Pearson

Annual Report and Accounts 2010

Notes to the consolidated financial statements

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11. Intangible assets

All figures in £ millions Goodwill Software Acquired customer
lists and relationships
Acquired trademarks and brands Acquired publishing rights Other intangibles acquired Total
Cost
At 1 January 2009 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
Exchange differences 140 9 10 4 9 10 182
Additions – internal development 41 41
Additions – purchased 15 15
Disposals (11) (18) (29)
Acquisition through business combination 288 9 159 40 6 76 578
Disposal through business disposal (195) (43) (85) (1) (41) (365)
At 31 December 2010 4,568 352 431 186 230 306 6,073
All figures in £ millions Goodwill Software Acquired customer
lists and relationships
Acquired trademarks and brands Acquired publishing rights Other intangibles acquired Total
Amortisation
At 1 January 2009 (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)
Exchange differences (5) (3) (2) (2) (1) (13)
Charge for the year (51) (39) (12) (24) (38) (164)
Disposals 16 16
Acquisition through business combination (5) (5)
Disposal through business disposal 19 35 28 82
At 31 December 2010 (250) (103) (41) (111) (101) (606)
Carrying amounts
At 1 January 2009 4,570 107 274 111 96 195 5,353
At 31 December 2009 4,346 115 251 116 130 171 5,129
At 31 December 2010 4,568 102 328 145 119 205 5,467

Goodwill

The goodwill carrying value of £4,568m 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. £3,090m of the carrying value relates to acquisitions completed between
1 January 1998 and 31 December 2002 and £1,478m 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.

Other intangible assets

Other intangibles acquired include content, technology, contracts and software rights. Amortisation of £3m (2009: £5m) is included in the income statement in cost of goods sold and £149m (2009: £126m) in administrative and other expenses. In 2010 £12m (2009: £16m) of amortisation relates to discontinued operations.

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 in respect of continuing operations is allocated to 12 cash-generating units (CGUs) within the business segments as follows:

All figures in £ millions 2010 2009
US Education Publishing 1,976 1,876
US School Assessment and Information 683 652
Canada 197 181
International Education Publishing 686 468
International Education Assessment and Testing 227 222
Professional Publishing 13 13
Professional Assessment and Training 287 226
Pearson Education total 4,069 3,638
Financial Times 48 43
Mergermarket 136 125
FT Group total 184 168
Penguin US 196 190
Penguin UK 103 103
Penguin Asia Pacific & International 16 63
Penguin total 315 356
Continuing operations 4,568 4,162
Interactive Data 184
Total goodwill 4,568 4,346

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 advanced to a point where, from 1 January 2010, these companies have been combined into one CGU for impairment review purposes.

The recoverable amount of each CGU is based on value in use calculations. Goodwill is tested for impairment annually. Other than goodwill there are no intangible assets with indefinite lives. The goodwill is generally denominated in the currency of the relevant cash flows and therefore the impairment review 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-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 11.2% to 12.1% for the Pearson Education businesses (2009: 10.9% to 11.8%), 12.9% to 20.0% for the FT Group businesses (2009: 12.7% to 18.1%) and 10.5% to 13.0% for the Penguin businesses (2009: 9.5% to 11.4%).

Perpetuity growth rates

A perpetuity growth rate of 2.0% was used for cash flows subsequent to the approved budget period for all CGUs in 2010 (2009: 2.0%). This perpetuity growth rate is a conservative rate and is considered to be lower than the long-term historic growth rates of the underlying territories in which the CGU operates and the long-term growth rate prospects of the sectors in which the CGU operates.

Cash flow growth rates

The cash flow growth rates are derived from management’s latest forecast of sales taking into consideration 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 any of these assumptions is unlikely to cause an impairment in any of the CGUs.