Annual report and accounts 2008

Notes contentsNotes to consolidated financial statements

11. Intangible assets

All figures in £ millions	Goodwill	Software	Acquired customer lists & relationships	Acquired trademarks & brands	Acquired publishing rights	Other intangibles acquired	Total
Cost
At 1 January 2007	3,271	201	113	26	96	53	3,760
Exchange differences	(4)	(2)	—	1	3	—	(2)
Additions — internal development	—	20	—	—	—	—	20
Additions — purchased	—	13	—	—	—	—	13
Disposals	(34)	(19)	(2)	—	(3)	2	(56)
Acquisition through business combination	304	4	76	35	40	44	503
Transfer to non-current assets held for sale	(194)	—	—	—	—	—	(194)
At 31 December 2007	3,343	217	187	62	136	99	4,044
Exchange differences	1,082	71	77	24	31	62	1,347
Additions — internal development	—	29	—	—	—	—	29
Additions — purchased	—	16	—	—	—	—	16
Disposals	(8)	(27)	—	—	—	—	(35)
Acquisition through business combination	153	17	77	42	—	97	386
Disposal through business disposal	—	(1)	—	—	(2)	—	(3)
Transfer to Pre-publication	—	(12)	—	—	—	—	(12)
At 31 December 2008	4,570	310	341	128	165	258	5,772

All figures in £ millions	Goodwill	Software	Acquired customer lists & relationships	Acquired trademarks & brands	Acquired publishing rights	Other intangibles acquired	Total
Amortisation
At 1 January 2007	—	(135)	(15)	(1)	(15)	(13)	(179)
Exchange differences	—	1	—	—	—	1	2
Charge for the year	—	(25)	(13)	(3)	(17)	(12)	(70)
Disposals	—	19	—	—	—	—	19
Acquisition through business combination	—	(2)	—	—	—	—	(2)
Transfer to non-current assets held for sale	—	—	—	—	—	—	—
At 31 December 2007	—	(142)	(28)	(4)	(32)	(24)	(230)
Exchange differences	—	(50)	(15)	(3)	(13)	(12)	(93)
Charge for the year	—	(30)	(24)	(10)	(25)	(27)	(116)
Disposals	—	27	—	—	—	—	27
Acquisition through business combination	—	(13)	—	—	—	—	(13)
Disposal through business disposal	—	1	—	—	1	—	2
Transfer to Pre-publication	—	4	—	—	—	—	4
At 31 December 2008	—	(203)	(67)	(17)	(69)	(63)	(419)
Carrying amounts
At 1 January 2007	3,271	66	98	25	81	40	3,581
At 31 December 2007	3,343	75	159	58	104	75	3,814
At 31 December 2008	4,570	107	274	111	96	195	5,353

Goodwill
The goodwill carrying value of £4,570m relates to acquisitions completed after 1 January 1998. Prior to 1 January 1998 all goodwill was written off to reserves on the date of acquisition. £3,309m of the carrying value relates to acquisitions completed between 1 January 1998 and 31 December 2002 and £1,261m relates to acquisitions completed after 1 January 2003 (the date of transition to IFRS).

For acquisitions completed between 1 January 1998 and 31 December 2002 no value was ascribed to intangibles other than goodwill and the goodwill on each acquisition was amortised over a period of up to 20 years. On adoption of IFRS on 1 January 2003, the Group chose not to restate the goodwill balance and at that date the balance was frozen (i.e. amortisation ceased). If goodwill had been restated then a significant value would have been ascribed to other intangible assets, which would be subject to amortisation, and the carrying value of goodwill would be significantly lower.

For acquisitions completed after 1 January 2003 value has been ascribed to other intangible assets, which are amortised, with only the remaining difference between the purchase price and the fair value of net assets acquired being allocated to goodwill.

Other intangible assets
Other intangibles acquired include content, technology and software rights. Amortisation of £5m (2007: £3m) is included in the income statement in cost of goods sold and £111m (2007: £67m) in administrative and other expenses.

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 14 cash-generating units (CGUs) within the business segments as follows:

All figures in £ millions	Notes	2008	2007
US School Curriculum		937	677
US School Assessment and Information		722	414
US Higher Education		1,164	839
Canada		173	155
International Education Publishing		315	270
International Education Assessment and Testing		241	194
Professional Publishing		15	10
Professional Assessment and Testing		254	181
Pearson Education total		3,821	2,740
Financial Times		46	12
Mergermarket		130	126
Interactive Data		208	147
FT Group total		384	285
Penguin US		216	155
Penguin UK		95	111
Pearson Australia		54	52
Penguin total		365	318
Total goodwill — continuing operations		4,570	3,343
Goodwill held for sale	31	—	96
Total goodwill		4,570	3,439

During 2008, after the change in organisational structure the CGUs were reorganised and goodwill reallocated to the units affected. 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 10.2% to 11.7% for the Pearson Education businesses (2007: 10.5% to 12.0%), 10.8% to 20.5% for the FT Group businesses (2007: 10.4% to 17.2%) and 8.8% to 10.4% for the Penguin businesses (2007: 8.9% to 11.7%).

Perpetuity growth rates — The cash flows subsequent to the approved budget period are based upon the long-term historic growth rates of the underlying territories in which the CGU operates and reflect the long-term growth prospects of the sectors in which the CGU operates. A perpetuity growth rate of 2.0% was used for all CGUs in 2008 (a range from 2.5% to 3.5% in 2007). The perpetuity growth rates are consistent with appropriate external sources for the relevant markets.

Cash flow growth rates — The cash flow growth rates are derived from management’s latest estimates of forecast sales taking into consideration past experience of operating margins achieved in the CGU. Historically, such forecasts have been reasonably accurate.

SensitivitiesThe Group’s impairment review is sensitive to a change in the key assumptions used, most notably the discount rates, the perpetuity growth rates and expected future cash flows. Based on the Group’s sensitivity analysis, a reasonably possible change in the discount rate or perpetuity growth rate could cause an impairment in either the US School Curriculum or Penguin UK CGUs.

The fair value of US School Curriculum is 8% or approximately £77m above its carrying value, but an increase of 0.5 percentage points in the discount rate or a reduction of 0.6 percentage points in the perpetuity growth rate would cause the value in use to fall below the carrying value.

The fair value of Penguin UK is 24% or approximately £44m above its carrying value, but an increase of 1.4 percentage points in the discount rate or a reduction of 1.7 percentage points in the perpetuity growth rate would cause the value in use to fall below the carrying value.