11. Intangible assets
| All figures in £ millions | Goodwill | Software | Acquired publishing rights |
Other intangibles acquired |
Total intangibles acquired |
Total |
|---|---|---|---|---|---|---|
| Cost | ||||||
| At 1 January 2006 | 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 |
| Exchange differences | (4) | (2) | 3 | 1 | 4 | (2) |
| Additions | – | 33 | – | – | – | 33 |
| Disposals | (34) | (19) | (3) | – | (3) | (56) |
| Acquisition through business combination |
304 | 4 | 40 | 155 | 195 | 503 |
| Transfer to non-current assets held for sale |
(194) | – | – | – | – | (194) |
| At 31 December 2007 | 3,343 | 217 | 136 | 348 | 484 | 4,044 |
| All figures in £ millions | Goodwill | Software | Acquired publishing rights |
Other intangibles acquired |
Total intangibles acquired |
Total |
|---|---|---|---|---|---|---|
| Amortisation | ||||||
| At 1 January 2006 | – | (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) |
| Exchange differences | – | 1 | – | 1 | 1 | 2 |
| Charge for the year | – | (25) | (17) | (28) | (45) | (70) |
| Disposals | – | 19 | – | – | – | 19 |
| Acquisition through business combination |
– | (2) | – | – | – | (2) |
| Transfer to non-current assets held for sale |
– | – | – | – | – | – |
| At 31 December 2007 | – | (142) | (32) | (56) | (88) | (230) |
| Carrying amounts | ||||||
| At 1 January 2006 | 3,654 | 68 | 63 | 69 | 132 | 3,854 |
| At 31 December 2006 | 3,271 | 66 | 81 | 163 | 244 | 3,581 |
| At 31 December 2007 | 3,343 | 75 | 104 | 292 | 396 | 3,814 |
Other intangibles acquired include customer lists and relationships, software rights, technology, trade names and trademarks. Amortisation of £3m (2006: £4m) is included in the income statement in cost of goods sold and £67m (2006: £47m) in administrative and other expenses. In 2007 £nil (2006: £3m) of software 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 is allocated to the Group’s cash-generating units identified according to the business segment. Goodwill has been allocated as follows:
| All figures in £ millions | Notes | 2007 | 2006 |
|---|---|---|---|
| Higher Education | 1,031 | 780 | |
| School Curriculum (2006: School Book) | 867 | 683 | |
| School Assessment and Information (2006: School Assessment and Testing) | 540 | 342 | |
| School Technology | – | 356 | |
| Other Assessment and Testing | 247 | 490 | |
| Technology and Business Publishing (2006: Other Book) | 55 | 56 | |
| Pearson Education total | 2,740 | 2,707 | |
| Penguin US | 155 | 156 | |
| Penguin UK | 111 | 114 | |
| Pearson Australia | 52 | 44 | |
| Penguin total | 318 | 314 | |
| Financial Times | 12 | 4 | |
| Mergermarket | 126 | 97 | |
| Interactive Data | 147 | 149 | |
| FT Publishing total | 285 | 250 | |
| Total goodwill – continuing operations | 3,343 | 3,271 | |
| Goodwill held for sale | 30 | 96 | 221 |
| Total goodwill | 3,439 | 3,492 |
Goodwill has been allocated for impairment purposes to 11 cash-generating units (CGUs). During 2007, three CGUs, School Book, School Assessment and Testing and Other Book were renamed following the reorganisation of the School segment. The reorganisation resulted in the School Technology CGU being allocated between School Assessment and Information (formerly School Assessment and Testing) and School Curriculum (formerly School Book). 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.
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 cash-generating unit. The average pre-tax discount rates used are in the range of 10.5% to 12.0% for the Pearson Education businesses, 8.9% to 11.7% for the Penguin businesses and 10.4% to 17.2% for the FT Group 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 CGU operates and reflect the long-term growth prospects of the sectors in which the CGU 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.
Sensitivities
The Group’s impairment review is sensitive to a change in the key assumptions used, most notably the discount rates and the perpetuity rates. Based on the Group’s sensitivity analysis, a reasonable possible change in a single factor will not cause impairment in any of the Group’s CGUs.
However, a significant adverse change in our key assumptions could result in an impairment in our School Curriculum and/or Penguin UK CGUs as their fair value currently exceeds their carrying value only by between 10% and 20%.