinued operations areoperation is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2006 | | | 2005 | | | | | | | 2004 | | | | | |
| | Pearson | | | Pearson | | | | | | | Pearson | | | | | |
| | Government | | | Government | | | 2005 | | | 2005 | | | Government | | | 2004 | | | 2004 | |
| | Solutions | | | Solutions | | | Recoletos | | | Total | | | Solutions | | | Recoletos | | | Total | |
| | | | | | | | | | | | | | | | | | | | | |
| | (All figures in £ millions) | |
Sales | | | 286 | | | | 288 | | | | 27 | | | | 315 | | | | 217 | | | | 190 | | | | 407 | |
| �� | | | | | | | | | | | | | | | | | | | | |
Operating profit/(loss) | | | 22 | | | | 20 | | | | (3 | ) | | | 17 | | | | 22 | | | | 26 | | | | 48 | |
Net finance income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3 | | | | 3 | |
| | | | | | | | | | | | | | | | | | | | | |
Profit/(loss) before tax | | | 22 | | | | 20 | | | | (3 | ) | | | 17 | | | | 22 | | | | 29 | | | | 51 | |
| | | | | | | | | | | | | | | | | | | | | |
Attributable tax (expense)/benefit | | | (8 | ) | | | (8 | ) | | | 1 | | | | (7 | ) | | | (8 | ) | | | (7 | ) | | | (15 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Profit/(loss) after tax | | | 14 | | | | 12 | | | | (2 | ) | | | 10 | | | | 14 | | | | 22 | | | | 36 | |
Profit on disposal of discontinued operations before tax | | | — | | | | — | | | | 306 | | | | 306 | | | | — | | | | — | | | | — | |
Attributable tax expense | | | — | | | | — | | | | (2 | ) | | | (2 | ) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
Profit for the year from discontinued operations | | | 14 | | | | 12 | | | | 302 | | | | 314 | | | | 14 | | | | 22 | | | | 36 | |
| | | | | | | | | | | | | | | | | | | | | |
Operating cash flows | | | 20 | | | | 22 | | | | (6 | ) | | | 16 | | | | 112 | | | | 12 | | | | 124 | |
Investing cash flows | | | (8 | ) | | | (13 | ) | | | — | | | | (13 | ) | | | (5 | ) | | | 17 | | | | 12 | |
Financing cash flows | | | (1 | ) | | | (1 | ) | | | — | | | | (1 | ) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
Total cash flows | | | 11 | | | | 8 | | | | (6 | ) | | | 2 | | | | 107 | | | | 29 | | | | 136 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | 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-24
Notes to the Consolidated Financial Statements (Continued)
| |
44. | Other net gains and lossesOperating expenses |
| | | | | | | | | | | | |
| | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | |
| | (All figures in £ millions) | |
Profit on sale of interest in MarketWatch | | | — | | | | 40 | | | | — | |
Other items | | | — | | | | — | | | | 9 | |
| | | | | | | | | |
Total other net gains and losses | | | — | | | | 40 | | | | 9 | |
| | | | | | | | | |
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.
F-22
| | | | | | | | | | | | |
| | 2009 | | | 2008 | | | 2007 | |
| | All figures in £ millions | |
|
By function: | | | | | | | | | | | | |
Cost of goods sold | | | 2,539 | | | | 2,174 | | | | 1,910 | |
| | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | |
Distribution costs | | | 274 | | | | 235 | | | | 202 | |
Administrative and other expenses | | | 2,206 | | | | 1,853 | | | | 1,600 | |
Other income | | | (120 | ) | | | (102 | ) | | | (101 | ) |
| | | | | | | | | | | | |
Total operating expenses | | | 2,360 | | | | 1,986 | | | | 1,701 | |
| | | | | | | | | | | | |
Total | | | 4,899 | | | | 4,160 | | | | 3,611 | |
| | | | | | | | | | | | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | |
| | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | |
| | (All figures in £ millions) | |
By function: | | | | | | | | | | | | |
Cost of goods sold | | | 1,917 | | | | 1,787 | | | | 1,631 | |
| | | | | | | | | |
Operating expenses | | | | | | | | | | | | |
Distribution costs | | | 299 | | | | 292 | | | | 226 | |
Administrative and other expenses | | | 1,504 | | | | 1,351 | | | | 1,340 | |
Other income | | | (99 | ) | | | (84 | ) | | | (83 | ) |
| | | | | | | | | |
Total operating expenses | | | 1,704 | | | | 1,559 | | | | 1,483 | |
| | | | | | | | | |
Total | | | 3,621 | | | | 3,346 | | | | 3,114 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Notes | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | |
| | | | (All figures in £ millions) | |
By nature: | | | | | | | | | | | | | | | | |
Utilisation of inventory | | | 18 | | | | 820 | | | | 767 | | | | 699 | |
Depreciation of property, plant and equipment | | | 11 | | | | 71 | | | | 76 | | | | 74 | |
Amortisation of intangible assets — pre-publication | | | 17 | | | | 210 | | | | 192 | | | | 168 | |
Amortisation of intangible assets — other | | | 12 | | | | 48 | | | | 26 | | | | 24 | |
Employee benefit expense | | | 6 | | | | 1,280 | | | | 1,177 | | | | 1,074 | |
Operating lease rentals | | | | | | | 125 | | | | 111 | | | | 126 | |
Other property costs | | | | | | | 121 | | | | 84 | | | | 69 | |
Royalties expensed | | | | | | | 360 | | | | 363 | | | | 331 | |
Advertising, promotion and marketing | | | | | | | 212 | | | | 198 | | | | 171 | |
Information technology costs | | | | | | | 90 | | | | 81 | | | | 73 | |
Other costs | | | | | | | 383 | | | | 355 | | | | 351 | |
Other income | | | | | | | (99 | ) | | | (84 | ) | | | (46 | ) |
| | | | | | | | | | | | |
Total | | | | | | | 3,621 | | | | 3,346 | | | | 3,114 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Notes | | | 2009 | | | 2008 | | | 2007 | |
| | | | | All figures in £ millions | |
|
By nature: | | | | | | | | | | | | | | | | |
Utilisation of inventory | | | 21 | | | | 843 | | | | 832 | | | | 732 | |
Depreciation of property, plant and equipment | | | 10 | | | | 85 | | | | 80 | | | | 65 | |
Amortisation of intangible assets — Pre-publication | | | 20 | | | | 307 | | | | 244 | | | | 192 | |
Amortisation of intangible assets — Other | | | 11 | | | | 147 | | | | 116 | | | | 70 | |
Employee benefit expense | | | 5 | | | | 1,903 | | | | 1,553 | | | | 1,288 | |
Operating lease rentals | | | | | | | 171 | | | | 168 | | | | 129 | |
Other property costs | | | | | | | 87 | | | | 116 | | | | 122 | |
Royalties expensed | | | | | | | 497 | | | | 415 | | | | 365 | |
Advertising, promotion and marketing | | | | | | | 297 | | | | 244 | | | | 195 | |
Information technology costs | | | | | | | 96 | | | | 76 | | | | 70 | |
Other costs | | | | | | | 586 | | | | 418 | | | | 484 | |
Other income | | | | | | | (120 | ) | | | (102 | ) | | | (101 | ) |
| | | | | | | | | | | | | | | | |
Total | | | | | | | 4,899 | | | | 4,160 | | | | 3,611 | |
| | | | | | | | | | | | | | | | |
During the year the Group obtained the following services from the Group’s auditor:
| | | | | | | | | | | | |
| | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | |
| | (All figures in £ millions) | |
Audit services | | | | | | | | | | | | |
Fees payable to the Company’s auditor for the audit of parent company and consolidated accounts | | | 1 | | | | 1 | | | | 1 | |
Non-audit services | | | | | | | | | | | | |
Fees payable to the Company’s auditor and its associates for other services: | | | | | | | | | | | | |
— The audit of the Company’s subsidiaries pursuant to legislation | | | 4 | | | | 3 | | | | 3 | |
— Other services pursuant to legislation | | | 4 | | | | — | | | | — | |
— Tax services | | | 1 | | | | 1 | | | | 2 | |
— Services relating to corporate finance transactions | | | 1 | | | | 1 | | | | — | |
— All other services | | | — | | | | 1 | | | | — | |
| | | | | | | | | |
| | | 11 | | | | 7 | | | | 6 | |
| | | | | | | | | |
| | | | | | | | | | | | |
| | 2009 | | | 2008 | | | 2007 | |
| | All figures in £ millions | |
|
Fees payable to the company’s auditor for the audit of parent company and consolidated financial statements | | | 4 | | | | 3 | | | | 3 | |
The audit of the company’s subsidiaries pursuant to legislation | | | 2 | | | | 2 | | | | 1 | |
Tax services | | | 2 | | | | 2 | | | | 2 | |
Other services | | | 1 | | | | 1 | | | | 1 | |
| | | | | | | | | | | | |
Total | | | 9 | | | | 8 | | | | 7 | |
| | | | | | | | | | | | |
F-25
F-23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
‘Other services pursuant to legislation’ represents
Reconciliation between audit and non-audit service fees is shown below:
| | | | | | | | | | | | |
| | 2009 | | | 2008 | | | 2007 | |
| | All figures in £ millions | |
|
Group audit fees including fees for attestation under section 404 of the Sarbanes-Oxley Act | | | 6 | | | | 5 | | | | 4 | |
Non-audit fees | | | 3 | | | | 3 | | | | 3 | |
| | | | | | | | | | | | |
Total | | | 9 | | | | 8 | | | | 7 | |
| | | | | | | | | | | | |
Fees for attestation under section 404 of the Sarbanes-Oxley Act are allocated between fees payable for services in relation to other statutory filings or engagements that are required to be carried out by the appointed auditor. In particular, this includes fees for reports under section 404 (S-404)audits of the US Public Company Accounting Reformconsolidated and Investor Protection Act of 2002 (Sarbanes-Oxley) which are required for the first time in 2006.subsidiary accounts.
‘Services relating to corporate finance transactions’ relate to a carve-out audit of Pearson Government Solutions in 2006. In 2005 this largely
Tax services include services related to tax planning and various other tax advisory matters. Other services include due diligence work at IDC.on acquisitions.
‘All other services’ in 2005 relate to IFRS transition work and Sarbanes-Oxley section 404 compliance services.
Audit fees in relation to the IDC SEC filings have been entirely included in ‘The audit of the Company’s subsidiaries pursuant to legislation’. The audit fee relates to an integrated S-404 review and audit in which the audit work takes leverage from the results of S-404 testing. The fees for the S-404 review and the audit are not separate, therefore no IDC fees have been included in ‘Other services pursuant to legislation’.
| | | | | | | | | | | | | | | | |
| | Notes | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | |
| | | | (All figures in £ millions) | |
Employee benefit expense | | | | | | | | | | | | | | | | |
Wages and salaries (including termination benefits and restructuring costs) | | | | | | | 1,080 | | | | 993 | | | | 903 | |
Social security costs | | | | | | | 111 | | | | 100 | | | | 89 | |
Share-based payment costs | | | 24 | | | | 25 | | | | 23 | | | | 25 | |
Pension costs — defined contribution plans | | | 24 | | | | 36 | | | | 35 | | | | 32 | |
Pension costs — defined benefit plans | | | 24 | | | | 29 | | | | 25 | | | | 24 | |
Other post-retirement benefits | | | 24 | | | | (1 | ) | | | 1 | | | | 1 | |
| | | | | | | | | | | | |
| | | | | | | 1,280 | | | | 1,177 | | | | 1,074 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Notes | | | 2009 | | | 2008 | | | 2007 | |
| | | | | All figures in £ millions | |
|
Employee benefit expense | | | | | | | | | | | | | | | | |
Wages and salaries (including termination benefits and restructuring costs) | | | | | | | 1,632 | | | | 1,317 | | | | 1,087 | |
Social security costs | | | | | | | 152 | | | | 119 | | | | 100 | |
Share-based payment costs | | | 26 | | | | 37 | | | | 33 | | | | 30 | |
Retirement benefits — defined contribution plans | | | 25 | | | | 62 | | | | 41 | | | | 39 | |
Retirement benefits — defined benefit plans | | | 25 | | | | 18 | | | | 37 | | | | 31 | |
Other post-retirement benefits | | | 25 | | | | 2 | | | | 6 | | | | 1 | |
| | | | | | | | | | | | | | | | |
| | | | | | | 1,903 | | | | 1,553 | | | | 1,288 | |
| | | | | | | | | | | | | | | | |
The details of the emoluments of the directors of Pearson plc are shown in Item 6 of this Form 20-F.the report on directors’ remuneration.
| | | | | | | | | | | | |
| | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | |
| | (Average number employed) | |
School | | | 11,064 | | | | 10,133 | | | | 10,403 | |
Higher Education | | | 4,368 | | | | 4,196 | | | | 4,087 | |
Professional | | | 3,754 | | | | 3,809 | | | | 3,368 | |
Penguin | | | 3,943 | | | | 4,051 | | | | 4,085 | |
FT Publishing | | | 2,285 | | | | 1,952 | | | | 1,989 | |
IDC | | | 2,200 | | | | 1,956 | | | | 1,826 | |
Other | | | 1,669 | | | | 1,573 | | | | 1,365 | |
| | | | | | | | | |
Continuing operations | | | 29,283 | | | | 27,670 | | | | 27,123 | |
| | | | | | | | | |
Discontinued operations | | | 5,058 | | | | 4,533 | | | | 5,963 | |
| | | | | | | | | |
| | | 34,341 | | | | 32,203 | | | | 33,086 | |
| | | | | | | | | |
| | | | | | | | | | | | |
| | 2009 | | | 2008 | | | 2007 | |
| | Average number employed | |
|
Employee numbers | | | | | | | | | | | | |
North American Education | | | 15,606 | | | | 15,412 | | | | 14,327 | |
International Education | | | 8,899 | | | | 5,718 | | | | 5,291 | |
Professional | | | 2,662 | | | | 2,641 | | | | 2,540 | |
FT Publishing | | | 2,328 | | | | 2,379 | | | | 2,083 | |
Interactive Data | | | 2,459 | | | | 2,413 | | | | 2,300 | |
Penguin | | | 4,163 | | | | 4,112 | | | | 4,163 | |
Other | | | 1,047 | | | | 909 | | | | 918 | |
| | | | | | | | | | | | |
Continuing operations | | | 37,164 | | | | 33,584 | | | | 31,622 | |
| | | | | | | | | | | | |
Discontinued operations | | | — | | | | 96 | | | | 1,070 | |
| | | | | | | | | | | | |
| | | 37,164 | | | | 33,680 | | | | 32,692 | |
| | | | | | | | | | | | |
F-26
F-24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | |
| | Notes | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | |
| | | | (All figures in £ millions) | |
Interest payable | | | | | | | (117 | ) | | | (98 | ) | | | (91 | ) |
Finance costs re employee benefits | | | 24 | | | | — | | | | (7 | ) | | | (5 | ) |
Net foreign exchange losses | | | | | | | (2 | ) | | | (9 | ) | | | — | |
Other losses on financial instruments in a hedging relationship: | | | | | | | | | | | | | | | | |
— fair value hedges | | | | | | | — | | | | (1 | ) | | | — | |
— net investment hedges | | | | | | | (2 | ) | | | — | | | | — | |
Other losses on financial instruments not in a hedging relationship: | | | | | | | | | | | | | | | | |
— derivatives | | | | | | | (12 | ) | | | (17 | ) | | | — | |
| | | | | | | | | | | | |
Finance costs | | | | | | | (133 | ) | | | (132 | ) | | | (96 | ) |
| | | | | | | | | | | | |
Interest receivable | | | | | | | 23 | | | | 21 | | | | 17 | |
Finance income re employee benefits | | | 24 | | | | 4 | | | | — | | | | — | |
Net foreign exchange gains | | | | | | | 21 | | | | 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 | | | | | | | 8 | | | | 7 | | | | — | |
— derivatives | | | | | | | 3 | | | | 9 | | | | — | |
| | | | | | | | | | | | |
Finance income | | | | | | | 59 | | | | 62 | | | | 17 | |
| | | | | | | | | | | | |
Net finance costs | | | | | | | (74 | ) | | | (70 | ) | | | (79 | ) |
| | | | | | | | | | | | |
Analysed as: | | | | | | | | | | | | | | | | |
Net interest payable | | | | | | | (94 | ) | | | (77 | ) | | | (74 | ) |
Finance income/(costs) re employee benefits | | | 24 | | | | 4 | | | | (7 | ) | | | (5 | ) |
| | | | | | | | | | | | |
Net finance costs reflected in adjusted earnings | | | | | | | (90 | ) | | | (84 | ) | | | (79 | ) |
Other net finance income | | | | | | | 16 | | | | 14 | | | | — | |
| | | | | | | | | | | | |
Total net finance costs | | | | | | | (74 | ) | | | (70 | ) | | | (79 | ) |
| | | | | | | | | | | | |
F-25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | |
| | Notes | | | 2009 | | | 2008 | | | 2007 | |
| | | | | All figures in £ millions | |
|
Interest payable | | | | | | | (92 | ) | | | (106 | ) | | | (114 | ) |
Finance costs in respect of retirement benefits | | | 25 | | | | (12 | ) | | | — | | | | — | |
Net foreign exchange losses | | | | | | | (7 | ) | | | (11 | ) | | | (25 | ) |
Other losses on financial instruments in a hedging relationship: | | | | | | | | | | | | | | | | |
— fair value hedges | | | | | | | (1 | ) | | | (7 | ) | | | (1 | ) |
— net investment hedges | | | | | | | — | | | | — | | | | (1 | ) |
Other losses on financial instruments not in a hedging relationship: | | | | | | | | | | | | | | | | |
— derivatives | | | | | | | (10 | ) | | | (12 | ) | | | (9 | ) |
| | | | | | | | | | | | | | | | |
Finance costs | | | | | | | (122 | ) | | | (136 | ) | | | (150 | ) |
| | | | | | | | | | | | | | | | |
Interest receivable | | | | | | | 7 | | | | 17 | | | | 19 | |
Finance income in respect of retirement benefits | | | 25 | | | | — | | | | 8 | | | | 10 | |
Net foreign exchange gains | | | | | | | — | | | | — | | | | 8 | |
Other gains on financial instruments in a hedging relationship: | | | | | | | | | | | | | | | | |
— fair value hedges | | | | | | | 4 | | | | 2 | | | | — | |
— net investment hedges | | | | | | | — | | | | 1 | | | | — | |
Other gains on financial instruments not in a hedging relationship: | | | | | | | | | | | | | | | | |
— amortisation of transitional adjustment on bonds | | | | | | | 3 | | | | 1 | | | | 1 | |
— derivatives | | | | | | | 13 | | | | 16 | | | | 6 | |
| | | | | | | | | | | | | | | | |
Finance income | | | | | | | 27 | | | | 45 | | | | 44 | |
| | | | | | | | | | | | | | | | |
Net finance costs | | | | | | | (95 | ) | | | (91 | ) | | | (106 | ) |
| | | | | | | | | | | | | | | | |
The £3m net gain (2008: £5m net loss; 2007: £1m net loss) on fair value hedges comprises a £96m gain (2008: £156m loss; 2007: £20m loss) on the underlying bonds offset by a £93m loss (2008: £151m gain; 2007: £19m gain) on the related derivative financial instruments.
| | | | | | | | | | | | | | | | |
| | Notes | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | |
| | | | (All figures in £ millions) | |
Current tax | | | | | | | | | | | | | | | | |
Charge in respect of current year | | | | | | | (88 | ) | | | (68 | ) | | | (57 | ) |
Recognition of previously unrecognised trading losses | | | | | | | 23 | | | | — | | | | — | |
Other adjustments in respect of prior years | | | | | | | 35 | | | | (1 | ) | | | 25 | |
| | | | | | | | | | | | |
Total current tax charge | | | | | | | (30 | ) | | | (69 | ) | | | (32 | ) |
| | | | | | | | | | | | |
Deferred tax | | | | | | | | | | | | | | | | |
In respect of timing differences | | | | | | | (73 | ) | | | (66 | ) | | | (46 | ) |
Recognition of previously unrecognised capital losses | | | | | | | 76 | | | | — | | | | — | |
Recognition of previously unrecognised trading losses | | | | | | | 37 | | | | — | | | | — | |
Other adjustments in respect of prior years | | | | | | | (21 | ) | | | 19 | | | | 23 | |
| | | | | | | | | | | | |
Total deferred tax benefit/(charge) | | | 14 | | | | 19 | | | | (47 | ) | | | (23 | ) |
| | | | | | | | | | | | |
Total tax charge | | | | | | | (11 | ) | | | (116 | ) | | | (55 | ) |
| | | | | | | | | | | | |
In 2006,
| | | | | | | | | | | | | | | | |
| | Notes | | | 2009 | | | 2008 | | | 2007 | |
| | | | | All figures in £ millions | |
|
Current tax | | | | | | | | | | | | | | | | |
Charge in respect of current year | | | | | | | (156 | ) | | | (89 | ) | | | (71 | ) |
Other adjustments in respect of prior years | | | | | | | 9 | | | | 10 | | | | 27 | |
| | | | | | | | | | | | | | | | |
Total current tax charge | | | | | | | (147 | ) | | | (79 | ) | | | (44 | ) |
| | | | | | | | | | | | | | | | |
Deferred tax | | | | | | | | | | | | | | | | |
In respect of temporary differences | | | | | | | (55 | ) | | | (97 | ) | | | (96 | ) |
Other adjustments in respect of prior years | | | | | | | 4 | | | | 4 | | | | 9 | |
| | | | | | | | | | | | | | | | |
Total deferred tax charge | | | 13 | | | | (51 | ) | | | (93 | ) | | | (87 | ) |
| | | | | | | | | | | | | | | | |
Total tax charge | | | | | | | (198 | ) | | | (172 | ) | | | (131 | ) |
| | | | | | | | | | | | | | | | |
F-27
Notes to the Group has recognised a deferred tax asset in relation to capital losses in the US which will be utilised on the sale of Pearson Government Solutions. Previously it had not been possible to foresee the utilisation of these losses prior to their expiry. In addition, due to improved trading performance and revised strategic plans together with the expected utilisation of US net operating losses in the Pearson Government Solutions sale, the Group has re-evaluated the likely utilisation of operating losses both in the US and UK and as a consequence has increased 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 tax benefit of £127m.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:
| | | | | | | | | | | | |
| | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | |
| | (All figures in £ millions) | |
Profit before tax | | | 466 | | | | 446 | | | | 303 | |
Tax calculated at UK rate | | | (140 | ) | | | (134 | ) | | | (91 | ) |
Effect of overseas tax rates | | | (19 | ) | | | (20 | ) | | | (6 | ) |
Joint venture and associate income reported net of tax | | | 7 | | | | 5 | | | | 2 | |
Income not subject to tax | | | 5 | | | | 16 | | | | 6 | |
Expenses not deductible for tax purposes | | | (18 | ) | | | (9 | ) | | | (5 | ) |
Utilisation of previously unrecognised tax losses | | | 7 | | | | 11 | | | | 5 | |
Recognition of previously unrecognised tax losses | | | 136 | | | | — | | | | — | |
Unutilised tax losses | | | (3 | ) | | | (3 | ) | | | (14 | ) |
Prior year adjustments | | | 14 | | | | 18 | | | | 48 | |
| | | | | | | | | |
Total tax charge | | | (11 | ) | | | (116 | ) | | | (55 | ) |
| | | | | | | | | |
UK | | | (15 | ) | | | (26 | ) | | | 5 | |
Overseas | | | 4 | | | | (90 | ) | | | (60 | ) |
| | | | | | | | | |
Total tax charge | | | (11 | ) | | | (116 | ) | | | (55 | ) |
| | | | | | | | | |
F-26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | |
| | 2009 | | | 2008 | | | 2007 | |
| | All figures in £ millions | |
|
Profit before tax | | | 660 | | | | 585 | | | | 468 | |
Tax calculated at UK rate (2009: 28%, 2008: 28.5%, 2007: 30%) | | | (185 | ) | | | (167 | ) | | | (141 | ) |
Effect of overseas tax rates | | | (40 | ) | | | (23 | ) | | | (25 | ) |
Joint venture and associate income reported net of tax | | | 8 | | | | 7 | | | | 7 | |
Net income/(expense) not subject to tax | | | 5 | | | | (7 | ) | | | (9 | ) |
Utilisation of previously unrecognised tax losses | | | 2 | | | | 4 | | | | 3 | |
Unutilised tax losses | | | (1 | ) | | | — | | | | (2 | ) |
Prior year adjustments | | | 13 | | | | 14 | | | | 36 | |
| | | | | | | | | | | | |
Total tax charge | | | (198 | ) | | | (172 | ) | | | (131 | ) |
| | | | | | | | | | | | |
UK | | | (43 | ) | | | (53 | ) | | | (42 | ) |
Overseas | | | (155 | ) | | | (119 | ) | | | (89 | ) |
| | | | | | | | | | | | |
Total tax charge | | | (198 | ) | | | (172 | ) | | | (131 | ) |
| | | | | | | | | | | | |
The tax benefit/(charge) on items charged to equityrecognised in other comprehensive income is as follows:
| | | | | | | | | | | | |
| | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | |
| | (All figures in £ millions) | |
Deferred tax on share based payments | | | 2 | | | | 3 | | | | 4 | |
Deferred tax on net investment hedges | | | 3 | | | | — | | | | — | |
Deferred tax on actuarial gains and losses | | | 9 | | | | — | | | | — | |
Current tax on foreign exchange gains and losses | | | (2 | ) | | | 9 | | | | 5 | |
| | | | | | | | | |
| | | 12 | | | | 12 | | | | 9 | |
| | | | | | | | | |
| | | | | | | | | | | | |
| | 2009 | | | 2008 | | | 2007 | |
| | All figures in £ millions | |
|
Pension contributions and actuarial gains and losses | | | 79 | | | | 10 | | | | 28 | |
Net investment hedges and other foreign exchange gains and losses | | | 12 | | | | (1 | ) | | | (6 | ) |
| | | | | | | | | | | | |
| | | 91 | | | | 9 | | | | 22 | |
| | | | | | | | | | | | |
A tax benefit of £6m (2008: tax charge £7m; 2007: tax benefit £7m) relating to share-based payments has been recognised directly in equity.
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-28
DilutedNotes 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.
| | | | | | | | | | | | | | | | |
| | Notes | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | |
| | | | (All figures in £ millions) | |
Earnings | | | | | | | 446 | | | | 624 | | | | 262 | |
Adjustments to exclude profit for the year from discontinued operations: | | | | | | | | | | | | | | | | |
Profit for the year from discontinued operations | | | 3 | | | | (14 | ) | | | (314 | ) | | | (36 | ) |
Majority interest share of above | | | | | | | — | | | | — | | | | 5 | |
| | | | | | | | | | | | |
Earnings — continuing operations | | | | | | | 432 | | | | 310 | | | | 231 | |
| | | | | | | | | | | | |
Earnings | | | | | | | 446 | | | | 624 | | | | 262 | |
| | | | | | | | | | | | |
Weighted average number of shares (millions) | | | | | | | 798.4 | | | | 797.9 | | | | 795.6 | |
Effect of dilutive share options (millions) | | | | | | | 1.5 | | | | 1.1 | | | | 1.1 | |
Weighted average number of shares (millions) for diluted earnings | | | | | | | 799.9 | | | | 799.0 | | | | 796.7 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | |
Earnings per share from continuing and discontinued operations | | | | | | | | | | | | |
Basic | | | 55.9 | p | | | 78.2 | p | | | 32.9 | p |
Diluted | | | 55.8 | p | | | 78.1 | p | | | 32.9 | p |
| | | | | | | | | |
Earnings per share from continuing operations | | | | | | | | | | | | |
Basic | | | 54.1 | p | | | 38.9 | p | | | 29.0 | p |
Diluted | | | 54.0 | p | | | 38.8 | p | | | 29.0 | p |
| | | | | | | | | |
Earnings per share from discontinued operations | | | | | | | | | | | | |
Basic | | | 1.8 | p | | | 39.3 | p | | | 3.9 | p |
Diluted | | | 1.8 | p | | | 39.3 | p | | | 3.9 | p |
| | | | | | | | | |
F-27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | |
| | Notes | | | 2009 | | | 2008 | | | 2007 | |
| | | | | All figures in £ millions | |
|
Profit for the year from continuing operations | | | | | | | 462 | | | | 413 | | | | 337 | |
Minority interest | | | | | | | (37 | ) | | | (31 | ) | | | (26 | ) |
| | | | | | | | | | | | | | | | |
Earnings from continuing operations | | | | | | | 425 | | | | 382 | | | | 311 | |
| | | | | | | | | | | | | | | | |
Loss for the year from discontinued operations | | | 3 | | | | — | | | | (90 | ) | | | (27 | ) |
| | | | | | | | | | | | | | | | |
Earnings | | | | | | | 425 | | | | 292 | | | | 284 | |
| | | | | | | | | | | | | | | | |
Weighted average number of shares (millions) | | | | | | | 799.3 | | | | 797.0 | | | | 796.8 | |
Effect of dilutive share options (millions) | | | | | | | 0.8 | | | | 0.5 | | | | 1.3 | |
Weighted average number of shares (millions) for diluted earnings | | | | | | | 800.1 | | | | 797.5 | | | | 798.1 | |
| | | | | | | | | | | | | | | | |
Earnings per share from continuing and discontinued operations | | | | | | | | | | | | | | | | |
Basic | | | | | | | 53.2p | | | | 36.6p | | | | 35.6p | |
Diluted | | | | | | | 53.1p | | | | 36.6p | | | | 35.6p | |
| | | | | | | | | | | | | | | | |
Earnings per share from continuing operations | | | | | | | | | | | | | | | | |
Basic | | | | | | | 53.2p | | | | 47.9p | | | | 39.0p | |
Diluted | | | | | | | 53.1p | | | | 47.9p | | | | 39.0p | |
| | | | | | | | | | | | | | | | |
Earnings per share from discontinued operations | | | | | | | | | | | | | | | | |
Basic | | | | | | | — | | | | (11.3p | ) | | | (3.4p | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | |
| | (All figures in £ millions) | |
Final paid in respect of prior year 17p (2005: 15.7p; 2004: 14.8p) | | | 136 | | | | 125 | | | | 119 | |
Interim paid in respect of current year 10.5p (2005: 10p; 2004: 9.7p) | | | 84 | | | | 80 | | | | 76 | |
| | | | | | | | | |
| | | 220 | | | | 205 | | | | 195 | |
| | | | | | | | | |
A
| | | | | | | | | | | | |
| | 2009 | | | 2008 | | | 2007 | |
| | All figures in £ millions | |
|
Final paid in respect of prior year 22.0p (2008: 20.5p; 2007: 18.8p) | | | 176 | | | | 163 | | | | 150 | |
Interim paid in respect of current year 12.2p (2008: 11.8p; 2007: 11.1p) | | | 97 | | | | 94 | | | | 88 | |
| | | | | | | | | | | | |
| | | 273 | | | | 257 | | | | 238 | |
| | | | | | | | | | | | |
The directors are proposing a final dividend in respect of the financial year endingended 31 December 20062009 of 18.8p23.3p per share has been approved andwhich will absorb an estimated £151m£187m of shareholders’ funds. It will be paid on 117 May 20072010 to shareholders who are on the register of members on 109 April 2007.2010. These financial statements do not reflect this dividend.
F-29
Notes 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 2005 | | | 280 | | | | 604 | | | | 13 | | | | 897 | |
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 | | | 328 | | | | 683 | | | | 7 | | | | 1,018 | |
| | | | | | | | | | | | |
Exchange differences | | | (20 | ) | | | (54 | ) | | | — | | | | (74 | ) |
Transfers | | | — | | | | (11 | ) | | | (1 | ) | | | (12 | ) |
Additions | | | 12 | | | | 52 | | | | 13 | | | | 77 | |
Disposals | | | (9 | ) | | | (32 | ) | | | — | | | | (41 | ) |
Acquisition through business combination | | | 9 | | | | 12 | | | | — | | | | 21 | |
Reclassifications | | | — | | | | 8 | | | | (8 | ) | | | — | |
Transfer to non-current assets held for sale | | | (7 | ) | | | (27 | ) | | | — | | | | (34 | ) |
| | | | | | | | | | | | |
At 31 December 2006 | | | 313 | | | | 631 | | | | 11 | | | | 955 | |
| | | | | | | | | | | | |
F-28
NOTES 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 2005 | | | (106 | ) | | | (436 | ) | | | — | | | | (542 | ) |
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 | | | (130 | ) | | | (504 | ) | | | — | | | | (634 | ) |
| | | | | | | | | | | | |
Exchange differences | | | 10 | | | | 41 | | | | — | | | | 51 | |
Transfers | | | — | | | | 5 | | | | — | | | | 5 | |
Charge for the year | | | (17 | ) | | | (60 | ) | | | — | | | | (77 | ) |
Disposals | | | 4 | | | | 27 | | | | — | | | | 31 | |
Acquisition through business combination | | | — | | | | (8 | ) | | | — | | | | (8 | ) |
Transfer to non-current assets held for sale | | | 5 | | | | 20 | | | | — | | | | 25 | |
| | | | | | | | | | | | |
At 31 December 2006 | | | (128 | ) | | | (479 | ) | | | — | | | | (607 | ) |
| | | | | | | | | | | | |
Carrying amounts | | | | | | | | | | | | | | | | |
At 1 January 2005 | | | 174 | | | | 168 | | | | 13 | | | | 355 | |
At 31 December 2005 | | | 198 | | | | 179 | | | | 7 | | | | 384 | |
At 31 December 2006 | | | 185 | | | | 152 | | | | 11 | | | | 348 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | Assets in
| | | | |
| | Land and
| | | Plant and
| | | course of
| | | | |
| | buildings | | | equipment | | | construction | | | Total | |
| | All figures in £ millions | |
|
Cost | | | | | | | | | | | | | | | | |
At 1 January 2008 | | | 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 | |
| | | | | | | | | | | | | | | | |
Exchange differences | | | (21 | ) | | | (55 | ) | | | (1 | ) | | | (77 | ) |
Additions | | | 14 | | | | 46 | | | | 7 | | | | 67 | |
Disposals | | | (2 | ) | | | (41 | ) | | | — | | | | (43 | ) |
Acquisition through business combination | | | 1 | | | | 17 | | | | — | | | | 18 | |
Reclassifications | | | 1 | | | | 5 | | | | (6 | ) | | | — | |
| | | | | | | | | | | | | | | | |
At 31 December 2009 | | | 348 | | | | 811 | | | | 7 | | | | 1,166 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | Assets in
| | | | |
| | Land and
| | | Plant and
| | | course of
| | | | |
| | buildings | | | equipment | | | construction | | | Total | |
| | All figures in £ millions | |
|
Depreciation | | | | | | | | | | | | | | | | |
At 1 January 2008 | | | (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 | ) |
| | | | | | | | | | | | | | | | |
Exchange differences | | | 11 | | | | 42 | | | | — | | | | 53 | |
Charge for the year | | | (17 | ) | | | (68 | ) | | | — | | | | (85 | ) |
Disposals | | | 2 | | | | 39 | | | | — | | | | 41 | |
Acquisition through business combination | | | — | | | | (9 | ) | | | — | | | | (9 | ) |
| | | | | | | | | | | | | | | | |
At 31 December 2009 | | | (174 | ) | | | (604 | ) | | | — | | | | (778 | ) |
| | | | | | | | | | | | | | | | |
Carrying amounts | | | | | | | | | | | | | | | | |
At 1 January 2008 | | | 172 | | | | 167 | | | | 16 | | | | 355 | |
At 31 December 2008 | | | 185 | | | | 231 | | | | 7 | | | | 423 | |
At 31 December 2009 | | | 174 | | | | 207 | | | | 7 | | | | 388 | |
| | | | | | | | | | | | | | | | |
Depreciation expense of £18m (2005: £19m)£12m (2008: £12m) has been included in the income statement in cost of goods sold, £6m (2005: £7m)£7m (2008: £6m) in distribution expenses and £53m (2005: £54m)£66m (2008: £61m) in administrative and other expenses. In 2006 £6m (2005: £4m) relates to discontinued operations.
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 £4m (2005: £3m)£15m (2008: £7m).
F-30
F-29
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) | |
Cost | | | | | | | | | | | | | | | | | | | | | | | | |
At 1 January 2005 | | | 3,160 | | | | 181 | | | | 10 | | | | 46 | | | | 56 | | | | 3,397 | |
Exchange differences | | | 345 | | | | 15 | | | | 2 | | | | 4 | | | | 6 | | | | 366 | |
Transfers | | | — | | | | (13 | ) | | | — | | | | — | | | | — | | | | (13 | ) |
Additions | | | — | | | | 24 | | | | — | | | | — | | | | — | | | | 24 | |
Disposals | | | (6 | ) | | | (10 | ) | | | — | | | | — | | | | — | | | | (16 | ) |
Acquisition through business combination | | | 155 | | | | — | | | | 56 | | | | 33 | | | | 89 | | | | 244 | |
| | | | | | | | | | | | | | | | | | |
At 31 December 2005 | | | 3,654 | | | | 197 | | | | 68 | | | | 83 | | | | 151 | | | | 4,002 | |
| | | | | | | | | | | | | | | | | | |
Exchange differences | | | (396 | ) | | | (17 | ) | | | (8 | ) | | | (8 | ) | | | (16 | ) | | | (429 | ) |
Transfers | | | — | | | | 6 | | | | — | | | | — | | | | — | | | | 6 | |
Additions | | | — | | | | 29 | | | | — | | | | — | | | | — | | | | 29 | |
Disposals | | | (5 | ) | | | (2 | ) | | | — | | | | — | | | | — | | | | (7 | ) |
Acquisition through business combination | | | 246 | | | | 4 | | | | 36 | | | | 117 | | | | 153 | | | | 403 | |
Adjustment on recognition of pre-acquisition deferred tax | | | (7 | ) | | | — | | | | — | | | | — | | | | — | | | | (7 | ) |
Transfer to non-current assets held for sale | | | (221 | ) | | | (16 | ) | | | — | | | | — | | | | — | | | | (237 | ) |
| | | | | | | | | | | | | | | | | | |
At 31 December 2006 | | | 3,271 | | | | 201 | | | | 96 | | | | 192 | | | | 288 | | | | 3,760 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Acquired | | | Other | | | Total | | | |
| | | | | | publishing | | | intangibles | | | intangibles | | | |
| | Goodwill | | | Software | | | rights | | | acquired | | | acquired | | | Total | |
| | | | | | | | | | | | | | | | | | |
| | (All figures in £ millions) | |
Amortisation | | | | | | | | | | | | | | | | | | | | | | | | |
At 1 January 2005 | | | — | | | | (111 | ) | | | — | | | | (8 | ) | | | (8 | ) | | | (119 | ) |
Exchange differences | | | — | | | | (10 | ) | | | — | | | | — | | | | — | | | | (10 | ) |
Charge for the year | | | — | | | | (18 | ) | | | (5 | ) | | | (6 | ) | | | (11 | ) | | | (29 | ) |
Disposals | | | — | | | | 10 | | | | — | | | | — | | | | — | | | | 10 | |
| | | | | | | | | | | | | | | | | | |
At 31 December 2005 | | | — | | | | (129 | ) | | | (5 | ) | | | (14 | ) | | | (19 | ) | | | (148 | ) |
| | | | | | | | | | | | | | | | | | |
Exchange differences | | | — | | | | 13 | | | | 1 | | | | 2 | | | | 3 | | | | 16 | |
Transfers | | | — | | | | (5 | ) | | | — | | | | — | | | | — | | | | (5 | ) |
Charge for the year | | | — | | | | (23 | ) | | | (11 | ) | | | (17 | ) | | | (28 | ) | | | (51 | ) |
Disposals | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | 1 | |
Acquisition through business combination | | | — | | | | (1 | ) | | | — | | | | — | | | | — | | | | (1 | ) |
Transfer to non-current assets held for sale | | | — | | | | 9 | | | | — | | | | — | | | | — | | | | 9 | |
| | | | | | | | | | | | | | | | | | |
At 31 December 2006 | | | — | | | | (135 | ) | | | (15 | ) | | | (29 | ) | | | (44 | ) | | | (179 | ) |
| | | | | | | | | | | | | | | | | | |
Carrying amounts | | | | | | | | | | | | | | | | | | | | | | | | |
At 1 January 2005 | | | 3,160 | | | | 70 | | | | 10 | | | | 38 | | | | 48 | | | | 3,278 | |
At 31 December 2005 | | | 3,654 | | | | 68 | | | | 63 | | | | 69 | | | | 132 | | | | 3,854 | |
At 31 December 2006 | | | 3,271 | | | | 66 | | | | 81 | | | | 163 | | | | 244 | | | | 3,581 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Acquired
| | | | | | | | | | | | | |
| | | | | | | | customer
| | | Acquired
| | | Acquired
| | | Other
| | | | |
| | | | | | | | lists and
| | | trademarks
| | | publishing
| | | intangibles
| | | | |
| | Goodwill | | | Software | | | relationships | | | and brands | | | rights | | | acquired | | | Total | |
| | All figures in £ millions | |
|
Cost | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At 1 January 2008 | | | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exchange differences | | | (420 | ) | | | (25 | ) | | | (32 | ) | | | (9 | ) | | | (5 | ) | | | (22 | ) | | | (513 | ) |
Additions — internal development | | | — | | | | 35 | | | | — | | | | — | | | | — | | | | — | | | | 35 | |
Additions — purchased | | | — | | | | 24 | | | | — | | | | — | | | | — | | | | — | | | | 24 | |
Disposals | | | (9 | ) | | | (5 | ) | | | — | | | | — | | | | — | | | | — | | | | (14 | ) |
Acquisition through business combination | | | 205 | | | | — | | | | 38 | | | | 24 | | | | 55 | | | | 25 | | | | 347 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At 31 December 2009 | | | 4,346 | | | | 339 | | | | 347 | | | | 143 | | | | 215 | | | | 261 | | | | 5,651 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-31
F-30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Acquired
| | | | | | | | | | | | | |
| | | | | | | | customer
| | | Acquired
| | | Acquired
| | | Other
| | | | |
| | | | | | | | lists and
| | | trademarks
| | | publishing
| | | intangibles
| | | | |
| | Goodwill | | | Software | | | relationships | | | and brands | | | rights | | | acquired | | | Total | |
| | All figures in £ millions | |
|
Amortisation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At 1 January 2008 | | | — | | | | (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 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exchange differences | | | — | | | | 19 | | | | 6 | | | | 1 | | | | 6 | | | | 8 | | | | 40 | |
Charge for the year | | | — | | | | (44 | ) | | | (35 | ) | | | (11 | ) | | | (22 | ) | | | (35 | ) | | | (147 | ) |
Disposals | | | — | | | | 4 | | | | — | | | | — | | | | — | | | | — | | | | 4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At 31 December 2009 | | | — | | | | (224 | ) | | | (96 | ) | | | (27 | ) | | | (85 | ) | | | (90 | ) | | | (522 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Carrying amounts | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At 1 January 2008 | | | 3,343 | | | | 75 | | | | 159 | | | | 58 | | | | 104 | | | | 75 | | | | 3,814 | |
At 31 December 2008 | | | 4,570 | | | | 107 | | | | 274 | | | | 111 | | | | 96 | | | | 195 | | | | 5,353 | |
At 31 December 2009 | | | 4,346 | | | | 115 | | | | 251 | | | | 116 | | | | 130 | | | | 171 | | | | 5,129 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Goodwill
The goodwill carrying value of £4,346m 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. £3,127m of the carrying value relates to acquisitions completed between 1 January 1998 and 31 December 2002 and £1,219m 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.
Other intangible assets
Other intangibles acquired include customer listscontent, technology and relationships, software rights, technology, trade names and trademarks.rights. Amortisation of £4m (2005: £4m)£5m (2008: £5m) is included in the income statement in cost of goods sold and £47m (2005: £25m)£142m (2008: £111m) in administrative and other expenses. In 2006 £3m of software amortisation (2005: £3m) relates
F-32
Notes to discontinued operations.the Consolidated Financial Statements (Continued)
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 to(CGUs) within the business segment. Goodwill has been allocatedsegments as follows:
| | | | | | | | | | | | |
| | Notes | | | | | |
| | | | | | | |
| | | | 2006 | | | 2005 | |
| | | | | | | | |
| | | | ) | |
| | | | (All figures | |
| | | | in £ millions | |
Higher Education | | | | | | | 780 | | | | 903 | |
School Book | | | | | | | 683 | | | | 714 | |
School Assessment and Testing | | | | | | | 342 | | | | 310 | |
School Technology | | | | | | | 356 | | | | 408 | |
Other Assessment and Testing | | | | | | | 490 | | | | 531 | |
Other Government Solutions | | | | | | | — | | | | 249 | |
Other Book | | | | | | | 56 | | | | 57 | |
| | | | | | | | | |
Pearson Education total | | | | | | | 2,707 | | | | 3,172 | |
| | | | | | | | | |
Penguin US | | | | | | | 156 | | | | 179 | |
Penguin UK | | | | | | | 114 | | | | 114 | |
Pearson Australia | | | | | | | 44 | | | | 47 | |
| | | | | | | | | |
Penguin total | | | | | | | 314 | | | | 340 | |
| | | | | | | | | |
IDC | | | | | | | 149 | | | | 138 | |
| | | | | | | | | |
Mergermarket | | | 28 | | | | 97 | | | | — | |
Other FT Publishing | | | | | | | 4 | | | | 4 | |
FT Publishing total | | | | | | | 101 | | | | 4 | |
| | | | | | | | | |
Total goodwill — continuing operations | | | | | | | 3,271 | | | | 3,654 | |
| | | | | | | | | |
Goodwill held for sale | | | 29 | | | | 221 | | | | — | |
| | | | | | | | | |
Total goodwill | | | | | | | 3,492 | | | | 3,654 | |
| | | | | | | | | |
Goodwill
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in £ millions | |
|
US School Curriculum | | | 812 | | | | 937 | |
US School Assessment and Information | | | 652 | | | | 722 | |
US Higher Education | | | 1,064 | | | | 1,164 | |
Canada | | | 181 | | | | 173 | |
International Education Publishing | | | 468 | | | | 315 | |
International Education Assessment and Testing | | | 222 | | | | 241 | |
Professional Publishing | | | 13 | | | | 15 | |
Professional Assessment and Testing | | | 226 | | | | 254 | |
| | | | | | | | |
Pearson Education total | | | 3,638 | | | | 3,821 | |
| | | | | | | | |
Financial Times | | | 43 | | | | 46 | |
Mergermarket | | | 125 | | | | 130 | |
Interactive Data | | | 184 | | | | 208 | |
| | | | | | | | |
FT Group total | | | 352 | | | | 384 | |
| | | | | | | | |
Penguin US | | | 190 | | | | 216 | |
Penguin UK | | | 103 | | | | 95 | |
Pearson Australia | | | 63 | | | | 54 | |
| | | | | | | | |
Penguin total | | | 356 | | | | 365 | |
| | | | | | | | |
Total goodwill | | | 4,346 | | | | 4,570 | |
| | | | | | | | |
As highlighted in the 2008 business review, integration of the US School and Higher Education businesses began in 2008. This integration continued throughout 2009 and has been allocatednow advanced to a point where, from 1 January 2010, these companies will be combined into one CGU for impairment purposes to 13 cash-generating units. review purposes.
The recoverable amount of each cash-generating unitCGU is based on value in use calculations, with the exception of IDC which is assessed on a market value basis.calculations. Goodwill is tested for impairment annually. Following aOther than goodwill there are no intangible assets with indefinite lives. The goodwill is generally denominated in the currency of the relevant cash flows and therefore the impairment review in 2006, the allocation of corporate items has been revised. The 2005 comparative has been revised accordingly.is 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 10.9% to 11.8% for the Pearson Education businesses (2008: 10.2% to 11.7%), 12.7% to 18.1% for the FT Group businesses (2008: 10.8% to 20.5%) and 9.5% to 11.4% for the Penguin businesses (2008: 8.8% to 10.4%).
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
F-33
Notes to the Consolidated Financial Statements (Continued)
all CGUs in 2009 (2008: 2.0%). 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 management’s latest forecast of 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 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 the US School Curriculum CGU. Following a restructuring during 2009, the Penguin UK CGU is no longer considered sensitive to impairment.
The fair value of US School Curriculum is 6%, or approximately £59m, above its carrying value, but an increase of 0.4 percentage points in the discount rate or a reduction of 0.5 percentage points in the perpetuity growth rate would have caused 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 |
F-31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
| of 10.3% to 11.9% for the Pearson Education businesses, 7.8% to 10.3% for the Penguin businesses and 10.5% to 11.0% for the FT Publishing businesses. |
|
| 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 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 2.5% and 3.5%. 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.
| |
13 | Investments in joint ventures and associates |
Joint ventures
| | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
| | (All figures in | |
| | £ millions) | |
At beginning of year | | | 12 | | | | 14 | |
Exchange differences | | | (3 | ) | | | (3 | ) |
Share of profit/(loss) after tax | | | 3 | | | | (1 | ) |
Dividends | | | (4 | ) | | | (4 | ) |
Additions and further investment | | | 4 | | | | 6 | |
| | | | | | |
At end of year | | | 12 | | | | 12 | |
| | | | | | |
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in £ millions | |
|
At beginning of year | | | 13 | | | | 11 | |
Exchange differences | | | — | | | | (4 | ) |
Share of profit after tax | | | 4 | | | | 6 | |
Dividends | | | (3 | ) | | | (5 | ) |
Loan repayment | | | (3 | ) | | | — | |
Additions and further investment | | | 13 | | | | 5 | |
Transfer to subsidiary | | | (6 | ) | | | — | |
| | | | | | | | |
At end of year | | | 18 | | | | 13 | |
| | | | | | | | |
Investments in joint ventures are accounted for using the equity method of accounting and are initially recognised at cost. Investments at 31 December 2009 include goodwill of £11m (2008: £nil).
F-34
Notes to the Consolidated Financial Statements (Continued)
The aggregate of the Group’s share inof its joint ventures,ventures’ assets (including goodwill) and liabilities, none of which are individually significant, are as follows:
| | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
| | (All figures in | |
| | £ millions) | |
Assets | | | | | | | | |
Non-current assets | | | 3 | | | | 3 | |
Current assets | | | 24 | | | | 26 | |
| | | | | | |
Liabilities | | | | | | | | |
Current liabilities | | | (15 | ) | | | (17 | ) |
| | | | | | |
Net assets | | | 12 | | | | 12 | |
| | | | | | |
Income | | | 52 | | | | 46 | |
Expenses | | | (49 | ) | | | (47 | ) |
| | | | | | |
Profit/(loss)after income tax | | | 3 | | | | (1 | ) |
| | | | | | |
F-32
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in £ millions | |
|
Assets | | | | | | | | |
Non-current assets | | | 15 | | | | 6 | |
Current assets | | | 11 | | | | 21 | |
| | | | | | | | |
Liabilities | | | | | | | | |
Current liabilities | | | (8 | ) | | | (14 | ) |
| | | | | | | | |
Net assets | | | 18 | | | | 13 | |
| | | | | | | | |
Income | | | 12 | | | | 36 | |
Expenses | | | (8 | ) | | | (30 | ) |
| | | | | | | | |
Profit after income tax | | | 4 | | | | 6 | |
| | | | | | | | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)Associates
Associates
| | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
| | (All figures in | |
| | £ millions) | |
At beginning of year | | | 24 | | | | 33 | |
Exchange differences | | | (1 | ) | | | — | |
Share of profit after tax | | | 21 | | | | 15 | |
Dividends | | | (41 | ) | | | (10 | ) |
Disposals | | | — | | | | (14 | ) |
Distribution from associate in excess of carrying value | | | 5 | | | | — | |
| | | | | | |
At end of year | | | 8 | | | | 24 | |
| | | | | | |
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in £ millions | |
|
At beginning of year | | | 10 | | | | 9 | |
Exchange differences | | | 4 | | | | (5 | ) |
Share of profit after tax | | | 26 | | | | 19 | |
Dividends | | | (19 | ) | | | (16 | ) |
Additions | | | 1 | | | | — | |
(Reversal of distribution)/Distribution from associate in excess of carrying value | | | (7 | ) | | | 6 | |
Actuarial losses on retirement benefit obligations | | | (3 | ) | | | (3 | ) |
| | | | | | | | |
At end of year | | | 12 | | | | 10 | |
| | | | | | | | |
Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. There is no acquisition goodwill relating to the Group’s investments in associates.
The Group’s interests in its principal associates, all of which are unlisted, wereare as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | % | | | | | | | | | |
2006 | | Country of incorporation | | | Interest held | | | Assets | | | Liabilities | | | Revenues | | | Profit | |
| | | | | | | | | | | | | | | | | | |
| | | | (All figures in £ millions ) | | | | | |
The Economist Newspaper Ltd | | | England | | | | 50 | | | | 64 | | | | (64 | ) | | | 122 | | | | 18 | |
Other | | | | | | | | | | | 28 | | | | (20 | ) | | | 48 | | | | 3 | |
| | | | | | | | | | | | | | | | | | |
Total | | | | | | | | | | | 92 | | | | (84 | ) | | | 170 | | | | 21 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | % | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | %
| | | | | | | | | | | | | |
2009 | | Country of incorporation | | | interest held | | | Assets | | | Liabilities | | | Revenues | | | Profit | |
| | All figures in £ millions | |
|
The Economist Newspaper Ltd | | | England | | | | 50 | | | | 116 | | | | (116 | ) | | | 161 | | | | 22 | |
Other | | | | | | | | | | | 42 | | | | (30 | ) | | | 50 | | | | 4 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | | | | | | | | | 158 | | | | (146 | ) | | | 211 | | | | 26 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | %
| | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
The interestinterests held in associates isare equivalent to voting rights.
F-35
Notes to the Consolidated Financial Statements (Continued)
| |
1413. | Deferred income tax |
| | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
| | (All figures in £ | |
| | millions) | |
Deferred tax assets | | | | | | | | |
Deferred tax assets to be recovered after more than 12 months | | | 288 | | | | 343 | |
Deferred tax assets to be recovered within 12 months | | | 129 | | | | 42 | |
| | | | | | |
| | | 417 | | | | 385 | |
| | | | | | |
Deferred tax liabilities | | | | | | | | |
Deferred tax liabilities to be settled after more than 12 months | | | (245 | ) | | | (204 | ) |
Deferred tax liabilities to be settled within 12 months | | | — | | | | — | |
| | | | | | |
| | | (245 | ) | | | (204 | ) |
| | | | | | |
Net deferred tax | | | 172 | | | | 181 | |
| | | | | | |
F-33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in £ millions | |
|
Deferred income tax assets | | | | | | | | |
Deferred income tax assets to be recovered after more than 12 months | | | 374 | | | | 341 | |
Deferred income tax assets to be recovered within 12 months | | | 13 | | | | 31 | |
| | | | | | | | |
| | | 387 | | | | 372 | |
| | | | | | | | |
Deferred income tax liabilities | | | | | | | | |
Deferred income tax liabilities to be settled after more than 12 months | | | (473 | ) | | | (447 | ) |
Deferred income tax liabilities to be settled within 12 months | | | — | | | | — | |
| | | | | | | | |
| | | (473 | ) | | | (447 | ) |
| | | | | | | | |
Net deferred income tax | | | (86 | ) | | | (75 | ) |
| | | | | | | | |
Deferred income tax assets to be recovered within 12 months relate to the utilisation of losses in the US. Included within the losses to be utilised in 2007 are capital and operating losses of £93m which it is anticipated will be utilised on the sale of Pearson Government Solutions.
Deferred income tax assets and liabilities may be offset when there is a legally enforceable right to offset current income tax assets against current income tax liabilities and when the deferred income taxes relate to the same fiscal authority. The Group has unrecognised deferred income tax assets at 31 December 20062009 in respect of UK losses of £35m and has not recognised a deferred tax asset amounting to £47m on the net pension deficit on UK plans on the basis that it is not sufficiently certain that suitable future profits will arise against which to offset the liability.£20m (2008: £28m). None of these unrecognised deferred income tax 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.
The movement on the net deferred income tax account is as follows:
| | | | | | | | | | | | |
| | Notes | | | 2006 | | | 2005 | |
| | | | | | | | | |
| | | | (All figures in | |
| | | | £ millions) | |
At beginning of year | | | | | | | 181 | | | | 220 | |
Transition adjustment on adoption of IAS 39 | | | | | | | — | | | | 5 | |
Exchange differences | | | | | | | (16 | ) | | | 21 | |
Acquisition through business combination | | | 28 | | | | (26 | ) | | | (21 | ) |
Income statement release/(charge) | | | 8 | | | | 19 | | | | (47 | ) |
Tax benefit to equity | | | | | | | 14 | | | | 3 | |
| | | | | | | | | |
At end of year | | | | | | | 172 | | | | 181 | |
| | | | | | | | | |
| | | | | | | | | | | | |
| | Notes | | | 2009 | | | 2008 | |
| | | | | All figures in £ millions | |
|
At beginning of year | | | | | | | (75 | ) | | | 41 | |
Exchange differences | | | | | | | 10 | | | | (12 | ) |
Income statement charge | | | 7 | | | | (51 | ) | | | (93 | ) |
Acquisition through business combination | | | 29 | | | | (45 | ) | | | (4 | ) |
Tax benefit/(charge) to other comprehensive income or equity | | | | | | | 75 | | | | (7 | ) |
| | | | | | | | | | | | |
At end of year | | | | | | | (86 | ) | | | (75 | ) |
| | | | | | | | | | | | |
F-36
Notes to the Consolidated Financial Statements (Continued)
The movement in deferred income tax assets and liabilities during the year is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Goodwill | | | | | |
| | Capital | | | Trading | | | and | | | | | |
| | losses | | | losses | | | intangibles | | | Other | | | Total | |
| | | | | | | | | | | | | | | |
| | (All figures in £ millions) | |
Deferred income tax assets | | | | | | | | | | | | | | | | | | | | |
At 1 January 2005 | | | — | | | | 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 | |
| | | | | | | | | | | | | | | |
Exchange differences | | | — | | | | (17 | ) | | | (4 | ) | | | (21 | ) | | | (42 | ) |
Income statement release/(charge) | | | 76 | | | | 12 | | | | (6 | ) | | | (19 | ) | | | 63 | |
Tax benefit to equity | | | — | | | | — | | | | — | | | | 11 | | | | 11 | |
| | | | | | | | | | | | | | | |
At 31 December 2006 | | | 76 | | | | 129 | | | | 25 | | | | 187 | | | | 417 | |
| | | | | | | | | | | | | | | |
F-34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Retirement
| | | | | | | |
| | Trading
| | | Goodwill and
| | | Returns
| | | benefit
| | | | | | | |
| | losses | | | intangibles | | | provisions | | | obligations | | | Other | | | Total | |
| | All figures in £ millions | |
|
Deferred income tax assets | | | | | | | | | | | | | | | | | | | | | | | | |
At 1 January 2008 | | | 87 | | | | 20 | | | | 79 | | | | 10 | | | | 132 | | | | 328 | |
Exchange differences | | | 19 | | | | 6 | | | | 28 | | | | 2 | | | | 38 | | | | 93 | |
Acquisition through business combination | | | 2 | | | | — | | | | — | | | | — | | | | — | | | | 2 | |
Income statement (charge)/benefit | | | (35 | ) | | | (6 | ) | | | (1 | ) | | | (8 | ) | | | 5 | | | | (45 | ) |
Tax benefit/(charge) to other comprehensive income or equity | | | — | | | | — | | | | — | | | | 3 | | | | (9 | ) | | | (6 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
At 31 December 2008 | | | 73 | | | | 20 | | | | 106 | | | | 7 | | | | 166 | | | | 372 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Exchange differences | | | (5 | ) | | | (2 | ) | | | (10 | ) | | | (1 | ) | | | (17 | ) | | | (35 | ) |
Acquisition through business combination | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Income statement (charge)/benefit | | | (46 | ) | | | (7 | ) | | | (4 | ) | | | (6 | ) | | | 42 | | | | (21 | ) |
Tax benefit to other comprehensive income or equity | | | — | | | | — | | | | — | | | | 68 | | | | 3 | | | | 71 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
At 31 December 2009 | | | 22 | | | | 11 | | | | 92 | | | | 68 | | | | 194 | | | | 387 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other deferred income tax assets include temporary differences on share-based payments, inventory sales returns and other provisions.
| | | | | | | | | | | | |
| | Goodwill and | | | | | |
| | intangibles | | | Other | | | Total | |
| | | | | | | | | |
| | (All figures in £ millions) | |
Deferred income tax liabilities | | | | | | | | | | | | |
At 1 January 2005 | | | (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 | ) |
| | | | | | | | | |
Exchange differences | | | 15 | | | | 11 | | | | 26 | |
Acquisition through business combination | | | (20 | ) | | | (6 | ) | | | (26 | ) |
Income statement charge | | | (27 | ) | | | (17 | ) | | | (44 | ) |
Tax benefit to equity | | | — | | | | 3 | | | | 3 | |
| | | | | | | | | |
At 31 December 2006 | | | (149 | ) | | | (96 | ) | | | (245 | ) |
| | | | | | | | | |
| | | | | | | | | | | | |
| | Goodwill and
| | | | | | | |
| | intangibles | | | Other | | | Total | |
| | All figures in £ millions | |
|
Deferred income tax liabilities | | | | | | | | | | | | |
At 1 January 2008 | | | (214 | ) | | | (73 | ) | | | (287 | ) |
Exchange differences | | | (73 | ) | | | (32 | ) | | | (105 | ) |
Acquisition through business combination | | | (5 | ) | | | (1 | ) | | | (6 | ) |
Income statement charge | | | (26 | ) | | | (22 | ) | | | (48 | ) |
Tax charge to other comprehensive income or equity | | | — | | | | (1 | ) | | | (1 | ) |
| | | | | | | | | | | | |
At 31 December 2008 | | | (318 | ) | | | (129 | ) | | | (447 | ) |
| | | | | | | | | | | | |
Exchange differences | | | 30 | | | | 15 | | | | 45 | |
Acquisition through business combination | | | (41 | ) | | | (4 | ) | | | (45 | ) |
Income statement (charge)/benefit | | | 10 | | | | (40 | ) | | | (30 | ) |
Tax benefit to other comprehensive income or equity | | | — | | | | 4 | | | | 4 | |
| | | | | | | | | | | | |
At 31 December 2009 | | | (319 | ) | | | (154 | ) | | | (473 | ) |
| | | | | | | | | | | | |
Other deferred income tax liabilities include temporary differences in respect of depreciation and royalty advances.
F-37
Notes to the Consolidated Financial Statements (Continued)
| |
1514. | Classification of financial instruments |
The accounting classification of each class of the Group’s financial assets and financial liabilities, together with their fair values, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 2009 | |
| | | | | Fair value | | | | | | | | | | | | | |
| | | | | | | | Derivatives
| | | Derivatives
| | | | | | Amortised cost | | | Total
| | | Total
| |
| | | | | Available
| | | deemed held
| | | in hedging
| | | Other
| | | Loans and
| | | Other
| | | carrying
| | | market
| |
| | Notes | | | for sale | | | for trading | | | relationships | | | liabilities | | | receivables | | | liabilities | | | value | | | value | |
| | | | | All figures in £ millions | |
|
Investments in unlisted securities | | | 15 | | | | 62 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 62 | | | | 62 | |
Cash and cash equivalents | | | 17 | | | | — | | | | — | | | | — | | | | — | | | | 750 | | | | — | | | | 750 | | | | 750 | |
Marketable securities | | | | | | | 63 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 63 | | | | 63 | |
Derivative financial instruments | | | 16 | | | | — | | | | 42 | | | | 70 | | | | — | | | | — | | | | — | | | | 112 | | | | 112 | |
Trade receivables | | | 22 | | | | — | | | | — | | | | — | | | | — | | | | 989 | | | | — | | | | 989 | | | | 989 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total financial assets | | | | | | | 125 | | | | 42 | | | | 70 | | | | — | | | | 1,739 | | | | — | | | | 1,976 | | | | 1,976 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivative financial instruments | | | 16 | | | | — | | | | (9 | ) | | | — | | | | — | | | | — | | | | — | | | | (9 | ) | | | (9 | ) |
Trade payables | | | 24 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (461 | ) | | | (461 | ) | | | (461 | ) |
Other financial liabilities — put option over minority interest | | | 24 | | | | — | | | | — | | | | — | | | | (23 | ) | | | — | | | | — | | | | (23 | ) | | | (23 | ) |
Bank loans and overdrafts | | | 18 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (70 | ) | | | (70 | ) | | | (70 | ) |
Borrowings due within one year | | | 18 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (4 | ) | | | (4 | ) | | | (4 | ) |
Borrowings due after more than one year | | | 18 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,934 | ) | | | (1,934 | ) | | | (1,969 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total financial liabilities | | | | | | | — | | | | (9 | ) | | | — | | | | (23 | ) | | | — | | | | (2,469 | ) | | | (2,501 | ) | | | (2,536 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-38
Notes to the Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 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 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 ’Financial Instruments: Recognition and Measurement’ 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 other comprehensive income.
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 described in note 19.
F-39
Notes to the Consolidated Financial Statements (Continued)
| |
15. | Other financial assets |
| | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
| | (All figures in | |
| | £ millions) | |
At beginning of year | | | 18 | | | | 15 | |
Exchange differences | | | (1 | ) | | | 1 | |
Additions | | | — | | | | 4 | |
Disposals | | | — | | | | (2 | ) |
| | | | | | |
At end of year | | | 17 | | | | 18 | |
| | | | | | |
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in £ millions | |
|
At beginning of year | | | 63 | | | | 52 | |
Exchange differences | | | (6 | ) | | | 18 | |
Acquisition of investments | | | 10 | | | | 1 | |
Disposal of investments | | | (5 | ) | | | (8 | ) |
| | | | | | | | |
At end of year | | | 62 | | | | 63 | |
| | | | | | | | |
Other financial assets comprise non-current unlisted securities.
F-35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
1616. | Derivative financial instruments |
The Group’s approach to the management of financial risks is set out in Item 11 of this Form 20-F.note 19. The Group’s outstanding derivative financial instruments are as follows:
| | | | | | | | | | | | |
| | 2006 | |
| | | |
| | Gross | | | |
| | notional | | | |
| | amounts | | | Assets | | | Liabilities | |
| | | | | | | | | |
| | (All figures in £ millions) | |
Interest rate derivatives — in a fair value hedge relationship | | | 953 | | | | 20 | | | | (17 | ) |
Interest rate derivatives — not in a hedge relationship | | | 1,026 | | | | 9 | | | | (2 | ) |
Cross currency rate derivatives — in a net investment hedge relationship | | | 230 | | | | 40 | | | | — | |
Cross currency rate derivatives — not in a hedge relationship | | | 180 | | | | 17 | | | | — | |
| | | | | | | | | |
Total | | | 2,389 | | | | 86 | | | | (19 | ) |
| | | | | | | | | |
Analysed as expiring: | | | | | | | | | | | | |
In less than one year | | | 976 | | | | 50 | | | | — | |
Later than one year and not later than five years | | | 1,005 | | | | 26 | | | | (4 | ) |
Later than five years | | | 408 | | | | 10 | | | | (15 | ) |
| | | | | | | | | |
Total | | | 2,389 | | | | 86 | | | | (19 | ) |
| | | | | | | | | |
| | | | | | | | | | | | |
| | 2005 | |
| | | |
| | Gross | | | |
| | notional | | | |
| | amounts | | | Assets | | | Liabilities | |
| | | | | | | | | |
| | (All figures in £ millions) | |
Interest rate derivatives — in a fair value hedge relationship | | | 1,109 | | | | 31 | | | | (16 | ) |
Interest rate derivatives — not in a hedge relationship | | | 1,330 | | | | 18 | | | | (6 | ) |
Cross currency rate derivatives — in a net investment hedge relationship | | | 230 | | | | 13 | | | | — | |
Cross currency rate derivatives — not in a hedge relationship | | | 180 | | | | 21 | | | | — | |
| | | | | | | | | |
Total | | | 2,849 | | | | 83 | | | | (22 | ) |
| | | | | | | | | |
Analysed as expiring: | | | | | | | | | | | | |
In less than one year | | | 250 | | | | 4 | | | | — | |
Later than one year and not later than five years | | | 1,823 | | | | 57 | | | | (8 | ) |
Later than five years | | | 776 | | | | 22 | | | | (14 | ) |
| | | | | | | | | |
Total | | | 2,849 | | | | 83 | | | | (22 | ) |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | | 2008 | |
| | Gross notional
| | | | | | | | | Gross notional
| | | | | | | |
| | amounts | | | Assets | | | Liabilities | | | amounts | | | Assets | | | Liabilities | |
| | All figures in £ millions | |
|
Interest rate derivatives — in a fair value hedge relationship | | | 1,103 | | | | 70 | | | | — | | | | 1,232 | | | | 161 | | | | — | |
Interest rate derivatives — not in a hedge relationship | | | 486 | | | | 13 | | | | (7 | ) | | | 1,033 | | | | 23 | | | | (20 | ) |
Cross currency rate derivatives — in a net investment hedge relationship | | | 220 | | | | 29 | | | | (2 | ) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 1,809 | | | | 112 | | | | (9 | ) | | | 2,265 | | | | 184 | | | | (20 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Analysed as expiring: | | | | | | | | | | | | | | | | | | | | | | | | |
In less than one year | | | 238 | | | | — | | | | (7 | ) | | | 487 | | | | 3 | | | | (5 | ) |
Later than one year and not later than five years | | | 844 | | | | 60 | | | | (2 | ) | | | 859 | | | | 47 | | | | (15 | ) |
Later than five years | | | 727 | | | | 52 | | | | — | | | | 919 | | | | 134 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 1,809 | | | | 112 | | | | (9 | ) | | | 2,265 | | | | 184 | | | | (20 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
The carrying value of the above derivative financial instruments equals their fair value. Fair values are determined by using market data and the use of established estimation techniques such as discounted cash flow and option valuation models.
At the end of 2006,2009, the currency split of themark-tomark-to-market-market values of rate derivatives, including the exchange of principal on cross currency rate derivatives, was US dollar £(247)£(127)m, euro £157msterling £252m and sterling £157m (2005:South African rand £(22)m (2008: US dollar £(269)m, euro £166m£161m, sterling £3m and sterling £164m)South African rand £nil).
The fixed interest rates on outstanding rate derivative contracts at the end of 20062009 range from 3.02%3.65% to 7.00% (2005: 3.02%9.28% (2008: 4.45% to 7.23%7.00%) and the floating rates are based on LIBOR in US dollar sterling and euro(EURIBOR).
F-36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)sterling.
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 reduce the risk of income statement volatility. The sensitivity of the portfolio to changes in market rates is set out in note 19.
The following sensitivity analysis of derivative financial instruments to interest rate movements is based on the assumption of a 1% change in interest rates for all currencies and maturities, with all other variables held constant.
| | | | | | | | | | | | |
| | 2006 | |
| | | |
| | Net carrying | | | 1% rate | | | 1% rate | |
| | amount | | | increase | | | decrease | |
| | | | | | | | | |
| | (All figures in £ millions) | |
Interest rate derivatives — in a fair value hedge relationship | | | 3 | | | | (28 | ) | | | 31 | |
Interest rate derivatives — not in a hedge relationship | | | 7 | | | | 1 | | | | (1 | ) |
Cross currency rate derivatives — in a net investment hedge relationship | | | 40 | | | | — | | | | — | |
Cross currency rate derivatives — not in a hedge relationship | | | 17 | | | | (1 | ) | | | 1 | |
| | | | | | | | | |
Total | | | 67 | | | | (28 | ) | | | 31 | |
| | | | | | | | | |
Effect of fair value hedge accounting | | | — | | | | 28 | | | | (31 | ) |
Sensitivity after the application of hedge accounting | | | 67 | | | | — | | | | — | |
| | | | | | | | | |
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.
F-40
Notes to the Consolidated Financial Statements (Continued)
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 held an amount of £29m equivalent as collateral under amark-to-market agreement. This reflected the amount, at market rates prevailing at the end of October 2006, owed to the Group by a counterparty for a set of three related rate derivatives. Under these derivatives the Group is due to exchange $209m for€204m at the beginning of February 2007,with the repayment of the€591m bond. 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’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 |
| | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
| | (All figures in | |
| | £ millions) | |
Cost | | | | | | | | |
At beginning of year | | | 1,357 | | | | 1,109 | |
Exchange differences | | | (148 | ) | | | 112 | |
Transfers | | | 6 | | | | — | |
Additions | | | 213 | | | | 222 | |
Disposals | | | (280 | ) | | | (113 | ) |
Acquisition through business combination | | | 4 | | | | 27 | |
| | | | | | |
At end of year | | | 1,152 | | | | 1,357 | |
| | | | | | |
Amortisation | | | | | | | | |
At beginning of year | | | (931 | ) | | | (753 | ) |
Exchange differences | | | 111 | | | | (87 | ) |
Charge for the year | | | (210 | ) | | | (192 | ) |
Disposals | | | 280 | | | | 113 | |
Acquisition through business combination | | | — | | | | (12 | ) |
| | | | | | |
At end of year | | | (750 | ) | | | (931 | ) |
| | | | | | |
Carrying amounts | | | | | | | | |
At end of year | | | 402 | | | | 426 | |
| | | | | | |
Included in the above are pre-publication assets amounting to £243m (2005: £261m)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 2006 and 2005.
| | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
| | (All figures in | |
| | £ millions) | |
Raw materials | | | 26 | | | | 23 | |
Work in progress | | | 28 | | | | 43 | |
Finished goods | | | 300 | | | | 307 | |
| | | | | | |
| | | 354 | | | | 373 | |
| | | | | | |
The cost of inventories, all relating to continuing operations, recognized as an expense and included in the income statement in cost of goods sold amounted to £820m (2005: £767m). In 2006 £46m (2005: £42m) 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 |
| | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
| | (All figures in £ | |
| | millions) | |
Current | | | | | | | | |
Trade receivables | | | 768 | | | | 825 | |
Royalty advances | | | 91 | | | | 124 | |
Prepayments and accrued income | | | 34 | | | | 38 | |
Other receivables | | | 58 | | | | 42 | |
Receivables from related parties | | | 2 | | | | 2 | |
| | | | | | |
| | | 953 | | | | 1,031 | |
| | | | | | |
Non-current | | | | | | | | |
Royalty advances | | | 80 | | | | 67 | |
Prepayments and accrued income | | | 4 | | | | 4 | |
Other receivables | | | 40 | | | | 37 | |
| | | | | | |
| | | 124 | | | | 108 | |
| | | | | | |
Trade receivables are stated net of provisions for bad and doubtful debts and anticipated future sales returns of £284m (2005: £313m). 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) |
| | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
| | (All figures in | |
| | £ millions) | |
Cash at bank and in hand | | | 421 | | | | 393 | |
Short-term bank deposits | | | 171 | | | | 509 | |
| | | | | | |
| | | 592 | | | | 902 | |
| | | | | | |
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in
| |
| | £ millions | |
|
Cash at bank and in hand | | | 580 | | | | 528 | |
Short-term bank deposits | | | 170 | | | | 157 | |
| | | | | | | | |
| | | 750 | | | | 685 | |
| | | | | | | | |
Short-term bank deposits are invested with banks and earn interest at the prevailing short-term deposit rates.
At the end of 20062009 the currency split of cash and cash equivalents iswas US dollars 31% (2005: 31%dollar 35% (2008: 36%), sterling 35% (2005: 38%22% (2008: 22%), euros 21% (2005: 24%euro 18% (2008: 20%) and other 13% (2005: 7%25% (2008: 22%).
Cash and cash equivalents have fair values that approximate to their carrying amountsvalue due to their short-term nature.
Cash and cash equivalents include the following for the purpose of the cash flow statement:
| | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
| | (All figures in | |
| | £ millions) | |
Cash and cash equivalents | | | 592 | | | | 902 | |
Bank overdrafts | | | (61 | ) | | | (58 | ) |
| | | | | | |
| | | 531 | | | | 844 | |
| | | | | | |
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in
| |
| | £ millions | |
|
Cash and cash equivalents | | | 750 | | | | 685 | |
Bank overdrafts | | | (70 | ) | | | (96 | ) |
| | | | | | | | |
| | | 680 | | | | 589 | |
| | | | | | | | |
F-41
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:
| | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
| | (All figures in | |
| | £ millions) | |
Non-current | | | | | | | | |
6.125% Euro Bonds 2007 (nominal amount€591m) | | | — | | | | 436 | |
10.5% Sterling Bonds 2008 (nominal amount £100m) | | | 105 | | | | 107 | |
4.7% US Dollar Bonds 2009 (nominal amount $350m) | | | 178 | | | | 203 | |
7% Global Dollar Bonds 2011 (nominal amount $500m) | | | 266 | | | | 307 | |
7% Sterling Bonds 2014 (nominal amount £250m) | | | 251 | | | | 250 | |
5.7% US Dollar Bonds 2014 (nominal amount $400m) | | | 206 | | | | 238 | |
4.625% US Dollar notes 2018 (nominal amount $300m) | | | 139 | | | | 161 | |
Finance lease liabilities | | | 3 | | | | 1 | |
| | | | | | |
| | | 1,148 | | | | 1,703 | |
| | | | | | |
Current | | | | | | | | |
Due within one year or on demand: | | | | | | | | |
Bank loans and overdrafts | | | 173 | | | | 102 | |
7.375% US Dollar notes 2006 | | | — | | | | 152 | |
6.125% Euro Bonds 2007 (nominal amount€591m) | | | 421 | | | | — | |
Finance lease liabilities | | | 1 | | | | 2 | |
| | | | | | |
| | | 595 | | | | 256 | |
| | | | | | |
Total borrowings | | | 1,743 | | | | 1,959 | |
| | | | | | |
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in
| |
| | £ millions | |
|
Non-current | | | | | | | | |
Bank loans and overdrafts | | | — | | | | 132 | |
7.0% Global Dollar Bonds 2011 (nominal amount $500m) | | | 322 | | | | 368 | |
5.5% Global Dollar Bonds 2013 (nominal amount $350m) | | | 226 | | | | 258 | |
5.7% US Dollar Bonds 2014 (nominal amount $400m) | | | 274 | | | | 322 | |
7.0% Sterling Bonds 2014 (nominal amount £250m) | | | 254 | | | | 254 | |
6.0% Sterling Bonds 2015 (nominal amount £300m) | | | 297 | | | | — | |
6.25% Global Dollar Bonds 2018 (nominal amount $550m) | | | 359 | | | | 445 | |
4.625% US Dollar notes 2018 (nominal amount $300m) | | | 191 | | | | 237 | |
Finance lease liabilities | | | 11 | | | | 3 | |
| | | | | | | | |
| | | 1,934 | | | | 2,019 | |
| | | | | | | | |
Current | | | | | | | | |
Due within one year or on demand: | | | | | | | | |
Bank loans and overdrafts | | | 70 | | | | 96 | |
4.7% US Dollar Bonds 2009 (nominal amount $350m) | | | — | | | | 244 | |
Finance lease liabilities | | | 4 | | | | 4 | |
| | | | | | | | |
| | | 74 | | | | 344 | |
| | | | | | | | |
Total borrowings | | | 2,008 | | | | 2,363 | |
| | | | | | | | |
Included in the non-current borrowings above is £12m of accrued interest (2005: £35m)(2008: £12m).
Included in the current borrowings above is £22m£nil of accrued interest (2005: £3m)(2008: £1m).
All of the Group’s borrowings are unsecured. In respect of finance lease obligations (2006: £4m; 2005: £3m) the rights to the leased asset revert to the lessor in the event of default.
The maturity of the Group’s non-current borrowing is as follows:
| | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
| | (All figures in | |
| | £ millions) | |
Between one and two years | | | 107 | | | | 437 | |
Between two and five years | | | 445 | | | | 310 | |
Over five years | | | 596 | | | | 956 | |
| | | | | | |
| | | 1,148 | | | | 1,703 | |
| | | | | | |
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in
| |
| | £ millions | |
|
Between one and two years | | | 327 | | | | 2 | |
Between two and five years | | | 760 | | | | 759 | |
Over five years | | | 847 | | | | 1,258 | |
| | | | | | | | |
| | | 1,934 | | | | 2,019 | |
| | | | | | | | |
F-42
F-40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
As at 31 December 2006 the exposure of the borrowings of the Group to interest rate changes when the borrowings re-price is as follows:
| | | | | | | | | | | | | | | | |
| | | | | | One to | | | More than | |
| | Total | | | One year | | | five years | | | five years | |
| | | | | | | | | | | | |
| | (All figures in £ millions) | |
Carrying value of borrowings | | | 1,743 | | | | 595 | | | | 552 | | | | 596 | |
Effect of rate derivatives | | | — | | | | 629 | | | | (221 | ) | | | (408 | ) |
| | | | | | | | | | | | |
| | | 1,743 | | | | 1,224 | | | | 331 | | | | 188 | |
| | | | | | | | | | | | |
The carrying amounts and market values of non-current borrowings are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | Carrying | | | Market | | | Carrying | | | Market | |
| | Effective | | | amount | | | value | | | amount | | | value | |
| | interest Rate | | | 2006 | | | 2006 | | | 2005 | | | 2005 | |
| | | | | | | | | | | | | | | |
| | | | (All figures in £ millions) | |
6.125% Euro Bonds 2007 | | | 6.18 | % | | | — | | | | — | | | | 436 | | | | 419 | |
10.5% Sterling Bonds 2008 | | | 10.53 | % | | | 105 | | | | 106 | | | | 107 | | | | 113 | |
4.7% US Dollar Bonds 2009 | | | 4.86 | % | | | 178 | | | | 176 | | | | 203 | | | | 200 | |
7% Global Dollar Bonds 2011 | | | 7.16 | % | | | 266 | | | | 269 | | | | 307 | | | | 310 | |
7% Sterling Bonds 2014 | | | 7.20 | % | | | 251 | | | | 265 | | | | 250 | | | | 282 | |
5.7% US Dollar Bonds 2014 | | | 5.88 | % | | | 206 | | | | 203 | | | | 238 | | | | 234 | |
4.625% US Dollar notes 2018 | | | 4.69 | % | | | 139 | | | | 135 | | | | 161 | | | | 155 | |
Finance lease liabilities | | | n/a | | | | 3 | | | | 3 | | | | 1 | | | | 1 | |
| | | | | | | | | | | | | | | |
| | | | | | | 1,148 | | | | 1,157 | | | | 1,703 | | | | 1,714 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | 2009 | | | 2008 | |
| | Effective
| | | Carrying
| | | | | | Carrying
| | | | |
| | interest rate | | | value | | | Market value | | | value | | | Market value | |
| | All figures in £ millions | |
|
Bank loans and overdrafts | | | n/a | | | | 70 | | | | 70 | | | | 228 | | | | 228 | |
4.7% US Dollar Bonds 2009 | | | 4.86 | % | | | — | | | | — | | | | 244 | | | | 243 | |
7.0% Global Dollar Bonds 2011 | | | 7.16 | % | | | 322 | | | | 331 | | | | 368 | | | | 349 | |
5.5% Global Dollar Bonds 2013 | | | 5.76 | % | | | 226 | | | | 232 | | | | 258 | | | | 227 | |
5.7% US Dollar Bonds 2014 | | | 5.88 | % | | | 274 | | | | 266 | | | | 322 | | | | 262 | |
7.0% Sterling Bonds 2014 | | | 7.20 | % | | | 254 | | | | 276 | | | | 254 | | | | 258 | |
6.0% Sterling Bonds 2015 | | | 6.27 | % | | | 297 | | | | 317 | | | | — | | | | — | |
6.25% Global Dollar Bonds 2018 | | | 6.46 | % | | | 359 | | | | 360 | | | | 445 | | | | 352 | |
4.625% US Dollar notes 2018 | | | 4.69 | % | | | 191 | | | | 176 | | | | 237 | | | | 169 | |
Finance lease liabilities | | | n/a | | | | 15 | | | | 15 | | | | 7 | | | | 7 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | 2,008 | | | | 2,043 | | | | 2,363 | | | | 2,095 | |
| | | | | | | | | | | | | | | | | | | | |
The market 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 the Group’s borrowings are denominated in the following currencies:
| | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
| | (All figures in | |
| | £ millions) | |
US dollar | | | 966 | | | | 1,165 | |
Sterling | | | 356 | | | | 357 | |
Euro | | | 421 | | | | 437 | |
| | | | | | |
| | | 1,743 | | | | 1,959 | |
| | | | | | |
The maturity of the Group’s finance lease obligations is as follows:
| | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
| | (All figures in | |
| | £ millions) | |
Finance lease liabilities — minimum lease payments | | | | | | | | |
Not later than one year | | | 1 | | | | 2 | |
Later than one year and not later than five years | | | 3 | | | | 1 | |
Later than five years | | | — | | | | — | |
Future finance charges on finance leases | | | — | | | | — | |
Present value of finance lease liabilities | | | 4 | | | | 3 | |
| | | | | | |
F-41
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in
| |
| | £ millions | |
|
US dollar | | | 1,457 | | | | 2,081 | |
Sterling | | | 551 | | | | 277 | |
Euro | | | — | | | | 5 | |
| | | | | | | | |
| | | 2,008 | | | | 2,363 | |
| | | | | | | | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The present value of finance lease liabilities is as follows:
| | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
| | (All figures in | |
| | £ millions) | |
Not later than one year | | | 1 | | | | 2 | |
Later than one year and not later than five years | | | 3 | | | | 1 | |
Later than five years | | | — | | | | — | |
| | | | | | |
| | | 4 | | | | 3 | |
| | | | | | |
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:
| | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
| | (All figures in | |
| | £ millions) | |
Floating rate | | | | | | | | |
— expiring within one year | | | — | | | | — | |
— expiring beyond one year | | | 894 | | | | 786 | |
| | | | | | |
| | | 894 | | | | 786 | |
| | | | | | |
During the year, the Group renegotiated its revolving credit facility which increased the amount and extended the maturity date.
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in
| |
| | £ millions | |
|
Floating rate | | | | | | | | |
— expiring within one year | | | — | | | | — | |
— expiring beyond one year | | | 1,084 | | | | 1,085 | |
| | | | | | | | |
| | | 1,084 | | | | 1,085 | |
| | | | | | | | |
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-43
Notes to the Consolidated Financial Statements (Continued)
The maturity of the Group’s finance lease obligations is as follows:
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in
| |
| | £ millions | |
|
Finance lease liabilities — minimum lease payments | | | | | | | | |
Not later than one year | | | 4 | | | | 4 | |
Later than one year and not later than two years | | | 5 | | | | 2 | |
Later than two years and not later than three years | | | 3 | | | | 1 | |
Later than three years and not later than four years | | | 3 | | | | — | |
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 | | | 15 | | | | 7 | |
| | | | | | | | |
The present value of finance lease liabilities is as follows:
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in
| |
| | £ millions | |
|
Not later than one year | | | 4 | | | | 4 | |
Later than one year and not later than five years | | | 11 | | | | 3 | |
Later than five years | | | — | | | | — | |
| | | | | | | | |
| | | 15 | | | | 7 | |
| | | | | | | | |
The carrying amounts of the Group’s lease obligations approximate their fair value.
| |
2219. | 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 2009, apart from a revision to the Group’s bank counterparty limits policy and a minor change applicable to the authorisation of treasury policy waivers.
The audit committee 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.
Interest rate risk management
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
F-44
Notes to the Consolidated Financial Statements (Continued)
continued to be to set a target proportion of its forecast borrowings (taken at the year end, with cash netted against floating rate debt and before certain adjustments for IAS 39 ’Financial Instruments: Recognition and Measurement’) 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 2009 the fixed to floating hedging ratio, on the above basis, was approximately 71%. This above-policy level was a result of better than forecast cash collections in December 2009, resulting in lower than expected net debt. 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 £6m 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 predominantly 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 2009 the average maturity of gross borrowings was 5.1 years of which bonds represented 96% of these borrowings (up from 5.0 years and up from 90% 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 2009 the committed facilities amounted to £1,084m and their weighted average maturity was 2.4 years.
F-45
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:
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in £
| |
| | millions | |
|
Cash and cash equivalents | | | 750 | | | | 685 | |
Marketable securities | | | 63 | | | | 54 | |
Derivative financial instruments | | | 103 | | | | 164 | |
Bank loans, overdrafts and loan notes | | | (70 | ) | | | (228 | ) |
Bonds | | | (1,923 | ) | | | (2,128 | ) |
Finance lease liabilities | | | (15 | ) | | | (7 | ) |
| | | | | | | | |
Net debt | | | (1,092 | ) | | | (1,460 | ) |
| | | | | | | | |
The split of net debt between fixed and floating rate, stated after the impact of rate derivatives, is as follows:
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in £
| |
| | millions | |
|
Fixed rate | | | 772 | | | | 781 | |
Floating rate | | | 320 | | | | 679 | |
| | | | | | | | |
Total | | | 1,092 | | | | 1,460 | |
| | | | | | | | |
Gross borrowings, after the impact of cross-currency rate derivatives, analysed by currency are as follows:
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in £ millions | |
|
US dollar | | | 1,656 | | | | 2,081 | |
Sterling | | | 330 | | | | 277 | |
Other | | | 22 | | | | 5 | |
| | | | | | | | |
Total | | | 2,008 | | | | 2,363 | |
| | | | | | | | |
As at 31 December 2009 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 | | | 74 | | | | 1,087 | | | | 847 | | | | 2,008 | |
Effect of rate derivatives | | | 1,289 | | | | (762 | ) | | | (527 | ) | | | — | |
| | | | | | | | | | | | | | | | |
Total | | | 1,363 | | | | 325 | | | | 320 | | | | 2,008 | |
| | | | | | | | | | | | | | | | |
F-46
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:
| | | | | | | | | | | | | | | | |
| | 2009 | |
| | USD | | | GBP | | | Other | | | Total | |
| | All figures in £ millions | |
|
Not later than one year | | | 42 | | | | 21 | | | | 2 | | | | 65 | |
Later than one year and not later than five years | | | 878 | | | | 313 | | | | 30 | | | | 1,221 | |
Later than five years | | | 739 | | | | 106 | | | | — | | | | 845 | |
| | | | | | | | | | | | | | | | |
Total | | | 1,659 | | | | 440 | | | | 32 | | | | 2,131 | |
| | | | | | | | | | | | | | | | |
Analysed as: | | | | | | | | | | | | | | | | |
Revolving credit facilities and commercial paper | | | — | | | | — | | | | — | | | | — | |
Bonds | | | 1,692 | | | | 745 | | | | — | | | | 2,437 | |
Rate derivatives — inflows | | | (386 | ) | | | (313 | ) | | | — | | | | (699 | ) |
Rate derivatives — outflows | | | 353 | | | | 8 | | | | 32 | | | | 393 | |
| | | | | | | | | | | | | | | | |
Total | | | 1,659 | | | | 440 | | | | 32 | | | | 2,131 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | 2008 | |
| | USD | | | GBP | | | Other | | | 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 | |
| | | | | | | | | | | | | | | | |
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 Group 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.
F-47
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 (after the impact of cross currency rate derivatives) 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 is only the US dollar. The Group still borrows small amounts in other currencies, typically for seasonal working capital needs. 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. In addition, currencies that account for less than 15% of Group operating profit before depreciation and amortisation can be included in the above hedging process at the request of the chief financial officer.
Included within year end net debt, the net borrowings/(cash) in the hedging currencies above (taking into account the effect of cross currency swaps) were: US dollar £1,314m, sterling £168m and South African rand £9m.
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 — fair value measurement
The following table provides an analysis of those financial instruments that are measured subsequent to initial recognition at fair value, grouped into levels 1 to 3, based on the degree to which the fair value is observable:
Level 1 fair value measurements are those derived from unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 fair value measurements are those derived from inputs, other than quoted prices included within level 1, that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices); and
Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).
| | | | | | | | | | | | | | | | |
| | 2009 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | All figures in £ millions | |
|
Financial assets at fair value | | | | | | | | | | | | | | | | |
Derivative financial assets | | | — | | | | 112 | | | | — | | | | 112 | |
Marketable securities | | | — | | | | 63 | | | | — | | | | 63 | |
Available for sale financial assets | | | | | | | | | | | | | | | | |
Investments in unlisted securities | | | — | | | | — | | | | 62 | | | | 62 | |
Financial liabilities at fair value | | | | | | | | | | | | | | | | |
Derivative financial liabilities | | | — | | | | (9 | ) | | | — | | | | (9 | ) |
Other financial liabilities — put option over minority interest | | | — | | | | — | | | | (23 | ) | | | (23 | ) |
| | | | | | | | | | | | | | | | |
Total | | | — | | | | 166 | | | | 39 | | | | 205 | |
| | | | | | | | | | | | | | | | |
F-48
Notes to the Consolidated Financial Statements (Continued)
The following table analyses the movements in level 3 fair value measurements:
| | | | | | | | |
| | 2009 | |
| | Investments in
| | | Other financial
| |
| | unlisted securities | | | liabilities | |
| | All figures in £ millions | |
|
At beginning of year | | | 63 | | | | — | |
Exchange differences | | | (6 | ) | | | — | |
Additions | | | 10 | | | | (23 | ) |
Disposals | | | (5 | ) | | | — | |
| | | | | | | | |
At end of year | | | 62 | | | | (23 | ) |
| | | | | | | | |
The fair value of the investments in unlisted securities is determined by reference to the financial performance of the underlying asset and amounts realised on the sale of similar assets. The fair value of other financial liabilities represents the present value of the estimated future liability.
Financial instruments — sensitivity analysis
As at 31 December 2009 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 | | | 62 | | | | — | | | | — | | | | (2 | ) | | | 3 | |
Cash and cash equivalents | | | 750 | | | | — | | | | — | | | | (47 | ) | | | 58 | |
Marketable securities | | | 63 | | | | — | | | | — | | | | (5 | ) | | | 7 | |
Derivative financial instruments | | | 103 | | | | (59 | ) | | | 66 | | | | 14 | | | | (17 | ) |
Bonds | | | (1,923 | ) | | | 54 | | | | (61 | ) | | | 118 | | | | (144 | ) |
Other borrowings | | | (85 | ) | | | — | | | | — | | | | 8 | | | | (9 | ) |
Put option over minority interest | | | (23 | ) | | | — | | | | — | | | | 3 | | | | (3 | ) |
Other net financial assets | | | 528 | | | | — | | | | — | | | | (42 | ) | | | 52 | |
| | | | | | | | | | | | | | | | | | | | |
Total financial instruments | | | (525 | ) | | | (5 | ) | | | 5 | | | | 47 | | | | (53 | ) |
| | | | | | | | | | | | | | | | | | | | |
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.
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.
F-49
Notes to the Consolidated Financial Statements (Continued)
| |
20. | Intangible assets — Pre-publication |
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in £ millions | |
|
Cost | | | | | | | | |
At beginning of year | | | 1,800 | | | | 1,264 | |
Exchange differences | | | (160 | ) | | | 494 | |
Additions | | | 322 | | | | 297 | |
Disposals | | | (230 | ) | | | (345 | ) |
Acquisition through business combination | | | (1 | ) | | | 78 | |
Transfer from software | | | — | | | | 12 | |
Transfer to inventories | | | (4 | ) | | | — | |
| | | | | | | | |
At end of year | | | 1,727 | | | | 1,800 | |
| | | | | | | | |
Amortisation | | | | | | | | |
At beginning of year | | | (1,105 | ) | | | (814 | ) |
Exchange differences | | | 102 | | | | (337 | ) |
Charge for the year | | | (307 | ) | | | (244 | ) |
Disposals | | | 230 | | | | 345 | |
Acquisition through business combination | | | 3 | | | | (51 | ) |
Transfer from software | | | — | | | | (4 | ) |
| | | | | | | | |
At end of year | | | (1,077 | ) | | | (1,105 | ) |
| | | | | | | | |
Carrying amounts | | | | | | | | |
At end of year | | | 650 | | | | 695 | |
| | | | | | | | |
Included in the above are pre-publication assets amounting to £398m (2008: £462m) which will be realised in more than 12 months.
Amortisation is included in the income statement in cost of goods sold.
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in £ millions | |
|
Raw materials | | | 32 | | | | 31 | |
Work in progress | | | 23 | | | | 29 | |
Finished goods | | | 390 | | | | 441 | |
| | | | | | | | |
| | | 445 | | | | 501 | |
| | | | | | | | |
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 £843m (2008: £832m). In 2009 £75m (2008: £56m) of inventory provisions was charged in the income statement. None of the inventory is pledged as security.
F-50
Notes to the Consolidated Financial Statements (Continued)
| |
22. | Trade and other receivables |
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in £ millions | |
|
Current | | | | | | | | |
Trade receivables | | | 989 | | | | 1,030 | |
Royalty advances | | | 99 | | | | 111 | |
Prepayments and accrued income | | | 75 | | | | 62 | |
Other receivables | | | 121 | | | | 135 | |
Receivables from related parties | | | — | | | | 4 | |
| | | | | | | | |
| | | 1,284 | | | | 1,342 | |
| | | | | | | | |
Non-current | | | | | | | | |
Royalty advances | | | 86 | | | | 102 | |
Prepayments and accrued income | | | 24 | | | | 3 | |
Other receivables | | | 2 | | | | 47 | |
| | | | | | | | |
| | | 112 | | | | 152 | |
| | | | | | | | |
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:
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in £ millions | |
|
At beginning of year | | | (72 | ) | | | (52 | ) |
Exchange differences | | | 5 | | | | (18 | ) |
Income statement movements | | | (26 | ) | | | (27 | ) |
Utilised | | | 20 | | | | 27 | |
Acquisition through business combination | | | (3 | ) | | | (2 | ) |
| | | | | | | | |
At end of year | | | (76 | ) | | | (72 | ) |
| | | | | | | | |
Concentrations of credit risk with respect to trade receivables are limited due to the Group’s large number of customers, who are internationally dispersed.
The ageing of the Group’s trade receivables is as follows:
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in £ millions | |
|
Within due date | | | 1,096 | | | | 1,110 | |
Up to three months past due date | | | 228 | | | | 248 | |
Three to six months past due date | | | 51 | | | | 60 | |
Six to nine months past due date | | | 20 | | | | 21 | |
Nine to 12 months past due date | | | 4 | | | | 15 | |
More than 12 months past due date | | | 20 | | | | 20 | |
| | | | | | | | |
Total trade receivables | | | 1,419 | | | | 1,474 | |
| | | | | | | | |
Less: provision for bad and doubtful debts | | | (76 | ) | | | (72 | ) |
Less: provision for sales returns | | | (354 | ) | | | (372 | ) |
| | | | | | | | |
Net trade receivables | | | 989 | | | | 1,030 | |
| | | | | | | | |
F-51
Notes to the Consolidated Financial Statements (Continued)
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 | | | | | Re- | | | | | | | |
| | consideration | | | Integration | | | organizations | | | Leases | | | Other | | | Total | |
| | | | | | | | | | | | | | | | | | |
| | (All figures in £ millions) | |
At 1 January 2006 | | | 26 | | | | 3 | | | | 5 | | | | 12 | | | | 18 | | | | 64 | |
Exchange differences | | | — | | | | — | | | | — | | | | (2 | ) | | | (2 | ) | | | (4 | ) |
Charged to consolidated income statement | | | | | | | | | | | | | | | | | | | | | | | | |
— Additional provisions | | | — | | | | — | | | | 1 | | | | 4 | | | | 7 | | | | 12 | |
— Unused amounts reversed | | | (9 | ) | | | — | | | | (2 | ) | | | — | | | | (4 | ) | | | (15 | ) |
On acquisition | | | 17 | | | | — | | | | — | | | | — | | | | 3 | | | | 20 | |
Utilised during year | | | (9 | ) | | | (1 | ) | | | (3 | ) | | | (2 | ) | | | (10 | ) | | | (25 | ) |
| | | | | | | | | | | | | | | | | | |
At 31 December 2006 | | | 25 | | | | 2 | | | | 1 | | | | 12 | | | | 12 | | | | 52 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
| | (All figures in | |
| | £ millions) | |
Analysis of provisions | | | | | | | | |
Non-current | | | 29 | | | | 31 | |
Current | | | 23 | | | | 33 | |
| | | | | | |
| | | 52 | | | | 64 | |
| | | | | | |
F-42
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | |
| | Deferred
| | | | | | | | | | |
| | consideration | | | Leases | | | Other | | | Total | |
| | All figures in £ millions | |
|
At 1 January 2009 | | | 43 | | | | 8 | | | | 38 | | | | 89 | |
Exchange differences | | | (2 | ) | | | — | | | | (3 | ) | | | (5 | ) |
Charged to income statement | | | 3 | | | | 3 | | | | 2 | | | | 8 | |
Released to income statement | | | — | | | | — | | | | (3 | ) | | | (3 | ) |
Acquisition through business combination — current year | | | 27 | | | | — | | | | — | | | | 27 | |
Acquisition through business combination — prior year adjustments | | | (4 | ) | | | — | | | | — | | | | (4 | ) |
Utilised | | | (29 | ) | | | (2 | ) | | | (13 | ) | | | (44 | ) |
| | | | | | | | | | | | | | | | |
At 31 December 2009 | | | 38 | | | | 9 | | | | 21 | | | | 68 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in £ millions | |
|
Analysis of provisions | | | | | | | | |
Non-current | | | 50 | | | | 33 | |
Current | | | 18 | | | | 56 | |
| | | | | | | | |
| | | 68 | | | | 89 | |
| | | | | | | | |
Deferred consideration — Additional deferred consideration of £17m was incurred during the year relating primarily relates to the acquisition of Mergermarket.Fronter in 2009.
Lease commitments — These relate primarily to onerous lease contracts, acquired through business combinations, which have various expiry dates up to 2010. The provision is based on current occupancy estimates.
| |
2324. | Trade and other liabilities |
| | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
| | (All figures in | |
| | £ millions) | |
Trade payables | | | 343 | | | | 348 | |
Social security and other taxes | | | 18 | | | | 21 | |
Accruals | | | 345 | | | | 363 | |
Deferred income | | | 276 | | | | 237 | |
Other liabilities | | | 178 | | | | 156 | |
| | | | | | |
| | | 1,160 | | | | 1,125 | |
| | | | | | |
Less: non-current portion | | | | | | | | |
Accruals | | | 24 | | | | 15 | |
Deferred income | | | 47 | | | | 51 | |
Other liabilities | | | 91 | | | | 85 | |
| | | | | | |
| | | 162 | | | | 151 | |
| | | | | | |
Current portion | | | 998 | | | | 974 | |
| | | | | | |
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in £ millions | |
|
Trade payables | | | 461 | | | | 450 | |
Social security and other taxes | | | 30 | | | | 35 | |
Accruals | | | 504 | | | | 501 | |
Deferred income | | | 487 | | | | 444 | |
Interest payable | | | 10 | | | | 10 | |
Dividends payable to minority interest | | | — | | | | 5 | |
Put option over minority interest | | | 23 | | | | — | |
Other liabilities | | | 205 | | | | 205 | |
| | | | | | | | |
| | | 1,720 | | | | 1,650 | |
| | | | | | | | |
Less: non-current portion | | | | | | | | |
Accruals | | | 23 | | | | 42 | |
Deferred income | | | 116 | | | | 87 | |
Interest payable | | | — | | | | 1 | |
Put option over minority interest | | | 23 | | | | — | |
Other liabilities | | | 91 | | | | 91 | |
| | | 253 | | | | 221 | |
| | | | | | | | |
Current portion | | | 1,467 | | | | 1,429 | |
| | | | | | | | |
F-52
Notes to the Consolidated Financial Statements (Continued)
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. |
The put option over minority interest is the fair value of an option held by the minority interest in our Pearson South Africa business. The option enables the minority interest to deliver workbookssell their 15% share of Pearson South Africa to adoption customers in school businesses;Pearson from 1 January 2012 at a price determined by the future performance of that business.
• advance payments in contracting businesses;
• subscription income in school, newspaper and market pricing businesses; and
• advertising income relating to future publishing days in newspaper businesses.
| |
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 plans are self-administered withlargest plan is the plans’ 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 plan is a hybrid planplan’) 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 plans, principally overseas.
The most recent actuarial valuation of the UK Group plan were closed to new members with the exception of a defined contribution section that was completed as at 1 January 2006.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.
F-43
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.
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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)Assumptions
The principal assumptions used for the UK Group plan and the US PRMB are shown below. Weighted average assumptions have been shown for the other plans.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2006 | | | 2006 | | | 2005 | | | 2005 | | | 2004 | | | 2004 | |
| | UK Group | | | Other | | | UK Group | | | Other | | | UK Group | | | Other | |
% | | plan | | | plans | | | plan | | | plans | | | plan | | | plans | |
| | | | | | | | | | | | | | | | | | |
Inflation | | | 3.00 | | | | 2.91 | | | | 2.80 | | | | 2.95 | | | | 2.80 | | | | 2.98 | |
Expected rate of increase in salaries | | | 4.70 | | | | 4.37 | | | | 4.50 | | | | 4.43 | | | | 4.80 | | | | 4.44 | |
Expected rate of increase for pensions in payment and deferred pensions | | | 2.10 to 4.60 | | | | — | | | | 2.50 to 4.00 | | | | — | | | | 2.80 to 4.00 | | | | — | |
Rate used to discount plan liabilities | | | 5.20 | | | | 5.70 | | | | 4.85 | | | | 5.54 | | | | 5.40 | | | | 5.84 | |
Expected return on assets | | | 6.40 | | | | 7.18 | | | | 6.40 | | | | 7.31 | | | | 6.60 | | | | 7.23 | |
| | | | | | | | | | | | | | | | | | |
Assumptions regarding future mortality experience are set based on advice, published statistics and experience in each territory. In 2006, the Group used the PMFA92 (medium-cohort) series mortality tables for the UK Group plan modified for age-rating adjustmentsplans, which primarily relate to recalibrate the tables against observed experience of the plan, and allowing for the future improvement effect from the medium cohort approach.US pension plans.
The remaining average life expectancy in years of a pensioner retiring at age 65 on the balance sheet date is as follows for the UK Group plan:
| | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
Male | | | 20.9 | | | | 19.5 | |
Female | | | 21.3 | | | | 21.5 | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | | 2008 | | | 2007 | |
| | UK Group
| | | Other
| | | | | | UK Group
| | | Other
| | | | | | UK Group
| | | Other
| | | | |
| | plan | | | plans | | | PRMB | | | plan | | | plans | | | PRMB | | | plan | | | plans | | | PRMB | |
|
% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Inflation | | | 3.50 | | | | 2.50 | | | | 2.50 | | | | 2.80 | | | | 2.80 | | | | 2.80 | | | | 3.30 | | | | 2.93 | | | | 3.00 | |
Rate used to discount plan liabilities | | | 5.70 | | | | 5.25 | | | | 5.50 | | | | 6.40 | | | | 6.25 | | | | 6.25 | | | | 5.80 | | | | 6.01 | | | | 6.05 | |
Expected return on assets | | | 6.03 | | | | 6.75 | | | | — | | | | 6.33 | | | | 7.60 | | | | — | | | | 6.50 | | | | 7.27 | | | | — | |
Expected rate of increase in salaries | | | 5.00 | | | | 4.00 | | | | — | | | | 4.30 | | | | 4.50 | | | | — | | | | 5.00 | | | | 4.36 | | | | — | |
Expected rate of increase for pensions in payment and deferred pensions | | | 2.60 to 4.40 | | | | — | | | | — | | | | 2.30 to 4.20 | | | | — | | | | — | | | | 2.50 to 4.30 | | | | — | | | | — | |
Initial rate of increase in healthcare rate | | | — | | | | — | | | | 8.50 | | | | — | | | | — | | | | 9.00 | | | | — | | | | — | | | | 9.50 | |
Ultimate rate of increase in healthcare rate | | | — | | | | — | | | | 5.00 | | | | — | | | | — | | | | 5.00 | | | | — | | | | — | | | | 5.00 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The remaining average life expectancy in years of a pensioner retiring at age 65, 20 years after the balance sheet date, is as follows for the UK Group plan:
| | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
Male | | | 22.2 | | | | 20.2 | |
Female | | | 22.5 | | | | 22.1 | |
| | | | | | |
The amounts recognised in the income statement are as follows:
F-53
| | | | | | | | | | | | | | | | | | | | |
| | | | Defined | | | | | | | |
| | UK Group | | | benefit | | | | | Defined | | | 2006 | |
| | plan | | | other | | | Sub Total | | | contribution | | | Total | |
| | | | | | | | | | | | | | | |
| | (All figures in £ millions) | |
Current service cost | | | 27 | | | | 2 | | | | 29 | | | | 36 | | | | 65 | |
| | | | | | | | | | | | | | | |
Total operating costs | | | 27 | | | | 2 | | | | 29 | | | | 36 | | | | 65 | |
| | | | | | | | | | | | | | | |
Expected return on plan assets | | | (85 | ) | | | (7 | ) | | | (92 | ) | | | — | | | | (92 | ) |
Interest on pension scheme liabilities | | | 78 | | | | 7 | | | | 85 | | | | — | | | | 85 | |
| | | | | | | | | | | | | | | |
Net finance income | | | (7 | ) | | | — | | | | (7 | ) | | | — | | | | (7 | ) |
| | | | | | | | | | | | | | | |
Net income statement charge | | | 20 | | | | 2 | | | | 22 | | | | 36 | | | | 58 | |
| | | | | | | | | | | | | | | |
Actual return on plan assets | | | 153 | | | | 13 | | | | 166 | | | | — | | | | 166 | |
| | | | | | | | | | | | | | | |
F-44
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | | | | |
| | | | Defined | | | | | | | |
| | UK Group | | | benefit | | | Sub | | | Defined | | | 2005 | |
| | plan | | | other | | | Total | | | contribution | | | Total | |
| | | | | | | | | | | | | | | |
| | (All figures in £ millions) | |
Current service cost | | | 25 | | | | 2 | | | | 27 | | | | 35 | | | | 62 | |
Curtailments | | | — | | | | (2 | ) | | | (2 | ) | | | — | | | | (2 | ) |
| | | | | | | | | | | | | | | |
Total operating costs | | | 25 | | | | — | | | | 25 | | | | 35 | | | | 60 | |
| | | | | | | | | | | | | | | |
Expected return on plan assets | | | (75 | ) | | | (6 | ) | | | (81 | ) | | | — | | | | (81 | ) |
Interest on pension scheme liabilities | | | 79 | | | | 6 | | | | 85 | | | | — | | | | 85 | |
| | | | | | | | | | | | | | | |
Net finance costs | | | 4 | | | | — | | | | 4 | | | | — | | | | 4 | |
| | | | | | | | | | | | | | | |
Net income statement charge | | | 29 | | | | — | | | | 29 | | | | 35 | | | | 64 | |
| | | | | | | | | | | | | | | |
Actual return on plan assets | | | 214 | | | | 7 | | | | 221 | | | | — | | | | 221 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | Defined | | | | | | | |
| | UK Group | | | benefit | | | Sub | | | Defined | | | 2004 | |
| | plan | | | other | | | Total | | | contribution | | | Total | |
| | | | | | | | | | | | | | | |
| | (All figures in £ millions) | |
Current service cost | | | 22 | | | | 2 | | | | 24 | | | | 32 | | | | 56 | |
| | | | | | | | | | | | | | | |
Total operating costs | | | 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 costs | | | 1 | | | | — | | | | 1 | | | | — | | | | 1 | |
| | | | | | | | | | | | | | | |
Net income statement charge | | | 23 | | | | 2 | | | | 25 | | | | 32 | | | | 57 | |
| | | | | | | | | | | | | | | |
Actual return on plan assets | | | 135 | | | | 9 | | | | 144 | | | | — | | | | 144 | |
| | | | | | | | | | | | | | | |
The total operating charge is included in administrative and other expenses.
The amounts recognised inUK discount rate is based on the balance sheet are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2006 | | | 2006 | | | 2006 | | | | | 2005 | | | 2005 | | | 2005 | | | |
| | UK | | | Other | | | Other | | | | | UK | | | Other | | | Other | | | |
| | Group | | | funded | | | unfunded | | | 2006 | | | Group | | | funded | | | unfunded | | | 2005 | |
| | plan | | | plans | | | plans | | | Total | | | plan | | | plans | | | plans | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | (All figures in £ millions) | |
Fair value of plan assets | | | 1,528 | | | | 105 | | | | — | | | | 1,633 | | | | 1,390 | | | | 110 | | | | — | | | | 1,500 | |
Present value of defined benefit obligation | | | (1,683 | ) | | | (115 | ) | | | (12 | ) | | | (1,810 | ) | | | (1,661 | ) | | | (131 | ) | | | (11 | ) | | | (1,803 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net pension liability | | | (155 | ) | | | (10 | ) | | | (12 | ) | | | (177 | ) | | | (271 | ) | | | (21 | ) | | | (11 | ) | | | (303 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other post-retirement medical benefit obligation | | | | | | | | | | | | | | | (48 | ) | | | | | | | | | | | | | | | (60 | ) |
Other pension accruals | | | | | | | | | | | | | | | (25 | ) | | | | | | | | | | | | | | | (26 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total retirement benefit obligations | | | | | | | | | | | | | | | (250 | ) | | | | | | | | | | | | | | | (389 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
F-45
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
annualised yield on the iBoxx over15-year AA-rated corporate bond index, adjusted to reflect the duration of our liabilities. The following gains/(losses) have been recognised inUS discount rate is set by reference to a US bond portfolio matching model. The expected return on assets is based on market expectations of long-term asset returns for the statement of recognised income and expense:
| | | | | | | | | | | | |
| | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | |
| | (All figures in £ millions) | |
Amounts recognised for defined benefit plans | | | 102 | | | | 21 | | | | (60 | ) |
Amounts recognised for post-retirement medical benefit plans | | | 5 | | | | 5 | | | | (1 | ) |
| | | | | | | | | |
Total recognised in year | | | 107 | | | | 26 | | | | (61 | ) |
| | | | | | | | | |
Cumulative amounts recognised | | | 44 | | | | (63 | ) | | | (89 | ) |
| | | | | | | | | |
The fair value of plan assets comprisesdefined portfolio at the following:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2006 | | | 2006 | | | | | 2005 | | | 2005 | | | |
| | UK | | | Other | | | | | UK | | | Other | | | |
| | Group | | | funded | | | 2006 | | | Group | | | funded | | | 2005 | |
% | | plan | | | plans | | | Total | | | plan | | | plans | | | Total | |
| | | | | | | | | | | | | | | | | | |
Equities | | | 46.6 | | | | 3.9 | | | | 50.5 | | | | 47.4 | | | | 4.3 | | | | 51.7 | |
Bonds | | | 23.8 | | | | 2.1 | | | | 25.9 | | | | 24.7 | | | | 2.0 | | | | 26.7 | |
Properties | | | 9.2 | | | | — | | | | 9.2 | | | | 8.9 | | | | — | | | | 8.9 | |
Other | | | 14.0 | | | | 0.4 | | | | 14.4 | | | | 11.7 | | | | 1.0 | | | | 12.7 | |
The plan assets do not include anyend of the Group’s own financial instruments, nor any property occupied by the Group.
F-46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)year.
Changes in the values of plan assets and liabilities are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2006 UK | | | | | | | 2005 UK | | | | | |
| | Group | | | 2006 | | | 2006 | | | Group | | | 2005 | | | 2005 | |
| | plan | | | Other | | | Total | | | plan | | | Other | | | Total | |
| | | | | | | | | | | | | | | | | | |
| | (All figures in £ millions) | |
Fair value of plan assets | | | | | | | | | | | | | | | | | | | | | | | | |
Opening fair value of plan assets | | | 1,390 | | | | 110 | | | | 1,500 | | | | 1,198 | | | | 82 | | | | 1,280 | |
Exchange differences | | | — | | | | (12 | ) | | | (12 | ) | | | — | | | | 9 | | | | 9 | |
Expected return on plan assets | | | 85 | | | | 7 | | | | 92 | | | | 75 | | | | 6 | | | | 81 | |
Actuarial gains and losses | | | 68 | | | | 6 | | | | 74 | | | | 139 | | | | 1 | | | | 140 | |
Contributions by employer | | | 43 | | | | 2 | | | | 45 | | | | 35 | | | | 10 | | | | 45 | |
Contributions by employee | | | 7 | | | | — | | | | 7 | | | | 6 | | | | — | | | | 6 | |
Benefits paid | | | (65 | ) | | | (8 | ) | | | (73 | ) | | | (63 | ) | | | (6 | ) | | | (69 | ) |
Acquisition through business combination | | | — | | | | — | | | | — | | | | — | | | | 8 | | | | 8 | |
| | | | | | | | | | | | | | | | | | |
Closing fair value of plan assets | | | 1,528 | | | | 105 | | | | 1,633 | | | | 1,390 | | | | 110 | | | | 1,500 | |
| | | | | | | | | | | | | | | | | | |
Present value of defined benefit obligation | | | | | | | | | | | | | | | | | | | | | | | | |
Opening defined benefit obligation | | | (1,661 | ) | | | (142 | ) | | | (1,803 | ) | | | (1,502 | ) | | | (113 | ) | | | (1,615 | ) |
Exchange differences | | | — | | | | 15 | | | | 15 | | | | — | | | | (12 | ) | | | (12 | ) |
Current service cost | | | (27 | ) | | | (2 | ) | | | (29 | ) | | | (25 | ) | | | (2 | ) | | | (27 | ) |
Curtailment | | | — | | | | — | | | | — | | | | — | | | | 2 | | | | 2 | |
Interest cost | | | (78 | ) | | | (7 | ) | | | (85 | ) | | | (79 | ) | | | (6 | ) | | | (85 | ) |
Actuarial gains and losses | | | 25 | | | | 3 | | | | 28 | | | | (112 | ) | | | (7 | ) | | | (119 | ) |
Contributions by employee | | | (7 | ) | | | — | | | | (7 | ) | | | (6 | ) | | | — | | | | (6 | ) |
Benefits paid | | | 65 | | | | 8 | | | | 73 | | | | 63 | | | | 6 | | | | 69 | |
Acquisition through business combination | | | — | | | | (2 | ) | | | (2 | ) | | | — | | | | (10 | ) | | | (10 | ) |
| | | | | | | | | | | | | | | | | | |
Closing defined benefit obligation | | | (1,683 | ) | | | (127 | ) | | | (1,810 | ) | | | (1,661 | ) | | | (142 | ) | | | (1,803 | ) |
| | | | | | | | | | | | | | | | | | |
The history of the defined benefit plans is as follows:
| | | | | | | | | | | | | | | | |
| | 2006 | | | 2005 | | | 2004 | | | 2003 | |
| | | | | | | | | | | | |
| | (All figures in £ millions) | |
Fair value of plan assets | | | 1,633 | | | | 1,500 | | | | 1,280 | | | | 1,164 | |
Present value of defined benefit obligation | | | (1,810 | ) | | | (1,803 | ) | | | (1,615 | ) | | | (1,454 | ) |
| | | | | | | | | | | | |
Net pension liability | | | (177 | ) | | | (303 | ) | | | (335 | ) | | | (290 | ) |
| | | | | | | | | | | | |
Experience adjustments on plan assets | | | 74 | | | | 140 | | | | 67 | | | | 88 | |
Experience adjustments on plan liabilities | | | 28 | | | | (119 | ) | | | (127 | ) | | | (113 | ) |
| | | | | | | | | | | | |
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 expected rate of increase in salaries has been set at 5.0% for 2009 with a short-term assumption of 3.0% for three years.
In 2008 the UK mortality assumptions were derived by adjusting standard mortality tables (PMFA 92 tables projected forward with medium cohort improvement factors). In 2009 the Group changed its mortality assumptions in the UK. The mortality base table assumptions have been derived from the SAPS ‘all pensioners’ tables for males and the SAPS ‘normal health pensioners’ tables for females, adjusted to reflect the observed experience of the plan, with medium cohort improvement factors. In 2008 a 1% improvement floor on the medium cohort was applied. In 2009 this was changed to 1.5% for males and 1.25% for females, with tapering.
For the US plans, the assumptions used were based on standard US mortality tables. In 2008 a switch from GAM94 to RP2000 was made, 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 | |
| | 2009 | | | 2008 | | | 2009 | | | 2008 | |
|
Male | | | 22.7 | | | | 21.5 | | | | 17.6 | | | | 17.6 | |
Female | | | 23.5 | | | | 21.8 | | | | 20.2 | | | | 20.2 | |
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 | |
| | 2009 | | | 2008 | | | 2009 | | | 2008 | |
|
Male | | | 25.3 | | | | 23.3 | | | | 17.6 | | | | 17.6 | |
Female | | | 25.6 | | | | 23.8 | | | | 20.2 | | | | 20.2 | |
F-54
Notes to the Consolidated Financial Statements (Continued)
Financial statement information
The amounts recognised in the income statement are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | |
| | | | | Defined
| | | | | | | | | | | | | |
| | UK Group
| | | benefit
| | | | | | Defined
| | | | | | | |
| | plan | | | other | | | Sub-total | | | contribution | | | PRMB | | | Total | |
| | All figures in £ millions | |
|
Current service cost | | | 14 | | | | 3 | | | | 17 | | | | 62 | | | | 2 | | | | 81 | |
Past service cost | | | — | | | | 1 | | | | 1 | | | | — | | | | — | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total operating expense | | | 14 | | | | 4 | | | | 18 | | | | 62 | | | | 2 | | | | 82 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Expected return on plan assets | | | (83 | ) | | | (5 | ) | | | (88 | ) | | | — | | | | — | | | | (88 | ) |
Interest on plan liabilities | | | 89 | | | | 8 | | | | 97 | | | | — | | | | 3 | | | | 100 | |
Net finance expense | | | 6 | | | | 3 | | | | 9 | | | | — | | | | 3 | | | | 12 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income statement charge | | | 20 | | | | 7 | | | | 27 | | | | 62 | | | | 5 | | | | 94 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Actual return on plan assets | | | 136 | | | | 8 | | | | 144 | | | | — | | | | — | | | | 144 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
F-55
Notes to the Consolidated Financial Statements (Continued)
The total operating charge is included in administrative and other expenses. In 2008 the UK Group plan current service cost included £14m (2007: £10m) relating to defined contribution sections. In 2009 the defined contribution section of the UK Group plan is recorded within the defined contribution expense.
The amounts recognised in the balance sheet are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | | 2008 | |
| | | | | 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 | | | 1,609 | | | | 118 | | | | — | | | | 1,727 | | | | 1,478 | | | | 100 | | | | — | | | | 1,578 | |
Present value of defined benefit obligation | | | (1,798 | ) | | | (151 | ) | | | (18 | ) | | | (1,967 | ) | | | (1,429 | ) | | | (149 | ) | | | (16 | ) | | | (1,594 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net pension (liability)/asset | | | (189 | ) | | | (33 | ) | | | (18 | ) | | | (240 | ) | | | 49 | | | | (49 | ) | | | (16 | ) | | | (16 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other post-retirement medical benefit obligation | | | | | | | | | | | | | | | (65 | ) | | | | | | | | | | | | | | | (68 | ) |
Other pension accruals | | | | | | | | | | | | | | | (34 | ) | | | | | | | | | | | | | | | (34 | ) |
Net retirement benefit obligations | | | | | | | | | | | | | | | (339 | ) | | | | | | | | | | | | | | | (118 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Analysed as: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Retirement benefit assets | | | | | | | | | | | | | | | — | | | | | | | | | | | | | | | | 49 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Retirement benefit obligations | | | | | | | | | | | | | | | (339 | ) | | | | | | | | | | | | | | | (167 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following (losses)/gains have been recognised in other comprehensive income:
| | | | | | | | | | | | |
| | 2009 | | | 2008 | | | 2007 | |
| | All figures in £ millions | |
|
Amounts recognised for defined benefit plans | | | (295 | ) | | | (74 | ) | | | 79 | |
Amounts recognised for post-retirement medical benefit plans | | | (4 | ) | | | 3 | | | | 1 | |
| | | | | | | | | | | | |
Total recognised in year | | | (299 | ) | | | (71 | ) | | | 80 | |
| | | | | | | | | | | | |
Cumulative amounts recognised | | | (246 | ) | | | 53 | | | | 124 | |
| | | | | | | | | | | | |
The fair value of plan assets comprises the following:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | | 2008 | |
| | | | | Other
| | | | | | | | | Other
| | | | |
| | UK Group
| | | funded
| | | | | | UK Group
| | | funded
| | | | |
| | plan | | | plans | | | Total | | | plan | | | plans | | | Total | |
| | % | |
|
Equities | | | 27.4 | | | | 2.4 | | | | 29.8 | | | | 28.0 | | | | 3.1 | | | | 31.1 | |
Bonds | | | 47.2 | | | | 2.1 | | | | 49.3 | | | | 40.8 | | | | 2.2 | | | | 43.0 | |
Properties | | | 9.4 | | | | 0.0 | | | | 9.4 | | | | 7.4 | | | | 0.1 | | | | 7.5 | |
Other | | | 10.4 | | | | 1.1 | | | | 11.5 | | | | 17.5 | | | | 0.9 | | | | 18.4 | |
The plan assets do not include any of the Group’s own financial instruments, or any property occupied by the Group.
F-56
Notes to the Consolidated Financial Statements (Continued)
Changes in the values of plan assets and liabilities of the retirement benefit plans are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | | 2008 | |
| | 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 | | | 1,478 | | | | 100 | | | | 1,578 | | | | 1,744 | | | | 109 | | | | 1,853 | |
Exchange differences | | | — | | | | (6 | ) | | | (6 | ) | | | — | | | | 23 | | | | 23 | |
Expected return on plan assets | | | 83 | | | | 5 | | | | 88 | | | | 104 | | | | 7 | | | | 111 | |
Actuarial gains and (losses) | | | 53 | | | | 3 | | | | 56 | | | | (234 | ) | | | (34 | ) | | | (268 | ) |
Contributions by employer | | | 64 | | | | 26 | | | | 90 | | | | 54 | | | | 3 | | | | 57 | |
Contributions by employee | | | 3 | | | | — | | | | 3 | | | | 9 | | | | — | | | | 9 | |
Benefits paid | | | (72 | ) | | | (10 | ) | | | (82 | ) | | | (72 | ) | | | (8 | ) | | | (80 | ) |
Other movements | | | — | | | | — | | | | — | | | | (127 | ) | | | — | | | | (127 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Closing fair value of plan assets | | | 1,609 | | | | 118 | | | | 1,727 | | | | 1,478 | | | | 100 | | | | 1,578 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Present value of defined benefit obligation | | | | | | | | | | | | | | | | | | | | | | | | |
Opening defined benefit obligation | | | (1,429 | ) | | | (165 | ) | | | (1,594 | ) | | | (1,682 | ) | | | (129 | ) | | | (1,811 | ) |
Exchange differences | | | — | | | | 14 | | | | 14 | | | | — | | | | (38 | ) | | | (38 | ) |
Current service cost | | | (14 | ) | | | (3 | ) | | | (17 | ) | | | (33 | ) | | | (3 | ) | | | (36 | ) |
Past service cost | | | — | | | | (1 | ) | | | (1 | ) | | | — | | | | (1 | ) | | | (1 | ) |
Interest cost | | | (89 | ) | | | (8 | ) | | | (97 | ) | | | (93 | ) | | | (7 | ) | | | (100 | ) |
Actuarial gains and (losses) | | | (335 | ) | | | (16 | ) | | | (351 | ) | | | 189 | | | | 5 | | | | 194 | |
Contributions by employee | | | (3 | ) | | | — | | | | (3 | ) | | | (9 | ) | | | — | | | | (9 | ) |
Benefits paid | | | 72 | | | | 10 | | | | 82 | | | | 72 | | | | 8 | | | | 80 | |
Other movements | | | — | | | | — | | | | — | | | | 127 | | | | — | | | | 127 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Closing defined benefit obligation | | | (1,798 | ) | | | (169 | ) | | | (1,967 | ) | | | (1,429 | ) | | | (165 | ) | | | (1,594 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
During 2008 changes made to the administration of the plan assets 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 are no longer disclosed as part of the UK Group plan assets. The other movements in both the change in value of plan assets and liabilities in 2008 represent the separation out of these defined contribution assets.
Changes in the value of the US PRMB are as follows:
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in £ millions | |
|
Opening defined benefit obligation | | | (68 | ) | | | (47 | ) |
Exchange differences | | | 8 | | | | (19 | ) |
Current service cost | | | (2 | ) | | | (1 | ) |
Past service cost | | | — | | | | (5 | ) |
Interest cost | | | (3 | ) | | | (3 | ) |
Actuarial gains and (losses) | | | (4 | ) | | | 3 | |
Benefits paid | | | 4 | | | | 4 | |
| | | | | | | | |
Closing defined benefit obligation | | | (65 | ) | | | (68 | ) |
| | | | | | | | |
F-57
Notes to the Consolidated Financial Statements (Continued)
The history of the defined benefit plans is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| | All figures in £ millions | |
|
Fair value of plan assets | | | 1,727 | | | | 1,578 | | | | 1,853 | | | | 1,633 | | | | 1,500 | |
Present value of defined benefit obligation | | | (1,967 | ) | | | (1,594 | ) | | | (1,811 | ) | | | (1,810 | ) | | | (1,803 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net pension (liability)/asset | | | (240 | ) | | | (16 | ) | | | 42 | | | | (177 | ) | | | (303 | ) |
| | | | | | | | | | | | | | | | | | | | |
Experience adjustments on plan assets | | | 56 | | | | (268 | ) | | | 29 | | | | 74 | | | | 140 | |
Experience adjustments on plan liabilities | | | (351 | ) | | | 194 | | | | 50 | | | | 28 | | | | (119 | ) |
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 plan trustees and the company are currently finalising the latest triennial valuation for funding purposes as at 1 January 2009. At this point, the Group has contributed an additional £20m to the plan in 2009. In total the Group contributed £42m (2008: £21m) towards the funding shortfall and expects to contribute a similar amount in 2010. Regular contributions to the plan are estimated to be £23m for 2010.
The Group expects to contribute approximately £150m$83m in 2010 and $126m in 2011 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 plans in 2007, which includes an additional contribution of £100m to the UK Group plan.
F-47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
obligation. The effect of a one percentage point increase and decrease in the discount rate on the defined benefit obligation and the total pension expense is as follows:
| | | | | | | | |
| | 2006 | | | 2006 | |
| | 1% increase | | | 1% decrease | |
| | | | | | |
| | (All figures in £ millions) | |
Effect on: | | | | | | | | |
(Decrease)/increase in defined benefit obligation | | | (242 | ) | | | 297 | |
Other post-retirement obligations
| | | | | | | | |
| | 2009 | |
| | 1% increase | | | 1% decrease | |
| | All figures in £ millions | |
|
Effect on: | | | | | | | | |
(Decrease)/increase in defined benefit obligation — UK Group plan | | | (260.2 | ) | | | 325.4 | |
(Decrease)/increase of aggregate of service cost and interest cost — UK Group plan | | | (4.5 | ) | | | 3.9 | |
(Decrease)/increase in defined benefit obligation — US plan | | | (12.4 | ) | | | 14.7 | |
The Group operates a numbereffect of post-retirement medicalmembers living one year more or one year less on the defined benefit plans, principally in the US. These plans are unfunded. The method of accountingobligation and the frequency of valuations are similar to those used for defined benefittotal pension plans.
The principal assumptions used are shown below:
| | | | | | | | | | | | |
% | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | |
Inflation | | | 3.00 | | | | 3.00 | | | | 3.00 | |
Initial rate of increase in healthcare rates | | | 10.00 | | | | 10.00 | | | | 12.00 | |
Ultimate rate of increase in healthcare rates | | | 5.00 | | | | 5.00 | | | | 5.00 | |
Rate used to discount scheme liabilities | | | 5.85 | | | | 5.60 | | | | 5.60 | |
The amounts recognised in the income statement areexpense is as follows:
| | | | | | | | | | | | |
| | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | |
| | (All figures in £ millions) | |
Current service cost | | | 1 | | | | 1 | | | | 1 | |
| | | | | | | | | |
Past service cost | | | (2 | ) | | | — | | | | — | |
| | | | | | | | | |
Total operating (income)/costs | | | (1 | ) | | | 1 | | | | 1 | |
| | | | | | | | | |
Interest cost | | | 3 | | | | 3 | | | | 4 | |
| | | | | | | | | |
Net income statement charge | | | 2 | | | | 4 | | | | 5 | |
| | | | | | | | | |
The current and past service costs have been included in administrative and other expenses.
| | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
| | (All figures in | |
| | £ millions) | |
Opening defined benefit obligation | | | (60 | ) | | | (58 | ) |
Exchange differences | | | 8 | | | | (7 | ) |
Reclassifications | | | (3 | ) | | | — | |
Current service cost | | | (1 | ) | | | (1 | ) |
Past service cost | | | 2 | | | | — | |
Interest cost | | | (3 | ) | | | (3 | ) |
Benefits paid | | | 4 | | | | 4 | |
Actuarial gains and losses | | | 5 | | | | 5 | |
| | | | | | |
Closing defined benefit obligation | | | (48 | ) | | | (60 | ) |
| | | | | | |
F-48
| | | | | | | | |
| | 2009 | |
| | 1 year increase | | | 1 year decrease | |
| | All figures in £ millions | |
|
Effect on: | | | | | | | | |
Increase/(decrease) in defined benefit obligation — UK Group plan | | | 50.7 | | | | (49.3 | ) |
Increase/(decrease) in defined benefit obligation — US plan | | | 1.3 | | | | (1.7 | ) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The effect of a one percentage point increase and decrease in the assumed medical cost trend rates is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2006 | | | 2006 | | | 2005 | | | 2005 | | | 2004 | | | 2004 | |
| | 1% increase | | | 1% decrease | | | 1% increase | | | 1% decrease | | | 1% increase | | | 1% decrease | |
| | | | | | | | | | | | | | | | | | |
| | (All figures in £ millions) | |
Effect on: | | | | | | | | | | | | | | | | | | | | | | | | |
Increase/(decrease) of aggregate of service cost and interest cost | | | 0.1 | | | | (0.1 | ) | | | 0.2 | | | | (0.2 | ) | | | 0.2 | | | | (0.2 | ) |
(Decrease)/increase in defined benefit obligation | | | (4.7 | ) | | | 5.1 | | | | (4.7 | ) | | | 4.1 | | | | (4.1 | ) | | | 3.7 | |
| | | | | | | | |
| | 2009 | |
| | 1% increase | | | 1% decrease | |
| | All figures in £ millions | |
|
Effect on: | | | | | | | | |
Increase/(decrease) in post-retirement medical benefit obligation | | | 3.1 | | | | (2.7 | ) |
Increase/(decrease) of aggregate of service cost and interest cost | | | 0.2 | | | | (0.2 | ) |
F-58
Share-based paymentsNotes to the Consolidated Financial Statements (Continued)
The Group recognised the following charges in the income statement in respect of its equity-settled share-based payment plans:
| | | | | | | | | | | | |
| | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | |
| | (All figures in £ millions) | |
Pearson plans | | | 18 | | | | 13 | | | | 15 | |
IDC plans | | | 7 | | | | 10 | | | | 10 | |
| | | | | | | | | |
Total share-based payment costs | | | 25 | | | | 23 | | | | 25 | |
| | | | | | | | | |
| | | | | | | | | | | | |
| | 2009 | | | 2008 | | | 2007 | |
| | All figures in £ millions | |
|
Pearson plans | | | 27 | | | | 25 | | | | 23 | |
Interactive Data plans | | | 10 | | | | 8 | | | | 7 | |
| | | | | | | | | | | | |
Total share-based payment costs | | | 37 | | | | 33 | | | | 30 | |
| | | | | | | | | | | | |
The Group operates the following equity-settled employee option and share plans:
| |
| 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 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 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 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 on continuing service and/or 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 awarded to senior management in October 2006 vest dependent on relative shareholder return, return on invested capital and a combination of earnings per share growth. The award was split equally across all three measures. Other restricted shares awarded in 2006 vest depending on continuing service over a three-year period. |
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 last 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 March 2008 and March 2009 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 2008 and 2009 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 i.e. the maximum number of matching shares is equal to the number of shares that could have been acquired with the amount of the pre-tax annual bonus taken in invested shares.
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-59
F-49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
| |
| 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 more than three years 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 after five years. |
|
| 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. |
The number and weighted average exercise prices of share options granted under the Group’s plans are as follows:
| | | | | | | | | | | | | | | | |
| | 2006 | | | 2006 | | | 2005 | | | 2005 | |
| | Number of | | | Weighted | | | Number of | | | Weighted | |
| | share | | | average | | | share | | | average | |
| | options | | | exercise | | | options | | | exercise | |
| | 000s | | | price £ | | | 000s | | | price £ | |
| | | | | | | | | | | | |
Outstanding at beginning of year | | | 21,677 | | | | 13.15 | | | | 26,179 | | | | 13.62 | |
Granted during the year | | | 837 | | | | 6.30 | | | | 606 | | | | 4.92 | |
Exercised during the year | | | (1,396 | ) | | | 5.36 | | | | (324 | ) | | | 6.01 | |
Forfeited during the year | | | (1,828 | ) | | | 15.39 | | | | (4,352 | ) | | | 15.75 | |
Expired during the year | | | (429 | ) | | | 6.72 | | | | (432 | ) | | | 9.17 | |
| | | | | | | | | | | | |
Outstanding at end of year | | | 18,861 | | | | 13.36 | | | | 21,677 | | | | 13.15 | |
| | | | | | | | | | | | |
Options exercisable at end of year | | | 15,595 | | | | 14.14 | | | | 17,420 | | | | 13.90 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | 2009 | | | 2008 | |
| | | | | Weighted
| | | | | | Weighted
| |
| | Number of
| | | average
| | | Number of
| | | average
| |
| | share
| | | exercise
| | | share
| | | exercise
| |
| | options
| | | price
| | | options
| | | price
| |
| | 000s | | | £ | | | 000s | | | £ | |
|
Outstanding at beginning of year | | | 14,379 | | | | 13.14 | | | | 16,781 | | | | 13.15 | |
Granted during the year | | | 1,320 | | | | 5.47 | | | | 1,437 | | | | 5.35 | |
Exercised during the year | | | (656 | ) | | | 5.91 | | | | (683 | ) | | | 4.85 | |
Forfeited during the year | | | (2,488 | ) | | | 13.02 | | | | (3,082 | ) | | | 11.56 | |
Expired during the year | | | (68 | ) | | | 5.20 | | | | (74 | ) | | | 6.06 | |
| | | | | | | | | | | | | | | | |
Outstanding at end of year | | | 12,487 | | | | 12.78 | | | | 14,379 | | | | 13.14 | |
| | | | | | | | | | | | | | | | |
Options exercisable at end of year | | | 9,264 | | | | 15.28 | | | | 11,527 | | | | 14.97 | |
| | | | | | | | | | | | | | | | |
Options were exercised regularly throughout the year. The weighted average share price during the year was £7.45 (2005: £6.52)£7.15 (2008: £6.44). Early exercises arising from redundancy, retirement or death are treated as an acceleration of vesting and the Group therefore recognises in the income statement the amount that otherwise would have been recognised for services received over the remainder of the original vesting period.
The options outstanding at the end of the year have weighted average remaining contractual lives and exercise prices as follows:
| | | | | | | | | | | | | | | | |
| | 2006 | | | 2006 | | | 2005 | | | 2005 | |
| | Number of | | | Weighted | | | Number of | | | Weighted | |
| | share | | | average | | | share | | | average | |
Range of exercise prices | | options | | | contractual | | | options | | | contractual | |
£ | | 000s | | | life years | | | 000s | | | life years | |
| | | | | | | | | | | | |
0 — 5 | | | 1,649 | | | | 1.94 | | | | 2,773 | | | | 2.32 | |
5 — 10 | | | 5,254 | | | | 3.85 | | | | 5,555 | | | | 4.57 | |
10 — 15 | | | 7,638 | | | | 3.63 | | | | 8,237 | | | | 4.64 | |
15 — 20 | | | 1,050 | | | | 2.88 | | | | 1,168 | | | | 3.81 | |
20 — 25 | | | 424 | | | | 3.19 | | | | 930 | | | | 3.80 | |
>25 | | | 2,846 | | | | 3.22 | | | | 3,014 | | | | 4.22 | |
| | | | | | | | | | | | |
| | | 18,861 | | | | 3.42 | | | | 21,677 | | | | 4.19 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | 2009 | | | 2008 | |
| | | | | 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 | | | 172 | | | | 1.07 | | | | 453 | | | | 1.23 | |
5 — 10 | | | 5,523 | | | | 2.37 | | | | 5,113 | | | | 2.84 | |
10 — 15 | | | 4,225 | | | | 1.36 | | | | 5,481 | | | | 1.97 | |
15 — 20 | | | 270 | | | | 0.75 | | | | 908 | | | | 0.84 | |
20 — 25 | | | 344 | | | | 0.19 | | | | 350 | | | | 1.19 | |
>25 | | | 1,953 | | | | 0.19 | | | | 2,074 | | | | 1.19 | |
| | | | | | | | | | | | | | | | |
| | | 12,487 | | | | 1.57 | | | | 14,379 | | | | 2.05 | |
| | | | | | | | | | | | | | | | |
In 20062009 and 20052008 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-60
F-50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
The weighted average estimated fair values and the inputs into the Black-Scholes model are as follows:
| | | | | | | | |
| | 2006 | | | 2005 | |
| | Weighted | | | Weighted | |
| | average | | | average | |
| | | | | | |
Fair value | | | £1.92 | | | | £2.41 | |
Weighted average share price | | | £7.66 | | | | £6.54 | |
Weighted average exercise price | | | £6.30 | | | | £5.08 | |
Expected volatility | | | 23.12 | % | | | 35.47 | % |
Expected life | | | 4.0 years | | | | 4.1 years | |
Risk free rate | | | 4.42 | % | | | 4.48 | % |
Expected dividend yield | | | 3.52 | % | | | 3.93 | % |
Forfeiture rate | | | 5.0 | % | | | 6.3 | % |
| | | | | | |
| | | | | | | | |
| | 2009
| | | 2008
| |
| | Weighted
| | | Weighted
| |
| | average | | | average | |
|
Fair value | | | £1.69 | | | | £1.67 | |
Weighted average share price | | | £7.13 | | | | £6.96 | |
Weighted average exercise price | | | £5.47 | | | | £5.35 | |
Expected volatility | | | 27.32 | % | | | 21.41 | % |
Expected life | | | 4.0 years | | | | 4.1 years | |
Risk free rate | | | 2.45 | % | | | 4.28 | % |
Expected dividend yield | | | 4.74 | % | | | 4.54 | % |
Forfeiture rate | | | 3.5 | % | | | 3.6 | % |
The expected volatility is based on the historic volatility of the Company’scompany’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:
| | | | | | | | | | | | | | | | |
| | 2006 | | | 2006 | | | | | 2005 | |
| | Number | | | Weighted | | | 2005 | | | Weighted | |
| | of shares | | | average | | | Number | | | average | |
| | 000s | | | fair value | | | of shares | | | fair value | |
| | | | | £ | | | 000s | | | £ | |
| | | | | | | | | | | |
Annual Bonus Share Matching Plan | | | 90 | | | | 6.27 | | | | 71 | | | | 5.57 | |
Long-Term Incentive Plan | | | 3,585 | | | | 6.96 | | | | 3,987 | | | | 5.05 | |
In 2005, the
| | | | | | | | | | | | | | | | |
| | 2009 | | 2008 |
| | | | Weighted
| | | | Weighted
|
| | Number of
| | average
| | Number of
| | average
|
| | shares
| | fair value
| | shares
| | fair value
|
| | 000s | | £ | | 000s | | £ |
|
Long-Term Incentive Plan | | | 4,519 | | | | 5.77 | | | | 4,152 | | | | 5.78 | |
Annual Bonus Share Matching Plan | | | 271 | | | | 6.70 | | | | 253 | | | | 6.73 | |
The fair value of restricted shares awardedgranted under the Annual Bonus Share Matching Plan and the Long-Term Incentive Plan wasthat vest unconditionally is determined using a Black-Scholes model to reflect dividends foregone using a dividend yieldthe share price at the date of 3.85%. From 2006 onwards, participantsgrant. Participants of the Long-Term Incentive Plan are entitled to dividends during the vesting period. Following a reviewThe number of the accounting policiesshares to vest has been adjusted, based on historical experience, to account for share-based payments in 2006, the restrictedany potential forfeitures. Restricted shares granted in 2006 under the Annual Bonus Share Matching Plan are valued using the share price at the date of grant discounted bygrant. Shares granted include the dividend yield (3.66%)entitlement to take into account any dividends foregone. The fair value of shares granted underduring the Long-Term Incentive Plan that vest unconditionally was determined usingvesting period and therefore the share price at the date of grant. The number of shares to vest was adjusted based on historical experience to account for any potential forfeitures. is not discounted.
Restricted shares with a market performance condition were valued by an independent actuary using a Monte Carlo model. Restricted shares with a non-market performance condition were fair valued based on the share price at the date of grant. 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 62%61% subsidiary of the Group, operates the following share-based payment plans:
| |
| 2001 Employee Stock Purchase Plan In 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 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 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 |
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-61
F-51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
| |
| 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. |
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.
Interactive Data employees purchased 234,956 shares (2008: 183,318) under the 2001 Employee Stock Purchase Plan at an average share price of $19.47 (£12.06) (2008: $22.95; £15.96). The weighted average fair value at the date of grant was $5.82 (£3.60) (2008: $6.59; £4.58).
The number and weighted average exercise prices of share options granted under the 2000 Long-Term Incentive Plan are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2006 | | | | | | | 2005 | | | |
| | 2006 | | | Weighted | | | 2006 | | | 2005 | | | Weighted | | | 2005 | |
| | Number | | | average | | | Weighted | | | Number | | | average | | | Weighted | |
| | of share | | | exercise | | | average | | | of share | | | exercise | | | average | |
| | options | | | price | | | exercise | | | options | | | price | | | exercise | |
| | 000s | | | $ | | | price £ | | | 000s | | | $ | | | price £ | |
| | | | | | | | | | | | | | | | | | |
Outstanding at beginning of year | | | 10,068 | | | | 15.16 | | | | 8.37 | | | | 9,832 | | | | 13.46 | | | | 7.36 | |
Granted during the year | | | 1,835 | | | | 20.58 | | | | 10.52 | | | | 1,940 | | | | 21.38 | | | | 11.80 | |
Exercised during the year | | | (1,252 | ) | | | 12.88 | | | | 6.58 | | | | (1,412 | ) | | | 11.57 | | | | 6.39 | |
Forfeited during the year | | | (139 | ) | | | 19.02 | | | | 9.72 | | | | (292 | ) | | | 16.86 | | | | 9.31 | |
Expired during the year | | | (6 | ) | | | 11.46 | | | | 5.86 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | |
Outstanding at end of year | | | 10,506 | | | | 16.33 | | | | 8.34 | | | | 10,068 | | | | 15.16 | | | | 8.37 | |
| | | | | | | | | | | | | | | | | | |
Options exercisable at end of year | | | 6,547 | | | | 14.11 | | | | 7.21 | | | | 6,052 | | | | 12.58 | | | | 6.94 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | | 2008 | |
| | | | | 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 | | | 10,264 | | | | 19.38 | | | | 13.48 | | | | 9,827 | | | | 18.21 | | | | 9.15 | |
Granted during the year | | | 1,224 | | | | 23.25 | | | | 14.40 | | | | 1,449 | | | | 24.95 | | | | 17.35 | |
Exercised during the year | | | (1,493 | ) | | | 14.20 | | | | 8.79 | | | | (895 | ) | | | 15.37 | | | | 10.69 | |
Forfeited during the year | | | (159 | ) | | | 24.44 | | | | 15.13 | | | | (99 | ) | | | 22.05 | | | | 15.34 | |
Expired during the year | | | (64 | ) | | | 25.93 | | | | 16.06 | | | | (18 | ) | | | 12.17 | | | | 8.46 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding at end of year | | | 9,772 | | | | 20.53 | | | | 12.71 | | | | 10,264 | | | | 19.38 | | | | 13.48 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Options exercisable at end of year | | | 6,839 | | | | 18.92 | | | | 11.72 | | | | 6,865 | | | | 16.89 | | | | 11.75 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
The options outstanding at the end of the year have a weighted average remaining contractual life and exercise price as follows:
| | | | | | | | | | | | | | | | |
| | 2006 | | | 2006 | | | 2005 | | | 2005 | |
| | Number | | | Weighted | | | Number | | | Weighted | |
| | of share | | | average | | | of share | | | average | |
Range of exercise prices | | options | | | contractual | | | options | | | contractual | |
$ | | 000s | | | life years | | | 000s | | | life years | |
| | | | | | | | | | | | |
0 — 4.4 | | | 30 | | | | 3.1 | | | | 33 | | | | 4.2 | |
4.4 — 7.5 | | | 157 | | | | 2.3 | | | | 206 | | | | 3.6 | |
7.5 — 12 | | | 2,164 | | | | 4.4 | | | | 2,685 | | | | 5.3 | |
12 — 20 | | | 4,640 | | | | 6.4 | | | | 5,243 | | | | 7.4 | |
>20 | | | 3,515 | | | | 9.0 | | | | 1,901 | | | | 9.5 | |
| | | | | | | | | | | | |
| | | 10,506 | | | | 6.8 | | | | 10,068 | | | | 5.4 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | 2009 | | | 2008 | |
| | | | | 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 | | | 20 | | | | 0.3 | | | | 47 | | | | 1.3 | |
7.5 — 12 | | | 909 | | | | 1.5 | | | | 1,502 | | | | 2.4 | |
12 — 20 | | | 2,339 | | | | 3.6 | | | | 2,987 | | | | 4.6 | |
> 20 | | | 6,504 | | | | 7.5 | | | | 5,728 | | | | 8.0 | |
| | | | | | | | | | | | | | | | |
| | | 9,772 | | | | 6.0 | | | | 10,264 | | | | 6.2 | |
| | | | | | | | | | | | | | | | |
F-62
Notes to the Consolidated Financial Statements (Continued)
The fair value of the options granted under the 2000 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. 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 | |
| | 2009
| | | 2008
| | | 2009
| | | 2008
| |
| | Weighted
| | | Weighted
| | | Weighted
| | | Weighted
| |
| | average | | | average | | | average | | | average | |
|
Fair value | | | $4.92 | | | | $5.58 | | | | $5.82 | | | | $6.59 | |
Weighted average share price | | | $23.25 | | | | $24.95 | | | | $19.47 | | | | $22.95 | |
Weighted average exercise price | | | $23.25 | | | | $24.95 | | | | $19.47 | | | | $22.95 | |
Expected volatility | | | 29.70 | % | | | 24.20 | % | | | 48.40 | % | | | 33.70 | % |
Expected life | | | 5.9 years | | | | 5.7 years | | | | 0.5 years | | | | 0.5 years | |
Risk free rate | | | 2.4% to 2.6% | | | | 1.5% to 3.5% | | | | 0.3% to 0.4% | | | | 2.0% to 2.4% | |
Expected dividend yield | | | 3.6 | % | | | 2.2 | % | | | 3.6 | % | | | 2.1 | % |
Forfeiture rate | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
The expected volatility is based on the historic volatility of Interactive Data’s share price over the vesting term of the options.
During the year IDCInteractive Data granted the following shares under restricted share arrangements:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2006 | | | | | | | | | |
| | 2006 | | | Weighted | | | 2006 | | | | | 2005 | | | 2005 | |
| | Number | | | average | | | Weighted | | | 2005 | | | Weighted | | | Weighted | |
| | of shares | | | fair value | | | average | | | Number | | | average | | | average | |
| | 000s | | | $ | | | fair value | | | of shares | | | fair value | | | fair value | |
| | | | | | | | £ | | | 000s | | | $ | | | £ | |
| | | | | | | | | | | | | | | | |
2000 Long-Term Incentive Plan | | | 196 | | | | 20.82 | | | | 10.64 | | | | 148 | | | | 20.57 | | | | 11.35 | |
2001 Employee Stock Purchase Plan | | | 206 | | | | 3.98 | | | | 2.03 | | | | 178 | | | | 3.68 | | | | 2.03 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | | 2008 | |
| | | | | 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 | | | 415 | | | | 22.92 | | | | 14.19 | | | | 194 | | | | 25.43 | | | | 17.69 | |
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
F-52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of the shares awarded under the 2001 Employee Stock Purchase Plan was estimated using a Black-Scholes model. 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 | |
| | | | | | |
| | 2006 | | | 2005 | | | 2006 | | | 2005 | |
| | Weighted | | | Weighted | | | Weighted | | | Weighted | |
| | average | | | average | | | average | | | average | |
| | | | | | | | | | | | |
Fair value | | | $ 6.57 | | | | $ 5.56 | | | | $ 3.98 | | | | $ 3.68 | |
Weighted average share price | | | $20.58 | | | | $21.38 | | | | $15.58 | | | | $15.46 | |
Weighted average exercise price | | | $20.58 | | | | $21.38 | | | | $15.58 | | | | $15.46 | |
Expected volatility | | | 25.90 | % | | | 24.50 | % | | | 18.32 | % | | | 20.00 | % |
Expected life | | | 4.7 years | | | | 4.0 years | | | | 0.5 years | | | | 0.5 years | |
Risk free rate | | | 4.56% to 5.11 | % | | | 3.86 | % | | | 3.66% to 5.22 | % | | | 2.33 | % |
Expected dividend yield | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
Forfeiture rate | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
| | | | | | | | | | | | |
The expected volatility is based on the historic volatility of IDC’s share price over the vesting term of the options.
| |
2527. | Share capital and share premium |
| | | | | | | | | | | | |
| | Number | | | Ordinary | | | Share | |
| | of shares | | | shares | | | premium | |
| | 000s | | | £m | | | £m | |
| | | | | | | | | |
At 1 January 2005 | | | 803,250 | | | | 201 | | | | 2,473 | |
Issue of ordinary shares — share option schemes | | | 770 | | | | — | | | | 4 | |
| | | | | | | | | |
At 31 December 2005 | | | 804,020 | | | | 201 | | | | 2,477 | |
| | | | | | | | | |
Issue of ordinary shares — share option schemes | | | 2,089 | | | | 1 | | | | 10 | |
| | | | | | | | | |
At 31 December 2006 | | | 806,109 | | | | 202 | | | | 2,487 | |
| | | | | | | | | |
| | | | | | | | | | | | |
| | Number
| | | Ordinary
| | | Share
| |
| | of shares
| | | shares
| | | premium
| |
| | 000s | | | £m | | | £m | |
|
At 1 January 2008 | | | 808,028 | | | | 202 | | | | 2,499 | |
Issue of ordinary shares — share option schemes | | | 1,248 | | | | — | | | | 6 | |
| | | | | | | | | | | | |
At 31 December 2008 | | | 809,276 | | | | 202 | | | | 2,505 | |
| | | | | | | | | | | | |
Issue of ordinary shares — share option schemes | | | 1,523 | | | | 1 | | | | 7 | |
| | | | | | | | | | | | |
At 31 December 2009 | | | 810,799 | | | | 203 | | | | 2,512 | |
| | | | | | | | | | | | |
The total authorised number of ordinary shares is 1,190m shares (2005: 1,186m shares) withhave a par value of 25p per share (2005:(2008: 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.
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.
F-63
Notes to the Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | | | | |
| | Pearson plc | | | IDC | | | Total | |
| | | | | | | | | |
| | Number | | | | | Number | | | | | |
| | of shares | | | | | of shares | | | | | |
| | 000s | | | £m | | | 000s | | | £m | | | £m | |
| | | | | | | | | | | | | | | |
At 1 January 2005 | | | 4,623 | | | | 105 | | | | 3,145 | | | | 27 | | | | 132 | |
Purchase of treasury shares | | | 626 | | | | 5 | | | | 1,407 | | | | 16 | | | | 21 | |
| | | | | | | | | | | | | | | |
At 31 December 2005 | | | 5,249 | | | | 110 | | | | 4,552 | | | | 43 | | | | 153 | |
| | | | | | | | | | | | | | | |
Purchase of treasury shares | | | 4,700 | | | | 36 | | | | 1,500 | | | | 16 | | | | 52 | |
Release of treasury shares | | | (1,188 | ) | | | (16 | ) | | | — | | | | — | | | | (16 | ) |
| | | | | | | | | | | | | | | |
At 31 December 2006 | | | 8,761 | | | | 130 | | | | 6,052 | | | | 59 | | | | 189 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Pearson plc | | | Interactive Data | | | Total | |
| | Number
| | | | | | Number
| | | | | | | |
| | of shares
| | | | | | of shares
| | | | | | | |
| | 000s | | | £m | | | 000s | | | £m | | | £m | |
|
At 1 January 2008 | | | 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 | |
| | | | | | | | | | | | | | | | | | | | |
Purchase of treasury shares | | | 2,200 | | | | 13 | | | | 1,280 | | | | 20 | | | | 33 | |
Release of treasury shares | | | (2,983 | ) | | | (29 | ) | | | — | | | | — | | | | (29 | ) |
| | | | | | | | | | | | | | | | | | | | |
At 31 December 2009 | | | 9,665 | | | | 96 | | | | 10,485 | | | | 130 | | | | 226 | |
| | | | | | | | | | | | | | | | | | | | |
The Group holds its ownPearson plc shares in trust to satisfy its obligations under its restricted share plans (see note 24)26). These shares, representing 1.2% (2008: 1.3%) ofcalled-up share capital, are heldtreated as treasury shares for accounting purposes and have a par value of 25p per share.
IDC
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.
F-53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The nominal value of Pearson plc treasury shares amounts to £2.2m (2005: £2.1m)£2.4m (2008: £2.6m). The nominal value of IDCInteractive Data treasury shares amounts to £0.3m (2005: £0.3m)£0.07m (2008: £0.06m).
At 31 December 20062009 the market value of Pearson plc treasury shares was £67.6m (2005: £36.2m)£86.1m (2008: £67.0m) and the market value of IDCInteractive Data treasury shares was £74.3m (2005: £60.2m)£164.3m (2008: £157.9m).
F-64
Notes to the Consolidated Financial Statements (Continued)
| |
2729. | Other reserves and retained earnings |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Total | | | |
| | | | Translation | | | Fair value | | | other | | | Retained | |
| | Notes | | | reserve | | | reserve | | | reserves | | | earnings | |
| | | | | | | | | | | | | | | |
| | (All figures in £ millions) | |
At 1 January 2005 | | | | | | | (491 | ) | | | — | | | | (491 | ) | | | 749 | |
Net exchange differences on translation of foreign operations | | | | | | | 327 | | | | — | | | | 327 | | | | — | |
Cumulative translation adjustment disposed | | | | | | | (14 | ) | | | — | | | | (14 | ) | | | — | |
Profit for the year attributable to equity holders of the Company | | | | | | | — | | | | — | | | | — | | | | 624 | |
Dividends paid to equity holders of the Company | | | 10 | | | | — | | | | — | | | | — | | | | (205 | ) |
Equity settled transactions | | | 24 | | | | — | | | | — | | | | — | | | | 23 | |
Actuarial gains on post-retirement plans | | | 24 | | | | — | | | | — | | | | — | | | | 26 | |
Taxation on items charged to equity | | | 8 | | | | — | | | | — | | | | — | | | | 12 | |
Transition adjustment on adoption of IAS 39 | | | | | | | 3 | | | | — | | | | 3 | | | | (15 | ) |
| | | | | | | | | | | | | | | |
At 31 December 2005 | | | | | | | (175 | ) | | | — | | | | (175 | ) | | | 1,214 | |
| | | | | | | | | | | | | | | |
Net exchange differences on translation of foreign operations | | | | | | | (417 | ) | | | — | | | | (417 | ) | | | — | |
Profit for the year attributable to equity holders of the Company | | | | | | | — | | | | — | | | | — | | | | 446 | |
Dividends paid to equity holders of the Company | | | 10 | | | | — | | | | — | | | | — | | | | (220 | ) |
Equity settled transactions | | | 24 | | | | — | | | | — | | | | — | | | | 25 | |
Actuarial gains on post-retirement plans | | | 24 | | | | — | | | | — | | | | — | | | | 107 | |
Treasury shares released under employee share plans | | | 26 | | | | — | | | | — | | | | — | | | | (16 | ) |
Taxation on items charged to equity | | | 8 | | | | — | | | | — | | | | — | | | | 12 | |
| | | | | | | | | | | | | | | |
At 31 December 2006 | | | | | | | (592 | ) | | | — | | | | (592 | ) | | | 1,568 | |
| | | | | | | | | | | | | | | |
The translation reserve includes exchange differences arising from the translation of the net investment in foreign operations and of borrowings and other currency instruments designated as hedges of such investments.
On 30 September 2006,15 April 2009 the Group acquired 100%Wall Street English (WSE), China’s leading provider of premium English language training to adults. On 15 July 2009 the voting rightsGroup completed the purchase of Mergermarket, a financial information company providing information to financial institutions, corporations and their advisers. In addition, several other businesses were acquiredan additional stake in the current year including Promissor, Paravia Bruno Mondadori (PBM)Maskew Miller Longman (MML), National Evaluation Systems (NES), PowerSchool and Chancery inits South African publishing business. Provisional values for the Education business and Quote.com in IDC. None of these other acquisitions were individually material to the Group. In 2005, the amounts shown below mainly relate to the acquisition of AGS Publishing.
F-54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The assets and liabilities arising from these and other acquisitions completed in the year together with adjustments to prior year acquisitions are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2006 | | | 2005 | |
| | | | | | | | |
| | | | Mergermarket | | | Mergermarket | | | | | Other | | | Total | | | Total | |
| | | | Carrying | | | Fair value | | | Mergermarket | | | Fair | | | Fair | | | Fair | |
| | Notes | | | amount | | | adjs | | | Fair value | | | value | | | value | | | value | |
| | | | | | | | | | | | | | | | | | | | | |
| | (All figures in £ millions) | |
Property, plant and equipment | | | 11 | | | | 1 | | | | — | | | | 1 | | | | 12 | | | | 13 | | | | 7 | |
Intangible assets | | | 12 | | | | — | | | | 34 | | | | 34 | | | | 122 | | | | 156 | | | | 89 | |
Intangible assets — Pre-publication | | | 17 | | | | — | | | | — | | | | — | | | | 4 | | | | 4 | | | | 15 | |
Inventories | | | | | | | — | | | | — | | | | — | | | | 14 | | | | 14 | | | | 10 | |
Trade and other receivables | | | | | | | 11 | | | | — | | | | 11 | | | | 13 | | | | 24 | | | | 32 | |
Cash and cash equivalents | | | | | | | 14 | | | | — | | | | 14 | | | | 14 | | | | 28 | | | | 3 | |
Trade and other liabilities | | | | | | | (21 | ) | | | — | | | | (21 | ) | | | (31 | ) | | | (52 | ) | | | (42 | ) |
Financial liabilities — Borrowings | | | | | | | — | | | | — | | | | — | | | | (3 | ) | | | (3 | ) | | | — | |
Deferred income tax liabilities | | | 14 | | | | — | | | | (10 | ) | | | (10 | ) | | | (16 | ) | | | (26 | ) | | | (21 | ) |
Retirement benefit obligations | | | 24 | | | | — | | | | — | | | | — | | | | (2 | ) | | | (2 | ) | | | (2 | ) |
Provisions for other liabilities and charges | | | 22 | | | | — | | | | — | | | | — | | | | (3 | ) | | | (3 | ) | | | (1 | ) |
Equity minority interest | | | | | | | — | | | | — | | | | — | | | | (9 | ) | | | (9 | ) | | | 8 | |
| | | | | | | | | | | | | | | | | | | | | |
Net assets acquired at fair value | | | | | | | 5 | | | | 24 | | | | 29 | | | | 115 | | | | 144 | | | | 98 | |
| | | | | | | | | | | | | | | | | | | | | |
Goodwill | | | | | | | | | | | | | | | 97 | | | | 149 | | | | 246 | | | | 155 | |
| | | | | | | | | | | | | | | | | | | | | |
Total | | | | | | | | | | | | | | | 126 | | | | 264 | | | | 390 | | | | 253 | |
| | | | | | | | | | | | | | | | | | | | | |
Satisfied by: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash | | | | | | | | | | | | | | | (109 | ) | | | (273 | ) | | | (382 | ) | | | (249 | ) |
Deferred consideration | | | | | | | | | | | | | | | (17 | ) | | | — | | | | (17 | ) | | | (5 | ) |
Net prior year adjustments | | | | | | | | | | | | | | | — | | | | 9 | | | | 9 | | | | 1 | |
Total consideration | | | | | | | | | | | | | | | (126 | ) | | | (264 | ) | | | (390 | ) | | | (253 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Book value of net assets acquired | | | | | | | | | | | | | | | 5 | | | | 43 | | | | 48 | | | | 58 | |
Fair value adjustments | | | | | | | | | | | | | | | 24 | | | | 72 | | | | 96 | | | | 40 | |
| | | | | | | | | | | | | | | | | | | | | |
Fair value to the Group | | | | | | | | | | | | | | | 29 | | | | 115 | | | | 144 | | | | 98 | |
| | | | | | | | | | | | | | | | | | | | | |
The fair value adjustments relating
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 2009 | | | 2008 | |
| | | | | Wall Street
| | | | | | | | | | | | | |
| | | | | English
| | | MML
| | | Other
| | | Total
| | | Total
| |
| | Notes | | | Fair value | | | Fair value | | | Fair value | | | Fair value | | | Fair value | |
| | All figures in £ millions | |
|
Property, plant and equipment | | | 10 | | | | 6 | | | | 1 | | | | 2 | | | | 9 | | | | 6 | |
Intangible assets | | | 11 | | | | 40 | | | | 47 | | | | 55 | | | | 142 | | | | 220 | |
Intangible assets — Pre-publication | | | 20 | | | | — | | | | — | | | | 2 | | | | 2 | | | | 27 | |
Inventories | | | | | | | 1 | | | | 12 | | | | 1 | | | | 14 | | | | 7 | |
Trade and other receivables | | | | | | | 8 | | | | 7 | | | | 8 | | | | 23 | | | | 54 | |
Cash and cash equivalents | | | | | | | 3 | | | | 9 | | | | 17 | | | | 29 | | | | 16 | |
Trade and other liabilities | | | | | | | (56 | ) | | | (16 | ) | | | (19 | ) | | | (91 | ) | | | (52 | ) |
Current income tax liabilities | | | | | | | — | | | | (2 | ) | | | (2 | ) | | | (4 | ) | | | (3 | ) |
Net deferred income tax liabilities | | | 13 | | | | (9 | ) | | | (12 | ) | | | (24 | ) | | | (45 | ) | | | (4 | ) |
Provisions for other liabilities and charges | | | | | | | — | | | | — | | | | — | | | | — | | | | (26 | ) |
Retirement benefit obligations | | | | | | | — | | | | — | | | | (1 | ) | | | (1 | ) | | | — | |
Minority interest | | | | | | | — | | | | (7 | ) | | | (9 | ) | | | (16 | ) | | | (2 | ) |
Assets held for sale | | | | | | | — | | | | — | | | | — | | | | — | | | | 3 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net assets/(liabilities) acquired at fair value | | | | | | | (7 | ) | | | 39 | | | | 30 | | | | 62 | | | | 246 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Goodwill | | | 11 | | | | 108 | | | | 38 | | | | 59 | | | | 205 | | | | 153 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Increase in fair values of proportionate holding arising on stepped acquisition | | | | | | | — | | | | (23 | ) | | | — | | | | (23 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | | | | | 101 | | | | 54 | | | | 89 | | | | 244 | | | | 399 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Satisfied by: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash | | | | | | | (101 | ) | | | (49 | ) | | | (51 | ) | | | (201 | ) | | | (394 | ) |
Other consideration | | | | | | | — | | | | (5 | ) | | | — | | | | (5 | ) | | | — | |
Deferred consideration | | | | | | | — | | | | — | | | | (27 | ) | | | (27 | ) | | | — | |
Net prior year adjustments | | | | | | | — | | | | — | | | | (11 | ) | | | (11 | ) | | | (5 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total consideration | | | | | | | (101 | ) | | | (54 | ) | | | (89 | ) | | | (244 | ) | | | (399 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Carrying value of net (liabilities)/assets acquired | | | | | | | (22 | ) | | | 5 | | | | 2 | | | | (15 | ) | | | 78 | |
Fair value adjustments | | | | | | | 15 | | | | 34 | | | | 28 | | | | 77 | | | | 168 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Fair value | | | | | | | (7 | ) | | | 39 | | | | 30 | | | | 62 | | | | 246 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
F-65
Notes to the acquisition of Mergermarket are provisionalConsolidated Financial Statements (Continued)
The goodwill arising on these acquisitions results from substantial cost and willrevenue synergies and from benefits that cannot be finalised during 2007. They includeseparately recognised, such as the valuation of intangible assets and the related deferred tax effect. Adjustments to 2005 provisional fair values largely relateassembled workforce.
| | | | | | | | | | | | |
| | Wall Street English | |
| | Carrying
| | | Fair value
| | | | |
| | value | | | adjustments | | | Fair value | |
| | All figures in £ millions | |
|
Property, plant and equipment | | | 6 | | | | — | | | | 6 | |
Intangible assets | | | 16 | | | | 24 | | | | 40 | |
Inventories | | | 1 | | | | — | | | | 1 | |
Trade and other receivables | | | 8 | | | | — | | | | 8 | |
Cash and cash equivalents | | | 3 | | | | — | | | | 3 | |
Trade and other liabilities | | | (56 | ) | | | — | | | | (56 | ) |
Net deferred income tax liabilities | | | — | | | | (9 | ) | | | (9 | ) |
| | | | | | | | | | | | |
Net liabilities acquired | | | (22 | ) | | | 15 | | | | (7 | ) |
| | | | | | | | | | | | |
Goodwill | | | | | | | | | | | 108 | |
| | | | | | | | | | | | |
Total | | | | | | | | | | | 101 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | MML | |
| | Carrying
| | | Fair value
| | | | |
| | value | | | adjustments | | | Fair value | |
| | All figures in £ millions | |
|
Property, plant and equipment | | | 1 | | | | — | | | | 1 | |
Intangible assets | | | — | | | | 47 | | | | 47 | |
Inventories | | | 12 | | | | — | | | | 12 | |
Trade and other receivables | | | 7 | | | | — | | | | 7 | |
Cash and cash equivalents | | | 9 | | | | — | | | | 9 | |
Trade and other liabilities | | | (16 | ) | | | — | | | | (16 | ) |
Current income tax liabilities | | | (2 | ) | | | — | | | | (2 | ) |
Net deferred income tax liabilities | | | 1 | | | | (13 | ) | | | (12 | ) |
Minority interest | | | (7 | ) | | | — | | | | (7 | ) |
| | | | | | | | | | | | |
Net assets acquired | | | 5 | | | | 34 | | | | 39 | |
| | | | | | | | | | | | |
Goodwill | | | | | | | | | | | 38 | |
| | | | | | | | | | | | |
Increase in fair values of proportionate holding arising on stepped acquisition | | | | | | | | | | | (23 | ) |
| | | | | | | | | | | | |
Total | | | | | | | | | | | 54 | |
| | | | | | | | | | | | |
F-66
Notes to the acquisition of AGS Publishing.Consolidated Financial Statements (Continued)
Net cash outflow on acquisition:
| | | | | | | | | | | | |
| | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | |
| | (All figures in £ millions) | |
Cash — Current year acquisitions | | | (382 | ) | | | (249 | ) | | | (39 | ) |
Deferred payments for prior year acquisitions and other items | | | (9 | ) | | | — | | | | (2 | ) |
Cash and cash equivalents acquired | | | 28 | | | | 3 | | | | — | |
| | | | | | | | | |
Cash outflow on acquisition | | | (363 | ) | | | (246 | ) | | | (41 | ) |
| | | | | | | | | |
The goodwill arising on the acquisition of Mergermarket is attributable to the profitability of the acquired business and the significant synergies expected to arise.
Mergermarket
| | | | | | | | | | | | |
| | 2009 | | | 2008 | | | 2007 | |
| | All figures in £ millions | |
|
Cash — Current year acquisitions | | | (201 | ) | | | (394 | ) | | | (468 | ) |
Cash — Acquisitions yet to complete | | | (4 | ) | | | (12 | ) | | | — | |
Deferred payments for prior year acquisitions and other items | | | (32 | ) | | | (5 | ) | | | (4 | ) |
Cash and cash equivalents acquired | | | 29 | | | | 16 | | | | — | |
| | | | | | | | | | | | |
Cash outflow on acquisition | | | (208 | ) | | | (395 | ) | | | (472 | ) |
| | | | | | | | | | | | |
Wall Street English contributed £9m£29m of sales and £2m£nil to the Group’s profit before tax between the date of acquisition and the balance sheet date. MML contributed £22m 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 £15m£37m to the Group’s sales and £6m to the Group’s profit before tax between the date of acquisition and the balance sheet date.
F-55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
If the acquisitions had been completed on 1 January 2006,2009, the Group estimates that sales for the period would have been £4,199m£5,658m and profit before tax would have been £478m.
29 Non-current assets classified as held for sale£662m.
As described in note 3, on 11 December 2006 the Group announced the disposal of Pearson Government Solutions. This disposal was completed on 15 February 2007 (see note 35). The major classes of assets and liabilities comprising the operations classified as held for sale at the balance sheet date are as follows:
| | | | | | | | |
| | Notes | | | 2006 | |
| | | | | | |
| | | | (All figures in | |
| | | | £ millions) | |
Property, plant and equipment | | | 11 | | | | 9 | |
Intangible assets — Goodwill | | | 12 | | | | 221 | |
Intangible assets — Other | | | 12 | | | | 7 | |
Inventories | | | | | | | 1 | �� |
Trade and other receivables | | | | | | | 56 | |
| | | | | | |
Non-current assets classified as held for sale | | | | | | | 294 | |
| | | | | | |
Other liabilities | | | | | | | (26 | ) |
| | | | | | |
Liabilities directly associated with non-current assets classified as held for sale | | | | | | | (26 | ) |
| | | | | | |
Net assets classified as held for sale | | | | | | | 268 | |
| | | | | | |
| | | | | | | | | | | | |
| | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | |
| | (All figures in £ millions) | |
Disposal of subsidiaries | | | | | | | | | | | | |
Property, plant and equipment | | | — | | | | (48 | ) | | | — | |
Investments in associates | | | — | | | | (3 | ) | | | — | |
Deferred income tax assets | | | — | | | | 8 | | | | — | |
Other financial assets | | | — | | | | (2 | ) | | | — | |
Inventories | | | — | | | | (4 | ) | | | — | |
Trade and other receivables | | | — | | | | (59 | ) | | | (4 | ) |
Trade and other liabilities | | | (1 | ) | | | 71 | | | | 2 | |
Provisions for other liabilities and charges | | | — | | | | 3 | | | | — | |
Cash and cash equivalents | | | — | | | | (134 | ) | | | 1 | |
Equity minority interests | | | (4 | ) | | | 54 | | | | (4 | ) |
Attributable goodwill | | | (5 | ) | | | (104 | ) | | | (4 | ) |
Currency translation adjustment | | | — | | | | 14 | | | | | |
| | | | | | | | | |
Net assets disposed of | | | (10 | ) | | | (204 | ) | | | (9 | ) |
| | | | | | | | | |
Proceeds received | | | 10 | | | | 513 | | | | 8 | |
Costs | | | — | | | | (3 | ) | | | (2 | ) |
| | | | | | | | | |
Profit on sale | | | — | | | | 306 | | | | (3 | ) |
| | | | | | | | | |
| | | | | | | | | | | | |
| | 2009 | | | 2008 | | | 2007 | |
| | Total | | | Total | | | Total | |
| | All figures in £ millions | |
|
Disposal of subsidiaries | | | | | | | | | | | | |
Property, plant and equipment | | | — | | | | (7 | ) | | | (16 | ) |
Intangible assets | | | — | | | | (1 | ) | | | (6 | ) |
Intangible assets — Pre-publication | | | — | | | | (2 | ) | | | — | |
Inventories | | | — | | | | (7 | ) | | | (1 | ) |
Trade and other receivables | | | — | | | | (8 | ) | | | (95 | ) |
Cash and cash equivalents | | | — | | | | — | | | | (14 | ) |
Net deferred income tax liabilities | | | — | | | | — | | | | 2 | |
Trade and other liabilities | | | — | | | | 9 | | | | 71 | |
Retirement benefit obligations | | | — | | | | — | | | | 3 | |
Provisions for other liabilities and charges | | | — | | | | — | | | | 1 | |
Minority interest | | | — | | | | — | | | | — | |
Attributable goodwill | | | — | | | | (99 | ) | | | (242 | ) |
Cumulative translation adjustment | | | — | | | | (49 | ) | | | (53 | ) |
| | | | | | | | | | | | |
Net assets disposed | | | — | | | | (164 | ) | | | (350 | ) |
| | | | | | | | | | | | |
Cash received | | | — | | | | 114 | | | | 481 | |
Deferred receipts | | | — | | | | 2 | | | | — | |
Other proceeds received | | | — | | | | — | | | | 35 | |
Costs | | | — | | | | (5 | ) | | | (20 | ) |
| | | | | | | | | | | | |
(Loss)/profit on sale | | | — | | | | (53 | ) | | | 146 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
F-67
F-56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | |
| | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | |
Cash flow from disposals | | | | | | | | | | | | |
Cash — Current year disposals | | | 10 | | | | 513 | | | | 8 | |
Costs paid | | | — | | | | (3 | ) | | | (2 | ) |
Cash and cash equivalents/net debt disposed of | | | — | | | | (134 | ) | | | 1 | |
| | | | | | | | | |
Net cash inflow | | | 10 | | | | 376 | | | | 7 | |
| | | | | | | | | |
The 2006 disposal relates to share options exercised in IDC.
2005 disposals relate mainlyNotes to the disposalConsolidated Financial Statements (Continued)
| | | | | | | | | | | | |
| | 2009 | | | 2008 | | | 2007 | |
|
Cash flow from disposals | | | | | | | | | | | | |
Cash — Current year disposals | | | — | | | | 114 | | | | 481 | |
Cash — Transactions with minorities | | | 14 | | | | 12 | | | | 14 | |
Cash and Cash equivalents disposed | | | — | | | | — | | | | (14 | ) |
Costs paid | | | — | | | | (15 | ) | | | (12 | ) |
| | | | | | | | | | | | |
Net cash inflow | | | 14 | | | | 111 | | | | 469 | |
| | | | | | | | | | | | |
Further details of the Group’s 79% interestData Management business disposal in Recoletos Grupo de Communicación S.A..2008 are shown in note 3.
31
| |
31. | Cash generated from operations |
| | | | | | | | | | | | | | | | |
| | Notes | | | 2009 | | | 2008 | | | 2007 | |
| | | | | All figures in £ millions | |
|
Net profit | | | | | | | 462 | | | | 323 | | | | 310 | |
Adjustments for: | | | | | | | | | | | | | | | | |
Income tax | | | | | | | 198 | | | | 209 | | | | 222 | |
Depreciation | | | 10 | | | | 85 | | | | 80 | | | | 68 | |
Amortisation of purchased intangible assets | | | 11 | | | | 103 | | | | 86 | | | | 45 | |
Amortisation of other intangible assets | | | 11 | | | | 44 | | | | 30 | | | | 25 | |
Loss on sale of property, plant and equipment | | | | | | | 2 | | | | 1 | | | | 1 | |
Net finance costs | | | 6 | | | | 95 | | | | 91 | | | | 106 | |
Share of results of joint ventures and associates | | | 12 | | | | (30 | ) | | | (25 | ) | | | (23 | ) |
Loss/(profit) on sale of discontinued operations | | | 3 | | | | — | | | | 53 | | | | (146 | ) |
Goodwill impairment of discontinued operation | | | | | | | — | | | | — | | | | 97 | |
Net foreign exchange adjustment from transactions | | | | | | | (14 | ) | | | 105 | | | | 11 | |
Share-based payment costs | | | 26 | | | | 37 | | | | 33 | | | | 30 | |
Pre-publication | | | | | | | (16 | ) | | | (58 | ) | | | (38 | ) |
Inventories | | | | | | | 32 | | | | (12 | ) | | | (1 | ) |
Trade and other receivables | | | | | | | (14 | ) | | | (81 | ) | | | (5 | ) |
Trade and other liabilities | | | | | | | 103 | | | | 82 | | | | 80 | |
Retirement benefit obligations | | | | | | | (72 | ) | | | (14 | ) | | | (126 | ) |
Provisions for other liabilities and charges | | | | | | | (3 | ) | | | (9 | ) | | | 3 | |
| | | | | | | | | | | | | | | | |
Net cash generated from operations | | | | | | | 1,012 | | | | 894 | | | | 659 | |
| | | | | | | | | | | | | | | | |
Net cash generated from operations
| | | | | | | | | | | | | | | | |
| | Notes | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | |
| | | | (All figures in £ millions) | |
Net profit | | | | | | | 469 | | | | 644 | | | | 284 | |
Adjustments for: | | | | | | | | | | | | | | | | |
Tax | | | | | | | 19 | | | | 125 | | | | 70 | |
Depreciation | | | 11 | | | | 77 | | | | 80 | | | | 84 | |
Amortisation of purchased intangible assets | | | 12 | | | | 28 | | | | 11 | | | | 5 | |
Adjustment on recognition of pre-acquisition deferred tax | | | 12 | | | | 7 | | | | — | | | | — | |
Amortisation of other intangible assets | | | 12 | | | | 23 | | | | 18 | | | | 20 | |
Investment in pre-publication assets | | | 17 | | | | (213 | ) | | | (222 | ) | | | (181 | ) |
Amortisation of pre-publication assets | | | 17 | | | | 210 | | | | 192 | | | | 168 | |
Loss on sale of property, plant and equipment | | | | | | | 2 | | | | — | | | | 4 | |
Profit on sale of investments | | | | | | | — | | | | — | | | | (16 | ) |
Net finance costs | | | | | | | 74 | | | | 70 | | | | 76 | |
Share of results of joint ventures and associates | | | 13 | | | | (24 | ) | | | (14 | ) | | | (10 | ) |
(Profit)/loss on sale of subsidiaries and associates | | | | | | | — | | | | (346 | ) | | | 3 | |
Net foreign exchange(losses)/gains from transactions | | | | | | | (37 | ) | | | 39 | | | | (15 | ) |
Share-based payment costs | | | 24 | | | | 25 | | | | 23 | | | | 25 | |
Inventories | | | | | | | (16 | ) | | | (17 | ) | | | (12 | ) |
Trade and other receivables | | | | | | | (60 | ) | | | (4 | ) | | | (18 | ) |
Trade and other liabilities | | | | | | | 54 | | | | 71 | | | | 61 | |
Provisions | | | | | | | (17 | ) | | | (17 | ) | | | (24 | ) |
| | | | | | | | | |
Cash generated from operations | | | | | | | 621 | | | | 653 | | | | 524 | |
| | | | | | | | | |
Following is translated at an exchange rate approximating to the rate at the date of cash flow. The difference between this rate and the average rate used to translate profit gives rise to a review of accounting presentationcurrency adjustment in 2006, the Group has chosen to reclassify investment in pre-publication assets asreconciliation between net profit and net cash generated from operations. This alignsadjustment reflects the classificationtiming difference between recognition of profit and the related cash receipts or payments.
Included in the cash flow with the treatment of comparable items in other industries and provides more relevant information on the Group cash flow. The impact of this change is to reducenet cash generated from operations by £222m in 2005 (£181m in 2004) and increase net cash (used in)/generated from investing activities by £222m in 2005 (£181m in 2004).is an amount of £nil (2008: £nil; 2007; £7m) relating to discontinued operations.
F-68
F-57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSNotes to the Consolidated Financial Statements (Continued)
In the cash flow statement, proceeds from sale of property, plant and equipment comprise:
| | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
| | (All figures in | |
| | £ millions) | |
Net book amount | | | 10 | | | | 3 | |
Loss on sale of property, plant and equipment | | | (2 | ) | | | — | |
| | | | | | |
Proceeds from sale of property, plant and equipment | | | 8 | | | | 3 | |
| | | | | | |
| | | | | | | | | | | | |
| | 2009 | | | 2008 | | | 2007 | |
| | All figures in £ millions | |
|
Net book amount | | | 3 | | | | 3 | | | | 15 | |
Loss on sale of property, plant and equipment | | | (2 | ) | | | (1 | ) | | | (1 | ) |
| | | | | | | | | | | | |
Proceeds from sale of property, plant and equipment | | | 1 | | | | 2 | | | | 14 | |
| | | | | | | | | | | | |
The principal other non-cash transactions are movements in finance lease obligations of £4m (2005: £nil)£8m (2008: £2m; 2007 £4m).
32 Contingencies
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.
33 Commitments
CapitalThere were no commitments
Capital for capital expenditure contracted for at the balance sheet date but not yet incurred is as follows:incurred.
| | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
| | (All figures in | |
| | £ millions) | |
Property, plant and equipment | | | — | | | | 1 | |
| | | | | | |
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:
| | | | | | | | |
| | 2006 | | | 2005 | |
| | | | | | |
| | (All figures in | |
| | £ millions) | |
Not later than one year | | | 123 | | | | 132 | |
Later than one year and not later than two years | | | 113 | | | | 117 | |
Later than two years and not later than three years | | | 103 | | | | 108 | |
Later than three years and not later than four years | | | 90 | | | | 97 | |
Later than four years and not later than five years | | | 83 | | | | 81 | |
Later than five years | | | 857 | | | | 915 | |
| | | | | | |
| | | 1,369 | | | | 1,450 | |
| | | | | | |
F-58
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | |
| | 2009 | | | 2008 | |
| | All figures in £ millions | |
|
Not later than one year | | | 153 | | | | 149 | |
Later than one year and not later than two years | | | 144 | | | | 138 | |
Later than two years and not later than three years | | | 129 | | | | 129 | |
Later than three years and not later than four years | | | 114 | | | | 118 | |
Later than four years and not later than five years | | | 99 | | | | 108 | |
Later than five years | | | 848 | | | | 970 | |
| | | | | | | | |
| | | 1,487 | | | | 1,612 | |
| | | | | | | | |
| |
34. | Related party transactions |
34 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.
Key management personnel — Key management personnel are 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.
35 Events after the balance sheet date
F-69
On 15 February 2007 the Group completed the disposal of Pearson Government Solutions, its Government services business, to Veritas Capital. Sale proceeds consist of $560m in cash, $40m in preferred stock and 10% of the equity of the business. The Group expects to make a post-tax loss on the disposal as the capital gain for tax purposes will exceed any book gain.
F-59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
3635. | Summary of principal differences between International Financial Reporting Standards and United States of America generally accepted accounting principlesEvents after the balance sheet date |
The accompanying consolidated financial statements have been prepared in accordance with EU-adopted International Financial Reporting 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.
Reconciliation of consolidated profit for the financial year
| | | | | | | | | | | | | | | | | |
| | | | Year ended December 31 | |
| | | | | |
| | Note | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | |
| | | | £m | | | £m | | | £m | |
Profit for the financial year under IFRS | | | | | | | 446 | | | | 624 | | | | 262 | |
US GAAP adjustments: | | | | | | | | | | | | | | | | |
| Intangible amortization | | | (i) | | | | (50 | ) | | | (60 | ) | | | (74 | ) |
| Discontinued operations | | | (iii) | | | | (71 | ) | | | — | | | | (2 | ) |
| Leases | | | (v) | | | | (5 | ) | | | — | | | | 3 | |
| Disposal adjustments | | | (iv) | | | | — | | | | (119 | ) | | | — | |
| Pensions and other post-retirement benefits | | | (vi) | | | | (19 | ) | | | (26 | ) | | | (23 | ) |
| Share-based payments | | | (vii) | | | | — | | | | (4 | ) | | | (13 | ) |
| Derivative financial instruments | | | (viii) | | | | (11 | ) | | | (12 | ) | | | (23 | ) |
| Acquisition adjustments | | | (xii) | | | | (3 | ) | | | 1 | | | | — | |
| Partnerships and associates | | | (x) | | | | (1 | ) | | | (2 | ) | | | — | |
| Minority interests | | | (xi) | | | | 1 | | | | 2 | | | | — | |
| Other | | | | | | | (2 | ) | | | (9 | ) | | | (1 | ) |
| Taxation effect of US GAAP adjustments | | | (xiv) | | | | 56 | | | | 16 | | | | 53 | |
| | | | | | | | | | | | |
Total US GAAP adjustments | | | | | | | (105 | ) | | | (213 | ) | | | (80 | ) |
| | | | | | | | | | | | |
Net income under US GAAP | | | | | | | 341 | | | | 411 | | | | 182 | |
| | | | | | | | | | | | |
Profit from continuing operations (less (benefit from)/charge for applicable taxes 2006: £(45)m, 2005: £100m, 2004: £2m) | | | | | | | 398 | | | | 164 | | | | 153 | |
(Loss)/profit from discontinued operations (less charge for applicable taxes 2006: £8m; 2005: £8m, 2004: £15m) | | | | | | | (57 | ) | | | 8 | | | | 29 | |
Profit on disposal of discontinued operations (less charge for applicable taxes 2006: £nil; 2005: £1m, 2004: £nil) | | | | | | | — | | | | 239 | | | | — | |
| | | | | | | | | | | | |
Net income under US GAAP | | | | | | | 341 | | | | 411 | | | | 182 | |
| | | | | | | | | | | | |
F-60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | |
| | | | Year ended December 31 | |
| | | | | |
| | Note | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | |
Presentation of earnings per equity share under US GAAP | | | (xiii) | | | | | | | | | | | | | |
Earnings/(loss) per equity share | | | | | | | (p | ) | | | (p | ) | | | (p | ) |
Basic: | | | | | | | | | | | | | | | | |
Continuing operations | | | | | | | 49.9 | | | | 20.5 | | | | 19.2 | |
Discontinued operations | | | | | | | (7.2 | ) | | | 31.0 | | | | 3.6 | |
| | | | | | | | | | | | |
Total | | | | | | | 42.7 | | | | 51.5 | | | | 22.8 | |
| | | | | | | | | | | | |
Diluted: | | | | | | | | | | | | | | | | |
Continuing operations | | | | | | | 49.8 | | | | 20.5 | | | | 19.2 | |
Discontinued operations | | | | | | | (7.2 | ) | | | 30.9 | | | | 3.6 | |
| | | | | | | | | | | | |
Total | | | | | | | 42.6 | | | | 51.4 | | | | 22.8 | |
| | | | | | | | | | | | |
Average shares outstanding (millions) | | | | | | | 798.4 | | | | 797.9 | | | | 795.6 | |
Dilutive effect of stock options (millions) | | | | | | | 1.5 | | | | 1.1 | | | | 1.1 | |
| | | | | | | | | | | | |
Average number of shares outstanding assuming dilution (millions) | | | | | | | 799.9 | | | | 799.0 | | | | 796.7 | |
| | | | | | | | | | | | |
Reconciliation of consolidated shareholders’ funds
| | | | | | | | | | | | | |
| | | | Year ended | |
| | | | December 31 | |
| | | | | |
| | Note | | | 2006 | | | 2005 | |
| | | | | | | | | |
| | | | £m | | | £m | |
Shareholders’ funds under IFRS | | | | | | | 3,476 | | | | 3,564 | |
US GAAP adjustments: | | | | | | | | | | | | |
| Goodwill | | | (i) | | | | 76 | | | | 81 | |
| Intangibles | | | (i),(ii) | | | | 158 | | | | 231 | |
| Discontinued operations | | | (iii) | | | | (64 | ) | | | 7 | |
| Leases | | | (v) | | | | (5 | ) | | | — | |
| Pensions and other post-retirement benefits | | | (vi) | | | | — | | | | 61 | |
| Derivative financial instruments | | | (viii) | | | | 5 | | | | 15 | |
| Share-based payments | | | (vii) | | | | (3 | ) | | | — | |
| Acquisition adjustments | | | (xii) | | | | 24 | | | | 26 | |
| Partnerships and associates | | | (x) | | | | 9 | | | | 15 | |
| Minority interests | | | (xi) | | | | (26 | ) | | | (30 | ) |
| Other | | | | | | | (8 | ) | | | (6 | ) |
| Taxation effect of US GAAP adjustments | | | (xiv) | | | | (61 | ) | | | (126 | ) |
| | | | | | | | | |
Total US GAAP adjustments | | | | | | | 105 | | | | 274 | |
| | | | | | | | | |
Shareholders’ funds under US GAAP | | | | | | | 3,581 | | | | 3,838 | |
| | | | | | | | | |
F-61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the principal differences and additional disclosures applicable toDuring January 2010, the Group are set out below:
| |
| (i) Goodwill and other intangibles |
Both IFRS and US GAAP require purchase consideration to be allocated to the net assets acquired at their fair value onannounced that Interactive Data was undertaking a preliminary review of strategic alternatives for its business. At the date of acquisition, withthis report, the difference between the consideration and the fair valueoutcome of the identifiable net assets recorded as goodwill.review is still uncertain.
Goodwill is tested for impairment on an annual basis in accordance with IFRS
On 3‘Business Combinations’.
For February 2010 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 reporting 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 other than goodwill 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.
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 in accordance with the transition rules of IFRS 1 but has been capitalized under US GAAP. In respect of acquisitions between January 1, 1998 and December 31, 2002, no acquired intangible assets other than goodwill 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 recognized when paid (see acquisition adjustments (xii) below).
F-62
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The movement of the US GAAP adjustments to goodwill and intangibles in the years ended December 31, 2006 and 2005 is as follows:
| | | | | | | | |
| | Goodwill | | | Intangible assets | |
| | | | | | |
| | £m | | | £m | |
Year ended December 31, 2004 | | | 129 | | | | 267 | |
Foreign exchange differences | | | (9 | ) | | | 28 | |
Amortization | | | — | | | | (60 | ) |
Net movement in deferred consideration | | | (39 | ) | | | — | |
Acquisitions | | | — | | | | (4 | ) |
| | | | | | |
Year ended December 31, 2005 | | | 81 | | | | 231 | |
| | | | | | |
Foreign exchange differences | | | 1 | | | | (25 | ) |
Amortization | | | — | | | | (50 | ) |
Net movement in deferred consideration | | | (4 | ) | | | — | |
Acquisitions | | | (2 | ) | | | 2 | |
| | | | | | |
Year ended December 31, 2006 | | | 76 | | | | 158 | |
| | | | | | |
| |
| (ii) Pre-publication assets |
In accordance with IAS 1 ‘Presentation of Financial Statements’ the Group classifies its pre-publication assets as current intangibles under IFRS, as they are expected to be consumed within their normal identifiable operating cycle. Under IFRS an asset shall be disclosed as current when it is expected to be realized in, or is intended for sale or consumption in, the entity’s normal operating cycle, provided that the operating cycle is clearly identifiable. Where the operating cycle is not clearly identifiable its duration is assumed to be twelve months. Under US GAAP, these assets are classified as long-term assets, as the benefit will accrue to several future annual periods, in accordance with ARB 43 ‘Restatement & Revision of Accounting Research Bulletin (Working Capital)’. As a result of this difference in classification, non-current intangible assets are £402m higher under US GAAP in 2006 than under IFRS (2005: £426m higher) and current intangible assets under US GAAP are £nil for all periods presented.
The Company determines a normal operating cycle under IFRS separately for each entity/ cash generating unit within the group with distinct economic characteristics. Each of its education businesses has an operating cycle which is clearly identifiable. The duration of the cycle is primarily based on the expected period over which the educational programs and titles will generate cash flows, and also takes account of the time it takes to produce the educational programs. The pre-publication assets are amortized from the date of first delivery of the program. The normal operating cycle commences when pre-publication activity starts and typically ends 5 years after the date of first delivery for the School, Higher Education and Professional segments, and 4 years after the date of first delivery for the Penguin segment.
Under US GAAP, the Company’s investment in pre-publication assets has been classified as an investing activity, whereas under IFRS, investment in pre-publication assets has been classified as an operating activity. Consequently under US GAAP, net cash generated from operations, in respect of this item, is £213m higher in 2006 than under IFRS (£222m higher in 2005 and £181m higher in 2004) while the cash flow from investing activities in 2006 is £213m lower than under IFRS (£222m lower in 2005 and £181m lower in 2004).
| |
| (iii) Discontinued operations |
Discontinued operations comprise the differences between IFRS and US GAAP in respect of Pearson Government solutions for 2006, 2005 and 2004 and Recoletos for 2005 and 2004.
F-63
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The (loss)/profit before tax, assets and liabilities in respect of discontinued operations under US GAAP are as follows:
| | | | | | | | | | | | |
| | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | |
| | £m | | | £m | | | £m | |
Total (loss)/profit before tax in respect of discontinued operations | | | (49 | ) | | | 17 | | | | 49 | |
Assets in respect of discontinued operations | | | 240 | | | | 388 | | | | 729 | |
Liabilities in respect of discontinued operations | | | (27 | ) | | | (51 | ) | | | (183 | ) |
Under US GAAP, the Company has included the Cumulative Translation Adjustment (CTA) relating to the assets held for sale in relation to Government Solutions in its impairment analysis as required by EITF 01-05. As the resulting carrying value exceeds the fair value less cost to sell, the Group has recognized an impairment loss of £70m in its US GAAP income statement for the year ended December 31, 2006. The CTA will be released to net income upon the completion of the disposal of Government Solutions in 2007.
Under IFRS, the Group has measured its assets and liabilities that have been classified as held for sale at the lower of its carrying amount and fair value less costs to sell. IFRS does not require the CTA to be included in the carrying value when assessing an asset held for disposal for impairment. As a result, there is no impairment loss recognized in the Group’s financial statements under IFRS in 2006.
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| (iv) Disposal adjustments |
In 2005 and 2004 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. There were no corresponding disposal adjustments in 2006.
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 theFT Publishing 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.
The reconciling items between IFRS and US GAAP in respect of disposals are summarized as follows:
| | | | | | | | | | | | |
| | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | |
| | £m | | | £m | | | £m | |
Difference in carrying value on disposal | | | — | | | | (86 | ) | | | — | |
Cumulative translation adjustment | | | — | | | | (33 | ) | | | — | |
| | | | | | | | | |
Total US GAAP differences in respect of disposals | | | — | | | | (119 | ) | | | — | |
| | | | | | | | | |
During the year, the Group disposed of one of its properties in a sale and lease back transaction. The resulting lease qualifies under both IFRS and US GAAP as an operating lease. A GAAP difference arises as under US GAAP any gain that arises on the sale is deferred and spread over the remaining life of the lease. In accordance with IAS 17, the gain on disposal was recognized immediately in the income statement as the transaction was established at fair value.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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(vi) | 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 plan is a funded plan operated in the UK.
In 2006, the Group adopted FAS 158 ‘Employers’ accounting for defined benefit pension and other post retirement plans’, this applies in conjunction with FAS 87 ‘Employers’ Accounting for Pensions’. FAS 87 has been applied during 2004 and 2005.
Under IFRS, the expense of defined benefit pension plan 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 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 December 31, 2005 and December 31, 2006. 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 both FAS 158 and FAS 87, in addition to the pension expense items recognized under IFRS, actuarial gains and losses in excess of the corridor are recognized over the average remaining service life of employees. 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. Under US GAAP this results in an £19m increase in the pension charge in 2006 (2005: £26m; 2004: £23m).
Under FAS 87, the accrual or prepayment recognized in the balance sheet in respect of pensions represents the cumulative income statement charges net of contributions to the scheme since transition to the standard. In addition to this amount, FAS 87 requires that an additional minimum liability is recorded for any plan where the accumulated benefit obligation exceeds the fair value of the plan assets by an amount greater than the liability recognized in the balance sheet.
Under FAS 158, the provision or surplus recognized on the balance sheet represents the difference between the fair value of plan assets and the projected benefit obligation.
The adoption of FAS 158 resulted in the recognition of a pension obligation representing the excess of the defined benefit obligation over the fair value of assets. The effect was an increase in the pension liability under US GAAP of £44m. At December 31, 2006 there is no difference between the pension liabilities under IFRS and US GAAP. For the year ended December 31, 2005 the Group had recognized prepaid pension costs amounting to £57m and a minimum pension liability of £298m in respect of pensions and accrued pension costs amounting to £49m in respect of post-retirement benefit plans in line with FAS 87.
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(vii) | 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.
The Group adopted FAS 123(R) as at January 1, 2006 using the ‘Modified Prospective Application’ transition method. In 2006, differences between US GAAP and IFRS relate to the treatment of dual-indexed awards which are considered equity-settled under IFRS. Under US GAAP these awards are classified as liabilities and revalued to their fair value at each balance sheet date. On adoption the Group reclassified £1.2m relating to dual-indexed awards from equity to liabilities and revalued them. The revaluation of these awards
F-65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
on adoption and at year-end resulted in an increase of the share-based payment charge by £1m. This increase was offset by differences in the IFRS and US GAAP charge due to the different treatment of forfeitures in prior years.
In 2005, differences between the US GAAP and IFRS charge were 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 £5m (2004: £13m). The remainder of the adjustment in 2005 relates to the treatment of forfeitures.
Differences also arise between US GAAP and IFRS on the calculation of deferred tax on share-based payments. Whereas under IFRS the deferred tax benefit is calculated based on the intrinsic value of the option/share at the balance sheet date, FAS 123(R) requires the tax benefit to be calculated based on the compensation expense recognized during the year.
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(viii) | 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.
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 hedged 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.
Under US GAAP, certain of the Group’s financial instruments met the designation and testing requirements for hedge accounting from January 1, 2004. Under IFRS, hedge accounting has only been available from the date of adoption of IAS 39, on January 1, 2005. This additional year of hedge accounting under US GAAP gives rise to a difference between IFRS and US GAAP in respect of shareholders’ funds.
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.
The Group recharges some of its freight revenue to its customers. As this income is incidental to the Group’s main revenue generating business, this income is classified as other income under IFRS as disclosed in note 5 to these financial statements. Under US GAAP freight recharges should be recognized as revenue in accordance with EITF 00-10 ‘Accounting for Shipping and Handling Fees and Costs’. The Group has also
F-66
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
reclassified distribution and subrights income to revenue for all years presented. This resulted in an increase in sales under US GAAP of £94m in 2006 (2005: £84m; 2004: £83m).
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(x) | 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 IFRS, when less than 100% of a subsidiary has been acquired, minority interest in a business combination 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, 2006, 2005 and 2004, 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.
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| (xii) Acquisition adjustments |
Under US GAAP, consideration related toannounced the acquisition of businesses contingent onMedley Global Advisors LLC, a future event such as achieving specific earnings levels in future periods, that is treated as additional purchase price is recorded only when the specified conditions are met and the consideration determinable, in accordance withSFAS 141 “Business Combinations.”Consideration relatedpremier provider of macro policy intelligence to the acquisition of a business contingent on a future event that is treated as compensation expense is recorded over the period in which the compensation is earned. 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 paidworld’s top investment banks, hedge funds and can be measured reliably.asset managers for $15.5m.
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| (xiii) Presentation of earnings per equity share |
Under US GAAP an entity must present basic and diluted EPS for discontinued operations or the cumulative effect of an accounting change. Accordingly, the Group has presented EPS for income from continuing operations, discontinued operations and net income.
Under IFRS, IAS 12“Income Taxes”, deferred tax is recognized if it is probable that sufficient taxable profit is available against which the temporary difference can be utilized. Under US GAAP, deferred tax is recognized in full but then reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)SIGNATURES
The reconciling items in 2006, 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 | |
| | 2006 | | | 2006 | | | 2005 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | | | | |
| | £m | | | £m | | | £m | | | £m | | | £m | |
Tax effect of GAAP adjustments on: | | | | | | | | | | | | | | | | | | | | |
Goodwill and intangible amortization | | | 20 | | | | (94 | ) | | | 18 | | | | (121 | ) | | | 17 | |
Derivative financial instruments | | | 3 | | | | (1 | ) | | | 3 | | | | (5 | ) | | | 38 | |
Options, pensions, disposals and other adjustments | | | 33 | | | | 34 | | | | (6 | ) | | | — | | | | (2 | ) |
| | | | | | | | | | | | | | | |
Total taxation effect of US GAAP adjustments | | | 56 | | | | (61 | ) | | | 15 | | | | (126 | ) | | | 53 | |
| | | | | | | | | | | | | | | |
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.
Valuation allowances have previously been recognized in respect of the tax losses carried forward. Following a review of the tax position in the US and the likely utilization of operating losses, the Group has released its valuation allowance in respect of the deferred tax asset relating to its US share-based payment plans amounting to £38m in 2006. These plans are not in the money and, consequently, a deferred tax asset has not been recognized in line with IAS 12. FAS 123(R) only permits a valuation allowance where there are insufficient future taxable profits to utilize the reversal of the temporary difference.
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| Other disclosures required by US GAAP |
Consolidation
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 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.
Use of estimates
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.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
U.S. Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an Interpretation of FASB Statement No. 109. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006 with the cumulative effect of a change in accounting principle recorded as an adjustment to opening retained earnings. The provisions of FIN 48 are to be applied to all tax positions upon initial adoption of this standard. FIN 48 requires that the Group recognizes in the financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognizing, classification, interest and penalties, accounting in interim periods, disclosure, and transition attributable to the tax position. Management is currently assessing the impact of FIN 48 on the Group.
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| International Accounting Pronouncements |
IFRS 7 ‘Financial Instruments: Disclosures’ (effective from January 1, 2007). IFRS 7 introduces new disclosures of qualitative and quantitative information about exposure to risks arising from financial instruments, including specific minimum disclosures about credit risk, liquidity risk and market risk. Management is currently assessing the impact of IFRS 7 on the Group’s financial statements.
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 and the management of the capital of an entity. Management is currently assessing the impact of the complementary amendment to IAS 1 on the Group’s financial statements
IFRS 8 ‘Operating Segments’ (effective January 1, 2009). IFRS 8 requires an entity to adopt the ‘management approach’ to reporting on the financial performance of its operating segments, revise explanations of the basis on which the segment information is prepared and provide reconciliations to the amounts recognized in the income statement and balance sheet. Management is currently assessing the impact of IFRS 8 on the Group’s financial statements.
IFRIC 8 ‘Scope of IFRS 2’ (effective for annual periods beginning on or after May 1, 2006). IFRIC 8 requires consideration of transactions involving the issuance of equity instruments — where the identifiable consideration received is less than the fair value of the equity instruments issued — to establish whether or not they fall within the scope of IFRS 2. The Group will apply IFRIC 8 from January 1, 2007, but it is not expected to have any impact on the Group’s accounts.
IFRIC 10 ‘Interim Financial Reporting and Impairment’ (effective for annual periods beginning on or after November 1, 2006). IFRIC 10 prohibits impairment losses recognized in an interim period on goodwill, investments in equity instruments and investments in financial assets carried at cost to be reversed at a subsequent balance sheet date. The Group will apply IFRIC 10 from January 1, 2007 but it is not expected to have a significant impact on the Group’s accounts.
IFRIC 7 ‘Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies’ (effective for annual reporting periods beginning on or after March 1, 2006). IFRIC 7 provides guidance on how to apply the requirements of IAS 29 in a reporting period in which an entity identifies the existence of hyperinflation in the economy of its functional currency, when the economy was not hyperinflationary in the prior period. As none of the Group entities have a currency of a hyperinflationary economy as their functional currency, IFRIC 7 is not relevant to the Group’s operations.
IFRIC 9 ‘Reassessment of Embedded Derivatives’ (effective for annual periods beginning on or after June 1, 2006). IFRIC 9 requires an entity to assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. The Group does not expect IFRIC 9 to have a material impact.
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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.
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| Pearson plc |
|
| /s/ Robin Freestone |
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| Robin Freestone |
| Chief Financial Officer |
Pearson plc
Robin Freestone
Chief Financial Officer
Date: April 30, 2007March 31, 2009
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