Helping people
make measurable progress
in their lives through learning
ANNUAL REPORT AND ACCOUNTS 2013
O U R TR A N S F O R M ATIO N
To find out more about how we are
transforming our business go to page 09
EF F IC AC Y
To find out more about our focus
on efficacy go to page 14
O U R P ER F O R M A N C E
For an in-depth analysis of our
performance in 2013 go to page 19
Pearson is the world’s leading learning
company, with 40,000 employees in more
than 80 countries working to help people
of all ages to make measurable progress
in their lives through learning.
We provide learning materials, technologies, assessments and services
to teachers and students in order to help people everywhere aim
higher and fulfil their true potential.
We put the learner at the centre of everything we do.
R E A D O U R R E P O RT O N L I N E
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Heading one
01
01
1 Overview
A summary of who we are and what
we do, including performance highlights,
our business strategy and key areas of
investment and focus.
02
Financial highlights
04 Chairman’s introduction
06 Our business models
09 Chief executive’s strategic overview
14
Pearson’s commitment to efficacy
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2 Our performance
An in-depth analysis of how we
performed in 2013, the outlook
for 2014 and the principal risks and
uncertainties affecting our businesses.
3 Responsible business
Explains Pearson’s approach to
corporate responsibility, giving a
summary of our work in 2013 and
our plans for 2014.
19 Our performance
20 Outlook 2014
23
32
34
Education:
North America, International, Professional
Financial Times Group
Penguin Random House
37 Other financial information
41
Principal risks and uncertainties
47
Introduction
48 Transforming our company
– supporting our people through change
49
Partnering and investing to extend
access to learning
50 Our communities
51
Environment: climate change and
avoiding deforestation
53
External benchmarks
53 Our values, principles and behaviour
4 Governance
Provides details of the board, its policies
and procedures and the report on
directors’ remuneration.
55
Board of directors
57 Chairman’s letter
58
78
Board governance
Report on directors’ remuneration
5 Financial statements
Detailed financial statements for both
the Group and the parent company,
including an analysis of the key measures
used by the Group in its management
of the business.
115 Financial statements: contents
116
Independent auditors’ report
123 Group accounts
195 Parent company accounts
204 Principal subsidiaries
205 Five-year summary
207 Corporate and operating measures
210 Shareholder information
212 Principal offices
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02
Pearson plc Annual report and accounts 2013
Financial highlights
In financial terms, Pearson’s goal is to achieve
sustainable growth on three key financial goals
– earnings, cash and return on invested capital,
and reliable cash returns to our investors
through healthy and growing dividends.
In 2013 trading was tough in many of our biggest and most established
markets. At the same time we are now in a more intensive phase of
investment, investing much more, both in building the technology and
related infrastructure, and in the next generation of products and
services. We also continue to finance the one-off costs of the biggest
restructuring in Pearson’s recent history. Headline earnings and cash were
again lower than the previous year and our return on invested capital fell
to 5.4% from 9.1% in 2013. We are proposing a 7% dividend increase.
2 013 S A L E S
£5.2bn
+2%
2013
£m
2012
£m
HEADLINE
GROWTH
CER
GROWTH
UNDERLYING
GROWTH
2 013 A DJ U S T E D O P E R ATI N G P RO F I T
Business performance
Sales
5,177
5,059
2%
2%
1%
Adjusted operating
profit before net
restructuring charges
Adjusted operating profit
871
736
932
932
(7)%
(6)%
(21)%
(21)%
(9)%
(23)%
Adjusted earnings
per share
Operating cash flow
Free cash flow
70.1p
82.6p
588
269
788
657
Free cash flow per share
33.3p
81.7p
Return on invested capital
5.4%
9.1%
(15)%
(25)%
(59)%
(59)%
–
Before net restructuring charges
£871m
-6%
Net debt
1,379
918
(50)%
O U R F I V E -Y E A R R ECO R D
Statutory results
Sales
Operating profit
Profit before tax
5,069
4,959
458
382
487
391
Basic earnings per share
66.6p
38.7p
2%
(6)%
(2)%
72%
Cash generated
from operations
684
916
(25)%
Dividend per share
48.0p
45.0p
7%
Note
a) Growth rates are stated on a constant exchange rate (CER) basis unless otherwise stated.
Where quoted underlying growth rates exclude both currency movements and portfolio changes.
Unless otherwise stated, sales exclude Penguin while operating profits include both Penguin and
our share of Penguin Random House (PRH). Continuing operations exclude both Penguin and
Mergermarket but include our share of PRH.
b) The ‘business performance’ measures are non-GAAP measures and reconciliations to the equivalent
statutory heading under IFRS are included in notes 2, 7 and 8 to the financial statements.
Average annual growth in
headline terms 2008–2013
Adjusted earnings per share
Operating cash flow
+4%
-6%
+7%
Dividend
Section 1 Overview
03
54%
8%
8%
2013 by business
North America £2,779m
International £1,539m
Professional £410m
FT Group £449m
30%
8%
57%
8%
2013 by business*
North America £455m
International £209m
Professional £63m
FT Group £66m
27%
Adjusted operating profit before
net restructuring charges £m
Pearson
North America
International
Professional
FT Group
1000
800
600
400
200
0
Pearson
North America
International
Professional
FT Group
Discontinued ex Mergermarket including PRH
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7%
60%
12%
2013 by region
North America £3,087m
Europe £1,062m
Asia £638m
RoW £390m
21%
70%
10%
5%
2013 by region*
North America £552m
Europe £118m
Asia £40m
RoW £83m
15%
*Excludes Penguin/PRH (£78m)
Sales £m
6000
5000
4000
3000
2000
1000
0
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13
04
Pearson plc Annual report and accounts 2013
Chairman’s introduction
Glen Moreno, Chairman of Pearson
While the business
environment remains
challenging, the board is
confident that Pearson is
well placed with a clear plan
to deliver future growth
and create value for our
shareholders.
Dear shareholders,
Pearson has always invested time and energy in
producing a clear and compelling annual report,
but with the new edition of the UK Corporate
Governance Code now in place, we have worked
particularly hard to ensure that our annual report
and accounts is fair, balanced and understandable.
At this important time in the company’s history we
have focused on providing the information necessary
for shareholders to fully assess the company’s business
model, strategy, development, performance, position
and future prospects.
2013 was an extremely significant year for Pearson
and the first full year under the leadership of
John Fallon as chief executive. Our restructuring
programme – designed to accelerate our shift
towards fast-growing economies and digital and
services businesses – is on track and we began 2014
under a new, integrated operating model for a single
and global education company.
As a company we also made a series of unique
commitments designed to measure and increase the
company’s impact on learning outcomes around the
world, including to commit to report audited learning
outcomes alongside our financial accounts, covering
our whole business by 2018.
Strengthening the board and executive team
John Fallon has strengthened his executive team by
promoting our best internal talent and recruiting some
exceptional global leaders in their specific fields.
We have also focused on the development of the
board, which I address in the Governance section of
this report. With recent and planned appointments,
I am confident that the board reflects the right blend
of skills and experience to guide Pearson in the best
interests of shareholders.
Section 1 Overview
05
S H A R E P R I C E P E R F O R M A N C E
A challenging 2013
One year % change
Pearson
FTSE 100
FTSE All-Share Media
STOXX 600 Media
Three year % change
Pearson
FTSE 100
FTSE All-Share Media
STOXX 600 Media
Five year % change
Pearson
FTSE 100
FTSE All-Share Media
STOXX 600 Media
Source: Datastream to 31 December 2013
TOTA L S H A R E H O L D E R R E T U R N
One year % change
Pearson
FTSE 100
FTSE All-Share Media
STOXX 600 Media
Three year % change
Pearson
FTSE 100
FTSE All-Share Media
STOXX 600 Media
Five year % change
Pearson
FTSE 100
FTSE All-Share Media
STOXX 600 Media
Source: Datastream to 31 December 2013
As CFO Robin Freestone outlines in his report
(page 19), our 2013 financial performance was
challenging. Market conditions continued to be strong
in digital, services and emerging markets, but
remained more difficult in some of our largest
textbook publishing markets.
These challenges were reflected in our share price
performance, which underperformed our indices.
While the business environment remains challenging,
the board is confident that Pearson is well placed with
a clear plan to deliver future growth and create value
for our shareholders. Longer term, our share price
and total shareholder return have reflected a 10 year
track record of strong business performance. We are
now focused on establishing a base for similar business
growth over the next decade.
Continued transformation
As I said in last year’s annual report, the basic
direction of Pearson’s strategy has not changed but
we are accelerating the pace to shift capital and talent
more quickly towards our most significant growth
opportunities. The restructuring of our global
education business, continued investment in
technology and focus on operational efficiency are
well underway.
I am confident that the global demand for affordable
and effective learning will continue to grow. As the
world’s leading learning company we are in an
increasingly strong position to take advantage of
this demand and deliver products and services that
measurably improve learning outcomes for our
customers and learners. I am also confident that
this will positively impact shareholder value.
Glen Moreno Chairman
12.9%
14.4%
35.4%
33.7%
33.0%
14.4%
56.1%
40.4%
109.2%
52.2%
144.3%
88.1%
16.8%
18.7%
39.6%
37.9%
45.8%
27.7%
71.5%
55.4%
140.3%
83.1%
186.7%
124.7%
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06
Pearson plc Annual report and accounts 2013
Our business models
Pearson is the world’s
leading learning company,
working to support
learners and teachers in
over 80 countries around
the world.
Whether it’s through new digital learning products
in the US, developing qualifications and assessments
in the UK, training school leaders in the Middle East,
teaching English in China, or educating professionals
through content from the Financial Times, we’re
helping people make measurable progress in their
lives through learning.
Our products and services may be provided and used
in a standalone way, but are increasingly integrated
and customised to meet the needs of individual
education systems, customers and learners. We have
identified four major market opportunities for our
products and so we create value for our customers
in four different, but related ways, outlined below.
B U S I N ES S M O D E L
Inside services
B U S I N ES S M O D E L
Direct delivery
Where we provide a set of integrated services
to institutions (public and private) that have
an institution-wide impact on improved learning
outcomes (often at lower cost).
Where we own and operate the learning institution
(physical, virtual and/or blended), providing an
integrated learning environment direct to the
learner rather than through other parties.
Includes:
Includes:
Sistema COC provides a complete
solution, from digital and traditional
learning to assessment tools and
pedagogical support, for pre-
K12 schools in Brazil, reaching
160,000 students.
Embanet™
Emabnet is the leading provider of online
learning services for the world’s premier
schools, colleges and universities.
We provide technology and
management services to support ASU’s
online students. ASU is the largest public
university in the US by enrolment.
university in the US by enrolment.
CTI is a private higher education
institution in South Africa, offering full
and part-time studies in Information
Technology, Psychology and Counselling,
Creative Arts and Graphic Design,
Commerce and Law, on campuses
spread throughout South Africa.
Wall Street English is among the largest
providers of English language instruction
for adults and corporate clients around
the world, operating over 450 centres in
28 countries.
Connections Academy offers a variety
of accredited virtual school options for
students in grades K-12 in the US.
students in grades K-12 in the US.
Section 1 Overview
07
Underpinning the effectiveness of each of these
four models, from design through to delivery, is the
Efficacy Framework, a tool we have devised to help
understand how our products or services can achieve
the best possible outcomes or results. You can read
more about our commitment to efficacy from page 14,
and online at efficacy.pearson.com
Like any business, we understand that there are
certain risks associated with each model. Read more
about how we are managing and mitigating these
on pages 41 to 45.
Associates and joint ventures
We have a 47% stake in Penguin Random House,
the world’s first truly global trade book publisher.
Penguin Random House was formed on 1 July 2013,
upon the completion of an agreement between
Bertelsmann and Pearson to merge their respective
trade publishing companies, Random House and
Penguin. Other associates and joint ventures
include Vedomosti in Russia and a 50% stake in
The Economist Group.
B U S I N ES S M O D E L
Learning services
B U S I N ES S M O D E L
Assessment
The individual elements of our products, including
learning materials, that are increasingly digital in
nature and operating as part of an integrated
learning ecosystem.
Where we provide services that enable an
institution or system to measure and validate
learner progress towards relevant standards
or to certify competency.
Includes:
Includes:
enVisionMATH is designed for students
in grades K–6 and seeks to help students
develop an understanding of maths
concepts through problem-based
instruction, small-group interaction,
and visual learning with a focus on
reasoning and modelling.
P E A R S O N V U E
MyLab &
Mastering
MyLab & Mastering is the world’s leading
collection of online homework, tutorial,
and assessment products, creates
personalised and continuously adaptive
learning experiences.
Speakout is an award-winning English
course for adults used around the world.
In partnership with the BBC, it includes
exercises, small-group work, audio
clips and video clips from well-known
TV programmes.
Pearson VUE is the world’s leading
computer-based testing and assessment
business, working with organisations
of all sizes to create flexible, custom-
built assessment solutions and
delivering them in a secure and reliable
testing environment.
BTEC vocational qualifications are
recognised in more than 80 countries
worldwide, and in 2011/2012, over 2m
learners registered for BTECs, including
650,000 school students.
We create, deliver and process state and
national assessments in the US. In 2013
we administered nearly 50m online and
paper tests.
paper tests.
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08
Pearson plc Annual report and accounts 2013
We have a remarkable opportunity
to make an impact
on some of the biggest and toughest
challenges in education
Pearson’s strategy: John Fallon, Chief executive
Section 1 Overview
09
John Fallon, Chief executive of Pearson
By accelerating the
transformation of Pearson
we become more
confident of our ability
to seize that once in a
generation opportunity
– to become directly
accountable for helping
people make progress in
their lives through learning.
Dear shareholders,
Last year, in my first letter to you as Pearson’s
chief executive, I wrote about the establishment
of a clear Pearson education strategy and its
accelerated implementation. That acceleration –
the transformation of the company – is now well
underway. Twelve months on, I am convinced that
we started it not a moment too soon, and that the
changes we need to make must go deeper, and
happen faster, than I originally envisaged.
The global opportunity
The long-term opportunity in global education is
greater than ever. Last year, the OECD reported
that poor math and literacy skills limit access to
better-paying and more-rewarding jobs. People who
are strong in these skills are not just wealthier and live
healthier lives, they are also more actively engaged in
public life. Nelson Mandela was right: education really
is the most powerful weapon with which to change
the world.
As rapid advances in technology continue to disrupt
the world of work, the economic value of education
and skills will continue to increase. Governments
spend trillions of dollars per year on education and
training; and, each year, the still rapidly growing middle
class invests more of its own increasing wealth in the
education of themselves and their children. And yet,
the world fails to meet the learning needs of far too
many of our fellow citizens. One in five adults in today’s
world still lack the written communication skills they
need to progress in life, 57 million children remain out
of school, and many millions more are in education, but
not really learning anything very much at all.
Pearson has a unique set of advantages with which to
help meet this global demand for better education and
skills, in part by applying technology to help tangibly
improve learning outcomes. And, by being better able
to meet some of the biggest challenges in global
education, we can build a stronger, more profitable
and faster growing company.
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Pearson plc Annual report and accounts 2013
Pearson’s strategy: John Fallon, Chief executive
continued
The transformation of our company
To seize this opportunity, we need to accelerate our
shift from mature to developing markets, from print to
digital products and from education inputs to services
with demonstrable learning outcomes. For much of
the last decade, we’ve been implementing this strategy
by reshaping the company portfolio through
acquisitions and disposals – and we continued this
work last year. We completed the Penguin Random
House merger, securing both Penguin’s commercial
and creative future and the opportunity for significant
economies of scale. We sold Mergermarket in
February 2014, which has flourished under Pearson’s
ownership, but was not part of our strategy in global
education. The sale proceeds helped us to finance the
acquisition of Grupo Multi, the leading adult English
language training company in Brazil. It fits very well
with our strategy of investing more in faster growing
economies and in digital and related services that can
have a greater and more measurable impact on
education around the world.
More urgently, the strategy now demands that we
run the company in a fundamentally different way, too.
Early last year, we started the biggest restructuring
in the company’s recent history, to tilt us towards our
biggest growth opportunities, and by measuring
everything we do in terms of impact in improving
learning outcomes.
This is what we are doing:
1
Redirecting more of our operating expenses,
and our organic investment, more quickly
to our most promising opportunities
We need fewer people, and resources, deployed
in the publishing, production and manufacturing of
textbooks and their physical distribution, sales and
marketing. We need less print-based testing capacity,
as we consolidate our operations and move more
towards online testing. By spending much less on
these activities as demand falls (for example, US
Higher Education textbook volumes have declined
by more than 20% in four years), we can invest much
more in our biggest growth opportunities (for
example, MyLab digital registrations and our sales
in emerging markets have both doubled over the
same period).
W E A R E TR A N S F O R M I N G FA S TE R
Our revenues in emerging markets
Our revenues in digital products
and services
Our revenues in print vs.
digital products and services
$1,302m
£819m
2013
$471m
£235m
2007
$4,727m
£3,020m
2013
$2,253m
£1,125m
2007
2013 revenues
40% 60%
Print
Digital and
services
Section 1 Overview
11
2
Running Pearson as one globally
connected company
Our operations are now entirely focused on our global
education strategy in which we include the FT Group.
We have appointed a new executive team to lead it.
We’d outgrown our organisation and, as a collection of
relatively stand-alone companies, we were duplicating
investment and proliferating small-scale initiatives,
limiting our ability to build global scale. We are now
organising around a smaller number of global products
and platforms, built around a single, world-class
infrastructure and common systems and processes.
This will help us to grow more quickly, as it frees up
resources to invest in our digital transformation, and
the new, more service-oriented, products that are vital
to future growth.
3
Publicly committing to efficacy and
improving learning outcomes
We will judge ourselves – and invite others to judge
us – not by the products that we make but by their
impact on learners. This changes how we decide
which companies to acquire, where and how we
invest, which products we get behind and which
we retire. It changes how we recruit, train and reward
each and every person in this company. It will change
how we develop new products, unleashing, I believe,
a new wave of innovation and creativity across the
company. It will be difficult to pull off; and it will take
time. That’s why we specifically talk about the ‘path
to efficacy’ that we are on. And it is why we have
committed to providing audited learning outcomes
data for all our products and services by 2018. But,
as detailed elsewhere in this report, we are making
some specific, and measurable, efficacy commitments
for this year.
4
We are putting the learner at the heart
of everything we do
We are putting the learner at the heart of everything
we do. Our commitment to efficacy recognises the
fact that, whilst our customer is often a teacher, an
institution, an education authority, a parent, or a
company; the real beneficiary of our work – and of
our customers’ work – is always the learner.
Our purpose as a company – and, ultimately, the true
measure of our success – is whether we really do help
to equip more people with the education and skills
they need to progress in their lives.
WO R K I N G A S O N E P E A R S O N
Global functions
Partner with geographies and lines of
business; operate as integrated global
functions to achieve scale economies.
Lines of Business
Responsible for global strategy, investment
priorities, product strategy and product
portfolio for respective learner ‘age and stage’.
Geographies
Responsible for customer relationships,
sales and marketing, and delivery of
education products in their markets.
O N E PEARSON
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LEARNER
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Pearson plc Annual report and accounts 2013
Pearson’s strategy: John Fallon, Chief executive
continued
A necessary transition
This is changing the way that every person in the
company works. At times, it is proving difficult and
disruptive. In the short term, it is made more painful,
but all the more necessary, by the fact that we are
battling against a number of cyclical, policy-related,
structural and operational headwinds. These led to
a sharp decline in earnings and free cash flow last year
and will continue to make life difficult for us in 2014:
› The creation of Penguin Random House is a major
portfolio change, which creates economic value for
Pearson, but the move to associate accounting
reduces our reported operating profit in 2013
and 2014.
› Our US college business, our biggest and most
profitable activity, is highly counter-cyclical, as
enrolments grow strongly during a recession, when
jobs are harder to come by, and then fall back in the
early years of economic recovery.
› Our two big assessment and qualifications businesses,
in the US and the UK, are seeing demand fall in the
short term due to changes in government policy,
which will open up new, and bigger, opportunities
as these changes are implemented.
The transformation of our company is fundamental to
get ahead of the significant structural changes taking
place in education – chiefly the digital shift, in which
Pearson is playing a leading role. It means that we are
now in a much more intensive phase of investment at
the same time as we are financing the one-off costs of
the biggest restructuring in Pearson’s recent history.
We are investing much more, both in building the
technology and related infrastructure, and in the next
generation of products and services, that are vital to
making the most of that global education opportunity.
We make this investment with confidence as we
continue to grow strongly in emerging markets and
with our digital and service-related products. In future
years, investing in these new growth areas will be
financed by cutting back in the print-led related areas
I outlined earlier. But, first, we face significant one-off
costs, both in 2013 and again in 2014, to achieve this.
U N I Q U E M A R K E T P O S ITI O N
2012 Education revenues
Pearson
Apollo Group
Benesse Education
Laureate
Kaplan
McGraw-Hill
Corinthian Colleges
Cengage Learning
Career Education Corp
Houghton Mifflin Harcourt
Houghton
n Mifflin Harcourt
$7.3bn
$4.0bn
$3.5bn
$3.4bn
$2.2bn
$2.1bn
$1.6bn
$1.5bn
$1.5bn
$1.1bn
$1.1bn
Section 1 Overview
13
I thank all my colleagues for all their hard work and
commitment, including all our former colleagues, who
have served the company with such distinction. I’m
sorry to see many good colleagues leave the company
as a result of our restructuring and I wish them every
success in their future careers. I also thank all our
shareholders for their support and patience through
this short, sharp transition.
I’m determined to ensure that it is rewarded, as soon
as possible, by building a leaner, more cash generative
and faster growing business – and one ever more
equipped to tackle some of the biggest and most
intractable problems in global education.
John Fallon Chief executive
An ever more purposeful, and faster growing, company
We have a lot of work ahead of us, but when I
write again in 12 months we will have completed
our second year of significant restructuring and
reorganisation. We will be reaping the rewards of
significant investment, and we will start to see the
benefits of a more favourable trading environment
as those headwinds, over time, begin to ease and the
operational risks recede.
By accelerating the transformation of Pearson,
we are ensuring that we shorten this transitional
period – and that we get the company growing in a
more profitable and sustainable manner, as quickly
as we can. As we do so, we open up, for Pearson,
bigger growth opportunities, a larger addressable
market and a greater impact on learning outcomes.
We become more confident of our ability to seize that
once-in-a-generation opportunity – to become
directly accountable for helping people make progress
in their lives through learning. We see the chance for
Pearson to be the stand-out company in education,
which is now emerging as one of the new global
growth industries.
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Pearson plc Annual report and accounts 2013
Pearson’s commitment to efficacy
In November 2013,
Pearson announced a new
commitment to report
on learning outcomes
across its product portfolio
from 2018. This new and
transparent approach
to efficacy is central to our
purpose to help people
make progress in their
lives through learning.
We want Pearson’s customers to be confident that
working with us will help them to achieve their long-
term learning goals and enable them to make progress
in their lives.
In November 2013, Pearson announced a new
commitment to report on learning outcomes across
its product portfolio from 2018. We also published
The Incomplete Guide to Delivering Learning Outcomes,
sharing the actions we have taken over the last two
years to prepare our company to meet this unique
challenge and demonstrate the efficacy of
our products.
This new and transparent approach to efficacy is
central to our purpose and also makes good business
sense. We hope that by demonstrating the evidence
base that supports our products we will encourage
a deeper engagement with learning outcomes across
the education sector and at the same time clearly
demonstrate the benefits of using those products.
We are now defining the practical approach that we
will take to reporting publicly on learning outcomes
in 2018, and how we will demonstrate and report
on our progress along the ‘Path to Efficacy’.
Below, we summarise our work to date and share our
priorities for 2014. Our approach will continue to be
refined in the coming years as we work towards our
goal, and we will consult upon it within and outside
of Pearson through 2014 and beyond. Our vision is
that by 2018, we will report on learning outcomes
alongside our financial results.
We welcome comments, feedback and support
as we take our next steps. Please email our
senior vice-president of efficacy, Saad Rizvi
saad.rizvi@pearson.com with any questions
or comments that you may have.
Pearson’s Efficacy Framework and Review Process
Pearson has developed an Efficacy Framework to
support our product development and management
teams to define measurable learning outcomes for
Pearson products and services, and progressively
to improve the likelihood of achieving them.
The Framework is a tool of systematic discovery that
helps us to ask key questions about our solutions,
and evaluate the likelihood that they will deliver their
intended learner outcomes.
A standardised Efficacy Review process accompanies
the Framework to ensure its wide and consistent use
across the organisation. More detail on the
Framework, review process and scoring system can
be found at efficacy.pearson.com
Section 1 Overview
15
RATING
RATIONALE
SUMMARY
T H E E F F I C AC Y F R A M E WO R K
CRITERIA AREA
OUTCOMES
Intended outcomes
Overall design
Value for money
EVIDENCE
Comprehensiveness of evidence
Quality of evidence
Application of evidence
How it works
Using this Framework we assess
the potential efficacy of a product or
programme against 12 criteria. By giving
each criteria a rating on the four point
scale (green to red) we gauge the likely
overall effectiveness of a product.
The Framework serves to identify specific
areas which, if improved, will increase our
likelihood of intended impact. Teams are
able focus their activity on taking these
steps before the product is assessed again.
PLANNING AND IMPLEMENTATION
KEY
Action plan
Governance
Monitoring and reporting
CAPACITY TO DELIVER
Pearson capacity and culture
Customer capacity and culture
Stakeholder relationships
Green:
Requires small number
of minor actions.
Amber/green:
Requires some actions
(some urgent and some
non-urgent).
Amber/red:
Requires large number
of urgent actions.
Red:
Highly problematic
requiring substantial
number of urgent actions.
E M B E D D I N G T H E E F F I C AC Y F R A M E WO R K
Our progress
Our plans in 2014
› In 2012, we began using the Efficacy Framework to
review all investments above $3m in value, and in 2014
all investments above $1m will undergo a review.
Products and programmes are repeatedly reviewed over
time to ensure progress and improvements are being made.
› Pearson acquisition opportunities are reviewed using the
Framework to evaluate the opportunity to improve learning
outcomes through Pearson ownership.
› We will now focus on securing the consistency with which
the Framework is applied by clarifying our definitions and
expectations of research, efficacy and quality standards.
Key statistics at year end 2013
123
33%
Reviews completed,
including nine potential
acquisitions and
14 internal functions
Showed progress
in repeat reviews
› A standardised Pearson Product Lifecycle will be introduced,
ensuring that the principles which support greater efficacy
are embedded consistently in all new product investments.
› We will increase the number of repeat Reviews on single
products, and increase the percentage of products showing
an improved score between Reviews.
› Pearson’s Lines of Business and Geographies will be
reviewed against Key Performance Indicators which address
the implementation of Pearson’s Efficacy Framework and
Review processes.
› At least 40 of our top products will have in place the detailed
targets, measures and systems necessary to track learner
outcomes over time.
› All new product developments will have defined and
measurable learner outcomes.
› We will have at least three products which are already in
a position to report on learning outcomes, covering the
g
range of learner ages and stages.
g
g
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16
Pearson plc Annual report and accounts 2013
Pearson’s commitment to efficacy
continued
Towards reporting on outcomes
Improving outcomes, in partnership
By using the Efficacy Framework and committing
to high standards of evidence, we will be better
able to anticipate and mitigate potential challenges
to our products’ efficacy, and to report back clear
evidence as to their success in improving defined
learning outcomes.
We are acutely aware that our efficacy challenge is not
one we can meet alone. We rely on guidance, support
and insights of our colleagues and partners across the
education community. We see a significant opportunity
to work in collaboration to debate and address the
broad educational research questions that will inform
and improve our contribution to learning worldwide,
and drive continuous improvement across education.
As part of our commitment to efficacy in November,
we brought together experts from inside and outside
of education to share their perspectives on the
opportunity ahead to improve learning outcomes
globally through the paper Asking More: The Path to
Efficacy. We also began a series of public engagements
on the topic of efficacy, bringing together experts in
dedicated events at the National Institute of Education
in Singapore, and the MIT Media Lab in Boston.
We also discussed the challenges around efficacy
at important global events such as the Education
World Forum in London and the World Economic
Forum in Davos.
The Efficacy Framework and Review process ensures
that all Pearson products and programmes address
the factors that could affect the learning outcomes
that they are ultimately able to produce, in a
consistent way.
Scores on the Framework do not in themselves
represent evidence of impact. Pearson’s ultimate goal
is to produce evidence of impact against defined
learning outcomes for all of our products.
Evidence will take a variety of forms depending on
where a product is within its lifecycle. Efficacy
evidence tends to be a longitudinal measure requiring
multiple measurements over the lifecycle of a product.
The standard of evidence that is available will vary by
product according to the specific learning outcome
targets for that product and its maturity.
We anticipate therefore, that the nature of evidence
will vary by product and time. We will be transparent
about the standard for each of our products.
TOWA R D S R E P O RTI N G O U TCO M ES
Our plans in 2014
› We will investigate and consult on how best to define our
evidence standards, working with an independent partner.
› We will complete and share efficacy studies that
demonstrate learner outcomes for several
product categories.
As we move towards 2018
› We will be able to make available increasing detail about
the standard of evidence that exists for each of our
products, in support of its stated intended outcome, and
the estimated number of learners reached by that product.
Our goal is to continually improve the standard of
evidence available.
› Executives will be measured on learner outcome-oriented
KPIs, including the quality of evidence available across their
product portfolios, along with financial returns.
› KPIs will be updated and refined to include targets which
capture Pearson’s aggregated impact on agreed learning
outcomes. Areas addressed may include academic quality,
emplo
oyability, learner progression, access or affordability.
employability, learner progression, access or affordability.
P RO G R E S S I N 2 013 –14
An Avalanche is Coming
Sir Michael Barber, Saad Rizvi, Katelyn
Donnelly: published with think tank IPPR,
this report explores the challenges and
opportunities for higher education in an
age of MOOCs, lifelong learning and
students as consumers.
www.ippr.org/publication/55/10432/
an-avalanche-is-coming-higher-
education-and-the-revolution-ahead
Learning Metrics Task Force
Pearson co-chaired this Brookings
Foundation initiative which sought input
from more than 1,700 individuals in 118
countries to make a series of
recommendations on improving learning
opportunities and outcomes for children
and young people worldwide.
www.brookings.edu/research/
reports/2013/09/learning-metrics-task-
force-universal-learning
A Rich Seam: How New Pedagogies Find
Deep Learning
Published in partnership with ITSE, MaRS
Discovery District and Nesta, Professor
Michael Fullan and Maria Langworthy’s
report asks how technology in schools is
p
changing the student-teacher relationship.
gg
researc
research.pearson.com
h.pearson.com
We will continue and extend this programme of
research, dialogue and engagement in 2014 and
2015, working with partners to pursue and share
research outputs around eight key questions which
we believe will shape the effectiveness of education
in the future, through our new Global Research
Function. This includes exploring educator quality
and pedagogy, system reform and the future role
of learning technologies and learning science in
improving outcomes.
Our research is now shared at research.pearson.com
Section 1 Overview
17
Alive in the Swamp
Professor Michael Fullan, Katelyn
Donnelly: published with Nesta, this
report addresses the impact of digital
innovation in education.
www.nesta.org.uk/publications/alive-
swamp-assessing-digital-innovations-
education
Asking More: The Path to Efficacy
This pamphlet shares insights from some
of the world’s leading education
practitioners and business people to
highlight the urgent need for a global
focus on outcomes in education.
efficacy.pearson.com
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18
Pearson plc Annual report and accounts 2013
Putting the learner
at the heart
of everything we do
Our performance: 2013 financial overview
Section 2 Our performance
19
K E Y F I N A N C I A L GOA L S
Adjusted earnings per share Pence
13
12
11
10
09
08
Robin Freestone, Chief financial officer of Pearson
Average annual growth (headline) 4%
£m
Operating cash flow £m
Operat
ting cash flow
In 2013, Pearson increased
sales by 2% in headline
terms to £5.2bn generating
adjusted operating profit
of £736m after net
restructuring charges.
13
12
11
10
09
08
%
Return on invested capital %
Return
on invested capital
13
12
11
10
09
08
Average capital/actual cash tax
70.1p
70.1p
82.6p
82.6p
86.0p
86.0p
77.5p
77.5p
65.4p
57.7p
£588m
£588m
£788m
£788m
£983m
£983m
£1,057m
£1,057m
£913m
£913m
£796m
5.4%
5.4%
9.1%
9.1%
9.0%
9.0%
10.3%
10.3%
8.9%
8.9%8.9%
9.2%
Penguin Random House was reported post-tax
following completion of the transaction on 1 July 2013
and resulted in a £23m reduction in the contribution
to operating income with an equal benefit to our tax
charge. We expensed £135m of net restructuring
charges during the year. Adjusted operating profit
including the negative impact of Penguin Random
House associate accounting but excluding the
restructuring charges was £871m.
The headline growth rates were helped by both
currency movements and acquisitions. Currency
movements increased sales by £19m (with a £50m
benefit primarily from a stronger dollar partly offset
by a £31m reduction from non-dollar currency
depreciation relative to sterling, primarily in emerging
markets) but reduced operating profits by £4m
(with an £8m benefit from a stronger dollar more
than offset by a £12m reduction from non-dollar
currency depreciation). At constant exchange rates
(i.e. stripping out the impact of those currency
movements), our sales and adjusted operating
profit grew 2% and declined 21%, respectively.
Acquisitions contributed £119m to sales and £50m to
operating profits. This includes integration costs and
investments related to our newly-acquired companies,
which we expense. Disposals and our exit from
Pearson in Practice reduced revenues by £49m but
boosted operating income by £23m. Associate
accounting arising from the Penguin Random House
transaction reduced operating income by £23m.
Stripping out the impact of portfolio changes, the
Penguin Random House transaction, net restructuring
costs and benefit and currency movements, revenues
grew by 1% underlying while adjusted operating profit
declined by 9%.
Our tax rate in 2013 was 14.6% compared to 23.1%
in 2012 reflecting the associate accounting impact
from Penguin Random House and movements in
tax settlements in each year.
Adjusted earnings per share before the impact of
net restructuring charges were 83.4p (2012: 82.6p).
Total adjusted earnings per share after net
restructuring charges were 70.1p.
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20
Pearson plc Annual report and accounts 2013
Our performance: 2013 financial overview
continued
Cash generation
Headline operating cash flow declined by £200m
reflecting restructuring and increased investment in
new education programmes. Free cash flow declined
by £388m to £269m, additionally reflecting higher tax
payments. Our average working capital to sales ratio
improved by a further 0.4 percentage points to 13.4%,
helped by lower inventory levels and the absence of
Penguin in the second half of the year.
Return on invested capital
Our return on average invested capital was 5.4%
(2012: 9.1%). ROIC was affected by lower underlying
profit, restructuring costs and higher cash taxes.
Statutory results
Our statutory results show a decrease of £29m in
operating profit to £458m, from £487m in 2012,
reflecting the absence in 2013 of the £113m closure-
related costs for Pearson in Practice in 2012, lower
underlying profits and restructuring costs. Basic
earnings per share increased to 66.6p in 2013, up from
38.7p in 2012, mainly due to the Penguin Random
House transaction.
Balance sheet
Our net debt increased to £1,379m (£918m in 2012)
reflecting higher cash tax payments from settlements
and deferred payments from 2012 due to Hurricane
Sandy, lower cash conversion, costs associated with
disposals, restructuring costs and increased pre-
publication investment. Since 2000, Pearson’s net
debt/EBITDA ratio has fallen from 3.9x to 1.6x and
our interest cover has increased from 3.1x to 10.2x.
Dividend
The board is proposing a dividend increase of 7% to
48.0p, subject to shareholder approval. 2013 will be
Pearson’s 22nd straight year of increasing our dividend
above the rate of inflation. Over the past 10 years we
have increased our dividend at a compound annual rate
of 7%, returning more than £2.9bn to shareholders.
We have a progressive dividend policy: we intend to
build our dividend cover to around 2.0x over the long
term, increasing our dividend more in line with
earnings growth from then.
Pence
Dividend per share paid in fiscal year Pence
Dividen
nd per share paid in fiscal year
13
12
11
10
09
08
48.0p
45.0p
42.0p
38.7p
35.5p
33.8p
Outlook 2014
In 2014, we will continue the major restructuring and
product investment programme, initiated in 2013,
designed to accelerate Pearson’s shift towards
significant growth opportunities in digital, services and
fast-growing economies. We believe this will provide
Pearson with a significantly larger market opportunity,
a sharper focus on the fastest-growing markets and
stronger financial returns.
This restructuring coincides with continued structural,
cyclical and policy-related pressures in some of our
largest markets. At this early stage in the year, we
expect to report adjusted earnings per share of
between 62p and 67p in 2014. This guidance
incorporates our expected trading environment,
restructuring activity and product investment.
This guidance also assumes current sterling exchange
rates against the dollar and key emerging
market currencies.
The major factors behind our guidance are as follows:
Portfolio changes
The sale of Mergermarket to BC Partners was
completed on 4 February 2014 and will reduce 2014
adjusted operating profit before central costs by
£28m. This will be partly offset by a part-year
contribution from Grupo Multi, which will be diluted
by integration costs and the weakness of the Real
against sterling.
We expect the contribution to adjusted operating
profit from Penguin Random House to be
approximately £20m lower in 2014 compared to the
£78m contribution in 2013. That reflects currency
movements, integration charges (which will be
concentrated in the first half of 2014) and an additional
half-year of associate accounting.
Section 2 Our performance
21
In our Core markets (which include the UK and
Australia), we see tough trading conditions in the
UK as curriculum change affects school, vocational
publishing and assessments, market stabilisation in
Australia, and a new adoption year in Italy.
In our Growth markets (which include Brazil, China,
India and South Africa), we expect continued growth
in China with Brazil benefitting from a better year in
public sistemas and a part-year contribution from
Grupo Multi. We expect a slower year in South Africa
after strong gains in 2013.
Looking at our global Lines of Business, we expect
School and Higher Education to remain challenging,
especially in our two largest markets, North
America and the UK. In Professional, we expect
continued good growth in Pearson VUE and English
with the Financial Times continuing to benefit from
its digital transition.
Interest and tax
We expect our interest charge to be similar to 2013
reflecting higher floating rates broadly offset by a
weaker dollar against sterling. We expect a tax rate
of between 19% and 21% on our total profit before
tax (which includes the post-tax contribution from
Penguin Random House).
As Pearson’s structure has changed to better suit
our marketplace and aspirations, so must our
financial reporting change. In this year’s annual
report, we discuss the progress made through
the lens of our existing financial reporting segments
(North American Education, International
Education, Professional and the Financial Times
Group). We will report our 2014 revenues and
operating profit against new segments that better
reflect the shape of our business; these will be by
Geography (North America, Core and Growth)
and by Line of Business (School, Higher Education
and Professional).
We will make available historical 2013 half-year
and full-year revenues and operating profit by
Line of Business and Geography in the second
quarter of 2014.
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Currency movements
Pearson generates approximately 60% of its sales in
the US. A five cent move in the average £:$ exchange
rate for the full year (which in 2013 was £1:$1.57) has
an impact of approximately 1.2p on adjusted earnings
per share. The move from an average £/$ exchange
rate of 1.57 in 2013 to the rate at the end of February
of 1.67 will reduce operating income by approximately
£30m if it continues for the full year. Similarly, when
compared to 2013 average exchange rates, Sterling
has significantly appreciated against a range of non-
dollar currencies, primarily in emerging markets.
If current exchange rates for those markets persist
throughout 2014, that would reduce operating income
on our 2013 base business by a further £20m.
Restructuring and investment programme
We will benefit from the absence of £176m of gross
restructuring charges expensed in 2013, which we
expect to generate £60m of incremental cost savings
in 2014.
These benefits will be partly offset by an additional
net restructuring charge of approximately £50m
in 2014, primarily in North America and weighted
towards the first half of the year. Our goal is to
complete our restructuring programme by the
end of 2014, returning to more normal annual levels
of restructuring expenditure from 2015.
As previously announced, we expect additional
product investment of approximately £50m in 2014
in digital, services and emerging markets to
accelerate growth.
Trading conditions
We expect trading conditions to remain challenging
in 2014, reflecting:
In North America, our largest market, we expect
college enrolments to decline again and some states
to defer assessment programmes as they transition
to the Common Core State Standards. Though we
expect the School publishing market to show some
improvement, we expect the benefits to be largely
offset by higher revenue deferrals and pre-publication
amortisation. We expect margins to be lower in 2014
when compared to 2013, reflecting the above organic
outlook, revenue mix, launch costs for major multi-
year service-based contracts, higher amortisation
and new product development expenditure.
22
Pearson plc Annual report and accounts 2013
Creating personalised products and services
that meet learners’ needs
and deliver measurable results
Section 2 Our performance
23
Sales
2013
2012
£2,779m 2013
£2,658m 2012
Adjusted operating profit
Headline growth
CER growth
Underlying growth
5%
3%
0%
Headline growth
CER growth
Underlying growth
£406m
£536m
(24)%
(25)%
(30)%
North American Education
North American Education
K E Y P E R F O R M A N C E I N D I C ATO R S
North American
Education is Pearson’s
largest business, with
2013 sales of £2.8bn and
operating profit of £406m.
C A S E S T U DY
Online learning
We introduced adaptive learning capabilities in
over 200 MyLab and Mastering products across
11 subjects. Student registrations in North America
grew 9% to almost 11 million. Usage continues
to grow strongly with graded submissions up
15% to almost 370 million across the globe.
Evaluation studies show that the use of MyLab
programmes, as part of a broader course redesign,
can significantly improve student test scores and
institutional efficiency (http://bit.ly/1derVjm).
We acquired Learning Catalytics, which allows
faculty to obtain real-time responses to open-ended
or critical thinking questions, to determine which
areas require further explanation, and enables
earlier intervention to help improve retention
and outcomes.
Total number of MyLab registrations
11m
2013
9.9m
2012
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Pearson plc Annual report and accounts 2013
North American Education
North American Education
continued
continued
In 2013, we generated good growth in our digital and
services businesses, where we continue to invest to
build scale and volume and solid growth in our school
curriculum business, which benefited from Common
Core curriculum purchasing. Market conditions
remained tough, with ongoing state budget pressures
and the transition to the Common Core affecting our
School assessment business. Lower enrolments
affected Higher Education with the career college
enrolments, where we have a strong market position,
being particularly weak. In addition to these market
pressures, our North American margins were further
affected by £49m of net restructuring charges, reduced
demand in our assessment business as states prepared
for new Common Core testing and curriculum related
investment and amortisation, the launch costs related
to major multi-year service-based contracts in higher
education, and increased returns provisions.
Higher Education highlights in 2013 include:
› In Higher Education, total enrolments fell 1.9%, with
career enrolments in two-year public (community)
and four-year for-profit declining 4.4%, affected by
rising employment rates, state budget pressures
and regulatory change affecting the for-profit and
developmental learning sectors. The publishing
market was broadly level with 2012 on a gross basis,
according to the Association of American Publishers,
while our higher education revenues grew 5% with
an underlying decline more than offset by the
contribution from Embanet.
› We partnered with West Virginia University
Parkersburg Online to redesign its Developmental
Education curriculum using Competency-Based
Education (CBE) modules. Our CourseConnect CBE
products will enhance up to 220 existing courses and
will be delivered through OpenClass where we will
also provide access to eTextbooks, tutoring and media
resources. Other CBE partnerships include Texas
A&M University-Commerce, South Texas College,
Kentucky Community & Technical College System
and Northern Arizona University.
School highlights in 2013 include:
› For our School businesses, state funding pressures,
the Federal sequester and the transition to Common
Core assessments continued to make market
conditions tough. Revenues grew modestly in 2013
with declines in state assessment contracts and
learning assessments more than offset by gains in
national assessment contracts for the PARCC
consortium and the federal government’s NAEP
programme, as well as demand for Connections
Education’s virtual charter schools and Common
Core reading/language arts and math programmes.
› Actionable data is critical to personalising learning and
boosting achievement. Our Schoolnet business aligns
assessment, curriculum and other services to help
individualise instruction and improve teacher
effectiveness. PowerSchool helps teachers automate
and manage student attendance records, gradebooks
and timetables.
› Schoolnet won significant contracts including two
new Race to the Top State Instructional Improvement
System contracts in New York and New Jersey, which
takes the total number of state system contracts to
seven; and new district contracts for Schoolnet
assessment, educator development and learning
management solutions in Dallas, Texas; Palm Beach,
Florida; Philadelphia, Pennsylvania; and New York
City. PowerSchool won new contracts in Charlotte-
Mecklenberg, North Carolina; Grand Erie DSB,
Ontario; and San Diego, California. Its mobile app
connecting teachers, students and parents was
downloaded by almost 3.4 million users. PowerSchool
now supports almost 13 million students (in 70
countries), up more than 5% on 2012 while Schoolnet
supports more than nine million students, up 7%
on 2012.
Section 2 Our performance
25
C A S E S T U DY
Online learning
programmes
Enterprise-wide partnerships with Arizona State
University Online, Ocean Community College,
Indiana Wesleyan University and Rutgers, where
we run fully online learning programmes and earn
revenues based on the success of the students and
the institution, gained more than 64,000 student
registrations, up 45% on 2012. In January 2014,
we extended our partnership with the University
of Florida to include both its graduate and under
graduate programmes providing technology,
e-Textbooks, recruitment marketing, enrolment
management, student support and retention services.
manag
gement, student support and retention services.
Pearson Embanet increased new student enrolments
by 8% to almost 12,000 and total student enrolment
by 6.5% to more than 27,000; adding 16 new
programmes, launching three new key academic
partners with Adelphi University, Villanova University
and University of Maryland; and expanding
partnerships with existing customers such as
Maryville and Northeastern. More than 200 colleges
are working with Pearson to build online learning
programmes that improve access to high quality
undergraduate and graduate degree programmes.
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› ACT Aspire, a college and career readiness assessment
aligned to the Common Core State Standards,
successfully launched its first field test on the new
TestNav 8 assessment system. ACT Aspire is a joint
venture between Pearson and ACT, Inc. Alabama is
the first state to adopt the ACT Aspire system for
measuring the Common Core State Standards.
› Connections Education, which operates K-12 managed
virtual public schools, managed blended public schools,
and a private school, served almost 51,000 students in
December 2013, up more than 20% from 2012, and
now operates 33 managed public schools in 23 states
and an international private virtual school.
Connections Education also provides virtual and
blended services to school districts and other schools
seeking to incorporate virtual learning into their
programmes. Connections Academy Schools have
consistently high performance ratings, particularly in
states focused on measuring growth in student learning.
26
Pearson plc Annual report and accounts 2013
North American Education
continued
› The Partnership for Assessment of Readiness for
College and Careers (PARCC), a consortium of
18 states, awarded Pearson several contracts to deliver
test item tryouts, develop field tests and to provide
the online delivery platform using our cloud-based,
mobile-ready TestNav 8 system for new English and
mathematics assessments. The assessments will be
based on what students need to be ready for college
and careers, and will measure and track their progress
along the way. We helped Kentucky and New York
deliver the first Common Core aligned state
assessments, and we won new online assessment
programmes in Colorado, Minnesota and Mississippi.
We continued to produce strong growth in secure
online testing. We delivered almost 12 million secure
online tests, up 33% on 2012. Legislative changes in
Texas and California reduced the scope of assessments
ahead of Common Core implementation.
› We renewed our contract with the US Department
of Education to administer the National Assessment
of Educational Progress (NAEP) for the 2013–2017
assessment cycles and won a number of state contract
extensions in Georgia, Puerto Rico, Tennessee,
Maryland, Arizona, South Dakota and Oklahoma.
We were selected by the National Board of
Professional Teaching Standards (NBPTS) as their
partner to develop their next-generation
programmes, and deliver and support NBPTS
through 2025.
C A S E S T U DY
Mental health
administration
Pearson Clinical Assessment launched Q-interactive,
a portable digital tool that enables mental health
professionals to automatically manage the
administration of clinical assessments, digital stimuli,
response recording through stylus notes and audio.
It serves 1,500 users within hospitals, private
practice, and schools in five countries (US, UK,
Australia, Canada and Netherlands). Paid test
administrations have increased ten-fold since launch.
Section 2 Our performance
27
C A S E S T U DY
Learning
Services
In Learning Services, we performed well in new
adoptions, taking a market leading 33% of the total
new adoption market ($390m), with #1 positions in
maths, science and social studies and a #2 position in
Reading/Language Arts. We were selected by the
two largest school districts in the US, Los Angeles
Unified School District and New York City, to
implement Common Core instructional
programmes. New York City adopted our new K-5
Common Core English Language Arts programme,
Ready Gen, and our middle school math offering,
Connected Math. In Los Angeles Unified School
District, we partnered with Apple to deliver our
Distric
ct, we partnered with Apple to deliver our
innovative next generation digital learning Common
Core System of Courses across K-12 Mathematics
and English Language Arts, initially to 30,000
students. In both districts, we are providing
professional development to thousands of
teachers. Learners using our OnRamp to Algebra
supplemental programme, which targets struggling
maths students, significantly out-gained peers using
other supplemental maths programmes, achieving
20% increase in their percentile rank while their
peers increased by only 3%. In addition, students of
all ability levels using OnRamp to Algebra exceeded
the gains of their peers.
the gains of their peers.
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Pearson plc Annual report and accounts 2013
International Education
K E Y P E R F O R M A N C E I N D I C ATO R S
Our International Education
business achieved
another strong underlying
performance in emerging
markets, particularly in
South Africa and China.
C A S E S T U DY
China
Sales
2013
2012
£1,539m 2013
£1,568m 2012
Adjusted operating profit
Headline growth
(2)%
Headline growth
CER growth
Underlying growth
0%
1%
CER growth
Underlying growth
£140m
£214m
(35)%
(29)%
(30)%
In China, student enrolments at Wall Street English
increased 7% to 65,000, boosted by good underlying
demand. Our students rapidly acquire high-level
English skills with average grade levels achieved rising
by 14% during 2013. Enrolments at Global Education,
our test preparation services for English language
and vocational qualifications, increased 24% to more
than 1.3 million, through 82 owned and 426
franchised learning centres with investment in
learning centres and digital learning platforms
enabling us to better meet learner demands and be
a premier brand in test preparation. Around 70%
of the high-end course students achieve IELTS 7.0
which demonstrates a high level of proficiency in
English and a key grade when studying abroad.
Wall Street English student enrolments in China
65,000
2013
61,000
2012
Our International education business achieved another
strong underlying performance in emerging markets,
particularly in South Africa and China. This growth was
offset by weak textbook sales in developed markets;
currency weakness against sterling; the exit from
certain publishing businesses primarily in Australia,
Japan, Germany, France and the UK; increased
customisation resulting from the Kirtsaeng ruling in
the US; and policy changes affecting qualifications
and textbook publishing in the UK. Although margins
before restructuring charges were similar to 2012,
reported margins fell due to £69m of net restructuring
charges expensed during the year. More than
1.3 million students registered for our MyLab digital
learning, homework and assessment programmes,
an increase of 17%, with good growth in school,
ELT and institutional selling in higher education.
Key highlights in 2013 include:
› Our Growth market revenues expanded strongly,
boosted by curriculum change in South Africa, strong
enrolment growth at CTI/MGI, and continued good
growth in China; partly offset by weaker currencies
against sterling, particularly in South Africa and
enrolment declines in our public sistemas in Brazil.
› In Mexico, our fully accredited online university
partnership, UTEL, reached 6,000 active students in
20 undergraduate and two graduate programmes and
through its services arm, Scala, signed its first three
agreements to help campus-based universities make
the transition to online. 5,400 students have
completed short duration courses in programmes
developed to address corporate and government
workforce training needs.
› In the Middle East, we won a five-year contract with
the UAE’s Ministry of Education to provide leadership
training and professional development for 700 current
and future Emirati school principals, in partnership
with the UK’s National College for Teaching and
Leadership. We partnered with: Taibah University in
Saudi Arabia to implement Foundation Level
MyLabsPlus across four subjects for 16,000 students;
Riyadh’s Princess Noura University in Saudi Arabia,
the world’s largest female university, to provide
12,000 new students with IT course content (through
our MyLabs e-learning technology) for tablets; and
Qatar University to implement MyLabsPlus for
5,000 students.
Section 2 Our performance
29
C A S E S T U DY
South
Africa
In South Africa our market leading school
publishing brands, Maskew Miller Longman and
Heinemann, performed strongly in a year of
significant curriculum reform. Student enrolments
grew strongly at CTI/MGI, our universities, up 15%
to 11,700 across 13 campuses.
› Our Core market revenues declined significantly,
affected by curriculum change in the UK and the exit
from publishing operations in Australia, Japan and
Continental Europe.
› In the UK, revenues declined due to a softer school
curriculum and vocational qualifications (BTEC)
market anticipating curriculum change. This was partly
offset by a strong performance in the GCSE and A/AS
level qualifications market. In higher education, we
partnered with Leeds Metropolitan University to
develop a suite of online learning business education
courses. In assessment, we marked almost six million
GCSE, A/AS Level and other examinations with more
than 93% using onscreen technology. We marked
2.7 million test scripts for over half a million pupils
taking National Curriculum Tests at Key Stage Two
in 2013 and were selected to administer the test until
2016. 2013 also saw the first delivery of the Next
generation BTEC qualifications to over 100,000
students, with a further 365,000 students to date
enrolled for 2014/15 delivery.
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Pearson plc Annual report and accounts 2013
International Education
continued
› In Italy, revenues declined, with market conditions
› In English Language Learning, Wall Street English
(WSE), Pearson’s worldwide chain of English language
centres for professionals, opened a new centre in
Ho Chi Minh City in Vietnam (and is now present in
28 countries), and has 107 owned and 338 franchised
centres. Our students rapidly acquire high-level
English skills with average grade levels achieved rising
by 8% during 2013. Student numbers grew slightly to
192,000. Registered users for ELL digital products
grew 45% to 610,000 with MyEnglishLabs registrations
up 51% to 400,000 and Our Discovery Island
registrations, an online adventure aimed at Primary
education, up almost 77% to 104,000.
tough due to a one-year government mandated pause
in new adoptions.
› In Japan, GlobalEnglish and the FT partnered with
Nikkei Inc on a ‘GlobalEnglish Nikkei edition’, an
English language learning service to serve English
students in the Japanese business community. We sold
our school textbook publishing business, Kirihara
Shoten, to management.
› In Australia, market conditions were very tough,
particularly in higher education where we exited the
vocational publishing market. We continue to make
good progress developing our digital and services
business including significant sales of Secondary School
Australian Curriculum ebooks. In higher education,
we partnered with Monash University with an
enterprise implementation of the MyLab suite of
products for 6,500 students including faculty training,
and to provide learning services and solutions for
online graduate programmes including course
development, marketing, student recruitment and
retention, and faculty training.
C A S E S T U DY
Brazil
In Brazil, we ended 2013 with 497,000 students
(533,000 in 2012) in our public and private sistemas
(or learning systems). In 2013, we added 24,000 net
students in our three private sistemas, COC, Dom
Bosco and Pueri Domus, up 7% on 2012. Tough
market conditions for public sistemas resulted in
lower enrolments in this post-election year but our
NAME sistema includes the #1 performing lower
secondary school in Brazil based on the 2011 IDEB
(national public test) scores of 3,067 municipalities.
90% of our municipal customers tested 20% above
the national standard and 70% of the municipalities
that adopted NAME showed improvement in their
IDEB scores. On 11 February 2014 we completed
the acquisition of Grupo Multi, the largest provider
of private language schools in Brazil serving over
800,000 students across more than 2,600
franchised schools.
Professional Education
K E Y P E R F O R M A N C E I N D I C ATO R S
Our Professional Education
business is focused on
publishing, training,
testing and certification
for professionals.
Section 2 Our performance
31
Sales
2013
2012
Adjusted operating profit
£410m 2013
£390m 2012
Headline growth
CER growth
Underlying growth
5%
4%
8%
Headline growth
CER growth
Underlying growth
£57m
£37m
54%
51%
(7)%
Our Professional Education business is focused on
publishing, training, testing and certification for
professionals. The Professional division performed
well, with good revenue and profit growth in testing
and training partly offset by declines in publishing.
C A S E S T U DY
Key highlights in 2013 include:
› Professional publishing revenues and profits declined,
with good profit growth in the US, underpinned by a
strong performance in our direct ecommerce sales and
at Safari Books Online, our joint-venture with O’Reilly
Media, offset by exiting some of our professional
publishing businesses in Continental Europe.
› Professional testing continued to see good revenue
and profit growth test volumes at Pearson VUE up 25%
on 2012 to almost 12 million. Key contract renewals
included tests for the American Board of Internal
Medicine, the Association of Social Work Boards and
the Pharmacy Technician Certification Board. We will
continue to deliver our UK contract to administer the
Driving Theory test for the DVSA until September
2016. We won a number of new contracts for
computer-based testing including the Charter of
Financial Analysts, Saudi Commission of Health
Specialties and the Korean Productivity Centre.
Vocational training in
Saudi Arabia
In Professional training, TQ grew strongly and was
awarded a five-year contract by Saudi Arabia’s
Colleges of Excellence to develop and operate
three vocational colleges in Saudi Arabia, providing
high quality vocational skills and qualifications.
The three colleges opened in the second half of 2013
with an expected initial intake of 1,100 students,
with an
n expected initial intake of 1,100 students,
rising to 8,000 students over time.
rising t
to 8,000 students over time.
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32
Pearson plc Annual report and accounts 2013
Financial Times Group
K E Y P E R F O R M A N C E I N D I C ATO R S
The Financial Times Group
achieved profits of £55m,
an underlying increase of
17% year-on-year.
Sales
2013
2012
Adjusted operating profit
£449m 2013
£443m 2012
Headline growth
CER growth
Underlying growth
1%
0%
0%
Headline growth
CER growth
Underlying growth
£55m
£47m
17%
17%
17%
C A S E S T U DY
Growth in digital readership
The FT’s total circulation grew 8% year-on-year to
652,000 across print and online, the highest paying
readership in its 125-year history. FT.com digital
subscriptions grew 31% to 415,000, more than
offsetting planned reductions in print circulation.
Digital subscribers now represent almost two-thirds
of the FT’s total paying audience and corporate
users grew nearly 60% to more than 260,000.
We continue to invest to shift resources from
analogue to digital and have further reduced leased
printing capacity globally since 31 December 2012
from 20 to 16 sites.
Financial Times digital subscriptions
415,000
2013
316,000
2012
2
0
1
3
Section 2 Our performance
33
C A S E S T U DY
Executive
education
The FT continues to expand its executive
education business. FT in Education products,
including annotation tool FT Newslines, are
now used by almost 300 education institutions,
including 37 of the world’s top 50 business
schools. The FT launched its Non-Executive
Director (NED) Diploma in Hong Kong.
More than a third of NED enrolments are
More t
than a third of NED enrolments are
now outside the UK.
now o
utside the UK.
The Financial Times Group achieved profits of £55m, an
underlying increase of 17% year-on-year. This was driven
by strong growth in digital and content businesses and
improved print circulation margins which more than
offset weak advertising. Digital and services revenues
accounted for 55% of FT Group revenues (31% in 2008).
Content revenues comprised 63% of revenues (48% in
2008), while advertising accounted for 37% of FT Group
revenues (52% in 2008).
Key highlights in 2013 include:
› Advertising continued to be short term and generally
weak, but the FT increased its market share with
luxury and financial sectors showing good growth
in digital.
› Mobile is an increasingly important channel for the
FT, driving 62% of subscriber consumption, 45%
of total traffic and almost a quarter of new digital
subscriptions. The FT’s flagship web app now has
more than 5 million users and new FT apps on Google
Newsstand and Flipboard have strengthened our
mobile offering. Other innovations, including launching
24-hour news service fastFT, redesigns to mobile apps
and improvements to FT.com, have helped
significantly increase overall digital engagement.
› The Economist Group, in which Pearson owns a
50% stake, had a record operating profit after tax,
up 3% on 2012. Content revenues accounted for
60% of total revenues (44% in 2008) and digital and
services revenues comprised 39% of total revenues
(29% in 2010). Global print and digital circulation at
The Economist reached a record high of 1.6 million.
› On 4 February 2014, we completed the disposal of
Mergermarket to BC Partners for £382m, payable in
cash. In 2013, Mergermarket contributed £108m of
revenue and £28m of adjusted operating profit before
central costs.
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Pearson plc Annual report and accounts 2013
Penguin Random House
The merger of Penguin and Random
House was completed on 1 July 2013.
Bertelsmann owns 53% and Pearson owns
47% of Penguin Random House, the first
truly global consumer publishing company.
Penguin Random House traded well in the second
half of the year, with a strong bestseller performance
in all major territories. Penguin Random House was
reported post-tax following completion of the merger
on 1 July 2013 and resulted in a £23m reduction in the
contribution to our operating income with an equal
benefit to our tax charge. Market share normalised,
following the unprecedented success of E L James’
50 Shades of Grey trilogy for Random House in 2012.
The integration of the two companies has commenced
in each of its territories. Divisional structures are
being combined, systems integration is underway,
and the US business has announced a plan to
consolidate distribution operations.
Key highlights in 2013 include:
› In Australia, where market conditions remain
challenging, we had four out of the top five bestsellers
for the year: Jeff Kinney’s Hard Luck: Diary of a Wimpy
Kid; Jamie Oliver’s Jamie’s 15 Minute Meals and Save
with Jamie; and Dan Brown’s Inferno.
› In Brazil, Companhia das Letras (45% stake) posted
strong revenue growth driven by an expanded
publishing program. In a challenging market, Penguin
Random House India had more than 40 titles pro
forma on the 2013 Hindustan Times Nielsen top ten in
combined categories. In China, our local-publishing
programme continued to grow, with notable
bestsellers, including My Life by Li Na. DK achieved
significant growth through its co-edition model with
Chinese publishers. In South Africa, Penguin Random
House completed the purchase of the Times Media
Group’s majority stake in Random House Struik,
cementing our market leading position, but lost a
significant agency contract during the year.
› DK performed well, boosted by the exceptional
performance of Brady Games® GTA V Strategy
Guide™, which sold over 800,000 copies, and the
ongoing success of the DK LEGO® properties, which
sold almost 10 million units in 2013.
› The pro forma ebook share of Penguin Random House
global revenue is 20%. Ebook growth for Penguin
continued but at a slower rate, while Random House
ebook sales declined significantly year-on-year due
to much lower sales for the Fifty Shades trilogy.
Digital innovations included the launch of Bookscout,
a dedicated app created for and with Facebook which
enables sharing personalised reading recommendations
among friends and online communities.
› Penguin Random House’s authors won numerous
major literary prizes around the world, including the
2013 Nobel Prize for Literature (Alice Munro); The
National Book Award for Fiction in the US (James
McBride’s The Good Lord Bird); and an unprecedented
four US Pulitzer Prizes.
› In self-publishing, Author Solutions performed well,
growing significantly over 2012, and continuing to
launch and plan for self-publishing imprints in
conjunction with Penguin in such territories as India
and South Africa.
› For 2014, Penguin Random House has a strong
publishing list with major new books from authors such
as: Isabel Allende, Martin Amis, Lee Child, John
Cleese, Harlan Coben, Steve Coogan, Lena Dunham,
Janet Evanovich, Ken Follett, Stephen Fry, Robert
Gates, Ina Garten, John Grisham, Deborah Harkness,
Carl Hiaasen, Jan Karon, Sue Monk Kidd, Jeff Kinney,
Michael Lewis, David Mitchell, Haruki Murakami, Jamie
Oliver, James Patterson, Jodi Picoult, Nora Roberts,
Danielle Steel, Colm Toibin, Jacqueline Wilson; and
movie tie-in paperbacks of John Green’s The Fault in
Our Stars; Gillian Flynn’s Gone Girl; and Laura
Hillenbrand’s Unbroken.
Section 2 Our performance
35
C A S E S T U DY
Bestsellers in 2013
In the US, on a pro forma basis, Penguin and Random
House published 480 New York Times bestsellers,
including three out of the top five Bookscan adult
fiction bestsellers for the year: Dan Brown’s Inferno,
John Grisham’s Sycamore Row and Khaled Hosseini’s
And The Mountains Echoed. Other New York Times
bestsellers included, in adult nonfiction: Sheryl
Sandberg’s Lean in; Charles Krauthammer’s Things
That Matter; and in children’s fiction: John Green’s
#1 bestselling The Fault in Our Stars.
In the UK, on a pro forma basis, Penguin and Random
House published 102 Bookscan bestsellers including:
Dan Brown’s Inferno; David Jason’s My Life; Jamie
Oliver’s Save with Jamie; Rachel Joyce’s The Unlikely
Pilgrimage of Harold Fry; Helen Fielding’s Bridget Jones:
Mad About the Boy; and a strong ongoing overall
performance from Jeff Kinney’s Diary of a Wimpy Kid
series, and from its newest volume Hard Luck.
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36
Pearson plc Annual report and accounts 2013
Pearson plc Annual report and accounts 2013
More and more people want
a better education
and new ways of learning
Other financial information
Net finance costs
Net interest payable
Finance income in respect
of employee benefit plans
Other net finance costs
Total net finance costs
2013
£m
(72)
(3)
(1)
(76)
2012
£m
(65)
(2)
(29)
(96)
Net interest payable in 2013 was £72m, up from £65m
in 2012. Although our fixed rate policy reduces the
impact of changes in market interest rates, we were
still able to benefit from low average US dollar and
sterling interest rates during the year. Year-on-year,
average three month LIBOR (weighted for the
Group’s net borrowings in US dollars and sterling at
each year end) fell by 0.2% to 0.3%. This decrease in
floating market interest rates was offset by an increase
in the Group’s average net debt which was the main
driver behind the Group’s higher interest charge.
These factors combined with lower levels of cash and
deposits and the impact of new notes issued in 2013
created a decrease in the Group’s average net interest
payable from 7.0% to 4.8%. The Group’s average net
debt rose by £561m, largely reflecting acquisition
activity, cash costs relating to the formation of Penguin
Random House (PRH) and cash paid in respect of the
closure of Pearson in Practice in 2012 together with an
increase in tax and dividend payments which more
than offset cash generated from operations.
Cash generated from operations was lower in 2013
partly as a result of restructuring activity in the year.
Net finance costs relating to post-retirement plans
have been restated to reflect the adoption of IAS 19
(revised) and under the new standard was £3m in
2013 compared to £2m in 2012. Finance costs relating
to retirement benefits have been excluded from our
adjusted earnings as we believe the new presentation
does not reflect the economic substance of the
underlying assets and liabilities.
Also included in the statutory definition of net finance
costs are finance costs on put options and deferred
consideration associated with acquisitions, foreign
exchange and other gains and losses. Finance costs
for put options and deferred consideration are
excluded from adjusted earnings as they relate to
future earn outs and similar payments on acquisitions
and therefore do not reflect cash expended.
Foreign exchange and other gains and losses are
Section 2 Our performance
37
excluded from adjusted earnings as they represent
short-term fluctuations in market value and are
subject to significant volatility. These other gains and
losses may not be realised in due course as it is
normally the intention to hold the related instruments
to maturity. In 2013, the total of these items excluded
from adjusted earnings was a loss of £1m compared to
a loss of £29m in 2012. The majority of the loss in 2012
relates to movements in the valuation of put options
associated with acquisitions. In 2013 losses relating to
put options were largely offset by foreign exchange
gains on a proportion of unhedged US dollar assets.
Funding position and liquid resources
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.
Our objective is to secure continuity of funding at a
reasonable cost from diverse sources and with varying
maturities. The Group does not use off-balance sheet
special purpose entities as a source of liquidity or for
any other financing purposes. The net debt position
of the Group is set out below.
Cash and cash equivalents
Marketable securities
Net derivative assets
Bonds
Bank loans and overdrafts
Finance leases
2013
£m
729
6
76
2012
£m
1,062
6
178
(2,168)
(2,200)
(47)
(11)
(55)
(17)
Net debt – continuing
(1,415)
(1,026)
Net cash classified as held for sale
36
Total net debt
(1,379)
108
(918)
Acquisition activity, cash costs relating to the
formation of PRH and cash paid in respect of the
closure of Pearson in Practice in 2012 together with an
increase in tax and dividend payments and lower than
expected cash generation in 2013 are the largest
contributors to the increase in the Group’s net debt.
Reflecting the geographical and currency split of our
business, a large proportion of our debt is
denominated in US dollars (see note 19 for our policy).
The strengthening of sterling against the US dollar
during 2013 (from $1.63 to $1.66:£1) decreases the
sterling equivalent value of our reported net debt.
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Pearson plc Annual report and accounts 2013
Other financial information
continued
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. In January 2014,
Moody’s changed the outlook on their short-term and
long-term ratings from ‘Stable’ to ‘Negative’. In May
2013, the Group accessed the capital markets, raising
$500m through the sale of notes maturing in May 2023
and bearing interest at 3.25%. The notes were
swapped to floating rate to conform with the policy
described in note 19. The Group has a $1,750m
committed revolving credit facility which matures in
November 2015. At 31 December 2013 this facility was
undrawn. The facility is used for short-term drawings
and providing refinancing capabilities, including acting
as a back-up for our US commercial paper programme.
This programme is primarily used to finance our US
working capital requirements, in particular our US
educational businesses which have a peak borrowing
requirement in June. At 31 December 2013, no
commercial paper was outstanding. The Group also
maintains other committed and uncommitted facilities
to finance short-term working capital requirements in
the ordinary course of business. Further details of the
Group’s approach to the management of financial risks
are set out in note 19 to the financial statements.
Taxation
The effective tax rate on adjusted earnings in 2013
was 14.6% as compared to an effective rate of 23.1%
in 2012. The reduction in the rate is partly explained
by the associate accounting treatment of our
investment in PRH – tax on the profits of PRH are
netted against profits in the presentation of the
associate interest and is not included in the tax line.
Our overseas profits, which arise mainly in the US, are
largely subject to tax at higher rates than that in the
UK (which had an effective statutory rate of 23.25% in
2013 and 24.5% in 2012). These higher tax rates were
largely offset by amortisation-related tax deductions
and by adjustments arising from settlements with tax
authorities. The reported tax charge on a statutory
basis was £87m (22.8%) compared to a charge of
£138m (35.3%) in 2012. The decrease in the statutory
rate is due to the factors affecting the adjusted rate as
described above but is also exacerbated by the lack of
tax relief in 2012 on the loss on closure of Pearson in
Practice. Tax paid in 2013 was £246m compared to
£65m in 2012. Tax paid in 2012 was unusually low as
a result of the permitted deferral of US tax payments
following Hurricane Sandy. These payments were
subsequently made in 2013 and were accompanied
by additional payments arising from settlements
with tax authorities including £55m relating to prior
year disposals.
Discontinued operations
In October 2012, Pearson and Bertelsmann
announced an agreement to create a new consumer
publishing business by combining Penguin and Random
House. The transaction completed on 1 July 2013 and
resulted in a gain on the disposal of the Penguin assets
of £202m. The gain arises as Pearson no longer has
control of the Penguin Group of companies. The 47%
interest in the new Penguin Random House (PRH)
venture has been accounted for as an equity
investment from 1 July 2013.
The loss of control resulted in the Penguin business
being classified as held for sale on the Pearson balance
sheet at 31 December 2012 and the results for both
2012 and the first six months of 2013 have been
included in discontinued operations. The share of profit
from associate interest in the PRH venture arising in the
second half of the year has been included in operating
profit in continuing operations net of tax of £23m.
Additionally on 29 November 2013 we announced
the sale on the Mergermarket Group to BC Partners.
The sale was completed on 4 February 2014 and the
Mergermarket business has been classified as held for
sale on the balance sheet at 31 December 2013.
The results for both 2012 and 2013 have been included
in discontinued operations.
Non-controlling interest
There are non-controlling interests in the Group’s
businesses in the US, South Africa and China although
none of these are material to the Group numbers.
Some of the minorities in South Africa and the
minorities in India were bought out in the year.
Other comprehensive income
Included in other comprehensive income are the
net exchange differences on translation of foreign
operations. The net loss on translation of £217m
in 2013 compares to a loss in 2012 of £238m and
is principally due to movements in the US dollar.
A significant proportion of the Group’s operations
is based in the US and the US dollar weakened slightly
in 2013 from an opening rate of £1:$1.63 to a closing
rate at the end of 2013 of £1:$1.66. At the end of 2012
the US dollar had also weakened in comparison to the
opening rate moving from £1:$1.55 to £1:$1.63.
Section 2 Our performance
39
Also included in other comprehensive income in 2013 is
an actuarial gain of £79m in relation to post retirement
plans. This gain arises from changes in the assumptions
used to value the liabilities and from returns on plan
assets that are in excess of the discount rate. The gain
compares to an actuarial loss for 2012 of £103m.
Dividends
The dividend accounted for in our 2013 financial
statements totalling £372m represents the final dividend
in respect of 2012 (30.0p) and the interim dividend for
2013 (16.0p). We are proposing a final dividend for 2013
of 32.0p, bringing the total paid and payable in respect
of 2013 to 48.0p, a 7% increase on 2012. This final 2013
dividend which was approved by the board in February
2014, is subject to approval at the forthcoming AGM
and will be charged against 2014 profits. For 2013, the
dividend is covered 1.5 times by adjusted earnings.
We seek to maintain a balance between the
requirements of our shareholders for a rising stream
of dividend income and the reinvestment opportunities
which we identify around the Group and through
acquisitions. The board expects to raise the dividend
above inflation, more in line with earnings growth,
thereby maintaining dividend cover at around two
times earnings in the long term.
Pensions
Pearson operates a variety of pension plans. Our UK
group plan has by far the largest defined benefit section.
We have some smaller defined benefit sections in the
US and Canada but, outside the UK, most of our
companies operate defined contribution plans.
The charge to profit in respect of worldwide pensions
and retirement benefits after restating 2012 figures for
IAS 19 (revised) and including discontinued operations
amounted to £104m in 2013 (2012: £114m) of which
a charge of £101m (2012: £112m) was reported in
adjusted operating profit and £3m (2012: £2m) was
reported against other net finance costs.
The overall deficit on the UK group plan of £19m at the
end of 2012 has become a surplus of £86m at the end
of 2013. The movement has arisen principally due to
favourable asset returns and deficit funding. In total, our
worldwide deficit in respect of pensions and other post
retirement benefits fell from a deficit of £172m at the
end of 2012 to a net deficit of £56m at the end of 2013.
Acquisitions and disposals
During the year the Group purchased a 5% interest
in NOOK Media for $89.5m. The Nook investment
was made as part of the strategy to accelerate our
move into digital content and personalised learning
and was made at the same time as entering into a
commercial arrangement to work together on device-
agnostic platforms.
Also in the year we have completed the purchase
of remaining minorities interests in some of our
South African and Indian businesses.
The acquisition of Grupo Multi for £492m, announced
in December 2013, completed in February 2014 and
has not been reflected in the financial statements at
31 December 2013.
In the first half of the year the FT Group disposed
of its associate interest in BDFM, the South African
Business Media Group realising a small loss and in
July 2013 the International business disposed of its
Japanese school and local publishing assets via a
management buy-out for a nominal sum. The sale
of Mergermarket will be accounted for in 2014.
Net cash consideration for all acquisitions made in
the year ended 31 December 2013 was £198m
including the investment in NOOK and provisional
goodwill recognised was £19m. In total, acquisitions
completed in the year contributed an additional £15m
of sales but did not contribute a material amount to
operating profit.
Return on invested capital (ROIC)
Our ROIC is calculated as total adjusted operating
profit less cash tax, expressed as a percentage of
average gross invested capital. ROIC fell in 2013 to
5.4% from 9.1% in 2012. Reduced profit and increased
tax payments are the main reasons for the movement.
Related party transactions
Transactions with related parties are shown in note 37
of the financial statements.
Post-balance sheet events
On 4 February 2014 the Group completed the sale
of Mergermarket for £382m. On 11 February 2014, we
acquired 100% of Grupo Multi, the leading adult English
language training company in Brazil for approximately
£435m in cash plus the assumption of £57m of debt.
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Pearson plc Annual report and accounts 2013
Applying and working with the best
technology, innovation
and expertise
from around the world
Principal risks and uncertainties
Our principal risks and uncertainties are outlined
below. These are the most significant risks that may
adversely affect our business strategy, financial position
or future performance. The risk assessment process
evaluates the probability of the risk materialising and
the financial or strategic impact of the risk. Those risks
which have a higher probability and significant impact
on strategy, reputation or operations or a financial
impact greater than £40 million are identified as
principal risks. The risk assessment and reporting
criteria are designed to provide the board with a
consistent, Group-wide perspective of the key risks.
The reports to the board, which are submitted twice
per year, include an assessment of the probability and
impact of risks materialising, as well as risk mitigation
initiatives and their effectiveness.
Section 2 Our performance
41
We conduct regular risk reviews to identify risk
factors which may affect our business and financial
performance and to assist management in prioritising
their response to those risks. Our Group internal audit
and compliance function facilitates risk reviews with
each business, shared service operations and
corporate functions, identifying measures and controls
to mitigate these risks. These reviews are designed
so that the different businesses are able to tailor and
adapt their risk management processes to suit their
specific circumstances. Management is responsible
for considering and executing the appropriate action
to mitigate these risks whenever possible. It is not
possible to identify every risk that could affect our
businesses, and the actions taken to mitigate the risks
described below cannot provide absolute assurance
that a risk will not materialise and/or adversely affect
our business or financial performance.
P R I N C I PA L R I S K S – I M PAC T A N D P RO B A B I L IT Y
T
C
A
P
M
I
EDUC ATION
R EG U L ATI O N
A N D F U N D I N G
TEC H N O LOGY
C H A N G ES
B R AN D/
R E P U TATI O N
M A N AG EM ENT
BUSINESS
TRANSFORMATION
ECON O M IC
U N C ERTA I NTI ES
INTELLECTUAL
PROPERTY
RIGHTS
EM ERG I NG
M A R K E T S
ACQ U I S ITI ON S
AN D M ERG ERS
DATA PR I VAC Y
B R E AC H
TESTI N G
FA I LU R ES
P RO B A B I L IT Y
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Pearson plc Annual report and accounts 2013
Principal risks and uncertainties
continued
Principal risks
TEC H N O LOGY C H A N G ES
Our businesses will be impacted by the
rate of and state of technological change,
including the digital revolution and other
disruptive technologies.
We operate in markets which are dependent
on Information Technology (IT) systems and
technological change. The transition of our
products and services to digital increases the
potential exposure to cyber threats.
E D U C ATI O N R EG U L ATI O N A N D F U N D I N G
Our US and UK educational solutions
and assessment businesses may be
affected by changes in government funding
resulting from either general economic
conditions, changes in government
educational funding, programmes, policy
decisions, legislation and/or changes in
the procurement processes.
ECO N O M I C U N C E RTA I N TI E S
Global economic conditions may adversely
impact our financial performance.
A significant deterioration in Group
profitability and/or cash flow caused by
prolonged economic instability could reduce
our liquidity and/or impair our financial
ratios, and trigger a need to raise additional
funds from the capital markets and/or
renegotiate our banking covenants.
We generate a substantial proportion of
our revenue in foreign currencies, particularly
the US dollar, and foreign exchange rate
fluctuation could adversely affect our earnings
and the strength of our balance sheet.
Mitigating factors
Our global education strategy will drive a faster move
to digital and services, recognising that this is a significant
opportunity for Pearson, as well as a potential risk. We
are transforming our products and services for the digital
environment along with managing our print inventories.
Our content is being adapted to new technologies across
our businesses and is priced to drive demand. We develop
new distribution channels by adapting our product offering
and investing in new formats.
We seek to mitigate IT risks by establishing strong IT policies
and operational controls, employing project management
techniques to manage new software developments and/or
systems implementations and have implemented an array
of security measures to protect our IT assets from attacks
or failures that could impact the confidentiality, availability
or integrity of our systems.
In the US we actively monitor changes through participation
in advisory boards and representation on standard setting
committees. Our customer relationship teams have detailed
knowledge of each state market. We are investing in new
and innovative ways to expand and combine our products
and services to provide a superior customer offering when
compared to our competitors, thereby reducing our reliance
on any particular funding stream in the US market. We work
through our own corporate affairs team and our industry
trade associations including the Association of American
Publishers. We are also monitoring municipal funding and
the impact on our education receivables.
In the UK we maintain relationships with those government
departments and agencies that are responsible for policy and
funding. We work proactively with them to ensure our
programmes meet existing and new government objectives
at the right quality.
The Group’s approach to funding is described on page 37
and the Group’s approach to the management of financial
risks is set out in note 19 to the financial statements.
Principal risks
B U S I N ES S TR A N S F O R M ATI O N
The pace and scope of our business
transformation initiatives increase the
execution risk that benefits may not be
fully realised, costs of these changes may
increase, or that our business as usual
activities do not perform in line
with expectations.
If we fail to attract and retain appropriately
skilled employees, our business may
be harmed.
B R A N D/ R E P U TATI O N M A N AG E M E N T
Our business depends on a strong brand,
and any failure to maintain, protect and
enhance our brand would hurt our ability
to retain or expand our business.
Section 2 Our performance
43
Mitigating factors
A chief transformation officer was appointed in 2013, to
oversee the development and implementation of a significant
change programme. Some of the key mitigations for potential
execution risk include change management workshops for
senior leaders; additional support for people moving to new
roles; and regular communication from the CEO and his
leadership team in person and by online videos. To clarify
decision-making authority and accountability in the new
global matrix organisation, worked examples of day-to-day
activities have been developed, including customer-facing
activities such as developing and delivering online
education services.
Our trading update in January 2014 noted the importance
of our transformation and our decisions on timing of changes
such as deferring sales-related restructuring to avoid key
selling periods.
Through the changes during 2013, we have been successful
in promoting our best internal talent and recruiting
individuals who are global leaders in their specific field.
Further details of how we are managing the risks associated
with transformational change are set out under ‘Responsible
business’ from page 47.
We seek to mitigate this risk through the development of
comprehensive processes to enable our business units
to effectively manage relationships with stakeholders,
customers, communities and employees. We have an
ongoing process to understand and evaluate potential brand
threats and monitor and evaluate information about our
brand across media sources. This process and associated
governance includes the reputation and responsibility
committee. The committee met during 2013 and has
considered a number of topics including Pearson’s
non-financial targets, brand and reputation metrics and
reputational risk and mitigations associated with testing
failures in the US.
We take very seriously the health, safety, wellbeing and
protection of our employees, learners and customers and
implement appropriate policies, standards and procedures.
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Pearson plc Annual report and accounts 2013
Principal risks and uncertainties
continued
Principal risks
E M E RG I N G M A R K E T S
Our investment into inherently riskier
emerging markets is growing and the returns
may be lower than anticipated.
I N T E L L EC T UA L P RO P E RT Y R I G H T S
If we do not adequately protect our
intellectual property and proprietary rights
our competitive position and results may be
adversely affected and limit our ability
to grow.
ACQ U I S ITI O N S A N D M E RG E R S
Failure to generate anticipated revenue
growth, synergies and/or cost savings from
acquisitions, mergers and other business
combinations could lead to goodwill and
intangible asset impairments.
Mitigating factors
We draw on our experience of developing businesses
internationally to manage specific country risks. We have
designed and adopted an operating model for a globally-
connected education company and we continue to strengthen
our financial control and managerial resources in emerging
markets to manage expansion. The diversification of our
international portfolio, and relative size of emerging markets
in relation to the Group, further minimises the effect any one
territory could have on the overall Group results.
We seek to mitigate this type of risk through general
vigilance, co-operation with other publishers and trade
associations, advances in technology, as well as recourse to
law as necessary. Digital rights management standards and
monitoring programmes have been developed. We have
a piracy task force to identify weaknesses and remediate
breaches. We monitor activities and regulations in each
market for developments in copyright/intellectual property
law and enforcement and take legal action where necessary.
We perform pre-transaction due diligence and closely
monitor actual performance to ensure we are meeting
operational and financial targets. Any divergence from
these plans will result in management action to improve
performance and minimise the risk of any impairments.
Executive management and the board receive regular
reports on the status of acquisitions and mergers.
Section 2 Our performance
45
Mitigating factors
Through our global enterprise information security and
compliance programme, we have established a governance
model; security and privacy framework and policies; a global
security and privacy organisational model; and standard-based
information security and privacy controls and practices.
We constantly test and re-evaluate our data security
procedures and controls across all our businesses with the
aim of ensuring personal data is secured and we comply with
relevant legislation and contractual requirements. We pursue
appropriate privacy accreditations, e.g., TRUSTe Privacy and
Safe Harbor Seal. We regularly monitor regulation changes
to assess the impact on existing processes and programmes.
We have established a global security operations centre that
provides ongoing monitoring of potential malicious attacks on
our infrastructure and systems.
We seek to minimise the risk of a breakdown in our student
marking with the use of robust quality assurance procedures
and controls and oversight of contract performance,
combined with our investment in technology, project
management and skills development of our people.
In addition to the internal business procedures and controls
implemented to ensure we successfully deliver on our
contractual commitments, we also seek to develop and
maintain good relationships with our customers to minimise
associated risks.
We also look to diversify our portfolio to minimise reliance
on any single contract.
Principal risks
DATA P R I VAC Y B R E AC H
Failure to comply with data privacy
regulations and standards or weakness in
information security, including a failure to
prevent or detect a malicious attack on our
systems, could result in a major data privacy
breach causing reputational damage to our
brands and financial loss.
TES TI N G FA I LU R ES
A control breakdown or service failure in
our school assessment and qualifications
businesses could result in financial loss
and reputational damage.
Our professional services and school
assessment businesses involve complex
contractual relationships with both
government agencies and commercial
customers for the provision of various
testing services. Our financial results,
growth prospects and/or reputation may
be adversely affected if these contracts
and relationships are poorly managed.
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Pearson plc Annual report and accounts 2013
Improving
learner outcomes
at scale, and at lower cost
Section 3 Responsible business
47
Responsible business
Our purpose as a company is
to help people all over the world
make progress in their lives
through learning.
In 2010, we identified three key issues as the focus
of the responsibility strategy for our company: raising
literacy levels; improving learning outcomes and
contributing to competitiveness.
Last year, we signalled that 2013 would be a year of
significant change for Pearson as we developed our
global educational strategy and looked forward to the
creation of Penguin Random House. We also made a
commitment to look at our responsibility framework
using four questions to guide us:
› Are the three key issues still the right ones for us?
› How should we measure and report the educational
impact of our products and services?
› What commitments and targets should we
set ourselves?
› What are the big unmet educational needs that
we can help tackle?
As our work on the global education strategy
progressed, so a clear priority emerged – to
deliver for the learner is the single most important
contribution that Pearson can make to social and
economic wellbeing. The tools and means by which
we will deliver for the learner has become the
efficacy agenda and this is central to our global
education strategy.
To reflect the importance of learning outcomes, we
have introduced a new efficacy section in our annual
report (page 14). In that section we describe our
commitments and targets on measurement and
reporting as we go down the path towards efficacy.
Our vision is that by 2018, we will report on learning
outcomes alongside our financial results.
This section will now report on our wider responsible
business agenda.
We welcome feedback on this aspect of the company
as we do on any other. Please email our director of
corporate responsibility at peter.hughes@pearson.com
with any questions or comments you may have.
Together with sections one and two of this document,
this section forms our strategic report, which was
approved for issue by the board of directors on
10 March 2014 and signed on its behalf by:
Robin Freestone Chief financial officer
(and board member responsible for
corporate responsibility)
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Pearson plc Annual report and accounts 2013
Responsible business
continued
Overview
Helping learners to learn and progress is both the
focus of our business strategy and the single most
significant social contribution we can make.
The section on efficacy (page 14) describes the
approach we are taking to our responsibilities towards
the learner.
In addition, Pearson has adopted a broad definition
of responsible business reflecting priorities we share
with many industry sectors and individual businesses.
These include commitments across a broad range of
social, community and human rights issues relevant to
Pearson to:
› Ensure that our products and services are inclusive,
appropriate in content to the age and location of the
learner and are safe to use and access.
› Inform, support and equip colleagues to embrace and
respond to new priorities and ways of working.
› Provide a safe, healthy workplace where our employees
and increasingly the learners we directly serve are able
to realise their individual potential and there is respect
for privacy, dignity and life outside work.
› Extend our principles on labour standards, human
rights and environmental responsibility to include
suppliers and business partners.
› Provide opportunities for Pearson people to be good
citizens and to get involved in their local communities.
› Deliver against stakeholder expectations on a
response to climate change and in making better,
more efficient use of resources.
› Be open and transparent in how we share and engage
with those with an interest and passion for education
and learning.
We consider our policies relating to these matters to
be effective.
Transforming our company – supporting our people
through change
Last year, we announced our plans to transform
Pearson into a single company driven by a focus on
helping learners make measurable progress in their
lives through learning.
A priority for 2013 was to design and put in place a
new organisational structure that shifted the company
from being a portfolio of businesses towards a single
operating model with standard systems, clear
accountability and quicker decision-making.
We recognised that change can be both inspiring and
empowering but can also bring operational risks.
To mitigate this, we:
› Were clear about the purpose of the change to better
focus on a shared single purpose of delivering for
the learner.
› Held change management workshops for senior
leadership teams to prepare for the new organisational
structure and operating model supported by videos,
blogs, emails and interactive materials.
› Introduced the new leadership team and their
priorities for 2014, both virtually and in-person.
› Explained how the new operating model would work,
focusing on better use of information, improved
efficiency and cohesiveness in collaborating on
strategic priorities.
› Supported the people that left the organisation as
a result of the restructure.
› Continually tracked morale and reaction to change
to inform and shape how we communicated and
supported our people.
At the same time, we continued to focus on our
broader responsibilities as an employer. During the
year, Pearson:
› Launched Milo, a single global platform for all our
people to access learning and development resources.
› Adopted a new consistent global health and safety
policy and introduced a new set of common
management and reporting procedures for our
businesses globally.
› Reviewed and refreshed our code of conduct including
emphasising our commitment to learners of all ages
and types.
› Continued to focus on how to meet our commitments
to attract, recruit and retain the best people. We
know that creating and sustaining an inclusive work
environment is critically important, offering equal
opportunity from the boardroom down regardless
of race, gender, gender identity or reassignment, age,
disability, religion or sexual orientation.
Section 3 Responsible business
49
C A S E S T U DY
Gender diversity
During 2013, we continued with the development of
the gender diversity strategy at Pearson. Pearson is
a supporter of the 30% Club which brings together
chairs and CEOs to work to encourage better
gender balance across their companies. There was
continued progress in advancing women and people
from diverse backgrounds. An example of our work
is the diversity toolkit introduced in the UK in 2012,
and launched in the United States and made
available globally in 2013. Designed for managers
and business leaders across Pearson, it is made up
of guides, tips, advice and employment law, to
enable our leaders to successfully build, manage,
and develop their diversity management skills.
We introduced a single global data collection
process based on our new operating structure to
help inform people management. This includes our
first global view on the gender balance within the
company. More work remains, in particular to
incorporate gender data from countries with
recent acquisitions. The gender balance based on
the introduction of our new organisational
structure was:
Board of directors
7
78%
2
22%
M E N
WO M E N
Senior managers
(excluding executive
board directors)*
61
69%
28
31%
All employees**
17,190
43% 22,774
57%
* For the purposes of this report, senior managers at Pearson are defined
as the senior leadership team, namely those up to and including two
reporting lines from the CEO. We believe this is the most meaningful
way to illustrate the senior leaders and decision-makers at Pearson.
** Data for over 2,000 employees predominantly from China and
Indonesia is not included in the all employees numbers above.
Employee information can be found on page 142.
› In the United States, Pearson received a perfect score
of 100% in the 2014 Corporate Equality Index (CEI),
a benchmarking survey and report on corporate
policies and practices related to LGBT workplace
equality, administered by the Human Rights Campaign
(HRC) Foundation. We were also named as one of
the 100 Best Adoption Friendly Workplaces by the
Dave Thomas Foundation for Adoption.
Disability forms a part of our wider commitment
to equal opportunity. We work to ensure that
appropriate policies, procedures, training and
support are available for disabled colleagues and
their managers. A recent example is a guide on how
to develop corporate videos, so that all our people,
including those with disabilities, can access and
benefit from these films.
Partnering and investing to extend access to learning
Extending access to quality education is a big
challenge, particularly in the poorest countries
in the world. Meeting the challenge requires a
sustained commitment to partnership – international
organisations like the UN and the World Bank,
national governments, donor agencies and charities,
businesses such as Pearson, education providers and
suppliers all working together.
We are committed to playing our part. We do this
through being active in helping shape and inform the
global debate around education and learning policy
as well as investing in projects that explore possible
solutions to the most intractable learning needs.
In 2013, we:
› Joined the board of the Global Partnership for
Education (GPE) representing the private sector
and private foundations. GPE brings together
representatives from nearly 60 developing countries,
donor governments, charitable foundations and
private businesses to work together to help
developing countries strengthen their education
systems. www.globalpartnership.org/
› Championed the role of the private sector in
education and learning in developing countries as a
founding member of the Global Business Coalition
for Education. www.gbc-education.org/
› Made a series of commitments during the UN General
Assembly including to: invest $30m in innovative
education solutions; establish a multi-year flagship
partnership to help overcome barriers to learning for
marginalised children; work with the GPE to develop
a private sector strategy that meets the goals of its
strategic focus on fragile states; and by 2018, to help
20,000 new graduates from across sub-Saharan Africa
to transition into employment.
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Pearson plc Annual report and accounts 2013
Responsible business
continued
› Continued to invest in models that provide access to
C A S E S T U DY
affordable education through low-cost private
schools. The $15m Pearson Affordable Learning Fund
has invested in projects in Ghana, Kenya and India.
www.affordable-learning.com/
› Continued to support the Education Zone on the
Business Fights Poverty network. The zone is a
platform for debate on the role of business in global
education. www.businessfightspoverty.org/page/
education-zone
› Launched Pearson Catalyst, a new incubator
programme to identify and back the most promising
education start-up companies. Pearson provides
mentors, seedcorn funding and access to resources
and insight.
Our communities
Not-for-profit partners help us extend our reach
and impact in ways that have a real impact on
learning – especially for the most disadvantaged –
and are complementary to our business objectives.
We also believe that our stakeholders expect and
value our efforts to work in partnership with
charitable organisations.
We therefore partner and fund a number of charitable
organisations with the Pearson Foundation being the
largest of these. In 2013, our worldwide charitable
giving was £11.8m or 1.5% of pre-tax profits.
Highlights this year include:
› Booktime gave its ten millionth book. Booktime sees
every child starting school in England and Wales
receive a book pack containing two free books to
take home and keep.
› We were the largest book donor to Book Aid
International in 2013. We have given 1.2 million
books to the charity to support the development
of libraries in schools and communities across sub-
Saharan Africa.
› The Financial Times seasonal appeal raised £1.4m for
World Child Cancer, a charity helping treat sick
children in some of the poorest countries. Since 2006,
FT appeals have raised £14m for charity partners.
For 2014, we will look more broadly at our approach to
community partnerships including the metrics we use.
Pearson Foundation
The Pearson Foundation is an independent charity
that aims to make a difference by promoting
literacy, learning and great teaching. Its programmes
in 2013 included:
› Helping Jumpstart’s Read for the Record to set a
new world record for reading the same book on
one day as 2,462,860 adults and children read
Otis, by Loren Long, in classrooms, libraries, and
community centres across the United States.
› Strong Performers and Successful Reformers in
Education, developed in partnership with the
Organisation for Economic Co-operation and
Development (OECD) helps inform what works
in education globally.
› BridgeIT has reached over one million children
and their teachers using mobile technology to
deliver professional development materials and
educational resources to remote and underserved
classrooms in ten countries around the world.
In 2011, the Pearson Foundation faced criticism on
some of its programmes and the New York State
Attorney General announced an investigation into
the Foundation’s governance, administration, and
relationship with Pearson. We co-operated fully
with the investigation. A settlement agreement
with the Pearson Foundation and Pearson, Inc.
has been concluded.
Pearson and the Foundation maintain we have
always acted with the best intentions and complied
with the law. However, we recognise there were
times when the governance of the Foundation could
have been clearer and more transparent. Over the
past two years, the Foundation has taken several
steps to strengthen its governance, beginning with
the addition of independent directors to the board
and the adoption of stronger operational systems.
Under the settlement, these efforts will be further
enhanced by the creation of a three-person
audit committee.
The Foundation has also agreed to pay $7.5m
into a fund managed by the Attorney General
that will support the work of 100Kin10, an
organisation committed to placing 100,000 science
and mathematics teachers into US schools in the
next ten years.
Section 3 Responsible business
51
CO M M U N IT Y
Challenges
Access to learning,
literacy and great teaching.
Raising literacy levels.
Our commitment
To maintain our total community investment
at 1% or more of operating profit.
Using 2010 as our base, to expand our
book gifting activities.
How we measure
progress
One way we extend our reach is through
partnerships with literacy and learning
charities. We report on our community
investment spend.
Number of books donated to schools,
libraries and literacy charities.
Community investment spend
Number of books donated
13
12
11
10
09
08
1.5%
1.2%
1.2%
1.6%
1.4%
1.1%
£11.8m
£11.8m
£11.4m
£11.4m
£11.5m
£11.5m
£13.1m
£13.1m
£10.5m
£10 5m
£10.5m
£7.7m
£7.7m
13
12
11
10
09
08
3.4m
3.4m
2.1m
2.1m
2.0m
2.0m
1.7m
1.7m
1 7m1.7m
1.7m
1.7m
1.7m
Environment: climate change and avoiding deforestation
Extreme weather events continued in 2013, most
notably Typhoon Haiyan in the Philippines which
was one of the worst storms on record. Pearson
has around 350 people in Manila with the majority
working for the FT. Although our employees are all
safe and our operations were not directly affected,
many had anxious moments tracking family members.
Pearson matches contributions made by Pearson
employees in countries and communities where we
operate. Over 1,000 Pearson people around the
world contributed to a special fund set up in the wake
of Haiyan, which together with matching from Pearson
meant that over $150,000 was raised for charities
working in the Philippines, primarily to help children
get back into school and to rebuild their lives.
Typhoon Haiyan was a stark reminder on the
importance of minimising environmental impact.
Pearson continues to be climate neutral, a
commitment we first achieved in 2009 and have
maintained ever since.
This commitment was designed to encourage the
company to focus on carbon reduction. Pearson was
included in the media category as a Decoupling Leader
in the Natural Capital Index developed by Trucost,
a research firm focusing on sustainability metrics.
Trucost looked at the environmental impact of 4,600
publicly traded companies and 34 were recognised
as Decoupling Leaders having successfully separated
growth from resource use over a sustained period.
Our second focus area is forests. As a purchaser of
paper and newsprint for our books, magazines and
newspapers, security and sustainability of supply
are very important to us. We have focused on
sustainability sourcing and being more efficient in
how we use paper. Also, as our transition towards
being an educational technology and solutions
provider gathers pace, so this will change our
environmental footprint.
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Pearson plc Annual report and accounts 2013
Responsible business
continued
Highlights of our activities include:
› Pearson received a 2013 Green Power Leadership
Award from the US Environmental Protection Agency
(EPA) for its green power purchase. 100% of the
electricity purchased by Pearson globally – over
215 MWh in 2013 – comes from green power.
› We have invested in renewable energy generation at
four sites and have 2.3 Megawatts of wind and solar
assets installed.
› Pearson was the second ever organisation to be
certified globally against the Carbon Trust Standard.
This recognises leadership in measuring, managing
and reducing year-on-year carbon emissions.
› Facilities in the United States also seek to secure
LEED, an internationally-recognised mark of excellence
by the US Green Building Council. Over 800,000
square feet across six of our buildings are LEED
certified. Pearson is also certified against ISO14001,
the environmental management standard in the UK
and Australia.
Pearson invests in forest-based carbon offsets for
any part of our climate footprint that we cannot
reduce or avoid through other means. Since 2009,
this programme has seen over 700 hectares of forest
protected in Colombia, Costa Rica, the United States
and the UK.
E N V I RO N M E N T
Challenges
Our commitment
How we
measure progress
Climate change
To maintain our
commitment to
climate neutrality
Through carbon reduction;
purchase of renewable
energy; renewable
energy generation at our
sites and the purchase
of carbon offsets
G LO B A L G H G E M I S S I O N S DATA F O R C A L E N DA R Y E A R 2 013
Emissions from:
Combustion of fuel and operation
of facilities (GHG Protocol Scope 1)
natural gas, company owned/
leased vehicles, refrigerant gas loss
and fuel oil
Electricity, heat, steam and cooling
purchased for own use
(GHG Protocol Scope 2)
Total
Intensity metric (tonnes CO2e/full time
employee for scope 1 and 2)
Metric tonnes
of CO2e
30,170
115,548
145,718
3.19
We have reported on all of the emission sources
required under the Companies Act 2006 (Strategic
Report and Directors’ Reports) Regulations 2013.
These sources fall within our consolidated financial
statement. We do not have responsibility for any
emission sources that are not included in our
consolidated statement.
The method we have used to calculate GHG
emissions is the GHG Protocol Corporate Accounting
and Reporting Standard (revised edition), together
with the latest emission factors from recognised public
sources including, but not limited to, Defra, the
International Energy Agency, the US Energy
Information Administration, the US Environmental
Protection Agency and the Intergovernmental panel
on Climate Change.
We publish a separate report providing more
information on our environmental impact and this
includes some corporate value chain emissions data
(GHG Protocol Scope 3).
Section 3 Responsible business
53
External benchmarks
One way we assess how we are doing as a responsible business is to maintain our position in key indices and
benchmarks of social responsibility.
Dow Jones
Sustainability
Indexes*
BITC Corporate
Responsibility
Index
Inclusion in
FTSE4Good
2013
Silver class
2012
Gold class
2011
2010
Global sector leader
Platinum
Platinum (retained)
Platinum
Platinum (retained)
Yes
*Gold class is within 1% of the sector leader, silver class is within 2% of the sector leader.
Pearson has a zero tolerance policy towards bribery
and corruption. Our policy introduced in 2011 sets out
our standards; we carry out risk assessments and have
a network of designated managers across the business
responsible for compliance with our policy.
We are committed to making sure our people
understand how we are doing as a company, including
how world trends might affect them and the business.
We provide comprehensive, relevant information in
a variety of ways, including regular presentations from
senior executives and consulting where appropriate
so that we can learn and take account of the views of
our people.
Our values, principles and behaviour
Although the structure and culture of the company is
changing, values are what define us. Our values to be
brave, imaginative and decent in everything we do are
the foundation of the company.
Our values are underpinned by our Code of Conduct
that covers, among other things, individual conduct,
learners, employees, community, the environment
and society.
We make sure everyone is aware of and understands
the code and this forms part of our induction for new
employees. Once a year, everyone working for
Pearson gets a copy either electronically or on paper,
and is asked to read it; to confirm to the Pearson CEO
that they have read it and understood it; and in doing
so, to provide a check that the company complies with
it. If anyone has concerns, these can be raised with a
line manager or through a free, confidential telephone
line/website.
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Pearson plc Annual report and accounts 2013
We have a passion
for the life changing impact of learning
around the world
Section 4 Governance
55
Board of directors
Pearson’s board brings a
wide range of experience,
skills and backgrounds.
C H A I R M A N
E X EC U TI V E D I R EC TO R S
Glen Moreno Chairman
aged 70, appointed 1 October 2005
John Fallon Chief executive
aged 51, appointed 3 October 2012
Robin Freestone Chief financial officer
aged 55, appointed 12 June 2006
Chairman of the nomination
committee and member of the
remuneration committee
Glen has more than four decades of
experience in business and finance,
and is currently deputy chairman of
The Financial Reporting Council Limited
in the UK and non-executive director
of Fidelity International Limited. Previously,
Glen was deputy chairman and senior
independent director at Lloyds Banking
Group plc, senior independent director
of Man Group plc and acting chairman
of UK Financial Investments Limited,
the company set up by HM Treasury to
manage the government’s shareholdings
in UK banks.
Member of the nomination committee
John became Pearson’s chief executive
on 1 January 2013. Since 2008 he had been
responsible for the company’s education
businesses outside North America, and
a member of the Pearson management
committee. He joined Pearson in 1997
as director of communications and was
appointed president of Pearson Inc., a role
he combined with his communications
responsibilities, in 2000. In 2003, he was
appointed CEO of Pearson’s educational
publishing businesses for Europe,
Middle East & Africa (EMA) and gradually
took on a broader international education
brief. Prior to joining Pearson, John was
director of corporate affairs at Powergen
plc, where he was also a member of
the company’s executive committee.
Earlier in his career, John held senior
public policy and communications roles
in UK local government.
Robin’s experience in management and
accounting includes a previous role as
group financial controller of Amersham plc
(now part of General Electric) and senior
financial positions with ICI plc, Zeneca and
Henkel UK. He joined Pearson in 2004 as
deputy chief financial officer and became
chief financial officer in June 2006.
Robin qualified as a chartered accountant
with Touche Ross (now Deloitte), and is
currently a non-executive director and
founder shareholder of eChem Limited.
Robin sits on the Advisory Group of the
ICAEW’s Financial Reporting Faculty and
is chairman of The Hundred Group of
Finance Directors. He also sits on the
CBI’s Economic Growth Board.
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Pearson plc Annual report and accounts 2013
Board of directors
continued
N O N - E X EC U TI V E D I R EC TO R S
David Arculus Non-executive director
aged 67, appointed 28 February 2006
Vivienne Cox Senior independent director
aged 54, appointed 1 January 2012
Linda Lorimer Non-executive director
aged 61, appointed 1 July 2013
Chairman of the remuneration
committee and member of the audit
and nomination committees
David has experience in banking,
telecommunications and publishing in a long
career in business. Currently he is chairman
of Numis Corporation plc and the Advisory
Board of the British Library and is a member
of council of Cranfield University. David’s
previous roles include the chairmanship of
Aldermore Bank plc, O2 plc, Severn Trent
plc and IPC Group, as well as chief operating
officer of United Business Media plc, group
managing director of EMAP plc and a non-
executive director of Telefonica S.A.
David served from 2002 to 2006 as
chairman of the UK government’s Better
Regulation Task Force, which worked on
reducing burdens on business.
Member of the audit, remuneration
and nomination committees
Member of the audit and
nomination committees
Vivienne has wide experience in energy,
natural resources and business innovation.
She worked for BP plc for 28 years, in Britain
and Continental Europe, in posts including
executive vice president and chief executive
of BP’s Gas, Power & Renewables business
and its Alternative Energy unit. She is non-
executive director of mining company Rio
Tinto plc and energy company BG Group
plc, and chairman of the supervisory board
of Vallourec, which supplies tubular systems
for the energy industry. She is also lead
independent director at the UK Department
for International Development. Vivienne is a
commissioner of the Airports Commission,
which was set up by the UK government
to examine any requirements for additional
UK airport capacity.
Linda has a deep background in education
strategy, administration and public affairs.
She is vice president for Global & Strategic
Initiatives at Yale University in New Haven,
Connecticut, where her duties include
oversight of Yale’s Office of International
Affairs and Office of Digital Dissemination.
Over a 30-year career in higher education,
she has been responsible for many of Yale’s
administrative services including the
university’s public communications, alumni
relations and Office of Sustainability.
Previously, Linda served as president of
Randolph-Macon Woman’s College in
Virginia, and had earlier worked at Yale in
several senior roles including associate
provost. She is a non-executive director of
Save the Children (US) and was chair of the
board of the Association of American
Colleges and Universities.
Ken Hydon Non-executive director
aged 69, appointed 28 February 2006
Josh Lewis Non-executive director
aged 51, appointed 1 March 2011
Harish Manwani Non-executive director
aged 60, appointed 1 October 2013
Chairman of the audit committee
and member of the remuneration
and nomination committees
Ken’s experience in finance and business
includes working in the electronics, retail,
consumer products and healthcare
sectors. He is a non-executive director
of Reckitt Benckiser Group plc, one of the
world’s leading branded consumer goods
companies in health, hygiene and home.
He is also a non-executive director of
Merlin Entertainments plc, the world’s
second largest visitor attraction operator.
From 2004 to 2013 he was a non-executive
director of Tesco plc. Previously, Ken was
chief financial officer of Vodafone Group plc,
the multinational telecommunications
company, and financial director of
subsidiaries of Racal Electronics.
Member of the remuneration and
nomination committees
Josh’s experience spans finance, education
and the development of digital enterprises.
He is the founder of Salmon River Capital
LLC, a New York-based private equity/
venture capital firm focused on technology-
enabled businesses in education, financial
services and other sectors. Over a 25-year
career in active, principal investing, he has
been involved in a broad range of successful
companies, including several pioneering
enterprises in the education sector.
In addition, he has long been active in
the non-profit education sector, with
associations including New Leaders, New
Classrooms, and the Bill & Melinda Gates
Foundation. He is also a non-executive
director of eVestment and Axioma, both
financial data/technology companies, and
Parchment, an education credentials
management company.
Member of the nomination committee
Harish has an extensive background in
emerging markets and senior experience
in a successful global organisation.
He is chief operating officer of consumer
products company Unilever, and serves
on the company’s executive board.
Harish joined Unilever in 1976 as a
marketing management trainee in India, and
has held senior management roles around
the world, including North America, Latin
America, Europe, Africa and Asia. He is
non-executive chairman of Hindustan
Unilever Limited in India, and serves on the
board of Whirlpool Corporation in the US.
He is also on the board of the Indian School
of Business, the Economic Development
Board (EDB) of Singapore, and The Human
Capital Leadership Institute in Singapore.
Section 4 Governance
57
With these changes the board now predominantly
comprises independent non-executive directors. We
believe this re-balancing enables Pearson to benefit
from our board’s wide range of perspectives and
backgrounds, and allows the board to look at the
bigger picture of the Group’s strategy, performance
and value, whilst allowing the executive management
to focus on what it does best – driving our company
forward.
May 2013 saw the announcement of the new Pearson
Executive team. You will have read elsewhere in this
B usiness
G
report about the new eographies and Lines of
along which Pearson is now organised. The presidents of
these Geographies and Lines of B usiness now sit on the
Pearson Executive, together with colleagues leading the
key enabling functions. The board and I had the pleasure
of spending two days discussing strategy with the
Pearson Executive in October 2013, of which a little
more later in the governance report.
As a board we organise our work around four major
themes where we believe we can add value:
governance, strategy, business performance and
people. Our board calendar and agenda provide ample
time to focus on these themes and we have set out
some examples of the business considered by the
board, as well as the governance practices to which
we adhere, on the pages that follow.
We hope this report clearly sets out how your
company is run, and how we align governance
and our board agenda with the strategic direction
of Pearson. We always welcome questions or
comments from shareholders, either via our website
(www.pearson.com) or in person at our annual
shareholders’ meeting.
Glen Moreno Chairman
Chairman’s letter
Dear shareholders
This year, we are reporting for the first time against the
2012 edition of the UK Corporate Governance Code
(the Code).
As has been highlighted elsewhere within this report,
2013 was a period of great change in our organisation,
following the appointment of John Fallon as chief
executive at the start of the year. I would like to take
this opportunity to share with you some insights as to
how our board and governance operations have
adapted throughout the year to take account of
Pearson’s focus on becoming one global education
company.
The Pearson board consists of senior executive
management alongside a strong group of non-executive
directors drawn from successful international
businesses and education institutions with experience
of corporate strategy, education, emerging markets,
technology and consumer marketing. We continually
assess and refresh the board to ensure we maintain
an appropriate balance and diversity of skills and
experience.
2013 saw a number of changes in Pearson’s
boardroom, reflecting both the new strategic direction
of the business and our desire to maximise the valuable
external experience which non-executive directors
bring to the table. Executive directors Rona Fairhead
and John Makinson stepped down from the board in
April and July respectively, although John remains part
of the Pearson family in his new role as chairman of
Penguin Random House. In August we said goodbye to
Susan Fuhrman, a non-executive director for nine years
and, at the end of December, Will Ethridge stepped
down from his executive position on the board and
from his role as CEO of Pearson North American
Education, although he will remain a valued adviser
to the company during 2014.
During the year we also welcomed Linda Lorimer
and Harish Manwani to the board, as non-executive
directors. Linda and Harish bring a wealth of
experience in the areas of education, digital initiatives
and emerging markets, which reflect precisely those
areas on which Pearson is now focused.
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Pearson plc Annual report and accounts 2013
Board governance
Corporate governance
Introduction
The board believes that during 2013 the company was
in full compliance with the UK Corporate Governance
Code (the Code). A detailed account of the provisions
of the Code can be found on the FRC’s website at
www.frc.org.uk and we encourage readers to view
our compliance schedule on the company website at
www.pearson.com/investors/shareholder-
information/governance
Composition of the board
The board currently consists of the chairman,
Glen Moreno, two executive directors including the
chief executive, John Fallon, and six independent
non-executive directors.
Chairman and chief executive
There is a defined split of responsibilities between the
chairman and the chief executive. The chairman is
primarily responsible for the leadership of the board
and ensuring its effectiveness; the chief executive is
responsible for the operational management of the
business and for the development and implementation
of the company’s strategy as agreed by the board and
the Pearson Executive. The roles and responsibilities of
the chairman and chief executive are clearly defined,
set out in writing and reviewed and agreed by the
board annually.
Chairman
There were no changes to the chairman’s significant
commitments during the course of 2013.
Senior independent director
Vivienne Cox is the company’s senior independent
director, having been appointed to the role on
1 January 2013.
Vivienne’s role includes meeting regularly with the
chairman and chief executive to discuss specific issues,
as well as being available to shareholders generally if
they should have concerns that have not been
addressed through the normal channels.
Following Patrick Cescau’s departure in December
2012, he was invited back in February 2013 − in his
former role as senior independent director − to
conduct a session with the other non-executive
directors and the chief executive to appraise the
performance of the chairman, including in relation to
the effectiveness of the nomination committee as part
of the annual board evaluation process.
Vivienne, as incumbent senior independent director,
has responsibility for appraising the chairman’s
performance during 2013 and beyond.
The senior independent director would be expected
to chair the nomination committee in the event that
it was considering succession to the role of chairman
of the board.
Independence of directors
All of the non-executive directors were considered by
the board to be independent for the purposes of the
Code during the year ended 31 December 2013.
The board reviews the independence of each of
the non-executive directors annually. This includes
reviewing their external appointments and any
potential conflicts of interest as well as assessing their
individual circumstances in order to ensure that there
are no relationships or circumstances likely to affect
their character or judgement. In addition to this review,
each of the non-executive directors is asked annually to
complete an independence questionnaire to satisfy
requirements arising from Pearson’s US listing.
David Arculus and Ken Hydon have each now served
on the board for eight years and it is their intention to
retire from the board at the 2015 AGM. As chairmen
of the remuneration and audit committees respectively,
the nomination committee is actively considering
options for their successors both in their capacity as
non-executive directors and for their chairmanships.
Length of tenure of non-executive directors
Under 3 years
3 to 6 years
7 years or more
3
1
2
Source: Pearson
Section 4 Governance
59
Conflicts of interest
Under the Companies Act 2006 (the Act), directors
have a statutory duty to avoid conflicts of interest with
the company. The company’s Articles of Association
(Articles) allow the directors to authorise conflicts of
interest. The company has established a procedure to
identify actual and potential conflicts of interest,
including all directorships or other appointments to, or
relationships with, companies which are not part of the
Pearson group and which could give rise to actual or
potential conflicts of interest. Once notified to the
chairman or company secretary, such potential
conflicts are considered for authorisation by the board
at its next scheduled meeting. The relevant director
cannot vote on an authorisation resolution, or be
counted in the quorum, in relation to the resolution
relating to his/her conflict or potential conflict.
The board reviews any authorisations granted on
an annual basis.
Board meetings
The board held six scheduled meetings in 2013, with
some meetings taking place over two or more days.
In recent years, we have developed our board meeting
agenda to ensure that board discussion and debate is
centred on the key strategic issues facing the company.
Over the course of 2013, the board maintained a
watching brief over the transformation project and
received regular formal updates from the chief
executive and the transformation team, headed by
the director of communications. Other major items
covered by the board in the year included:
BUSINESS PERFORMANCE: FEBRUARY 2013, LONDON
›(cid:3)2012 report and accounts and dividend
recommendation
›(cid:3)2013 operating plan
›(cid:3)Risk assessment and review of mitigating actions
›(cid:3)Annual review of authorised conflicts
›(cid:3)Review of division of responsibilities between
chairman and chief executive
›(cid:3)Plans for board effectiveness review
›(cid:3)Discussion of accounting exemption for UK subsidiaries
GOVERNANCE AND SHAREHOLDER MATTERS:
APRIL 2013, LONDON
›(cid:3)Focus on forthcoming AGM and review of
shareholder issues
›(cid:3)Review of investor relations strategy and share price
performance
›(cid:3)Review of corporate social responsibility
›(cid:3)Status update on Penguin Random House transaction
and ebook settlement proposal
›(cid:3)Risk assessment and review of mitigating actions
›(cid:3)Governance update
STRATEGY: JUNE 2013, JOHANNESBURG
›(cid:3)Review of Southern African education business
including site visits, panel sessions and debates – see
case study on page 62 for further information
BUSINESS PERFORMANCE: JULY 2013, LONDON
›(cid:3)Interim results and dividend approval
›(cid:3)Penguin Random House – post-completion update
›(cid:3)Initial review of proposed Multi acquisition
›(cid:3)Consideration of Mergermarket sale
STRATEGY: OCTOBER 2013, LONDON
›(cid:3)Launch of efficacy strategy
›(cid:3)Discussion of New York Attorney General’s review
of the Pearson Foundation
›(cid:3)Review of standing committee terms of reference
›(cid:3)Workshop with Pearson Executive – see case study
on page 61 for further information
STRATEGIC PLAN: DECEMBER 2013, NEW YORK
›(cid:3)Preliminary view of 2014
›(cid:3)Overview of changes to the 2013 year end reporting
requirements
›(cid:3)Risk assessment and review of mitigating actions
›(cid:3)Approval of schedule of authority limits
In addition to the six scheduled meetings, the board
held one further full meeting in November 2013 to
approve the Mergermarket sale and Grupo Multi
acquisition and undertook discussions throughout the
year, both in formal meetings and as otherwise
required, to consider the progress and terms of these
and other corporate transactions.
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Pearson plc Annual report and accounts 2013
Board governance continued
The following table sets out the attendance of the
company’s directors at scheduled board meetings
during 2013:
Board
meetings
attended
Notes
6/6
Chairman
Glen Moreno
Executive directors
6/6
John Fallon
5/6
Will Ethridge
–
Rona Fairhead
6/6
Robin Freestone
John Makinson
3/3
Non-executive directors
4/6
David Arculus
6/6
Vivienne Cox
3/4
Susan Fuhrman
6/6
Ken Hydon
6/6
Josh Lewis
3/3
Linda Lorimer
2/2
Harish Manwani
absent for medical reasons
stood down 26 April 2013
stood down 1 July 2013
unable to travel due to injury
stood down 7 August 2013
appointed 1 July 2013
appointed 1 October 2013
The role and business of the board
The board is deeply engaged in developing and
measuring the company’s long-term strategy,
performance and value. We believe that it adds
a valuable and diverse set of external perspectives
and that robust, open debate about significant
business issues brings a valuable additional discipline
to major decisions.
A schedule of formal matters reserved for the board’s
decision and approval is available on our website,
at www.pearson.com/investors/shareholder-
information/governance
A standing committee of the board has been
established to approve certain ordinary course of
business items such as banking matters, guarantees,
intra-group transactions and routine matters relating
to employee share plans. The committee has written
terms of reference, reviewed and approved each year,
which clearly set out its authority and duties. These can
be found on the company website at
www.pearson.com/investors/shareholder-
information/governance
The board receives timely, regular and necessary
financial, management and other information to fulfil its
duties. Comprehensive board papers are circulated to
the board and committee members at least one week
in advance of each meeting and the board receives
regular reports from the chief executive. In addition
to meeting papers, a library of current and historic
corporate information is made available to directors
electronically to support the board’s decision-making
process. Directors can obtain independent professional
advice, at the company’s expense, in the performance
of their duties as directors. All directors have access to
the advice and services of the company secretary.
Non-executive directors meet with local senior
management every time board and committee
meetings are held at the locations of operating
companies, such as during the board’s 2013 trip to
South Africa. This allows the non-executive directors
to share their experience and expertise with senior
managers as well as allowing them to better
understand the abilities of senior management, which
in turn will help them assess the company’s prospects
and plans for succession.
Culture and values of the board
During a time of widespread organisational and
strategic change at Pearson, the board has had
oversight of the plans to embed efficacy firmly into
the company’s culture.
Since 2012, the board has been kept abreast of the
company’s intentions through a number of sessions
with the chief education advisor. At the most recent
such session, in October 2013, the board had the
opportunity to discuss building efficacy into all aspects
of Pearson’s operations, and noted their strong
support for Pearson’s involvement in the global public
dialogue on efficacy and education.
Section 4 Governance
61
Succession planning
Board evaluation
The board considers oversight of succession planning –
not only at board and executive management level but
for all key positions throughout the business – as one
of its prime responsibilities.
2013 has seen a large scale reorganisation of both the
company and the structure of its senior management
team. Throughout the year, the board received regular
updates from the chief executive and the
transformation team on the organisational redesign
project. This included oversight of the key
appointments made to the Pearson Executive and that
team’s direct reports, the senior leadership group.
C A S E S T U DY
Board and Pearson Executive
As part of the board’s regular programme
of updates on the education strategy and
organisational design initiatives, a section of the
October 2013 board meeting was dedicated to
a workshop involving members of the Pearson
Executive. Each member of the Pearson Executive
discussed with the board their new roles, strategic
priorities, and the challenges and opportunities
facing their particular business area as they
moved towards the new operating structure
on 1 January 2014.
The session had benefits for all parties involved –
the board was able to learn more about the
recently appointed executive team, and to
explore with them key issues relating to the
geographies, lines of business, products and
technologies, whilst demonstrating to the
executive its involvement and support during
a period of great change.
During the year the board also approved formal
contingency plans for temporary absence of the chief
executive for health or other reasons.
The board’s review of its effectiveness in 2012 took
place during early 2013. A primary focus for the board
in 2012 was chief executive succession. On review,
the board concluded that the process was structured,
detailed and effective.
For 2013, the board identified two key priorities:
›(cid:3)To restructure and strengthen the board through
a higher proportion of independent directors with
experience and skills relevant to Pearson’s strategy,
particularly in education and emerging markets. The
appointments of Linda Lorimer and Harish Manwani
were in line with this objective;
›(cid:3)To keep the board closely informed and involved in
Pearson’s strategic transformation during the year,
including regular detailed briefings on strategy, planned
organisational changes and key leadership
appointments. The board reviewed plans and actions in
considerable detail on six different occasions in 2013,
including at the strategy workshop held in October
with the Pearson Executive.
The board has also given consideration to the
information it receives and how this is reported. As a
result, an improved board information system is being
designed which will enable the board to more
effectively track performance and developments in the
business model. As part of this review, in January 2014,
we instituted a revised monthly chief executive’s letter
to the board.
The board also wished to give consideration as to ways
in which to maximise the effectiveness of its overseas
meetings. In June 2013, the board held a meeting in
South Africa, more information on which is set out in
the case study on page 62. Following the trip, a short
questionnaire was distributed to board members.
Particular learning points arising from the board’s input
related to:
›(cid:3)Continuing to ensure site visits are representative
of Pearson’s operations in the region;
›(cid:3)The high value placed on meeting the end users
of Pearson’s products – students and teachers;
›(cid:3)Logistical arrangements both before and during the
trip; and
›(cid:3)Ensuring that board presentations are pitched to
impart a sufficient level of knowledge for directors
to perform their roles.
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Pearson plc Annual report and accounts 2013
Board governance continued
It is intended that these learning points will be used to
shape future overseas agendas, including potential visits
by the board to the US and an emerging market
territory during 2014.
During the course of the year the executive directors
were also evaluated on their performance against
personal objectives. Up to 20% of the executives’ total
annual incentive opportunity for 2013 was based on
functional, operational, strategic and non-financial
objectives relevant to their specific area of
responsibility. The chairman leads the assessment of
the chief executive, and the non-executive directors,
led by the senior independent director, conduct a
review of the chairman’s performance.
In accordance with the Code, the board anticipates
undertaking an external evaluation during 2014. The
board is currently discussing focus and timing for the
process to gain the maximum benefit from the review.
In addition to the review of the board and individual
directors, the audit and remuneration committees each
undergo an annual evaluation process to review their
performance and effectiveness. The process covers
areas such as roles and responsibilities, quality and
timeliness of meeting materials, opportunity for
discussion and debate, dialogue with management
and access to independent advice.
C A S E S T U DY
South Africa
In June 2013, the board visited South Africa for a
three-day meeting to understand the economic
and political environment, the education landscape
and Pearson’s South African business, one of the
Group’s most consistently successful businesses
over the last decade.
The board met with a number of Pearson’s senior
leaders in the region and also took the opportunity
to meet with the leader of Pearson’s Nigeria
business as it learned more about scope for growth
in that country and more widely across Africa.
The board spent time visiting local schools as well
as reviewing higher education initiatives on the
main campus of CTI, Pearson’s higher education
business in South Africa.
The board also met with Cyril Ramaphosa, the
recently elected deputy president of the ANC,
at a session involving a range of business leaders,
journalists, authors and key opinion leaders in
education, exploring how Pearson could do more
to tackle problems in education and training in
the region.
Finally, outside of the core educational focus of the
trip, the board received an update on Penguin in
South Africa to learn more about how the merger
with Random House is enhancing publishing
opportunities.
Section 4 Governance
63
Directors’ training and induction
Directors receive a significant bespoke induction
programme and a range of information about Pearson
when they join the board. This includes background
information on Pearson and details of board procedures,
directors’ responsibilities and various governance-related
issues, including procedures for dealing in Pearson shares
and their legal obligations as directors. The induction also
includes a series of meetings with members of the board,
presentations regarding the business from senior
executives and a briefing on Pearson’s investor
relations programme. The induction programme for
Linda Lorimer and Harish Manwani is ongoing and is
being tailored to best introduce them to Pearson in a
period of organisational change.
The directors’ training is supplemented with
presentations about the company’s operations, by
holding board meetings at the locations of operating
companies and by encouraging the directors to visit
operating companies and local management as and when
their schedule allows. The company secretary and general
counsel, in conjunction with the Group’s advisers,
monitor legal and governance developments and update
the board on such matters as agreed with the chairman.
Directors can also make use of external courses.
Directors’ indemnities
In accordance with section 232 of the Act, the company
grants an indemnity to all of its directors. The indemnity
relates to costs incurred by them in defending any civil
or criminal proceedings and in connection with an
application for relief under sections 661(3) and (4) or
sections 1157(1)-(3) of the Act, so long as monies are
repaid not later than when the outcome becomes final if:
(i) they are convicted in the proceedings; (ii) judgment is
given against them; or (iii) the court refuses to grant the
relief sought.
The company has purchased and maintains directors’
and officers’ insurance cover against certain legal liabilities
and costs for claims in connection with any act or
omission by such directors and officers in the execution
of their duties.
Shareholder engagement
Pearson has an extensive programme of communication
with all of its shareholders – large and small, institutional
and private.
In 2013, we continued with our shareholder outreach
programme, seeing approximately 780 institutional and
private investors at more than 450 different institutions
in Australia, Brazil, Canada, China, Continental Europe,
India, Japan, Malaysia, Singapore, South Africa, South
Korea, the UK and the US.
There are five trading updates each year and the chief
executive and chief financial officer present our
preliminary and interim results updates. They also attend
regular meetings throughout the year with investors in
the UK and around the world, tailored to investor
requirements, to discuss the performance of the
company, the company’s strategy, our restructuring
programme, structural changes in our markets and risks
and opportunities for the future.
The chairman meets regularly with significant
shareholders to understand any issues and concerns they
may have. This is in accordance with both the Code and
the UK Stewardship Code. The non-executive directors
meet informally with shareholders both before and after
the AGM and respond to shareholder queries and
requests as necessary. The chairman ensures that the
board is kept informed of principal investors’ and
advisers’ views on strategy, and corporate governance.
We also have an established programme of educational
seminars for our institutional shareholders focusing
on individual parts of Pearson. These seminars are
available to all shareholders via webcast on
www.pearson.com
Private investors represent over 80% of the shareholders
on our register and we make a concerted effort to
engage with them regularly. Shareholders who cannot
attend the AGM are invited to email questions to the
chairman in advance at glenmoreno-agm@pearson.com
We encourage our private shareholders to become
more informed investors and have provided a wealth
of information on our website about managing Pearson
shareholdings, see
www.pearson.com/investors/shareholder-information
for further information, or turn to page 210 of this report.
We also encourage all shareholders, who have not
already done so, to register their email addresses through
our website and with our registrar. This enables them to
receive email alerts when trading updates and other
important announcements are added to our website.
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Pearson plc Annual report and accounts 2013
Board governance continued
We post all company announcements on our website,
www.pearson.com, as soon as they are released, and
major shareholder presentations are made accessible
via webcast or conference call. Our website contains
a dedicated investor relations section with an extensive
archive of past announcements and presentations,
historical financial performance, share price data and
a calendar of events. It also includes information about
all of our businesses, links to their websites and details
of our corporate responsibility policies and activities.
We are committed to ensuring that all our
shareholders receive their dividends and encourage the
use of our dividend mandate service which enables UK
and many overseas shareholders to receive dividends
directly into their nominated bank account.
Due to its continued popularity we again provided
shareholders with smaller holdings the opportunity to
use our registrar’s low-cost share dealing service, giving
them the chance to add to or reduce their stake in
Pearson at significantly reduced dealing rates, or to
donate shares to charity with ease. This service proved
very popular with shareholders, and consequently we
intend to offer this service again at a future date.
We believe it is important that our employees have
a shared interest in the direction and achievements
of Pearson and are pleased to say that a large number
of our employees are shareholders in the company.
Our AGM – which will be held on 25 April this year
– is an opportunity for all shareholders to meet the
board and to hear presentations about Pearson’s
businesses and results.
Board committees
The board has established three formal committees:
the nomination committee, the remuneration
committee and the audit committee. The chairmen
and members of these committees are appointed
by the board on the recommendation (where
appropriate) of the nomination committee and in
consultation with each relevant committee chairman.
In addition to these board committees, two further
committees operate with board input: the standing
committee and the reputation and responsibility
committee which primarily focuses on reputational risk.
More detail on the work of this committee can be
found within the principal risks and uncertainties
section on pages 41 to 45.
During 2013, the balance of work considered by the
board and its formal committees has shifted, so that
more time is spent by the committees discussing their
areas of expertise, enabling the board meetings to
focus on strategy and performance. Reports to the
board by each of the committee chairmen continue to
form a standing item on each board agenda, ensuring a
good communication flow between the bodies.
The following table shows attendance by directors at
committee meetings throughout 2013:
Glen Moreno
John Fallon
David Arculus*
Vivienne Cox
Susan Fuhrman**
Ken Hydon
Josh Lewis***
Linda Lorimer
Harish Manwani
Audit
committee
meetings
Remuneration
committee
meetings
Nomination
committee
meetings
–
–
4/5
4/5
3/3
5/5
5/5
–
–
5/5
–
5/5
3/5
–
5/5
4/4
–
–
5/5
5/5
3/5
5/5
3/4
5/5
5/5
2/2
1/1
* Unable to travel due to injury.
** Stood down on 7 August 2013.
*** Joined remuneration committee on 23 April 2013.
NOMINATION COMMITTEE
Chairman Glen Moreno
Members David Arculus, Vivienne Cox, John Fallon, Ken Hydon,
Josh Lewis, Linda Lorimer, Harish Manwani and Glen Moreno
The nomination committee meets at least once a year
and at other times as and when required. The
committee primarily monitors the composition and
balance of the board and its committees, and identifies
and recommends to the board the appointment of
new directors and/or committee members.
Section 4 Governance
65
Lord Davies’ review published in 2011 called for
companies to target 25% female representation on
boards of FTSE 100 companies by 2015. Pearson is
committed to having at least 30% female directors
within Lord Davies’ 2015 timeframe and currently has
two female directors on its board of nine (representing
22%). With the retirement of three female directors
over the last year, the committee is actively seeking to
recruit at least one additional female board member.
Immediately below board level, the Pearson Executive,
not including the chief executive and chief financial
officer who are main board directors, has four female
members out of a total of 13 (representing 31%).
Pearson considers diversity as an important issue
across the Group, not just at board level. One of the
key aims of Pearson’s diversity policy is to increase the
number of leaders coming from a diverse background,
including advancing more women into leadership
positions. The Responsible business section of this
report on pages 47 to 53 contains further information
and statistics on diversity throughout the Group.
REMUNERATION COMMITTEE
Chairman David Arculus
Members David Arculus, Vivienne Cox, Ken Hydon, Josh Lewis
and Glen Moreno
The remuneration committee reports to the full board
and the directors’ remuneration report, which has
been considered and adopted by the board, is set out
on pages 78 to 114.
The committee met five times during the year, and has
a written charter and terms of reference which clearly
set out its authority and duties. These can be found
on the company website at www.pearson.com/
investors/shareholder-information/governance
During 2013, the committee met five times with its
primary focus being to consider suitable candidates
for non-executive positions, culminating in the
appointment of Linda Lorimer and Harish Manwani
to the board. An external search consultancy, Egon
Zehnder, was used during the recruitment process.
Egon Zehnder does not have any other connection to
Pearson apart from as a search consultancy. Pearson
uses a number of leading firms in its board and
executive search activities.
During the year, the committee also discussed and
approved the appointments of Josh Lewis to the
remuneration committee and of Linda Lorimer to the
audit committee, in place of Josh Lewis who stepped
down at the end of 2013. Linda Lorimer and Harish
Manwani also joined the nomination committee
following their appointments to the board during
the year.
Although the chairman of the board chairs the
nomination committee, he is not permitted to chair
meetings when the appointment of his successor is
being considered or during a discussion regarding his
performance. At such times, the senior independent
director will chair the meetings.
The committee has written terms of reference
which clearly set out its authority and duties.
These can be found on the company website
(cid:10)www.pearson.com/investors/shareholder-
at (cid:36)
information/governance
Diversity
The board embraces the Code’s underlying principles
with regard to board balance and diversity, including
gender diversity. The nomination committee, led by
the chairman, ensures that the directors of Pearson
demonstrate a broad balance of skills, experience and
nationality, to support Pearson’s strategic development
and reflect the global nature of the Group’s business.
The committee and the board always take account of
diversity in its broadest sense when considering board
appointments whilst ensuring that appointments are
made based on merit and relevant experience.
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Pearson plc Annual report and accounts 2013
Board governance continued
AUDIT COMMITTEE
Chairman Ken Hydon
Members David Arculus, Vivienne Cox, Ken Hydon and
Linda Lorimer
As a committee we welcome the new governance
requirements for the financial statements, enshrined
in the changes to the Code introduced in 2013, and
in particular that the report and accounts need to be
fair, balanced and understandable. The production,
co-ordination and review of the annual report and
accounts is a substantial exercise which needs to be
undertaken within a relatively short timeframe,
running alongside the formal audit process
undertaken by our external auditors. In order to
arrive at a position where the audit committee and
the board are satisfied with the overall fairness,
balance and clarity of the document we discussed the
new requirements and agreed with management a
robust process of review and approval.
The committee is aware of the recommendations of
the Competition Commission and the EU on audit
tender and rotation, and currently expects that the
tender process will begin no later than 2017 for the
2018 financial year end. The committee reviews the
auditor’s independence on an annual basis and also
monitors on a quarterly basis the nature and level of
non-audit fees payable to them. As described later in
this report, during 2013 Pearson spent a considerable
amount of non-audit fees with PwC. In the main, this
expenditure related to specific assurance and tax
advisory services associated with the planned
creation of the venture between Penguin and
Random House, and both management and the audit
committee believe that using PwC for these services
was the most practical and economical solution for
the company. We anticipate that this level of
non-audit fee is unusual, and that the balance of audit
to non-audit fee paid to PwC will return to more
normal levels in 2014.
As I have said in previous years, a key part of the
role of the committee is in providing oversight and
reassurance to the board with regard to the integrity
of the company’s financial reporting, internal control
policies, and procedures for the identification,
assessment and reporting of risk. The latter two
have been a particular focus for the Pearson audit
committee throughout 2013 as the company
embarked on such a wide ranging and significant
transformational and organisational change through
the launch of its global education strategy. Again,
committee meetings are always attended by the chief
financial officer and SVP internal audit and compliance
and our external auditors, and others often attend by
invitation, including the chief executive and chairman.
During the year the audit committee continued
to interact with local and business management,
and in particular spent time with local management
during their visit to South Africa, discussing the
implementation of the company’s anti-bribery and
corruption policy, data protection, disaster recovery
planning, risk registers and the Pearson code of
conduct. The committee also added an additional
fifth meeting to its annual calendar, both to allow an
appropriate amount of time be set aside for
consideration of all relevant matters, as well as to
allow us to focus on a number of risk deep-dives, in
particular on data security and privacy, treasury risk
and anti-bribery and corruption.
In August 2013, Susan Fuhrman stood down from the
board and audit committee, and at the end of 2013,
Josh Lewis stood down from the committee and has
been replaced by Linda Lorimer. We thank Susan and
Josh for their wise counsel over the last few years and
welcome Linda.
Ken Hydon
Members
All of the audit committee members are independent
non-executive directors and have financial and/or
related business experience due to the senior positions
they hold or have held in other listed or publicly traded
companies and/or similar public organisations.
Ken Hydon, chairman of the committee, is the
company’s designated financial expert. He is a Fellow
of the Chartered Institute of Management
Accountants, the Association of Chartered Certified
Accountants and the Association of Corporate
Treasurers. He also serves as audit committee
chairman for Reckitt Benckiser Group plc and Merlin
Entertainments plc, and until 2012 for Tesco plc and
Royal Berkshire NHS Foundation Trust.
The qualifications and relevant experience of the other
committee members are detailed on page 56.
Role and responsibilities
The committee has written terms of reference which
clearly set out its authority and duties. These are
reviewed annually and can be found on the company
website at www.pearson.com/investors/shareholder-
information/governance
The committee has been established by the
board primarily for the purpose of overseeing the
accounting, financial reporting, internal control and risk
management processes of the company and the audit
of the financial statements of the company.
The committee is responsible for assisting the board’s
oversight of the quality and integrity of the company’s
external financial reporting and statements and the
company’s accounting policies and practices.
The group’s internal auditor has a dual reporting line
to the chief financial officer and chair of the committee
and external auditors have direct access to the
committee to raise any matter of concern and to
report on the results of work directed by the
committee. The committee reports to the full board
at every board meeting immediately following a
committee meeting. It also reviews the independence
of the external auditors, including the provision of
non-audit services (further details of which can be
found on page 73 and note 4 to the financial
statements), and ensures that there is an appropriate
audit relationship and that auditor objectivity and
independence is upheld.
Section 4 Governance
67
External audit
Based on management’s recommendations, the
committee reviews the proposal on the appointment
of the external auditors. The committee reviewed the
effectiveness and independence of the external
auditors during 2013 and remains satisfied that the
auditors provide effective independent challenge
to management.
The review was conducted by distributing a
questionnaire to key audit stakeholders including
members of the audit committee, the chief executive,
chief financial officer, SVP company secretarial, SVP
internal audit and compliance, operating company
CFOs and heads of corporate functions. In relation to
specific comments received, the lead audit partner
explained to the committee how PwC were
monitoring and reviewing each highlighted area and
confirmed that they would consider how to adapt their
approach in light of feedback.
In addition, in accordance with our external auditor
policy, Group internal audit performs an annual
assessment of audit fees, services and independence.
This review takes into account internal and external
information and benchmarks and forms the basis for
a recommendation by the committee to the board in
respect of the appointment and compensation of our
external auditor.
Recognising the importance of maintaining auditor
independence and objectivity, the committee paid
particular attention to this matter during 2013. PwC
were appointed to provide assurance procedures over
the completion balance sheet and tax advice on the
Penguin Random House transaction. This decision was
made only after careful consideration of the
alternatives, as well as ensuring that appropriate
safeguards were put in place to maintain independence.
As a result of this decision, non-audit fees paid to PwC
exceeded Pearson’s target proportion of audit fees
during the year.
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Pearson plc Annual report and accounts 2013
Board governance continued
The committee will continue to review the
performance of the external auditors on an annual
basis and will consider their independence and
objectivity, taking account of all appropriate guidelines.
There are no contractual obligations restricting the
committee’s choice of external auditors. In any event,
the external auditors are required to rotate the audit
partner responsible for the Group audit every five
years. The current lead audit partner rotated onto the
Group’s audit in 2013.
Pearson’s last audit tender was in respect of the 1996
year end resulting in the appointment of Price
Waterhouse as auditors. Given the recent rotation of
lead audit partner ahead of the 2013 reporting period
and giving careful consideration to the timing and other
practicalities of undertaking a formal audit tendering
process, the committee agreed that a tender process
would commence no later than 2017 to ensure
auditors have been appointed in time for the 2018 year
end audit, following the end of the current lead
partner’s term. The committee is also monitoring
developments from the Competition Commission on
audit tendering and at EU level regarding mandatory
audit rotation for listed companies, and will factor
any legislative requirements into its future plans for
audit tender.
Significant issues
During the year, the committee discussed the planning,
conduct and conclusions of the external audit as
it proceeded.
At the July 2013 audit committee meeting, the
committee discussed and approved the auditors’
Group audit plan and reviewed the key risks of
misstatement of the Group’s financial statements,
which were updated at the December 2013
committee meeting. The table below sets out the
significant issues considered by the audit committee
together with details of how these items have been
addressed.
SIGNIFICANT ISSUES
HOW ISSUES WERE ADDRESSED
Penguin Random House transaction:
A number of complex accounting and business
model changes including disposal accounting,
valuation of the new business and intangibles,
associate accounting including harmonisation of
accounting policies, changes to existing operating
model of shared services, infrastructure and
corporate costs such as pensions.
Revenue recognition:
This is considered significant in light of a number
of products and services sold by Pearson where
revenue recognition practices are complex and
management assumptions and estimates are
necessary.
The committee discussed this issue at a number of meetings, including
reviewing management’s discussion of the significant accounting judgements
and estimates and monitoring the views of the external auditors. The
committee and management have visibility of Penguin Random House’s
accounting to ensure that all accounting policies, valuations and adjustments
are considered in Pearson’s accounts. The committee monitors and, where
appropriate, challenges mitigating actions by management. These actions
include key Sarbanes-Oxley controls over acquisition and disposal accounting
including review by the technical accounting team, use of external valuation
experts and use of local management to ensure that policies and operating
model are communicated and adjusted as required.
The committee receives a regular presentation from management on revenue
recognition and routinely monitors the views of the external auditors on this
issue. The committee has visibility to internal audit findings relating to revenue
recognition controls and processes, the related management action plans
and timely closure of open issues. The committee monitors and, where
appropriate, challenges mitigating actions by management. These actions
include key Sarbanes-Oxley controls and identification of significant contracts
through the ‘large and unusual’ process, such that accounting treatment can
be agreed by specialists.
Section 4 Governance
69
SIGNIFICANT ISSUES
HOW ISSUES WERE ADDRESSED
US tax activity:
Changes to processes, structure and strategy in
2012 and 2013, and IRS audit activity.
Impairment of goodwill and intangibles:
The Group carries significant goodwill and
acquired intangible asset balances. There is
judgement in the identification and aggregation
of cash generating units (CGUs) and in the
assumptions used in the annual goodwill
impairment review.
The committee met with the SVP, Tax twice during 2013, discussed the tax
strategy and held a risk deep dive into the tax process in October. Key tax
accounting matters including judgements and estimates were reported to the
committee by management, and the committee monitored the views of the
external auditors on the company’s tax accounting. The committee monitors
and, where appropriate, challenges mitigating actions by management. These
actions include key Sarbanes-Oxley controls in place in the US, and improved
UK central oversight to ensure critical judgements are appropriately reviewed
and understood.
The committee considered the results of the Group’s annual goodwill
impairment review and management’s judgements and assumptions used in
arriving at a valuation for each of the Group’s CGUs. The key assumptions are
cash flows derived from strategic plans, long-term growth rates and weighted
average cost of capital. The committee also considered sensitivities to changes
in assumptions and related disclosures as required by IAS 36 ‘Impairment of
Assets’. The annual impairment review in 2013 showed that there was
sufficient headroom in each of the Group’s CGUs and based on the sensitivity
analysis a reasonably possible change in any of the assumptions is unlikely to
cause an impairment in any of the CGUs.
The committee discussed these issues with the
auditors at the time of their review of the half year
interim financial statements in July 2013 and again at
the conclusion of their audit of the financial statements
for the year in February 2014. All the significant issues
were areas of focus for the auditors, as detailed in their
report on pages 116 to 122.
In December 2013, the committee discussed with the
auditors the status of their work, focusing in particular
on internal controls and covering the significant issues
outlined above.
As the auditors concluded their audit, they explained
to the committee:
›(cid:3)The work they had conducted over revenue, which
included targeted procedures and testing of products
and services which were considered to have more
complex revenue recognition, such as multiple element
arrangements (e.g. the provision of supplementary
print or digital materials or training with textbooks)
and certain long-term contracts in the education
businesses;
›(cid:3)Their evaluation of the directors’ assessment of the
Penguin Random House transaction and assessment
of valuations of that business and associate accounting;
›(cid:3)The work they had done to understand the Group’s
tax strategy and identify business and legislative risks,
to challenge key underlying assumptions and assess
the recoverability of deferred tax assets;
›(cid:3)Their assessment and evaluation of returns provisions
and controls in the shipment and returns processes,
particularly in light of the ongoing business transition
from print to digital;
›(cid:3)Their evaluation of the recoverability of pre-publication
assets and inventories. These are considered to be
material and judgement is required to evaluate their
valuation, plus estimating recoverability may be more
complex during the transition to digital;
›(cid:3)Their focus on goodwill impairment due to the
Group’s significant goodwill and intangible asset
balances, and the work they had done to test
management’s impairment analysis, underlying
assumptions, calculation of discount and growth
rates and integrity of the valuation model;
›(cid:3)The results of their controls testing to date for
Sarbanes-Oxley Act section 404 reporting purposes
and in support of their financial statements audit; and
›(cid:3)The review of the company’s ‘going concern’ reports.
The auditors also reported to the committee the
misstatements that they had found in the course
of their work, which were insignificant, and the
committee confirmed that there were no
material items remaining unadjusted in these
financial statements.
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Pearson plc Annual report and accounts 2013
Board governance continued
Training
The committee receives regular technical updates
as well as specific or personal training as appropriate.
During 2013, the committee discussed with PwC at an
audit committee meeting the new Code requirement
for the annual report and accounts to be ‘fair, balanced
and understandable’, and the disclosure committee
undertook a training session on the subject.
Committee members also meet with local
management on an ongoing basis in order to gain
a better understanding of how Group policies are
embedded in operations.
Meetings
The committee met five times during the year with
the following in attendance: the chief financial officer;
SVP internal audit and compliance; members of the
senior management team; and the external auditors.
Additionally, the chief executive and chairman
periodically attended committee meetings. The
committee also met regularly in private with the
external auditors and the SVP internal audit and
compliance.
At every meeting, the committee considered reports
on the activities of the Group internal audit function,
including the results of internal audits, risk reviews,
project assurance reviews and fraud and
whistleblowing reports. The committee also monitored
the company’s financial reporting, internal controls
and risk management procedures, reviewed the
non-audit services provided by PwC and considered
any significant legal claims and regulatory issues in the
context of their impact on financial reporting.
Specifically, the committee considered the following
matters during the course of the year:
›(cid:3)The 2012 annual report and accounts: preliminary
announcement, financial statements and income
statement;
›(cid:3)The Group accounting policies;
›(cid:3)Compliance with the Code;
›(cid:3)Form 20-F and related disclosures including the annual
Sarbanes-Oxley Act section 404 attestation of financial
reporting internal controls;
›(cid:3)Receipt of the external auditors’ report on the Form
20-F and on the year end audit;
›(cid:3)Penguin Random House transaction – accounting
matters;
›(cid:3)Assessment of the effectiveness of the Group’s internal
control environment;
›(cid:3)Reappointment, remuneration and engagement letter
of the external auditors;
›(cid:3)Provision of non-audit services by PwC;
›(cid:3)Review of the interim financial statements and
announcement;
›(cid:3)Review of key findings of over 100 Group internal
audits and special projects;
›(cid:3)Annual reapproval of the Group internal audit
mandate;
›(cid:3)Compliance with SEC and NYSE requirements
including Sarbanes-Oxley Act;
›(cid:3)Reviews of the effectiveness of the audit committee,
the external auditors and the Group internal audit
function;
›(cid:3)External auditor benchmarking;
›(cid:3)Review of the committee’s terms of reference;
›(cid:3)Annual internal audit plan;
›(cid:3)Review of company risk maps and mitigating actions for
top risks;
›(cid:3)Risk deep dives − anti-bribery and corruption, data
security and privacy, and treasury risk;
›(cid:3)Implementation of new health and safety strategy,
policy and reporting of any significant incidents;
›(cid:3)Fraud, whistleblowing and code of conduct matters;
›(cid:3)Review of Group tax strategy, tax risks and tax
departmental structure; and
›(cid:3)Annual review of treasury policy and strategy.
At its December meeting, the committee considered
the Group’s business continuity planning, the latest
internal report on which indicated that readiness to
withstand significant business interruption does not
currently meet Pearson’s own stringent standards.
It was noted that workable plans generally existed but
that, in light of the scale of business transformation,
these plans had not been updated or tested within
the past year. The committee reported this risk to the
board at its December meeting where it was noted
that management had in principle accepted the level
of risk on the basis that the restructured organisation
would change the focus of business continuity plans
which would consequently require updating.
In February 2014, the committee also considered
the 2013 annual report and accounts, including the
preliminary announcement, financial statements,
strategic report, directors’ report and corporate
governance compliance statement.
Section 4 Governance
71
Internal control and risk management
The directors confirm they have conducted a review
of the effectiveness of the Group’s systems of risk
management and internal controls, including strategic,
financial, operational and compliance controls and risk
management systems, in accordance with the Code
and Turnbull guidance. These systems have been
operating throughout the year and to the date
of this report.
During 2013, the semi-annual reporting of top risks
was reviewed by executive management as well as the
board and audit committee. The principal risks are set
out on pages 41 to 45, together with mitigating factors.
During the year, the audit committee considered the
oversight of specific selected principal risks, through a
series of risk ‘deep dives’. This is covered in more
detail in the separate report on the audit committee.
The key elements and procedures that have been
established to provide effective risk management
and internal control systems are described below. We
recognise that during 2014, we will need to align these
existing procedures to the new organisation structure.
Control environment
The board of directors has overall responsibility for
Pearson’s system of internal control, which is designed
to manage, and where possible mitigate, the risks facing
the Group, safeguard assets and provide reasonable,
but not absolute, assurance against material financial
misstatement or loss.
Responsibility for monitoring financial management and
reporting and risk management and internal control
systems has been delegated to the audit committee
by the board. At each meeting, the audit committee
considers reports from management, Group internal
audit and the external auditors, with the aim of
reviewing the effectiveness of the internal financial
and operating control environment of the Group.
The identification and mitigation of significant business
risks is the responsibility of Group senior management
and the management team for each business area –
being the heads of the L ines of B usiness, Geographies
and enabling functions. Each business area, including
the corporate centre, maintains internal controls and
procedures appropriate to its structure, business
environment and risk assessment, whilst complying
with Group policies, standards and guidelines.
Financial management and reporting
There is a comprehensive strategic planning, budgeting
and forecasting system with an annual operating plan
approved by the board of directors. Monthly financial
information, including trading results, balance sheets,
cash flow statements, capital expenditures and
indebtedness, is reported against the corresponding
figures for the plan and prior years, with corrective
action outlined by the appropriate senior executive.
Group senior management meet periodically with
business area management to review their business
and financial performance against plan and forecast.
Major risks relevant to each business area as well as
performance against the stated financial and strategic
objectives are reviewed in these meetings.
We have an ongoing process to monitor the risks and
effectiveness of controls in relation to the financial
reporting and consolidation process including the
related information systems. This includes up-to-date
Group financial policies, formal requirements for
finance functions, Group consolidation reviews and
analysis of material variances, Group finance technical
reviews, including the use of technical specialists, and
review and sign-off by senior finance managers. These
processes are subject to reviews based on Group
internal audit’s risk based audit programme. The
Group finance function also monitors and assesses
these processes, through a finance compliance
function.
These controls include those over external financial
reporting which are documented and tested in
accordance with the requirements of section 404
of the Sarbanes-Oxley Act, which is relevant to
our US listing. One key control in this area is the
disclosure committee, which reports directly to the
audit committee. This committee is chaired by the SVP
internal audit and compliance and members include the
chief financial officer, general counsel, SVP financial
communications, SVP company secretarial as well as
senior members of financial management. The primary
responsibility of this committee is to review Pearson’s
public reporting and disclosures to ensure that
information provided to shareholders is complete,
accurate and compliant with all applicable legislation
and listing regulations.
The effectiveness of key financial controls is subject
to management review and self-certification and
independent evaluation by Group internal audit.
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Pearson plc Annual report and accounts 2013
Board governance continued
An enterprise risk management (ERM) framework is in
place to identify, evaluate and manage risks, including
key financial reporting risks. Business areas undertake
semi-annual risk reviews to identify new or potentially
under-managed risks. Throughout the year, risk
discussions are facilitated by the risk assurance team
with Group and business area management to identify
the key risks the company faces in achieving its
objectives, to assess the probability and impact of
those risks and to document the actions being taken to
manage those risks. The Pearson Executive reviews the
output of these sessions, focusing on the key risks
facing the business. Management has the responsibility
to consider and execute appropriate action to mitigate
these risks whenever possible. The results of these
reviews are reported to the audit committee and the
board in detail.
Group internal audit
The Group internal audit function is responsible for
providing independent assurance to management and
the audit committee on the design and effectiveness of
internal controls to mitigate strategic, financial,
operational and compliance risks. The risk-based
annual internal audit plan is approved by the audit
committee. Management action plans to improve
internal controls and to mitigate risks, or both, are
agreed with each business area after each audit. Formal
follow-up procedures allow Group internal audit to
monitor business areas’ progress in implementing its
recommendations and to resolve any control
deficiencies. Group internal audit has a formal
collaboration process in place with the external
auditors to ensure efficient coverage of internal
controls. Regular reports on the work of Group
internal audit are provided to executive management
and, via the audit committee, to the board.
The SVP internal audit and compliance oversees
compliance with our code of conduct and works with
senior legal and human resources personnel to
investigate any reported incidents including ethical,
corruption and fraud allegations. The Pearson anti-
bribery and corruption programme provides the
framework to support our compliance with various
anti-bribery and corruption regulations such as the
UK Bribery Act 2010 and the US Foreign Corrupt
Practices Act.
Treasury management
The treasury department operates within policies
approved by the board and its procedures are
reviewed regularly by the audit committee. Major
transactions are authorised outside the department
at the requisite level, and there is an appropriate
segregation of duties. Frequent reports are made
to the chief financial officer and regular reports are
prepared for the audit committee and the board.
Insurance
Pearson purchases comprehensive insurance coverage
where this is available on a cost-effective basis.
Pearson’s insurance subsidiary, Spear Insurance
Company Limited, is used to leverage the risk
retention capability of the Group and to achieve a
balance between retaining insurance risk and
transferring it to external insurers.
Going concern
Having reviewed the Group’s liquid resources and
borrowing facilities and the Group’s 2014 and 2015
cash flow forecasts, the directors believe that the
Group has adequate resources to continue as a going
concern. For this reason, the financial statements have,
as usual, been prepared on that basis. Information
regarding the Group’s borrowing liabilities and financial
risk management can be found in notes 18 and 19 on
pages 164 to 172.
Share capital
Details of share issues are given in note 27 to the
accounts on page 185. The company has a single class
of shares which is divided into ordinary shares of 25p
each. The ordinary shares are in registered form.
As at 31 December 2013, 818,580,447 ordinary shares
were in issue. At the AGM held on 26 April 2013, the
company was authorised, subject to certain conditions,
to acquire up to 81,746,807 ordinary shares by market
purchase. Shareholders will be asked to renew this
authority at the AGM on 25 April 2014.
Information provided to the company pursuant to
the Financial Conduct Authority’s Disclosure and
Transparency Rules (DTR) is published on a Regulatory
Information Service and on the company’s website.
Section 4 Governance
73
As at 4 March 2014, being the latest practicable date
before the publication of this report, the company had
been notified under DTR5 of the following significant
voting rights in its shares:
›(cid:3)Tax compliance and related activities up to the greater
of £1,000,000 per annum or 50% of the external audit
fee; and
›(cid:3)For forward-looking tax advisory services we use the
Number of
voting rights
Harbor International Fund
Libyan Investment Authority
24,598,034
24,431,000
Annual General Meeting (AGM)
Percentage
as at date of
notification
3.01%
3.01%
The notice convening the AGM, to be held at 12 noon
on Friday, 25 April 2014 at 8 Northumberland Avenue,
London WC2N 5BY, is contained in a circular to
shareholders to be dated 24 March 2014.
Registered auditors
In accordance with section 489 of the Act,
a resolution proposing the reappointment of
PricewaterhouseCoopers LLP (PwC) as auditors to
the company will be proposed at the AGM, at a level
of remuneration to be agreed by the directors.
Auditors’ independence
In line with best practice, our relationship with PwC
is governed by our external auditors 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.
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 subject to the
authorities below:
›(cid:3)Pre-approved non-audit services can be authorised by
the chief financial officer up to £100,000 per project,
subject to a cumulative limit of £500,000 per annum;
›(cid:3)Acquisition or disposal transactions and due diligence
up to £100,000 per project may be performed by our
external auditors, in light of the need for confidentiality.
Any project/transaction generating fees in excess of
£100,000 must be specifically approved by the audit
committee;
most appropriate adviser, usually after a tender
process. Where we decide to use our independent
auditors, 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
other allowable non-audit services, irrespective of
value, must be approved by the audit committee.
Where appropriate, services will be tendered prior to
a decision being made as to whether to award work to
the auditors.
The audit committee receives regular reports
summarising the amount of fees paid to the auditors.
During 2013, Pearson spent a considerable amount of
non-audit fees with PwC. In the main, this expenditure
related to specific assurance and tax advisory services
associated with the planned creation of the venture
between Penguin and Random House. PwC were
selected only after consideration that it was most
practical and economical to utilise PwC for these
services. We anticipate that this level of non-audit fee
is unusual, and that the balance of audit to non-audit
fee paid to PwC will return to more normal levels in
2014. Other significant non-audit work performed by
PwC during 2013 was:
›(cid:3)Tax compliance services related to a routine audit by
the US Internal Revenue Service;
›(cid:3)Assurance services on a corporate bond issued in
May 2013; and
›(cid:3)Other assurance services which were individually less
than £100,000 per project.
In each case, PwC was selected as they were best able
to provide the services we required at a reasonable fee
and within the terms of our external auditors policy.
To assist in ensuring that independence and objectivity
is maintained, for forward-looking tax advisory and due
diligence work PwC assign a different partner from the
one leading the external audit.
A full statement of the fees for audit and services is
provided in note 4 to the accounts on page 141.
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Pearson plc Annual report and accounts 2013
Board governance continued
Fair, balanced and understandable reporting
Pearson is mindful of the Code’s revised principle C.1.1
relating to fair, balanced and understandable reporting
and has accordingly built in additional steps to its
annual report timetable to ensure that the directors
are given sufficient opportunity to review, consider and
comment on the report.
The disclosure committee and the board each held an
additional meeting as part of their review process, and
members of the disclosure committee also attended a
training session provided by PwC to better understand
the requirements. In addition, the audit committee
is available to advise the board on certain aspects of
the report, to enable the directors to fulfil their
responsibility in this regard.
Statement of directors’ responsibilities
The directors are responsible for preparing the annual
report, the report on directors’ remuneration and the
financial statements in accordance with applicable law
and regulations.
Company law requires the directors to prepare
financial statements for each financial year. Under that
law the directors have prepared the Group and parent
company financial statements in accordance with
International Financial Reporting Standards (IFRSs)
as adopted by the European Union. Under company
law the directors must not approve the financial
statements unless they are satisfied that they give a
true and fair view of the state of affairs of the company
and the Group and of the profit or loss of the Group
for that period.
In preparing these financial statements, the directors
are required to:
›(cid:3)Select suitable accounting policies and then apply
them consistently;
›(cid:3)Make judgements and accounting estimates that
are reasonable and prudent;
›(cid:3)State whether applicable IFRSs as adopted by the
European Union have been followed, subject to any
material departures disclosed and explained in the
financial statements; and
›(cid:3)Prepare the financial statements on a going concern
basis, unless it is inappropriate to presume that the
company and/or the Group will continue in business.
The directors are responsible for keeping adequate
accounting records that are sufficient to show and
explain the company’s transactions and disclose with
reasonable accuracy at any time the financial position
of the company and the Group and enable them to
ensure that the financial statements and the report on
directors’ remuneration comply with the Act and, as
regards the Group financial statements, Article 4 of
the IAS Regulation. They are also responsible for
safeguarding the assets of the company and the Group
and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
The directors are responsible for the maintenance and
integrity of the company’s website. Legislation in the
UK governing the preparation and dissemination
of financial statements may differ from legislation
in other jurisdictions.
Each of the directors, whose names and functions are
listed on pages 55 and 56, confirm that to the best of
their knowledge:
›(cid:3)The Group financial statements, which have been
prepared in accordance with IFRSs as adopted by the
European Union, give a true and fair view of the assets,
liabilities, financial position and profit of the Group and
company; and
›(cid:3)The directors’ report contained in the annual report
includes a fair review of the development and
performance of the business and the position of the
company and Group, together with a description
of the principal risks and uncertainties that they face.
The directors also confirm that, for all directors
in office at the date of this report:
a) so far as the directors are aware, there is no
relevant audit information of which the company’s
auditors are unaware; and
b) they have taken all the steps that they ought to have
taken as directors in order to make themselves aware
of any relevant audit information and to establish that
the company’s auditors are aware of that information.
In addition, the directors as at the date of this report
consider that the annual report, taken as a whole, is
fair, balanced and understandable and provides the
information necessary for shareholders to assess the
company’s performance, business model and strategy.
Sections one to four of this document contain the
information required to be disclosed in the directors’
report and were approved by the board on 10 March
2014 and signed on its behalf by
Philip Hoffman Secretary
Section 4 Governance
75
Additional information for shareholders
Set out below is other statutory and regulatory
information that Pearson is required to disclose
in its directors’ report.
Amendment to Articles of Association
Any amendments to the Articles of Association of the
company (the Articles) may be made in accordance
with the provisions of the Companies Act 2006
(the Act) by way of a special resolution.
Rights attaching to shares
The rights attaching to the ordinary shares are defined
in the Articles. A shareholder whose name appears
on the company’s register of members can choose
whether his/her shares are evidenced by share
certificates (i.e. in certificated form) or held
electronically (i.e. uncertificated form) in CREST
(the electronic settlement system in the UK).
Subject to any restrictions below, shareholders may
attend any general meeting of the company and,
on a show of hands, every shareholder (or his/her
representative) who is present at a general meeting has
one vote on each resolution for every ordinary share
of which they are the registered holder. A resolution
put to the vote at a general meeting is decided on
a show of hands unless before, or on the declaration
of the result of, a vote on a show of hands, a poll is
demanded. A poll can be demanded by the chairman
of the meeting, or by at least three shareholders
(or their representatives) present in person and having
the right to vote, or by any shareholders (or their
representatives) present in person having at least 10%
of the total voting rights of all shareholders, or by any
shareholders (or their representatives) present in
person holding ordinary shares on which an aggregate
sum has been paid up of at least 10% of the total sum
paid up on all ordinary shares. At this year’s AGM
voting will again be conducted on a poll, consistent
with best practice.
Shareholders can declare a final dividend by passing
an ordinary resolution but the amount of the dividend
cannot exceed the amount recommended by the
board. The board can pay interim dividends on any
class of shares of the amounts and on the dates and
for the periods they decide. In all cases the
distributable profits of the company must be sufficient
to justify the payment of the relevant dividend.
The board may, if authorised by an ordinary resolution
of the shareholders, offer any shareholder the right to
elect to receive new ordinary shares, which will be
credited as fully paid, instead of their cash dividend.
Any dividend which has not been claimed for 12 years
after it became due for payment will be forfeited and
will then belong to the company, unless the directors
decide otherwise.
If the company is wound up, the liquidator can, with
the sanction of a special resolution passed by the
shareholders, divide among the shareholders all or
any part of the assets of the company and he/she can
value assets and determine how the division shall be
carried out as between the shareholders or different
classes of shareholders. The liquidator can also, with
the same sanction, transfer the whole or any part of
the assets to trustees upon such trusts for the benefit
of the shareholders.
Voting at general meetings
Any form of proxy sent by the shareholders to the
company in relation to any general meeting must be
delivered to the company (via its registrars), whether
in written or electronic form, not less than 48 hours
before the time appointed for holding the meeting
or adjourned meeting at which the person named
in the appointment proposes to vote.
No shareholder is, unless the board decides otherwise,
entitled to attend or vote either personally or by proxy
at a general meeting or to exercise any other right
conferred by being a shareholder if he/she or any
person with an interest in shares has been sent a notice
under section 793 of the Act (which confers upon
public companies the power to require information
with respect to interests in their voting shares) and
he/she or any interested person failed to supply the
company with the information requested within
14 days after delivery of that notice. The board may
also decide, where the relevant shareholding comprises
at least 0.25% of the nominal value of the issued shares
of that class, that no dividend is payable in respect of
those default shares and that no transfer of any default
shares shall be registered.
Pearson operates two employee benefit trusts to
hold shares, pending employees becoming entitled
to them under the company’s employee share plans.
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Pearson plc Annual report and accounts 2013
Board governance continued
There were 9,282,365 shares so held as at
31 December 2013. Each trust has an independent
trustee which has full discretion in relation to the
voting of such shares. A dividend waiver operates
on the shares held in these trusts.
Pearson also operates a nominee shareholding
arrangement known as Sharestore which holds shares
on behalf of employees. There were 4,564,039 shares
so held as at 31 December 2013. The beneficial
owners of shares held through Sharestore are
invited to submit voting instructions online at
(cid:10)www.shareview.co.uk. If no instructions are given
by the beneficial owner, the trustees holding these
shares will not exercise the voting rights.
Transfer of shares
The board may refuse to register a transfer of a
certificated share which is not fully paid, provided that
the refusal does not prevent dealings in shares in the
company from taking place on an open and proper
basis. The board may also refuse to register a transfer
of a certificated share unless (i) the instrument of
transfer is lodged, duly stamped (if stampable), at the
registered office of the company or any other place
decided by the board, and is accompanied by the
certificate for the share to which it relates and such
other evidence as the board may reasonably require
to show the right of the transferor to make the
transfer; (ii) it is in respect of only one class of
shares; and (iii) it is in favour of not more than
four transferees.
Transfers of uncertificated shares must be carried out
using CREST and the board can refuse to register a
transfer of an uncertificated share in accordance with
the regulations governing the operation of CREST.
Variation of rights
If at any time the capital of the company is divided into
different classes of shares, the special rights attaching
to any class may be varied or revoked either:
(i) with the written consent of the holders of at least
75% in nominal value of the issued shares of the
relevant class; or
(ii) with the sanction of a special resolution passed at
a separate general meeting of the holders of the shares
of the relevant class.
Without prejudice to any special rights previously
conferred on the holders of any existing shares or class
of shares, any share may be issued with such preferred,
deferred, or other special rights, or such restrictions,
whether in regard to dividend, voting, return of capital
or otherwise as the company may from time to time
by ordinary resolution determine.
Appointment and replacement of directors
The Articles contain the following provisions in relation
to directors:
Directors shall number no less than two. Directors
may be appointed by the company by ordinary
resolution or by the board. A director appointed by
the board shall hold office only until the next AGM and
shall then be eligible for reappointment, but shall not
be taken into account in determining the directors or
the number of directors who are to retire by rotation
at that meeting. The board may from time to time
appoint one or more directors to hold executive office
with the company for such period (subject to the
provisions of the Act) and upon such terms as the
board may decide and may revoke or terminate any
appointment so made.
The Articles provide that, at every AGM of the
company, at least one-third of the directors shall retire
by rotation (or, if their number is not a multiple of
three, the number nearest to one-third). The first
directors to retire by rotation shall be those who wish
to retire and not offer themselves for re-election. Any
further directors so to retire shall be those of the other
directors subject to retirement by rotation who have
been longest in office since they were last re-elected
but, as between persons who became or were last
re-elected on the same day, those to retire shall
(unless they otherwise agree among themselves)
be determined by lot. In addition, any director who
would not otherwise be required to retire shall
retire by rotation at the third AGM after they were
last re-elected.
Notwithstanding the provisions of the Articles, the
board has resolved that all directors should offer
themselves for re-election annually, in accordance
with the Code.
The company may by ordinary resolution remove any
director before the expiration of his/her term of office.
In addition, the board may terminate an agreement or
arrangement with any director for the provision of
his/her services to the company.
(cid:35)
Section 4 Governance
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Powers of the directors
Subject to the company’s Articles, the Act and any
directions given by special resolution, the business of
the company will be managed by the board who may
exercise all the powers of the company, including
powers relating to the issue and/or buying back of
shares by the company (subject to any statutory
restrictions or restrictions imposed by shareholders
in general meeting).
Significant agreements
The following significant agreements contain provisions
entitling the counterparties to exercise termination
or other rights in the event of a change of control
of the company:
Under the $1,750,000,000 revolving credit facility
agreement dated November 2010 which matures
in November 2015 between, amongst others, the
company, HSBC Bank plc (as facility agent) and the
banks and financial institutions named therein as
lenders (the Facility), any such bank may, upon a
change of control of the company, require its
outstanding advances, together with accrued interest
and any other amounts payable in respect of such
Facility, and its commitments, to be cancelled, each
within 60 days of notification to the banks by the facility
agent. For these purposes, a ‘change of control’ occurs
if the company becomes a subsidiary of any other
company or one or more persons acting either
individually or in concert, obtains control (as defined
in section 1124 of the Corporation Tax Act 2010)
of the company.
Shares acquired through the company’s employee
share plans rank pari passu with shares in issue and
have no special rights. For legal and practical reasons,
the rules of these plans set out the consequences of
a change of control of the company.
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Pearson plc Annual report and accounts 2013
Report on directors’ remuneration
Dear shareholders
I am pleased to present our report on directors’
remuneration for 2013.
The report and related resolutions will be put forward
for your consideration and approval at the annual
general meeting on 25 April 2014.
I should like to start by summarising the decisions on,
and the changes to, directors’ remuneration made
during the year and importantly the context in which
those changes occurred and decisions have been taken.
Pearson has a unique set of advantages with which to
help meet the global demands for better education and
skills. And, by being better able to meet some of the
biggest challenges in global education, we can build a
stronger, more profitable and faster growing company.
To get there Pearson has fundamentally changed the way
the company is organised. From January this year,
Pearson is being run as one globally-connected education
company, working to an operating model designed
specifically to support a global education strategy, and a
new executive team has been appointed to lead it. The
new model ensures that the company will be organised
around a smaller number of global products and
platforms, built around a single, world-class infrastructure
and common systems and processes.
Over time, this will help Pearson to grow more quickly,
as it will free up resources to invest in digital
transformation, and the new, more service oriented,
products that are vital to future growth. It should enable
the company to increase the rate of innovation and
invention, by focusing on the research and development
of the next generation of global products that will have
the data to demonstrate their positive impact on
learning outcomes.
Pearson’s executive remuneration arrangements have
been reviewed to align with and better support this
strategy. Executive remuneration decisions have been
made after careful consideration of the needs of the
business, the transformation and reorganisation of the
business and the impact on roles and responsibilities,
the pay markets in which Pearson operates and
changes in pay elsewhere within the company.
This strategy also informs our remuneration philosophy
and policy and complements our more traditional
financial measures. In financial terms, Pearson’s goal is to
achieve sustainable growth on three key financial goals
(earnings, cash and return on invested capital) and reliable
cash returns to our investors through healthy and
growing dividends. We believe those are, in concert,
good indicators that we are building the long-term
value of Pearson. So those measures (or others that
contribute to them) form the basis of our annual
budgets and strategic plans and the basis for annual
and long-term incentives.
The remuneration committee is continually sensitive
to the current social and economic environment
surrounding executive compensation.
We welcome the UK government’s action to improve
the clarity and transparency of remuneration
disclosure. We welcome the introduction of the new
executive remuneration reporting requirements
including a new binding vote on policy.
We hope that these changes will continue to
demonstrate the link between our remuneration
policy and practice and the company’s strategy and
performance, as well as our commitment to
shareholder engagement.
Performance in 2013
In 2013, trading was tough in many of our biggest
and most established markets. Overall, we saw:
›(cid:3)sales up 2% on 2012 at constant exchange rates
›(cid:3)adjusted operating profit 6% lower before net
restructuring charges
›(cid:3)our dividend raised 7% which was Pearson’s 22nd
straight year of increasing our dividend above the
rate of inflation.
Over the past ten years we have increased our
dividend at a compound annual rate of 7%, returning
£2.9bn to shareholders. Restructuring is on track to
deliver benefits in 2014 and beyond.
Principles of remuneration policy
The remuneration committee believes that the
purpose of its remuneration policy is to support the
company’s strategy and to help deliver sustained
performance and consistent long-term value creation
in the interests of all stakeholders.
Our reward policy is aligned with the interests of all
stakeholders in providing:
›(cid:3)competitive base salaries that reflect the market and
individual roles and contribution
›(cid:3)a high proportion of total remuneration being delivered
in variable forms that are directly linked to the annual
and long-term performance of the company
›(cid:3)annual incentives that reward achievement of
strategic goals
Section 4 Governance
79
›(cid:3)long-term incentives that drive long-term earnings and
share price growth and encourage participants in these
plans to acquire and hold Pearson shares in line with
shareholders’ interests
›(cid:3)the opportunity for many people at Pearson to share
in the company’s success through cash-based annual
incentives and bonuses and worldwide participation in
share ownership plans, continuing practices first started
in 1998.
We continue to keep our remuneration policy under
review in light of the prevailing economic conditions
and the impact of these on the company’s objectives
and strategy.
What we did in 2013
Looking back to some specific aspects of policy and
practice in 2013:
›(cid:3)we reviewed and established an appropriate starting
remuneration package for John Fallon comprising base
salary, annual and long-term incentives, allowances
and benefits
›(cid:3)we reviewed and amended the service agreements for
those executive directors, including the CEO, who
continued to serve throughout 2013. The consequence
of this review was to remove any entitlement to annual
incentive from the calculation of any compensation that
might be payable on termination of employment by the
company without notice or cause
›(cid:3)we undertook a regular periodic review of base salaries
for 2013 taking into account general economic and
market conditions, the level of increases made across
the company as a whole, the remuneration of
executives in similar positions in comparable
companies and individual performance
›(cid:3)appointments were made to the new Pearson
Executive
›(cid:3)annual incentives paid to executives for 2013 were
below target, as they were in 2012, reflecting
performance in a tough trading environment
›(cid:3)there was a nil pay-out on long-term incentives based
on 2013 performance reflecting below threshold
performance against the company’s three-year targets
for earnings per share growth, return on invested
capital and relative total shareholder return.
What we’ve planned for 2014
Looking forward, for 2014:
›(cid:3)we have undertaken a full review of the company’s
executive remuneration policy and either confirmed or,
where necessary, established maximum opportunities
for each of the different elements of remuneration to
ensure that this policy fully supports the needs of the
business
›(cid:3)we have aligned executive remuneration policy with
the new global education strategy and ‘one Pearson’
organisation
›(cid:3)we have listened to, and sought to address,
shareholders’ concerns and wishes regarding simplicity
and alignment of interests
›(cid:3)we actively consulted with our major shareholders and
their representative bodies on the directors’
remuneration policy set out in this report.
As a consequence:
›(cid:3)while we have established maximum opportunities for
each of the different elements of remuneration, in all
cases these represent maximum limits or caps to cover
all likely eventualities for the life of the policy and
should not be deemed to be a target or an entitlement.
For example, for 2014 there will be no increase in
maximum annual incentive opportunities and award
levels under the long-term incentive plan will be
consistent with those seen in recent years and below
the policy maximum
›(cid:3)starting in 2014 and onwards, the size of the global
annual incentive pool and the funding of all annual
incentives across the company will be linked to overall
Pearson results
›(cid:3)for performance-related long-term incentive awards
for 2014 for members of the Pearson Executive, to
emphasise the importance of earnings growth and
to reward the delivery of the desired outcomes from
the strategic effort, the weighting of the performance
metrics within the Pearson long-term incentive plan will
be changed from one-third on each measure to half on
earnings per share growth, one-third (no change) on
return on invested capital and one-sixth on relative
total shareholder return
›(cid:3)for performance-related long-term incentive awards
for 2015 and onwards, the averaging period for the
calculation of relative total shareholder return will be
moved to the period running up to the year end and
the length of the averaging period will be increased to
three months. This is understood to be more in line
with institutional investors’ preferences
›(cid:3)to promote simplicity, the previous annual bonus share
matching plan has ceased to operate with the last
awards made in 2013 in respect of annual bonus for
2012. We have not made any compensatory
adjustments to annual or long-term incentive
opportunities to take this into account
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Report on directors’ remuneration continued
›(cid:3)for performance-related long-term incentive awards
for members of the Pearson Executive, performance
will continue to be tested over three years and 75% of
the vested shares will continue to be released at that
point. However, starting with awards for 2014, there
will be a mandatory restriction on participants’ ability
to dispose of the 75% of the vested shares (other than
to meet personal tax liabilities) for a further two years.
Furthermore, participants’ rights to the release of the
25% of the vested shares will be subject to continued
employment over the same period
›(cid:3)we have affirmed our commitment to share ownership
and increased our mandatory shareholding guidelines
to 300% of salary for the CEO and 200% of salary for
other executive directors (compared to 200% and
125% respectively). We will continue to set
performance targets for our annual and long-term
incentive arrangements that are appropriately
stretching
›(cid:3)on incentive pay-outs, we have clarified our
arrangements for adjusting for malus and strengthened
our provisions for clawback.
We are confident that these changed remuneration
arrangements will better suit the needs of Pearson
going forward.
Introduction
The rest of this report on directors’ remuneration
comprises:
›(cid:3)the directors’ remuneration policy report – a forward-
looking statement on remuneration policy for 2014 and
beyond; and
›(cid:3)the annual remuneration report – a report on
remuneration practice in 2013.
Together, this report was compiled in accordance with
Schedule 8 of the Large and Medium-sized Companies
and Groups (Accounts and Reports) (Amendment)
Regulations 2008 and was approved by the board of
directors on 10 March 2014.
The committee believes that the company has
complied with the provisions regarding remuneration
matters contained within the UK Corporate
Governance Code.
Where required under current regulations, the
following tables have been subject to audit:
›(cid:3)single total figure of remuneration and prior year
comparison (page 97)
›(cid:3)remuneration paid to the chairman and non-executive
directors (page 98)
Our policy and implementation is summarised in more
detail in the remainder of this report.
›(cid:3)retirement benefits (page 101)
›(cid:3)details of long-term share interests including awards
made in 2013 (pages 102 to 105)
›(cid:3)payments to former directors (pages 105 and 106)
›(cid:3)payments for loss of office (page 107)
›(cid:3)interests of directors and value of shareholdings
(page 108).
I look forward to the ongoing support of Pearson
shareholders on both the advisory vote on the
executive remuneration arrangements as they were
operated in the year as well as the forward-looking
remuneration policy which is the subject of the
binding vote.
I am personally committed to an ongoing dialogue with
shareholders regarding executive remuneration and
would therefore welcome any observations or
questions that individual shareholders may wish to put
forward to me. I can be contacted at
david.arculus@integral2.com.
Finally, I would like to thank my fellow members of the
committee and the people who have assisted us for
their contribution over the past year.
Yours sincerely,
David Arculus
Chairman, remuneration committee
Directors’ remuneration policy report
This report outlines the company’s policy on directors’
remuneration that applies to executive directors, the
chairman and non-executive directors. Reference is also
made to the remuneration policy for other members of
the Pearson Executive (currently 13 in number) who are
not directors but who fall within the committee’s remit.
The policy is intended to last three years and will take
effect, subject to shareholder approval, at the AGM on
25 April 2014.
The policy report is comprised of the following parts:
›(cid:3)future policy table
›(cid:3)selection of performance measures and target setting
›(cid:3)legacy arrangements under the annual bonus share
matching plan
›(cid:3)remuneration policy for other employees
›(cid:3)pay and performance scenario analysis
›(cid:3)other policies relating to directors such as recruitment,
service contracts and termination provisions, executive
directors’ non-executive directorships
›(cid:3)
considerations taken into account when determining
remuneration policy for directors
(cid:3)
› chairman’s and non-executive directors’ remuneration.
The committee considers that a successful
remuneration policy needs to be sufficiently flexible
to take account of future changes in the company’s
business environment and in remuneration practice.
Our starting point continues to be that total
remuneration should reward both short- and long-
term results, delivering competitive rewards for
target performance but outstanding rewards for
exceptional performance.
Section 4 Governance
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The committee has avoided, where possible, including
general discretions in the policy table. However,
exceptional or genuinely unforeseen circumstances
may arise in the future and in those circumstances it
may be in shareholders’ interests for Pearson to put in
place remuneration arrangements that are outside the
terms of the policy set out in this report. If this
happens, the committee will be permitted to
implement remuneration arrangements that it
considers appropriate in the circumstances. In these
circumstances, Pearson would consult in advance with
major shareholders before it does so and would
explain the exercise of this discretion in the following
year’s directors’ remuneration report.
Given the long-term nature of some of Pearson's
remuneration structures – including obligations under
service contracts, incentive plans and pension
arrangements – a number of pre-existing obligations
will remain at the time that the new policy becomes
effective, including obligations that are ‘grandfathered’
by virtue of being in force at 27 June 2012. Pearson's
policy is to honour all pre-existing obligations,
commitments or other entitlements that were entered
into before the effective date of this policy.
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Future policy table for executive directors
Total remuneration is made up of fixed and performance-linked elements, with each element supporting different
strategic objectives. Total remuneration is normally reviewed annually and benchmarked against total
remuneration for similar positions in comparable companies.
Base salary
P U R P O S E A N D L I N K TO S TR AT EGY
› Helps to recruit, reward and retain.
› Reflects competitive market level, role, skills,
experience and individual contribution.
O P E R ATI O N
Base salaries are set to provide the appropriate rate
of remuneration for the job, taking into account
relevant recruitment markets, business sectors and
geographic regions. Base salaries may be set in
sterling or the local currency of the country in which
the director is based.
Base salaries are normally reviewed annually for the
following year taking into account: general economic
and market conditions; the level of increases made
across the company as a whole; particular
circumstances such as changes in role, responsibilities
or organisation; the remuneration and level of
increases for executives in similar positions in
comparable companies; and individual performance.
For benchmarking purposes, we review
remuneration by reference to different comparator
groups. We look at survey data from: FTSE 100
companies with significant international exposure,
excluding financial services; the FTSE 20-50,
excluding financial services; a broad media industry
group of US companies; select UK human capital-
intensive businesses; and UK and US so-called media
convergence companies with a focus on media,
information services and technology. These
companies are of a range of sizes relative to Pearson,
but the method our independent advisers, Towers
Watson, use to make comparisons on remuneration
takes this variation in size into account. We also look
at publicly disclosed and proxy data for global media
convergence comparators with a focus on media and
technology. We use these companies because they
represent the wider executive talent pool from
which we might expect to recruit externally and the
pay market to which we might be vulnerable if our
remuneration was not competitive.
Base salaries are paid in cash via the regular employee
payroll (monthly in the UK and every two weeks in
the US) and are subject to all necessary withholdings.
No malus or clawback provisions apply to base
salary.
O P P O RT U N IT Y
Base salary increases for executive directors will
not ordinarily exceed 10% per annum and will take
account of the base salary increases elsewhere
within the company.
The committee will retain the discretion to deliver
base salary increases in excess of 10% per annum
in specific individual situations including internal
promotions and material changes to the business
or the role.
P E R F O R M A N C E CO N D ITI O N S
None, although performance of both the company
and the individual are taken into account when
determining an appropriate level of base salary
increase each year.
P E R F O R M A N C E P E R I O D
None.
Section 4 Governance
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Allowances and benefits
P U R P O S E A N D L I N K TO S TR AT EGY
O P P O RT U N IT Y
› Help to recruit and retain.
› Reflect local competitive market.
O P E R ATI O N
Allowances and benefits comprise cash allowances and
non-cash benefits and inter alia include: travel-related
benefits (comprising company car, car allowance and
private use of a driver); health-related benefits
(comprising health care, health assessment and gym
subsidy); and risk benefits (comprising additional life
cover and long-term disability insurance that are not
covered by the company’s retirement plans).
Allowances may also include, where appropriate,
location and market premium and housing allowance
although no continuing director is in receipt of such
allowances. Allowances and benefits received in 2013
are set out in the annual remuneration report.
Directors are also covered by the company’s
directors’ and officers’ liability insurance and an
indemnity in respect of certain third-party liabilities.
Other benefits may be offered on the same terms
as to other employees.
Allowances and benefits do not form part of
pensionable earnings.
No malus or clawback provisions apply to
allowances and benefits.
Retirement benefits
P U R P O S E A N D L I N K TO S TR AT EGY
› Help to recruit and retain.
› Recognise long-term commitment to the company.
O P E R ATI O N
New employees in the UK are eligible to join the
Money Purchase 2003 section of the Pearson Group
Pension Plan. New employees in the US are eligible
to join the 401(k) plan.
Under the Money Purchase 2003 section of the
Pearson Group Pension Plan in the UK, normal
retirement age is 62, but, subject to company
consent, retirement is currently possible from age 55
or earlier in the event of ill-health. During service, the
company and the employee make contributions into
a pension fund. Account balances are used to provide
benefits at retirement. Pensions for a member’s
spouse, dependent children and/or nominated
financial dependants are payable on death.
The provision and level of cash allowances and non-
cash benefits are competitive and appropriate in the
context of the local market.
The total value of cash allowances and non-cash
benefits for executive directors will not ordinarily
exceed 15% of base salary in any year. The
committee will retain the discretion to deliver a total
value of benefits in excess of 15% of base salary in
specific individual situations including changes in
individual circumstances such as health status,
changes in the role such as relocation, increases in
the cost of current benefits that are outside
company control, and changes in benefits’ providers.
Executive directors are also eligible to participate in
savings-related share acquisition programmes in the
UK, US and rest of world, which are not subject to
any performance conditions, on the same terms as
other employees.
P E R F O R M A N C E CO N D ITI O N S
None.
P E R F O R M A N C E P E R I O D
None.
Under the 401(k) plan in the US, which is a defined
contribution plan, account balances will be used to
provide benefits at retirement. In the event of death
before retirement, the account balances will be used
to provide benefits for designated beneficiaries.
Depending on when they joined the company,
directors may participate in the Final Pay section of
the Pearson Group Pension Plan in the UK or the
defined benefit Pearson Inc. Pension Plan in the US,
both of which are closed to new members.
Under the Final Pay section of the Pearson Group
Pension Plan in the UK, normal retirement age is 62,
but, subject to company consent, retirement is
currently possible from age 55 or earlier in the event
of ill-health. During service, the employee makes a
contribution of 5% of pensionable salary and the
pension fund builds up based on final pensionable
salary and pensionable service. The accrued pension
is reduced on retirement prior to age 60. Pensions for
a member’s spouse, dependent children and/or
nominated financial dependants are payable on death.
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Retirement benefits continued
In the US, the defined benefit Pearson Inc. Pension
Plan provides a lump sum benefit that is convertible
to an annuity on retirement. The lump sum benefit
accrued at an age dependent percentage of capped
compensation until 31 December 2001 when further
benefit accruals ceased for most employees.
Employees who satisfied criteria of age and service
as of 30 November 1998 continue to earn benefits
under an alternative formula that provides for 1.5%
of final average earnings, adjusted for US Social
Security. The benefit paid to these employees is the
maximum of the lump sum benefit converted to an
annuity and the benefit earned under the alternative
final average earnings formula.
Executive directors and other executives across the
company may be entitled to additional pension
benefits to take account of the cap on the amount of
benefits that can be provided from the all-employee
pension arrangements in the US and the UK.
Members of the Pearson Group Pension Plan who
joined after May 1989 are subject to an upper limit
of earnings that can be used for pension purposes,
known as the earnings cap. This limit, £108,600 as at
6 April 2006, was abolished by the Finance Act 2004.
However the Pearson Group Pension Plan has
retained its own ‘cap’, which will increase annually in
line with the UK Government’s Index of Retail Prices
(All Items). The cap was £137,400 as at 6 April 2012.
As a result of the UK Government’s A-Day changes
effective from April 2006, UK executive directors
and other members of the Pearson Group Pension
Plan who are, or become, affected by the lifetime
allowance or new hires who opt out of membership
of the Plan may be provided with a cash supplement
of normally up to 26% of salary as an alternative to
further accrual of pension benefits.
No malus or clawback provisions apply to
retirement benefits.
Note Effective from 6 April 2011, the annual allowance (i.e. the maximum
amount of pension saving that benefits from tax relief each year) reduced
from £255,000 to £50,000 and will further reduce to £40,000 from 6 April
2014. Effective 6 April 2012, the lifetime allowance (i.e. the maximum amount
of pension and/or lump sum that can benefit from tax relief) reduced from
£1.8m to £1.5m and will further reduce to £1.25m from 6 April 2014.
O P P O RT U N IT Y
In the UK, company contributions for eligible
employees to the Money Purchase 2003 section of
the Pearson Group Pension Plan amount up to 16%
of pensionable salary (double the amount of the
employee contribution, which is limited according
to certain age bands).
In the US, company contributions to the 401(k) plan
amount to 100% of the first 3% of eligible
compensation contributed by the employee and 50%
of the next 3%, plus a basic annual company
contribution of 1.25% of eligible compensation.
Pearson Inc. Pension Plan participants who were at
least age 40 at 31 December 2001 can receive an
additional 0.5% to 1.5% of pay.
John Fallon is a member of the Final Pay section of
the Pearson Group Pension Plan. His pension accrual
rate is 1/30th of pensionable salary per annum,
restricted to the plan earnings cap. Until April 2006,
the company also contributed to a Funded
Unapproved Retirement Benefits Scheme (FURBS)
on his behalf. Since April 2006, he has received a
taxable and non-pensionable cash supplement in
replacement of the FURBS.
Robin Freestone is a member of the Money Purchase
2003 section of the Pearson Group Pension Plan.
Company contributions are 16% of pensionable
salary per annum, restricted to the plan earnings
cap. Until April 2006, the company also contributed
to a Funded Unapproved Retirement Benefits
Scheme (FURBS) on his behalf. Since April 2006,
he has received a taxable and non-pensionable
cash supplement in replacement of the FURBS.
The company has no ongoing financial liabilities in
respect of FURBS.
No continuing director is currently a member of
the defined benefit Pearson Inc. Pension Plan.
P E R F O R M A N C E CO N D ITI O N S
None.
P E R F O R M A N C E P E R I O D
None.
Section 4 Governance
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Annual incentives
P U R P O S E A N D L I N K TO S TR AT EGY
› Motivate the achievement of annual strategic goals
and personal objectives.
› Provide a focus on key financial metrics.
› Reward individual contribution to the success of
the company.
O P E R ATI O N
Annual incentive is delivered entirely in cash and
does not form part of pensionable earnings.
Measures and performance targets are set by the
committee at the start of the year with payment
made after year end following the committee’s
assessment of performance relative to targets.
The plans are designed to incentivise and reward
underlying performance and actual results are
adjusted for the effect of foreign exchange and for
portfolio changes (acquisitions and disposals) and
other factors that the committee considers relevant
in the performance year.
Annual incentive plans are discretionary. The
committee reserves the right to adjust payments
up or down before they are made if it believes
exceptional factors warrant doing so. The
committee may in exceptional circumstances make
a special award where it is satisfied that the normal
operation of the annual incentive does not provide
an appropriate incentive or reward to participants.
The committee also reserves the right as a form
of malus to adjust payments before they are made
if special circumstances exist that warrant this, such
as financial misstatement, individual misconduct
or reputational damage to the company.
The committee also reserves, in the same special
circumstances, a right to reclaim or claw back
payments or awards that have already been made.
O P P O RT U N IT Y
For the chief executive, other executive directors
and other members of the Pearson Executive, there
is normally no pay-out for performance at threshold.
No adjustment has been made to annual incentive
opportunities for the cessation of the annual bonus
share matching plan under which the last conditional
awards were made in 2013 in respect of 2012 annual
incentive.
P E R F O R M A N C E CO N D ITI O N S
The committee has the discretion to select the
performance measures, targets and relative
weightings from year to year to ensure continuing
alignment with strategy and to ensure targets are
sufficiently stretching.
The committee establishes a threshold below which
no pay-out is achieved and a maximum at or above
which the annual incentive pays out in full.
For 2014 and onwards, the funding of annual
incentives will normally be related to the
performance against targets for Pearson’s adjusted
earnings per share (or operating profit), sales, and
operating cash flow. For 2014, the weightings will be
60% on adjusted earnings per share, 20% on sales
and 20% on operating cash flow.
Individual annual incentive pay-outs will also take
into account individual performance against personal
objectives. Personal objectives are agreed with the
chief executive (or, in the case of the chief executive,
the chairman) and may be functional, operational,
strategic and non-financial and include inter alia
objectives relating to environmental, social and
governance issues.
Details of performance measures, weightings and
targets will be disclosed in the annual remuneration
report for the relevant financial year if and to the
extent that the committee deems them to be no
longer commercially sensitive.
Annual incentives will not exceed 200% of base salary.
P E R F O R M A N C E P E R I O D
One year.
For the chief executive, the individual maximum
incentive opportunity that will apply for 2014 is 180%
of base salary (which is the same as applied for 2013).
For other executive directors and other members
of the Pearson Executive, individual maximum
incentive opportunities vary by individual but will be
no more than 170% of base salary.
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Long-term incentives
P U R P O S E A N D L I N K TO S TR AT EGY
› Help to recruit, reward and retain.
› Drive long-term earnings, share price growth and
value creation.
› Align the interests of executives and shareholders.
› Encourage long-term shareholding and
commitment to the company.
› Link management’s long-term reward and wealth
to corporate performance in a flexible way.
O P E R ATI O N
Awards of restricted shares are made on an
annual basis.
Awards of restricted shares for executive directors
and other members of the Pearson Executive vest
on a sliding scale based on performance against
stretching corporate performance targets measured
at the end of the three-year performance period.
For performance-related awards for members of
the Pearson Executive, performance will continue
to be tested over three years and 75% of the vested
shares will continue to be released at that point.
However, starting with awards made in 2014, there
will be a mandatory restriction on participants’
ability to dispose of the 75% of the vested shares
(other than to meet personal tax liabilities) for
a further two years. Furthermore, participants’
rights to the release of the 25% of the vested shares
will be subject to continued employment over the
same period.
Where shares vest, participants also receive
additional shares representing the gross value of
dividends that would have been paid on these shares
during the performance period and reinvested.
The plan permits awards of restricted shares to be
made that are not subject to performance conditions
to satisfy reward and retention objectives. However,
other than in exceptional circumstances on
recruitment, it is the company’s normal policy not to
award restricted shares to executive directors and
other members of the Pearson Executive without
performance conditions.
The long-term incentive plan also provides for the
grant of stock options. Whilst it is not the
committee’s intention to grant stock options in 2014
or the foreseeable future, the committee believes
that it should retain the flexibility of granting stock
options in addition to, or instead of, restricted stock
awards in the right circumstances. Any decision by
the committee to grant stock options in the future
would take account of best practice prevailing at
the time. The committee would consult with
shareholders before granting stock options to
executive directors.
An option granted under the stock option element
may not generally be exercised until a time specified
when the option is granted. The date on which
options would become exercisable would be set by
the committee. Options may not be exercised later
than the tenth anniversary of grant. Any options
granted to executive directors would vest only if
stretching performance conditions are achieved over
a three-year minimum vesting period. Any options
would vest on a sliding scale based on performance
over the period. There will be no re-testing.
Pearson’s reported financial results for the relevant
periods are used to measure performance.
The committee reserves the right to adjust pay-outs
up or down before they are released taking into
account exceptional factors that distort underlying
business performance or if it believes exceptional
factors warrant doing so. In making such
adjustments, the committee is guided by the
principle of aligning shareholder and management
interests.
The committee also reserves the right as a form
of malus to adjust pay-outs before they are released
if exceptional circumstances exist that warrant this,
such as financial misstatement, individual misconduct
or reputational damage to the company.
The committee also reserves, in the same special
circumstances, a right to reclaim or claw back pay-
outs or awards that have already been released.
O P P O RT U N IT Y
We set the level of individual awards by taking into
account:
› the face value of individual awards at the time of grant,
assuming that performance targets are met in full;
› market practice for comparable companies and
market assessments of total remuneration from
our independent advisers;
› individual roles and responsibilities; and
› company and individual performance.
Restricted share awards to executive directors may
normally be made up to a maximum face value of
400% of base salary. Awards in excess of 400%
of base salary may be made in exceptional
circumstances, for example, for retention purposes
or to reflect particular business situations.
Section 4 Governance
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The reasons for any such exceptional awards will be
disclosed in the annual report for the year in which
they are made.
The value of awards at pay-out is subject to the
extent to which performance and any other
conditions are met and the share price at the time
of vesting. The proportion of the award that vests
at threshold level of performance may vary by
performance condition.
Whilst it is not the committee’s intention to grant
stock options in 2014 or the foreseeable future, the
maximum value of stock option awards would be
the equivalent expected value of the maximum
restricted share awards set out above, based on an
independent assessment of their net present value
taking into account all the conditions.
For 2014, we will set the level of individual restricted
share awards consistent with those seen in recent
years and within the policy maximum taking into
account the factors set out above.
No adjustment has been made to long-term
incentive opportunities for the cessation of the
annual bonus share matching plan under which the
last conditional awards were made in 2013 in respect
of 2012 annual incentive.
P E R F O R M A N C E CO N D ITI O N S
The committee will determine the performance
measures, weightings and targets governing an
award of restricted shares prior to grant to ensure
continuing alignment with strategy and to ensure
that targets are sufficiently stretching.
The committee establishes a threshold below which
no pay-out is achieved and a maximum at or above
which the award pays out in full.
For 2014 and onwards, awards will normally be
subject to the achievement of targets for growth in
earnings per share, return on invested capital and
relative total shareholder return. For 2014, to
emphasise the importance of earnings growth and to
reward the delivery of the desired outcomes from
the strategic effort, the weighting of the performance
metrics within the Pearson long-term incentive plan
will be changed from one-third on each measure to
half on earnings per share growth, one-third on
return on invested capital (no change) and one-sixth
on relative total shareholder return.
We will set targets for the 2014 awards that are
consistent with the company’s strategic objectives
over the period to 2016. Full details of the
performance measures, weightings and targets for
2014 and the proportion of the award payable at
threshold will be set out in the annual remuneration
report for 2014.
As with restricted shares, the committee will
determine the performance conditions that apply
to any awards of stock options prior to grant.
The intention would be that these conditions would
be the same as apply to restricted shares.
Total shareholder return (TSR) is the return to
shareholders from any growth in Pearson’s share
price and reinvested dividends over the performance
period. For long-term incentive awards, TSR is
measured relative to the constituents of the FTSE
World Media Index over a three-year period.
Companies that drop out of the index are normally
excluded i.e. only companies in the index for the
entire period are counted. Share price is averaged
over three months at the start and end of the
performance period. Dividends are treated as
reinvested on the ex-dividend date, in line with the
Datastream methodology. The vesting of shares
based on relative TSR is subject to the committee
satisfying itself that the recorded TSR is a genuine
reflection of the underlying financial performance
of the business.
Return on invested capital (ROIC) is adjusted
operating profit less cash tax expressed as a
percentage of gross invested capital (net operating
assets plus gross goodwill).
Adjusted earnings per share (EPS) is calculated by
dividing the adjusted earnings attributable to equity
shareholders of the company by the weighted
average number of ordinary shares in issue during the
year, excluding any ordinary shares purchased by the
company and held in trust (see note 8 of the financial
statements for a detailed description of adjusted
earnings per share). EPS growth is calculated using
the point-to-point method. This method compares
the adjusted EPS in the company’s accounts for the
financial year ended prior to the grant date with the
adjusted EPS for the financial year ending three years
later and calculates the implicit compound annual
growth rate over the period.
P E R F O R M A N C E P E R I O D
Three years.
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Pearson plc Annual report and accounts 2013
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Selection of performance measures and target setting
In the selection and weighting of performance measures
for the annual and long-term incentive awards the
committee takes into account Pearson’s strategic
objectives and short- and long-term business priorities.
In the case of annual incentives, the committee chose
sales, earnings per share or operating profit, and
operating cash flow as being relevant measures of
Pearson’s performance against its short-term strategic
objectives and business priorities.
In the case of long-term incentives, the committee
chose earnings per share growth in order to reward
the delivery of the desired outcomes from the
strategic effort and because strong bottom-line
growth is imperative if we are to improve our total
shareholder return and our return on invested capital.
We chose return on invested capital because, over the
past few years, the transformation of Pearson has
significantly increased the capital invested in the
business (mostly in the form of goodwill associated
with acquisitions) and required substantial cash
investment to integrate those acquisitions. We chose
total shareholder return relative to the constituents
of the FTSE World Media Index because, in line with
many of our shareholders, we felt that part of
executive directors’ rewards should be linked to
performance relative to the company’s peers.
The performance ranges chosen set a careful balance
between upside opportunity and downside risk and
are normally based on targets in accordance with the
company’s operating and strategic plans.
Legacy arrangements under the annual bonus share
matching plan
Up to and including 2013 in respect of annual incentives
for 2012, awards were made under the annual bonus
share matching plan. This plan encouraged executive
directors and other senior managers to acquire and
hold Pearson shares and aligned the interests of
executives and shareholders. Senior managers across
the company were invited to invest up to 50% of their
after-tax annual incentive in Pearson shares purchased
in the market and hold these shares for three years,
in return for the opportunity to earn additional free
matching shares and dividend shares, depending on
performance against a real growth in earnings per
share performance condition. Where matching shares
vest, participants also receive additional shares
representing the gross value of dividends that would
have been paid on the matching shares during the
performance period and reinvested. The maximum
matching award is equal to the number of shares that
could have been acquired with the amount of pre-tax
annual bonus invested in Pearson shares (i.e. one
matching share for every one invested share, grossed
up for tax).
Remuneration policy for other employees
The approach to remuneration for the broader
employee population varies by level and geography,
but is broadly consistent with that of directors:
› The approach to setting base salary increases
elsewhere in the company takes into account
economic factors, competitive market rates, roles,
skills, experience and individual performance.
› Allowances and benefits for employees reflect the
local labour market in which they are based.
› As part of their overall retirement arrangements,
executive directors participate in the same
underlying pension arrangements that have been
set up for Pearson employees in the US and the UK.
› Many employees participate in some form of cash-
based annual incentive, bonus, profit-share or sales
commission plan. Annual incentive plans for the
Pearson Executive form the basis of the annual
incentive plans below the level of the principal
operating companies and establish performance
measures and standards and set the ceiling for
individual incentive opportunities.
› Approximately 5% of the company’s employees
below the Pearson Executive – selected on the basis
of their role, performance and potential – currently
hold time-vesting shares under the long-term
incentive plan.
› All employees (including executive directors) are
also eligible to participate in savings-related share
acquisition programmes in the UK, US and the
rest of the world, which are not subject to any
performance conditions.
Pay and performance scenario analysis
Consistent with its policy, the committee places
considerable emphasis on the performance-linked
elements i.e. annual and long-term incentives.
The chart overleaf shows what each director
could expect to receive in 2014 under different
performance scenarios, based on the following
definitions of performance:
Section 4 Governance
89
PERFORMANCE
SCENARIO
ELEMENTS OF REMUNERATION
AND ASSUMPTIONS
Recruitment
Maximum
Target
Minimum
2014 base salary; allowances,
benefits, and retirement benefits at
the same percentage of base salary
as in 2013; maximum individual
annual incentive as per policy;
maximum value of 2013 long-term
incentive award
2014 base salary; allowances,
benefits, and retirement benefits at
the same percentage of base salary
as in 2013; target individual annual
incentive as per policy; target value
of 2013 long-term incentive award
(Towers Watson’s independent
assessment of the expected value of
the award i.e. the net present value
taking into account all the conditions)
2014 base salary; allowances,
benefits, and retirement benefits at
the same percentage of base salary
as in 2013; no annual or long-
term incentives
Note The value of long-term incentives does not take into account dividend
awards that are payable on the release of restricted shares nor any changes
in share price.
On this basis, the relative weighting of fixed and
performance-related remuneration and the absolute
size of the remuneration packages for the chief
executive and the chief financial officer are as follows:
Chief executive officer
21%
25%
54%
Maximum
Target
Minimum
31%
21%
48%
100%
Chief financial officer
21%
27%
52%
Maximum
Target
33%
21%
46%
100%
Minimum
Base salary, allowances,
benefits and pension
Annual incentives
Long-term incentives
£000
£5,536
£3,664
£1,145
£000
£3,494
£2,264
£737
We will continue to review the mix of fixed and
performance-linked remuneration on an annual basis,
consistent with our overall policy.
The committee expects any new executive directors
to be engaged on terms that are consistent with the
general remuneration principles outlined in this policy.
In particular, the company’s policy is that regular
variable remuneration would normally be awarded
within the same parameters and subject to the same
performance conditions as for the current executive
directors outlined in the policy, save that the
committee may provide that in exceptional
circumstances an annual or long-term incentive award
may be subject to a requirement of continued service
over a specified period or some other specified
requirement, rather than a corporate performance
condition. The terms of any such exceptional award
will be disclosed in the relevant subsequent annual
remuneration report.
The committee recognises that it cannot always
predict accurately the circumstances in which any
new directors may be recruited. The committee may
determine that it is in the interests of the company
and shareholders to secure the services of a
particular individual which may require the committee
to take account of the terms of that individual’s existing
employment and/or their personal circumstances.
Examples of circumstances in which the committee
expects it might need to do this are:
› where an existing employee of the company is
promoted to the board, in which case the company
will honour all existing contractual commitments
including any outstanding share awards, benefit and
pension entitlements;
› where an individual is relocating in order to take up
the role in which case the company may provide
certain benefits such as reasonable relocation
expenses, accommodation for a short period
following appointment and assistance with visa
applications or other immigration issues and ongoing
arrangements such as tax equalisation, annual flights
home, and housing allowance;
› where an individual would be forfeiting valuable
variable remuneration in order to join the company,
in which case the committee may award appropriate
compensation. The committee would require
reasonable evidence of the nature and value of any
forfeited award and would, to the extent practicable,
ensure any compensation was provided on a like-
for-like basis and was no more valuable than the
forfeited award.
In light of the various legacy pension arrangements
enjoyed by the incumbent executive directors, in
determining the pension arrangements for any new
recruit, the committee expects to offer a defined
contribution arrangement with company contributions
not exceeding those set out on page 84 but would
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Pearson plc Annual report and accounts 2013
Report on directors’ remuneration continued
have regard to the recruit’s existing arrangements, the
market norms in the home country and the existing
pension vehicles available within the company.
In making any decision on any aspect of the
remuneration package for a new recruit, the committee
would balance shareholder expectations, current best
practice and the requirements of any new recruit and
would strive not to pay more than is necessary to
achieve the recruitment. The committee would give full
details of the terms of the package of any new recruit in
the next annual remuneration report.
Pearson expects any new chairman or non-executive
director to be engaged on terms that are consistent with
the general remuneration principles outlined in the
relevant sections of this policy. However, in the case of
the chairman, the committee may consider it
appropriate to offer a remuneration package that differs
from that of the existing incumbent if that is necessary to
attract the most capable candidate or to reflect the
individual’s expected duties.
Service contracts and termination provisions
In accordance with long established policy, all
executive directors have service agreements under
which, other than by termination in accordance with
the terms of these agreements, employment
continues indefinitely.
There are no special provisions for notice or
compensation in the event of a change of control
of Pearson.
It is the company’s policy that the company may
terminate the chairman’s and executive directors’ service
agreements by giving no more than 12 months’ notice.
As an alternative, for executive directors the company
may at its discretion pay in lieu of that notice.
Payment-in-lieu of notice may be made in equal
monthly instalments from the date of termination to
the end of any unexpired notice period. In the case of
the CEO, payment-in-lieu of notice in instalments may
also be subject to mitigation and reduced taking into
account earnings from alternative employment.
For executive directors, pay in lieu of notice comprises
100% of the annual salary at the date of termination
and the annual cost to the company of providing
pension and all other benefits. For the chairman,
pay in lieu of notice comprises 100% of the annual
fees at the date of termination. In limited
circumstances, in addition to making a full payment
in lieu of notice, the company may permit an executive
director to stay employed after the announcement of
his or her departure for a limited period to ensure an
effective hand-over and/or allow time for a successor
to be appointed.
The company may, depending on the circumstances
of the termination, determine that it will not pay the
director in lieu of notice and may instead terminate
a director’s contract in breach and make a damages
payment, taking into account as appropriate the
director’s ability to mitigate his or her loss.
On cessation of employment, save as otherwise
provided for under the rules of Pearson’s discretionary
share plans, executive directors’ entitlements to any
unvested awards lapse automatically. In the case of injury,
disability, ill-health or redundancy (as determined by
the committee), where a participant’s employing
company ceases to be part of Pearson, or any other
reason if the committee so decides in its absolute
discretion:
› awards that are subject to performance conditions
will stay in force as if the participant had not ceased
employment and shall vest on the original
vesting date;
› awards that are not subject to a performance
condition will be released as soon as practicable
following cessation of employment;
› the number of shares that are released shall be
prorated for the period of the participant’s service in
the restricted period (although the committee may
in its absolute discretion waive or vary the prorating).
In determining whether and how to exercise its
discretion under Pearson’s discretionary share plans,
the committee will have regard to all relevant
circumstances distinguishing between different types
of leaver, the circumstances at the time the award was
originally made, the director’s performance and the
circumstances in which the director left employment.
On cessation of employment, executive directors,
having been notified of participation in an annual
incentive plan for the relevant financial year, may, at
the committee’s discretion, retain entitlement to a
pro rata annual incentive for their period of service in
the financial year prior to their leaving date. Such pay-
out will normally be calculated in good faith on the
same terms and paid at the same time as for
continuing executive directors.
Eligibility for allowances and benefits including
retirement benefits normally ceases on retirement
or on the termination of employment for any
other reason.
Details of each individual’s service agreement are
outlined in the table overleaf. Employment agreements
for other employees are determined according to
local labour law and market practice.
Section 4 Governance
91
Individual service agreements
POSITION
Chairman
Executive directors
DATE OF AGREEMENT
NOTICE PERIODS
29 July 2005
31 December 2012
(John Fallon)
17 December 2012
(Robin Freestone)
12 months from
the director;
12 months from
the company
Six months from
the director;
12 months from
the company
COMPENSATION ON TERMINATION
OF EMPLOYMENT BY THE COMPANY
WITHOUT NOTICE OR CAUSE
Payment-in-lieu of notice of 100% of
annual fees at the date of termination
Payment-in-lieu of notice of 100%
of annual salary at the date of
termination and the annual cost
of pension and all other benefits
Note Under pay-in-lieu of notice, the annual cost of pension for executive directors is normally calculated as the sum, where applicable, of: an amount equal to
the company’s cost of providing the executive’s pension under the pension plan based on the Future Service Company Contribution Rate for the relevant section
of the pension plan as stated in the most recent actuarial valuation (as at the date of termination of employment) as limited by the earnings cap; and any cash
allowance in lieu of pension or to take account of fact that pension benefits and life assurance cover are restricted by the earnings cap.
Executive directors’ non-executive directorships
The committee’s policy is that executive directors
may, by agreement with the board, serve as non-
executives of other companies and retain any fees
payable for their services.
Employment conditions
In accordance with the committee’s charter and terms
of reference, the committee’s remit does not include
remuneration matters below that of the chief
executive, the other executive directors and other
members of the Pearson Executive. However, before
the remuneration packages for the Pearson Executive
are set for the year ahead, the committee considers
a report from the chief executive and chief human
resources officer on general pay trends in the market
and the level of pay increases across the company
as a whole. This helps to ensure that executive
remuneration packages are reviewed in the context
of the wider organisation.
The company consults with various employee
representative bodies – including trade unions and
works councils in some jurisdictions – about the
company’s strategy, competitiveness and performance
of the business and other matters affecting employees.
The company also conducts an employee engagement
survey to find out how people feel about working for
Pearson, what they think about the work they do,
the opportunities they have and the rewards they get
(including a section on pay and benefits). The company
uses all of this feedback to inform decisions on people-
related activities, resources and investment, local
management action plans and wider business unit and
organisational strategies.
It is the company’s intention to continue to engage
with employees and employee representatives in this
way in the future.
The committee has not consulted directly with
employees on the setting of the directors’
remuneration policy.
Shareholder views
The company consults regularly with shareholders
on all matters affecting its strategy and business
operations. As part of that process, we also engage
with shareholders on matters relating to executive
remuneration.
The committee continues to be aware of and respond
to best practice guidelines of shareholders and their
representative bodies.
The committee actively consulted with the company’s
major shareholders and their representative bodies
on the directors’ remuneration policy set out in this
report. The consultation provided some valuable
feedback relating to remuneration policy, company
performance and business strategy. Specifically,
shareholders commented on the operation of the
long-term incentive plan, the use of flexibility and
discretion, and the policy on recruitment. They
supported the committee’s proposals on deferral/
holding periods for vested shares and shareholding
guidelines. And, on incentive pay-outs, they requested
clarification of our arrangements for adjustments for
malus and the strengthening of our clawback
provisions.
These matters have been addressed in this policy report.
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Pearson plc Annual report and accounts 2013
Report on directors’ remuneration continued
Future policy table for chairman’s and non-executive directors’ remuneration
The table below summarises policy with respect to the remuneration of the chairman and non-executive directors:
P U R P O S E A N D L I N K TO S TR AT EGY
O P P O RT U N IT Y
The chairman’s fees were last reviewed in 2010
and increased with effect from 1 April 2011 with a
commitment to review again in 2014. Fees for the
non-executive directors were last increased with
effect from 1 July 2010.
The structure of non-executive directors’ fees with
effect from 1 May 2014 is as follows:
DIRECTOR
Non-executive director
Chairmanship of audit committee
Chairmanship of remuneration committee
Chairmanship of reputation and
responsibility committee
Membership of audit committee
Membership of remuneration committee
Membership of reputation and
responsibility committee
Senior independent director
FEE
£70,000
£27,500
£22,000
£10,000
£15,000
£10,000
£5,000
£22,000
The maximum opportunity per director depends
on individual duties or combination of duties in
accordance with this structure. The total fees
payable to the non-executive directors are subject
to the limit set out in the Articles of Association of
the company (currently £750,000) and as increased
by ordinary resolution from time to time.
The fees for the chairman remains unchanged at
£500,000 per year.
P E R F O R M A N C E CO N D ITI O N S
None.
P E R F O R M A N C E P E R I O D
None.
To attract and retain high calibre individuals, with
appropriate experience or industry relevant skills,
by offering market competitive fee levels.
O P E R ATI O N
The chairman is paid a single fee for all of his
responsibilities.
The chairman’s fee is set at a level that is competitive
with those of chairmen in similar positions in
comparable companies. The chairman is not entitled
to any annual or long-term incentive, retirement or
other employee benefits.
The non-executive directors are paid a basic fee.
The chairmen and members of the main board
committees and the senior independent director
are paid an additional fee to reflect their extra
responsibilities.
The chairman and the non-executive directors are
covered by the company’s normal arrangements for
directors’ and officers’ liability insurance and an
indemnity in respect of certain third-party liabilities.
The company reimburses the chairman’s and non-
executive directors’ travel and other business
expenses and any tax incurred thereon, if applicable.
A minimum of 25% of the basic non-executive
directors’ fee is paid in Pearson shares that the non-
executive directors have committed to retain for the
period of their directorships. Shares are acquired
quarterly at the prevailing market price with the
individual after-tax fee payments.
Fees for non-executive directors are determined
by the full board having regard to market practice
and within the restrictions contained in the
company’s Articles of Association. Non-executive
directors receive no other pay or benefits (other
than reimbursement for expenses incurred in
connection with their directorship of the company)
and do not participate in the company’s equity-based
incentive plans.
Non-executive directors serve Pearson under
letters of appointment which are renewed annually
and do not have service contracts. For non-
executive directors, there is no notice period or
entitlement to compensation on the termination of
their directorships.
Section 4 Governance
93
Annual remuneration report
The remuneration committee presents the annual
remuneration report, which will be put to shareholders
as an advisory (non-binding) vote at the Annual
General Meeting to be held on 25 April 2014.
This report comprises of a number of sections:
›(cid:3)The remuneration committee and its activities
›(cid:3)Voting outcome at 2013 AGM
›(cid:3)Single figure of total remuneration and prior
year comparison
›(cid:3)Detail of executive remuneration for 2013
›(cid:3)Detail of long-term share interests including awards
made in 2013
›(cid:3)Payments to former directors
›(cid:3)Payments for loss of office
›(cid:3)Interests of directors and value of shareholdings
›(cid:3)Executive directors’ non-executive directorships
›(cid:3)Historical performance and remuneration
›(cid:3)Comparative information
›(cid:3)Information on changes to remuneration for 2014.
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Pearson plc Annual report and accounts 2013
Report on directors’ remuneration continued
The remuneration committee and its activities
Composition
David Arculus chaired the remuneration committee for
the year 2013; the other members were Vivienne Cox,
Ken Hydon, Joshua Lewis and Glen Moreno. David
Arculus, Vivienne Cox, Ken Hydon and Joshua Lewis
are independent non-executive directors. Glen
Moreno, chairman of the board, is a member of the
committee as permitted under the UK Corporate
Governance Code.
Internal advisers to the committee
John Fallon, chief executive, Robin Freestone, chief
financial officer, Robin Baliszewski, formerly director
for people, Melinda Wolfe, chief human resources
officer from October 2013, Robert Head, director for
executive reward, and Stephen Jones, SVP company
secretarial, provided material assistance to the
committee during the year. They attended meetings of
the committee, although none of them was involved in
any decisions relating to his or her own remuneration.
External advisers to the committee
To ensure that the committee receives independent
advice, Towers Watson supplies survey data and
advises on market trends, long-term incentives and
other general remuneration matters. Towers Watson
was selected and appointed by the committee through
a formal tendering process. Towers Watson also
advised the company on health and welfare benefits in
the US and provided consulting advice directly to
certain Pearson operating companies. Towers Watson
is a member of the Remuneration Consultants’ Group,
the body which oversees the code of conduct in
relation to executive remuneration consulting in the
UK. During the year, Towers Watson was paid fees for
advice to the committee, which were charged on a
time spent basis, of £89,129. As part of its annual
review of its performance and effectiveness, the
committee remains satisfied that Towers Watson’s
advice was objective and independent and that Towers
Watson’s provision of other services in no way
compromises its independence.
Responsibility
The committee’s principal duties are to:
›(cid:3)determine and regularly review the remuneration
policy for the executive directors, the presidents of the
principal geographic markets and lines of business and
other members of the Pearson Executive who report
directly to the CEO (Executive Management).
This policy includes base salary, annual and long-term
incentives, pension arrangements, any other benefits
and termination of employment
›(cid:3)regularly review the implementation and operation of
the remuneration policy for Executive Management
and approve the individual remuneration and benefits
packages of the executive directors.
The committee’s duties are also to:
›(cid:3)approve the design of, and determine targets for,
any performance-related pay plans operated by the
company and approve the total payments to be made
under such plans
›(cid:3)review the design of the company’s long-term incentive
and other share plans for approval by the board and
shareholders
›(cid:3)advise and decide on general and specific arrangements
in connection with the termination of employment of
executive directors
›(cid:3)review and approve corporate goals and objectives
relevant to CEO remuneration and evaluate the CEO’s
performance in light of those goals and objectives
›(cid:3)have delegated responsibility for determining the
remuneration and benefits package of the chairman
of the board
›(cid:3)appoint and set the terms of engagement for any
remuneration consultants who advise the committee
and monitor the cost of such advice.
The committee’s full charter and terms of reference
are available on the company’s website.
Annually, the committee reviews its own performance,
constitution and charter and terms of reference to
ensure it is operating at maximum effectiveness and
recommends any changes it considers necessary to the
board for approval.
The committee participated in a survey to review its
performance and effectiveness in July 2013, looking at
areas such as the clarity of roles and responsibilities,
the composition of the committee, the use of time,
the quality and timeliness of meeting materials, the
opportunity for discussion and debate, dialogue with
management and access to independent advice.
The committee concluded that it is operating
effectively and noted the challenges for the year ahead.
Section 4 Governance
95
Meetings in 2013
The committee met five times during 2013. The
matters discussed and actions taken were as follows:
20 FEBRUARY 2013
›(cid:3)Confirmed the leaving arrangements for Rona Fairhead
›(cid:3)Noted the activity of the standing committee of the
board in relation to the operation of the company’s
equity-based reward programmes
›(cid:3)Noted company’s use of equity for employee share
plans
›(cid:3)Noted Towers Watson’s overview of the current
remuneration environment
›(cid:3)Reviewed and approved 2012 annual incentive plan
pay-outs
›(cid:3)Reviewed and approved provisional 2010 long-term
incentive plan pay-outs
›(cid:3)Approved vesting of 2010 annual bonus share matching
awards and release of shares
›(cid:3)Reviewed and approved increases in base salaries for
2013 for the Pearson management committee (now
called the Pearson Executive)
›(cid:3)Reviewed 2013 Pearson and operating company annual
incentive plan targets
24 APRIL 2013
›(cid:3)Noted the activity of the standing committee of the
board in relation to the operation of the company’s
equity-based reward programmes
›(cid:3)Confirmed 2010 long-term incentive plan pay-outs
including element relating to relative shareholder
return performance and release of shares
›(cid:3)Confirmed 2013 Pearson and operating company
annual incentive plan targets
›(cid:3)Confirmed 2013 long-term incentive awards and
associated performance conditions for the Pearson
management committee
›(cid:3)Noted feedback on the 2012 report on directors’
remuneration
›(cid:3)Discussed new executive remuneration reporting
requirements.
24 JULY 2013
›(cid:3)Reviewed the committee’s charter and terms of
reference
›(cid:3)Discussed 2013 AGM season and shareholder voting
›(cid:3)Noted remuneration packages for a number of internal
appointments and one new hire to the Pearson
Executive
›(cid:3)Reviewed and approved 2013 individual annual
incentive opportunities for the Pearson management
committee
›(cid:3)Noted John Makinson’s remuneration package and
contract on secondment to, and appointment as
chairman of, Penguin Random House
›(cid:3)Reviewed 2013 long-term incentive awards and
associated performance conditions for the Pearson
management committee
›(cid:3)Noted Will Ethridge’s intention to stand down from
the Pearson board and the arrangements for his 2014
employment and retirement
›(cid:3)Reviewed and noted total remuneration for members
of the Pearson management committee for 2012
and 2013
›(cid:3)Noted implications of new executive remuneration
reporting requirements and commenced review of
executive remuneration policy.
›(cid:3)Reviewed and approved the 2012 report on directors’
remuneration
›(cid:3)Reviewed and approved the 2012 annual incentive
pay-out for Marjorie Scardino
›(cid:3)Reviewed and approved the 2012 annual incentive
pay-out and 2013 remuneration package for
John Fallon.
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Pearson plc Annual report and accounts 2013
Report on directors’ remuneration continued
2 OCTOBER 2013
5 DECEMBER 2013
›(cid:3)Noted the activity of the standing committee of the
board in relation to the operation of the company’s
equity-based reward programmes
›(cid:3)Noted the activity of the standing committee of the
board in relation to the operation of the company’s
equity-based reward programmes
›(cid:3)Reviewed the committee’s charter and terms of
›(cid:3)Reviewed and approved the committee’s charter and
reference
terms of reference
›(cid:3)Reviewed the committee’s performance and
›(cid:3)Discussed Towers Watson’s overview of the current
effectiveness
›(cid:3)Reviewed the status of outstanding long-term incentive
awards
›(cid:3)Ratified 2013 long-term incentive awards and
associated performance conditions for new appointees
to the Pearson Executive
›(cid:3)Considered the approach to 2013 annual incentives in
remuneration environment and approach to executive
pay benchmarking for 2013/2014
›(cid:3)Reviewed the status of outstanding long-term incentive
awards
›(cid:3)Considered the approach to annual incentives in the
light of the company’s global education strategy and
new organisation
light of company’s restructuring plans
›(cid:3)Reviewed long-term incentive plan design and
operation
›(cid:3)Reviewed the programmes and policies related to
equity participation of executives
›(cid:3)Noted the draft format for the 2013 directors’
remuneration report.
›(cid:3)Noted the company’s strategy for 2013 long-term
incentive awards for executives and managers below
the Pearson Executive
›(cid:3)Considered the approach to annual incentives in the
light of the company’s global education strategy and
new organisation
›(cid:3)Continued the review of executive remuneration policy
›(cid:3)Noted the remuneration packages for two new hires
to the Pearson Executive.
Voting outcome at 2013 AGM
The following table summarises the details of votes cast in respect of the resolution to approve the directors’
remuneration report at the 2013 AGM.
Votes for
Votes against
Total votes cast
Votes withheld (abstentions)
523,204,046
93.64% of votes cast
35,545,800
6.36% of votes cast
558,749,846
68.35% of issued share capital
14,082,005
While the committee was pleased with the level of support shown by shareholders in respect of this resolution,
consideration was given to those shareholders that did not vote in favour of the directors’ remuneration report.
Through consultation, the committee received feedback from three institutional shareholders who between them
accounted for one-third of the votes against to understand better why these shareholders voted against the
resolution. The committee subsequently discussed this at their July 2013 meeting. In the light of the feedback, the
committee concluded at that time that, notwithstanding any issues arising out of its regular review of executive
remuneration policy, there was nothing fundamental or structural within our existing arrangements to cause
particular concern to shareholders.
As in previous years and required by law, details of the voting on all resolutions at the 2014 AGM will be
announced via the RNS and posted on the Pearson website following the AGM.
http://www.pearson.com/content/dam/pearson-corporate/files/press-
releases/2013/20130426_AGM_Poll_Results.pdf
Section 4 Governance
97
Single total figure of remuneration and prior year comparison
Executive directors
The remuneration received by executive directors in respect of the financial years ending 31 December 2013 and
31 December 2012 was as follows:
Executive
director
£000s
Current directors
John Fallon
Robin Freestone
Former directors
Will Ethridge
Rona Fairhead
(stepped down
26 April 2013)
John Makinson
(stepped down
1 July 2013)
Total
Base
salary
750
146
545
500
681
658
176
529
274
549
2,426
2,382
Allowances
and
benefits
Annual
incentive
Retirement
benefits
Long-term
incentives
43
7
14
22
7
2
14
50
122
244
200
325
463
63
341
252
227
293
–
192
301
330
61
163
144
247
300
110
242
298
238
1,332
1,038
–
1,148
747
141
221
181
1,121
177
1,135
47
769
69
741
615
3,987
Total
1,727
498
1,244
2,039
1,339
2,388
347
1,782
1,064
1,772
5,721
8,479
2013
2012
2013
2012
2013
2012
2013
2012
2013
2012
2013
2012
Note 1 John Fallon was appointed to the board on 3 October 2012. For the full year for 2012, John Fallon’s remuneration
reflected nine months in his role as CEO, Pearson International and three months as Pearson CEO designate and was:
salary/fees – £506; allowances and benefits £29; annual incentive – £259; retirement benefits – £249; long-term incentives
– £909; total – £1,952 (all figures in £000s).
Note 2 In accordance with the regulations, we show a single total figure of remuneration, which includes retirement benefits
and long-term incentives in addition to the other elements of remuneration that have been shown in previous reports.
Note 3 Where necessary, the figures for allowances and benefits, long-term incentives and retirement benefits for 2012 have
been restated to reflect the revised requirements and valuation methodology.
Note 4 In 2012, the accrued pension over the period for John Makinson decreased because of a transfer made as a result of
a pension sharing order.
Note 5 The single figure of remuneration for 2013 includes all awards that were subject to a performance condition where
the performance period ended, or was substantially (but not fully) completed, at 31 December 2013 and awards where the
performance condition has been satisfied but where the release of shares is subject to a further holding period. The same
methodology has been applied for earlier periods and the single figure for earlier reporting periods has been restated
where necessary.
Further explanatory details/notes are included in the tables that follow.
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98
Pearson plc Annual report and accounts 2013
Report on directors’ remuneration continued
Chairman and non-executive directors
The remuneration paid to the chairman and non-executive directors in respect of the financial years ending
31 December 2013 and 31 December 2012 was as follows:
Director
£000s
Glen Moreno
David Arculus
Vivienne Cox
Ken Hydon
Josh Lewis
Linda Lorimer
(appointed 1 July 2013)
Harish Manwani
(appointed 1 October 2013)
Susan Fuhrman
(stepped down 7 August 2013)
Total
Salary/
basic fee
Committee
chairmanship
Committee
membership
Senior
independent
directorship
500
500
65
65
65
65
65
65
65
65
33
–
16
–
39
65
848
825
–
–
20
20
–
–
25
25
–
–
–
–
–
–
–
45
45
–
–
10
10
15
15
5
5
13
10
–
–
–
–
6
10
49
50
–
–
–
–
20
–
–
–
–
–
–
–
–
–
–
20
Total
500
500
95
95
100
80
95
95
78
75
33
–
16
–
45
75
962
920
2013
2012
2013
2012
2013
2012
2013
2012
2013
2012
2013
2012
2013
2012
2013
2012
2013
2012
Total aggregate emoluments for executive and non-executive directors were £5.3m in 2013. These emoluments
are included with total employee benefit expense in note 5 to the financial statements (page 142).
Section 4 Governance
99
Detail of executive remuneration for 2013
In this sub-section, we summarise or provide details of each element of remuneration set out in the single figure
table as required (page 97).
Base salaries
In accordance with policy, the committee considered a report from the chief executive and chief human resources
officer on general pay trends in the market and the level of pay increases across the company as a whole. For 2013,
the company had reiterated its starting principles that base compensation provides the appropriate rate of
remuneration for the job, taking into account relevant recruitment markets, business sectors and geographic
regions and that total remuneration should reward both short- and long-term results, delivering competitive
rewards for target performance, but higher rewards for exceptional company performance. For the US and UK,
the budget guideline issued at the end of September 2012 for adjustments to base pay for 2013 was 2% although
business units were given the flexibility to take into account factors such as their own performance, where they are
in the business cycle, and specific market factors. As the year closed and pay budgets for 2013 were confirmed,
most businesses remained on an overall 2% salary increase pool. Local inflation rates were taken into account in
particular markets.
The increases for the executive directors who served during all or part of 2013 were as follows:
Base salary at 31 December 2012
Increase
Base salary at 1 January 2013
John
Fallon
Robin
Freestone
Will
Ethridge
Rona
Fairhead
(stepped down
26 April 2013)
John
Makinson
(stepped down
1 July 2013)
£600,000
£150,000
25%
£750,000
£500,000 $1,045,500
$20,900
£45,000
2%
9%
£545,000 $1,066,400
£529,100 £548,900
–
–
£529,100 £548,900
–
–
Note John Fallon was appointed to the board on 3 October 2012 and his base salary was reviewed on his appointment to CEO
on 1 January 2013.
Allowances and benefits
During the year the executive directors received a number of benefits as summarised below.
Allowance/benefit
£
Location and market premium
Travel
Health
Risk
Total
John
Fallon
Robin
Freestone
–
15,387
2,405
24,765
42,557
–
12,037
1,988
253
14,278
Rona
Fairhead
(stepped down
26 April 2013)
John
Makinson
(stepped down
1 July 2013)
–
5,530
663
8,074
14,267
105,469
6,865
1,132
8,605
122,071
Will
Ethridge
–
–
5,720
1,673
7,393
Note 1 Travel benefits comprise company car, car allowance and private use of a driver. Health benefits comprise healthcare,
health assessment and gym subsidy. Risk benefits comprise additional life cover and long-term disability insurance.
Note 2 Allowance and benefits for Will Ethridge include US health benefits. Such benefits are self-insured and the value shown
here is the fully insured equivalent. There is no employee tax on this value.
Note 3 In addition to the above benefits and allowances that are included in the single figure, the executive directors may also
participate in company benefit or policy arrangements that have no taxable value.
Note 4 Additional life cover and long-term disability insurance not covered by the retirement plans were previously reported
as ‘other pension-related benefit costs’ and included in retirement benefits in the 2012 directors’ remuneration report.
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100
Pearson plc Annual report and accounts 2013
Report on directors’ remuneration continued
Annual incentive
For 2013, annual incentive opportunities were based on the following performance measures and performance
against these measures (designated as:
between target
and maximum and
above maximum) was as follows:
between threshold and target,
below threshold,
>
<
Maximum
opportunity
(% of salary)
Weighting of
performance measures
(% of maximum opportunity)
Performance in 2013
Pay-out for
2013
(% of
salary) (£000)
Pearson
Operating company
Underlying
growth in
adjusted EPS
(pre-
restructuring)
Underlying
growth in
adjusted EPS
(post-
restructuring)
Average
working
capital to
sales
ratio
Weighted
pay-out
(% of
maximum)
Operating
cash flow
Operating
profit (pre-
restructuring)
Operating
profit (post-
restructuring)
Sales
Average
working
capital
to sales
ratio
Weighted
pay-out
(% of
maximum)
Operating
cash flow
25%
>
25%
<
>
>
>
<
<
<
10%
20%
30%
20%
20%
10%
20%
28.1%
26.0%
–
–
26.0%
<
–
–
–
–
–
–
–
–
– 61.8% 463
– 62.5% 341
10.5% 33.4% 227
26.0%
>
>
>
91.4% 109.8% 301
Sales
20%
<
<
<
10%
20%
10%
10%
<
Operating
company Personal
Pearson
180%
90%
170%
80%
175%
30%
160%
30%
–
–
60%
Pearson
North
America
60%
Penguin
Group
Name
John
Fallon
Robin
Freestone
Will
Ethridge
John
Makinson
(stepped
down
1 July
2013
Note 1 For all plans, Pearson’s reported financial results for the relevant period were used to measure performance. In order
to incentivise and reward underlying performance, actual results are adjusted for the effect of foreign exchange and for
portfolio changes (acquisitions and disposals) and other factors that the committee considers relevant in the performance year.
No discretion has been exercised to adjust the resulting underlying pay-outs.
Note 2 Rona Fairhead, who left the company on 30 April 2013, was not eligible for an annual incentive in respect of her service
in 2013.
Note 3 Details of performance targets and performance against those targets are not disclosed as the committee deems them
to be commercially sensitive.
Section 4 Governance
101
Retirement benefits
Details of the directors’ pension entitlements and pension-related benefits during the year are as follows:
Normal
retirement
age
62
Accrued
pension at
31 Dec 13
£000(1)
74.0
Value of
defined benefit
pension over
the period
£000(2)
Other pension
costs to the
company over
the period
£000(3)
Other
allowances
in lieu of
pension
£000(4)
Total
annual value
in 2013
£000(5)
134.8
–
194.7
330
62
–
–
22.0
141.4
163
65
227.5
215.2
31.6
–
247
62
53.1
65.4
–
44.6
110
Directors’ pensions
Plans
John Fallon
Pearson Group Pension Plan.
Accrual rate of 1/30th of
pensionable salary per annum.
Taxable and non-pensionable
cash supplement
Will Ethridge
Robin Freestone Money Purchase 2003 section
of the Pearson Group Pension
Plan. Taxable and non-
pensionable cash supplement
Pearson Inc. Pension Plan and
the approved 401(k) plan.
Non-qualified Excess Plan
Pearson Group Pension Plan.
Accrual rate of 1/30th of
pensionable salary per annum.
Taxable and non-pensionable
cash supplement
Rona Fairhead
John Makinson Pearson Group Pension Plan.
62
241.1
298
–
–
298
Unfunded Unapproved
Retirement Benefits Scheme
Note 1 The accrued pension at 31 December 2013 is the deferred pension to which the member would be entitled on ceasing
pensionable service on 31 December 2013. For Will Ethridge this is his pension from the US plan and the US SERP. For John
Fallon and Rona Fairhead it relates to the pension payable from the UK plan. For John Makinson it relates to the pension from
the UK Plan and his unapproved arrangements in aggregate. Robin Freestone does not accrue defined benefits.
Note 2 This column comprises the increase in the directors’ accrued pension over the period (net of inflation) multiplied by 20
and from which the directors’ contributions are deducted.
Note 3 This column comprises contributions to defined contribution arrangements for UK benefits. For US benefits, it includes
company contributions to funded defined contribution plans.
Note 4 This column represents the cash allowances paid in lieu of the previous FURBS arrangements for John Fallon,
Robin Freestone and Rona Fairhead. John Makinson’s deferred FURBS entitlement is referred to in note 1 above.
Note 5 Total annual value is the sum of the previous three columns.
Note 6 Additional life cover and long-term disability insurance not covered by the retirement plans were previously reported as
‘other pension-related benefit costs’ and included in retirement benefits in the 2012 directors’ remuneration report and are now
included as ‘allowances and benefits’.
Note 7 There are no additional benefits or special arrangements under the retirement plans for directors who retire before their
normal retirement date.
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Pearson plc Annual report and accounts 2013
Report on directors’ remuneration continued
Details of long-term share interests including awards made in 2013
Long-term incentives
Details of awards made, outstanding, held or released under the annual bonus share matching plan are as follows:
Date of award
Share price on date of award Vesting
annual EPS growth Status of award
Real compound
15/05/13 1,206.0p
15/05/12 1,152.0p
20/04/11 1,129.0p
15/05/16
15/05/15
20/04/14
− Outstanding subject to 2012 to 2015 performance
− Outstanding subject to 2011 to 2014 performance
-6.6% Performance condition not met. Matching share
21/04/10 1,024.1p
21/04/13
award lapsed
4.4% Target met for release of 84.5% of matching share
award as reported in report on directors’
remuneration for 2012. Shares released on
21 April 2013
The pay-out to performance vesting scale for all awards is as follows:
Performance condition
< 3% real compound annual EPS growth
3% real compound annual EPS growth
3% to 5% real compound annual EPS growth
5% real compound annual EPS growth
> real 5% compound annual EPS growth
Pay-out (% of Match)
Nil
50%
50% to 100% sliding scale
100%
100%
Note For all awards, Pearson’s reported financial results for the relevant period were used to measure performance and no
discretion has been exercised.
The following directors invested part of their after-tax annual incentive in Pearson shares and received conditional
matching awards under the annual bonus share matching plan on 15 May 2013 which will vest, subject to
performance, on 15 May 2016 as follows:
Name
John Fallon
Matching shares awarded
Share price on date of award
Face value on date of award
6,083
1,206.0p
£73,361
Section 4 Governance
103
Details of awards made, outstanding, vested and held or released under the long-term incentive plan are
as follows:
Share
price on
date of
award
Vesting
date
Date
of award
Performance
measures
(award split
equally across
three measures)
Performance
period
Pay-out at
threshold
Pay-out at
maximum
Actual
performance
% of
award
vested
Status of
award
01/05/13 1,183.0p 01/05/16 Relative TSR 2013 to
30% at median 100% at upper
–
ROIC
2016
2015
EPS growth 2015
compared
to 2012
02/05/12 1,161.0p 02/05/15 Relative TSR 2012 to
ROIC
2015
2014
EPS growth 2014
compared
to 2011
0% for ROIC
of 8.5%
quartile
100% for ROIC
of 10.5%
100% for EPS
growth of 12.0%
30% for EPS
growth of
6.0%
30% at median 100% at upper
quartile
100% for ROIC
of 10.5%
100% for EPS
growth of 12.0%
0% for ROIC
of 8.5%
30% for EPS
growth of
6.0%
–
–
–
–
–
Outstanding
Outstanding
–
–
–
–
–
–
03/05/11 1,149.0p 03/05/14 Relative TSR 2011 to
30% at median 100% at upper
ROIC
2014
2013
EPS growth 2013
compared
to 2010
03/03/10 962.0p 03/03/13 Relative TSR 2010 to
quartile
100% for ROIC
of 10.5%
100% for EPS
growth of 12.0%
25% for ROIC
of 9.0%
30% for EPS
growth of
6.0%
30% at median 100% at upper
44th
percentile
5.4%
Nil
Nil
Estimated but still
outstanding
Lapsed
-3.3%
Nil
ROIC
2013
2012
EPS growth 2012
compared
to 2009
25% for ROIC
of 8.5%
30% for EPS
growth of
6.0%
Nil
48th
percentile
9.1%
47.5%
quartile
100% for ROIC
of 10.5%
100% for EPS
growth of 12.0%
8.8%
62.5%
36.7% of shares vested.
Three-quarters released
on 3 March 2013. If after
tax number of shares are
retained for a further
two years, the remaining
quarter will be released
on 3 March 2015
Note For all awards, Pearson’s reported financial results for the relevant period were used to measure performance and no
discretion has been exercised.
The following directors received conditional restricted share awards under the long-term incentive plan on
1 May 2013 which will vest, subject to performance, on 1 May 2016 as follows:
Name
John Fallon
Robin Freestone
Will Ethridge
Face value on date of award
Restricted
shares awarded
Share price on
date of award
% of 2013
base salary
£
250,000
150,000
150,000
1,183.0p £2,957,500
1,183.0p £1,774,500
1,183.0p £1,774,500
394%
326%
260%
Summary of share plan interests
The following tables summarise vested, released, lapsed, held, and outstanding share interests under the share-based
incentive plans for executive directors who served throughout 2013. Awards are designated as: ABSMP annual bonus
share matching plan, subject to performance conditions; LTIP long-term incentive plan, subject to performance
conditions; Dividends where dividend-equivalent shares are added without performance conditions to vested shares
under the ABSMP and LTIP and released immediately on award.
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104
Pearson plc Annual report and accounts 2013
Report on directors’ remuneration continued
Award date
Vesting date
Status
John Fallon
Freestone Will Ethridge
Robin
Plan
ABSMP
ABSMP
ABSMP
ABSMP
LTIP
LTIP
LTIP
LTIP
LTIP
Dividends
(LTIP)
Dividends
(LTIP)
Dividends
(ABSMP)
Total
21/04/2010 21/04/2013 Released
20/04/2011 20/04/2014 Vested
Value £000
Lapsed
Held
15/05/2012 15/05/2015 Outstanding
15/05/2013 15/05/2016 Outstanding
04/03/2008 04/03/2011 Released
03/03/2009 03/03/2012 Held
03/03/2010 03/03/2013 Released
Lapsed
Held
LTIP
03/05/2011 03/05/2014 Vested
Value £000
Lapsed
Held
02/05/2012 02/05/2015 Outstanding
01/05/2013 01/05/2016 Outstanding
04/03/2013 04/03/2013 Released (price 1,168.0p)
03/04/2013 03/04/2013 Released (price 1,143.0p)
Value £000
Value £000
21/05/2013 21/05/2013 Released (price 1,262.0p)
Value £000
Released
Vested
Held
Outstanding
Value £000
6,991
0
£0
4,539
0
8,917
6,083
24,375
29,887
41,257
50,000
13,752
0
£0
150,000
0
100,000
250,000
6,094
£71
5,199
£59
895
£11
84,811
0
43,639
365,000
£141
26,287
0
£0
29,049
0
17,833
−
30,468
25,617
34,381
41,667
11,460
0
£0
125,000
0
100,000
150,000
7,617
£89
4,333
£50
3,366
£42
106,452
0
37,077
267,833
£181
6,658
0
£0
4,517
0
4,485
−
36,562
29,887
41,257
50,000
13,752
0
£0
150,000
0
100,000
150,000
9,141
£107
5,199
£59
853
£11
99,670
0
43,639
254,485
£177
2013 single figure of remuneration
Note 1 Vested means where awards are no longer subject to performance conditions. Released means where shares have been
transferred to participants. Held means where awards have vested but are held pending release on the relevant anniversary of
the award date. Outstanding means awards that have been granted but are still subject to the achievement of performance
conditions.
Note 2 No variations to terms and conditions of plan interests were made during the year.
Note 3 Performance conditions and vesting for awards under the bonus share matching and long-term incentive plans are
described on pages 102 and 103.
Note 4 The single figure of remuneration for 2013 includes all awards that were subject to a performance condition where
the performance period ended, or was substantially (but not fully) completed, at 31 December 2013 and awards where the
performance condition has been satisfied but where the release of shares is subject to a further holding period. The same
methodology has been applied for earlier periods and the single figure for earlier reporting periods has been restated
where necessary.
Note 5 The value of shares included in the single figure of remuneration is the number of shares multiplied by the share price
on release (or, if the shares have not yet been released, the average share price over the final quarter of the year which for
2013 was 1,310.45p).
Section 4 Governance
105
Movements in directors’ interests in share options
John Fallon and Robin Freestone also hold options under the worldwide save for shares plan as follows:
Name
John Fallon
Robin Freestone
Date of grant
7/5/10
4/5/12
Options held as
at 31 Dec 13
Option price
Earliest exercise
date
1,930
990
805.6p
909.0p
1/8/15
1/8/15
Value in 2013
single figure
£000
0
0
Expiry date
1/2/16
1/2/16
Note 1 No share option awards were made, vested, or exercised in the year.
Note 2 All share options that become exercisable during a year are included in the single figure of total remuneration for that
year. The value included in the single figure of total remuneration is the number of options multiplied by the difference between
the value on grant and the market value on the earliest exercise date.
Note 3 No variations to terms and conditions of share options were made during the year.
Note 4 Acquisition of shares under the worldwide save for shares plan is not subject to a performance condition.
Note 5 The market price on 31 December 2013 was 1,341.0p per share and the range during the year was 1,119.0p to 1,365.0p.
Payments to former directors
It is the committee’s intention to disclose any payments to past directors, including the release of share-based
awards post departure.
The number of shares retained from the number of shares originally awarded takes into account lapses due to
performance, releases prior to ceasing to be a director and, where applicable, pro-rating for service in the
performance period.
Marjorie Scardino
Marjorie Scardino stepped down from the Pearson board on 31 December 2012.
In accordance with her employment agreement, six months after retirement Marjorie Scardino received
the distribution of the account cash and share balances of her unfunded unapproved defined contribution
retirement plan.
Marjorie also retained certain entitlements on retirement and received the following share releases during 2013:
Number of
shares retained
Number of
shares lapsed
Number of
shares released
Plan
ABSMP
LTIP
Dividends
(ABSMP)
Dividends
(LTIP)
Date of award
21 April 2010
20 April 2011
4 March 2008
3 March 2009
3 March 2010
3 May 2011
2 May 2012
4 March 2013
4 March 2013
3 April 2013
63,497
47,630
97,500
76,852
280,024 subject to
2012 performance
266,666 subject to
2013 performance
83,333 subject to
2014 performance
–
–
–
0
47,630
0
0
133,333
266,666
0
–
–
–
63,497
0
97,500
76,852
146,691
0
0
Date of release
4 March 2013
–
4 March 2013
4 March 2013
3 March 2013
–
–
6,160
4 March 2013
38,593
18,484
4 March 2013
3 April 2013
Number of
shares
outstanding
0
0
0
0
0
0
83,333
0
0
0
Note In the case of the 21 April 2010 annual bonus share matching award, the number of shares retained and released comprises
the total number of shares originally awarded.
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106
Pearson plc Annual report and accounts 2013
Report on directors’ remuneration continued
Rona Fairhead
Rona Fairhead stepped down from the Pearson board on 26 April 2013 and left the company on 30 April 2013.
Rona retained certain entitlements on leaving the company and received the following share releases during 2013:
Plan
LTIP
Date of award
4 March 2008
3 March 2009
3 March 2010
3 May 2011
2 May 2012
Dividends 4 March 2013
3 April 2013
Number of
shares retained
30,468
25,617
87,508
subject to 2012
performance
97,222
subject to 2013
performance +
40,000 shares
44,444
subject to 2014
performance
–
–
Number of
shares
lapsed
0
0
41,667
97,222
0
0
0
Number
of shares
released
2013 single figure
of remuneration
£000
Number of
shares held
Number of
shares
outstanding
Date of release
30,468 4 March 2013
25,617 10 May 2013
34,381 3 March 2013
11,460 10 May 2013
0
0
–
–
–
–
–
–
0
0
0
0
– 40,000
0
0
0
0
0
–
0
44,444
7,617 4 March 2013
4,333 3 April 2013
£30
£17
−
−
−
−
Note 1 In the case of the 3 May 2011 long-term incentive award, the committee agreed in December 2012 that, in recognition
of the circumstances at the time the award was made, 40,000 of the 165,000 shares originally awarded should vest in full at the
normal vesting date. The remaining shares would be retained on her leaving pro rata for service and be released subject to
performance in the normal way.
Note 2 The value of dividends included in the 2013 single figure of remuneration is calculated pro rata for service in the year.
John Makinson
On stepping down from the board on 1 July 2013, John Makinson’s then remuneration package (base salary,
annual incentive, allowances and benefits and retirement benefits) continued to apply for the remainder of 2013.
He did not receive a Pearson long-term incentive award for 2013.
John’s participation in Pearson share plans continues and he received the following share releases during 2013:
Plan
LTIP
Date of award
4 March 2008
3 March 2009
3 March 2010
3 May 2011
2 May 2012
Dividends 4 March 2013
3 April 2013
30,468
25,617
87,508
subject to 2012
performance
125,000
subject to 2013
performance
100,000
subject to 2014
performance
–
–
125,000
0
0
0
Number of
shares retained
Number of
shares lapsed
Number
of shares
released
2013 single figure
of remuneration
£000
Number of
shares held
Number of
shares
outstanding
Date of release
0
0
41,667
30,468 4 March 2013
–
34,381 3 March 2013
–
–
0
– 25,617
– 11,460
0
0
0
0
0
0
–
–
–
–
0
0 100,000
7,617 4 March 2013
4,333 3 April 2013
£44
£25
−
−
−
−
Note The value of dividends included in the 2013 single figure of remuneration is calculated pro rata for service in the year.
Payments for loss of office
Rona Fairhead
As announced on 27 November 2012 and set out in
the report on directors’ remuneration for 2012, Rona
Fairhead stepped down from the board at the Annual
General Meeting on 26 April 2013 and left the
company on 30 April 2013. Her service agreement
dated 24 January 2003 provided for notice periods of
six months from the director and 12 months from the
company and compensation on termination of
employment by the company without notice or cause
of 100% of annual salary at the date of termination, the
annual cost of pension and all other benefits and 50%
of potential annual incentive.
The committee and the board determined that her
leaving employment was a consequence of the planned
incorporation of the professional education division
overseen by Rona into other parts of Pearson's
education business, coupled with the smaller size
of the Financial Times Group owing to recent
major divestments. The company therefore paid
compensation amounting to £1,148,195 comprising:
£529,100, an amount equal to her annual salary as of
her leaving date; £195,815, an amount equal to the
annual cost to the company of pension and other
benefits (but excluding health care to which she
remained entitled for 12 months from her leaving
date); and £423,280, an amount equal to half of her
maximum annual incentive opportunity. The company
also made a contribution toward the cost of
outplacement counselling (£50,000) and paid legal
fees in connection with her leaving (£6,150).
Section 4 Governance
107
John Makinson
As first announced on 29 October 2012 and confirmed
on 1 July 2013, John Makinson stepped down from the
Pearson board to assume his full-time responsibilities
as chairman of Penguin Random House on 1 July 2013.
There was no payment for loss of office.
John’s employment continues under service
agreements with Pearson Inc. (for the US portion of his
duties) and with Pearson Management Services Limited
(for his duties in the rest of the world outside the US).
These Pearson entities are entering into secondment
agreements with Penguin Random House, pursuant to
which John’s services as chairman are provided to, and
paid for by, Penguin Random House. John is paid an
annual base salary, but is no longer entitled to a
location and market premium or an annual incentive.
He will be eligible to receive a one-off performance-
related cash long-term incentive award, the terms
of which are being agreed by the remuneration
committee of Penguin Random House. He will no
longer receive awards under the Pearson long-term
incentive plan. Penguin Random House is also meeting
the cost of John’s accrual of Pearson pension benefits
while he is seconded to Penguin Random House.
Will Ethridge
As announced on 23 May 2013, Will Ethridge stepped
down from the board on 31 December 2013. There
was no payment for loss of office. Will’s employment
with Pearson Education Inc. continues on the same
terms and conditions as previously pending his
retirement on 31 December 2014. No compensation
for loss of office or severance will be payable on his
retirement. On retirement, he will retain entitlement to
his 2012 long-term incentive award in full and to two-
thirds and one-third respectively of his 2013 and any
2014 long-term incentive awards with shares released
subject to performance in 2015, 2016 and 2017.
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108
Pearson plc Annual report and accounts 2013
Report on directors’ remuneration continued
Interests of directors and value of shareholdings
Directors’ interests
The share interests of the continuing directors and their connected persons are as follows:
Chairman
Glen Moreno
Executive directors
John Fallon
Robin Freestone
Will Ethridge
Non-executive directors
David Arculus
Vivienne Cox
Ken Hydon
Josh Lewis
Linda Lorimer (appointed
1 July 2013)
Harish Manwani (appointed
1 October 2013)
Ordinary shares
at 31 Dec 13
Conditional shares
at 31 Dec 13
Total number of ordinary
and conditional shares at
31 Dec 13
Value
(x salary)
Guideline
(x salary)
Guideline met
150,000
–
–
–
–
262,569
478,507
397,017
16,301
1,351
17,818
5,681
637
180
43,639
37,077
43,639
306,208
515,584
440,656
4.5
10.5
7.2
2.00
1.25
1.25
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(cid:57)
(cid:57)
(cid:57)
–
–
–
–
–
–
Note 1 Conditional shares means shares which have vested but remain held subject to continuing employment for a pre-defined
holding period.
Note 2 The current value of the executive directors’ holdings of ordinary and conditional shares is based on the middle market
value of Pearson shares of 1,113.0p on 21 February 2014 against base salaries in 2013. All executive directors comfortably
exceeded the shareholding guidelines. The shareholding guidelines do not apply to the chairman and non-executive directors.
Note 3 Ordinary shares include both ordinary shares listed on the London Stock Exchange and American Depositary Receipts
(ADRs) listed on the New York Stock Exchange. The figures include both shares and ADRs acquired by individuals investing part
of their own after-tax annual bonus in Pearson shares under the annual bonus annual bonus share matching plan.
Note 4 The register of directors’ interests (which is open to inspection during normal office hours) contains full details of
directors’ shareholdings and options to subscribe for shares. The market price on 31 December 2013 was 1,341.0p per share
and the range during the year was 1,119.0p to 1,365.0p.
Note 5 There were no movements in ordinary shares between 1 January 2014 and a month prior to the sign-off of this report.
Note 6 Ordinary shares do not include any shares vested but held pending release under a restricted share plan.
Interests of directors
John Fallon
Robin Freestone
Will Ethridge
0
200
400
600
Shareholding guideline
Ordinary shares
Conditional shares
Number of shares (000)
Section 4 Governance
109
At 31 December 2013, stock awards to be satisfied
by new-issue equity granted in the last ten years
under all Pearson share plans amounted to 1.6%
of the company’s issued share capital. No stock
awards granted in the last ten years under executive
or discretionary share plans will be satisfied by
new-issue equity.
In addition, for existing shares no more than 5% of
Pearson equity may be held in trust at any time.
Against this limit, shares held in trust at 31 December
2013 amounted to 1.1% of the company’s issued
share capital.
The headroom available for all Pearson plans,
executive or discretionary plans and shares held in
trust is as follows:
Headroom
2013
2012
2011
All Pearson plans
Executive or discretionary plans
Shares held in trust
8.4% 8.3% 8.3%
5.0% 5.0% 5.0%
3.9% 3.8% 3.2%
Executive directors’ non-executive directorships
In accordance with policy, the following executive
directors served as non-executive directors elsewhere
and retained fees or other benefits for the period
covered by this report as follows:
Name
Company
Fees/benefits
Rona Fairhead
HSBC Holdings plc
£83,333
Other executive directors served as non-executive
directors elsewhere but either waived or did not
receive fees.
Shareholding guidelines for executive directors
Executive directors are expected to build up a
substantial shareholding in the company in line with the
policy of encouraging widespread employee ownership
and to align further the interests of executives and
shareholders. With effect from 2014, target holding is
300% of salary for the chief executive and 200% of
salary for the other executive directors.
Shares that count towards these guidelines include any
shares held unencumbered by the executive, their
spouse and/or dependent children plus any shares
vested but held pending release under a restricted
share plan. Executive directors have five years from the
date of appointment to reach the guideline.
There are currently no mandatory share ownership
guidelines below executive director level, although
employees are encouraged to become shareholders in
the company by retaining shares acquired through the
company’s discretionary and all-employee stock
programmes. The shareholding guidelines do not apply
to the chairman and non-executive directors.
Dilution and use of equity
We can use existing shares bought in the market,
treasury shares or newly-issued shares to satisfy
awards under the company’s various stock plans.
For restricted stock awards under the long-term
incentive plan and matching share awards under the
annual bonus share matching plan, we would normally
expect to use existing shares.
There are limits on the amount of new-issue equity we
can use. In any rolling ten-year period, no more than
10% of Pearson equity will be issued, or be capable of
being issued, under all Pearson’s share plans, and no
more than 5% of Pearson equity will be issued, or be
capable of being issued, under executive or
discretionary plans.
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110
Pearson plc Annual report and accounts 2013
Report on directors’ remuneration continued
Historical performance and remuneration
Total shareholder return performance
We set out below Pearson’s total shareholder return
(TSR) performance relative to the FTSE All-Share
index on an annual basis over the five-year period
2008 to 2013. This comparison has been chosen
because the FTSE All-Share represents the broad
market index within which Pearson shares are traded.
TSR is the measure of the returns that a company has
provided for its shareholders, reflecting share price
movements and assuming reinvestment of dividends
(source: DataStream).
In accordance with the new regulations, this section
also presents Pearson’s TSR performance alongside
the single figure of total remuneration for the CEO
over the last five years and a summary of the variable
pay outcomes relative to the prevailing maximum at
the time. The table below summarises the total
remuneration for the CEO over the last five years, and
the outcomes of annual and long-term incentive plans
as a proportion of maximum.
Financial year ending
Total remuneration − John Fallon
(single figure, 000s)
Total remuneration − Marjorie Scardino
(single figure, 000s)
Annual incentive − incumbent
(% of maximum)
Long-term incentive − incumbent
(% of maximum)
Total shareholder return: five years to 31 December 2013
275
250
225
200
175
150
125
100
75
2008
2009
2010
2011
2012
2013
Pearson
FTSE All-Share
2009
2010
2011
2012
2013
–
–
–
– 1,727
6,370
8,466
8,340 5,330
–
91.3% 92.1% 75.7% 24.2% 34.3%
80.0% 97.5% 68.3% 36.7%
Nil
Note 1 Marjorie Scardino stepped down from the board on 31 December 2012 and John Fallon was appointed CEO with effect
from 1 January 2013.
Note 2 The annual incentive is the actual annual incentive received by the incumbent as a percentage of maximum opportunity.
Note 3 The long-term incentive is the pay-out of performance-related restricted shares under the long-term incentive plan where
the year shown is the final year of the performance period for the purposes of calculating the single total figure of remuneration.
Section 4 Governance
111
Comparative information
Information on changes to remuneration for 2014
Executive directors’ base salaries
We have undertaken a regular periodic review of base
salaries for 2014 taking into account general economic
and market conditions, the level of increases made
across the company as a whole, the remuneration
of executives in similar positions in comparable
companies and individual performance.
As a result of this review, the 2014 base salaries for the
CEO and CFO are as follows:
Base salary at
31 December 2013
Increase
Base salary at
1 April 2014
John
Fallon
Robin
Freestone
£750,000 £545,000
£15,000 £11,000
2.0%
2.0%
£765,000 £556,000
Full details will be set out in the annual remuneration
report and included in the single figure of total
remuneration for 2014.
Annual incentive
The key design principles underlying the company’s
approach to annual incentives for 2014 are:
›(cid:3)full alignment of annual incentives with the global
education strategy to reinforce a ‘one Pearson’ focus;
›(cid:3)a clear, transparent, coherent, consistent, organisation-
wide approach to incentives and performance
management with a common incentive framework for
Lines of Business, Geographies and Enabling functions;
›(cid:3)the size of the overall annual incentive pay-out will be
linked to overall Pearson performance.
The following information is intended to provide
additional context regarding the total remuneration
for executive directors.
Relative percentage change in remuneration for CEO
The following table sets out the change between 2012
and 2013 in three elements of remuneration for the
CEO, in comparison to the average for all employees.
However, while the committee considers the increase
in base pay for the CEO relative to the broader
employee population, benefits are driven by local
practices and eligibility is determined by level and
individual circumstances which do not lend itself to
comparison. Similarly, annual incentives are driven by
different factors throughout the organisation and so are
typically not compared.
CEO
All employees
Allowances
and
benefits
Base
salary
Annual
incentive
Total
-24%
5%
-77%
11%
7% -22%
8%
31%
Note 1 The figures for the CEO are based on the
remuneration of Majorie Scardino for 2012 and of John Fallon
for 2013.
Note 2 The figures for all employees reflect average salaries
and average employee numbers each year. Annual incentives
include all plans, including sales incentives.
Relative importance of pay spend
The committee consider directors’ remuneration in the
context of the company’s allocation and disbursement
of resources to different stakeholders.
In particular, we chose operating profit because this is
a measure of our ability to reinvest in the company.
We include dividends because these constitute an
important element of our return to shareholders.
£m
Operating profit
Dividends
Total wages and
salaries
Year-on-year change
2013
736
372
2012
932
346
£m
-196
26
%
-21%
+8%
1,836 1,610
226 +14%
Note Wages and salaries include continuing operations only
and include directors. 2012 is restated on the same basis.
Average employee numbers for continuing operations for
2013 were 42,115 (2012: 42,135). Further details are set out
in note 5 to the financial statements on page 142.
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›(cid:3)the sum of the CEO’s and the Pearson Executives’ ‘on
target’ annual incentive constitutes the incentive pool
for this group which flexes up or down based on
overall Pearson performance;
›(cid:3)individual performance is assessed against goals set at
the start of the year;
›(cid:3)individual pay-outs up to individual maximum
opportunities and within the total pool are
recommended by the CEO (or by the chairman in the
case of the CEO himself) for review and, in the case of
the executive directors, approval by the committee.
The committee considers the performance targets
for 2014 to be commercially sensitive. Details of
performance measures, weightings and targets will be
disclosed in the annual remuneration report for 2014
if and to the extent that the committee deems them
to be no longer commercially sensitive.
112
Pearson plc Annual report and accounts 2013
Report on directors’ remuneration continued
The principles that underlie the ‘one Pearson’
approach to funding are that:
›(cid:3)there will be a single annual incentive pool for Pearson
which will vary according to the performance of the
whole company;
›(cid:3)for 2014, the overall Pearson performance measures
and weightings will be: adjusted earnings per share
(60% weighting); sales (20%); cash flow (20%);
›(cid:3)there will be a theoretical ‘on target’ size for the annual
incentive pool which is the sum of all employees’
annual incentive opportunities;
›(cid:3)there will be scope to flex the size of the pool upwards
if performance exceeds target (up to a cap) and
downwards if performance falls short of target (down
to a threshold below which no annual incentive would
be paid). This flex will be sufficiently sensitive to
demonstrate a clear link between overall performance
and the annual incentive pay-out, but not so sensitive
that there is significant uncertainty in the total pay-out.
The committee will set a range around which the
annual incentive pay-out can flex;
›(cid:3)the Pearson financial targets will be set each year as
part of the normal operating plan process. The CEO
and CFO will recommend the overall Pearson incentive
funding metrics (including performance measures,
targets and weightings) to the committee for approval
in the normal way;
›(cid:3)the Pearson-derived pay-out may be informed and
modified (up or down) reflecting the circumstances
at the time consistent with the committee’s normal
adjustment powers.
In relation to the operation of the annual incentive
framework for the executive directors and the
Pearson Executive:
›(cid:3)there will be no change in individual annual incentive
opportunities;
›(cid:3)for 2014, there would be one mechanism for
determining annual incentive for an individual, namely
a combination of Pearson-wide performance and
individual goals;
Section 4 Governance
113
Long-term incentives
The committee reviewed the design and operation
of the long-term incentives plan with the following
changes for performance-related awards to be granted
to members of the Pearson Executive in 2014:
›(cid:3)the weighting of the performance metrics will be
50% on earnings per share growth, 33.3% on return
on invested capital and 16.7% on relative total
shareholder return.
›(cid:3)performance will continue to be tested over three
years and 75% of the vested shares will continue to
be released at that point. However, there will be a
mandatory restriction on participants’ ability to dispose
of the 75% of the vested shares (other than to meet
personal tax liabilities) for a further two years.
Furthermore, participants’ rights to the release of
the 25% of the vested shares will be subject to
continued employment over the same period.
We have set targets for the 2014 awards that are
consistent with the company’s strategic objectives
over the period to 2016.
Subject to approval of the company’s remuneration
policy, the performance measures and targets for the
2014 long-term incentive awards to the executive
directors and other members of the Pearson Executive
that will be made as soon as practicable after the AGM
will be as follows:
Performance
measure
Weighting
Performance
period
Pay-out
at
threshold
Pay-out
progression
Pay-out
at
maximum
EPS
growth
2016
compared
to 2013
50%
ROIC
33.3%
2016
30%
for EPS
growth
of 6.0%
30%
for
ROIC
of 6.5%
Straight-
line
50% for
ROIC
of 7.0%
Relative
TSR
16.7%
2014 to
2017
30% at
median
Straight-
line
100%
for EPS
growth
of
12.0%
100%
for
ROIC
of 7.5%
100%
at
upper
quartile
We will set the level of individual awards consistent
with those seen in recent years and below the policy
maximum taking into account:
›(cid:3)the face value of individual awards at the time of grant,
assuming that performance targets are met in full;
›(cid:3)market practice for comparable companies and market
assessments of total remuneration from our
independent advisers;
›(cid:3)individual roles and responsibilities; and
›(cid:3)company and individual performance.
At the time of writing, the committee has yet to
approve the 2014 long-term incentive awards for
the executive directors and other members of
the Pearson Executive.
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Pearson plc Annual report and accounts 2013
Report on directors’ remuneration continued
Full details of individual awards and of the performance
measures, weightings and targets for 2014 will be set
out in the annual remuneration report for 2014.
Fees for the chairman and non-executive directors
The chairman’s and non-executive directors’ fees were
reviewed for 2014.
For 2015 and onwards, the averaging period for the
calculation of relative total shareholder return will be
moved to the period running up to the year end and
the length of the averaging period will be increased to
three months more in line with institutional investors’
preferences.
Annual bonus share matching
The previous annual bonus share matching plan will
cease to operate with the last awards made in 2013
in respect of annual incentive for 2012. We have
not made any compensatory adjustments to annual
or long-term incentive opportunities to take this
into account.
As a consequence of that review, the basic non-
executive directors’ fee, and the fees for committee
chairmanship and committee membership were
increased. Fees for the chairmanship and membership
of the reputation and responsibility committee were
also introduced for the first time. The salary for the
chairman remains unchanged.
The policy and future arrangements are set out
on page 92 in the directors’ remuneration policy
report.
Approved by the board and signed on its behalf by
David Arculus Director
10 March 2014
Section 5 Financial statements
115
Financial statements: contents
Consolidated financial statements
Independent auditors’ report to the members of Pearson plc
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated balance sheet
Consolidated statement of changes in equity
Consolidated cash flow statement
Notes to the consolidated financial statements
1 Accounting policies
2 Segment information
3 Discontinued operations
4 Operating expenses
5 Employee information
6 Net finance costs
7
Income tax
8 Earnings per share
9 Dividends
10 Property, plant and equipment
11 Intangible assets
12 Investments in joint ventures and associates
13 Deferred income tax
14 Classification of financial instruments
15 Other financial assets
16 Derivative financial instruments
17 Cash and cash equivalents (excluding overdrafts)
18 Financial liabilities – Borrowings
19 Financial risk management
20 Intangible assets – Pre-publication
21 Inventories
22 Trade and other receivables
23 Provisions for other liabilities and charges
24 Trade and other liabilities
25 Retirement benefit and other post-retirement obligations
26 Share-based payments
27 Share capital and share premium
28 Treasury shares
29 Other comprehensive income
30 Business combinations
31 Disposals including business closures
32 Held for sale
33 Transactions with non-controlling interest
34 Cash generated from operations
35 Contingencies
36 Commitments
37 Related party transactions
38 Events after the balance sheet date
39 Accounts and audit exemptions
Company financial statements
Company balance sheet
Company statement of changes in equity
Company cash flow statement
Notes to the company financial statements
Principal subsidiaries
Five year summary
Corporate and operating measures
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116
Pearson plc Annual report and accounts 2013
Independent auditors’ report to the members of Pearson plc
Report on the financial statements
Our opinion
In our opinion:
›(cid:3)The financial statements, defined below, give a true
and fair view of the state of the Group’s and company’s
affairs as at 31 December 2013 and of the Group’s
profit and of the Group’s and company’s cash flows
for the year then ended;
›(cid:3)The consolidated financial statements have been
properly prepared in accordance with International
Financial Reporting Standards (IFRSs) as adopted by
the European Union;
›(cid:3)The company financial statements have been properly
prepared in accordance with IFRSs as adopted by the
European Union and as applied in accordance with the
provisions of the Companies Act 2006; and
›(cid:3)The financial statements have been prepared in
accordance with the requirements of the Companies
Act 2006 and, as regards the consolidated financial
statements, Article 4 of the IAS Regulation.
This opinion is to be read in the context of what we
say in the remainder of this report.
Separate opinion in relation to IFRSs as issued by
the IASB
As explained in note 1 to the financial statements, the
Group, in addition to applying IFRSs as adopted by the
European Union, has also applied IFRSs as issued by
the International Accounting Standards Board (IASB).
In our opinion the consolidated financial statements
comply with IFRSs as issued by the IASB.
What we have audited
The consolidated financial statements and company
financial statements (the ‘financial statements’), which
are prepared by Pearson plc, comprise:
›(cid:3)the consolidated and company balance sheet as at
31 December 2013;
›(cid:3)the consolidated income statement and statement of
comprehensive income for the year then ended;
›(cid:3)the consolidated and company statements of changes
in equity and cash flow statements for the year then
ended; and
›(cid:3)the notes to the financial statements, which include a
summary of significant accounting policies and other
explanatory information.
The financial reporting framework that has been
applied in their preparation comprises applicable law
and IFRSs as adopted by the European Union and, as
regards the company, as applied in accordance with the
provisions of the Companies Act 2006.
Certain disclosures required by the financial reporting
framework have been presented elsewhere in the
annual report and accounts (the ‘annual report’),
rather than in the notes to the financial statements.
These are cross-referenced from the financial
statements and are identified as audited.
What an audit of financial statements involves
We conducted our audit in accordance with
International Standards on Auditing (UK and Ireland)
(ISAs (UK & Ireland)). An audit involves obtaining
evidence about the amounts and disclosures in the
financial statements sufficient to give reasonable
assurance that the financial statements are free from
material misstatement, whether caused by fraud or
error. This includes an assessment of:
›(cid:3)whether the accounting policies are appropriate to the
Group’s and company’s circumstances and have been
consistently applied and adequately disclosed;
›(cid:3)the reasonableness of significant accounting estimates
made by the directors; and
›(cid:3)the overall presentation of the financial statements.
In addition, we read all the financial and non-financial
information in the annual report to identify material
inconsistencies with the audited financial statements
and to identify any information that is apparently
materially incorrect based on, or materially inconsistent
with, the knowledge acquired by us in the course of
performing the audit. If we become aware of any
apparent material misstatements or inconsistencies
we consider the implications for our report.
Section 5 Financial statements
117
Overview of our audit approach
Materiality
We set certain thresholds for materiality. These helped
us to determine the nature, timing and extent of our
audit procedures and to evaluate the effect of
misstatements, both individually and on the financial
statements as a whole.
Using our professional judgement, we determined
materiality for the consolidated financial statements as
a whole to be £32m. This is based on 5% of profit
before tax, after adjusting for non-recurring items such
as gain on disposal of subsidiaries, this being an
appropriate measure of the group’s underlying
performance.
We agreed with the audit committee that we would
report to them misstatements identified during our
audit above £2m as well as misstatements below that
amount that, in our view, warranted reporting for
qualitative reasons.
Overview of the scope of our audit
The Group is organised into four business segments,
being North American Education, International
Education, Professional and FT Group, plus the
investment in associate Penguin Random House. Each
segment comprises a number of reporting units. The
consolidated financial statements comprise these
reporting units plus the Group’s centralised functions.
In establishing the overall approach to the Group audit,
we determined the type of work that needed to be
performed at the reporting units by us, as the Group
engagement team, or component auditors within PwC
UK and from other PwC network firms operating
under our instruction. Where the work was performed
by component auditors, we determined the level of
involvement we needed to have in the audit work at
those reporting units to be able to conclude whether
sufficient appropriate audit evidence had been obtained
as a basis for our opinion on the consolidated financial
statements as a whole.
Across these segments, we identified two reporting
units in the US and UK that required an audit of their
complete financial information due to size alone, plus a
further nine reporting units in the US, UK, Brazil, China
and South Africa that required specified procedures
on certain transactions and balances. We also obtained
an audit opinion on the financial information of the
associate Penguin Random House. Our audit work
at these reporting units and at head office gave us
coverage of approximately 80% of the Group’s profit
before tax. This, together with procedures at the
consolidated Group level and at the Group’s shared
service centres, provided the evidence we needed for
our opinion on the consolidated financial statements
taken as a whole.
Areas of particular audit focus
In preparing the financial statements, the directors
made a number of subjective judgements, for example
in respect of significant accounting estimates that
involved making assumptions and considering future
events that are inherently uncertain. We primarily
focused our work in these areas by assessing the
directors’ judgements against available evidence,
forming our own judgements, and evaluating the
disclosures in the financial statements.
In our audit, we tested and examined information,
using sampling and other auditing techniques, to
the extent we considered necessary to provide
a reasonable basis for us to draw conclusions.
We obtained audit evidence through testing the
effectiveness of controls, substantive procedures
or a combination of both.
We considered the following areas to be those that
required particular focus in the current year. This is not
a complete list of all risks or areas of focus identified by
our audit. We discussed these areas of focus with the
audit committee. Their report on those matters that
they considered to be significant issues in relation to
the financial statements is set out on pages 68 and 69.
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118
Pearson plc Annual report and accounts 2013
Independent auditors’ report to the members of Pearson plc continued
Area of focus
Risk of fraud in revenue recognition
Auditing standards require us to consider the risk of
fraud in revenue recognition.
We focused on material products and services where
revenue recognition practices are particularly complex
and subject to estimates, being:
›(cid:3) multiple element arrangements, such as the provision
of supplementary (print or digital) materials or
training with textbooks, where revenue is recognised
for each element as if it were an individual
contractual arrangement requiring the estimation of
its fair value; and
›(cid:3) certain long-term contracts in the Education
segments, where revenue is recognised using
estimated percentage of completion based on costs.
Risk of management override of internal controls
Auditing standards require us to consider the risk of
management override of internal controls.
Penguin Random House transaction
On 1 July 2013, management announced the completion
of the Penguin Random House combination which
resulted in a number of complex accounting and
business model changes as follows:
›(cid:3) disposal accounting, including the gain on the sale;
›(cid:3) valuation of the new business and intangible
assets; and
›(cid:3) associate accounting, including alignment of
accounting policies and presentation of results
in the consolidated financial statements.
We focused on this area because it was a complex
transaction which required the directors to exercise
a significant level of judgement.
How the scope of our audit addressed the area of focus
We evaluated the relevant systems and tested the
internal controls over the accurate and complete
recording of revenue.
We assessed the accounting treatment of new
contracts at inception, including examination of
evidence supporting key assumptions and estimates.
We assessed the profitability and percentage of
completion estimates made for material long-term
revenue contracts and assessed multiple-element
arrangements and the related fair value allocations.
We performed substantive testing of revenue
recorded during the year and evaluated any changes
in estimates to determine if they were indicators of
management bias.
We also tested manual journals posted to revenue to
determine their appropriateness and compliance with
Group revenue recognition policies.
We assessed the overall control environment of
the Group, including the arrangements for staff to
‘whistleblow’ inappropriate actions, and interviewed
senior management and the Group’s internal audit
function. We examined the significant accounting
estimates and judgements relevant to the financial
statements for evidence of bias by the directors that
may represent a risk of material misstatement due to
fraud. We also tested manual journal entries, including
consolidation entries, and incorporated elements of
unpredictability in the nature, timing and extent of our
audit procedures.
We evaluated the directors’ assessment of this
transaction as a disposal of a business segment and
an acquisition.
We evaluated the valuation of the business and
associated gain on disposal. We also assessed the
resulting associate accounting including the fair value
acquisition adjustments such as recognition of intangible
assets and alignment of accounting policies and their
application. For the valuation exercises we assessed the
directors’ cash flow forecasts, comparing them to board
approved plans and challenged the underlying
assumptions.
Section 5 Financial statements
119
Area of focus
Provision for uncertain tax liabilities
The Group is subject to several tax regimes due to the
geographical diversity of its businesses.
The directors are required to exercise significant
judgement in determining the appropriate amount to
provide in respect of potential tax exposures and
uncertain tax provisions. The most significant of these
relate to US tax.
We focused on this area because of the inherent
judgements required in estimating the amount of any
provision required. Changes in assumptions can
materially impact the level of provisions recorded in the
financial statements.
Returns provisions
We focused on this area because there are material
judgemental provisions for anticipated book returns
within the Education segments particularly as the
Group transitions from print to digital.
Valuation of pre-publication assets and inventories
We focused on this area because there are material pre-
publication assets and inventories within the Education
segments. Judgement is required to evaluate the valuation
of these assets which may be more complex during the
transition from print to digital.
Goodwill impairment reviews
We focused on this area because the Group carries
significant goodwill and acquired intangible asset balances.
There is judgement in the identification and aggregation
of cash generating units (CGUs) and in the assumptions
used in the annual goodwill impairment review.
How the scope of our audit addressed the area of focus
We obtained an understanding of the Group’s tax
strategy to identify tax risks relating to business and
legislative developments. We recalculated the directors’
valuation of tax provisions and determined whether the
calculations were in line with the Group’s tax policies
and had been applied consistently.
We evaluated key underlying assumptions, particularly
in the US and in territories with new cross border
tax structures, having due regard to ongoing
correspondence between the Group and local
tax authorities.
We tested the calculation of the provisions, assessing
judgements for reasonableness against historical
experience and the impact on returns of the
ongoing business transition from print to digital.
We also tested controls in the shipment and returns
provisioning processes.
We evaluated the recoverability of the pre-publication
assets and inventories held, by assessing actual
experience against historical estimates and in light
of business transition from print to digital.
We also tested controls in the pre-publication assets
and inventories processes.
We tested management’s impairment analysis by
examining their identification and aggregation of
CGUs and by evaluating the underlying assumptions
through assessment of forecasts, market conditions
and sensitivity analysis and through assessing the
historical accuracy of forecasts and budgets.
We assessed management’s calculation of discount rates
and perpetuity growth rates and we tested the integrity
of the valuation model.
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120
Pearson plc Annual report and accounts 2013
Independent auditors’ report to the members of Pearson plc continued
Other matters on which we are required to report by
exception
Adequacy of accounting records and information and
explanations received
Under the Companies Act 2006 we are required
to report to you if, in our opinion:
›(cid:3)we have not received all the information and
explanations we require for our audit; or
›(cid:3)adequate accounting records have not been kept by
the company, or returns adequate for our audit have
not been received from branches not visited by us; or
›(cid:3)the company financial statements and the part of the
directors’ remuneration report to be audited are not in
agreement with the accounting records and returns.
We have no exceptions to report arising from this
responsibility.
Directors’ remuneration
Under the Companies Act 2006 we are required
to report to you if, in our opinion, certain disclosures
of directors’ remuneration specified by law have not
been made. We have no exceptions to report arising
from this responsibility.
Going concern
Under the Listing Rules we are required to review the
directors’ statement, set out on page 72, in relation to
going concern. We have nothing to report having
performed our review.
As noted in the directors’ statement, the directors
have concluded that it is appropriate to prepare the
consolidated and company financial statements using
the going concern basis of accounting. The going
concern basis presumes that the Group and company
have adequate resources to remain in operation, and
that the directors intend them to do so, for at least
one year from the date the financial statements were
signed. As part of our audit we have concluded that the
directors’ use of the going concern basis is appropriate.
However, because not all future events or conditions
can be predicted, these statements are not a guarantee
as to the Group’s and the company’s ability to
continue as a going concern.
Opinions on other matters prescribed by the
Companies Act 2006
In our opinion:
›(cid:3)the information given in the strategic report and the
directors’ report for the financial year for which the
financial statements are prepared is consistent with
the financial statements; and
›(cid:3)the part of the directors’ remuneration report to be
audited has been properly prepared in accordance with
the Companies Act 2006.
Section 5 Financial statements
121
Other information in the annual report
Under ISAs (UK & Ireland), we are required to report
to you if, in our opinion, information in the annual
report is:
›(cid:3)materially inconsistent with the information in the
audited financial statements; or
›(cid:3)apparently materially incorrect based on, or materially
inconsistent with, our knowledge of the Group and
company acquired in the course of performing our
audit; or
›(cid:3)is otherwise misleading.
We have no exceptions to report arising from this
responsibility.
Corporate Governance Statement
Under the Listing Rules we are required to review the
part of the Corporate Governance Statement relating
to the Company’s compliance with nine provisions of
the UK Corporate Governance Code (the Code). We
have nothing to report having performed our review.
On page 74 of the annual report, as required by the
Code Provision C.1.1, the directors state that they
consider the annual report taken as a whole to be
fair, balanced and understandable and provides the
information necessary for members to assess the
Group’s performance, business model and strategy.
On pages 68 and 69, as required by C.3.8 of the
Code, the audit committee has set out the significant
issues that it considered in relation to the financial
statements, and how they were addressed. Under ISAs
(UK & Ireland) we are required to report to you if, in
our opinion:
›(cid:3)the statement given by the directors is materially
inconsistent with our knowledge of the Group
acquired in the course of performing our audit; or
›(cid:3)the section of the annual report describing the work
of the audit committee does not appropriately address
matters communicated by us to the audit committee.
We have no exceptions to report arising from this
responsibility.
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Pearson plc Annual report and accounts 2013
Independent auditors’ report to the members of Pearson plc continued
Responsibilities for the financial statements and
the audit
Our responsibilities and those of the directors
As explained more fully in the statement of directors’
responsibilities set out on page 74, the directors are
responsible for the preparation of the consolidated and
company financial statements and for being satisfied
that they give a true and fair view.
Our responsibility is to audit and express an opinion on
the consolidated and company financial statements in
accordance with applicable law and ISAs (UK &
Ireland). Those standards require us to comply with
the Auditing Practices Board’s Ethical Standards for
Auditors.
This report, including the opinions, has been prepared
for and only for the company’s members as a body
in accordance with Chapter 3 of Part 16 of the
Companies Act 2006 and for no other purpose.
We do not, in giving these opinions, accept or assume
responsibility for any other purpose or to any other
person to whom this report is shown or into whose
hands it may come save where expressly agreed by
our prior consent in writing.
Stuart Newman (Senior Statutory Auditor)
For and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London, United Kingdom
10 March 2014
Notes:
(a)(cid:3) The maintenance and integrity of the Pearson
plc website is the responsibility of the directors;
the work carried out by the auditors does not
involve consideration of these matters and,
accordingly, the auditors accept no responsibility
for any changes that may have occurred to the
financial statements since they were initially
presented on the website.
(b)(cid:3) Legislation in the United Kingdom governing
the preparation and dissemination of financial
statements may differ from legislation in other
jurisdictions.
Section 5 Financial statements
123
Consolidated income statement
Year ended 31 December 2013
All figures in £ millions
Sales
Cost of goods sold
Gross profit
Operating expenses
Loss on closure of subsidiary
Share of results of joint ventures and associates
Operating profit
Finance costs
Finance income
Profit before tax
Income tax
Profit for the year from continuing operations
Profit for the year from discontinued operations
Profit for the year
Attributable to:
Equity holders of the company
Non-controlling interest
Earnings per share for profit from continuing and discontinued operations
attributable to equity holders of the company during the year
(expressed in pence per share)
– basic
– diluted
Earnings per share for profit from continuing operations attributable
to equity holders of the company during the year
(expressed in pence per share)
– basic
– diluted
Notes
2013
2012
Restated
4,959
(2,187)
2,772
(2,181)
(113)
9
487
(115)
19
391
(138)
253
61
314
5,069
(2,312)
2,757
(2,353)
–
54
458
(111)
35
382
(87)
295
244
539
538
1
311
3
66.6p
66.5p
38.7p
38.6p
36.4p
36.3p
31.1p
31.0p
2
4
4
12
2
6
6
7
3
8
8
8
8
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S
P
O
N
S
I
B
L
E
B
U
S
I
N
E
S
S
G
O
V
E
R
N
A
N
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F
I
N
A
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124
Pearson plc Annual report and accounts 2013
Consolidated statement of comprehensive income
Year ended 31 December 2013
All figures in £ millions
Profit for the year
Items that may be reclassified to the income statement
Net exchange differences on translation of foreign operations – Group
Net exchange differences on translation of foreign operations – associates
Currency translation adjustment disposed – Group
Attributable tax
Items that are not reclassified to the income statement
Remeasurement of retirement benefit obligations – Group
Remeasurement of retirement benefit obligations – associates
Attributable tax
Other comprehensive expense for the year
Total comprehensive income for the year
Attributable to:
Equity holders of the company
Non-controlling interest
Notes
2013
7
25
7
539
(206)
(11)
(18)
6
79
–
(23)
(173)
366
369
(3)
2012
Restated
314
(238)
–
–
1
(100)
(3)
50
(290)
24
23
1
Consolidated balance sheet
As at 31 December 2013
Section 5 Financial statements
125
All figures in £ millions
Notes
2013
2012
Assets
Non-current assets
Property, plant and equipment
Intangible assets
Investments in joint ventures and associates
Deferred income tax assets
Financial assets – Derivative financial instruments
Retirement benefit assets
Other financial assets
Trade and other receivables
Current assets
Intangible assets – Pre-publication
Inventories
Trade and other receivables
Financial assets – Derivative financial instruments
Financial assets – Marketable securities
Cash and cash equivalents (excluding overdrafts)
Assets classified as held for sale
Total assets
Liabilities
Non-current liabilities
Financial liabilities – Borrowings
Financial liabilities – Derivative financial instruments
Deferred income tax liabilities
Retirement benefit obligations
Provisions for other liabilities and charges
Other liabilities
Current liabilities
Trade and other liabilities
Financial liabilities – Borrowings
Current income tax liabilities
Provisions for other liabilities and charges
Liabilities directly associated with assets classified as held for sale
Total liabilities
Net assets
10
11
12
13
16
25
15
22
20
21
22
16
14
17
32
18
16
13
25
23
24
24
18
23
32
342
5,801
1,092
250
111
86
94
70
7,846
717
224
1,173
13
6
729
2,862
223
327
6,218
15
229
174
–
31
79
7,073
666
261
1,104
4
6
1,062
3,103
1,172
10,931
11,348
(1,693)
(48)
(612)
(142)
(77)
(257)
(2,829)
(1,505)
(533)
(164)
(112)
(2,314)
(82)
(2,010)
–
(601)
(172)
(110)
(282)
(3,175)
(1,556)
(262)
(291)
(38)
(2,147)
(316)
(5,225)
5,706
(5,638)
5,710
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126
Pearson plc Annual report and accounts 2013
Consolidated balance sheet continued
As at 31 December 2013
All figures in £ millions
Notes
2013
2012
Equity
Share capital
Share premium
Treasury shares
Translation reserve
Retained earnings
Total equity attributable to equity holders of the company
Non-controlling interest
Total equity
27
27
28
205
2,568
(98)
(103)
3,128
5,700
6
5,706
204
2,555
(103)
128
2,902
5,686
24
5,710
These financial statements have been approved for issue by the board of directors on 10 March 2014 and signed
on its behalf by
Robin Freestone Chief financial officer
Section 5 Financial statements
127
Consolidated statement of changes in equity
Year ended 31 December 2013
Equity attributable to equity holders of the company
All figures in £ millions
At 1 January 2013
Profit for the year
Other comprehensive expense
Equity-settled transactions
Tax on equity-settled transactions
Issue of ordinary shares under share
option schemes
Purchase of treasury shares
Release of treasury shares
Put options over non-controlling
interest
Changes in non-controlling interest
Dividends
At 31 December 2013
All figures in £ millions
At 1 January 2012
Profit for the year
Other comprehensive expense
Equity-settled transactions
Tax on equity-settled transactions
Issue of ordinary shares under share
option schemes
Purchase of treasury shares
Release of treasury shares
Put options over non-controlling
interest
Changes in non-controlling interest
Dividends
At 31 December 2012
Share
capital
Share
premium
Treasury
shares
Translation
reserve
Retained
earnings
204
–
–
–
–
1
–
–
–
–
–
205
2,555
–
–
–
–
13
–
–
–
–
–
2,568
(103)
–
–
–
–
–
(47)
52
–
–
–
(98)
Non-
controlling
interest
24
1
(4)
–
–
–
–
–
Total
5,686
538
(169)
37
–
14
(47)
–
Total
equity
5,710
539
(173)
37
–
14
(47)
–
128
–
(231)
–
–
2,902
538
62
37
–
–
–
–
–
–
(52)
–
–
–
(103)
–
13
(372)
3,128
–
13
(372)
5,700
–
(15)
–
6
–
(2)
(372)
5,706
Equity attributable to equity holders of the company
Restated
Share
capital
Share
premium
Treasury
shares
Translation
reserve
Retained
earnings
204
–
–
–
–
–
–
–
–
–
–
204
2,544
–
–
–
–
11
–
–
–
–
–
2,555
(149)
–
–
–
–
–
–
46
–
–
–
(103)
364
–
(236)
–
–
–
–
–
–
–
–
128
Non-
controlling
interest
19
3
(2)
–
–
–
–
–
Total
5,943
311
(288)
32
(6)
11
–
–
Total
equity
5,962
314
(290)
32
(6)
11
–
–
2,980
311
(52)
32
(6)
–
–
(46)
39
(10)
(346)
2,902
39
(10)
(346)
5,686
–
6
(2)
24
39
(4)
(348)
5,710
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.
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Pearson plc Annual report and accounts 2013
Consolidated cash flow statement
Year ended 31 December 2013
All figures in £ millions
Notes
2013
2012
Cash flows from operating activities
Net cash generated from operations
Interest paid
Tax paid
Net cash generated from operating activities
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired
Acquisition of joint ventures and associates
Purchase of investments
Purchase of property, plant and equipment
Purchase of intangible assets
Disposal of subsidiaries, net of cash disposed
Proceeds from sale of associates
Proceeds from sale of investments
Proceeds from sale of property, plant and equipment
Proceeds from sale of intangible assets
Proceeds from sale of liquid resources
Investment in liquid resources
Interest received
Dividends received from joint ventures and associates
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of ordinary shares
Purchase of treasury shares
Proceeds from borrowings
Loans to related parties
Loans advanced
Liquid resources acquired
Repayment of borrowings
Finance lease principal payments
Dividends paid to company’s shareholders
Dividends paid to non-controlling interest
Transactions with non-controlling interest
Net cash used in financing activities
Effects of exchange rate changes on cash and cash equivalents
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
The consolidated cash flow statement includes discontinued operations (see note 3).
34
30
31
34
27
28
9
33
17
684
(82)
(246)
356
(48)
(10)
(64)
(118)
(64)
(132)
2
2
28
2
13
(14)
9
64
(330)
14
(47)
319
(44)
(5)
–
(225)
(8)
(372)
–
(76)
(444)
21
(397)
1,137
740
916
(75)
(65)
776
(716)
(39)
(10)
(78)
(73)
(11)
–
–
1
3
23
(19)
9
27
(883)
11
–
327
–
–
(1)
–
(8)
(346)
(2)
(4)
(23)
(24)
(154)
1,291
1,137
Notes to the consolidated financial statements
Section 5 Financial statements
129
General information
Pearson plc (the company) its subsidiaries and
associates (together the Group) are international
media businesses covering education, business
information and consumer publishing.
The company is a public limited company incorporated
and domiciled in England. The address of its registered
office is 80 Strand, London WC2R 0RL.
The company has its primary listing on the London
Stock Exchange and is also listed on the New York
Stock Exchange.
These consolidated financial statements were
approved for issue by the board of directors
on 10 March 2014.
1. Accounting policies
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 on the going concern basis and in accordance
with International Financial Reporting Standards (IFRS)
and IFRS Interpretations Committee interpretations as
adopted by the European Union (EU) and with those
parts of the Companies Act 2006 applicable to companies
reporting under IFRS. In respect of the accounting
standards applicable to the Group there is no difference
between EU-adopted and IASB-adopted IFRS.
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)
to fair value through profit or loss.
1. Interpretations and amendments to published standards
effective 2013
›(cid:3)The following amendments and interpretations were
adopted in 2013:
›(cid:3)Amendments to IAS 19 ‘Employee Benefits (2011)’,
effective for annual reporting periods beginning on
or after 1 January 2013. The amendments include the
elimination of the corridor approach, changes to the
calculation of the net interest and service cost
components and changes to disclosure. The 2012
results have been restated for IAS 19 (2011) with
the results as follows:
Operating profit reduced by £4m.
Net finance costs increased by £15m.
Income tax charge reduced by £4m.
The remeasurement of retirement benefit obligations
charge in the statement of other comprehensive
income reduced by £15m.
If the results for 2013 had been prepared under IAS 19
(rev 2008) the service cost would have been £4m
lower and the net interest income would have been
£28m higher.
›(cid:3)Amendments to IAS 1 ‘Presentation of Financial
Statements’ – Presentation of Items and Other
Comprehensive Income, effective for annual
reporting periods beginning on or after 1 July 2012.
The amendments require the grouping of items in
other comprehensive income into those that may
be reclassified to the income statement in subsequent
periods, and those that will not. The statement of
other comprehensive income has been updated to
present this information.
›(cid:3)The IASB issued a ‘package of five’ new and amended
standards together. IFRS 10 ‘Consolidated Financial
Statements’, IFRS 11 ‘Joint Arrangements’ and IFRS 12
‘Disclosures of Involvement with Other Entities’ have
been issued. IAS 27 ‘Separate Financial Statements’
(Revised 2011) has been amended following the issuance
of IFRS 10 and retains the guidance for separate
financial statements. IAS 28 ‘Investments in Associates
and Joint Ventures’ (Revised 2011) has been amended
following the issuance of IFRS 10 and IFRS 11. All three
new standards and two amended standards are not
mandatory for the Group until 1 January 2014.
However, the Group has early adopted these
standards and amendments as of 1 January 2013.
›(cid:3)IFRS 13 ‘Fair Value Measurement’, effective for annual
reporting periods beginning on or after 1 January 2013.
The standard defines fair value, provides guidance on
its determination, and introduces disclosure
requirements on fair value measurements.
›(cid:3)Amendments to IFRS 7, ‘Financial Instruments –
Disclosures’ regarding asset and liability offsetting.
Amendments to IAS 36, ‘Impairment of assets’, on
the recoverable amount disclosures for non-financial
assets. This amendment removed certain disclosures
of the recoverable amount of CGUs which had been
included in IAS 36 by the issue of IFRS 13. The
amendment is not mandatory for the Group until
1 January 2014. However, the Group has early
adopted the amendments as of 1 January 2013.
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130
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
1. Accounting policies continued
a. Basis of preparation continued
With the exception of IAS 19 ‘Employee Benefits
(2011)’, the adoption of these new pronouncements
from 1 January 2013, does not have a material impact
on the consolidated financial statements. Disclosure
requirements have been updated as required.
2. Standards, interpretations and amendments
to published standards that are not yet effective
The Group has not early adopted the following new
pronouncements that are not yet effective:
›(cid:3)IFRS 9 ‘Financial Instruments’, effective for annual
reporting periods beginning on or after 1 January 2018.
The new standard details the requirements for the
classification, measurement and recognition of financial
assets and liabilities. The Group is yet to assess the full
impact of IFRS 9, and will do so once the remaining
sections of the standard are completed.
›(cid:3)IFRIC 21, ‘Levies’ details the accounting for an
obligation to pay a levy that is not income tax. As the
Group is not currently subjected to significant levies
the impact on the Group is not material.
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 consolidated
financial statements, are discussed in the relevant
accounting policies under the following headings:
Intangible assets: Goodwill
Intangible assets: Pre-publication assets
Taxation
Employee benefits: Pension obligations
Revenue recognition
b. Consolidation
1. Business combinations The acquisition method of
accounting is used to account for business combinations.
The consideration transferred for the acquisition
of a subsidiary is the fair value of the assets transferred,
the liabilities incurred and the equity interest issued by
the Group. The consideration transferred includes the
fair value of any asset or liability resulting from a
contingent consideration arrangement. Acquisition
related costs are expensed as incurred in the operating
expenses line of the income statement.
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 independent valuer. The
excess of the consideration transferred, the amount
of any non-controlling interest in the acquiree and the
acquisition date fair value of any previous equity
interest in the acquiree over the fair value of the
identifiable net assets acquired is recorded as goodwill.
See note 1e(1) for the accounting policy on goodwill.
If this is less than the fair value of the net assets of the
subsidiary acquired, in the case of a bargain purchase, the
difference is recognised directly in the income statement.
On an acquisition-by-acquisition basis, the Group
recognises any non-controlling interest in the acquiree
either at fair value or at the non-controlling interest’s
proportionate share of the acquiree’s net assets.
2. Subsidiaries Subsidiaries are entities over which the
Group has control. The Group controls an entity when
the Group is exposed to, or has rights to, variable
returns from its involvement with the entity and has
the ability to affect those returns through its power
over the entity. Subsidiaries are fully consolidated from
the date on which control is transferred to the Group.
They are deconsolidated from the date that control
ceases.
3. Transactions with non-controlling interests Transactions
with non-controlling interests that do not result in loss
of control are accounted for as equity transactions,
that is as transactions with the owners in their capacity
as owners. Any surplus or deficit arising from disposals
to a non-controlling interest is recorded in equity.
For purchases from a non-controlling 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 has rights to the net assets through contractually
agreed sharing of control. 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 the fair value of
consideration transferred.
Section 5 Financial statements
131
1. Accounting policies continued
b. Consolidation continued
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 operations form part of the core publishing
business of the Group and are an integral part of
existing wholly-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’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
monetary assets and liabilities denominated in foreign
currencies are recognised in the income statement,
except when deferred in equity as qualifying net
investment hedges.
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.
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 operation is sold, such
exchange differences are recognised in the income
statement as part of the gain or loss on sale.
The principal overseas currency for the Group is the
US dollar. The average rate for the year against sterling
was $1.57 (2012: $1.59) and the year end rate was
$1.66 (2012: $1.63).
d. Property, plant and equipment
Property, plant and equipment are stated at historical
cost less depreciation. Cost includes the original
purchase price of the asset and the costs attributable
to bringing the asset to its working condition for
intended use. Land is not depreciated. Depreciation
on other assets is calculated using the straight-line
method to allocate their cost less their residual values
over their estimated useful lives as follows:
Buildings (freehold):
Buildings (leasehold):
Plant and equipment:
20–50 years
over the period of the lease
3–10 years
The assets’ residual values and useful lives are
reviewed, and adjusted if appropriate, at each balance
sheet date.
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 For the acquisition of subsidiaries made
on or after 1 January 2010 goodwill represents the
excess of the consideration transferred, the amount
of any non-controlling interest in the acquiree and
the acquisition date fair value of any previous equity
interest in the acquiree over the fair value of the
identifiable net assets acquired. For the acquisition of
subsidiaries made from the date of transition to IFRS
to 31 December 2009 goodwill represents the excess
of the cost of an acquisition over the fair value of the
Group’s share of the net identifiable assets acquired.
Goodwill on acquisitions of subsidiaries is included in
intangible assets. Goodwill on acquisition of associates
and joint ventures represents the excess of the cost of
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132
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
1. Accounting policies continued
e. Intangible assets continued
an acquisition over the fair value of the Group’s share
of the net identifiable assets acquired. Goodwill on
acquisitions of associates and joint ventures is included
in investments in 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 amount is the
higher of fair value less costs to sell and value in use.
These calculations require the use of estimates and
significant management judgement. A description of the
key assumptions and sensitivities is included in note 11.
Goodwill is allocated to aggregated cash-generating
units for the purpose of impairment testing. The
allocation is made to those aggregated cash-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.
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-line basis
over its estimated useful life of between three and
eight 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 eight years.
4. Acquired intangible assets Acquired intangible assets
include customer lists and relationships, trademarks
and 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 an
amortisation method that reflects the pattern of
their consumption.
5. Pre-publication assets Pre-publication assets
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 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 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 cash generated from operations
in the cash flow statement (see note 34).
The assessment of the recoverability of pre-publication
assets and the determination of the amortisation
profile involve a significant degree of judgement based
on historical trends and management estimation of
future potential 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 20.
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 to the
income statement.
Section 5 Financial statements
133
j. Share capital
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.
Where any Group company purchases the company’s
equity share capital (treasury shares) the consideration
paid, including any directly attributable incremental
costs, net of income taxes, is deducted from equity
attributable to the company’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
transaction costs and the related income tax effects,
is included in equity attributable to the company’s
equity holders.
k. 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.
l. Derivative financial instruments
Derivatives are recognised at fair value and remeasured
at each balance sheet date. The fair value of derivatives
is 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
(fair value hedges) or hedges of net investments in
foreign operations (net investment hedges).
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1. Accounting policies continued
g. Inventories
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 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, 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. Cash and cash equivalents
Cash and cash equivalents in the cash flow statement
include cash in hand, deposits held on 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.
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
where these amounts are used to offset the
borrowings of the Group or as cash flows from
investing activities where these amounts are held
to generate an investment return.
134
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
1. Accounting policies continued
l. Derivative financial instruments continued
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 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.
m. Taxation
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 or other comprehensive income.
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.
n. Employee benefits
1. Pension obligations The retirement benefit asset and
obligation recognised in the balance sheet represents
the net of the present value of the defined benefit
obligation and the fair value of plan 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 and longevity.
Actuarial gains and losses arising from experience
adjustments and changes in actuarial assumptions are
charged or credited to equity in other comprehensive
income in the period in which they arise.
The service cost, representing benefits accruing over
the year, is included in the income statement as an
operating cost. Net interest is calculated by applying
the discount rate to the net defined benefit obligation
and is presented as finance costs or finance income.
Section 5 Financial statements
135
1. Accounting policies continued
n. Employee benefits continued
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 expected costs
of post-retirement healthcare and life assurance
benefits are accrued over the period of employment,
using a similar accounting methodology as for defined
benefit pension obligations. The liabilities and costs
relating to significant other post-retirement obligations
are assessed annually by independent qualified actuaries.
3. Share-based payments 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 an 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.
o. Provisions
Provisions are recognised if 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.
The Group recognises a provision for deferred
consideration at fair value.
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 provision is based on the present value of future
payments for surplus leased properties under non-
cancellable operating leases, net of estimated sub-
leasing income.
p. Revenue recognition
Revenue comprises the fair value of the consideration
received or receivable for the sale of goods and
services net of sales taxes, rebates and discounts,
and after eliminating sales within the Group.
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, such as the provision of supplementary
materials with textbooks, revenue is recognised for
each 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-party
costs incurred on behalf of the principal that are
rechargeable under the contractual arrangement
are not included in revenue.
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Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
1. Accounting policies continued
p. Revenue recognition continued
Income from recharges of freight and other activities
which are incidental to the normal revenue generating
activities is included in other income.
q. 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 are depreciated over the
shorter of the useful life of the asset or the lease term.
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.
r. Dividends
Dividends are recorded in the Group’s financial
statements in the period in which they are approved
by the company’s shareholders.
s. Assets and liabilities held for sale
Assets and liabilities are classified as 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
where appropriate.
t. Trade receivables
Trade receivables are stated at fair value after provision
for bad and doubtful debts and anticipated future sales
returns (see also note 1p).
2. Segment information
The Group is organised into the following business
segments:
Continuing operations:
North American Education Educational 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,
training, testing and certification for professional
bodies;
FT Group Publisher of the Financial Times, business
magazines and specialist information.
In addition the Group separately discloses the results
of the Penguin Random House (PRH) associate. The
results of the Penguin segment to 30 June 2013 and the
Mergermarket business (previously included as part of
the FT Group) are shown as discontinued in both 2012
and 2013.
Section 5 Financial statements
137
2. Segment information continued
For more detail on the services and products included in each business segment refer to the strategic report.
All figures in £ millions
Notes
International
Education
Professional
FT
Group
PRH Corporate
Discontinued
operations
Group
2013
North
American
Education
2,779
3
406
(92)
(2)
–
312
1,539
1
140
(60)
(9)
(16)
55
410
15
57
(12)
–
–
45
341
–
29
(2)
(1)
–
26
–
–
50
(30)
–
–
20
–
–
–
–
–
–
–
Continuing operations
Sales (external)
Sales (inter-segment)
Adjusted operating profit
Intangible charges
Acquisition costs
Other net gains and losses
Operating profit
Finance costs
Finance income
Profit before tax
Income tax
Profit for the year from
continuing operations
Segment assets
Joint ventures
Associates
Total assets
Other segment items
Share of results of joint
ventures and associates
Capital expenditure
Pre-publication investment
Depreciation
Amortisation
6
6
7
12
12
5,544
–
1
5,545
2,311
3
9
2,323
12
10, 11
20
10
11, 20
(1)
92
288
43
355
(4)
37
69
21
141
609
–
–
609
2
23
7
8
22
293
–
8
301
–
–
1,070
1,070
859
–
1
860
223 9,839
3
–
– 1,089
223 10,931
26
22
–
9
15
31
–
–
–
–
–
–
–
–
–
–
1
–
1
2
54
175
364
82
535
– 5,069
19
–
682
–
(196)
–
(12)
–
–
(16)
458
–
(111)
35
382
(87)
295
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138
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
2. Segment information continued
All figures in £ millions
Continuing operations
Sales (external)
Sales (inter-segment)
Adjusted operating profit
Intangible charges
Acquisition costs
Other net gains and losses
Operating profit
Finance costs
Finance income
Profit before tax
Income tax
Profit for the year from
continuing operations
Segment assets
Joint ventures
Associates
Total assets
North
American
Education
Notes
International
Education
Professional
FT
Group
Corporate
Discontinued
operations
Group
2012
Restated
2,658
5
536
(66)
(7)
–
463
1,568
1
214
(73)
(8)
–
133
390
12
37
(37)
(1)
(123)
(124)
343
–
22
(3)
(4)
–
15
–
–
–
–
–
–
–
– 4,959
18
–
809
–
(179)
–
(20)
–
(123)
–
487
–
(115)
19
391
(138)
253
6
6
7
12
12
5,449
–
1
5,450
2,390
7
4
2,401
631
–
–
631
(11)
16
7
8
45
445
1
2
448
1,246
–
–
1,246
1,145 11,306
8
34
1,172 11,348
–
27
23
26
–
7
13
–
–
–
–
–
–
11
31
8
42
9
152
364
80
553
Other segment items
Share of results of joint ventures
and associates
Capital expenditure
Pre-publication investment
Depreciation
Amortisation
12
10, 11
20
10
11, 20
–
66
250
41
311
(3)
33
76
16
142
In 2013, sales from the provision of goods were £2,867m (2012: £2,946m) and sales from the provision of
services were £2,202m (2012: £2,013m). 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 and other service businesses are classified as being from the provision of services.
Included in other net gains and losses in continuing operations in 2013 is a loss on the disposal of the Japanese
school and local publishing assets and in 2012 is a loss on closure of Pearson in Practice (£113m) and an
impairment loss on a joint venture (£10m).
Section 5 Financial statements
139
2. Segment information continued
Corporate costs are allocated to business segments including discontinued operations 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-length basis. Segment assets consist of property, plant and
equipment, intangible assets, inventories, receivables, deferred taxation and other financial assets and exclude
cash and cash equivalents and derivative assets. Corporate assets comprise cash and cash equivalents, marketable
securities and derivative financial instruments. Capital expenditure comprises additions to property, plant and
equipment and software (see notes 10 and 11).
Property, plant and equipment and intangible assets acquired through business combination were £202m
(2012: £296m) (see note 30). Capital expenditure, depreciation and amortisation include amounts relating
to discontinued operations.
The Group operates in the following main geographic areas:
All figures in £ millions
Continuing operations
UK
Other European countries
USA
Canada
Asia Pacific
Other countries
Total continuing
Discontinued operations
UK
Other European countries
USA
Canada
Asia Pacific
Other countries
Total discontinued
Total
2013
649
366
2,913
128
624
389
5,069
97
49
369
24
74
8
621
5,690
Sales
2012
678
377
2,756
144
633
371
4,959
187
92
647
57
153
17
1,153
6,112
Non-current assets
2013
2012
1,068
200
5,026
301
495
215
7,305
–
–
–
–
–
–
–
7,305
803
234
4,496
307
524
275
6,639
–
–
–
–
–
–
–
6,639
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. The geographical split of non-current assets is 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 trade and
other receivables.
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140
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
3. Discontinued operations
Discontinued operations relate to Penguin and Mergermarket.
An analysis of the results and cash flows of discontinued operations is as follows:
All figures in £ millions
Sales
Penguin Mergermarket
513
108
28
1
29
(9)
20
202
15
–
237
36
(6)
(8)
22
24
–
24
(9)
15
–
–
(8)
7
22
(2)
(29)
(9)
Operating profit
Finance income
Profit before tax
Attributable tax expense
Profit after tax
Profit on disposal of Penguin before tax
Attributable tax benefit
Mergermarket transaction costs
Profit for the year from discontinued
operations
Operating cash flows
Investing cash flows
Financing cash flows
Total cash flows
4. Operating expenses
All figures in £ millions
By function:
Cost of goods sold
Operating expenses
Distribution costs
Selling, marketing and product development costs
Administrative and other expenses
Restructuring costs
Other net gains and losses
Other income
Total net operating expenses
Total
2013
Total
621
52
1
53
(18)
35
202
15
(8)
244
58
(8)
(37)
13
Penguin Mergermarket
2012
Total
1,053
100
1,153
62
–
62
(19)
43
–
–
–
43
83
(81)
10
12
24
–
24
(6)
18
–
–
–
18
26
(24)
(6)
(4)
86
–
86
(25)
61
–
–
–
61
109
(105)
4
8
2013
2012
Restated
2,312
2,187
90
1,027
1,162
176
16
(118)
2,353
4,665
82
925
1,242
–
10
(78)
2,181
4,368
Included in other income in 2013 is service fee income from Penguin Random House of £28m.
Section 5 Financial statements
141
4. Operating expenses continued
All figures in £ millions
By nature:
Royalties expensed
Other product costs
Employee benefit expense
Contract labour
Employee related expense
Promotional costs
Depreciation of property, plant and equipment
Amortisation of software
Amortisation of intangible assets – Other
Amortisation of intangible assets – Pre-publication
Property and facilities
Technology and communications
Professional and outsourced services
Other general and administrative costs
Capitalised costs
Acquisition costs
Other net gains and losses
Other income
Total
Notes
2013
2012
Restated
5
10
20
256
793
2,100
194
177
167
81
59
166
308
229
104
259
61
(199)
12
16
(118)
4,665
245
865
1,866
137
168
155
72
49
179
283
188
80
253
38
(162)
20
10
(78)
4,368
During the year the Group obtained the following services from the Group’s auditors:
All figures in £ millions
2013
2012
The audit of parent company and consolidated financial statements
The audit of the company’s subsidiaries
Total audit fees
Other assurance services
Total assurance services
Tax compliance services
Tax advisory services
Total tax services
Total non-audit services
Total
Reconciliation between audit and non-audit service fees is shown below:
4
2
6
1
1
2
2
4
5
11
4
2
6
1
1
1
1
2
3
9
All figures in £ millions
2013
2012
Group audit fees including fees for attestation under section 404 of the Sarbanes-Oxley Act
Non-audit fees
Total
6
5
11
6
3
9
Fees for attestation under section 404 of the Sarbanes-Oxley Act are allocated between fees payable for the audits
of consolidated and subsidiary accounts. Non-audit fees for 2013 includes £3m for assurance and tax services
related to the Penguin Random House transaction.
O
V
E
R
V
I
E
W
O
U
R
P
E
R
F
O
R
M
A
N
C
E
R
E
S
P
O
N
S
I
B
L
E
B
U
S
I
N
E
S
S
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
142
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
5. Employee information
All figures in £ millions
Employee benefit expense
Wages and salaries (including termination benefits and restructuring costs)
Social security costs
Share-based payment costs
Retirement benefits – defined contribution plans
Retirement benefits – defined benefit plans
Other post-retirement benefits
Total
Notes
2013
1,836
136
35
66
27
–
2,100
26
25
25
25
2012
Restated
1,610
129
28
69
26
4
1,866
The details of the emoluments of the directors of Pearson plc are shown in the report on directors’ remuneration.
Average number employed
Employee numbers
North American Education
International Education
Professional
FT Group
Other
Continuing operations
2013
2012
19,670
16,113
3,357
2,216
759
42,115
18,552
16,751
3,706
2,243
883
42,135
The employee benefit expense relating to discontinued operations was £168m (2012: £265m) and the average
number employed was 3,592 (2012: 5,387).
Section 5 Financial statements
143
6. Net finance costs
All figures in £ millions
Interest payable
Net finance costs in respect of retirement benefits
Finance cost of put options, deferred consideration associated with acquisitions
and other interest charges related to transactions
Net foreign exchange losses
Other losses on financial instruments in a hedging relationship:
– fair value hedges
Other losses on financial instruments not in a hedging relationship:
– derivatives
Finance costs
Interest receivable
Net foreign exchange gains
Other gains on financial instruments in a hedging relationship:
– fair value hedges
Other gains on financial instruments not in a hedging relationship:
– derivatives
Finance income
Net finance costs
Analysed as:
Net interest payable reflected in adjusted earnings
Other net finance costs
Total net finance costs
Notes
2013
2012
Restated
25
(82)
(3)
(9)
–
–
(17)
(111)
10
20
(75)
(2)
(27)
(8)
(1)
(2)
(115)
10
9
1
–
4
35
(76)
(72)
(4)
(76)
–
19
(96)
(65)
(31)
(96)
The net gain of £1m on fair value hedges in 2013 (2012: net loss of £1m) comprises a gain of £95m (2012: gain
of £7m) on the underlying bonds, offset by a loss of £94m (2012: loss of £8m) on the related derivative financial
instruments.
O
V
E
R
V
I
E
W
O
U
R
P
E
R
F
O
R
M
A
N
C
E
R
E
S
P
O
N
S
I
B
L
E
B
U
S
I
N
E
S
S
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
144
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
7. Income tax
All figures in £ millions
Current tax
Charge in respect of current year
Adjustments in respect of prior years
Total current tax charge
Deferred tax
In respect of temporary differences
Other adjustments in respect of prior years
Total deferred tax credit/(charge)
Total tax charge
Notes
2013
2012
Restated
(129)
(7)
(136)
14
35
49
(87)
(147)
18
(129)
(45)
36
(9)
(138)
13
The adjustments in respect of prior years in 2013 mainly relate to changes in estimates arising from uncertain tax
positions following settlements with tax authorities in the year.
The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the UK tax rate
as follows:
All figures in £ millions
Profit before tax
Tax calculated at UK rate (2013: 23.25%, 2012: 24.5%)
Effect of overseas tax rates
Joint venture and associate income reported net of tax
Net expense not subject to tax
Loss on sale of businesses not subject to tax
Utilisation of previously unrecognised tax losses and credits
Unutilised tax losses
Adjustments in respect of prior years
Total tax charge
UK
Overseas
Total tax charge
Tax rate reflected in earnings
2013
382
(89)
(13)
13
(14)
(6)
1
(7)
28
(87)
(13)
(74)
(87)
22.8%
2012
Restated
391
(96)
(51)
2
(15)
(28)
2
(6)
54
(138)
(14)
(124)
(138)
35.3%
Section 5 Financial statements
145
7. Income tax continued
The tax rate reflected in adjusted earnings is calculated as follows:
All figures in £ millions
Profit before tax
Adjustments:
Other net gains and losses
Acquisition costs
Amortisation of acquired intangibles
Other net finance costs
Adjusted profit before tax – continuing operations
Adjusted profit before tax – discontinued operations
Total adjusted profit before tax
Total tax charge
Adjustments:
Tax charge on other net gains and losses
Tax benefit on acquisition costs
Tax benefit on amortisation of acquired intangibles
Tax benefit on other net finance costs
Tax amortisation benefit on goodwill and intangibles
Adjusted income tax charge – continuing operations
Adjusted income tax charge – discontinued operations
Total adjusted income tax charge
Tax rate reflected in adjusted earnings
The tax (charge)/benefit recognised in other comprehensive income is as follows:
All figures in £ millions
Remeasurement of retirement benefit obligations
Net exchange differences on translation of foreign operations
2013
382
16
12
196
4
610
54
664
2012
Restated
391
123
20
179
31
744
123
867
(87)
(138)
32
(2)
(51)
(1)
30
(79)
(18)
(97)
14.6%
–
(5)
(54)
(1)
36
(162)
(38)
(200)
23.1%
2013
(23)
6
(17)
2012
Restated
50
1
51
A tax charge of £nil (2012: tax benefit £6m) relating to share-based payments has been recognised directly
in equity.
O
V
E
R
V
I
E
W
O
U
R
P
E
R
F
O
R
M
A
N
C
E
R
E
S
P
O
N
S
I
B
L
E
B
U
S
I
N
E
S
S
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
146
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
8. Earnings per share
Basic
Basic earnings per share is calculated by dividing the profit attributable to equity shareholders of the company by
the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by
the company and held as treasury shares.
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.
All figures in £ millions
Profit for the year from continuing operations
Non-controlling interest
Earnings from continuing operations
Profit for the year from discontinued operations
Non-controlling interest
Earnings
Weighted average number of shares (millions)
Effect of dilutive share options (millions)
Weighted average number of shares (millions) for diluted earnings
Earnings per share from continuing and discontinued operations
Basic
Diluted
Earnings per share from continuing operations
Basic
Diluted
Earnings per share from discontinued operations
Basic
Diluted
Notes
2013
2012
Restated
3
295
(1)
294
244
–
538
807.8
1.1
808.9
66.6p
66.5p
36.4p
36.3p
30.2p
30.2p
253
(3)
250
61
–
311
804.3
1.3
805.6
38.7p
38.6p
31.1p
31.0p
7.6p
7.6p
Adjusted
In order to show results from operating activities on a consistent basis, an adjusted earnings per share is presented.
The company’s definition of adjusted earnings per share may not be comparable to other similarly titled measures
reported by other companies.
Adjusted earnings includes the results from continuing and discontinued operations.
The following items are excluded from adjusted earnings:
Other net gains and losses represent profits and losses on the acquisition and disposal of subsidiaries, joint ventures,
associates and other financial assets that are included within continuing or discontinued operations but which
distort the performance of the Group.
Amortisation of acquired intangibles, acquisition costs and movements in contingent acquisition consideration are also
excluded from adjusted earnings as these items are not considered to be fully reflective of the underlying
performance of the Group.
Section 5 Financial statements
147
8. Earnings per share continued
Other net finance income/costs include finance costs in respect of retirement benefits, finance costs of put options
and deferred consideration and foreign exchange and other gains and losses. Finance costs relating to retirement
benefits are excluded as the Group’s interpretation is that the new presentation under IAS 19 (revised) does not
reflect the economic substance of the underlying assets and liabilities. Finance costs of put options and deferred
consideration are excluded as they relate to future earn outs and similar payments on acquisitions and do not
reflect cash expended. Foreign exchange and other gains and losses are excluded as they represent short-term
fluctuations in market value and are subject to significant volatility. Other gains and losses may not be realised in
due course as it is normally the intention to hold the related instruments to maturity. Other net finance costs of
Group companies are included in finance costs or finance income as appropriate. Other net finance costs of
joint ventures and associates are included within the share of results of joint ventures and associates within
operating profit.
Tax on the above items is excluded from adjusted earnings. Where relevant the Group also excludes the benefit
from recognising previously unrecognised pre-acquisition and capital losses. The Group includes the benefit of tax
amortisation of goodwill and intangibles as this benefit more accurately aligns the adjusted tax charge with the
expected rate of cash tax payments.
Non-controlling interest for the above items is excluded from adjusted earnings.
The following tables reconcile statutory earnings to adjusted earnings.
All figures in £ millions
Operating profit
Net finance costs
Profit before tax
Income tax
Profit for the year from
continuing operations
Profit for the year from
discontinued operations
Profit for the year
Non-controlling interest
Earnings
Weighted average number
of shares (millions)
Adjusted earnings per share
Statutory
income
statement
Discontinued
operations
Other net
gains and
losses
Acquisition
costs
Intangible
charges
2013
Other net
finance
income/
costs
Tax
amortisation
benefit
Adjusted
income
statement
458
(76)
382
(87)
295
244
539
(1)
538
807.8
66.6p
54
–
54
(18)
36
(36)
–
–
–
16
–
16
32
48
(209)
(161)
–
(161)
12
–
12
(2)
10
–
10
–
10
196
–
196
(51)
145
2
147
–
147
–
4
4
(1)
3
(1)
2
–
2
–
–
–
30
30
–
30
–
30
736
(72)
664
(97)
567
–
567
(1)
566
807.8
70.1p
O
V
E
R
V
I
E
W
O
U
R
P
E
R
F
O
R
M
A
N
C
E
R
E
S
P
O
N
S
I
B
L
E
B
U
S
I
N
E
S
S
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
148
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
8. Earnings per share continued
All figures in £ millions
Operating profit
Net finance costs
Profit before tax
Income tax
Profit for the year from
continuing operations
Profit for the year from
discontinued operations
Profit for the year
Non-controlling interest
Earnings
Weighted average number
of shares (millions)
Adjusted earnings per share
9. Dividends
All figures in £ millions
Statutory
income
statement
Discontinued
operations
Other net
gains and
losses
Acquisition
costs
Intangible
charges
Other net
finance
income/
costs
Tax
amortisation
benefit
Adjusted
income
statement
2012
Restated
123
–
123
(38)
123
–
123
–
85
123
(85)
–
–
–
20
143
–
143
20
–
20
(5)
15
1
16
–
16
179
–
179
(54)
125
3
128
–
128
–
31
31
(1)
30
–
30
–
30
487
(96)
391
(138)
253
61
314
(3)
311
804.3
38.7p
–
–
–
36
932
(65)
867
(200)
36
667
–
36
–
36
2013
242
130
372
–
667
(3)
664
804.3
82.6p
2012
225
121
346
Final paid in respect of prior year 30.0p (2012: 28.0p)
Interim paid in respect of current year 16.0p (2012: 15.0p)
The directors are proposing a final dividend in respect of the financial year ended 31 December 2013 of 32.0p per
share which will absorb an estimated £259m of shareholders’ funds. It will be paid on 2 May 2014 to shareholders
who are on the register of members on 4 April 2014. These financial statements do not reflect this dividend.
10. Property, plant and equipment
All figures in £ millions
Cost
At 1 January 2012
Exchange differences
Additions
Disposals
Acquisition through business combination
Disposal through business disposal
Reclassifications
Transfer from/(to) software
Transfer from pre-publication
Transfer to assets held for sale
At 31 December 2012
Exchange differences
Additions
Disposals
Acquisition through business combination
Disposal through business disposal
Reclassifications
Transfer from software
Transfer from assets held for sale
Transfer to assets held for sale
At 31 December 2013
Section 5 Financial statements
149
Land and
buildings
Plant and
equipment
Assets in
course of
construction
363
(9)
12
(2)
4
(1)
8
9
–
(32)
352
(5)
33
(13)
–
(1)
9
–
–
–
375
706
(23)
51
(20)
13
(4)
–
(27)
3
(102)
597
(14)
58
(78)
3
(2)
(1)
3
9
(7)
568
12
–
15
–
–
–
(8)
–
–
(1)
18
–
22
–
–
–
(8)
–
–
–
32
Total
1,081
(32)
78
(22)
17
(5)
–
(18)
3
(135)
967
(19)
113
(91)
3
(3)
–
3
9
(7)
975
O
V
E
R
V
I
E
W
O
U
R
P
E
R
F
O
R
M
A
N
C
E
R
E
S
P
O
N
S
I
B
L
E
B
U
S
I
N
E
S
S
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
150
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
10. Property, plant and equipment continued
All figures in £ millions
Depreciation
At 1 January 2012
Exchange differences
Charge for the year
Disposals
Acquisition through business combination
Disposal through business disposal
Reclassifications
Transfer (from)/to software
Transfer to assets held for sale
At 31 December 2012
Exchange differences
Charge for the year
Disposals
Acquisition through business combination
Transfer from assets held for sale
Transfer to assets held for sale
At 31 December 2013
Carrying amounts
At 1 January 2012
At 31 December 2012
At 31 December 2013
Land and
buildings
Plant and
equipment
Assets in
course of
construction
(187)
6
(21)
2
(1)
–
(8)
(3)
17
(195)
3
(25)
7
–
–
–
(210)
176
157
165
(511)
17
(59)
19
(6)
2
8
7
78
(445)
13
(57)
64
(2)
(1)
5
(423)
195
152
145
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
12
18
32
Total
(698)
23
(80)
21
(7)
2
–
4
95
(640)
16
(82)
71
(2)
(1)
5
(633)
383
327
342
Depreciation expense of £24m (2012: £23m) has been included in the income statement in cost of goods sold and
£57m (2012: £49m) in operating expenses. In 2013 £1m (2012: £8m) 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 £11m (2012: £17m).
Section 5 Financial statements
151
11. Intangible assets
All figures in £ millions
Goodwill
Software
Acquired
customer
lists, contracts
and
relationships
Acquired
trademarks
and brands
Acquired
publishing
rights
Other
intangibles
acquired
Cost
At 1 January 2012
Exchange differences
Additions – internal development
Additions – purchased
Disposals
Acquisition through business combination
Disposal through business disposal
Transfer from PPE
Transfer to assets held for sale
At 31 December 2012
Exchange differences
Additions – internal development
Additions – purchased
Disposals
Acquisition through business combination
Disposal through business disposal
Reclassifications
Transfer to PPE
Transfer to assets held for sale
At 31 December 2013
5,199
(213)
–
–
–
505
(50)
–
(364)
5,077
(122)
–
–
–
(133)
(6)
–
–
(150)
4,666
428
(13)
38
36
(11)
12
–
18
(42)
466
(6)
38
24
(50)
–
–
–
(3)
–
469
681
(26)
–
–
–
182
(89)
–
(19)
729
(25)
–
–
–
190
–
(10)
–
(29)
855
253
(11)
–
–
–
27
(2)
–
(9)
258
(8)
–
–
–
–
–
(1)
–
(12)
237
213
(9)
–
–
–
10
–
–
(7)
207
(12)
–
–
–
3
–
–
–
–
198
356
(18)
–
–
–
56
–
–
–
394
(11)
–
–
–
7
(1)
11
–
(2)
398
Total
7,130
(290)
38
36
(11)
792
(141)
18
(441)
7,131
(184)
38
24
(50)
67
(7)
–
(3)
(193)
6,823
O
V
E
R
V
I
E
W
O
U
R
P
E
R
F
O
R
M
A
N
C
E
R
E
S
P
O
N
S
I
B
L
E
B
U
S
I
N
E
S
S
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
152
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
11. Intangible assets continued
All figures in £ millions
Goodwill
Software
Acquired
customer
lists, contracts
and
relationships
Acquired
trademarks
and brands
Acquired
publishing
rights
Other
intangibles
acquired
Amortisation
At 1 January 2012
Exchange differences
Charge for the year
Disposals
Acquisition through business combination
Disposal through business disposal
Transfer from PPE
Transfer to assets held for sale
At 31 December 2012
Exchange differences
Charge for the year
Disposals
Disposal through business disposal
Transfer to assets held for sale
At 31 December 2013
Carrying amounts
At 1 January 2012
At 31 December 2012
At 31 December 2013
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5,199
5,077
4,666
(296)
9
(54)
8
(7)
–
(4)
32
(312)
6
(59)
49
–
–
(316)
132
154
153
(168)
8
(90)
–
–
45
–
1
(204)
10
(78)
–
–
23
(249)
513
525
606
(63)
3
(27)
–
–
1
–
–
(86)
4
(21)
–
–
10
(93)
190
172
144
(128)
5
(20)
–
–
–
–
4
(139)
6
(15)
–
–
–
(148)
85
68
50
Total
(788)
32
(237)
8
(7)
46
(4)
37
(913)
33
(227)
49
1
35
(1,022)
(133)
7
(46)
–
–
–
–
–
(172)
7
(54)
–
1
2
(216)
223
222
182
6,342
6,218
5,801
Goodwill
The goodwill carrying value of £4,666m 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. 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 and software rights.
Intangible assets are valued separately for each acquisition and the primary method of valuation used is the
discounted cash flow method. The majority of acquired intangibles are amortised using the unit of production
method which is based on the pattern of benefits embodied in the asset.
Amortisation of £15m (2012: £10m) is included in the income statement in cost of goods sold and £210m
(2012: £218m including an impairment of £21m relating to Pearson in Practice) in operating expenses.
In 2013 £2m (2012: £9m) of amortisation relates to discontinued operations.
Section 5 Financial statements
153
11. Intangible assets continued
The range of useful economic lives for each major class of intangible asset (excluding goodwill and software)
is shown below:
Class of intangible asset
Acquired customer lists, contracts and relationships
Acquired trademarks and brands
Acquired publishing rights
Other intangibles acquired
The expected amortisation profile of acquired intangible assets is shown below:
2013
Useful economic life
3–20 years
2–20 years
5–20 years
2–20 years
All figures in £ millions
Class of intangible asset
Acquired customer lists, contracts and relationships
Acquired trademarks and brands
Acquired publishing rights
Other intangibles acquired
One to five
years
Six to ten
years
More than
ten years
357
78
46
148
166
41
4
33
83
25
–
1
2013
Total
606
144
50
182
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, and monitored at the level of, nine aggregated cash-generating units (CGUs) within the
business segments as follows:
All figures in £ millions
US Education Publishing
US School Assessment and Information
Canada
International – Emerging Markets
International – UK
International – Rest of World
Professional Publishing
Professional Assessment and Training
Pearson Education total
Financial Times
Continuing operations
Mergermarket
Discontinued operations
Total
2013
2,225
750
173
423
444
253
14
334
4,616
50
4,666
–
–
4,666
2012
2,384
773
188
463
450
267
15
334
4,874
51
4,925
152
152
5,077
O
V
E
R
V
I
E
W
O
U
R
P
E
R
F
O
R
M
A
N
C
E
R
E
S
P
O
N
S
I
B
L
E
B
U
S
I
N
E
S
S
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
154
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
11. Intangible assets continued
Impairment tests for cash-generating units containing goodwill continued
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 rates 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 10.7% to 13.8% for the Pearson Education businesses
(2012: 9.8% to 12.7%) and 11.3% for the Financial Times (2012: 11.5%).
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 2013 (2012: 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.
12. Investments in joint ventures and associates
The amounts recognised in the balance sheet are as follows:
All figures in £ millions
Associates
Joint ventures
Total
The amounts recognised in the income statement are as follows:
All figures in £ millions
Associates
Joint ventures
Total
2013
1,089
3
1,092
2013
56
(2)
54
2012
7
8
15
2012
23
(14)
9
Section 5 Financial statements
155
12. Investments in joint ventures and associates continued
Investment in associates
The Group has the following material associates:
Penguin Random House
The Economist Newspaper Ltd
*Neither associate has a quoted market price.
Principal place
of business
% Ownership
interest
Nature of
relationship
Measurement
method
Global
UK
47
50
Note 1
Note 2
Equity*
Equity*
Note 1 – On 1 July 2013 Penguin Random House was formed, upon the completion of an agreement between
Pearson and Bertelsmann to merge their respective trade publishing companies, Penguin and Random House, with
the parent companies owning 47% and 53% of the combined business respectively. The shareholder agreement
includes protection rights for Pearson as the minority shareholder including rights to dividends.
Note 2 – The Group has a 50% interest in The Economist Newspaper Ltd, publisher of one of the world’s leading
weekly business and current affairs magazines.
The summarised financial information of the material associates is detailed below:
All figures in £ millions
Assets
Current assets
Non-current assets
Liabilities
Current liabilities
Non-current liabilities
Net assets
Sales
Profit from continuing operations
Other comprehensive (expense)/income
Total comprehensive income
Dividends received from associate
2013
2012
Penguin
Random House
Economist
Economist
1,210
1,361
(905)
(455)
1,211
103
163
(190)
(60)
16
120
160
(202)
(78)
–
1,315
340
348
66
(34)
32
43
52
9
61
21
46
(6)
40
21
The information above reflects the amounts presented in the financial statements of the associates, adjusted for fair
value and similar adjustments.
O
V
E
R
V
I
E
W
O
U
R
P
E
R
F
O
R
M
A
N
C
E
R
E
S
P
O
N
S
I
B
L
E
B
U
S
I
N
E
S
S
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
156
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
12. Investments in joint ventures and associates continued
Investment in associates continued
A reconciliation of the summarised financial information to the carrying value of the material associates is
shown below:
All figures in £ millions
Opening net assets
Exchange differences
Profit for the period
Other comprehensive income
Dividends
Additions
Distribution from associate in excess of carrying value
Reversal of distribution from associate in excess of carrying value
Closing net assets
Share of net assets
Goodwill
Carrying value of associate
Information on other individually immaterial associates is detailed below:
All figures in £ millions
Loss from continuing operations
Other comprehensive income
Total comprehensive expense
2013
2012
Penguin
Random House
Economist
Economist
–
(68)
66
(34)
(91)
1,338
–
–
1,211
569
501
1,070
–
–
52
9
(41)
–
–
(4)
16
8
–
8
–
(1)
46
(6)
(41)
–
2
–
–
–
–
–
2013
2012
(1)
–
(1)
–
–
–
Transactions with material associates
The Group has loans to Penguin Random House which are unsecured and interest is calculated based on market
rates. The amount outstanding at 31 December 2013 was £44m.
The Group also has a current asset receivable of £14m from Penguin Random House arising from the provision of
services. Included in other income (note 4) is £28m of service fees.
Investment in joint ventures
Information on joint ventures, all of which are individually immaterial, is detailed below:
All figures in £ millions
Loss from continuing operations
Other comprehensive income
Total comprehensive expense
2013
(2)
–
(2)
2012
(14)
–
(14)
Section 5 Financial statements
157
13. Deferred income tax
All figures in £ millions
Deferred income tax assets
Deferred income tax liabilities
Net deferred income tax
2013
250
(612)
(362)
2012
229
(601)
(372)
Substantially all of the deferred tax assets are expected to be recovered after more than one year.
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. At 31 December 2013 the Group has unrecognised deferred income tax assets of £4m (2012: £13m) in
respect of UK losses, £11m (2012: £14m) in respect of US losses and approximately £36m (2012: £30m) in
respect of losses in other territories. None of the unrecognised UK losses have expiry dates associated with them.
The US losses relate to state taxes and therefore have expiry periods of between 5 and 20 years.
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:
All figures in £ millions
At beginning of year
Exchange differences
Income statement benefit/(charge)
Acquisition through business combination
Disposal through business disposal
Tax charge to other comprehensive income or equity
Transfer to current tax
Transfer to assets held for sale
At end of year
Notes
7
30
31
2013
(372)
9
47
(37)
–
(35)
25
1
(362)
2012
Restated
(333)
14
(13)
(67)
11
34
–
(18)
(372)
Included in the income statement above for 2013 is a £2m charge (2012: £4m charge) relating to discontinued
operations.
O
V
E
R
V
I
E
W
O
U
R
P
E
R
F
O
R
M
A
N
C
E
R
E
S
P
O
N
S
I
B
L
E
B
U
S
I
N
E
S
S
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
158
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
13. Deferred income tax continued
The movement in deferred income tax assets and liabilities during the year is as follows:
All figures in £ millions
Deferred income tax assets
At 1 January 2012
Exchange differences
Acquisition through business combination
Income statement charge
Tax benefit/(charge) to other
comprehensive income or equity
Transfer to assets held for sale
At 31 December 2012
Exchange differences
Acquisition through business combination
Income statement (charge)/benefit
Tax charge to other comprehensive
income or equity
Transfer to current tax
Transfer from assets held for sale
Transfer to assets held for sale
At 31 December 2013
Trading
losses
Goodwill and
intangibles
Returns
provisions
Retirement
benefit
obligations
Other
Total
Restated
14
–
19
(13)
–
(2)
18
–
21
(24)
–
–
–
–
15
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
89
(3)
–
(16)
–
(25)
45
(1)
–
(5)
–
–
–
–
39
19
(1)
–
(1)
39
(9)
47
(1)
–
25
(36)
–
7
–
42
165
(5)
–
(33)
(6)
(2)
119
(4)
–
22
–
25
(7)
(1)
154
287
(9)
19
(63)
33
(38)
229
(6)
21
18
(36)
25
–
(1)
250
Other deferred income tax assets include temporary differences on share-based payments, inventory and
other provisions.
All figures in £ millions
Deferred income tax liabilities
At 1 January 2012
Exchange differences
Acquisition through business combination
Disposal through business disposal
Income statement benefit
Tax benefit to other comprehensive income or equity
Transfer to assets held for sale
At 31 December 2012
Exchange differences
Acquisition through business combination
Income statement (charge)/benefit
Tax benefit to other comprehensive income or equity
Transfer to assets held for sale
At 31 December 2013
Goodwill and
intangibles
Other
Total
(464)
18
(65)
11
15
–
10
(475)
13
(61)
(61)
–
–
(584)
(156)
5
(21)
–
35
1
10
(126)
2
3
90
1
2
(28)
(620)
23
(86)
11
50
1
20
(601)
15
(58)
29
1
2
(612)
Other deferred income tax liabilities include temporary differences in respect of depreciation and royalty advances.
Section 5 Financial statements
159
14. 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:
All figures in £ millions
Investments in unlisted securities
– continuing operations
Cash and cash equivalents –
continuing operations
Cash and cash equivalents
classified within assets held
for sale
Marketable securities
Derivative financial instruments
Trade receivables – continuing
operations
Trade receivables classified within
assets held for sale
Total financial assets
Derivative financial instruments
Trade payables – continuing
operations
Trade payables classified within
liabilities held for sale
Bank loans and overdrafts –
continuing operations
Borrowings due within one year
Borrowings due after more than
one year
Total financial liabilities
Fair value
Amortised cost
2013
Notes
Available
for sale
Derivatives
deemed held
for trading
Derivatives
in hedging
relationships
Other
liabilities
Loans and
receivables
Other
liabilities
Total
carrying
value
Total
market
value
15
17
32
16
22
16
24
18
18
18
94
–
–
6
–
–
–
100
–
–
–
–
–
–
–
–
–
–
–
4
–
–
4
(16)
–
–
–
–
–
–
–
–
120
–
–
120
(32)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
729
36
–
–
882
–
–
–
–
–
–
94
94
729
729
36
6
124
36
6
124
882
882
25
1,672
–
–
25
25
– 1,896 1,896
(48)
(48)
–
–
–
–
–
(316)
(316)
(316)
(1)
(1)
(1)
(47)
(508)
(47)
(508)
(47)
(514)
–
(16)
–
(32)
–
–
– (1,671) (1,671) (1,683)
– (2,543) (2,591) (2,609)
O
V
E
R
V
I
E
W
O
U
R
P
E
R
F
O
R
M
A
N
C
E
R
E
S
P
O
N
S
I
B
L
E
B
U
S
I
N
E
S
S
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
160
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
14. Classification of financial instruments continued
All figures in £ millions
Investments in unlisted securities –
continuing operations
Investments in unlisted securities
classified within assets held for sale
Cash and cash equivalents –
continuing operations
Cash and cash equivalents classified
within assets held for sale
Marketable securities
Derivative financial instruments
Trade receivables – continuing
operations
Trade receivables classified within
assets held for sale
Total financial assets
Trade payables – continuing
operations
Trade payables classified within
liabilities held for sale
Other financial liabilities – put
options over non-controlling
interest
Bank loans and overdrafts –
continuing operations
Bank loans and overdrafts classified
within liabilities held for sale
Borrowings due within one year
Borrowings due after more than
one year
Total financial liabilities
Fair value
Amortised cost
2012
Notes
Available
for sale
Derivatives
deemed held
for trading
Derivatives
in hedging
relationships
Other
liabilities
Loans and
receivables
Other
liabilities
Total
carrying
value
Total
market
value
15
32
17
32
16
22
24
24
18
32
18
18
31
1
–
–
6
–
–
–
38
–
–
–
–
–
–
–
–
–
–
–
–
–
1
–
–
1
–
–
–
–
–
–
–
–
–
–
–
–
–
177
–
–
177
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(68)
–
–
–
–
–
–
–
31
31
1
1
1,062
– 1,062 1,062
115
–
–
883
–
–
–
–
115
6
178
115
6
178
883
883
249
2,309
249
249
–
– 2,525 2,525
–
–
–
–
–
–
(337)
(337)
(337)
(148)
(148)
(148)
–
(68)
(68)
(55)
(55)
(55)
(7)
(229)
(7)
(229)
(7)
(228)
–
(68)
– (1,988) (1,988) (2,043)
– (2,764) (2,832) (2,886)
Section 5 Financial statements
161
14. Classification of financial instruments continued
Certain of the Group’s derivative financial instruments are classified as 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.
15. Other financial assets
All figures in £ millions
At beginning of year
Exchange differences
Acquisition of investments
Disposal of investments
Transfer to assets held for sale
At end of year
2013
2012
31
–
63
–
–
94
26
(2)
10
(2)
(1)
31
Other financial assets comprise non-current unlisted securities.
16. Derivative financial instruments
The Group’s approach to the management of financial risks is set out in note 19. The Group’s outstanding
derivative financial instruments are as follows:
All figures in £ millions
Interest rate derivatives –
in a fair value hedge relationship
Interest rate derivatives –
not in a hedge relationship
Cross-currency rate derivatives –
in a net investment hedge relationship
Total
Analysed as expiring:
In less than one year
Later than one year and not later
than five years
Later than five years
Total
Gross notional
amounts
Assets
Liabilities
Gross notional
amounts
Assets
Liabilities
2013
2012
1,439
634
220
2,293
312
1,377
604
2,293
81
4
39
124
13
111
–
124
(32)
1,465
143
(16)
–
(48)
61
220
1,746
–
215
–
(48)
(48)
701
830
1,746
1
34
178
4
69
105
178
–
–
–
–
–
–
–
–
O
V
E
R
V
I
E
W
O
U
R
P
E
R
F
O
R
M
A
N
C
E
R
E
S
P
O
N
S
I
B
L
E
B
U
S
I
N
E
S
S
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
162
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
16. Derivative financial instruments continued
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 2013, the currency split of the mark-to-market values of rate derivatives, including the exchange of
principal on cross-currency rate derivatives, was US dollar £(151)m, sterling £243m and South African rand £(16)m
(2012: US dollar £(59)m, sterling £257m and South African rand £(20)m).
The fixed interest rates on outstanding rate derivative contracts at the end of 2013 range from 1.10% to 9.28%
(2012: 3.65% to 9.28%) and the floating rates are based on LIBOR in US dollar and 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.
Derivative financial assets and liabilities subject to offsetting arrangements are as follows:
All figures in £ millions
2013
2012
Gross
derivative
assets
£m
Gross
derivative
liabilities
£m
Net derivative
assets/
liabilities
£m
Gross
derivative
assets
£m
Gross
derivative
liabilities
£m
Net derivative
assets/
liabilities
£m
Counterparties in an asset position
Counterparties in a liability position
Total as presented in the balance sheet
122
2
124
(12)
(36)
(48)
110
(34)
76
178
–
178
–
–
–
178
–
178
All of the Group’s derivative financial instruments are subject to enforceable netting arrangements with individual
counterparties, allowing net settlement in the event of default of either party. Offset arrangements in respect of
cash balances are shown in note 17.
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. 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.
In accordance with IAS 39 ‘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.
Section 5 Financial statements
163
17. Cash and cash equivalents (excluding overdrafts)
All figures in £ millions
Cash at bank and in hand
Short-term bank deposits
Continuing operations
Cash at bank and in hand classified within assets held for sale
2013
521
208
729
36
765
2012
372
690
1,062
115
1,177
Short-term bank deposits are invested with banks and earn interest at the prevailing short-term deposit rates.
At the end of 2013 the currency split of cash and cash equivalents was US dollar 28% (2012: 47%), sterling 18%
(2012: 25%), euro 5% (2012: 3%) and other 49% (2012: 25%).
Cash and cash equivalents have fair values that approximate to their carrying value due to their short-term nature.
Cash and cash equivalents include the following for the purpose of the cash flow statement:
All figures in £ millions
Cash and cash equivalents – continuing operations
Cash at bank and in hand classified within assets held for sale
Bank overdrafts – continuing operations
Bank overdrafts classified within liabilities held for sale
2013
729
36
(25)
–
740
2012
1,062
115
(33)
(7)
1,137
The Group has the following cash pooling arrangements in US dollars, sterling and euro, where both the company
and the bank have a legal right of offset.
All figures in £ millions
Offset asset Offset liability
US dollars
Sterling
Euro
Total for continuing operations as
presented in the balance sheet
298
1,018
6
(299)
(1,027)
(5)
2013
Net offset
asset/liability
(1)
(9)
1
(9)
Offset asset
Offset liability
39
982
11
(37)
(1,057)
(11)
2012
Net offset
asset/liability
2
(75)
–
(73)
In addition to the above, the Group had offset US dollar, sterling and euro asset balances of £1m, £16m and £nil
respectively in respect of discontinued operations at the end of 2013. At the end of 2012, the Group had a sterling
offset asset of £74m in respect of discontinued operations.
Offset arrangements in respect of derivatives are shown in note 16.
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A
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164
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
18. Financial liabilities – Borrowings
The Group’s current and non-current borrowings are as follows:
All figures in £ millions
2013
2012
Non-current
5.7% US Dollar Bonds 2014 (nominal amount $400m)
7.0% Sterling Bonds 2014 (nominal amount £250m)
6.0% Sterling Bonds 2015 (nominal amount £300m)
4.0% US Dollar Notes 2016 (nominal amount $350m)
6.25% Global Dollar Bonds 2018 (nominal amount $550m)
4.625% US Dollar Notes 2018 (nominal amount $300m)
3.75% US Dollar Notes 2022 (nominal amount $500m)
3.25% US Dollar Notes 2023 (nominal amount $500m)
Bank loans and overdrafts
Finance lease liabilities
Current
Due within one year or on-demand:
5.5% Global Dollar Bonds 2013 (nominal amount $350m)
5.7% US Dollar Bonds 2014 (nominal amount $400m)
7.0% Sterling Bonds 2014 (nominal amount £250m)
Bank loans and overdrafts
Finance lease liabilities
Total borrowings – continuing operations
Bank overdrafts classified within liabilities held for sale
Total borrowings
–
–
299
221
375
202
283
286
22
5
1,693
–
248
254
25
6
533
264
256
298
229
402
217
315
–
22
7
2,010
219
–
–
33
10
262
2,226
2,272
–
7
2,226
2,279
Included in the non-current borrowings above is £9m of accrued interest (2012: £11m). Included in the current
borrowings above is £4m of accrued interest (2012: £2m).
The maturity of the Group’s non-current borrowing is as follows:
All figures in £ millions
Between one and two years
Between two and five years
Over five years
2013
303
821
569
1,693
2012
524
552
934
2,010
Section 5 Financial statements
165
18. Financial liabilities – Borrowings continued
The carrying amounts and market values of borrowings are as follows:
All figures in £ millions
Bank loans and overdrafts
5.5% Global Dollar Bonds 2013
5.7% US Dollar Bonds 2014
7.0% Sterling Bonds 2014
6.0% Sterling Bonds 2015
4.0% US Dollar Notes 2016
6.25% Global Dollar Bonds 2018
4.625% US Dollar Notes 2018
3.75% US Dollar Notes 2022
3.25% US Dollar Notes 2023
Finance lease liabilities
Continuing operations
Bank overdrafts classified within liabilities held
for sale
Effective interest
rate
Carrying
value
n/a
5.76%
5.88%
7.20%
6.27%
4.26%
6.46%
4.69%
3.94%
3.36%
n/a
n/a
47
–
248
254
299
221
375
202
283
286
11
2,226
–
2,226
2013
Market
value
47
–
246
262
325
223
376
195
286
273
11
2,244
–
2,244
Carrying
value
55
219
264
256
298
229
402
217
315
–
17
2,272
7
2,279
2012
Market
value
55
218
260
274
337
233
410
209
313
–
17
2,326
7
2,333
The market values stated above 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:
All figures in £ millions
US dollar
Sterling
Other
2013
1,645
559
22
2,226
2012
1,684
573
22
2,279
The Group has the following undrawn capacity on its committed borrowing facilities as at 31 December:
All figures in £ millions
Floating rate
– expiring within one year
– expiring beyond one year
2013
2012
–
1,057
1,057
–
1,077
1,077
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.
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166
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
18. Financial liabilities – Borrowings continued
The maturity of the Group’s finance lease obligations is as follows:
All figures in £ millions
Finance lease liabilities – minimum lease payments
Not later than one year
Later than one year and not later than two years
Later than two years and not later than three years
Later than three years and not later than four years
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
The present value of finance lease liabilities is as follows:
All figures in £ millions
Not later than one year
Later than one year and not later than five years
Later than five years
2013
2012
6
4
1
–
–
–
–
11
10
4
3
–
–
–
–
17
2013
2012
6
5
–
11
10
7
–
17
The carrying amounts of the Group’s lease obligations approximate their fair value.
19. Financial risk management
The Group’s approach to the management of financial risks together with sensitivity analyses of its financial
instruments 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 overleaf. All the treasury policies remained
unchanged throughout, except for revisions to the Group’s bank counterparty risk limits and related approval
processes and a change to permitted investment instruments for some operating companies.
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.
Section 5 Financial statements
167
19. Financial risk management continued
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
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 2013 the fixed to floating
hedging ratio, on the above basis, was approximately 45%:55%. A simultaneous 1% change on 1 January 2014 in
the Group’s variable interest rates in US dollar and sterling, taking into account forecast seasonal debt, would have
a £11m 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 the mark-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 2013
the average maturity of gross borrowings was 4.2 years (2012: 3.9 years) of which bonds represented 97%
(2012: 97%) of these borrowings.
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. In January 2014 Moody’s changed the outlook on
their short-term and long-term ratings from ‘Stable’ to ‘Negative’. 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 2013 the committed
facilities amounted to £1,057m and their weighted average maturity was 1.9 years.
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B
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S
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G
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A
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168
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
19. Financial risk management 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:
All figures in £ millions
Cash and cash equivalents
Marketable securities
Derivative financial instruments
Bank loans, overdrafts and loan notes
Bonds
Finance lease liabilities
Continuing operations
Cash and cash equivalents classified within assets held for sale
Bank loans, overdrafts and loan notes classified within liabilities held for sale
Net debt
2013
2012
729
6
76
(47)
(2,168)
(11)
(1,415)
36
–
(1,379)
1,062
6
178
(55)
(2,200)
(17)
(1,026)
115
(7)
(918)
The split of net debt between fixed and floating rate, stated after the impact of rate derivatives, is as follows:
All figures in £ millions
Fixed rate
Floating rate
Total
2013
612
767
1,379
Gross borrowings, after the impact of cross-currency rate derivatives, analysed by currency are as follows:
All figures in £ millions
US dollar
Sterling
Other
Total
2013
1,849
339
38
2,226
As at 31 December 2013 the exposure of the borrowings of the Group to interest rate changes when the
borrowings re-price is as follows:
All figures in £ millions
Re-pricing profile of borrowings
Effect of rate derivatives
Total
Less than
one year
One to
five years
More than
five years
533
1,026
1,559
1,124
(422)
702
569
(604)
(35)
2012
499
419
918
2012
1,883
353
43
2,279
Total
2,226
–
2,226
Section 5 Financial statements
169
19. Financial risk management continued
The maturity of contracted cash flows associated with the Group’s financial liabilities are as follows:
All figures in £ millions
Not later than one year
Later than one year and not later than five years
Later than five years
Total
Analysed as:
Bonds
Rate derivatives – inflows
Rate derivatives – outflows
Trade payables
Total
All figures in £ millions
Not later than one year
Later than one year and not later than five years
Later than five years
Total
Analysed as:
Bonds
Rate derivatives – inflows
Rate derivatives – outflows
Trade payables
Total
USD
434
1,000
648
2,082
1,918
(350)
359
155
2,082
USD
489
726
863
2,078
1,837
(326)
328
239
2,078
GBP
316
106
–
422
604
(248)
1
65
422
GBP
126
357
–
483
639
(264)
3
105
483
2013
Total
863
1,106
648
2,617
2,522
(598)
376
317
2,617
2012
Total
757
1,104
863
2,724
2,476
(590)
353
485
2,724
Other
113
–
–
113
–
–
16
97
113
Other
142
21
–
163
–
–
22
141
163
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.
Any 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.
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170
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
19. Financial risk management 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 soften 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 £1,631m, sterling £202m and South African rand £(21)m.
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).
Section 5 Financial statements
171
19. Financial risk management continued
Financial instruments – fair value measurement continued
All figures in £ millions
Level 1
Level 2
Level 3
Financial assets at fair value
Derivative financial assets
Marketable securities
Available for sale financial assets
Investments in unlisted securities –
continuing operations
Investments in unlisted securities classified
within assets held for sale
Financial liabilities at fair value
Derivative financial liabilities
Other financial liabilities – put options over
non-controlling interest
Total
–
–
–
–
–
–
–
124
6
–
–
(48)
–
82
–
–
94
–
–
–
94
2013
Total
124
6
94
–
(48)
–
176
The following table analyses the movements in level 3 fair value measurements:
Level 1
Level 2
Level 3
178
6
–
–
2012
Total
178
6
–
–
–
–
–
–
–
–
–
–
30
30
1
–
1
–
–
184
(68)
(37)
(68)
147
All figures in £ millions
At beginning of year
Exchange differences
Additions
Fair value movements
Transfer to assets classified as held for sale
Disposals
At end of year
2013
2012
Investments in
unlisted
securities
Other financial
liabilities
Investments in
unlisted
securities
Other financial
liabilities
31
–
63
–
–
–
94
(68)
9
–
(8)
–
67
–
26
(2)
10
–
(1)
(2)
31
(86)
5
–
(25)
–
38
(68)
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. In 2012, the fair value of other financial
liabilities represents the present value of the estimated future liability.
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B
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S
G
O
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N
A
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172
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
19. Financial risk management continued
Financial instruments – sensitivity analysis
As at 31 December 2013 the sensitivity of the carrying value of the Group’s financial instruments to fluctuations
in interest rates and exchange rates is as follows:
All figures in £ millions
Investments in unlisted securities – continuing
operations
Cash and cash equivalents – continuing operations
Cash and cash equivalents classified within assets held
for sale
Marketable securities
Derivative financial instruments
Bonds
Other borrowings – continuing operations
Other net financial assets – continuing operations
Other net financial assets classified within assets and
liabilities held for sale
Total financial instruments
Carrying value
Impact of 1%
increase in
interest rates
Impact of 1%
decrease in
interest rates
Impact of 10%
strengthening in
sterling
Impact of 10%
weakening in
sterling
94
729
36
6
76
(2,168)
(58)
566
24
(695)
–
–
–
–
(54)
58
–
–
–
4
–
–
–
–
59
(62)
–
–
–
(3)
(9)
(56)
(2)
–
15
147
5
(43)
(1)
56
10
68
2
–
(18)
(179)
(5)
53
1
(68)
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, due to the location and functional currency of the entities
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.
20. Intangible assets – Pre-publication
All figures in £ millions
Cost
At beginning of year
Exchange differences
Additions
Disposal through business disposal
Disposals
Acquisition through business combination
Transfer to property, plant and equipment
Transfer to assets classified as held for sale
At end of year
Amortisation
At beginning of year
Exchange differences
Charge for the year
Disposal through business disposal
Disposals
Acquisition through business combination
Transfer to assets classified as held for sale
At end of year
Carrying amounts
At end of year
Section 5 Financial statements
173
2013
2012
1,876
(46)
364
(29)
(234)
2
–
–
1,933
(1,210)
46
(308)
23
234
(1)
–
(1,216)
1,965
(74)
364
–
(188)
14
(3)
(202)
1,876
(1,315)
55
(316)
–
188
(8)
186
(1,210)
717
666
Included in the above are pre-publication assets amounting to £480m (2012: £431m) which will be realised in more
than one year.
Amortisation is included in the income statement in cost of goods sold. In 2013 £nil (2012: £33m) relates to
discontinued operations.
21. Inventories
All figures in £ millions
Raw materials
Work in progress
Finished goods
2013
15
13
196
224
2012
13
11
237
261
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 £472m (2012: £512m). In 2013 £53m (2012: £71m) of inventory
provisions was charged in the income statement. None of the inventory is pledged as security.
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F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
174
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
22. Trade and other receivables
All figures in £ millions
Current
Trade receivables
Royalty advances
Prepayments and accrued income
Other receivables
Non-current
Trade receivables
Royalty advances
Prepayments and accrued income
Other receivables
2013
2012
863
23
101
186
1,173
19
8
33
10
70
868
16
81
139
1,104
15
13
33
18
79
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:
All figures in £ millions
At beginning of year
Exchange differences
Income statement movements
Utilised
Acquisition through business combination
Transfer to assets classified as held for sale
At end of year
2013
(55)
5
(27)
18
–
1
(58)
2012
(102)
4
(21)
53
(1)
12
(55)
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:
All figures in £ millions
Within due date
Up to three months past due date
Three to six months past due date
Six to nine months past due date
Nine to 12 months past due date
More than 12 months past due date
Total trade receivables
Less: provision for sales returns
Net trade receivables
2013
2012
783
194
36
22
9
1
1,045
(163)
882
774
231
43
10
7
5
1,070
(187)
883
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
All figures in £ millions
At 1 January 2013
Exchange differences
Charged to income statement
Released to income statement
Deferred consideration on acquisition
Utilised
Transfer from liabilities held for sale
Transfer to liabilities held for sale
At 31 December 2013
Analysis of provisions:
All figures in £ millions
Current
Non-current
Current
Non-current
Section 5 Financial statements
175
Deferred
consideration
Property
Disposals
and closures
Legal
and other
64
(1)
–
–
2
(4)
–
(3)
58
26
–
6
(4)
–
(17)
–
–
11
15
–
67
–
–
(15)
–
–
67
43
(1)
55
(1)
–
(66)
24
(1)
53
Deferred
consideration
Property
Disposals
and closures
Legal
and other
5
53
58
6
58
64
10
1
11
12
14
26
67
–
67
15
–
15
30
23
53
5
38
43
Total
148
(2)
128
(5)
2
(102)
24
(4)
189
2013
Total
112
77
189
2012
38
110
148
Deferred consideration primarily relates to the formation of a venture in the US Professional business in 2011.
Disposals and closures include retirement benefit obligations and other liabilities related to the disposal of Penguin.
Legal and other includes litigation in relation to ebooks which was settled in full during 2013, as well as other
provisions in relation to legal claims, contract disputes and potential contract losses.
24. Trade and other liabilities
All figures in £ millions
Trade payables
Social security and other taxes
Accruals
Deferred income
Interest payable
Put options over non-controlling interest
Other liabilities
Less: non-current portion
Accruals
Deferred income
Interest payable
Put options over non-controlling interest
Other liabilities
Current portion
2013
316
23
478
698
22
–
225
1,762
25
155
21
–
56
257
1,505
2012
337
30
440
714
21
68
228
1,838
18
147
13
25
79
282
1,556
O
V
E
R
V
I
E
W
O
U
R
P
E
R
F
O
R
M
A
N
C
E
R
E
S
P
O
N
S
I
B
L
E
B
U
S
I
N
E
S
S
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
176
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
24. Trade and other liabilities continued
The carrying value of the Group’s trade and other liabilities approximates its fair value.
The deferred income balance comprises principally multi year obligations to deliver workbooks to adoption
customers in school businesses; advance payments in assessment, testing and training businesses; subscription
income in school, college and newspaper businesses; and obligations to deliver digital content in future years.
The put options over non-controlling interest in 2012 are the fair value of options held by the non-controlling
interests in the Group’s Southern African and Indian businesses.
25. Retirement benefit and other post-retirement obligations
Background
The Group operates a number of defined benefit and defined contribution retirement plans throughout the world.
The largest plan is the Pearson Group Pension Plan (UK Group plan) in the UK, which is sectionalised to provide
both defined benefit and defined contribution pension benefits. The defined benefit section was closed to new
members from 1 November 2006. The defined contributions section, opened in 2003, is open to new and existing
employees. Finally, there is a separate section within the UK Group plan set up for auto-enrolment. The defined
benefit section of the UK Group plan is a final salary pension plan which provides benefits to members in the form
of a guaranteed level of pension payable for life. The level of benefits depends on the length of service and final
pensionable pay. The UK Group plan is funded with benefit payments from trustee administered funds. The UK
Group plan is administered in accordance with the Trust Deed and Rules in the interests of its beneficiaries by
Pearson Group Pension Trustee Limited.
At 31 December 2013 the UK Group plan has approximately 26,500 members, analysed in the following table:
%
Defined benefit
Defined contribution
Total
Active
Deferred
Pensioners
3
17
20
25
23
48
32
–
32
Total
60
40
100
The other major defined benefit plans are based in the US. These are also final salary pension plans which provide
benefits to members in the form of a guaranteed pension payable for life, with the level of benefits dependent on
length of service and final pensionable pay. The majority of the US plans are funded.
The Group 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.
The defined benefit schemes expose the Group to actuarial risks, such as life expectancy, inflation risks, and
investment risk including asset volatility and changes in bond yields. The Group is not exposed to any unusual,
entity specific or plan specific risks.
Section 5 Financial statements
177
25. Retirement benefit and other post-retirement obligations 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, which primarily relate to US pension plans.
%
Inflation
Rate used to discount plan liabilities
Expected rate of increase in salaries
Expected rate of increase for pensions in
payment and deferred pensions
Initial rate of increase in healthcare rate
Ultimate rate of increase in healthcare rate
UK Group
plan
3.4
4.4
3.9
2.3 to 5.1
–
–
Other
plans
2.5
4.4
3.9
–
–
–
2013
PRMB
2.5
4.4
4.0
–
7.5
5.0
UK Group
plan
3.0
4.4
3.5
2.3 to 5.1
–
–
Other
plans
2.5
3.6
3.9
–
–
–
2012
PRMB
2.5
3.6
–
–
8.0
5.0
The UK discount rate is based on corporate bond yields adjusted to reflect the duration of liabilities. The US
discount rate is set by reference to a US bond portfolio matching model.
The inflation rate for the UK Group plan of 3.4% reflects the RPI rate. In line with changes to legislation in 2010,
certain benefits have been calculated with reference to CPI as the inflationary measure and in these instances a rate
of 2.6% has been used.
The expected rate of increase in salaries has been set at 3.9% for 2013 with a short-term assumption of 3.0%
for three years.
For the UK plan, 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 CMI model improvement factors. A 1.5% long term rate improvement on the CMI model is
applied for males, and 1.25% for females.
For the US plans, the RP2000 table projected to 2020 is used, reflecting the mortality assumption most 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 Group plan and US plans is as follows:
Male
Female
2013
24.3
24.4
UK
2012
23.0
24.2
2013
19.2
21.1
US
2012
19.2
21.1
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:
Male
Female
2013
25.9
25.9
UK
2012
25.1
26.1
2013
19.2
21.1
US
2012
19.2
21.1
O
V
E
R
V
I
E
W
O
U
R
P
E
R
F
O
R
M
A
N
C
E
R
E
S
P
O
N
S
I
B
L
E
B
U
S
I
N
E
S
S
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
178
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
25. Retirement benefit and other post-retirement obligations continued
Financial statement information
The amounts recognised in the income statement are as follows:
All figures in £ millions
Current service cost
Curtailments
Administration expenses
Total operating expense
Interest on plan assets
Interest on plan liabilities
Net finance (income)/expense
Net income statement charge
All figures in £ millions
Current service cost
Administration expenses
Total operating expense
Interest on plan assets
Interest on plan liabilities
Net finance (income)/expense
Net income statement charge
UK Group
plan
Defined
benefit
other
Sub-total
Defined
contribution
PRMB
22
–
4
26
(95)
94
(1)
25
3
–
–
3
(6)
7
1
4
25
–
4
29
(101)
101
–
29
72
–
–
72
–
–
–
72
4
(4)
–
–
–
3
3
3
UK Group
plan
Defined
benefit
other
Sub-total
Defined
contribution
PRMB
23
4
27
(98)
96
(2)
25
3
–
3
(6)
7
1
4
26
4
30
(104)
103
(1)
29
78
–
78
–
–
–
78
4
–
4
–
3
3
7
2013
Total
101
(4)
4
101
(101)
104
3
104
2012
Restated
Total
108
4
112
(104)
106
2
114
Included within the 2013 results are discontinued operations consisting of a £2m charge (2012: £4m charge)
relating to defined benefit schemes and a £6m charge (2012: £9m charge) relating to defined contribution schemes.
The amounts recognised in the balance sheet are as follows:
All figures in £ millions
Fair value of plan assets
Present value of defined benefit
obligation
Net pension asset/(liability)
Other post-retirement
medical benefit obligation
Other pension accruals
Net retirement benefit obligations
Analysed as:
Retirement benefit assets
Retirement benefit obligations
2013
UK Group
plan
2,353
Other
funded
plans
156
Other
unfunded
plans
Total
UK Group
plan
–
2,509
2,162
Other
funded
plans
165
Other
unfunded
plans
2012
Total
–
2,327
(2,267)
86
(171)
(15)
(20)
(20)
(2,458)
51
(2,181)
(19)
(196)
(31)
(24) (2,401)
(74)
(24)
(77)
(30)
(56)
86
(142)
(89)
(35)
(198)
–
(198)
Section 5 Financial statements
179
25. Retirement benefit and other post-retirement obligations continued
Included within the 2012 retirement benefit obligation is a liability of £26m which relates to Penguin and is classified
as held for sale. During 2013 this was transferred back from held for sale to pension liabilities.
The following gains/(losses) have been recognised in other comprehensive income:
All figures in £ millions
Amounts recognised for defined benefit plans
Amounts recognised for post-retirement medical benefit plans
Total recognised in year
The fair value of plan assets comprises the following:
2013
70
9
79
2012
Restated
(95)
(5)
(100)
%
Equities
Bonds
Property
Other
UK Group
plan
Other
funded
plans
28
40
9
17
2
3
–
1
2013
Total
30
43
9
18
UK Group
plan
Other
funded
plans
32
38
9
14
2
3
1
1
2012
Total
34
41
10
15
The plan assets do not include any of the Group’s own financial instruments, or any property occupied by
the Group.
The table below further disaggregates the UK Group plan assets into additional categories and those assets which
have a quoted market price in an active market and those that do not:
%
UK equities
Non-UK equities
Fixed-interest securities
Index-linked securities
Property
Other
Total
The liquidity profile of the UK Group plan assets is as follows:
%
Liquid – call <1 month
Less liquid – call 1–3 months
Illiquid – call > 3 months
2013
2012
Quoted
market price
No quoted
market price
Quoted
market price
No quoted
market price
6
20
19
24
–
–
69
1
3
–
–
9
18
31
6
25
21
19
–
1
72
1
3
–
–
10
14
28
2013
2012
72
2
26
73
2
25
O
V
E
R
V
I
E
W
O
U
R
P
E
R
F
O
R
M
A
N
C
E
R
E
S
P
O
N
S
I
B
L
E
B
U
S
I
N
E
S
S
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
180
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
25. Retirement benefit and other post-retirement obligations continued
Changes in the values of plan assets and liabilities of the retirement benefit plans are as follows:
All figures in £ millions
Fair value of plan assets
Opening fair value of plan assets
Exchange differences
Interest on plan assets
Return on plans assets excluding interest
Contributions by employer
Contributions by employee
Benefits paid
Acquisition through business combination
Closing fair value of plan assets
Present value of defined benefit obligation
Opening defined benefit obligation
Exchange differences
Current service cost
Administration expenses
Interest cost
Actuarial gains/(losses) – experience
Actuarial gains/(losses) – demographic
Actuarial gains/(losses) – financial
Contributions by employee
Benefits paid
Acquisition through business combination
Closing defined benefit obligation
UK Group
plan
Other
plans
2,162
–
95
103
77
2
(86)
–
2,353
(2,181)
–
(22)
(4)
(94)
5
–
(55)
(2)
86
–
(2,267)
165
(2)
6
6
5
–
(24)
–
156
(220)
4
(3)
–
(7)
1
1
9
–
24
–
(191)
2013
Total
2,327
(2)
101
109
82
2
(110)
–
2,509
(2,401)
4
(25)
(4)
(101)
6
1
(46)
(2)
110
–
(2,458)
UK Group
plan
Other
plans
2,008
–
98
48
72
2
(78)
12
2,162
(1,983)
–
(23)
(4)
(96)
44
(14)
(170)
(2)
78
(11)
(2,181)
149
(5)
6
9
2
–
(11)
15
165
(197)
7
(3)
–
(7)
2
–
(14)
–
11
(19)
(220)
2012
Restated
Total
2,157
(5)
104
57
74
2
(89)
27
2,327
(2,180)
7
(26)
(4)
(103)
46
(14)
(184)
(2)
89
(30)
(2,401)
The weighted average duration of the defined benefit obligation is 15.8 years for the UK and 9.4 years for the US.
Section 5 Financial statements
181
25. Retirement benefit and other post-retirement obligations continued
Changes in the value of the US PRMB are as follows:
All figures in £ millions
Opening defined benefit obligation
Exchange differences
Current service cost
Curtailments
Interest cost
Actuarial gains/(losses) – experience
Actuarial gains/(losses) – financial
Benefits paid
Closing defined benefit obligation
2013
(89)
1
(4)
4
(3)
–
9
5
(77)
2012
(85)
4
(4)
–
(3)
2
(7)
4
(89)
Funding
The UK Group plan is self-administered with the plan’s assets being held independently of the Group in trust. The
trustee of the plan is required to act in the best interest of the plan’s beneficiaries. Assets of the plan are divided
into two elements; matching assets, which are assets that produce cashflows that can be expected to match the
cashflows for a proportion of the membership, and include UK and overseas bonds, inflation linked property and
infrastructure; return seeking assets, which are assets invested with a longer term horizon to generate the returns
needed to provide the remaining expected cashflows for the beneficiaries, and include equities, property and
alternative asset classes. The benchmark allocation is 60% matching and 40% return seeking assets.
The most recent triennial actuarial valuation for funding purposes was completed as at 1 January 2012 and this
valuation revealed a funding shortfall. The Group has agreed that the funding shortfall will be eliminated by June
2017. In 2013 the Group contributed £56m (2012: £48m) towards the funding shortfall. Following the completion
of the triennial funding valuation the Group has agreed to contribute £41m per annum until 2017 in excess of
regular contributions. In addition, a mechanism has been agreed for the Group to make supplementary payments
up to a maximum of £15m per annum if certain conditions are met. If such payments are made they are expected
to accelerate the end date for extinguishing the deficit. Regular contributions to the plan in respect of the defined
benefit sections are estimated to be £18m for 2014.
The Group expects to contribute $12m in 2014 and $12m in 2015 to its US defined benefit pension plans.
O
V
E
R
V
I
E
W
O
U
R
P
E
R
F
O
R
M
A
N
C
E
R
E
S
P
O
N
S
I
B
L
E
B
U
S
I
N
E
S
S
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
182
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
25. Retirement benefit and other post-retirement obligations continued
Sensitivities
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:
All figures in £ millions
Effect:
(Decrease)/increase in defined benefit obligation – UK Group plan
(Decrease)/increase in defined benefit obligation – US plan
2013
1% increase
1% decrease
(316.0)
(16.1)
390.5
20.0
The effect of members living one year more or one year less on the defined benefit obligation is as follows:
All figures in £ millions
Effect:
Increase/(decrease) in defined benefit obligation – UK Group plan
Increase/(decrease) in defined benefit obligation – US plan
The effect of a half percentage point increase and decrease in the inflation rate is as follows:
All figures in £ millions
Effect:
Increase/(decrease) in defined benefit obligation – UK Group plan
Increase/(decrease) in defined benefit obligation – US plan
2013
1 year
increase
1 year
decrease
79.2
4.2
(76.2)
(4.8)
2013
0.5% increase
0.5% decrease
106.1
0.2
(99.5)
(0.3)
The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant,
although in practice this is unlikely to occur and changes in some assumptions may be correlated. When calculating
these sensitivities the same method has been applied to calculate the defined benefit obligation as has been applied
when calculating the liability recognised in the balance sheet. This methodology is the same as prior periods.
Section 5 Financial statements
183
26. Share-based payments
The Group recognised the following charges in the income statement in respect of its equity-settled share-based payment plans:
All figures in £ millions
Pearson plans
2013
35
2012
28
Share-based payment charges included in discontinued operations amounted to £2m (2012: £4m).
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 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 first introduced in 2001, renewed in 2006 and again in 2011. The plan
consists of restricted shares.
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 market and/or non-market performance criteria. Restricted shares awarded
to senior management in May and October 2013, and May 2012 vest dependent on relative total 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 2013 and 2012 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 of up to one matching share for
every invested share 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.
The number and weighted average exercise prices of share options granted under the Group’s plans are as follows:
Outstanding at beginning of year
Granted during the year
Exercised during the year
Forfeited during the year
Expired during the year
Outstanding at end of year
Options exercisable at end of year
2013
Weighted
average
exercise price
£
2012
Weighted
average
exercise price
£
Number of
share options
000s
Number of
share options
000s
3,373
763
(820)
(516)
(8)
2,792
35
8.24
9.14
7.12
8.75
5.75
8.73
6.95
3,203
1,321
(840)
(294)
(17)
3,373
106
7.15
9.09
5.59
7.84
5.60
8.24
5.58
O
V
E
R
V
I
E
W
O
U
R
P
E
R
F
O
R
M
A
N
C
E
R
E
S
P
O
N
S
I
B
L
E
B
U
S
I
N
E
S
S
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
184
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
26. Share-based payments continued
Options were exercised regularly throughout the year. The weighted average share price during the year was
£12.42 (2012: £12.01). 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:
Range of exercise prices
£
0 – 5
5 – 10
>10
2013
Weighted
average
contractual
life
Years
–
2.31
–
2.31
2012
Weighted
average
contractual
life
Years
–
2.56
–
2.56
Number of
share
options
000s
–
3,373
–
3,373
Number of
share
options
000s
–
2,792
–
2,792
In 2013 and 2012 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.
The weighted average estimated fair values and the inputs into the Black-Scholes model are as follows:
2013
Weighted
average
2012
Weighted
average
Fair value
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk free rate
Expected dividend yield
Forfeiture rate
£2.27
£11.71
£9.14
22.05%
£2.38
£11.51
£9.09
23.62%
3.8 years 3.8 years
0.74%
3.65%
3.3%
0.53%
3.84%
3.3%
The expected volatility is based on the historic volatility of the company’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:
Long-Term Incentive Plan
Annual Bonus Share Matching Plan
2013
Weighted
average
fair value
£
11.52
12.06
2012
Weighted
average
fair value
£
11.56
11.52
Number of
shares
000s
4,503
237
Number of
shares
000s
3,482
99
The fair value of shares granted under the Long-Term Incentive Plan that vest unconditionally is determined using
the share price at the date of grant. The number of shares expected to vest is adjusted, based on historical
experience, to account for potential forfeitures. Restricted shares granted under the Annual Bonus Share Matching
Plan are valued using the share price at the date of grant. Participants under both plans are entitled to dividends
during the vesting period and therefore the share price is not discounted.
Section 5 Financial statements
185
26. Share-based payments continued
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 are taken into consideration by adjusting the
number of shares expected to vest based on the most likely outcome of the relevant performance criteria.
27. Share capital and share premium
At 1 January 2012
Issue of ordinary shares – share option schemes
At 31 December 2012
Issue of ordinary shares – share option schemes
At 31 December 2013
Number
of shares
000s
Ordinary
shares
£m
815,626
1,417
817,043
1,537
818,580
204
–
204
1
205
Share
premium
£m
2,544
11
2,555
13
2,568
The ordinary shares have a par value of 25p per share (2012: 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.
28. Treasury shares
At 1 January 2012
Purchase of treasury shares
Release of treasury shares
At 31 December 2012
Purchase of treasury shares
Release of treasury shares
At 31 December 2013
Number
of shares
000s
14,665
–
(4,563)
10,102
4,111
(4,931)
9,282
Pearson plc
£m
149
–
(46)
103
47
(52)
98
The Group holds Pearson plc shares in trust to satisfy its obligations under its restricted share plans (see note 26).
These shares, representing 1.1% (2012: 1.2%) of called-up share capital, are treated as treasury shares for
accounting purposes and have a par value of 25p per share.
The nominal value of Pearson plc treasury shares amounts to £2.3m (2012: £2.5m).
At 31 December 2013 the market value of Pearson plc treasury shares was £124.4m (2012: £120.0m).
O
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F
O
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M
A
N
C
E
R
E
S
P
O
N
S
I
B
L
E
B
U
S
I
N
E
S
S
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
186
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
29. Other comprehensive income
All figures in £ millions
Items that may be reclassified to the income statement
Net exchange differences on translation of foreign
operations – Group
Net exchange differences on translation of foreign
operations – associate
Currency translation adjustment disposed – subsidiaries
Attributable tax
Items that are not reclassified to the income statement
Remeasurement of retirement benefit obligations – Group
Remeasurement of retirement benefit obligations – associate
Attributable tax
Other comprehensive expense for the year
All figures in £ millions
Items that may be reclassified to the income statement
Net exchange differences on translation of foreign
operations – Group
Attributable tax
Items that are not reclassified to the income statement
Remeasurement of retirement benefit obligations – Group
Remeasurement of retirement benefit obligations – associate
Attributable tax
Other comprehensive expense for the year
30. Business combinations
Attributable to equity holders of the company
Translation
reserve
Retained
earnings
Non-
controlling
interest
Total
2013
Total
(202)
(11)
(18)
–
–
–
–
(231)
–
–
–
6
79
–
(23)
62
(202)
(4)
(206)
(11)
(18)
6
79
–
(23)
(169)
–
–
–
–
–
–
(4)
(11)
(18)
6
79
–
(23)
(173)
2012
Restated
Attributable to equity holders of the company
Translation
reserve
Retained
earnings
Non-
controlling
interest
Total
Total
(236)
–
–
–
–
(236)
–
1
(100)
(3)
50
(52)
(236)
1
(100)
(3)
50
(288)
(2)
–
(238)
1
–
–
–
(2)
(100)
(3)
50
(290)
There were no significant acquisitions in 2013. Adjustments have been made in respect of prior year acquisitions in
2013 and include the recognition of intangibles of £185m on the EmbanetCompass acquisition. The acquisition was
made in late 2012 and was provisionally accounted for as at 31 December 2012.
Section 5 Financial statements
187
30. Business combinations continued
Provisional values for the assets and liabilities arising from acquisitions completed in the year together with
adjustments to prior year acquisitions are as follows:
All figures in £ millions
Property, plant and equipment
Intangible assets
Intangible assets – Pre-publication
Inventories
Trade and other receivables
Cash and cash equivalents (excluding overdrafts)
Net deferred income tax assets/(liabilities)
Retirement benefit obligations
Provisions for other liabilities and charges
Trade and other liabilities
Current income tax liabilities
Net assets acquired at fair value
Goodwill
Fair value of previously held interest arising on stepped acquisition
Total
Satisfied by:
Cash
Deferred consideration
Net prior year adjustments
Total consideration
Notes
Current
year
Prior
year
Total
fair value
Total
fair value
2013
2012
10
11
20
13
11
1
7
1
–
8
2
2
–
–
(6)
–
15
19
(7)
27
(25)
(2)
–
(27)
–
193
–
1
1
–
(39)
–
–
(1)
–
155
(152)
–
3
(6)
–
3
(3)
1
200
1
1
9
2
(37)
–
–
(7)
–
170
(133)
(7)
30
(31)
(2)
3
(30)
10
280
6
1
34
34
(67)
(2)
(1)
(111)
(1)
183
505
–
688
(682)
(6)
–
(688)
The goodwill arising on these acquisitions results from cost and revenue synergies and from benefits that cannot be
separately recognised.
A provisional value of £6m of goodwill arising on 2013 acquisitions is expected to be deductible for tax purposes
(2012: £nil).
Intangible assets acquired in 2012 and recognised in 2013 have the following useful economic lives:
EmbanetCompass: customer lists, contracts and relationships 3–17 years; trademarks and brands two years.
Intangible assets acquired in 2013 are classified as other intangible assets and have useful lives of 3–10 years.
O
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E
R
V
I
E
W
O
U
R
P
E
R
F
O
R
M
A
N
C
E
R
E
S
P
O
N
S
I
B
L
E
B
U
S
I
N
E
S
S
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
188
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
30. Business combinations continued
All figures in £ millions
Cash flow on acquisitions
Cash – Current year acquisitions
Deferred payments for prior year acquisitions and other items
Cash and cash equivalents acquired
Acquisition costs and other acquisition liabilities paid
Net cash outflow
2013
2012
(25)
(6)
2
(19)
(48)
(682)
(31)
34
(37)
(716)
In total, acquisitions of subsidiaries completed in the year contributed an additional £15m of sales but did not
contribute a material amount to operating profit. There would not have been a material difference to either sales
or profits had these acquisitions completed on 1 January 2013.
31. Disposals including business closures
All figures in £ millions
Penguin
Other
Disposal of subsidiaries
Property, plant and equipment
Intangible assets
Investment in joint ventures and associates
Other financial assets
Intangible assets – Pre-publication
Inventories
Trade and other receivables
Cash and cash equivalents (excluding overdrafts)
Net deferred income tax (assets)/liabilities
Retirement benefit obligations
Provisions for other liabilities and charges
Trade and other liabilities
Non-controlling interest
Attributable goodwill
Cumulative translation adjustment
Net assets disposed
Cash received
Fair value of associate acquired
Costs
Gain/(loss) on disposal
(39)
(43)
(22)
(1)
(20)
(91)
(447)
(34)
(22)
–
7
224
3
(370)
18
(837)
–
1,160
(121)
202
(3)
–
–
–
(6)
(3)
(6)
(3)
–
4
–
10
–
(6)
–
(13)
3
–
(14)
(24)
2013
Total
(42)
(43)
(22)
(1)
(26)
(94)
(453)
(37)
(22)
4
7
234
3
(376)
18
(850)
3
1,160
(135)
178
2012
(3)
(45)
–
–
–
–
–
–
11
–
–
–
–
(50)
–
(87)
–
–
(26)
(113)
The gain on disposal of Penguin arises from the measurement at fair value of the associate investment acquired in
Penguin Random House.
Section 5 Financial statements
189
31. Disposals including business closures continued
All figures in £ millions
Cash flow from disposals
Cash – current year disposals
Cash and cash equivalents disposed
Costs and other disposal liabilities paid
Net cash outflow
2013
2012
3
(37)
(98)
(132)
–
–
(11)
(11)
The disposal in 2012 includes the write down of assets resulting from the closure of Pearson in Practice.
32. Held for sale
Assets classified as held for sale in 2012 relate to Penguin and in 2013 to Mergermarket.
All figures in £ millions
Notes
Property, plant and equipment
Intangible assets
Investments in joint ventures and associates
Deferred income tax assets
Other financial assets
Trade and other receivables
Intangible assets – Pre-publication
Inventories
Cash and cash equivalents (excluding overdrafts)
Assets classified as held for sale
Financial liabilities – Borrowings
Deferred income tax liabilities
Retirement benefit obligations
Provisions for other liabilities and charges
Trade and other liabilities
Current income tax liabilities
Liabilities directly associated with assets classified as held for sale
Net assets classified as held for sale
33. Transactions with non-controlling interest
10
11
13
15
20
17
18
13
25
23
2013
2
158
–
1
–
26
–
–
36
223
–
(2)
–
(4)
(71)
(5)
(82)
141
2012
40
404
27
38
1
451
16
80
115
1,172
(7)
(20)
(26)
(29)
(234)
–
(316)
856
In 2013 the Group purchased non-controlling interests in the Southern African business for £65m, and in the Indian
business for £11m. In 2012 the Group increased its investments in its subsidiaries in China at a cost of £4m.
O
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O
U
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P
E
R
F
O
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A
N
C
E
R
E
S
P
O
N
S
I
B
L
E
B
U
S
I
N
E
S
S
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
190
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
34. Cash generated from operations
All figures in £ millions
Profit
Adjustments for:
Income tax
Depreciation
Intangible charges
Amortisation of other intangible assets
Net finance costs
Share of results of joint ventures and associates
(Profit)/loss on disposals
Acquisition costs
Costs on formation of Penguin Random House
Net foreign exchange adjustment from transactions
Share-based payment costs
Pre-publication
Inventories
Trade and other receivables
Trade and other liabilities
Retirement benefit obligations
Provisions for other liabilities and charges
Net cash generated from operations
Dividends from joint ventures and associates
Purchase of property, plant and equipment
Purchase of intangible assets
Proceeds from sale of property, plant and equipment
Proceeds from sale of intangible assets
Finance lease principal payments
Operating cash flow
Operating tax paid
Net operating finance costs paid
Operating free cash flow
Non-operating tax paid
Free cash flow
Dividends paid (including to non-controlling interests)
Net movement of funds from operations
Acquisitions and disposals (net of tax)
Loans advanced (including to related parties)
Purchase of treasury shares
New equity
Other movements on financial instruments
Net movement of funds
Exchange movements on net debt
Total movement in net debt
Notes
10
11
11
12
26
2013
539
90
82
168
59
75
(54)
(187)
12
–
(40)
37
(77)
18
(50)
72
(57)
(3)
684
64
(118)
(64)
28
2
(8)
588
(191)
(73)
324
(55)
269
(372)
(103)
(326)
(49)
(47)
14
(9)
(520)
59
(461)
2012
314
163
80
183
54
96
(9)
113
21
32
(21)
32
(55)
49
(94)
–
(37)
(5)
916
27
(78)
(73)
1
3
(8)
788
(65)
(66)
657
–
657
(348)
309
(780)
–
–
11
–
(460)
41
(419)
Section 5 Financial statements
191
34. Cash generated from operations continued
Net cash generated from operations 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 currency
adjustment in the reconciliation between net profit and net cash generated from operations. This adjustment
reflects the timing difference between recognition of profit and the related cash receipts or payments.
Operating cash flow, operating free cash flow and total free cash flow are non-GAAP measures and have been
disclosed as they are part of Pearson’s corporate and operating measures.
In the cash flow statement, proceeds from sale of property, plant and equipment comprise:
All figures in £ millions
Net book amount
Profit on sale of property, plant and equipment
Proceeds from sale of property, plant and equipment
35. Contingencies
2013
2012
19
9
28
1
–
1
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,
joint ventures and associates. In addition there are contingent liabilities of the Group in respect of legal claims,
contract disputes, royalties, copyright fees, permissions and other rights. None of these claims are expected to
result in a material gain or loss to the Group.
36. Commitments
There were no commitments for capital expenditure contracted for at the balance sheet date but not yet incurred.
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. Lease expenditure charged to the income statement was £183m (2012: £169m).
The future aggregate minimum lease payments in respect of operating leases are as follows:
All figures in £ millions
Not later than one year
Later than one year and not later than two years
Later than two years and not later than three years
Later than three years and not later than four years
Later than four years and not later than five years
Later than five years
2013
161
149
133
118
105
737
1,403
2012
186
174
158
137
124
899
1,678
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V
I
E
W
O
U
R
P
E
R
F
O
R
M
A
N
C
E
R
E
S
P
O
N
S
I
B
L
E
B
U
S
I
N
E
S
S
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
192
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
37. 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 12. Apart from transactions with the Group’s joint ventures and associates, there were no other material
related party transactions.
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 had responsibility for planning, directing and controlling the activities of the Group in 2013. 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.
38. Events after the balance sheet date
On 4 February 2014, the Group completed the sale of Mergermarket for £382m. On 11 February 2014, the Group
acquired 100% of Grupo Multi, the leading English Language Training company in Brazil, for approximately £435m
in cash plus the assumption of £57m of debt.
Section 5 Financial statements
193
39. Accounts and audit exemptions
The Pearson plc subsidiary companies listed below are exempt from the requirements of the Companies Act 2006
relating to the audit of individual accounts by virtue of section 479A.
Company number
Company number
Aldwych Finance Ltd
ASET Ltd
ASET Group Ltd
ASET Management Ltd
ASET Solutions Ltd
Blue Wharf Ltd
Burmedia Investments Ltd
Edexcel Ltd
Education Development International plc
Embankment Finance Ltd
eNVQ Ltd
EQL Assessment Ltd
Escape Studios Ltd
Financial Times (ASC) Ltd
Financial Times Group Ltd
Fronter UK Ltd
FT Business Information Ltd
FT Labs Ltd
FT Personal Finance Ltd
Goal Ltd
Green Wharf Ltd
Icodeon Ltd
Joint Examining Board Ltd
Longman Group (Overseas Holdings) Ltd
Midlands Educational Technology Ltd
Pearson Affordable Learning Fund Ltd
Pearson Amsterdam Finance Ltd
Pearson Australia Finance Unltd
Pearson Books Ltd
Pearson Canada Finance Unltd
Pearson College Ltd
Pearson Dollar Finance plc
Pearson Dollar Finance Two plc
Pearson Education Holdings Ltd
Pearson Education Investments Ltd
04720439
04231636
03964551
03139404
03849880
04344573
03060487
04496750
03914767
04460625
03985948
05224778
04399042
00519261
00879531
05737591
00758738
04701650
03855520
03566588
07009228
05068195
03278422
00690236
01448842
08038068
03041245
05578463
02512075
05578491
07967446
05111013
06507766
00210859
08444933
00872828
Pearson Education Ltd
07970304
Pearson Funding Four plc
02911143
Pearson Funding One plc
07210654
Pearson Funding Two plc
03099304
Pearson Heinemann Ltd
07679091
Pearson in Practice ATA Ltd
Pearson in Practice Holdings Ltd
06337129
Pearson in Practice Skills Based Learning Ltd 03755464
03786989
Pearson in Practice Technology Ltd
02496206
Pearson International Finance Ltd
05632021
Pearson Loan Finance No.2 Unltd
05052661
Pearson Loan Finance No.3 Ltd
02635107
Pearson Loan Finance No.4 Ltd
05144467
Pearson Loan Finance Unltd
00096263
Pearson Management Services Ltd
00145205
Pearson Overseas Holdings Ltd
08561316
Pearson PRH Holdings Ltd
00149375
Pearson Professional Holdings Ltd
01341060
Pearson Services Ltd
04623186
Pearson Shared Services Ltd
03754757
Peter Honey Publications Ltd
05342448
Sector Training Ltd
02174119
St Clements Press (1988) Ltd
02496240
Testchange Ltd
05333023
The Coaching Space Ltd
01613899
The Financial Times (Benelux) Ltd
00867316
The Financial Times (France) Ltd
01613900
The Financial Times (Japan) Ltd
01398449
The Financial Times (M-M UK) Ltd
01214411
The Financial Times (Spain) Ltd
00227590
The Financial Times Ltd
07307943
TQ Catalis Ltd
07307925
TQ Clapham Ltd
07802458
TQ Global Ltd
06294307
TQ Holdings Ltd
O
V
E
R
V
I
E
W
O
U
R
P
E
R
F
O
R
M
A
N
C
E
R
E
S
P
O
N
S
I
B
L
E
B
U
S
I
N
E
S
S
G
O
V
E
R
N
A
N
C
E
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
194
Pearson plc Annual report and accounts 2013
Notes to the consolidated financial statements continued
39. Accounts and audit exemptions continued
The Pearson plc subsidiary companies listed below are exempt from the requirements of the Companies Act 2006
to prepare individual accounts by virtue of section 394A.
Exec-Appointments Ltd
FDI Intelligence Ltd
Financial Times Business Ltd
Financial Times Electronic Publishing Ltd
Financial Times Investor Ltd
Mandatewire Ltd
Company number
04010964
N1040129
00202281
02749250
04005565
03855296
Medley Global Advisors Ltd
The Financial News Ltd
The Financial Times (Switzerland) Ltd
The Financial Times (Zhongwen) Ltd
Throgmorton Publications Ltd
Company number
00931507
00607228
01613901
01900030
00905696
Company balance sheet
As at 31 December 2013
Section 5 Financial statements
195
All figures in £ millions
Notes
2013
2012
Assets
Non-current assets
Investments in subsidiaries
Amounts due from subsidiaries
Financial assets – Derivative financial instruments
Current assets
Amounts due from subsidiaries
Amounts due from related parties
Prepayments
Current income tax assets
Financial assets – Derivative financial instruments
Cash and cash equivalents (excluding overdrafts)
Total assets
Liabilities
Non-current liabilities
Amounts due to subsidiaries
Financial liabilities – Borrowings
Financial liabilities – Derivative financial instruments
Current liabilities
Amounts due to subsidiaries
Current income tax liabilities
Financial liabilities – Borrowings
Provisions for other liabilities and charges
Total liabilities
Net assets
Equity
Share capital
Share premium
Treasury shares
Special reserve
Retained earnings
Total equity attributable to equity holders of the company
2
6
6
4
5
6
5
7
8
8
9
8,537
2,009
111
10,657
380
44
–
24
13
394
855
11,512
(3,553)
(202)
(48)
(3,803)
(1,256)
–
(766)
(42)
(2,064)
(5,867)
5,645
205
2,568
(22)
447
2,447
5,645
9,108
2,021
174
11,303
578
–
4
–
4
643
1,229
12,532
(4,227)
(473)
–
(4,700)
(1,953)
(13)
(618)
–
(2,584)
(7,284)
5,248
204
2,555
(27)
447
2,069
5,248
These financial statements have been approved for issue by the board of directors on 10 March 2014 and signed
on its behalf by
Robin Freestone Chief financial officer
10 March 2014
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Pearson plc Annual report and accounts 2013
Company statement of changes in equity
Year ended 31 December 2013
Equity attributable to equity holders of the company
All figures in £ millions
At 1 January 2013
Profit for the year
Issue of ordinary shares under
share option schemes*
Purchase of treasury shares
Release of treasury shares
Dividends
At 31 December 2013
All figures in £ millions
At 1 January 2012
Profit for the year
Issue of ordinary shares under
share option schemes*
Contributions from subsidiaries
for treasury shares
Release of treasury shares
Dividends
At 31 December 2012
Share
capital
204
–
1
–
–
–
205
Share
capital
204
–
–
–
–
–
204
Share
premium
2,555
–
13
–
–
–
2,568
Share
premium
2,544
–
11
–
–
–
2,555
(27)
–
–
(47)
52
–
(22)
Treasury
shares
(94)
–
–
21
46
–
(27)
Treasury
shares
Special
reserve
Retained
earnings
2,069
802
–
–
(52)
(372)
2,447
Total
5,248
802
14
(47)
–
(372)
5,645
447
–
–
–
–
–
447
Equity attributable to equity holders of the company
Special
reserve
447
–
–
–
–
–
447
Retained
earnings
1,450
1,011
Total
4,551
1,011
–
11
–
(46)
(346)
2,069
21
–
(346)
5,248
The special reserve represents the cumulative effect of cancellation of the company’s share premium account.
Included within retained earnings is an amount of £131m (2012: £131m) relating to profit on intra-group disposals
that is not distributable.
*Full details of the share-based payment plans are disclosed in note 26 to the consolidated financial statements.
Company cash flow statement
Year ended 31 December 2013
Section 5 Financial statements
197
All figures in £ millions
Notes
2013
2012
Cash flows from operating activities
Net profit
Adjustments for:
Income tax
Net finance costs
Amounts due to subsidiaries
Net cash (used in)/generated from operations
Interest paid
Tax received
Net cash (used in)/generated from operating activities
Cash flows from investing activities
Disposal of subsidiaries, net of cash disposed
Interest received
Net cash received from investing activities
Cash flows from financing activities
Proceeds from issue of ordinary shares
Net purchase of treasury shares
Loans to related parties
Repayment of borrowings
Dividends paid to company’s shareholders
Net cash used in financing activities
Effects of exchange rate changes on cash and cash equivalents
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
802
1,011
(51)
167
(1,053)
(135)
(82)
14
(203)
482
10
492
14
(48)
(44)
–
(372)
(450)
18
(143)
25
(118)
8
4
(39)
103
(427)
648
(93)
43
598
–
1
1
11
–
–
(1)
(346)
(336)
(4)
259
(234)
25
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198
Pearson plc Annual report and accounts 2013
Notes to the company financial statements
1. Accounting policies
The financial statements on pages 195 to 203 comprise the separate financial statements of Pearson plc.
As permitted by section 408 of the Companies Act 2006, only the consolidated income statement and statement
of comprehensive income has been presented.
The company has no employees.
The accounting policies applied in the preparation of these company financial statements are the same as those
set out in note 1 to the consolidated financial statements with the addition of the following:
Investments
Investments in subsidiaries are stated at cost less provision for impairment, with the exception of certain hedged
investments that are held in a foreign currency and revalued at each balance sheet date.
2. Investments in subsidiaries
All figures in £ millions
At beginning of year
Subscription for share capital in subsidiaries
Disposals/liquidations
Currency revaluations
At end of year
3. Financial risk management
2013
2012
9,108
424
(985)
(10)
8,537
9,056
110
–
(58)
9,108
The company’s financial instruments comprise amounts due to/from subsidiary undertakings, cash and cash
equivalents, derivative financial instruments and current and non-current borrowings. Derivative financial
instruments are held at fair value, with all other financial instruments held at amortised cost. The company’s
approach to the management of financial risks is consistent with the Group’s treasury policy, as discussed
in note 19 to the consolidated financial statements. The company believes the value of its financial assets
to be fully recoverable.
The company designates certain of its 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 carrying value of the company’s financial instruments is exposed to movements in interest rates and foreign
currency exchange rates (primarily US dollars). The company estimates that a 1% increase in interest rates would
result in a £47m decrease in the carrying value of its financial instruments, with a 1% decrease in interest rates
resulting in a £50m increase in their carrying value. The company also estimates that a 10% strengthening in sterling
would decrease the carrying value of its financial instruments by £126m, while a 10% decrease in the value of
sterling would increase the carrying value by £129m. These increases and decreases in carrying value would be
recorded through the income statement. Sensitivities are calculated using 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%.
Section 5 Financial statements
199
3. Financial risk management continued
The maturity of contracted cash flows on the company’s borrowings and all of its derivative financial instruments
are as follows:
All figures in £ millions
Not later than one year
Later than one year and not later than five years
Later than five years
Total
Analysed as:
Bonds
Rate derivatives – inflows
Rate derivatives – outflows
Total
All figures in £ millions
Not later than one year
Later than one year and not later than five years
Later than five years
Total
Analysed as:
Bonds
Rate derivatives – inflows
Rate derivatives – outflows
Total
USD
(20)
287
(39)
228
219
(350)
359
228
USD
(26)
105
155
234
232
(326)
328
234
GBP
233
(212)
–
21
268
(248)
1
21
GBP
3
21
–
24
285
(264)
3
24
Other
16
–
–
16
–
–
16
16
Other
1
21
–
22
–
–
22
22
2013
Total
229
75
(39)
265
487
(598)
376
265
2012
Total
(22)
147
155
280
517
(590)
353
280
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 company net settles these amounts wherever possible.
Any 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.
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200
Pearson plc Annual report and accounts 2013
Notes to the company financial statements continued
4. Cash and cash equivalents (excluding overdrafts)
All figures in £ millions
Cash at bank and in hand
Short-term bank deposits
2013
269
125
394
2012
1
642
643
Short-term bank deposits are invested with banks and earn interest at the prevailing short-term deposit rates.
At the end of 2013 the currency split of cash and cash equivalents was US dollar 76% (2012: 63%) and sterling 24%
(2012: 37%).
Cash and cash equivalents have fair values that approximate to their carrying amounts due to their
short-term nature.
Cash and cash equivalents include the following for the purpose of the cash flow statement:
All figures in £ millions
Cash and cash equivalents
Bank overdrafts
5. Financial liabilities – Borrowings
All figures in £ millions
Non-current
7.0% Sterling Bonds 2014 (nominal amount £250m)
4.625% US Dollar Notes 2018 (nominal amount $300m)
Current
Due within one year or on-demand:
7.0% Sterling Bonds 2014 (nominal amount £250m)
Bank loans and overdrafts
Total borrowings
2013
394
(512)
(118)
2012
643
(618)
25
2013
2012
–
202
202
254
512
766
968
256
217
473
–
618
618
1,091
Included in non-current borrowings above is £nil of accrued interest (2012: £3m). Included in current borrowings
above is £3m of accrued interest (2012: £nil).
Section 5 Financial statements
201
5. Financial liabilities – Borrowings continued
The maturity of the company’s non-current borrowings is as follows:
All figures in £ millions
Between one and two years
Between two and five years
Over five years
2013
–
202
–
202
2012
256
–
217
473
As at 31 December 2013 the exposure to interest rate changes of the borrowings and amounts due to subsidiaries
when the borrowings re-price is as follows:
All figures in £ millions
Re-pricing profile of borrowings
Amounts due to subsidiaries
Effect of rate derivatives
The carrying amounts and market values of borrowings are as follows:
All figures in £ millions
Bank loans and overdrafts
7.0% Sterling Bonds 2014
4.625% US dollar Notes 2018
Effective
interest rate
Carrying
amount
n/a
7.20%
4.69%
512
254
202
968
Less than
one year
One to
five years
More than
five years
766
1,256
1,026
3,048
202
2,731
(422)
2,511
2013
Market
value
512
262
195
969
–
822
(604)
218
Carrying
amount
618
256
217
1,091
Total
968
4,809
–
5,777
2012
Market
value
618
274
209
1,101
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 company’s borrowings are denominated in the following currencies:
All figures in £ millions
US dollar
Sterling
Euro
2013
202
762
4
968
2012
255
826
10
1,091
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202
Pearson plc Annual report and accounts 2013
Notes to the company financial statements continued
6. Derivative financial instruments
The company’s outstanding derivative financial instruments are as follows:
All figures in £ millions
Interest rate derivatives –
in a fair value hedge relationship
Interest rate derivatives –
not in a hedge relationship
Cross-currency derivatives
Total
Analysed as expiring:
In less than one year
Later than one year and not later
than five years
Later than five years
Total
Gross notional
amounts
Assets
Liabilities
Gross notional
amounts
Assets
Liabilities
2013
2012
231
1,842
220
2,293
312
1,377
604
2,293
22
63
39
124
13
111
–
124
–
234
(48)
–
(48)
1,292
220
1,746
–
215
–
(48)
(48)
701
830
1,746
35
109
34
178
4
69
105
178
–
–
–
–
–
–
–
–
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.
7. Provisions for other liabilities and charges
Provisions in the year comprise liabilities assumed on the closure of the business of a group subsidiary.
It is anticipated that the provision will be utilised in less than one year.
8. Share capital and share premium
At 1 January 2012
Issue of ordinary shares – share option schemes
At 31 December 2012
Issue of ordinary shares – share option schemes
At 31 December 2013
Number of
shares
000s
815,626
1,417
817,043
1,537
818,580
Ordinary
shares
£m
204
–
204
1
205
Share
premium
£m
2,544
11
2,555
13
2,568
The ordinary shares have a par value of 25p per share (2012: 25p per share). All issued shares are fully paid.
All shares have the same rights.
9. Treasury shares
At 1 January 2012
Purchase of treasury shares
Contribution from subsidiaries
Release of treasury shares
At 31 December 2012
Purchase of treasury shares
Release of treasury shares
At 31 December 2013
Section 5 Financial statements
203
Number of
shares
000s
14,665
–
–
(4,563)
10,102
4,111
(4,931)
9,282
£m
94
–
(21)
(46)
27
47
(52)
22
The company holds its own shares in trust to satisfy its obligations under its restricted share plans. These shares
are treated as treasury shares for accounting purposes and have a par value of 25p per share. The nominal value
of the company’s treasury shares amounts to £2.3m (2012: £2.5m). At 31 December 2013 the market value of
the company’s treasury shares was £124.4m (2012: £120.0m).
10. Contingencies
There are contingent 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. In addition
there are contingent liabilities in respect of legal claims. None of these claims are expected to result in a material
gain or loss to the company.
11. Audit fees
Statutory audit fees relating to the company were £35,000 (2012: £35,000).
12. Related party transactions
Subsidiaries
The company transacts and has outstanding balances with its subsidiaries. Amounts due from subsidiaries
and amounts due to subsidiaries are disclosed on the face of the company balance sheet.
These loans are generally unsecured and interest is calculated based on market rates. The company has interest
payable to subsidiaries for the year of £144m (2012: £171m) and interest receivable from subsidiaries for the
year of £59m (2012: £64m). Management fees payable to subsidiaries in respect of centrally provided services
amounted to £55m (2012: £47m). Dividends received from subsidiaries were £1,363m (2012: £1,124m).
Associates
Amounts due from related parties, disclosed on the face of the company balance sheet, relate to loans to Penguin
Random House, an associate of the Group. These loans are unsecured and interest is calculated based on market
rates.
Key management personnel
Key management personnel are deemed to be the members of the board of directors of the company.
It is this board which has responsibility for planning, directing and controlling the activities of the company.
Key management personnel compensation is disclosed in the report on directors’ remuneration in the
consolidated financial statements.
There were no other material related party transactions.
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204
Pearson plc Annual report and accounts 2013
Principal subsidiaries
The principal operating subsidiaries at 31 December 2013 are listed below. They operate mainly in the countries
of incorporation or registration. The investments are in equity share capital and they are all 100% owned.
Pearson Education
Pearson Education Inc.
Pearson Education Ltd
NCS Pearson Inc.
FT Group
The Financial Times Ltd
Country of incorporation or registration
US
England
US
England
The company has taken advantage of the exemption under Section 410(2) of the Companies Act 2006 by
providing information only in relation to subsidiary undertakings whose results or financial position, in the opinion
of the directors, principally affected the financial statements. A complete list of subsidiary and associated
undertakings will be included in the next Pearson plc annual return filed with the Registrar of Companies.
Five-year summary
All figures in £ millions
Sales
North American Education
International Education
Professional
Education
FT Group
Continuing
Discontinued
Total sales
Adjusted operating profit
North American Education
International Education
Professional
Education
FT Group
Penguin Random House
Continuing
Discontinued
Total adjusted operating profit
Section 5 Financial statements
205
2009
2010
2011
Restated
2012
Restated
2,470
1,035
275
3,780
288
4,068
1,556
5,624
403
141
43
587
19
–
606
252
858
2,640
1,234
333
4,207
325
4,532
1,427
5,959
469
171
51
691
41
–
732
206
938
2,584
1,424
382
4,390
338
4,728
1,134
5,862
493
194
66
753
53
–
806
132
938
2,658
1,568
390
4,616
343
4,959
1,153
6,112
536
214
37
787
22
–
809
123
932
2013
2,779
1,539
410
4,728
341
5,069
621
5,690
406
140
57
603
29
50
682
54
736
Operating margin – continuing
14.9%
16.2%
17.0%
16.3%
13.5%
Adjusted earnings
Total adjusted operating profit
Net finance costs
Income tax
Non-controlling interest
Adjusted earnings
Weighted average number of shares (millions)
Adjusted earnings per share
858
(97)
(194)
(44)
523
799.3
65.4p
938
(85)
(215)
(17)
621
801.2
77.5p
938
(55)
(196)
1
688
800.2
86.0p
932
(65)
(200)
(3)
664
804.3
82.6p
736
(72)
(97)
(1)
566
807.8
70.1p
2011 and 2012 have been restated to reflect the adoption of IAS 19 revised. Prior periods have not been restated.
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206
Pearson plc Annual report and accounts 2013
Five-year summary continued
All figures in £ millions
Cash flow
Operating cash flow
Operating cash conversion
Operating free cash flow
Operating free cash flow per share
Total free cash flow
Total free cash flow per share
Net assets
Net debt
Return on invested capital (gross basis)
Total adjusted operating profit
Cash tax paid
Return
Average invested capital
Return on invested capital
2009
2010
2011
Restated
2012
Restated
913
106%
723
90.5p
723
90.5p
1,057
113%
904
112.8p
904
112.8p
983
105%
772
96.5p
772
96.5p
788
85%
657
81.7p
657
81.7p
2013
588
80%
324
40.1p
269
33.3p
4,636
5,605
5,962
5,710
5,706
1,092
430
499
918
1,379
858
(103)
755
8,504
8.9%
938
(85)
853
8,315
10.3%
938
(151)
787
8,731
9.0%
932
(65)
867
9,578
9.1%
736
(191)
545
10,130
5.4%
Dividend per share
35.5p
38.7p
42.0p
45.0p
48.0p
Corporate and operating measures
Section 5 Financial statements
207
Pearson’s corporate and operating measures include the results of Mergermarket throughout 2013 as the business
was wholly-owned during that period.
Sales – underlying and constant exchange rate movement
Sales movement excluding Penguin and excluding the impact of acquisitions and disposals and movements
in exchange rates.
All figures in £ millions
Underlying increase
Portfolio changes
Exchange differences
Total sales increase
Underlying increase
Constant exchange rate increase
Adjusted income statement
2013
29
70
19
118
1%
2%
Reconciliation of the consolidated income statement to the adjusted numbers presented as non-GAAP measures
in the financial statements.
All figures in £ millions
Operating profit
Net finance costs
Profit before tax
Income tax
Profit for the year from
continuing operations
Profit for the year from
discontinued operations
Profit for the year
Non-controlling interest
Earnings
Statutory
income
statement
Discontinued
operations
Other net
gains and
losses
Acquisition
costs
Intangible
charges
2013
Other net
finance
income/
costs
Tax
amortisation
benefit
Adjusted
income
statement
458
(76)
382
(87)
295
244
539
(1)
538
54
–
54
(18)
36
(36)
–
–
–
16
–
16
32
48
(209)
(161)
–
(161)
12
–
12
(2)
10
–
10
–
10
196
–
196
(51)
–
4
4
(1)
–
–
–
30
736
(72)
664
(97)
145
3
30
567
2
147
–
147
(1)
2
–
2
–
30
–
30
–
567
(1)
566
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Pearson plc Annual report and accounts 2013
Corporate and operating measures continued
Adjusted income statement continued
All figures in £ millions
Operating profit
Net finance costs
Profit before tax
Income tax
Profit for the year from
continuing operations
Profit for the year from
discontinued operations
Profit for the year
Non-controlling interest
Earnings
Statutory
income
statement
Discontinued
operations
Other net
gains and
losses
Acquisition
costs
Intangible
charges
2012
Other net
finance
income/
costs
Tax
amortisation
benefit
Adjusted
income
statement
487
(96)
391
(138)
253
61
314
(3)
311
123
–
123
(38)
123
–
123
–
85
123
(85)
–
–
–
20
143
–
143
20
–
20
(5)
15
1
16
–
16
179
–
179
(54)
125
3
128
–
128
–
31
31
(1)
30
–
30
–
30
–
–
–
36
36
–
36
–
36
932
(65)
867
(200)
667
–
667
(3)
664
Adjusted operating profit – underlying and constant exchange rate movement
Operating profit movement excluding the impact of acquisitions, disposals and movements in exchange rates.
All figures in £ millions
Underlying decrease
Portfolio changes
Exchange differences
Total adjusted operating profit decrease
Underlying decrease
Constant exchange rate decrease
2013
(222)
30
(4)
(196)
(23)%
(21)%
The underlying and constant exchange rate decreases above primarily reflect the impact of restructuring charges
booked during 2013. Excluding the impact of these restructuring charges, underlying and constant exchange rate
operating profits have decreased 9% and 6% respectively.
Section 5 Financial statements
209
Free cash flow per share
Operating cash flow for continuing and discontinued operations before tax and finance charges, divided by the
weighted average number of shares in issue.
All figures in £ millions
Adjusted operating profit
Cash conversion
Operating cash flow
Operating tax paid
Net operating finance costs paid
Total operating free cash flow
Non-operating tax paid
Total free cash flow
Weighted average number of shares in issue (millions)
Operating free cash flow per share
Total free cash flow per share
Return on invested capital
All figures in £ millions
Total adjusted operating profit
Operating tax paid
Return
Average goodwill and other intangibles
Average net operating assets
Average invested capital
Return on invested capital
2013
736
80%
588
(191)
(73)
324
(55)
269
807.8
40.1p
33.3p
2013
736
(191)
545
8,903
1,227
10,130
5.4%
2012
932
85%
788
(65)
(66)
657
–
657
804.3
81.7p
81.7p
Invested capital
2012
932
(65)
867
8,550
1,028
9,578
9.1%
Return on invested capital is calculated as total adjusted operating profit less operating cash tax paid expressed as
a percentage of average invested capital. Invested capital includes the original unamortised goodwill and intangibles.
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Pearson plc Annual report and accounts 2013
Shareholder information
Pearson ordinary shares are listed on the London
Stock Exchange and on the New York Stock Exchange
in the form of American Depositary Receipts.
Corporate website
The investors’ section of our corporate website
www.pearson.com/investors provides a wealth of
information for shareholders. It is also possible to
sign up to receive email alerts for reports and press
releases relating to Pearson at
www.pearson.com/investors/announcements/
email-alerts
Shareholder information online
Shareholder information can be found on our website
www.pearson.com/investors/shareholder-information
Our registrar, Equiniti also provides a range of
shareholder information online. You can check your
holding and find practical help on transferring shares
or updating your details at www.shareview.co.uk.
For more information, please contact our registrar,
Equiniti, Aspect House, Spencer Road, Lancing, West
Sussex BN99 6DA. Telephone 0871 384 2233* or, for
those shareholders with hearing difficulties, textphone
number 0871 384 2255*.
Information about the Pearson share price
The company’s share price can be found on our
website at www.pearson.com. It also appears in the
financial columns of the national press.
2013 Dividends
Payment date
Amount per share
Interim
Final
13 September 2013
2 May 2014
16 pence
32 pence
Payment of dividends to mandated accounts
Should you elect to have your dividends paid through
BACS, this can be done directly into a bank or building
society account, with the tax voucher sent to the
shareholder’s registered address. Equiniti can be
contacted for information on 0871 384 2043*.
Dividend reinvestment plan (DRIP)
The DRIP gives shareholders the right to buy the
company’s shares on the London stock market
with their cash dividend. For further information,
please contact Equiniti on 0871 384 2268*.
Individual Savings Accounts (ISAs)
Equiniti offers ISAs in Pearson shares. For more
information, please go to www.shareview.co.uk/dealing
or call customer services on 0845 300 0430*.
Share dealing facilities
Equiniti offers telephone and internet services
for dealing in Pearson shares. For further
information, please contact their telephone dealing
helpline on 08456 037 037 (weekdays only) or, for
online dealing, log on to www.shareview.co.uk/dealing.
You will need your shareholder reference number
as shown on your share certificate.
A weekly postal dealing service is also available
through Equiniti. Please telephone 0871 384 2248* for
details or log on to www.shareview.co.uk to download
a form.
ShareGift
Shareholders with small holdings of shares, whose
value makes them uneconomic to sell, may wish to
donate them to ShareGift, the share donation charity
(registered charity number 1052686). Further
information about ShareGift and the charities it has
supported may be obtained from their website,
www.ShareGift.org or by contacting them at ShareGift,
PO Box 72253, London, SW1P 9LQ.
American Depositary Receipts (ADRs)
Pearson’s ADRs are listed on the New York Stock
Exchange and traded under the symbol PSO. Each ADR
represents one ordinary share. For enquiries regarding
registered ADR holder accounts and dividends,
please contact The Bank of New York Mellon,
PO Box 43006, Providence, RI 02940-3006,
telephone 1 (866) 259 2289 (toll free within the US)
or 001 201 680 6825 (outside the US). Alternatively,
you may email shrrelations@bnymellon.com, or log on
to www.bnymellon.com/shareowner. Voting rights for
registered ADR holders can be exercised through
The Bank of New York Mellon, and for beneficial
ADR holders (and/or nominee accounts) through
your US brokerage institution. Pearson will file with
the Securities and Exchange Commission a Form 20-F.
*Calls to these numbers are charged at 8p per minute plus
network extras. Lines open 8.30am to 5.30pm Monday
to Friday.
Section 5 Financial statements
211
›(cid:3)Be aware of dividend payment dates and contact the
registrar if you do not receive your dividend cheque
or better still, make arrangements to have the dividend
paid directly into your bank account.
›(cid:3)Consider holding your shares electronically in a CREST
account via a nominee.
2014 Financial calendar
Ex-dividend date
Record date
Last date for dividend
reinvestment election
Annual General Meeting
Payment date for dividend and share
purchase date for dividend reinvestment
Interim results
Payment date for interim dividend
2 April
4 April
9 April
25 April
2 May
25 July
12 September
Share register fraud: protecting your investment
Pearson does not contact its shareholders directly to
provide recommendation advice and neither does it
appoint third parties to do so. As required by law, our
shareholder register is available for public inspection
but we cannot control the use of information obtained
by persons inspecting the register. Please treat any
approaches purporting to originate from Pearson
with caution.
For more information, please log on to our website at
www.pearson.com/investors/shareholder-
information/managing-your-shares and
www.pearson.com/shareholderfaqs
Tips on protecting your shares
›(cid:3)Keep any documentation that contains your
shareholder reference number in a safe place and
shred any unwanted documentation.
›(cid:3)Inform our registrar, Equiniti promptly when you
change address.
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Pearson plc Annual report and accounts 2013
Principal offices
Pearson plc
80 Strand,
London WC2R 0RL, UK
T +44 (0)20 7010 2000
F +44 (0)20 7010 6060
firstname.lastname@pearson.com
Pearson Inc.
330 Hudson Street,
New York City,
NY 10013, USA
T +1 212 390 7100
firstname.lastname@pearson.com
www.pearson.com
Pearson plc
Registered number 53723 (England)
By their nature, forward-looking statements involve
risks and uncertainties because they relate to events
and depend on circumstances that will occur in the
future. There are a number of factors which could
cause actual results and developments to differ
materially from those expressed or implied by these
forward-looking statements, including a number of
factors outside Pearson’s control. Any forward-
looking statements speak only as of the date they are
made, and Pearson gives no undertaking to update
forward-looking statements to reflect any changes in
its expectations with regard thereto or any changes to
events, conditions or circumstances on which any such
statement is based.
Reliance on this document
Our Strategic report on pages 02 to 53 has been
prepared in accordance with section 414 (‘Duty to
prepare a strategic report’) of the Companies Act
2006 (Strategic Report and Directors’ Report)
Regulations 2013. It also incorporates much of the
guidance set out in the Accounting Standards Board’s
Reporting Statement on the Operating and
Financial Review.
The intention of this document is to provide
information to shareholders and is not designed
to be relied upon by any other party or for any
other purpose.
Forward-looking statements
This document contains forward-looking statements
which are made by the directors in good faith based
on information available to them at the time of
approval of this report. In particular, all statements
that express forecasts, expectations and projections
with respect to future matters, including trends in
results of operations, margins, growth rates, overall
market trends, the impact of interest or exchange
rates, the availability of financing, anticipated costs
savings and synergies and the execution of Pearson’s
strategy, are forward-looking statements.
Design and Production: Radley Yeldar (London) www.ry.com
Print: Pureprint Group
Pearson has supported the planting of 400 square metres
of new native woodland with the Woodland Trust, helping
to remove 16 tonnes of carbon dioxide emissions generated
by the production of this report.
This report has been printed on Edixion Challenger
Offset which is FSC® certified and made from 100%
Elemental Chlorine Free (ECF) pulp. The mill and the
printer are both certified to ISO 14001 environmental
management system and registered to EMAS the eco
management Audit Scheme. The report was printed
using vegetable based inks by a CarbonNeutral® printer.
Learn more at www.pearson.com
Pearson plc
80 Strand
London
WC2R 0RL
T +44 (0)20 7010 2000
F +44 (0)20 7010 6060