Notes to the consolidated financial statements
Notes contents11. 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 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 |
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 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 content, technology and software rights. Amortisation of £5m (2008: £5m) is included in the income statement in cost of goods sold and £142m (2008: £111m) in administrative and other expenses.
Impairment tests for cash-generating units containing goodwill
Impairment tests have been carried out where appropriate as described below. The recoverable amount for each unit tested exceeds its carrying value.
Goodwill is allocated to 14 cash-generating units (CGUs) within the business segments as follows:
All figures in £ millions | 2009 | 2008 | |
---|---|---|---|
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 now advanced to a point where, from 1 January 2010, these companies will be 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 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 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.