Focused
on delivery
Pearson Annual report and accounts 2015
Pearson at a glance
Financial highlights
Sales
£4.5bn
-5%
2015
Sales
by Geography
North America
Core
Growth
66%
19%
15%
£2,940m
£836m
£692m
Adjusted operating profi t
£723m
-3%
2015
(cid:36)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:72)(cid:71)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:564)(cid:87)
by Geography
North America
Core
Growth
72%
17%
-2%
Penguin Random House 13%
Discontinued
£480m
£114m
-£12m
£90m
£51m
Average annual growth in
headline terms 2010–2015
Sales £m
6,000
Adjusted earnings per share
-1.9%
Operating cash fl ow
-16.3%
Dividend
+6.1%
5,000
4,000
3,000
2,000
1,000
(cid:36)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:72)(cid:71)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:564)(cid:87) £m
1,200
1,000
800
600
400
200
10
11
12
13
14
15
10
11
12
13
14
15
To read about our KPIs go to p14
Throughout this report 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.
Section 1 Our business
01
About Pearson
Pearson is the world’s learning company, with
global capabilities in educational courseware
and assessment, based on a strong portfolio of
products and services, powered by technology.
We believe that our strategy of combining
these core capabilities with services enable our
partners to scale online, reach more people and
ensure better learning outcomes, providing
Pearson with a larger market opportunity, a
sharper focus on the fastest-growing education
markets and stronger fi nancial returns.
Our mission is to help people make progress
through access to better learning. We believe
that learning opens up opportunities, creating
fulfi lling careers and better lives.
This strategic report is formed of three sections ‘Our business’,
Our performance’ and ‘Social impact’, (p02-67), and was approved
for issue by the board on 4 March 2016 and signed on its behalf by :
Coram Williams
Chief fi nancial offi cer
Strategic report
Our business
02 Chairman’s introduction
04 Chief executive’s strategic overview
08 Our business model
Our performance
10 Financial overview
14 Key performance indicators
16 Operating performance overview
18
Operating performance:
North America, Core, Growth
34 Other fi nancial information
38 Risk management
41 Principal risks and uncertainties
46 Targeting growth through effi cacy
Our social impact
54
Our social impact overview
56
Sustainability
59
Our values and behaviours
61
Our relationships
63
Our planet
65
Impact campaigns
67
Social innovation
Governance
68 Governance overview
72 Leadership & eff ectiveness
82 Accountability
90 Engagement
94 Report on directors’ remuneration
118 Additional disclosures
Financial statements
126 Independent auditors’ report
to the members of Pearson plc
134 Group accounts
208 Parent company accounts
222 Five-year summary
224 Corporate and operating measures
227 Shareholder information
BC Principal offi ces worldwide
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Pearson plc Annual report and accounts 2015
Chairman’s introduction
Sidney Taurel
Chairman
“ My focus will be on helping
guide Pearson back to growth,
supporting the management
team and all of our employees
in our mission: to help more
people make progress in their
lives through learning.”
Dear shareholders,
I am proud to introduce our annual report for the fi rst
time as Pearson’s chairman.
My predecessor, Glen Moreno, made a major
contribution to Pearson during his long and successful
tenure as chairman. I am sure my fellow shareholders
will join me in thanking Glen and wishing him all the
best for the future.
This is an important time to be joining Pearson.
Our 2015 performance was not what we would
have wanted, and we now have a plan in place to
return the company to growth.
The company has a strong purpose at its heart, and has
made great strides in focusing on education. My own
focus will be on helping guide Pearson back to growth,
supporting the management team and all of our
employees in our mission: to help more people make
progress in their lives through learning.
Our immediate priorities
This is a challenging time for businesses in global
education, with rapid changes taking place in the sector.
Digital technology is revolutionising education just as it
has all other aspects of the way we work, communicate
and do business. In an era of constrained spending,
there is a big productivity challenge, as governments
and education leaders seek to achieve better outcomes
at the same or lower cost. The value of a university
degree continues to grow, but many students and
institutions face cost pressures. These changes off er
big opportunities for Pearson, but also present risks
and transitions that we will need to manage in some
of our traditionally strong businesses.
With these factors in mind, my immediate priorities
are(cid:98)clear:
I will be supporting our management team to
ensure that we stay focused on our biggest strategic
growth objectives.
I will off er guidance to help them to make further
progress on simplifying and integrating the business.
We need to make sure that Pearson is better able to
leverage our assets, skills, and technology platforms
in order to deploy our products globally.
I will be supporting the team to ensure that capital
is allocated in a way that provides better returns for
shareholders, ultimately creating a better, more
sustainable company for the future.
We will engage transparently with shareholders on
our capital allocation plans and progress against our
strategic goals, as well as on all important issues.
We plan to hold our dividend at the 2015 level while we
rebuild cover, refl ecting the board’s confi dence in the
medium-term outlook for our business, and we are
committed to increasing total shareholder returns.
These priorities require strong leadership,
dedication and hard work from me, the board,
and the management team.
Our leadership team
We have continued to enhance the strength and depth
of our board, including the appointment of Coram Williams
as our chief fi nancial offi cer. Coram has a decade’s
experience working directly for Pearson and helped to
lead our joint venture, Penguin Random House, through
a successful company integration as its fi rst CFO.
Like me, Lincoln Wallen joined the board on 1 January
2016. Lincoln is chief technology offi cer for DreamWorks
Animation, and his appointment further strengthens
our digital capabilities. Like thousands of Pearson
employees across the globe, he also has a background
in education and teaching.
We have an experienced executive team, and committed
employees around the world. I look forward to working with
John Fallon and the executive team to deliver our agenda.
Read more about our board on pages 72-73.
Section 1 Our business
03
Building a company for the future
I led Eli Lilly, a business in the global health sector, as
CEO and Chair for ten years. I see some clear parallels
between health and education that I believe provide
opportunities for Pearson.
Like health, education aff ects every citizen of the world
in a deep and personal way. Both sectors have seen
dramatic increases in the use of digital technologies
for the benefi t of users – in our case, teachers and
students. For us, this means personalised, adaptive
learning, with the ability to measure and improve
outcomes at an individual level.
So we are continuing at pace on our mission to become
more digital and service-driven, and a simpler, better
integrated business, with effi cacy at the heart of
everything we do. Read more on our ongoing
commitment to effi cacy on pages 46-53.
Pearson’s future
I would like to thank you for your continued support
of Pearson. It has been a tough 2015, and there are
undoubtedly challenges ahead. Pearson is a company
with strong market positions, real competitive
advantage and a signifi cant medium-term market
opportunity. The board believes that the plans we are
enacting will help to build on these strengths and enjoy
sustained growth.
I see an exciting future ahead for Pearson – as with
my experience in the health sector, I am inspired by
working in a company with a strong sense of purpose.
As chairman I am fully focused on helping the
management team develop our strategy and deliver
long-term value for our students, customers and you,
our shareholders.
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Sidney Taurel
Chairman
Read our full Governance section
Governance overview
Leadership & eff ectiveness
Accountability
Engagement
Report on directors’ remuneration
Additional disclosures
p70-71
p72-81
p82-89
p90-93
p94-117
p118-123
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Share price performance
One year % change
Pearson
FTSE 100
FTSE All-Share
FTSE All-Share Media
STOXX 600 Media
Five years % change
Pearson
FTSE 100
FTSE All-Share
FTSE All-Share Media
STOXX 600 Media
Ten years % change
Pearson
FTSE 100
FTSE All-Share
FTSE All-Share Media
STOXX 600 Media
-38.2%
-4.9%
-2.5%
13.3%
12.0%
-27.0%
5.8%
12.5%
78.2%
68.8%
7.1%
11.1%
21.0%
88.2%
36.1%
Source: Datastream to 31 December 2015
Total shareholder return (TSR)
See p14
One year % change
Pearson
FTSE 100
FTSE All-Share
FTSE All-Share Media
STOXX 600 Media
Five years % change
Pearson
FTSE 100
FTSE All-Share
FTSE All-Share Media
STOXX 600 Media
Ten years % change
Pearson
FTSE 100
FTSE All-Share
FTSE All-Share Media
STOXX 600 Media
Source: Datastream to 31 December 2015
-35.7%
-1.3%
1.0%
16.5%
15.3%
-11.2%
26.9%
33.8%
107.5%
102.6%
59.8%
60.2%
71.8%
155.8%
97.4%
04
Pearson plc Annual report and accounts 2015
Chief executive’s strategic overview
John Fallon
Chief executive
“ 2015 was a year of change
and challenge at Pearson,
which ultimately will leave
us better placed to meet
the huge unmet demands
in global education.”
Dear shareholders,
2015 was a year of change and challenge at Pearson,
which ultimately will leave us better placed to meet
the huge unmet demands in global education.
The biggest change was that, with the sale of the
Financial Times Group and our stake in The Economist,
we completed Pearson’s exit from the fi nancial news
and information market. We thought long and hard
about these disposals. It is not easy to part with such
globally respected brands, which have been an
important part of Pearson for many years. After
careful(cid:98)consideration, the board concluded that these
transactions made strategic sense, achieved a good
fi nancial return for shareholders, and were in the best
long-term interest of both The Economist and the
Financial Times.
The pace of disruptive change in new technology –
in(cid:98)particular, the growth of mobile and social media –
poses a direct challenge to how leading news
organisations produce and sell their journalism.
The(cid:98)best way to ensure continuing success is to be part
of a global, digital news organisation that is completely
focused on the business of journalism. We concluded
that new owners with strong track records in media
would help grow the FT and The Economist’s global
reach and reputation in a digital age, just as we
secured Penguin’s creative and commercial future by
combining it with Random House to create the world’s
largest consumer publisher, Penguin Random House.
That(cid:98)business, of which we own a 47% stake, continues
to perform well, as you can read on page 33.
Our strategy
Short-term priorities
Strategic growth drivers
Deliver transformation
Simplify our business
Stronger cash generation
A growing company
1
Digital & services:
Build on our global strength
in educational courseware
and assessment with
leading digital products
and services, where we see
the greatest potential for
growth, scalability and
impact on learner progress.
2
Market presence:
Our strategy to build on our
leading presence in developed
markets, and the opportunity
to(cid:98)meet growing global demand
for education.
Section 1 Our business
05
Challenges in 2015
A clear strategy
These disposals enable us to focus more fully on our
education business, which was where we faced our
biggest challenge last year. The cyclical and policy
related headwinds we face in our major education
markets – which we have described in previous years
and which we cover later in this report – are persisting
for longer than we anticipated. They are also having a
more pronounced impact on our profi tability than we
expected, reducing our annual operating profi t(cid:98)by
approximately £230m from its peak. These headwinds
are largely cyclical and, over the next two years, they
should fi nally abate.
This means that, although operating profi t and earnings
per share were only down marginally in underlying
terms on the previous year, they fell short of(cid:98)the goals
we set at the start of the year.
Our strong competitive performance
Pearson’s competitive performance remains strong.
We(cid:98)held or increased our market share in higher
education courseware, school courseware, and in UK
general qualifi cations. In professional testing, virtual
schooling, online higher education and other areas
we increased our capabilities, our reach and our
commercial success substantially. You can read more
about our operating performance on pages 16-33.
We are also confi dent that education remains an
attractive investment opportunity with the growth
potential to enable us to serve more students around
the world and deliver good, sustainable returns to
our(cid:98)shareholders.
Our strategy to capitalise on this opportunity is clear.
As(cid:98)the world’s learning company, Pearson has world-
class capabilities and products in educational
courseware and assessment, powered by learning
technology. By combining these capabilities with
teaching and learning services, we help schools,
universities and others to scale online, reach more
people and ensure better learning outcomes. As we
do(cid:98)so, we provide Pearson with a larger market
opportunity, a sharper focus on the fastest-growing
education markets and stronger fi nancial returns.
This approach recognises that education is undergoing
a number of structural changes. The economic value
of an education remains large. In the US, for example,
the earnings premium of a university degree has never
been higher. However, the cost of education is going up
faster than infl ation – and public funding for education
is under real pressure. This presents our customers –
university presidents, school superintendents,
teachers and faculty, students and their parents –
with a real challenge.
It is compounded by the fact that rising costs have
not(cid:98)brought any real increases in learning outcomes –
which remain uneven and variable – and there is an
alarming mismatch between the expectations of
educators and employers. For example, according to
Gallup research from 2014, 96% of chief academic
offi cers in the US rate their institution as somewhat
or very eff ective at preparing students for the world
of work. Yet only 11% of business leaders agree.
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3
Measurable outcomes:
Our effi cacy programme is our
long(cid:98)term commitment to delivering
measurable impact. It informs all
strategic decision making across
Pearson, including our product
and(cid:98)services strategy. We will
begin(cid:98)reporting formally on this
impact(cid:98)from(cid:98)2018.
Our constant goals
Generate sustainable returns by:
Delivering long-term growth
Extending our global presence
and reach
Building on our leading
education position
To deliver measurable impact
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06
Pearson plc Annual report and accounts 2015
Chief executive’s strategic overview continued
Helping teachers to be more eff ective
and students more successful
We know that technology can help to address these
challenges, by making learning more accessible,
fl exible, personal and aff ordable. For example, we
are(cid:98)drawing on the latest digital advances to develop
products which further customise and personalise
learning. So we are embedding learning analytics in
our(cid:98)new courseware off erings, such as Revel, to help
teachers use data to teach students more eff ectively.
For students themselves, we are using adaptive
learning technologies to focus their studies on
concepts which require more time and attention.
We are developing new qualifi cations and certifi cations
that help students to translate education into
employment by assessing career-relevant knowledge
and skills, providing quality assurance to schools,
universities and employers. For example, last year we
ran nearly 50 million practice or actual assessments
for students on digital devices in the US using our
TestNav application, aligning these new tests to
higher standards for career and college readiness.
Online degree and virtual online school programmes
represent 10% of Pearson today, from nothing fi ve
years ago – and are growing at double-digit rates each
year. With a solid platform and market position in the
US, we(cid:98)are now growing these businesses globally.
With the global online programme management
market set to double in the next fi ve years, there will
be many more opportunities for Pearson to partner
with universities to improve learning.
This opportunity is highlighted through our long-
standing partnership with Arizona State University,
where we are helping to recruit, retain and teach
several thousand online students. As more and more
universities and students embrace the possibilities
for(cid:98)improving access and success in education using
technology, there will be many more opportunities for
Pearson to partner with institutions on course design,
student recruitment and online tuition.
All of our new products and services are underpinned
by our effi cacy approach, launched three years ago,
which is designed to ensure that we help teachers to
be(cid:98)more eff ective, and students to be more successful.
We(cid:98)are committed to reporting on the learning impact
of our individual products from 2018 onwards, through
independently audited evidence and reports. We are
making good progress towards this target, as you can
read later in this report (pages 46-53).
Our success in helping our customers address these
structural changes in education should enable Pearson
to increase our average revenue per customer, and access
larger markets as we provide educational services far
broader than just stand-alone content or(cid:98)assessment. To
make the most of the opportunity, we are making Pearson
a simpler, better integrated, more cost-effi cient company.
Sharpening the future
In January we announced a series of actions that will
help us to achieve this goal.
We are creating a single global product organisation,
combining our three previously separate lines of business.
We are integrating our school, clinical and professional
assessment operations in North America. We are
reducing our exposure to large, direct delivery operations
to focus on online, virtual, and blended services in a
much more scalable, and profi table way. Each of these
changes will help us invest in fewer, bigger opportunities,
and ensure that our world-class capabilities can be scaled
to customers around the globe.
We are also making productivity improvements across
all our enabling functions like Technology, HR and
Finance – as our product off ering and customer and
employee support becomes more digital. We plan to
rationalise our property portfolio and consolidate major
supplier agreements to drive greater cost effi ciency.
As a result of these changes, we expect to reduce
Pearson’s global workforce by around 4,000 roles,
10%(cid:98)of our headcount. These are decisions that we never
take lightly and we are committed to supporting our
colleagues during the transition. These actions will(cid:98)be
complete by the end of 2016, and will reduce our(cid:98)annual
running costs by around £350m. Importantly, they will
also create a more focused, integrated business, better
able to create and sell products across our markets to
improve learning outcomes. This restructuring will give
us the improved operational and fi nancial fl exibility to
invest in growth areas and underpin shareholder returns.
Our reach and impact
Big changes in the education landscape will create big
opportunities for Pearson to grow our reach and impact.
There are huge unmet demands in global education that
need to be addressed.
In higher education, the number of students going to
university worldwide is expected to increase by more
than 50 million to 260 million by 2025. Every one of those
students wants a degree that(cid:98)is more aff ordable, more
accessible and more likely to(cid:98)lead to a good job. One billion
people will soon be learning English worldwide. School
students and teachers increasingly expect to learn digitally.
Section 1 Our business
07
So we plan to increase access to high quality education;
ensure the success of all our learners against
measurable outcomes; and to help more people
around the world make progress in their lives – giving
them the ability to secure a better job and a better life.
As well as measuring the impact of individual products,
we should also be measuring Pearson’s total impact on
learning. We are committed to ambitious goals to
expand our reach and impact over the next decade.
We(cid:98)currently reach around 75 million learners each year.
By 2025, our aspiration is to reach 200 million learners
each year – more than doubling our reach. These
ambitious goals will contribute not only to Pearson’s
success, but to the societies of which we are a(cid:98)part.
In 2015 Pearson joined other businesses and world
leaders in committing to the UN’s Sustainable
Development Goals (SDGs). The SDGs represent global
challenges, many of which can be alleviated through
better literacy and better education. In particular,
Goal 4 of the SDGs, to ‘ensure inclusive and equitable
quality education and promote lifelong opportunities for
all’, is central to the work of every Pearson employee
and the millions of teachers and students we work with
around the world each year.
To help maximise our contribution towards these goals,
in 2015 we continued our strong commitment to
sustainability, built new relationships with partners
like Save the Children and supported a new coalition
called Project Literacy. (Read more about Pearson’s
social impact on pages 54-67.)
We also invested in the Pearson brand in 2015 and
it(cid:98)continues as an area of focus in the year ahead.
Building a stronger brand will give us a better platform
to reach more students and teachers, and act as a mark
of quality as we develop and deliver new services across
education. We have introduced a new visual brand
capturing the curiosity and excitement of learning,
which will unify Pearson’s portfolio of products and
services over time. The new brand is represented in(cid:98)
this annual report for the fi rst time.
Our long-term opportunity
It’s clear that 2016 will be a tough year as we work
through the substantial change programme outlined
above. Our plan focuses on operational execution,
tight(cid:98)cost management and a sharper strategy to
return(cid:98)to growth. We will be faster, leaner and more
agile as a result of the changes we are making.
We(cid:98)expect our business to stabilise into 2017 and
return(cid:98)to growth in 2018.
We remain committed to the long-term opportunity
for(cid:98)Pearson to provide high quality, aff ordable and
accessible education that leads to a better job and
a(cid:98)better life. For many people, learning is the route to
a(cid:98)job to support their family or to acquiring the skills
to help them progress in their career. For others, it’s
simply a passion for discovery that enriches their lives.
All over the world, we hear parents say the same thing:
they want to see a(cid:98)greater return on their investment
in education, so(cid:98)that their children can gain skills, get
better jobs and succeed in their lives. That remains
a very compelling and exciting opportunity.
This powerful motivating purpose is what drives
Pearson’s business, which carries with it great
responsibilities to learners as well as to you, our
shareholders. In 2016, we are focused on delivering
these responsibilities, and the plans laid out in this
report explain how they will be achieved. We are
confi dent that they will ultimately make Pearson
a(cid:98)simpler, stronger company, and that they set the
company up for a sustained period of growth.
We’ll(cid:98)keep you updated on our progress.
Thank you for your ongoing support.
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John Fallon
Chief executive
My executive team
Coram Williams Chief Financial Offi cer
Albert Hitchcock Chief Technology and Operations Offi cer
k
Michael Barber Chief Education Advisor
r
Kate James Chief Corporate Aff airs Offi cer
Tim Bozik President Global Product
k
Don Kilburn President North America
Rod Bristow President Core Markets
w
Bob Whelan President Pearson Assessments
Giovanni Giovannelli President Growth Markets
Melinda Wolfe Chief Human Resources Offi cer
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08
Pearson plc Annual report and accounts 2015
Our business model
Creating value by developing products and services that
meet learner needs most eff ectively.
At the heart of this is our effi cacy strategy which over the
long-term provides insight and data on the full impact of
our products and services.
From 2018 our effi cacy programme will be reporting on this.
How our strategy aligns with value creation
1
2
Digital & services
Plan and develop
We combine our insights
into market need with our
global education expertise.
This perspective informs
the planning and
development of all our
teaching and learning
products and services,
driven by technology,
and shapes those where
we place the greatest
investment.
Market presence
Market, sell and serve
Our leading position in
educational courseware
and assessment enables
us to build our capabilities
in fast-growing related
services. We use our
experience and expertise
across the business
to develop scalable,
successful products
and services, always
meeting learner needs.
3
Measurable outcomes
Assess and
provide insight
We measure and assess
the impact of our products
and services on learner
outcomes. This feeds
into our global insights
capabilities, enabling
us to build a deep
understanding of learners’
and customers’ needs,
and develop world-class
products and services.
See a summary of our strategy on p04-05
Section 1 Our business
09
Capture insight
Exploring customer
and learner needs to
identify opportunities.
Develop strategy & plan
Major product divisions
integrated with geographic
markets to set strategic
priorities.
Develop product
Developed with insight from
geographies to address
specifi c local needs.
BLE O U T C
S
E
M
O
T U R E
S I G H T
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3
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1.
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ST
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& P
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P
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LEARNER
OUTCOMES
P
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O
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T
D
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V
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T &
L
M A R
E
L
K
E
S
2. MARKET PR E S E N C E
S
E
R
VE
Assess impact
Measuring effi cacy and
understanding the learner
informs all decisions made
through the cycle.
Serve
Customer service and
support is a shared
responsibility with diff erent
owners at diff erent stages.
Market & sell
Sales activity supported
with guidance from global
brand and marketing.
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10
Pearson plc Annual report and accounts 2015
Financial overview
Coram Williams
Chief fi nancial offi cer
“ In 2015, Pearson’s sales
decreased by £72m in
headline terms to £4.5bn.
Total adjusted operating
profi t rose £1m to £723m.”
Sales (at CER)
-5%
Adjusted earnings per share
+5%
Operating cash fl ow
-33%
Dividend per share
+2%
Business performance
£ millions
2015
2014
Headline
growth
CER
growth
Underlying
growth
Sales
4,468
4,540
(2)%
(5)%
(2)%
Adjusted
operating
profi t
Adjusted
earnings
per share
Operating
cash fl ow
723
722
–
(3)%
(2)%
70.3p
66.7p
5%
435
649
(33)%
Net debt
(654)
(1,639)
60%
Statutory results
£ millions
2015
2014
Headline
growth
CER
growth
Underlying
growth
Sales
4,468
4,540
(2)%
Operating
(loss)/profi t
(Loss)/profi t
before tax
Profi t for
the year
Basic earnings
per share
Cash
generated
from
operations
Dividend
per share
(404)
348
(433)
255
823
470
75%
101.2p
58.1p
74%
518
704
(26)%
52p
51p
2%
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 FT Group, while total adjusted
operating profi ts include FT Group. Continuing operations exclude
FT Group.
b) The ‘business performance’ measures are non-GAAP measures and
reconciliations to the equivalent statutory heading under IFRS are
included in notes to the consolidated fi nancial statements 2, 6, 7, 8
and 32, and the corporate and operating measures.
Section 2 Our performance
11
Profi t and loss statement
Return on invested capital
In 2015, Pearson’s sales decreased by £72m in headline
terms to £4.5bn. Total adjusted operating profi t rose
£1m to £723m (2014: £722m).
Currency movements, primarily from the depreciation
of sterling against the US dollar during the period,
increased sales by £137m and operating profi ts
by(cid:98)£22m.
At constant exchange rates (i.e. stripping out the
impact(cid:98)of those currency movements), our sales fell
by(cid:98)5% primarily due to a change in revenue model at
Connections Education which now records revenues
charged at cost on a net basis; and adjusted operating
profi t fell by 3% due to revenue mix and an operating
loss in our Growth segment.
The net eff ect of acquisitions, disposals and revenue
model adjustments reduced sales by £129m and
operating profi ts by £9m.
Stripping out the impact of portfolio changes and
currency movements, revenues were down 2%
in(cid:98)underlying terms while adjusted operating profi t
fell(cid:98)2%.
Net interest payable in 2015 was £46m, compared
to(cid:98)£64m in 2014. Our tax rate in 2015 was 15.5%
compared to 17.9% in 2014. The decrease in both
interest and tax was primarily due to agreement
on(cid:98)historical tax positions and the release of
associated(cid:98)accrued interest.
Our return on average invested capital was 5.8% (2014:
5.6%) primarily due to lower operating cash tax paid.
Statutory results
Our statutory results showed a profi t for the year
after(cid:98)tax of £823m, including gains on the disposal
of(cid:98)the Financial Times Group, The Economist Group
and(cid:98)PowerSchool of £1,214m and an impairment of
goodwill and intangibles of £849m, primarily refl ecting
trading pressures in our Growth and North America
businesses. Included within the net gain on disposal
is a £70m balance sheet write down on the disposal
of(cid:98)PowerSchool, related to the reduced market
opportunity for software (such as Pearson System
of(cid:98)Courses and Schoolnet) which was to be integrated
with PowerSchool and the recognition that adoption
of(cid:98)such software in US Schools is now unlikely to occur
at the rate originally envisaged.
Balance sheet
Our net debt decreased to £654m (2014: £1,639m)
primarily refl ecting the disposals of the Financial Times,
The Economist Group and PowerSchool and an
increased dividend from Penguin Random House,
off set by the strengthening of the US dollar relative to
sterling, a higher group dividend and higher working
capital. Pearson’s net debt/EBITDA ratio decreased
from 1.9x in 2014 to 0.8x in 2015 and our interest cover
increased from 11.3x to 15.7x.
Adjusted earnings per share were 70.3p (2014: 66.7p).
Dividend
The Board is proposing a fl at fi nal dividend of 34p,
which results in a 2% increase in the overall 2015
dividend to 52p, subject to shareholder approval.
Cash generation
Headline operating cash fl ow decreased by £214m to
£435m as a result of challenging trading and disposals.
Operating cash conversion fell from 90% in 2014 to 60%
in 2015 due to: a mismatch between cash and accrued
incentive compensation as a result of lower incentive
compensation awards for 2015 when compared to
2014; capital expenditure greater than depreciation
due(cid:98)to investments in our enabling function technology
designed to lower administrative costs; an increase
in(cid:98)US Higher Education textbook returns; and pension
top-up payments as a result of a triennial valuation.
These factors were partly off set by an increased
dividend payment from Penguin Random House.
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12
Pearson plc Annual report and accounts 2015
Financial overview continued
2016 outlook
Trading conditions
In 2016, we expect to report adjusted operating profi t
before restructuring costs of between £580m and
£620m. This refl ects the impact of: the in-year benefi ts
from restructuring off set by the loss of operating profi t
from disposals made in 2015, ongoing challenging
conditions in our largest markets, the reinstatement
of(cid:98)the employee incentive pool and other operational
factors (including dual running costs as we rationalise
our technology infrastructure, cost infl ation and
increased pre-publication amortisation relating to
new product launches).
We expect adjusted earnings per share to be between
50p and 55p, after a normalised interest charge of
approximately £60m and a tax rate of approximately
19%. In 2016, we are excluding the one-off cost of our
major restructuring from adjusted operating profi t and
earnings per share to better refl ect the underlying
earnings potential of the business. Operating profi t
after restructuring charges is expected to be in the
£260m to £300m range. This guidance is based on our
current portfolio of businesses and exchange rates on
31 December 2015.
The major factors behind this guidance are as follows:
While we expect to achieve continued good growth in
areas such as virtual schools and online programme
management, we anticipate trading conditions to
remain challenging in our major markets in 2016.
North America
In North America, our largest market, we anticipate US
college enrolments will be fl at given forecast modest
improvements in US employment; a smaller adoption
market in K-12 learning services and lower participation
rate partially off set by growth in open territories driven
by new products; reduced testing revenues in North
America refl ecting State and National Assessment
contract losses worth approximately £100m announced
in 2015; and growth in clinical assessments and
professional certifi cation.
Core
In our Core markets (which include the UK, Italy and
Australia), we expect declines in vocational course
registrations in UK schools, ongoing pressure in our
various learning services businesses, partially off set
by(cid:98)growth in managed services in Australia and the
UK. At VUE, we will cease to deliver the contract to
administer the UK Driving Theory test for the DVSA
in(cid:98)September 2016.
Growth
In our Growth markets (which include Brazil, China,
India and South Africa), we expect continued pressure
in South Africa on government spending on textbooks
and lower enrolments in CTI, macro-economic
pressures in emerging markets, specifi cally China
and Brazil, off set by growth from new products such
as our Wall Street English new student experience.
Penguin Random House
In Penguin Random House, we anticipate that
additional benefi ts from the ongoing integration
of(cid:98)the(cid:98)business will be broadly off set by reduced
demand for ebooks, following industry-wide changes
in(cid:98)terms in 2015.
Section 2 Our performance
13
To implement this programme, we will incur costs of
approximately £320m in 2016 and expect to generate
annualised savings of approximately £350m, with
approximately £250m of savings in 2016 and a
further £100m of savings in 2017. We have already
implemented a number of signifi cant associated
actions since announcing the programme in January.
Currency movements
In 2015, Pearson generated approximately 63% of its
sales in the US, 6% in Greater China, 5% in the Eurozone,
3% in Brazil, 2% in Canada, 2% in Australia, 2% in South
Africa and 1% in India and our guidance is based on
exchange rates at 31 December 2015.
Interest and tax
We expect our interest charge to be approximately
£60m, with lower average net debt levels off set by
the(cid:98)absence of released accrued interest payments
following agreement on historical tax positions.
We(cid:98)expect a tax rate of approximately 19% on our
total(cid:98)profi t before tax (which includes the post-tax
contribution from Penguin Random House).
Coram Williams
Chief fi nancial offi cer
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Portfolio changes
We completed the sale of PowerSchool on 31 July
2015 for £222m; the sale of the Financial Times on
30(cid:98)November 2015 for £858m; and substantially
completed the sale of our 50% stake in The Economist
Group on 16 October 2015 for £469m. In addition
we disposed of Fronter and a number of print
textbook lists in the US. Total disposals contributed
approximately £90m to 2015 operating profi t which
will(cid:98)not recur in 2016.
Other operational factors
Dual running costs from technology implementations,
increased investment amortisation from new product
launches and cost infl ation will increase costs by
approximately £90m in 2016 when compared to 2015.
Incentive compensation
Group incentive compensation was zero in 2015
refl ecting the weakness of performance versus budget.
The incentive pool will be reinstated to £110m in 2016
to(cid:98)ensure our workforce is incentivised to sustain its
strong competitive performance and to implement a
signifi cant programme of change within the company.
Restructuring
Building on the work we have done over the last three
years, we are taking further action to simplify our
business, reduce our costs and position Pearson for
growth in our major markets. We will: create a single
courseware product organisation; integrate our North
America assessment operations; reduce our exposure
to large scale direct delivery and focus on more scalable
online, virtual, and blended services; implement major
effi ciency improvements across all our enabling
functions - technology, fi nance, HR; and rationalise our
property portfolio and renegotiate and consolidate
major supplier agreements.
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14
Pearson plc Annual report and accounts 2015
Key performance indicators
Five-year performance
Financial objectives
KPI
Maintain
long-term
growth
Sales
Sales fell 5% at CER in 2015 and have grown over the last fi ve years at an average
annual rate of over 1%, refl ecting good long-term growth in digital and services
businesses and acquisitions in the global education market, partially off set by
a shift to subscription revenues, recent cyclical and policy factors and adverse
exchange rate movements in emerging markets.
Performance
+1.2%
Total adjusted operating profi t
Total adjusted operating profi t fell 3% in 2015 at CER and has fallen at a compound
annual rate of 5.1% since 2010 refl ecting good long-term growth in digital and
services off set by the sale of businesses, recent cyclical and policy factors and
adverse exchange rate movements in emerging markets.
-5.1%
Deliver
sustainable
returns
Total adjusted earnings
Total adjusted earnings per share is up 5% year-on-year in 2015, refl ecting portfolio
changes, exchange rate movements and a lower tax rate. Over fi ve years EPS has
declined at an average annual rate of 1.9% refl ecting good long-term growth in our
digital and services businesses off set by declines in print, portfolio changes, cyclical
and policy factors and adverse exchange rate movements in emerging markets.
-1.9%
Return on invested capital
ROIC grew 0.2% to 5.8% in 2015 and was aff ected by a lower tax charge. ROIC has
fallen from 10.2% in 2010. We expect ROIC to improve as we deliver the plans for
simplifi cation and growth that we announced in January and make progress
towards our 2018 goals.
-4.4
percentage points
Total shareholder return
TSR in 2015 was -36% which compares to a -1% return on the FTSE 100 Index of large
UK listed companies. Over fi ve years, Pearson has returned approximately -11%, well
behind the return on the FTSE 100 Index of 27% over the same period. Our recent
shareprice performance has been disappointing but we are confi dent that the plans
and strategy laid out in this report will make Pearson a simpler, stronger company,
and that they set the company up for a sustained period of growth and value creation.
-11.2%
Dividends per share
We increased dividends in comparison to 2014 by 2% to 52p, our 24th straight year
of increasing our dividend above the rate of infl ation. Pearson plans to hold its
dividend at the 2015 level whilst it rebuilds cover, refl ecting the Board’s confi dence
in the medium term outlook.
+6.1%
Manage our
cash position
effectively
Operating cash fl ow
Operating cash fl ow fell to £435m in 2015, refl ecting an increase in(cid:98)capital
investment in new simplifi ed systems, higher returns in our US higher education
business due to de-stocking at one major retailer, weaker trading and pension
top-ups partly off set by an increased dividend from Penguin Random House.
Over fi ve years operating cash fl ow has declined at an average annual rate of
over 16% per annum, refl ecting good long-term growth in our digital and(cid:98)services
businesses off set by declines in print, portfolio changes, recent cyclical and
policy factors and adverse exchange rate movements.
-16.3%
Section 2 Our performance
15
Strategic objectives
Data/Progress
Transform
to digital and
services
Digital and services revenue share
2010: 46.5%
2015: 65.0%
£2.1bn
£2.9bn
Grow presence
in emerging
markets
Emerging markets revenue share
2010: 11.3%
2015: 16.4%
£475m
£734m
Deliver
measurable
impact
(Efficacy)
› Reporting programme on track for 2018
› Growth and impact goals set for 2025
Product improvements identifi ed by effi cacy reviews
are being implemented on track with plans
95%
See strategic growth drivers on p04-05
Non-fi nancial measures
Deliver
gender balance
Gender diversity
Men
Women
Board
7
70%
3
30%
Senior managers
(excl executive
board directors)
68
66%
35
All employees
16,781
41% 24,260
34%
59%
Reduce our
carbon footprint
Global Greenhouse Gas (GHG) emissions
Metric tonnes CO2e
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Maintain
community
investment
2015
110,724 -15%
2014
129,742
(cid:20)(cid:8)(cid:3)(cid:82)(cid:85)(cid:3)(cid:80)(cid:82)(cid:85)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:83)(cid:85)(cid:72)(cid:16)(cid:87)(cid:68)(cid:91)(cid:3)(cid:83)(cid:85)(cid:82)(cid:564)(cid:87)(cid:86)
2015
2014
2013
2012
2011
2010
1.5% (£10.7m)
2.0% (£14.4m)
1.5% (£11.4m)
1.2% (£11.5m)
1.2% (£13.1m)
1.6% (£10.5m)
See Our social impact section on p54-67
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Data/Progress
Sales 2010-2015 £m
6,000
5,000
4,000
3,000
2,000
1,000
0
10
11
12
13
14
15
(cid:36)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:72)(cid:71)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:564)(cid:87)(cid:3)(cid:21)(cid:19)(cid:20)(cid:19)(cid:16)(cid:21)(cid:19)(cid:20)(cid:24) £m
1,000
800
600
400
200
0
10
11
12
13
14
15
Adjusted earnings per share Pence
2015
2014
2013
2012
2011
2010
70.3p
66.7p
70.1p
82.6p
86.0p
77.5p
Return on invested capital %
2015
2014
2013
2012
2011
2010
5.8%
5.6%
5.4%
9.1%
9.0%
10.3%
TSR: Five-year change %
Pearson
FTSE 100
FTSE All-Share
FTSE All-Share Media
STOXX 600 Media
-11.2%
44.8%
51.8%
122.1%
107.5%
(cid:39)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:3)(cid:83)(cid:72)(cid:85)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:564)(cid:86)(cid:70)(cid:68)(cid:79)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85) Pence
2015
2014
2013
2012
2011
2010
52.0p
51.0p
48.0p
45.0p
42.0p
38.7p
(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:565)(cid:82)(cid:90) £m
2015
2014
2013
2012
2011
2010
£435m
£649m
£588m
£788m
£983m
£1,057m
16
Pearson plc Annual report and accounts 2015
Section 2 Our performance
17
Operating
performance
overview
Developing for access,
delivering for outcomes
Education is a sector with large growth opportunities
for Pearson. The rise of digital and the need for eff ective
learning which better equips students for their future
careers are trends which will benefi t us in the long term.
Pearson has world class capabilities and products in
educational courseware and assessment, powered by
learning technology. By combining these capabilities with
digital teaching and learning services, we help schools,
universities and others to scale online, reach more people
and ensure better learning outcomes.
Our primary segments for management reporting are
Geographies (North America, Core and Growth), as this
is how we drive business performance. This is how we
reach learners, through content and digital services in
individual classrooms; through broad partnerships with
public and private education institutions and, in certain
markets, by directly expanding capacity through our
own schools and colleges.
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Pearson plc Annual report and accounts 2015
Section 2 Our performance
19
Operating performance
Geography
North
America
Sales
£2.9bn
Adjusted operating profi t
£480m
Revenues grew 1% in headline terms,
due to the depreciation of sterling against
the US dollar, but fell by 5% at CER and 1%
in underlying terms.
In School, strong enrolment growth in Connections
Education, good growth in clinical assessment and
market share gains in courseware were off set by the
impact of a smaller textbook adoptions market and
weakness in the open territories in K-12 courseware,
and a change in revenue model at Connections
Education which records revenue for services
charged at cost on a net basis.
In Higher Education, market share gains in
courseware were off set by lower enrolments (total
US college enrolments fell 1.7%, with combined
two-year public and four-year for-profi t enrolments
declining 4.4%, aff ected by a rising employment rate
and regulatory change aff ecting the for-profi t and
developmental learning sectors), higher textbook
returns and list sales. Strong enrolment growth at
Pearson online services was off set by lower revenues
from Learning Studio, a higher education learning
management system that we are retiring, and the
impact of a change in revenue model.
In Professional, revenues grew strongly at VUE
due to higher volumes of professional certifi cation
assessments. Adjusted operating profi ts rose 8% in
headline terms due to currency movements, fell 1%
at CER and were up 1% in underlying terms, with
contract losses in school assessment and an adverse
revenue mix off set by tight cost control and the profi t
on sale of lists.
Read about Tremayne and the
General Education Degree on p20
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Pearson plc Annual report and accounts 2015
Operating performance continued
North America
continued
School
Connections Education, our virtual school business
served over 68,000 full time equivalent students
through full-time virtual and blended school
programmes in 2015, up 11% from 2014 as a result
of underlying growth and a new statewide school in
North Carolina. Connections manages 30 virtual public
schools with three new, full-time state-wide virtual
public schools approved for the 2016-17 school year
to serve students in Arkansas, Washington and New
Mexico. In its annual Parent Satisfaction Survey, 93% of
parents of students enrolled in full-time online partner
schools “recommend” Connections to other families.
In courseware, revenue declined year-on-year despite
strong market share performance, primarily due to a
smaller overall adoption market as compared to 2014.
Overall market share increased slightly driven by a
strong performance in new adoption markets where
we won 31% (2014: 25%) of new adoptions competed
for, or 29% (2014: 25%) of the total new adoption market
of $730m in 2015 (2014: $910m), led by a strong
performance in Grades K-6 Social Studies in Texas
and Indiana, and in Grades K-6 Science in Oklahoma.
We expanded iLit, our digital reading intervention
programme, covering a broader range of students
including English language learners. Research studies
show that students using iLit gain two or more years
of reading growth in a year using this tablet-based
programme (http://pear.sn/PErhf). We launched
ReadyGEN, a K-6 reading series and enVisionMATH2.0,
the newest off ering in the highly successful
enVisionMATH K-6 maths programme.
In State and National Assessments, revenues for the
full year declined due to contract losses. High-stakes
online test volumes grew strongly, up 130% on 2014 to
26.4(cid:98)million, as customers transitioned to computer-
based testing. Paper-based high-stakes test volumes
grew 3% to 32.7 million. Pearson successfully delivered
English Language, Arts and Math PARCC assessments to
5.1 million students across ten states and the District of
Tremayne, General Education Degree graduate, US
Living in Maryland in the United States, Tremayne was
19 years old when he realised that dropping out of high
school was a big mistake. “I realised that without a high
school diploma or GED no one would hire me”. He knew he
needed a change, so he turned to the GED Testing Service
to(cid:98)help him and found the MyGED portal fi t well with his
lifestyle, “having the GED portal online was very convenient,
very quick. I used to access it on my phone.”
Tremayne successfully passed the test and is looking forward
to exciting new opportunities, “when I received my(cid:98)diploma,
I was so proud of myself.”
“I wasn’t used to accomplishing much in
life and realised that I could do anything
I put my mind to.”
He’s been accepted into a local community college in
Maryland and plans to transfer to a four-year school to
study engineering. He hopes one day to start his own
construction business.
Columbia. ACT Aspire delivered Common Core aligned
college and career readiness assessments to 1.3 million
students up 67% from 2014 and was chosen for three
new state-wide deployments in 2016. The states of
Arkansas, Mississippi and Ohio will discontinue PARCC
assessments in 2016. We were awarded contracts to
deliver the Indiana Statewide Test of Educational
Progress (ISTEP); renewed the Puerto Rican Tests
of Academic Achievement (PPAA) and parts of the
assessments contract awarded by the Texas Education
Agency; and extended our contracts to administer the
Mississippi Science Test and Mississippi Subject Area
Testing Program. We ceased to administer the majority
of the current Texas STAAR contract in September 2015.
Pearson extended its partnership with the College
Board for the SAT assessment with the award of a fi ve-
year contract for processing of the redesigned SAT and
PSAT assessments. Pearson will continue to provide the
essay-scoring component for the SAT until March 2016.
Clinical assessment grew well, benefi ting from
continued growth of the fi fth edition of the Wechsler
Intelligence Scale for Children (WISC-V), strong growth in
Behavior Assessment for Children 3e (BASC) and rapid
growth in Q-Interactive, Pearson’s digital solution for
clinical assessment administration with geographic
expansion and continued strong growth in active
users to over 9,000 from 4,000 in 2014 with test
administrations up over 400% to 1.3 million sub-tests.
Section 2 Our performance
21
Bradford, High school student, US
Bradford attends Hart-Ransom Academic(cid:98)Charter High
School, an independent-study high school, which uses
Connections Learning for its online learning curriculum.
Now in the 11th grade, Bradford likes the online
curriculum’s rigour, and has taken advantage of
Connections Learning’s(cid:98)fl exibility and self-paced learning
to accelerate(cid:98)his education.
“It defi nitely challenges me academically,
and thanks to the online learning,
I can pace myself exactly how I need
to be paced.”
Bradford appreciates the personal attention he’s
received(cid:98)from his online learning teachers, like his Spanish
teacher, who he talks to on the phone, and his(cid:98)Maths
teacher, who meets him virtually in the LiveLesson
room. “I really like how involved the teachers are with
the students.”
+11%
Connections Education served
over(cid:98)68,000 Full Time Equivalent
students through full-time virtual
and blended school programmes
in(cid:98)2015, up 11% from 2014
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Pearson plc Annual report and accounts 2015
Operating performance continued
North America
continued
REVEL
Sterling, University student, US
Sterling is currently a junior in the business school at Texas
A & M University and is majoring in marketing. To fulfi l a
prerequisite for upper-level business classes, Sterling took
a State government course online last summer, using
REVEL, Pearson’s interactive learning programme for the
humanities and social sciences. “I learned so much in the
course because it wasn’t the same thing every time you
fl ipped the page,” Sterling explained. “There would be a
graph, then a video, and then a picture. And you could get
involved with some of the animations.”
“I really loved that it was so interactive,
because it infl uenced how well I learned
and how quickly I picked up the material.”
11m
REGISTER
In North America, digital registrations
grew 3% to almost 11 million with
good growth in Science, Business &
Economics, Statistics, REVEL and skills
applications like Pearson Writer
Higher Education
Gross courseware revenues fell 1.5% (compared to
industry gross revenue declines of 2.7%), due to lower
college enrolments off set by market share gains.
Net revenues declined 5.7% (compared to industry
net declines of 7.5%) refl ecting the impact of higher
returns. Our market share in courseware benefi ted
from strong performance from key titles including:
Hubbard Economics 5e, Hibbeler Engineering Mechanics
14e and Marieb Human Anatomy & Physiology 10e.
Global digital registrations of MyLab and related
products grew 3% to nearly 13 million. In North
America, digital registrations grew 3% to almost
11 million with good growth in Science, Business &
Economics, Statistics, REVEL and skills applications
like Pearson Writer, off set by softness in
developmental Mathematics. Faculty-generated case
studies indicate that the use of MyLab programmes,
as part of a broader course redesign, can support
improvements in student test scores and lower
institutional cost (http://pear.sn/IZxLE). We launched
a suite of features that include Adaptive Practice
in our MyLabs to personalise subjects including
Mathematics and Nursing practice, Predictive
Analytics Early Alerts in Mastering to help science
instructors support at-risk students, gamifi cation
features in Business and rich learning analytics
dashboards in numerous products that off er
deep insight into students’ progress, performance
and engagement.
Section 2 Our performance
23
In Pearson online services, our higher education
Online Program Management (OPM) business, course
enrolments grew strongly, up 25% to over 265,000,
boosted by strong growth in Arizona State University
Online where we renewed our partnership at the start
of 2015. We extended our collaboration with Maryville
University to launch a Bachelor and Master’s in
Cybersecurity and a Doctorate in Leadership. Ohio
University is partnering with Pearson to launch a
Master’s in Financial Economics and Public Relations.
University of Nevada Reno is partnering to increase
access to the Master of Social Work degree
programme online. Pearson launched a new
managed programmes service model with Cincinnati
State Technical and Community College, adapting
traditional OPM services to the Community College
market signing a landmark ten-year agreement
to provide marketing, recruiting, admission and
retention services both to online and ground-based
programmes.
In enterprise solutions, Pearson signed signifi cant
large-scale, enterprise adoptions of cross-discipline
digital content, where content is purchased via an
upfront course fee and integrated with university
IT systems, with Jones County College, National
University, Algonquin College and the University of
Missouri system. We signed an expanded strategic
partnership agreement with Southern New
Hampshire University’s (SNHU) College of Online
and Continuing Education (COCE). Pearson will
support curriculum development, online tutoring,
enterprise-wide content and data integration, ebooks
with a print-on-demand option and data and analytics
services, which will provide greater visibility into
students’ achievement of learning outcomes.
The Charles A. Dana Center at The University of
Texas at Austin is collaborating with Pearson to
provide webbased course resources to community
colleges across Texas that dramatically shorten the
time it takes for students to earn college credit in
mathematics as part of the New Mathways Project.
Three courses were launched in 2015: Foundations
Mathematical Reasoning, Statistics Reasoning and
Quantitative Reasoning, with more planned in 2016.
Pearson was named as the premier US Green Building
Council Education Partner and will off er curriculum
and course services to universities, associations,
training companies, corporations, and workforce
education and apprenticeship programmes. We are
partnering with Broward College to launch new
competency-based workforce certifi cation pathways
focused on IT and Healthcare. Pearson will support
Broward’s strategy by providing 12 industry
certifi cations with existing workforce education
courseware, as well as curriculum development
services to build new courses towards certifi cation
and the Acclaim badging platform.
Professional
In professional certifi cation, VUE global test volumes
grew 11% year-on-year to 14.2 million, boosted by
continued growth in IT, Professional and GED,
with increased volumes from Microsoft Certifi ed
Professional (MCP) Program globally, National
Council of State Boards of Nursing and US teacher
certifi cation programmes. VUE renewed the Certiport
Microsoft Offi ce Specialists and Microsoft Technology
Associate programmes for an additional year and
extended our partnership with Cisco Systems for
three and a half years.
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Pearson plc Annual report and accounts 2015
Operating performance continued
Geography
Core
Sales
Adjusted operating profi t
£836m £114m
Revenues declined by 8% in headline terms,
5% at CER and in underlying terms.
Growth in Pearson online services in Australia, Wall
Street English in Italy, Clinical Assessment in Germany
and the Pearson Test of English in Australia was more
than off set by revenue declines in UK qualifi cations
as the business nears the end of a period of policy
change, revenue declines at VUE, phasing and market
weakness in Australian higher education courseware
and the focusing of our UK school courseware on
products that directly support Pearson Qualifi cations.
Adjusted operating profi t (excluding the FT, The
Economist and Mergermarket) declined 2% in
underlying terms due to lower revenue off set by
tight cost control.
Section 2 Our performance
25
Read about Sarah and Pearson College on p26
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Pearson plc Annual report and accounts 2015
Operating performance continued
Core
continued
School
In assessment, UK qualifi cations have been impacted
by government policy, where changes to accountability
measures have led to a further 20% decline in BTEC
registrations in 2015. GCSE and GCE entries for summer
2015 grew modestly compared with 2014, resulting
from increases in GCSE registrations in Sport, ICT and
Business and strength in iGCSE entries. We successfully
delivered the National Curriculum Test for 2015,
marking 4 million scripts from 1.7 million students and
successfully transitioned the marking of the test to an
online-only model.
In courseware, UK School revenue fell with growth
in primary school more than off set by declines in
secondary, as the vocational market contracted and
our upper secondary revenues were impacted by
lower market participation as we focus on products
that directly support our qualifi cations. More than
5,400 UK schools now subscribe to at least one Bug
Club service, our primary school blended reading
programme, representing growth of nearly 16% in
the year. There are over 1.8 million pupils, more than
9,000 schools and 152,000 teachers currently using a
service on ActiveLearn Primary. Italy revenues declined
slightly with market share gains in primary off set
by market weakness and a lower share in upper
secondary. Australia revenues declined, with growth
and increased market share in primary more than
off set by a weaker secondary market.
Clinical assessment grew well with Germany benefi ting
from strong growth in Kaufman Assessment Battery for
Children (K-ABC), partly off set by declines in Australia,
after a strong year in 2014 driven by the release of
Wechsler Primary and Preschool Scale of Intelligence IV.
P E A R S O N
C O L L E G E
L O N D O N
P E A R SON V U E
Sarah, Pearson College London student, UK
Noel, Pearson VUE customer, UK
Sarah works in the marketing team at Nestlé, having
graduated from Pearson College London last September.
She says “Education gave me the confi dence to take a step
back from a career path that I was unhappy with and fi nd a
new direction. It gave me the fl exibility to study a full degree
in two years which enabled me to get back on my career
ladder as soon as possible.”
“Pearson College London gave me the skills
to impress at interview, the knowledge to
succeed in my new role and the confi dence
to apply in the fi rst place.”
“Through the(cid:98)degree, and the environment, I was able
to understand what I wanted from a career and fi nd
the(cid:98)right move for me.”
The Chartered Institute of Management Accountants (CIMA)
has worked in partnership with Pearson VUE to transform
its portfolio of professional-level exams from pen and
paper to computer-based testing. Noel Tagoe, Executive
Director of CIMA, says: “By maximising the opportunities
off ered through technological advances in(cid:98)computerised
assessment, we can access a wide range(cid:98)of testing methods,
assess a variety of skills and competencies at diff erent
levels, and off er much greater fl exibility for where and when
examinations are taken. All(cid:98)of which will be of tremendous
benefi t to both students and, importantly, employers.
These changes will take full(cid:98)advantage of the role that
technology plays in the lives(cid:98)of the younger generation,
and refl ect the evolution in(cid:98)the workplace.”
Section 2 Our performance
27
Higher Education
Professional
The Pearson Test of English Academic (PTEA) saw
strong growth in test volumes and revenues after
gaining approval from the Australian Department
of Immigration and Border Protection to administer
a broad range of language tests linked to visa
applications.
Wall Street English revenues fell slightly with strong
growth in Italy off set by declines in Germany.
In courseware, UK revenues declined, primarily due
to a weak market. In Australia, revenues declined
signifi cantly due to phasing and market weakness.
In online services, our Australian University
Partnerships business grew strongly with combined
course enrolments of nearly 4,000, up 380% from 2014.
The growth of our partnership with Monash University
was led by the Graduate Diploma in Psychology, which
is now one of Monash’s largest postgraduate courses.
Our new partnership with Griffi th University started
very strongly, seeing consistent demand for the MBA
programme and the launch of two further courses.
Kings College London partnered with Pearson to launch
online postgraduate degree programmes in Psychology
and Law.
Total enrolled students at Pearson College doubled
to 232.
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Stephanie, Winner of Outstanding BTEC Student of the Year
Award 2015, UK
Stephanie studied a Level 3 Diploma in Health and Social Care
at Penwith College in the UK. She is passionate about helping
others and her outstanding achievements in college and in
the local community marked her out to the(cid:98)BTEC Award
judges as truly outstanding.
Stephanie supported herself fi nancially with paid
employment as a community carer alongside her BTEC.
She(cid:98)juggled long working hours with her studies, yet still
far(cid:98)exceeded the 100-hour work experience requirements
of her course, completing a range of placements in hospital
wards, care homes and day care centres. She also
participated in many local voluntary projects working with
individuals in her community who are isolated and lonely.
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Pearson plc Annual report and accounts 2015
Section 2 Our performance
29
Operating performance continued
Geography
Growth
Sales
Adjusted operating loss
£692m -£12m
Revenues fell 4% in headline terms, were fl at
at CER and fell 1% in underlying terms.
In China, revenues grew modestly refl ecting strong
sales of premium services in our direct delivery
English Language Learning businesses off set by list
disposals. In Brazil, revenues were stable with good
growth in private sistemas and language schools,
off set by declines in(cid:98)government funded sistemas and
language schools. In South Africa, revenues declined
signifi cantly due to a smaller textbook adoption cycle
and lower enrolments at CTI, due to a reduction in
the number of qualifi ed students graduating from
high school and tightening consumer credit aff ecting
re-enrolment rates. In the Middle East, our business
was impacted by the withdrawal from the Saudi
Arabian Colleges of Excellence.
Adjusted operating profi t decreased £44m to a loss
of(cid:98)£12m due to the strengthening of Sterling against
key Emerging Market currencies, revenue declines
in(cid:98)South Africa, a contract termination charge arising
from the transition of our three Saudi Colleges to new
providers, cost infl ation and additional investment in
China; partially off set by the benefi ts of restructuring
and integration in Brazil.
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Read about Mpho and MGI on p30
30
Pearson plc Annual report and accounts 2015
Operating performance continued
Growth
continued
School
In South Africa, there was continued pressure on
Government spending on textbooks due to budget
pressures, which resulted in the value of the textbook
market falling 60% from a peak of R2.9bn in 2013
to an estimated R1.15bn in 2015. We continued to
perform well competitively and maintained a leading
market share.
In Brazil, sistemas revenues grew well with strong
growth in private sistemas partly off set by declines in
NAME, our public sistema, following the cancellation
of a large contract as a result of government spending
cuts. Overall sistema enrolments fell 7% to nearly
449,000 with declines in NAME partly off set by growth
in our three private sistemas, led by our largest sistema,
COC. More than half of COC schools that participated in
the High School National Exam (ENEM) ranked among
the top three schools in their municipalities.
Mpho, MGI graduate, South Africa
Mpho Nethengwe is a 28 year-old MGI graduate who
is now a Writing and Communication Skills and English
Lecturer at her alma mater in Midrand. She says:
“The skills I acquired at MGI made it
easier for me to step into my role in the
working world. I am able to take on every
challenge as it comes, to refl ect on,
evaluate and improve on what to do in
order to remain productive.”
Mpho has ambitions of putting her learning and experience
into practice, even exploring a possible future(cid:98)career in
communications at Pearson. We think she’d be a real asset.
In India, enrolments at our managed schools grew
14% to nearly 27,000 students and we launched a
pilot in more than 60 schools of MyPedia, an inside
service ‘sistema’ solution for schools comprising
print and digital content, assessment and academic
support services.
Middle East school courseware and professional
development revenues grew strongly on improved
distribution.
Higher Education
In South Africa, after strong growth over a number of
years, student enrolments at CTI universities fell by 16%
to 11,300 driven by a 13% decline in qualifi ed graduating
high school students and tightening consumer credit
aff ecting re-enrolment rates.
In Mexico, our fully accredited online university
partnership, UTEL, increased the number of students
enrolled by 34% to nearly 12,600.
+14%
Enrolments at our
managed schools
in India grew 14%
Section 2 Our performance
31
+34%
In Mexico, our fully
accredited online
university partnership,
UTEL, increased the
number of students
enrolled by 34%
In India, Higher Education courseware revenues grew
strongly. Cornell University partnered with Pearson
to launch the Cornell-ILR Experienced Managers
Programme in India, with a blended learning approach
combining online and in-person instruction.
In the Middle East, our three-year partnership with
Taibah University in Saudi Arabia, to enable its
transformation to a fully blended and personalised
learning model, is progressing with over 4,000 students
enrolled in our solution in 2015. Our partnership
with the Preparatory Year Deanship at Um Al Qura
University (PYP-UQU), to provide online learning and
assessment technology has delivered 13,000
MyMathLab, MyITLab and MasteringPhysics licences.
We withdrew from an agreement to run three Saudi
Arabian Colleges of Excellence, with the colleges
transitioning to new providers from 30 June 2015.
This resulted in a termination charge.
Alvir, English student, Brazil
Alvir is a 17 year-old who has been studying at Wizard for
three years. In the beginning, studying English was only a
way to remember his father, who used to love the language.
But studying evolved into something bigger and helped him
to achieve his goals; he got his fi rst job as an assistant teacher
at Wizard, and took the TOEIC exam, achieving the maximum
990 points. Alvir says that English has helped him to meet
new people and now his goal is to(cid:98)live abroad some day.
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Pearson plc Annual report and accounts 2015
Operating performance continued
Growth
continued
Professional
In Pearson English, good growth in direct delivery in
China, private expenditure in language schools in Brazil,
and English Language Teaching (ELT) was partly off set
by the impact of lower public expenditure in language
schools in Brazil.
In China, Wall Street English (WSE) achieved strong
revenue growth, refl ecting success in the premium
segment and the growth in VIP branded off erings.
Overall enrolments grew modestly to over 67,000 with
new enrolments growing strongly. We launched the
New Student Experience (NSE) in six pilot centres during
December 2015. The NSE delivers a major upgrade
to the Wall Street English service with adaptive,
personalised learning incorporating Pearson’s Global
Scale of English.
Global Education achieved moderate revenue growth
as the market shifted to more intensive premium
courses with smaller class sizes and new products,
which resulted in enrolments declining 6.5% to 85,110.
We launched around 30 new MyEnglishLab products
including Top Notch 3e and Progress. MyTOEFLLab and
the second edition of MyIELTSLab successfully launched
in China in WSE and Global Education. Global student
registrations for MyEnglishLab and other ELT digital
courseware grew 14% to 739,000. Pearson Test of
English grew strongly in India.
Grupo Multi in Brazil saw strong revenue growth
at Wizard, our consumer-facing franchised English
language learning business, but this was off set
by declines in government orders due to public
spending cuts. We opened 40 new school-in-school
units for Multi English franchises in K-12 sistemas
partner schools.
Angelina, Wall Street English graduate, China
Angelina runs a wedding planning company in Shenzhen,
China. Learning English with Wall Street English has
enabled her to attract more international clients. She is
now qualifi ed with a top wedding planning institution in
North America and is realising her dream of giving couples
their perfect wedding memories.
Section 2 Our performance
33
Penguin Random House
Pearson owns 47% of Penguin Random House, the
fi rst truly global consumer book publishing company.
Penguin Random House had a strong performance in
2015, boosted by publication of hundreds of Adult and
Children’s bestsellers across its territories, including
the fi ction mega-successes of Grey and The Girl on the
Train, which each sold over 7 million copies worldwide.
The US business published 584 New York Times print
and ebook bestsellers in 2015 (2014: 760, based on
a broader New York Times title count than 2015).
The division benefi ted from the multi-million copy
successes of Grey by E L James and the Adult debut
novel The Girl on the Train by Paula Hawkins.
Children’s authors who extended their outstanding
sales in 2015 include Dr. Seuss, John Green, R.J.
Palacio, James Dashner, Rick Yancey, Drew Daywalt,
and Oliver Jeff ers. Additional notable Adult titles
include The Life-Changing Magic of Tidying Up by Marie
Kondo; Rogue Lawyer by John Grisham; Lost Ocean
by Johanna Basford; Between The World and Me by
Ta-Nehisi Coates; and the movie tie-in paperback
The Martian by Andy Weir.
The UK business published 201 titles on the Sunday
Times bestseller lists (2014: 206). The division enjoyed
outstanding sales for Grey and The Girl on the Train,
which each sold more than 2 million UK copies, and
for Harper Lee’s Go Set A Watchman and Jamie Oliver’s
Everyday Super Food. Great demand continued for
Jeff Kinney’s Diary of a Wimpy Kid and John Green’s
titles, and for DK Publishing’s Star Wars publications.
Penguin Random House’s promising 2016 publishing
lists include new titles from Lisa Brennan-Jobs, Bill
Bryson, Lee Child, Harlan Coben, Phil Collins, Janet
Evanovich, Ina Garten, John Grisham, Jazz Jennings,
Jeff Kinney, Marie Kondo, John le Carré, Jojo Moyes,
Jamie Oliver, James Patterson, Nathaniel Philbrick,
Pope Francis, Nora Roberts, John Sandford, Danielle
Steel and Star Wars.
Penguin Random House completed the sale of
Author Solutions, its supported self-publishing
services company, to an affi liate of Najafi Companies,
an international private-investment fi rm, on
31 December, and sold its Australian online bookseller
Bookworld to online retailer Booktopia in August.
The integration of Penguin and Random House
continued to provide net benefi ts through
organisational alignments and systems, and
warehouse combinations in 2015, as well as for 2016
and thereafter. The North America warehouse
consolidation was completed in February 2015, and
in December, the UK business announced it will be
gradually closing its Rugby distribution centre and
relocating its inventory to two other locations.
The integration in Spain and Latin America of
Santillana with Grupo Editorial Penguin Random
House remains on course.
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Pearson plc Annual report and accounts 2015
Other financial information
Net fi nance costs
All fi gures in £ millions
Net interest payable
Finance income in respect of
employee benefi t plans
Other net fi nance costs
Net fi nance costs
2015
2014
(46)
(64)
4
13
(29)
1
(30)
(93)
Net interest payable in 2015 was £46m, compared to
£64m in 2014. The majority of the movement in net
interest payable is due to the release of accrued interest
following agreement of historical tax positions. For our
debt portfolio, our fixed rate policy reduces the impact
of changes in market interest rates, however we were
still able to benefit from low average US dollar interest
rates during the year as the majority of the Group’s debt
is US dollar denominated. Year-on-year, average three-
month US dollar LIBOR rose by 0.1% to 0.3%. This slight
increase in floating market interest rates, along with
the impact of changes in our debt portfolio, foreign
exchange translation and the eff ect of slightly lower
levels of average net debt in the period led to little
change in the year-on-year interest charge on debt.
Interest receivable on cash balances held overseas
was reduced from the prior year due mainly to the
weakening of emerging market currencies against
sterling. The Group’s average net debt fell by £61m,
largely as a result of disposals in the fourth quarter of
2015 off setting the translation of our predominantly
US dollar debt. These combined factors contributed
to the overall decrease in the Group’s average net
interest payable from 3.6% to 2.7%.
Finance income and costs relating to retirement
benefi ts have been excluded from our adjusted
earnings as we believe the income statement
presentation does not refl ect the economic substance
of the underlying assets and liabilities. Also included in
the statutory defi nition of net fi nance costs (but not in
our adjusted measure) are fi nance costs for deferred
consideration associated with acquisitions, foreign
exchange and other gains and losses. Finance costs for
deferred consideration are excluded from adjusted
earnings as they relate to the future potential
acquisition of non-controlling interests and do not
refl ect cash expended. Foreign exchange and other
gains and losses are excluded from adjusted earnings
as they represent short-term fl uctuations in market
value and are subject to signifi cant 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.
In 2015, the total of these items excluded from adjusted
earnings was a gain of £17m compared to a loss of
£29m in 2014. Both the gain in 2015 and the loss in
2014 mainly relate to foreign exchange diff erences
on unhedged cash and cash equivalents and other
fi nancial instruments.
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.
All fi gures in £ millions
Cash and cash equivalents
Marketable securities
Net derivative fi nancial instruments
Bonds
Bank loans and overdrafts
Finance leases
Net debt
2015
1,703
28
(55)
2014
530
16
40
(2,284)
(2,173)
(38)
(8)
(42)
(10)
(654)
(1,639)
Section 2 Our performance
35
The largest contributors to the decrease in net debt
are the receipt of disposal proceeds, off set by changes
in the value of gross debt due to exchange rates and
a decrease in the value of our derivative portfolio.
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 2015 (from $1.56 to $1.47:£1) increases the
sterling equivalent value of our reported net debt.
At the year end, the long-term ratings were Baa1 from
Moody’s and BBB+ from Standard and Poor’s, and
the short-term ratings were P2 and A2 respectively.
Both long-term ratings were on negative outlook at the
year end. In March 2016, Standard & Poor’s changed
Pearson’s long-term rating from BBB+ (Negative) to
BBB (Stable). The short-term ratings from Moody’s and
Standard & Poor’s remain unchanged at P2 and A2.
In April 2015, the Group accessed the capital markets,
raising €500m through the sale of notes maturing in
May 2025 and bearing interest at 1.375%. The notes
were swapped to floating rate in US dollars to conform
with the policy described in note 19. The Group has a
$1,750m committed revolving credit facility. During
the year, the maturity of the facility was extended by
one year. The facility now matures in August 2020.
At 31 December 2015 this facility was undrawn. The
revolving credit 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 July. At 31 December 2015, 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 eff ective tax rate on adjusted earnings in 2015 was
15.5% compared to an eff ective rate of 17.9% in 2014.
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 eff ective statutory rate of 20.25% in 2015
and 21.5% in 2014). These higher tax rates were largely
off set by amortisation-related tax deductions and by
adjustments arising from agreement of historical tax
positions. Both these items were more signifi cant in
2015 than they had been in 2014.
The reported tax benefi t on a statutory basis in 2015
was £81m (18.7%) compared to a charge of £56m
(22.0%) in 2014. The statutory tax benefi t in 2015 is
mainly due to benefi ts arising on the increase in
intangible charges. Operating tax paid in 2015 was
£129m compared to £163m in 2014.
Discontinued operations
Discontinued operations in 2015 relate to the sale of
the Financial Times and the Group’s 50% interest in
The Economist. The Economist sale was substantially
completed on 16 October 2015 and realised a gain of
£473m before tax. The sale of the Financial Times
completed on 30 November 2015 and realised a gain of
£711m before tax. We expect both of these transactions
to qualify for substantial shareholder exemption in the
UK. The gains on these transactions and the results for
both 2014 and 2015 to the respective sale dates have
been included in discontinued operations.
The sale of Mergermarket to BC Partners, completed on
4 February 2014, resulted in a gain of £244m before tax.
The gain on sale and the results for 2014 to the date of
sale have been included in discontinued operations.
Also included in discontinued operations in 2014 is a
gain of £29m relating to adjustments to liabilities arising
on the formation of the Penguin Random House group.
Although this transaction completed in 2013 there
were subsequent adjustments relating to the potential
transfer of pension liabilities and tax.
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Pearson plc Annual report and accounts 2015
Other financial information continued
Other comprehensive income
Post-retirement benefi ts
Included in other comprehensive income are the
net exchange diff erences on translation of foreign
operations. The gain on translation of £175m in 2014
compares to a loss in 2015 of £69m and is principally
due to movements in the US dollar. A signifi cant
proportion of the Group’s operations are based in the
US and the US dollar strengthened in 2015 from an
opening rate of £1:$1.56 to a closing rate at the end
of 2015 of £1:$1.47 However at the same time other
currencies have weakened compared to sterling and
this eff ect was more than enough to off set gains on
the US dollar. At the end of 2014 the US dollar had
also strengthened in comparison to the opening rate
moving from £1:$1.66 to £1:$1.56 and other currencies
did not weaken to the same extent as they have done
in 2015.
Also included in other comprehensive income in 2015
is an actuarial gain of £118m (including a £8m gain in
respect of associates) in relation to pension and other
post retirement plans. This gain mainly arises from
a higher discount rate used to value the liabilities.
The gain compares to an actuarial gain in 2014 of
£8m (including a £15m loss in respect of associates).
Dividends
The dividend accounted for in our 2015 fi nancial
statements totalling £423m represents the fi nal
dividend in respect of 2014 (34.0p) and the interim
dividend for 2015 (18.0p). We are proposing a fi nal
dividend for 2015 of 34.0p, bringing the total paid and
payable in respect of 2015 to 52.0p, a 2% increase on
2014. This fi nal 2015 dividend which was approved by
the board in February 2016, is subject to approval at
the forthcoming Annual General Meeting and will be
charged against 2016 profi ts. For 2015, the dividend
is covered 1.4 times by adjusted earnings. We plan to
hold our future dividend at the 2015 level while we
rebuild cover.
Pearson operates a variety of pension and post-
retirement plans. Our UK Group pension plan has by
far the largest defi ned benefi t section. We have some
smaller defi ned benefi t sections in the US and Canada
but, outside the UK, most of our companies operate
defi ned contribution plans. In addition to pension plans
we also operate post-retirement medical benefi t plans
(PRMBs), the most signifi cant of which is in the US. In
2014 we amended the eligibility criteria for the US PRMB
plan. This amendment resulted in a curtailment gain
and a reduction in the ongoing service cost of the plan.
The charge to profi t in respect of worldwide pensions
and retirement benefi ts for continuing operations
amounted to £81m in 2015 (2014: £70m) of which a
charge of £85m (2014: £71m) was reported in adjusted
operating profi t and an income of £4m (2014: £1m)
was reported against other net fi nance costs. The
increase charge in 2015 is in part due to the US PRMB
curtailment gain taken in 2014 and an increase in costs
relating to our defi ned contribution plans.
The overall surplus on the UK Group pension plan of
£190m at the end of 2014 has increased to a surplus of
£337m at the end of 2015. The movement has arisen
principally due to continuing asset returns, defi cit
funding and favourable movements in the assumptions
used to value the liabilities. In total, our worldwide
net surplus in respect of pensions and other post-
retirement benefi ts increased from a net asset of
£27m at the end of 2014 to a net asset of £198m at
the end of 2015.
Goodwill and Intangible assets
Following signifi cant economic and market
deterioration in the Group’s operations in emerging
markets and ongoing cyclical and policy related
pressures in the Group’s mature market operations,
management’s expectations of future returns were
revised down in the course of 2015. It was determined
during the goodwill impairment review that the fair
value less costs of disposal of the Growth, North
America and Core cash generating units (CGUs) no
longer supported the carrying value of the goodwill.
An impairment of £507m was booked in respect of the
Group’s Growth operations, representing impairments
of £269m in the Brazil CGU, £181m in the China CGU,
£48m in the South Africa CGU and £9m in the Other
Growth CGU, thereby bringing the carrying value of
goodwill in those CGUs down to £nil. Impairments of
£10m and £13m were also booked in respect of other
acquired intangibles in the South Africa and Other
Growth CGUs respectively, bringing their carrying value
down to £nil. Impairments of £282m and £37m were
also booked in respect of the North America and Core
CGUs respectively, bringing the carrying value of the
goodwill in those CGUs down to fair value less costs
of disposal.
In 2014 following deterioration in the market conditions
for the Group’s online tutoring business based in India,
it was determined in the course of the impairment
review that the value in use of the India CGU no longer
supported the carrying value of the goodwill in that
CGU. An impairment of £67m was booked, thereby
bringing the carrying value of goodwill in the India CGU
down to £nil. An impairment of £10m was also booked
in respect of other acquired intangibles in that CGU,
bringing their carrying value to £nil. Further details
on these impairments are included in note 11 of the
fi nancial statements.
Acquisitions and disposals
There were no signifi cant acquisitions in 2015. The
acquisition of Grupo Multi, Brazil’s leading adult English
language training company, for £437m (plus £49m in
net debt assumed) was announced in December 2013
and completed on 11 February 2014.
Section 2 Our performance
37
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During 2015 the Group disposed of its interest in the
FT Group including its 50% share of The Economist.
The Financial Times sale to Nikkei was completed on
30 November 2015 for consideration of £858m and
realised a gain on sale of £711m before a tax charge
of £49m. The sale of our 50% share of The Economist
Group to EXOR was substantially completed on
16(cid:98)October 2015. The value of the investment in The
Economist on Pearson’s books was not signifi cant
and there was no tax on the transaction with the
result that the gain on sale of £473m largely refl ects
the proceeds received. Also, in July 2015, the
Group disposed of its interest in PowerSchool for
consideration of £222m realising a pre-tax gain of £30m
net of a £70m write down of related software assets.
The sale of the Mergermarket group of companies
in 2014, as noted above, realised a profi t before tax
of £244m. In addition, in 2014, our North America
business disposed of its joint venture interests in
Safari Books Online and CourseSmart, realising
a profi t before tax of £40m, and its investment in
Nook Media realising a loss before tax of £38m.
Return on invested capital (ROIC)
Our ROIC is calculated as total adjusted operating profi t
less cash tax, expressed as a percentage of average
gross invested capital. ROIC increased from 5.6% in
2014 to 5.8% in 2015. Reduced tax payments were the
main reason for the movement.
Related party transactions
Transactions with related parties are shown in note 35
of the fi nancial statements.
Post-balance sheet events
In January 2016, Pearson announced that we are
embarking on a restructuring programme to simplify
the business, reduce costs and position the company
for growth in its major markets. The majority of the
programme is expected to be complete by mid-year
2016 and will involve implementation costs in 2016 of
approximately £320m.
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38
Pearson plc Annual report and accounts 2015
Risk management
The board has carried out a robust assessment of the
principal risks facing the company, including those
that would threaten its business model, future
performance, solvency or liquidity. Our principal risks
and uncertainties are outlined below, along with a
description of how they are being managed.
See pages 82 to 89 in ‘Governance’ for details on the
board and audit committee’s risk oversight during
2015, their ongoing monitoring of risks, including
deep dives into selected principal risks and the annual
eff ectiveness review.
The goal of our risk management approach is to
support Pearson in meeting its strategic and
operational objectives of growth and simplifi cation
as set out in the chief executive’s overview on pages
4 to 7, so that the key business risks are identifi ed,
assessed and mitigated. Our aim is to manage risks,
understanding that many risks are external in nature
and cannot therefore be fully controlled.
How we manage risk
We assessed our risk management maturity in 2014
and made improvements in 2015 towards our 2017
target. The diagram ‘how we manage risk’ shows our
approach to embedding a Pearson-wide risk culture.
This framework is being used to drive improvements in
risk management across Pearson, taking a pragmatic
approach that assists in eliminating ineffi ciencies and
identifying and closing gaps. Our Enterprise Risk
Management (ERM) framework has been developed
to be aligned with international standards (COSO and
ISO31000) and it aids our compliance with the Financial
Reporting Council’s (FRC) UK Corporate Governance
Code guidance. Risk identifi cation and assessment
were also included in the 2015 strategic planning
and acquisition processes, to further embed risk
management in decision making.
Identifying and assessing risk
The board is ultimately responsible for the oversight of
risk management, assisted by the assurance the audit
committee provides with regard to the procedures for
the identifi cation, assessment and reporting of risk.
Throughout the year (twice as a minimum), the
identifi cation of principal risks is informed using a
bottom up and top down approach through discussions
with each business area, identifying new risks as
well as re-assessing those already being monitored.
To aid in the identifi cation of risks and development of
associated mitigating actions, risks are categorised into
four main areas: strategy and change, operational,
fi nancial, and legal and compliance.
How we manage risk
Risk management
Foundations
Governance
and oversight
Framework, policy
and procedures
Roles and
responsibilities
Appetite and
tolerance
Working with
third-parties
Risk management
Process
Risk
context
Risk
monitoring
and review
Reporting
Risk
assessment
(Identifi cation and
analysis and
evaluation)
Risk
treatment
Risk management
Culture
Communication
Training, education
and awareness
Embedding in
decision-making
Continuous
improvement
Learn more in the Governance section on pages 82 to 89
Section 2 Our performance
39
The probability of a risk materialising and the potential
impact of each risk across multiple parameters is rated
based on existing controls, then the adequacy of action
plans to address any remaining control gaps is also
assessed. Those risks which have a higher probability
and signifi cant impact on strategy, reputation or
operations, or a fi nancial impact greater than £50m
are identifi ed as principal risks.
Pearson executives have oversight of risks relevant to
their areas of responsibility, which were included in
their 2015 objectives. Management is responsible for
executing appropriate actions to mitigate risks where
required and whenever possible. It is not possible to
identify every risk that could aff ect 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 aff ect our business or
fi nancial performance.
The outputs of the risk assessments described above
and below are reported to the audit committee and
board in detail. In addition to the company-wide risks,
this includes risk maps for our main Pearson business
areas and geographies.
Risk appetite
Risk appetite is the target level of risk the board fi nds
appropriate to accept in order to achieve Pearson’s
strategy and goals. Further work was done in 2015 to
defi ne the risk appetite for each of our principal risks,
working with the Pearson executive. Recommendations
are made annually to the board, as part of the board’s
oversight of risk management (see page 88 in
‘Governance’ for more on the board’s governance
of risk management).
The semi-annual risk assessment reviews take into
account the current level of risk compared to appetite.
A consideration of target risk appetite is now included
in key business decisions, such as acquisitions and
strategic planning.
There are certain risk areas where we have a very low
appetite, such as complying with all applicable laws,
including those on anti-bribery and corruption or the
safety and security of learners. This means that we take
actions to try to avoid or eliminate this risk as far as
possible. In other areas, such as strategy and change,
we recognise the importance of managed risk-taking
in order to achieve business objectives and goals.
Our principal risks (as of 31 December 2015)
Outlined here are our most signifi cant risks that may aff ect
our future. We assess the probability of the risk materialising
and the impact of the risk. The risks with greatest potential
severity are identifi ed as principal risks.
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Business transformation and change
Digital and services evolution and
market forces
Talent
Political and regulatory risk
Acquisitions, divestments and JVs
Testing failure
Safety and security
Customer facing systems
Safeguarding and protection
Business continuity (new risk)
Tax
Treasury (new risk)
Data privacy and information security
Intellectual property
Competition law (new risk)
Anti-bribery and corruption
Data quality and integrity (new risk)
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Pearson plc Annual report and accounts 2015
Risk management continued
Key changes to Pearson risks in 2015
The key themes arising from company-wide risk
discussions in 2015 refl ect those of our strategic goals –
simplifi cation and growth, underpinned by business
transformation and change to enable these. As
highlighted in the chief executive’s strategic overview
on page 4, 2015 was a year of change for Pearson.
The theme of change is refl ected in the relatively high
probability of our principal risks, as shown in the map.
The level of change increases risk short term, however in
the medium to longer term it will enhance our controls
for many of our risks, as well as enabling Pearson to
achieve its goal of becoming more effi cient, simplifying
the way we work for our customers and learners.
More robust risk assessments in 2015 have improved
our understanding of the nature and scale of risks, such
as data privacy and information security (highlighted
in the audit committee chair’s statement on page 83)
where external threats continue to increase and we
have programmes of work to close identifi ed gaps.
Good progress has been made in implementing
mitigation plans, especially for those risks with lower
target risk appetite, such as for ABC and in our direct
delivery businesses, where risks such as the safety and
security of both our learners and staff have new roles
and defi ned plans underway (both highlighted in the
audit committee chair’s statement on page 83).
Risk assessment of prospects and viability
This section should be read together with the full
viability statement on page 118.
Pearson’s principal risks and our ability to manage them
as outlined in this section are linked to our viability as a
company. These risks have therefore been taken into
account when preparing the viability statement.
The board assessed the prospects of the company over a
three-year period, longer than the minimum 12 months
of the annual going concern review. The three-year
period corresponds with Pearson’s strategic planning
process and represents the time over which the
company can reasonably predict market dynamics and
the likely impact of additions to the product portfolio.
The board discusses the company’s strategic plan on
an annual basis taking account of a range of factors
including market conditions, the principal risks to the
company, product and capital investment levels as well
as available funding. Pearson’s strategy and business
model are discussed in more detail on pages 2 to 9.
In assessing the company’s viability for the three years
to December 2018, the board overlaid a ‘severe but
Key assumptions
The key assumptions which underpin our three-year
strategic plan to December 2018 are as follows:
1. The key cyclical and policy factors that have recently hurt
Pearson (US college enrolments and UK qualifi cations)
should stabilise by the end of 2017 and improve modestly
thereafter, helped by new product launches
2. Pearson makes modest market share gains in
North(cid:98)America higher education subjects where
next generation courseware is being launched
3. US state testing revenues continue to decline through
2017, as current contracts unwind, before stabilising
in 2018
4. Professional certifi cation and clinical assessment
revenues continue to grow
5. Pearson businesses in China and Brazil benefi t from
the launch of new products, including the Wall Street
English New Student Experience
6. Pearson’s services businesses (for example, online
programme management, virtual schools, blended
learning in English) continue to grow as new
platforms(cid:98)and products come to market and capitalise
on market growth
7. The benefi ts of the company’s restructuring plan
are(cid:98)delivered in full, with minimal disruption to
sales, market share and operations from this major
programme of change
›
›
›
›
plausible’ downside scenario onto base case strategic
plan for the group, focusing on the impact of the
following assumptions and key risks:
Further revenue shortfalls in US assessments.
Further revenue shortfalls in higher education
courseware assuming enrolments remain fl at.
Additional revenue shortfalls in growth markets
(principally South Africa, Brazil and China) driven
by weaker local economic conditions.
Business transformation and change execution risk
associated with timely delivery of the restructuring
programme in 2016 causing the benefi ts to be delayed
or not fully realised.
The board also stress tested the impact on our
liquidity(cid:98)of all the principal risks listed above occurring
together. Although this is not regarded as a plausible
scenario the test showed that the company would still
have liquid resources subject to a limited number of
management actions.
The board’s confi rmation of Pearson’s viability for the
three years to 2018 is included alongside the going
concern statement on page 118.
Principal risks and uncertainties
Section 2 Our performance
41
Strategic and change risks
Risk
2015 activities
2016 plans
Business transformation
and change:
1
The pace and scope of our
business transformation
initiatives increase the
execution risk that
benefi ts may not be fully
realised, costs of these
changes may increase, or
that our business as usual
activities do not perform
in line with our plans, or
our level of customer
service may not meet
expectations.
2
Digital and services
evolution and market
forces:
Failure to invest
successfully in and
deliver the right
products and services.
2015 was a year of change for Pearson. A number of major
transformational change programmes commenced in 2015, including
the Enabling Programme – a programme of work to deliver a single
Pearson-wide solution to integrate our data, systems and processes
across HR, Finance, Procurement and Supply Chain), OneCRM and
Technology Delivery Centre (TDC) and these continue into 2016.
The Enabling Programme runs until 2018 and will deliver sustainable
improvements in fi nance, human resources and operations.
In addition to usual good practices in place for project and change
management, there is enhanced governance, monitoring and
reporting in place for these most signifi cant change initiatives.
Our global education strategy will drive a faster move to digital and
services, recognising that this is a signifi cant 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. The 2015 strategic planning process took a more
in-depth review and challenge of areas for future investment and
re-investment.
As indicated in the section above on risk assessment of our prospects
and viability, we take into account cyclical market factors in our
strategic planning process.
The Global Product Lifecycle continued to be embedded across Pearson
and won an award for Best Innovation Programme at the Corporate
Entrepreneur Awards.
You can read more about the Product Lifecycle and its governance
on page 61 in the ‘Social impact’ section.
At the end of 2015 we undertook
a rigorous, bottom up review
of our markets, operations
and fi nancial plans. The chief
executive’s strategic overview
on pages 4 to 7 describes our
plans for transforming Pearson.
In 2016, we will further simplify
our business, reduce our costs
and position ourselves for growth
in our major markets.
The success of the restructuring
plan is a key assumption
underpinning achieving our
goals by 2018, showing how
critical it is that this risk is
eff ectively managed.
Turning this risk into an
opportunity – successfully
investing in and delivering the
right products and services – is
key to our strategy for returning
to growth by 2018.
In the chief executive’s strategic
overview on pages 4 to 7, we have
laid out a strategy for returning to
growth. We are combining our
lines of business for courseware
into a single product organisation,
as well as rationalising and
integrating our product
development capabilities to focus
on more adaptive, personalised
‘next generation’ courseware and
we are increasing our assessment
focus on more adaptive and
personalised online services.
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Pearson plc Annual report and accounts 2015
Principal risks and uncertainties continued
Strategic and change risks
3
Risk
Talent:
Failure to attract, retain
and develop staff ,
including adapting to
new skill sets required
to run the business.
4
Political and
regulatory risk:
Changes in policy
and/or regulations
have the potential to
impact business model
and/or decisions across
all markets.
2015 activities
2016 plans
Throughout 2015, we have been successful in promoting our best
internal talent and recruiting individuals who are global leaders in
their specifi c fi eld. Globally consistent performance assessment,
and talent and succession management approaches are in place,
and the annual engagement survey shows consistent scores overall
from the prior year.
See pages 59 to 63 in ‘Social Impact’ for more detail on key fi ndings
from the engagement survey, as well as information about our
approach to learning and development.
We are expanding our global public aff airs capability with a specifi c
focus on coordinated international government relations across our
key markets. Building deeper government relations, including working
with business and industry associations, policy research organisations
and other advocacy groups, we can more proactively identify and
mitigate international political and regulatory risk, as well as bring
greater coordination, clarity and consistency to our work globally.
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 work with our industry trade associations including the
Association of American Publishers and have launched a three-year
campaign with America’s Promise Alliance to raise high school
graduation rates to 9 0% and to support state led innovations.
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 level.
Across all of our other markets, there is a government relations
programme to support our international markets.
As we are going into a period of
change and transformation, we
will focus on a number of areas
that are key to mitigating talent
risk, including: clear employee
objectives and development plans;
an all-employee engagement
survey, with action plans as
appropriate; succession planning
and talent management; an
internal management and
leadership development
programme supporting ‘learning
for all’. The employee incentive
pool will also be reinstated.
2015 priorities to continue to be
actively driven in 2016, with a
specifi c focus on leveraging our
resources in the US and UK to build
global political and regulatory
relationships and partnerships; to
elevate our international political
profi le; and to better understand
future international political and
regulatory trends, increasingly
using trade associations and
agencies to inform our decisions
and actions.
Building a strong brand and
reputation in the US remains
a priority.
Transitional support services to
the FT will end in 2016.
Our continued priorities for use
of cash are:
– Maintaining a strong
balance sheet
– Organic investment
– Sustaining our dividend and
maintaining the commitment
to our credit rating
– Acquisitions in education with
a strong ROIC potential.
Acquisitions,
divestments and JVs:
5
Failure to meet fi nancial
and operational targets
of acquisitions. Failure to
successfully manage JVs
and divestments in line
with plans.
We perform pre-transaction due diligence and closely monitor
actual performance against operational and fi nancial 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, with a formal review once a year.
During 2015, transitional support services to Penguin ended and we
completed the sales of the FT, Pearson’s stake in The Economist and
Powerschool.
Section 2 Our performance
43
Operational risks
Risk
2015 activities
6
Testing failure:
A control breakdown or
service failure in our
school assessment and
qualifi cations businesses
could result in fi nancial
loss and reputational
damage.
We seek to minimise the risk of a breakdown in our student marking
systems 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, including software security controls,
system monitoring, pre-deployment testing, change controls and
the use of root cause analysis procedures to learn from incidents
and prevent recurrence.
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 risks.
7
Safety and security:
Risk to safety and security
due to increasing local
and global threats.
The health and safety policy was updated and released in 2015.
Management review processes have been established with
key leadership groups and incident data is collected every
six months globally.
An implementation plan has been developed, with the objective
of delivering a pragmatic corporate security function which
supports our learners and employees within a safe and secure
learning and working environment.
Customer facing
systems:
8
Failure to maintain and
support customer facing
services, systems, and
platforms, including
addressing quality issues
and execution on time
of new products and
enhancements.
Eff ective project management disciplines are in place to ensure that
enhancements and new products meet the required standards.
Real-time monitoring and reporting of operational performance
are used to identify any issues and direct appropriate responses.
The Quality Task Force, established in 2014 to improve customers’
back-to-school experience, is now part of business as usual. In 2015,
this initiative delivered signifi cant improvements with fewer
incidents overall, less unplanned downtime, faster resolution of
issues, better protection against denial of service attacks.
Safeguarding and
protection:
9
We continue to take safeguarding as a fundamental obligation and
high priority.
Failure to adequately
protect children and
learners, particularly
in our direct delivery
businesses.
There is increased understanding and reporting of safeguarding
concerns in many of the countries where we deliver services.
See page 61 in the ‘Social impact’ section for more on our
relationships with learners and customers.
10
Business continuity
(new risk):
Previously reported as a component of other risks, this is now being
reported as a separate risk to provide greater clarity.
Failure to have plans in
place or plans are not
properly executed.
Crisis management and
technology disaster
recovery plans may
not be comprehensive.
Pearson’s business continuity policy has been refreshed in 2015,
identifying our exposure and risk as they relate to key products,
sites, services and supply chain. This will be implemented in 2016.
Technology incidents are dealt with reactively and proactive
closure of known disaster recovery gaps is prioritised based
upon the importance of products and systems. An annual
disaster recovery schedule is in place for testing data centres.
2016 plans
Cross-Pearson team formed to
establish standards for testing
risk factors, identify any gaps
against standards and
implement improvements.
The key health and safety focus
will be on executing a three-year
strategy. We continue to improve
risk assessment in the due
diligence process with mergers
and acquisitions, as well as in our
existing and future operations.
Ongoing engagement with
Pearson leadership ensures that
health and safety is integrated into
business agendas.
Security activity will be prioritised
based upon an assessment of risk,
which is constantly evaluated.
2016 will focus on the next tier of
priority products and fully
embedding the quality initiative in
business as usual. Plans include
more thorough testing, easier
onboarding and greater access to
self-service, plus more proactive
monitoring and further upgrades
to the network and security.
Other longer-term initiatives are
underway to further improve the
customer experience.
Activities will focus on continuing to
address risk in the direct delivery
businesses, with a focus on those
in less regulated countries. The
implementation of a safeguarding
self assessment tool and incident
reporting system will assist in
developing metrics.
The new business continuity policy
will be implemented in 2016,
including additional tools and
software to support a standard
global approach to business
continuity planning.
The new crisis management
framework will be embedded
through testing and scenarios.
The resilience of technology
platforms and systems will be
further reviewed and improved.
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Pearson plc Annual report and accounts 2015
Principal risks and uncertainties continued
Financial risks
11
12
Risk
Tax:
Risk that changes in tax
law or perceptions on
tax planning strategies
lead to higher eff ective
tax rate or negative
reputational impact.
Treasury (new risk):
Inability to mitigate
treasury fi nancial risks,
including the failure
to secure adequate
committed funding,
the failure to manage
exposures to fi nancial
counterparties and
the failure to manage
exposures to market risk
such as interest and
foreign exchange rates.
2015 activities
2016 plans
Our tax strategy refl ects our business strategy and the locations and
fi nancing needs of our operations. In common with many companies,
we seek to manage our tax aff airs to protect value for our shareholders,
in line with our broader fi duciary duties. We are committed to complying
with all statutory obligations, to undertake full disclosure to tax
authorities and to follow agreed policies and procedures with regard
to tax planning and strategy.
Oversight of tax strategy is within the remit of the audit committee,
which receives a report on this topic at least once a year. All of the
audit committee members are independent non-executive directors.
The chief fi nancial offi cer is responsible for tax strategy; the conduct
of our tax aff airs and the management of tax risk are delegated to a
global team of tax professionals.
See page 145 for details of tax accounting policy.
The treasury risk is now being reported as a principal risk due
to currency and fi nancial market volatility, as well as the recent
changes to our credit rating.
Our approach to the mitigation of treasury fi nancial risk, including
funding risk, fi nancial counterparty risk and exposures to interest
and foreign exchange rates is covered in more detail in note 19,
starting on page 181.
There is now known legislative
change in the UK on tax reporting
requirements in 2016 and almost
certain change on tax treatment
of fi nancing structures. A change
to US legislation is possible.
Work has been performed to
prepare systems for the increased
tax disclosure requirements
relating to country by country
reporting.
In 2016, we will continue to operate
in line with our treasury policy.
More on this can be found in
note 19, starting on page 181.
Legal and compliance risks
Risk
2015 activities
2016 plans
The data privacy and information
security improvement
programmes will continue
through 2016 into 2017 and will
implement critical processes to
drive best practices.
13
Data privacy and
information security:
Risk of a data privacy
incident or other failure
to comply with data
privacy regulations and
standards; and/or a
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
and fi nancial loss.
Data privacy: A data privacy offi ce has been established and a 2015-
2016 data privacy strategy developed. The implementation of the
strategy is overseen by the data privacy governance board which
has operated throughout 2015. We 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 seek to comply
with relevant legislation and contractual requirements. We regularly
monitor regulation changes to assess the impact on existing
processes and programmes. The data privacy offi ce is working with
those limited parts of the business aff ected by the Safe Harbor
decision to transfer them to model contract clauses.
Annual training on data security and privacy was introduced in 2015 for
all employees. In addition, all Pearson staff who deal with US student
data are required to take educational data protection training.
Information security: Pearson has an established global security
organisational model; and standard-based information security
controls and practices. Security policies have all been updated in
2015. We have established a global security operations centre that
provides ongoing monitoring of potential malicious attacks on our
infrastructure and systems.
Section 2 Our performance
45
Legal and compliance risks
Risk
2015 activities
2016 plans
14
Intellectual property:
If we do not adequately
protect our intellectual
property and proprietary
rights our competitive
position and profi ts may
be adversely aff ected and
limit our ability to grow.
We seek to mitigate these risks by being generally vigilant and
deploying policies and internal and external resources to manage
and protect our intellectual property. We co-operate and advocate
through trade associations, monitor advances in technology and law
and, when appropriate, take legal or collective enforcement actions
with other publishers to secure our rights. We have in place a patent
programme to establish enforceable patent rights to protect our
technology innovations and promote appropriate confi dentiality
and trade secret protocols. Our global IP legal function also helps
us clear and protect our key brands and patentable innovations.
15
Competition law
(new risk):
Failure to comply with
anti-trust and competition
legislation.
In October 2015, a lawyer specialising in competition law was
appointed to ensure we are fully compliant with all laws and
regulations. A plan has been put in place to perform a full risk
assessment given the evolving complexity of legislation and
regulation in this area. This evolving complexity is why this risk
has now been included in the principal risks.
16
Anti-bribery and
corruption (ABC):
Failure to eff ectively
manage risks associated
with compliance to global
and local ABC legislation.
We have a risk-based programme of training (online and face-to-
face), with code of conduct certifi cation including a clear statement
of ABC policy. The policy was revised in 2015, with no change to
Pearson’s ‘zero tolerance’ principle. In 2015, the Business Partner
Code of Conduct launched, which will help to mitigate third-party
ABC risk.
See page 60 in the ‘Social impact’ section for more detail on what is
covered by the Code of Conduct.
17
Data quality and integrity
(new risk):
Unavailability of timely,
complete and accurate
data limits informed
decision-making and
increased risk of non-
compliance with legal,
regulatory and reporting
requirements.
Data quality and integrity is now being reported as a principal risk
due to its importance in supporting business change initiatives,
such as the Enabling Programme and OneCRM (as highlighted risk 1,
business transformation and change). Data is key to their success.
A Pearson Data Services team has been created and a data
governance target operating model agreed which defi nes data
ownership accountability at executive level to ensure that data
initiatives align to business strategy, priorities and initiatives.
We will continue to streamline our
portfolios; procure and register
expanded rights in our high value
IP globally; monitor activities and
regulations; and proactively
enforce our rights, taking
necessary legal action.
Based upon the completed risk
assessment, we will develop and
implement actions, prioritising key
risk areas.
Training and awareness in 2016 will
focus on the revised ABC policy for
higher risk countries and activities.
Third-party due diligence will
continue to be enhanced, taking
into account the benefi ts from
business transformation
implementations, such as the
Enabling Programme.
The primary focus is on the
Enabling Programme which will,
in time, deliver signifi cant
improvements in data quality
and facilitate better informed
decision-making.
The 2016 roll-outs require the
migration of a signifi cant number
of datasets.
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46
Pearson plc Annual report and accounts 2015
Targeting growth through efficacy
The road to empowering the
lives of 200 million learners
annually by 2025
Introduction
Over the last few years, we have been progressively
measuring and increasing our impact on learner
outcomes. We are already helping millions of learners
progress in their lives; to become more literate and
numerate, move from school to college, learn a new
language, or secure a new career which off ers better
prospects for them and their families.
To advance Pearson’s reach and impact and to position
the company for sustainable growth, we have
embarked on an ambitious effi cacy programme
which has evolved the way we manage our business,
our approach to product development and our
relationships with customers.
In 2013, our drive to build a company centred around
‘what works’ in education led to a commitment to
publicly report on the learner outcomes delivered
by our products in 2018.
In 2014, Pearson started embedding the effi cacy
framework and approach at the centre of our business
model, conducting effi cacy reviews and using those
insights to improve our products and how we serve
our customers. In preparation for 2018 we started the
process of publicly reporting on effi cacy, profi ling the
progress of fi ve key products.
In 2015, we expanded the focus of our work, gathering
evidence for more products and services. We are seeing
increased interest in our effi cacy approach from our
customers and it has become a bigger factor in sales
decisions. We are reporting publicly on the effi cacy of
many more products alongside this report.
Key achievements in 2015
We made great progress in 2015, achieving the following milestones:
2014 fi rst wave products:
Gathering
evidence
For all ‘fi rst wave’ products (products chosen based on
strategic importance, market position and revenue)
we have worked with customers to refi ne their learner
outcomes, are now gathering evidence of their
impact, and have been completing effi cacy-led
product improvements.
2015 second wave products:
Defi ned learner
outcomes
We have also defi ned learner outcomes and metrics for
all ‘second wave’ products (products representing a wider
range of geographies in our portfolio), in addition to
evaluating existing evidence and implementing plans to
gather more evidence of impact. Going forward we will
continue to build an evidence base for these products and
make improvements.
Competitive edge
Importantly, we are increasingly seeing our Sales and
Marketing teams working with our Effi cacy teams to
provide a competitive edge to Pearson’s proposals. Our
commitment to build more eff ective products has already
resulted in increased customer demand for such products
and, therefore, increased revenue. We look forward to
seeing this trend continue into 2016 and beyond.
Section 2 Our performance
47
Today we continue to refi ne our effi cacy practice; and,
although our knowledge has matured, we remain
pioneers. We continue to encourage everyone, from
our customers, to learners, to policymakers, to
investors, to join in and challenge us, to tell us how we
can improve our approach and in turn our products
and services.
Effi cacy leading to product improvement
The effi cacy review process has been designed to
help teams identify areas of improvement in product,
customer relationships and internal capacity to deliver.
The product improvement process is specifi cally
designed to ensure that the product will benefi t
learners and customers, eventually making it more
commercially successful. Examples of these
improvements are illustrated below.
In 2016, we continue to make progress evaluating and
improving the effi cacy of our products. Effi cacy has
become central to our growth strategy. Our knowledge
and capabilities are maturing. Both our current
portfolio and the way we identify future acquisitions
are grounded in a commitment to demonstrating
eff ective learner outcomes. We are delivering on our
commitment to report on these too.
Our effi cacy journey
“Hold us accountable for our impact... If we
fail, we fail as a business.”
John Fallon, Chief executive offi cer
Building on last year’s reports, this year our public
effi cacy reports refl ect what we’ve learnt since 2013.
They include more detail on the impact each product is
having, improvements made to date, future product
research and improvement plans and, importantly,
stories from our customers. Highlights of this work
follow, but to read the full reports, please visit:
effi cacy.pearson.com
Effi cacy approach and activities
1
Defi ne intended learner
outcomes
2
Review products to
ensure they are positioned
to deliver on those
outcomes, and put in place
effi cacy improvement
programmes
3
Conduct research to
measure the effi cacy of
products and feed insights
back into product
development
4
Support customers to
eff ectively implement the
products to get the best
outcomes possible
Product
Improvement
Wall Street
English
New student
experience
Pearson Schools
India
Launch of algorithm identifying students at risk of dropping out, providing insights for eff ective
interventions. Improves learner outcomes as well as centre profi tability
Class-level analytics to demonstrate that students perform equally, whether they are using print
or digital manuals; another change that will improve centre effi ciency
Optimising duration of language videos will increase learner engagement and encourage them
not to break their study rhythm
Augmentation of teacher numbers and quality as a direct result of the effi cacy review
Improved data systems, which now provide teachers with data at a concept and student level,
aiming for 48-hour turnaround time
Adoption of Big English, an English language learning product, to increase student English
profi ciency; teachers also being supported to improve their own English skills where required
More teacher-to-teacher collaboration and interventions driven by effi cacy. Our School
Management Improvement Framework, as well as a new Professional Development programme
to improve school leadership
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Pearson plc Annual report and accounts 2015
Targeting growth through efficacy continued
2015 effi cacy reports:
product highlights
Selected examples of our
effi cacy reports are included below.
The remainder of the reports can
be found at effi cacy.pearson.com
Alongside this annual report, we are publishing
several reports to share our effi cacy progress
and the outcomes achieved by some of our most
powerful products and services. We will continue
to develop the capability to report transparently
on the effi cacy of products across our portfolio.
In the last decade, the number of college
students majoring in STEM fi elds –
science, technology, engineering, and
mathematics – has increased rapidly.
Between 2007 and 2011, STEM majors in the US increased
by 48%. Today, approximately 40% of male college
graduates and 29% of female college graduates earn a
degree in one of the STEM disciplines. These areas of
study off er students practical and applicable skills upon
entering the professional world and also create signifi cant
economic opportunity.
MasteringChemistry is an online tutorial and problem-
solving tool for students to practise and reinforce their
understanding of college-level chemistry – a vital tool for
any successful STEM degree. The product launched in 2004
and today reaches about 350,000 students in the United
States, and 50,000 more in 60 countries around the world.
MasteringChemistry uses personalised instruction to
improve competency in chemistry and prepare students
for success in chemistry courses. Learners benefi t from
self-paced tutorials featuring specifi c, wrong-answer
feedback and hints that emulate the tutor. New content
features have been added to increase student achievement
and retention. For example, there(cid:98)are additional adaptive
opportunities through new Dynamic Study Modules,
which are designed to(cid:98)help students study on their own
more eff ectively, using adaptive algorithms that adjust
the content based on each student’s understanding of
the(cid:98)concepts.
For detail on the effi cacy of this product go to
effi cacy.pearson.com
Section 2 Our performance
49
Connections Academy schools are
accredited, tuition-free, online public
schools for K-12 students, providing
a personalised approach to learning,
supported by certifi ed teachers and
a custom curriculum.
Since the fi rst Connections Academy opened in 2002, the
schools have been established in 26 US states and have served
nearly 270,000 students who – for academic, personal or
professional reasons – may be better suited to online rather
than bricks-and-mortar education.
Connections believes that all students perform better
when(cid:98)they receive individual attention in a safe, nurturing
environment – what Connections calls Personalised
Performance Learning®. Students are able to accelerate
learning in areas of strength or receive extra attention in
areas of weakness. Individualised learning does not mean
learning alone – students meet regularly in online LiveLesson
sessions and have opportunities to share ideas and
experiences, while having fun learning together. In-person
events, clubs, activities, and fi eld trips help students stay
connected and make friends. Parents, as Learning Coaches,
are closely involved in their children’s education.
For detail on the effi cacy of this product go to
effi cacy.pearson.com
CTI Education Group (CTI) is an
institute of higher education that
serves approximately 11,000 students
across 12 campuses in South Africa.
The institute focuses on arming students with real-life
career skills, training them to succeed as employable
graduates in a competitive 21st-century economy.
Because career-readiness is such a steadfast priority for
the institute, CTI has developed a number of strategies
designed to ensure that all of its graduates are well
prepared for a highly demanding employment market. For
example, a virtual employability centre will open in 2016 to
serve as a resource hub for students looking to enter the
job market. The virtual hub will be followed by six physical
employability centres to provide personalised, face-to-face
job coaching. Finally, employability competencies are fi rmly
embedded into the CTI curriculum, which focuses primarily
on information technology, commerce and law.
For detail on the effi cacy of this product go to
effi cacy.pearson.com
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Pearson plc Annual report and accounts 2015
Targeting growth through efficacy continued
REVEL
With 85% of young millennials in the US
owning smartphones in 2014 according
to Nielsen, education innovators have
come to understand that hardcover
textbooks are no longer in line with
students’ primary consumption habits.
REVEL is a digital resource that off ers students online
and mobile access to humanities and social sciences
course materials. The programme includes embedded
assessments, interactive components and videos
integrated within the narrative content to reinforce key
concepts. REVEL provides instructors an assignment
calendar, which allows them to indicate to(cid:98)students when
work must be completed with reminders and study tips
to help students stay on track(cid:98)throughout the course.
REVEL was launched in 2014 to foster independent
self-initiated learning outside the classroom, so that
students and educators are better prepared inside the
classroom. REVEL allows students to access their learning
anytime, anywhere, with an engaging experience that
encourages class participation and course completion.
REVEL helps instructors address a particularly thorny
challenge they face in the humanities and social sciences –
that students don’t do their assigned reading and come to
class under-prepared. REVEL provides specialised tools to
allow instructors to plan for and address this challenge.
For Detail on the effi cacy of this product go to
effi cacy.pearson.com
The path towards audited effi cacy statements
Auditing effi cacy
From the start of our effi cacy work we planned to have
our effi cacy statements audited in the same way as our
fi nancials each year. In order for our focus on learner
outcomes to transform our business, it is essential that
our customers trust any effi cacy statements that we
make. We are pleased to announce that this work is
underway. This year we began work with an external
auditor, PricewaterhouseCoopers (PwC), to ensure that
any effi cacy statements we make stand up to audit.
We have now published 13 product reports. PwC will
collaborate with us during 2016 to continue to strengthen
our reporting process.
In 2016 PwC will work with us to:
Standardise and stabilise our effi cacy reporting processes
Further align our evidence to support product effi cacy
statements
Run a mock audit of a sample of effi cacy statements in the
2016 annual report in preparation for 2018
Section 2 Our performance
51
Through effi cacy we are capturing our impact on
learner outcomes at a product level, thereby providing
customers with products and services that are eff ective
learning tools, and, as a result, expanding our reach.
We now have the opportunity to measure the collective
reach and impact of all of our products, and to report
on our growth in new ways.
In the next ten years, we at Pearson believe that the
world should be a place where far more people are
making much more progress in their lives through
learning – and we are making an ambitious plan to
get there.
Access to high quality education
58m
primary-aged children
are not in(cid:98)school.
250 million children
worldwide are in school
but are not(cid:98)learning.
Literacy and numeracy skills
750m+
adults, globally, are illiterate. In
developed countries, 200 million
young people still have not mastered
basic literacy and numeracy skills.
Employability and English language skills
206m
adults are unemployed. 290 million
young people are out of work.
Meanwhile 40% of employers are
unable to fi nd qualifi ed candidates
to(cid:98)fi ll vacancies.
1. UNESCO Policy Paper, June 2014 (58m children not in school)
2. UNESCO, Education For All Monitoring Report, April 2013
(250m in school but not learning)
3. UIS Fact Sheet, Sept. 2015 (750m illiterate)
4. International Labour Organisation, Global Employment Trends,
2012 (206m adult unemployed)
5. The Economist, April 2013 (290m young people out of work)
6. The Economist, April 2013 (40% unable to fi nd qualifi ed candidates)
Our plans for 2016
Expand the evidence of impact With effi cacy processes
in place for our ‘fi rst wave’ and ‘second wave’ products,
we will expand the breadth of evidence we are
collecting across even more Pearson products, further
demonstrating their impact on learner outcomes.
Leverage effi cacy to develop models of product
improvement While all products engaged in the effi cacy
process undergo an improvement cycle, in 2016 we will
deepen our effi cacy focus on several products that
span our business models (e.g. managed services,
courseware) to establish a ‘gold standard’ model of how
our effi cacy process leads to product improvement.
Further embed effi cacy into our organisation and
portfolio More product teams around the company will
embrace the effi cacy approach. Effi cacy will be better
embedded in internal processes such as acquisition and
strategic planning.
Share our effi cacy story with the world Lead a global
conversation across the education sector about the
impact of Pearson’s effi cacy work, demonstrating how
eff ective education products and services deliver
enhanced learner outcomes and positioning Pearson
at the forefront of the industry.
The remaining education challenge
Education matters more than ever. It is the most
important factor in driving economic and social
progress. Research shows that better education helps
individuals, families and countries prosper, improves
health outcomes and builds cohesive societies. There
are huge challenges to overcome, as noted in the
adjacent diagram.
There is growing consensus that addressing these
pressing educational and global development issues
and thereby meeting the needs of learners, employers
and governments will require everyone involved in
education to work together and focus on solutions
which can be shown to make a diff erence.
In 2015 we joined world leaders at the United Nations in
committing to the UN World Sustainable Development
Goals (SDGs) to make the world a better place by 2030.
These goals represent global challenges across both the
developed and developing world and all of Pearson’s
major markets. Pearson will use these goals to inform
our own sustainability plan. We will leverage our
investment in effi cacy and our growth strategy to fuel
the fi nancial success of Pearson, demonstrate progress
in achieving our mission, and be a global leader in
addressing Goal 4 of the SDGs, “to ensure inclusive
and equitable quality education and promote lifelong
opportunities for all.”
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Pearson plc Annual report and accounts 2015
Targeting growth through efficacy continued
The Plan
By 2025, Pearson commits to empower the lives of 200 million learners annually, more than doubling our current
reach and doing it through the delivery of more eff ective products and services.
Access
Success
Progress
Our goals
To meet our commitment
to empower the lives of
200 million learners
annually, we have set
three goals.
2025 targets
We are building on our
effi cacy work to set
ourselves ambitious
growth targets.
Enhance access
to high quality
education that leads
to meaningful
outcomes
We will help 10 million
primary and secondary
learners annually access
high quality education
We will help 2 million post-
secondary learners annually
access high quality education
Strategic
alignment
Our goals and targets
align with our core
strategic priorities.
For more see strategic
overview on p04
Online degree and virtual school
programmes can improve
learner access to quality primary
and secondary education;
currently those programmes
are helping 1.8 million learners
to annually access quality
education. By 2025, we aim
to help 10 million.
Help more learners
gain the knowledge
and skills required
for life and career
success in the
21st century
We will help increase literacy
and numeracy for 50 million
learners annually
We will help 50 million
learners annually gain
the knowledge and skills
required for study and
employment
We will help advance the
English language skills of
75(cid:98)million learners annually
Our products that support adult
English language learning can
provide learners with the skills
required for success in a global
workforce. Products such as
MyEnglishLab and many others
allow us to help advance the
English language skills of
30(cid:98)million learners annually.
By 2025 we aim to help
75(cid:98)million learners annually.
Help more people
make measurable
progress in their
life and career
through learning
We will help 25 million
learners annually transition
into the workforce after
further or higher education
We will help 20 million
learners advance their
career prospects annually
Our workforce readiness
products support learners to
make measurable progress
in their lives and careers.
Products such as MyITLab
help approximately 15 million
learners to transition into the
workforce annually. By 2025
we aim to help 25 million
learners annually transition
into the workforce after higher
or further education.
From 2016 to 2025
While our effi cacy work continues, we will sharpen the
focus of our portfolio, investments, partnerships, and
campaigns to meet the goal of reaching, and positively
impacting, 200 million learners with increasingly
eff ective products. This approach will eventually be
embedded into every area of our business so that we
are positioned for growth.
In 2016, we will:
Defi ne company-wide trajectories and set product-level
targets and trajectories.
Tie KPIs to the targets across Pearson, measuring the
performance of our business leaders and executives by
their contributions to these goals.
Develop and implement a system capable of tracking
our progress towards these goals.
Agree upon processes for determining new acquisitions
and investments in our current and future portfolio
based on their contribution to our goals.
Section 2 Our performance
53
Timeline
2013
Public launch of our
effi cacy commitment
2016
Build on effi cacy commitment
to set targets for our impact
and our reach
2018
First major public reporting
on effi cacy progress and
progress against our impact
and reach targets
2025
Meet our impact and
reach targets
Setting the targets
Pearson’s ambitious research programme
World-leading research continues to be a priority for
Pearson. We work with the best minds in education to
bring their diverse and independent insights to a wider
audience. These include two reports published in 2015
with world-renowned educationalist Professor John
Hattie, What Doesn’t Work in Education: the Politics of
Distraction, and What Works Best in Education: the
Politics of Collaborative Expertise.
These papers have been read 70,000 times via our
website and have redefi ned our ambition for the global
reach of Pearson’s thought leadership. They have
formed the basis of engagements with government
offi cials, stakeholders and academia in key markets
across the world.
In 2016, we look forward to building on this momentum
with releases on critical topics including adaptive
learning, artifi cial intelligence in education, and building
effi cacy into learning technologies.
Our targets are derived from the key educational
challenges facing learners, market realities and
opportunities identifi ed by our business leaders
where Pearson has opportunity to grow.
Our product portfolio was evaluated to determine
the areas where Pearson can measurably have the
greatest impact on global education.
The targets are set based on current reach and
market trends. Choosing these targets will help
organise and measure our energy to grow
the company.
We are at a critical juncture in our history and the
education sector is at a critical juncture in its evolution.
With far greater data being made available on learners’
performance and more willingness to use that data to
improve education, we have a singular opportunity to
have greater impact with our products as well as reach
more people.
Our targets to increase our reach and impact will drive
us towards commercial success and our mission to help
people make progress in their lives through learning.
The number of learners reached by Pearson
200m
By 2025,
Pearson aspires
to empower the
lives of 200 million
learners annually
Aspirational – 200m
Current – 75m
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Pearson plc Annual report and accounts 2015
Section 3 Our social impact
55
Our social
impact
Learning is the means by which people
progress in their lives.
At Pearson, our commercial success and delivering on(cid:98)our
social purpose are mutually reinforcing. Our aim is(cid:98)to help
people fl ourish and make progress in their lives through
education and learning.
Our promise is progress for the millions who learn with us and
effi cacy (p46) is the key mechanism by which we will deliver.
This means a clear focus on developing products and services
that have a measurable impact on improving students’ lives
through learning.
This year, we have gone further by setting clear goals on(cid:98)
the number of learners we will support through our products
and services.
Purpose reinforces success in a number of ways – it attracts
and helps us retain talent, something we know to be true
from the results of our engagement survey; it(cid:98)inspires our
customers; builds confi dence; drives performance and helps
foster innovation.
Our strategy is focused on extending and deepening our
impact, but we also know that ‘how’ we deliver is central
to our purpose. Acting responsibly helps us to deliver better
outcomes and to meet the expectations of our stakeholders.
Our social impact strategy
Sustainability
Impact
We invest in our people,
our communities and
work to reduce our
environmental footprint.
We contribute to signifi cant
social and environmental
campaigns.
Innovation
We actively partner and
invest in new models of
learning to help fi nd
solutions to the biggest
unmet educational needs.
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Pearson plc Annual report and accounts 2015
Overview
1. Sustainability
Pearson has an active role
to play in fi nding solutions
to our global sustainability
challenges, which is integral
to our business strategy
and how we report on our
most material issues.
Sustainability
p56-58
Our values and behaviours
p59-60
Our relationships
Our planet
Impact campaigns
Project Literacy
Employee engagement
p61-63
p63-64
p65-66
Social innovation
p67
1
2
3
4
5
6
From June 2016 we will report in more detail
in our 2015 Sustainability Report available on
pearson.com/social-impact
Towards a new strategy
During 2015 we began a review of our sustainability
practice, to ensure that our strategy, activities and
reporting eff orts:
Refl ect best practice in sustainability.
Are fi t for purpose in a rapidly changing business climate.
Align with current business and stakeholder priorities.
Match our ambition and business strategy.
Refl ect how our business model can link to the UN’s
Sustainable Development Goals.
Pearson has a broad defi nition of responsible business
and(cid:98)has established a set of commitments across a range
of(cid:98)social, community and human rights principles to:
Ensure that our products and services are inclusive,
appropriate in content to the age, location and ability
of(cid:98)the(cid:98)learner, and are easy and safe to use and access.
Respect and protect how we use and share data
entrusted(cid:98)to us by learners and our customers.
Inform, support and equip colleagues to work
collaboratively.
Encourage and reward high performance, nurturing
talent(cid:98)and creating a culture where all are able to realise
their individual potential.
Provide a safe and healthy workplace for our employees
and the learners we serve.
Extend our commitments on labour standards, human
rights and environmental responsibility to include our
suppliers and business partners. This includes a concern
across the value chain for ensuring our activities are free
from slavery, servitude, forced or compulsory labour and
human traffi cking.
Provide opportunities for Pearson people to be good
citizens and to get involved in their local communities.
Deliver against our targets on our response to climate
change and to make more effi cient use of resources.
Pearson has in place policies to support recognised
human(cid:98)rights principles. These include health and safety,
safeguarding, non-discrimination and a right to quality
education. As a founder signatory to the UN Global
Compact, we have also made a series of commitments
to the Universal Declaration of Human Rights, the ILO
declarations on fundamental principles and rights at work,
the Rio Declaration on Environment and Development
and to refl ect a zero tolerance approach to bribery
and corruption.
The approach we’ve taken for our sustainability review
and(cid:98)the resulting sustainability map are opposite on p57
Section 3 Our social impact
57
Pearson sustainability review – fi ve key phases:
1
Assess
current state
2
Conduct
materiality
analysis
3
Defi ne,
ambitions,
visions and
goals
4
Create
implementation
roadmap
5
Devise
reporting
strategy
We have completed a third-party review of policies and
reporting, a benchmark against competitors and leaders,
as well as internal interviews with Pearson executives.
A new sustainability map captures our most material issues.
This has been reviewed by internal experts and, to date, nearly
40 Pearson executives have been consulted. This will be
fi nalised in 2016 and form part of our sustainability reporting.
Detailed below is our current thinking:
Pearson sustainability map
Mission
Help people make progress in their lives
through access to better learning
Alignment
with UN
sustainable
development
goals
4 Quality
education
8 Decent work and
economic growth
10 Reduced
inequalities
Our framework
indirectly addresses
the other 14 goals
Ambition
1
Be a trusted partner
operate responsibly
2
Reach more learners
be inclusive
3
Create the future
of education lead in
product innovation
1 2 3 4 5
Strategic
intent
Operate responsibly
Maximise social impact by(cid:98)reaching
new markets and expanding access
to our products
Lead in product innovation and
excellence to create education that
meets society’s future needs.
Value our learners,
customers(cid:98)and(cid:98)partners
Respect and progress
our(cid:98)employees
Promote stewardship in our
everyday operations
Actively contribute to the
communities where we work
Deliver products which give
learning(cid:98)outcomes we promise
Reach more of the people who need
a better education the most
Produce products which improve
the way education is delivered
Make our products accessible to
every type of learner
Consider the aff ordability of
our(cid:98)products in relation to the
type(cid:98)of market and its customers’
income levels
Advance the skills, competencies,
and qualifi cations needed for life
and work in the 21st century
Empower learners to be
global(cid:98)citizens
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Pearson plc Annual report and accounts 2015
1. Sustainability continued
Pearson and the UN sustainable development goals
In 2015 we joined world leaders at the United Nations
in committing to the UN sustainable development
goals (SDGs) setting out their ambition for a more
peaceful and prosperous world. These goals
represent global challenges that impact education
across the world. Goal 4 is particularly important
for(cid:98)Pearson – “to ensure inclusive and equitable
quality education and promote lifelong learning
opportunities for all.” We are playing our part in
contributing to this goal, through contributing
educational expertise, knowledge and resources
to(cid:98)help address these pressing challenges.
We are also working in partnership with others
to(cid:98)make a diff erence:
We are supporting Project Everyone – an
organisation with a simple but mighty ambition
–(cid:98)to(cid:98)share the global goals with all 7 billion people
on(cid:98)the planet
We have joined the Global Citizen movement
–(cid:98)an(cid:98)organisation dedicated to creating change
and(cid:98)taking action to address the world’s
biggest challenges
Governance
Corporate responsibility cannot be separated from
our business and reputation. The reputation and
responsibility committee, a formal committee of the
board, provides ongoing oversight, scrutiny and
challenge across the entire responsible business agenda.
Learn more on p90.
The Pearson executive drives the implementation of
business strategy, including our response to the key
issues and opportunities we face. The responsible
business leadership council oversees the development
and implementation of our responsible business
strategy on behalf of the board. It is chaired by our chief
corporate aff airs offi cer and comprises senior executives
from across the global business.
Stakeholders
Public and private sector customers regularly seek
information on how we go about our business, while
many learners and employees want to understand our
approach to sustainability. Socially responsible investors
and non-governmental organisations look at issues such
as supply chain standards and ethics.
Our approach to responsible business is informed
by the priorities and views of our many stakeholders.
A priority for us will be testing our new sustainability
framework with stakeholders as part of a continuing
focus on identifying, engaging and inspiring our
priority audiences.
2. Our values and behaviours
Section 3 Our social impact
59
Employee engagement
Our organisational structure continues to evolve to
better deliver on our business strategy and to position
the company for growth. We continue to invest in our
single operating model, and in particular in standardising
systems and a smaller number of global platforms.
At the same time, we are accelerating our shift and
investment in digital products.
Change can be inspiring but also brings operational risk.
The link between employee engagement and business
performance is well established, and our 2014 employee
engagement survey had some key lessons for us:
Our purpose to improve lives through learning is clear
and compelling.
Our focus on effi cacy is improving our products
and services.
Values and behaviours are critical to our success,
but need to be more clearly articulated.
In this time of change, our leaders and managers
need to communicate more often and more clearly
their expectations of working together in a more
joined-up way.
More work is needed to clarify to employees how our
new structure works and how it helps deliver outcomes
for learners.
Based on this, we set the following agenda for the work around our values in 2015 and beyond:
Priorities in 2015 and beyond
Activities in 2015
Leaders more consistently model
the behaviours required for us to
be successful
Many of our leaders have written, spoken or tweeted about our values in 2015, and the
values themselves have been integrated into business processes and communication
Following consultation and research, we introduced ‘accountable’ as a fourth value,
alongside our current values of brave, imaginative and decent, to provide positive
tension and increase our focus on responsibility and delivery
Employees see evidence of the values
driving the right behaviours across the
organisation
We created a clear set of behavioural expectations against each of the values, and
defi ned high, expected and low performance for each behaviour, for all employees as
well as for more senior leaders. Clear behavioural expectations provide more clarity in
terms of what the values look like day-to-day
People feel safe to speak out and
challenge where our values are not
being lived
In 2015, we provided much clearer guidance on how to assess values and behaviours
in a performance review
The values and behaviours were used to help shape the revised Pearson Code of
Conduct, with a particular focus on speaking up and challenging behaviour that is
not consistent with our values
Candidates are attracted to Pearson by
our values, Employee Value Proposition
and culture
We created and launched a range of simple but powerful toolkits to help leaders,
managers and teams explore and understand what the values and behaviours look
like in their own context
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Evidence that our values drive
performance, engagement and(cid:98)
retention of key talent
Welcome to Pearson, our award-winning global onboarding tool, has been updated to
ensure that all new hires are familiar with the values from day one. We continue to have
high recall of the values, and strong identifi cation with them, as evidenced in our 2015
engagement survey (see below)
The 2015 engagement survey found that 89% of employees agree that ‘Pearson’s values are important to me’ – even
higher than in 2014 (84%). The survey also indicated that behaviour consistent with our values was signifi cantly more
visible to employees, and that all four values are more prevalent within most parts of our company. As part of our work
on culture, we found that the way Pearson’s colleagues treat one another and the values themselves are factors in the
decision to join and stay at Pearson.
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Pearson plc Annual report and accounts 2015
2. Our values and behaviours continued
Our values
Brave
Takes bold and decisive action
to deliver ambitious outcomes
and champions a culture of
high performance
Imaginative
Looks beyond their
immediate job both inside
and outside of Pearson and
introduces new ways of
seeing, thinking and working
Our behaviours
C O L LEAGUES
C U S TOMERS
THE
LEARNER
S
TAKEHO L D E
S
R
Decent
Listens, encourages and
respects diff erence, treats
all people fairly, with
honesty and transparency
Accountable
Drives results by owning
the solution, getting the
right people involved and
delivering on promises
Brave
Imaginative
Decent
Accountable
Shows determination
and courage in the face
of obstacles and setbacks
Off ers ideas or opinions
without fear of criticism or
professional risk
Sets high standards for own
and others’ performance
Assesses complex issues
from multiple angles and
addresses problems that
don’t have clear solutions
or outcomes
Off ers creative ideas and
innovative solutions to
solve problems and address
opportunities
Takes a broad perspective
to identify opportunities
and solutions
Is honest, transparent and
straightforward when
working with others
Builds trusting relationships
with a broad range of
people inside and outside
Pearson
Looks for and includes
diverse viewpoints and
talents of others
Takes ownership of
own work and drives to
successful completion
and closure
Identifi es and involves
others to accomplish
individual and group
outcomes
Follows through
on commitments
Code of conduct
Raising concerns
Our values are reinforced by our code of conduct
which covers, among other things, individual conduct,
safeguarding of learners, employee rights and
responsibilities, community involvement, the
environment and our social obligations. We make sure
everyone is aware of the Code and this forms part of the
onboarding process. This year, we completed a material
review and rewrite of the Code including detailed
additional guidance and case study support. The Code
was circulated early in 2015 to every Pearson employee
and they were asked to confi rm they had read it,
understood it and to affi rm that they would comply with
it. Over 99% of employees have signed up to the Code.
We operate a free, confi dential telephone helpline and
website for anyone who wants to raise a concern and we
have a clear non-retaliation policy in place to encourage
people to share the issues they have. In 2015, we had
119 concerns (112 in 2014) raised through the ethics
reporting process. These were investigated and, where
possible, the outcome shared with the whistleblower.
This year, as in most years, the majority of the concerns
related to HR practices. Material concerns raised are
reported to the Pearson audit committee.
3. Our relationships
Section 3 Our social impact
61
Learners and customers
Our people
Our primary responsibility to learners is to ensure that
every product or service we sell can be measured by
what it helps them to achieve. It is also the primary
contribution we can make to society. Our section on
effi cacy describes the commitments and progress we
have made.
Highlights during the year include:
Reinforcing our single global approach to performance
assessment. Introduced in 2014 and refi ned in 2015, this
is designed to help our employees agree expectations
for the year and to motivate people to act consistently
with our values and business strategy.
Last year, we adopted the Pearson product lifecycle
framework for managing our products, services and
platforms. This introduced a unifi ed product strategy
that brought a single global approach to shape how
we invest, develop, market and deliver our products.
We have identifi ed a number of priority products for
investment, selected for their potential to generate
the most business value and deliver the greatest
learner outcomes at scale. These are the focus of our
commitments. Our products are increasingly digital,
off ering opportunities to tailor and personalise learning
around individual needs. At the same time, many people
have concerns over the security and privacy of data.
We have established a governance body within Pearson
to oversee our global approach to these issues.
Product development is part of a wider approach to
better understanding product and customer experience.
Last year, we introduced the Net Promoter Score (NPS)
system into Pearson. This is one of the most recognised
methods of measuring customer loyalty and to date over
150,000 of our customers have shared their comments.
Corporately, we have also invested in a brand tracker –
seeking the views of learners, parents and educators on
Pearson in our largest markets.
One area in which we can do more is to integrate our
approach to managing customer relationships. We are
now implementing a single global platform – Salesforce –
for our marketing, sales and service functions. Starting
with our businesses in South Africa and the Higher
Education sales teams in the United States, we will be
adding new markets, geographies and capabilities in
2016. A single customer view will help improve our
responsiveness to customer needs.
As we grow through operating and owning learning
institutions, we have new responsibilities to safeguard
and protect learners through providing a safe, age-
appropriate learning environment, whether in a
classroom or online. Our new head of safeguarding has
spearheaded our work in this area through assigning
local business leads, establishing common reporting
frameworks, launching a new safeguarding online
learning module and training strategy, as well as piloting
a new approach to incident prevention.
A continuing commitment to internal learning and
development. Pearson has a single global platform – Milo
– for learning and development. Employees completed
approximately 200,000 courses relevant to employee
development during 2015. Through Milo, we delivered
a global employee induction module called ‘Welcome
to Pearson’ and a suite of management modules on
ways of working. Employees and managers use Milo to
record their individual goals, monitor their progress,
and assess their performance. Pearson also began the
implementation of a single global recruitment process,
which will allow all employees access to job openings
around the world and introduces a consistent approach
to internal movement.
Ensuring our employees and the learners we serve are
safe, resilient and productive. Our goal is to achieve zero
harm for our employees, contractors and learners,
working to prevent incidents before they occur. In 2013,
we launched a revised Global Health & Safety Policy
which included 39 minimum performance standards for
implementation at all of our locations in the world. In
June 2015, Pearson secured the RoSPA Bronze Award for
health and safety performance for our global operations.
A health and safety strategic plan is in place for 2015-17
with 11 focus areas, each with clear accountability and
measures of performance.
Helping employees understand how we are doing as a
company, including how world and sector trends might
aff ect them and their business. We provide
comprehensive and relevant information on our
performance including presentations, small group
discussions, messages and webinars. Senior leaders also
use technology to reach all areas of Pearson, through
initiatives such as virtual town halls. The chief executive
hosts a regular call to update all employees on strategy
and to share new innovations from across the company.
In the UK, we have set up an employee engagement
group involving members elected by staff as well as
trade union representatives.
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3. Our relationships continued
Diversity and inclusion
At Pearson, we value the power of diff erence. It drives
innovation, productivity and engagement, helping create a
culture of opportunity, where every employee and learner
is valued. That’s why we’re committed to ensuring that the
core principles of diversity and inclusion are embedded
across our entire business, so that we refl ect our
customers and learners, and where our people can be
themselves and contribute fully to our mission to improve
lives through learning.
The three pillars of our approach are:
Equality
Diversity
Inclusion
Champion fair
treatment,
respect and equal
opportunity for
all our people.
Celebrate what
makes us diff erent,
our individual and
organisational
culture, work
styles, values,
beliefs,
experiences,
backgrounds,
preferences and
behaviours.
Create a single
global working
environment and
culture, where all
our people can
bring their full
selves to work,
are valued for their
diff erences and
can contribute fully
to our company
purpose.
We are committed to attracting, retaining, engaging and
developing the best people. We know that creating and
sustaining an inclusive work environment is critically
important from the boardroom down, regardless of race,
gender, gender identity or reassignment, age, disability,
religion or sexual orientation.
Highlights of our activities include:
We have 30% female board members, ahead of the
25% by 2015 target set by Lord Davies for the UK’s
350 largest companies.
We remain an enthusiastic member of the 30% Club which
brings together chairs and CEOs to work together on
gender balance. We participate in their cross-company
mentoring programme which helps the development of
talented mid-career women.
Raising awareness about the impact of unconscious bias
on key people management decisions. To date, over 4,000
employees have completed our interactive training on
the topic.
In the UK, we are members of the Stonewall Diversity
Champions programme and participate in the Stonewall
Workplace Equality Index, benchmarking how we perform
as an LGBT-friendly employer against over 400 UK
organisations. In the United States, Pearson again
recorded a perfect score of 100% in the 2015 Corporate
Equality Index run by LGBT advocacy organisation,
the Human Rights Campaign.
We have involved over 3,000 employees in global
employee resources groups. Networks include Women
in Learning and Leadership (WILL) which currently has
15 chapters, Pearson Spectrum for LGBT colleagues and
allies, Pearson Parents, Pearson Able for colleagues with
disabilities and accessibility advocates, Pearson Veterans
for military families and veterans, and the Pearson Latino
Network, dedicated to addressing the needs of Hispanic
and Latino employees and learners.
Disability is an important part of our wider commitment
to diversity and inclusion. We work to ensure that
appropriate procedures, training and support are in
place for people with disabilities to ensure fair access to
career and progression opportunities. Our Able network
of employees will help us improve practice.
Women in Pearson (%)
Board of directors
Senior leadership*
All employees
33%
2015
30%
as at
1.1.16
30% 2014
22% 2013
34%
2015
35% 2014
31% 2013
59%
2015
58% 2014
57% 2013
* Two reporting lines from chief executive
All employees (number)
Board of directors
Senior leadership*
All employees**
7
as at
1.1.16
6
men
3
women
68
men
35
women
16,781
men
24,260
women
* Two reporting lines from chief executive
** Derived from HR systems and includes the FT
Supply chain and partners
Pearson purchases goods and services valued at around
£1.5bn each year. This total includes our investment in
research and development of new digital products and
services.
Specifi c clauses relating to our commitments made
under the UN Global Compact are an integral part of our
contracts for key suppliers. These standards include the
rejection of forced and compulsory labour, a respect for
diversity, a minimum age to work on Pearson projects and
compliance with employment laws and regulations.
This year, we reviewed our approach to franchise
partners and introduced a common contract template
governing our responsibilities on health and safety,
labour standards, combatting corruption, safeguarding
and the environment.
Communities
In 2015, our community investment was £10.7m, or 1.5% of
pre-tax profi ts. In 2014, Pearson adopted a new strategy
which established increasing literacy rates worldwide as
our anchor social impact campaign issue, along with a
focus on employee engagement in communities. Read
more on pages 65-66.
We are committed to playing an active role in helping
shape and inform the global debate around education
and learning policy. A major milestone this year was the
launch of the UN Sustainable Development Goals and,
with others, we successfully advocated for the inclusion of
education as a core goal. We also contributed to the debate
during the UN General Assembly in September as well as
to Project Everyone to spread the word on the goals.
We are a board member representing the private sector
on the Global Partnership for Education, having been
one of the fi rst companies to join the initiative. GPE
brings together over 50 developing countries, donor
governments, international organisations, the private
sector, teachers, and civil society/NGO groups to support
developing countries with their education sector plans
through fi nancial assistance and technical expertise:
www.globalpartnership.org
We also believe that the wider private sector has an
important contribution to make in developing education
and learning policy. We helped establish, and continue
to support, the Global Business Coalition for Education,
helping focus the wider business community on the
challenges faced by developing countries to promote
learning: http://gbc-education.org/about-us
Section 3 Our social impact
63
4. Our planet
We believe that we have a responsibility to play our part in
protecting the natural resources on which we all depend.
Climate change
Pearson maintained our climate neutral status for our
directly controlled operations – a commitment we fi rst
achieved in 2009. We do this through carbon reduction,
purchase of renewable energy, renewable energy
generation at our sites and the purchase of carbon
off sets.
Highlights of our activities include:
Pearson retains global certifi cation against the Carbon
Trust Standard. We were the second ever organisation
to secure the standard which recognises leadership
in measuring, managing and reducing year-on-year
carbon emissions.
Pearson completed our work to build a carbon footprint
analysis tool for our book publishing in the US and UK.
This will help us target the most eff ective reductions.
We maintained our record of purchasing 100% of the
electricity we use from green power representing over
141,000 MWh of electricity in 2015. During COP21 in
Paris, Pearson announced that we had signed up to
RE100, joining over 50 companies helping build the
market for renewable electricity.
We continue to generate renewable electricity at
fi ve sites and have 2.6 MW of wind and solar assets
installed.
Pearson is certifi ed against ISO14001, the environmental
management standard in the UK and Australia. During
2015, Pearson completed the work to become certifi ed
against ISO 50001, the energy management standard.
Our River Street offi ces in Hoboken, New Jersey, became
the latest to secure LEED certifi cation, an internationally
recognised mark of environmental excellence in facilities
management. Pearson occupies 840,000 square feet
in LEED certifi ed buildings including our offi ces at
330 Hudson Street in New York.
Our approach to managing other materially important
emissions – such as embedded carbon dioxide in
purchased raw materials as well as business travel by
air – are detailed in our 2015 Environment report.
This will be published in June 2016.
Targets
25%
100%
reduction in operational
emissions by the end of
2015, based on a 2009 base
year. We achieved 30%
To maintain our record of
purchasing 100% of the
electricity we use from
green power. Achieved
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Pearson plc Annual report and accounts 2015
4. Our planet continued
Global Greenhouse Gas (GHG) emissions data (Metric tonnes of CO2e)
Emissions from:
Combustion of fuel and operation
of facilities (GHG Protocol scope 1)
Electricity, heat, steam and cooling
purchased for own use (GHG
Protocol scope 2)
Total
Calendar year
2014
Calendar year
2015
Intensity ratios:
Calendar year
2014
Calendar year
2015
Scopes 1 and 2 (tonnes CO2e)/
sales revenue £ (millions)
Scopes 1 and 2 (tonnes CO2e)/FTE
26.6
3.17
24.8
2.70
25,027
22,343
104,715
88,381
129,742
110,724
Carbon emissions The scope 1 and scope 2 carbon emissions are calculated according to The Greenhouse Gas Protocol: Corporate Accounting
and Reporting Standard (Revised Edition) together with the latest emission factors from recognised sources including, but not limited to DEFRA,
the International Energy Agency, and the US Environmental Protection Agency. No material scope 1 or scope 2 emissions have been excluded
from the reported GHG emissions.
Material use: Forests
When purchasing paper for our books, security and
sustainability of supply are very important to us.
Paper use remains a priority environmental issue
and we continue to focus on sustainability sourcing
and being more effi cient in how we use paper. We:
First adopted and publicly disclosed our environmental
sourcing policy for paper in 2003.
Collect and map data on the forest of origin, certifi cation
systems applicable and recycled content for the papers
we purchase.
Talk about our guidelines with our key paper suppliers
when we meet and as part of our contract negotiations.
Discuss our approach to paper purchasing with
customers, environmental groups, investor analysts
and other interested stakeholders.
Signed up to the WWF Save Forests campaign and added
our voice for the inclusion of printed material within the
scope of the EU Timber Regulation.
Hold Forest Stewardship Council (FSC) chain of custody
certifi cation, allowing books to carry the FSC label for our
businesses in North America and in the UK.
Are members of industry bodies dedicated to responsible
forest management. We have been members of the WWF
forest and trade network for over a decade and are a
founder member of PREPS – the publishers database for
responsible environmental paper sourcing – which we use
across our global business.
Invest in forest-based carbon off sets for any part of our
climate footprint we cannot reduce or avoid through
other means. Since 2009, this programme has seen over
1,300 hectares of forest protected in Canada, Colombia,
Costa Rica, the US and the UK.
Visit pearson.com/environment to learn more.
Our performance: Our social impact rankings
One way we assess how we are doing as a responsible business is to maintain our position in key indices
and(cid:98)benchmarks of social responsibility.
Index/year
Dow Jones Sustainability Indices*
BITC Corporate Responsibility Index
2011
Global
Sector Leader
Platinum
2012
Gold
Class
2013
Silver
Class
Platinum
(retained)
Platinum
Inclusion in FTSE4Good
Yes
Yes
Yes
Corporate Knights index of the Global 100
most sustainable corporations
2014
2015
Bronze
Class
Platinum
(retained)
Yes
Yes
Bronze
Class
95%**
Yes
Yes
* For the last decade, we have been included in the DJSI World index
which includes only the top 10% of companies in each industry
assessed for sustainability performance.
** BITC introduced a new rating system in 2015.
We welcome feedback on this aspect of the
company as we do on any other. Please e-mail
amanda.gardiner@pearson.com with any questions
or ideas you may have.
5. Impact campaigns
Pearson has changed its approach to community
investment. We believe that we can make more of
a(cid:98)diff erence to people’s lives through focusing on
a(cid:98)small(cid:98)number of campaigns and issues, where
working(cid:98)together with others can accelerate the
impact(cid:98)of learning.
As the world’s learning company, Pearson has a lot to
off er beyond traditional cash donations – we can also
bring the expertise and enthusiasm of our people, as
well as a wealth of relevant products and services.
This approach also delivers value for the company.
By(cid:98)getting involved in social campaigns, our employees
can develop new skills, insight and energy and apply
this(cid:98)to their work at Pearson. Our social impact
campaigns also raise Pearson’s profi le, diff erentiate us,
and increase awareness of issues that inhibit access
to(cid:98)better learning outcomes.
In 2015, our primary focus has been on developing our
fl agship campaign, Project Literacy. Alongside this, we
have also off ered employees a range of new ways to get
involved in worthy causes and their local communities.
Project Literacy
Illiteracy remains a huge challenge. One in ten people
worldwide, or over 750 million adults, are illiterate, two-
thirds of whom are women. This is a staggering number
of people.
We also know that being literate is fundamental
to(cid:98)building a world in which everyone has the chance
to(cid:98)learn.
Literacy is an issue where we believe that Pearson can
make a substantial contribution, but is far from suffi cient
on its own. This is why we launched Project Literacy –
a(cid:98)movement with a shared vision to put literacy within
everyone’s reach, unlocking the potential of people,
communities and whole economies. To date,
40(cid:98)organisations have joined the campaign.
Project Literacy – headlines
Section 3 Our social impact
65
To shape our campaign strategy and focus, we
researched the views of the public, the private sector
and literacy charities to understand both the current
landscape and to benchmark awareness of illiteracy
as an urgent issue. We found that:
a) Illiteracy is not viewed as a major global or
national(cid:98)issue. However, when illiteracy is connected
to social and economic challenges such as poverty,
interest rises
b) The vast majority of funding is for child literacy
leaving(cid:98)adult, and in particular women’s, literacy
under-funded
c) More investment is needed to support families to
help(cid:98)their children develop literacy skills before
starting school
Based on these insights, Project Literacy refi ned its
focus and strategy as a fi ve-year campaign dedicated
to building a movement and partnerships that will act
together to close the global literacy gap.
Building partnerships Partnerships are critical to the
success of Project Literacy. Our partnership selection
process is based on a theory of change developed in
collaboration with the Pearson Effi cacy team and
Results for Development (R4D), a US non-profi t that
specialises in monitoring and evaluation for international
development programmes.
Engaging employees in social impact
Our people are our best ambassadors and advocates.
One way we support them is to provide opportunities
to give time and money to invest in their communities.
We use Project Literacy as a lever, but we also support
our employees to make an impact on causes they care
about through opportunities to volunteer, donate and
to share their social impact stories. Over the course of
2015, 30% of employees participated in social impact
activities at Pearson.
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969m
people reached through
media, social reach and
events
11,460
people have sought
volunteering opportunities
with our Project Literacy
partners
449,477
views of Project Literacy
articles published by GOOD
Magazine, a social purpose
media company
Celebrities and infl uencers
supporting the campaign:
Richard Branson, Chelsea
Clinton and Piers Morgan
Events marked by
Project Literacy:
World Book Day, Mandela
Day, International Youth
Day, International Literacy
Day, UNGA week,
International Human Rights
Day, and Giving Tuesday
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5. Impact campaigns continued
The three pillars of our theory of change that guide our partnership investment decisions are:
1
Advancing
best practice
2
Innovating
new solutions
We partner with organisations
implementing proven literacy
interventions to help them grow.
Why? Because there are some
things that we already know work
to improve literacy, and we need
more of them.
We partner with organisations
to design, build and rigorously
test new approaches to tackling
illiteracy. Why? Because new
solutions will be needed to
reach the most marginalised
and achieve scale.
3
Raising awareness and
mobilising action
We are building a network to
advocate collectively for greater
investment in and attention to
literacy. Why? Because the extent of
the problem and its potential impact
is huge; we’ll need everyone united
to close the literacy gap.
National Literacy Trust (NLT)
Worldreader
Unsigned petition
Project Literacy and NLT are
partnering together to replicate Early
Words Together, a targeted literacy
peer education programme for
families with children aged 2 to 5,
in 30 schools across the London
metropolitan area. As an integral
component of the programme,
Pearson and community volunteers
are recruited and trained to help
parents improve their home learning
environment and adopt behaviours
that support literacy using evidence-
based approaches and materials.
Project Literacy and Worldreader are
partnering together on a mobile
technology pilot project in India –
Mobile Reading to Children – to
empower parents to talk more
and read more to their children,
specifi cally through the use of mobile
devices. With the Worldreader mobile
app, which is available on feature
phones and smartphones, we will
be providing a rich bank of locally
relevant content at low cost for
200,000 low-income parents in
Delhi who have children aged 6 and
younger. Additional partners include
Results for Development, Center for
Knowledge Societies, Society for All
Round Development, Katha, and
Health and Family Planning
Organization.
In September 2015, 16 Project
Literacy partners joined forces to
sign an open letter to world leaders
meeting at the United Nations
General Assembly (UNGA), calling
on them to make literacy a key part
of the sustainable development
agenda. The letter was published
in The New York Times and The
Guardian. This letter, combined with
the launch of our global ‘Unsigned
Petition’, reached 410 million people
through social media. The petition
is(cid:98)our major call to action for 2015
and 2016, serving as a striking and
visual reminder of the global scale
of(cid:98)illiteracy and the 750 million
people worldwide who cannot sign
for themselves.
Volunteering
Giving
We now have formal volunteering programmes in place
in the US and the UK with Project Literacy partners
including Reading Partners, Jumpstart and the National
Literacy Trust. In 2015, our employees volunteered
over 10,000 hours with 40% of those linked to literacy.
For one programme – Read for the Record run by
Jumpstart – our employees contributed approximately
1,000 volunteering hours and helped 7,000 children.
Sharing
Pearson employees helped inspire others by
contributing more than 1,400 stories about literacy
volunteering or donating, either on social media or
on our internal community engagement hub.
Pearson has teamed up with Kiva, the world’s largest
micro-lending platform, to provide micro-loans to people
around the world who are locked out of traditional
banking systems. To date, employees have made more
than $600,000 of loans to Kiva entrepreneurs, making
Pearson third globally for total amount loaned by a
business on Kiva.
In September, we launched a matching gifts campaign
to mark the launch of the Global Goals and Project
Literacy presence at UNGA. Throughout the entire
month, employees across Pearson who gave to charities
received a 4:1 match from Pearson. The campaign raised
over $430,000. Over the course of the year, employees
supported more than 1,100 charities.
6. Social innovation
Section 3 Our social impact
67
Lack of access to quality education for low-income and
marginalised families is a global challenge that impacts
both developing and developed economies.
Central to our approach is a belief that commercial
solutions can accelerate access to quality, aff ordable
education, while presenting new business opportunities
for Pearson. Uncovering, developing and scaling
solutions, especially in places where education
standards fall well behind the best in the world, can
require us to challenge the way we think about our
business. We invest in new technology as well as test
innovative partnerships for our products to reach
these(cid:98)markets.
One example is Every Child Learning – our partnership
with Save the Children. Our shared vision is to work
together to fi nd sustainable ways for the education
system in Jordan to cope with the infl ux of displaced
Syrian refugee children. We have donated £500,000
to(cid:98)fund the establishment of two Save the Children
education centres in Amman, which are supporting
Syrian refugees and host community children (5 to 13
years old) to get a quality education. We have made
a(cid:98)further £1m commitment to work jointly with Save
the Children to scope, research, design and develop
new education solutions. That means going beyond
traditional philanthropy to leverage the full potential
of Pearson’s global operations, networks and people.
Social innovation in practice – the Pearson
Aff ordable Learning Fund
The Fund launched in 2012 and has a maximum commitment
level of $65m in capital. Its ambition is to reach millions of
students from low income families by 2020, allowing access
to high quality aff ordable education. Integral to its approach
is to set improvements in learning outcomes and market-
based returns as conditions of continued investment. The
Fund has invested in innovative education start-ups in South
Africa, Nigeria, Ghana, India and the Philippines. The Fund
goes far beyond fi nancial backing in that it contributes to
good governance, and operational support to education
entrepreneurs. The(cid:98)Fund(cid:98)enables innovation from which
both Pearson and(cid:98)governments can learn; the cost per
student in the schools in the fund portfolio is on par or
lower than the per(cid:98)pupil cost in the public sector.
Every Child Learning
Providing education for children in confl ict and emergency
settings presents many unique challenges. As the confl ict in
Syria enters its sixth year, over two million Syrian children are
no longer in school and even more are vulnerable to the risks
of child labour, early marriage and recruitment into militia
groups. To address this critical issue we have joined forces
with the international organisation Save the Children to
launch Every Child Learning. The three-year partnership
worth £1.5m will increase educational opportunities for
Syrian refugees and(cid:98)host communities, and innovate new
solutions to help(cid:98)improve the delivery of education in
emergency and(cid:98)confl ict-aff ected settings.
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Pearson plc Annual report and accounts 2015
Section 4 Governance
69
Governance
report
Remuneration
94
Remuneration committee
introduction
97
Summary of remuneration policy
101 Annual remuneration report
116
Information on changes to
remuneration for 2016
Additional disclosures
118 Report of the directors
121
Additional shareholder
information
Governance overview
70
Senior independent
director’s letter
Leadership & eff ectiveness
72 Board of directors
74 Board governance and activities
79 Chairman’s succession
80 Nomination committee report
Accountability
82 Audit committee report
88 Risk governance and control
Engagement
90
Reputation & responsibility
committee report
92
Shareholder engagement
93 Wider engagement
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Note: This section constitutes our directors’
report as required by UK legislation.
70
Pearson plc Annual report and accounts 2015
Governance overview
From Vivienne Cox, Senior independent director
Vivienne Cox
Senior independent director
During times of change, good
governance is paramount. As a
board we organise our work around
four major themes where we believe
we can add value: governance,
strategy, performance and people.
In this Governance section
Leadership & eff ectiveness
Accountability
Engagement
Remuneration
Additional disclosures
p72-81
p82-89
p90-93
p94-117
p118-123
Dear shareholders
The past year has seen some notable changes at
Pearson, in terms of both personnel and portfolio,
and as senior independent director, the board felt it
was appropriate for me to set out these changes for
you in greater detail.
After ten years at Pearson, during which our business
and the wider economy in which we operate have
transformed markedly, Glen Moreno stepped down as
chairman at the end of 2015. Whilst the last few months
of 2015 were challenging for Pearson, Glen’s legacy to the
company can be seen in the well balanced and forward-
thinking board of directors he has assembled which is
working hard to steer Pearson back to growth. Having
worked alongside Glen for the past four years on the
board, and on behalf of Pearson as a whole, I would like
to thank him for his deep commitment to Pearson and
its mission and wish him the very best for the future.
Glen’s successor as Pearson chairman, Sidney Taurel,
offi cially took up his post in January 2016 and we are
confi dent that his experience and dedication will help
guide Pearson towards successful delivery of its key
priorities. Read more about Chairman succession
on p79
Governance principles
During times of change, good governance is paramount.
The board was closely involved with the strategic
decisions to sell Pearson’s interests in the Financial
Times, The Economist and PowerSchool, providing input
and challenge as matters progressed. We will continue
to do so throughout the current phase of change.
Our role and activities As a board we organise our work
around four major themes where we believe we can add
value: governance, strategy, 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. Learn more about Board meetings
and activities on p75
UK Corporate Governance Code This year, for the fi rst
time, we are reporting against the 2014 edition of the
UK Corporate Governance Code (the Code). The board
believes that during 2015 the company was in full
compliance with all relevant provisions of 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/governance
Section 4 Governance/Leadership & eff ectiveness
71
Board and management
Engagement
See full section on p90-93
The Pearson board consists of senior executive
management alongside a strong team of non-executive
directors drawn from successful international
businesses and education institutions with experience
of corporate strategy, education, emerging markets,
technology and consumer marketing.
Board changes As is best practice, we continually
assess and refresh the board to ensure we maintain
an appropriate balance and diversity of skills and
experience. In April 2015 we also bid farewell to David
Arculus and Ken Hydon, who each served on the board
for nine years, as remuneration and audit committee
chairmen respectively. In addition to our new chairman,
we have also welcomed two other directors to our board
since our last report to shareholders. Coram Williams –
a long-time Pearson and Penguin Random House
colleague – joined the board on 1 August 2015, assuming
the role of chief fi nancial offi cer following Robin
Freestone’s departure, and in January 2016, Lincoln
Wallen joined the board as a non-executive director
bringing with him a wealth of digital and technology
experience. We welcome Coram and Lincoln to the
board, where they are already making valuable
contributions to our governance and deliberations.
Learn more about our Board of directors on p72-73
Board and executive structure and balance Our board
consists primarily of non-executive directors, who
bring a strong independent viewpoint, complementing
the executive perspectives of John Fallon and Coram
Williams. In addition, we invite members of the Pearson
executive to attend a number of the board’s sessions to
bring insights and thoughts from across the business,
such as at the board’s overseas strategy sessions in Palo
Alto, California and New Delhi, India. Learn more about
the Overseas strategy sessions on p93
Accountability
See full section on p82-89
A key element of the board and audit committee’s work
each year is consideration of Pearson’s risk appetite and
the review of our principal risks. The 2014 edition of the
Code introduced a requirement for the board to assess
the company’s prospects taking into account the current
position and principal risks, and to make a viability
statement on this basis. The audit committee supported
the board in this process by examining the analysis
and assumptions underlying the viability statement,
considering the required inputs and evaluating the
proposed disclosures resulting from the process.
Learn more about Risk management on p38-40
and read the Viability statement on p118
Engagement with shareholders and society as a whole is
key to Pearson’s mission to help people make progress
in their lives through access to better learning. We have
announced important partnerships during the past year,
such as Project Literacy and our partnership with Save
the Children, and the launch of the UN’s Sustainable
Development Goals has presented an opportunity for
Pearson to become engaged with a wide section of
stakeholders. As a result, our reputation & responsibility
committee continues to expand its areas of focus, with
increased sight of Pearson’s social impact initiatives,
social and traditional media engagement activity, and
employee engagement matters. We also welcomed a
number of shareholders to our Annual General Meeting
(AGM) which, as always, was a valuable opportunity
for our board and senior management to respond to
shareholders’ views and questions.
Remuneration
See full section on p94-117
This year’s directors’ remuneration report refers to
further incremental changes we have made in line
with policy in 2015 to better align executive director
compensation with the interests of our shareholders
and how this policy was operated in 2015. To put our
report into context, we have included a summary of the
approved directors’ remuneration policy report from
2013 which is not subject to a vote. Our remuneration
policy was reviewed in 2013 to align with the company’s
strategy and organisation and was approved by
shareholders at the 2014 AGM. We continue to operate
executive remuneration in line with the approved policy
and at present do not anticipate seeking shareholder
approval for our policy again until required to do so at
the 2017 AGM.
Conclusion
I 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 General Meeting.
Vivienne Cox
Senior independent director
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72
Pearson plc Annual report and accounts 2015
Board of directors
Chairman
Executive directors
N
R
Sidney Taurel Chairman
aged 67, appointed 1 January 2016
John Fallon Chief executive
aged 53, appointed 3 October 2012
Coram Williams Chief fi nancial offi cer
aged 42, appointed 1 August 2015
Sidney has over 40 years of experience in
business and fi nance, and is currently a board
director and chairman of the Compensation
Committee at IBM Corporation. He is also a
director at McGraw Hill Financial, Inc., a role
from which he will step down during 2016.
Sidney is senior advisor at global investment
bank Moelis & Co and an advisory board
member at pharmaceutical fi rms Takeda
Pharmaceutical and Almirall. He was chief
executive offi cer of global pharmaceutical
fi rm Eli Lilly and Company from 1998 until
2008, chairman of the business from 1999
until 2008, and has been chairman emeritus
since 2009. Sidney has received three US
presidential appointments: to the Homeland
Security Advisory Council, the President’s
Export Council and the Advisory Committee
for Trade Policy and Negotiations, and is an
offi cer of the French Legion of Honour.
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., in 2000.
In 2003, he was appointed CEO of Pearson’s
educational publishing businesses for Europe,
Middle East and Africa. Prior to joining
Pearson, John was director of corporate aff airs
at Powergen plc, and 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. He is an advisory board member
of the Global Business Coalition for Education
and a member of the Council of the University
of Hull.
Coram joined Pearson in 2003 and has held a
number of senior positions including fi nance
and operations director for Pearson’s English
Language Teaching business in Europe,
Middle East & Africa, interim president of
Pearson Education Italia and head of fi nancial
planning and analysis for Pearson. In 2008
Coram became CFO of The Penguin Group
and was latterly appointed CFO of Penguin
Random House in 2013. Coram was trained at
Arthur Andersen, and subsequently worked
in both the auditing and consulting practices
of the fi rm.
Key to committees
A
Audit
Committee
Committee
Chair
N
R
Nomination
Committee
Remuneration
Committee
RR
Reputation &
Responsibility
Non-executive directors
A
N
RR
N
RR
Linda Lorimer Non-executive director
aged 63, appointed 1 July 2013
Harish Manwani Non-executive director
aged 62, appointed 1 October 2013
Linda has a deep background in education
strategy, administration and public aff airs.
She is senior counsellor to the president and
provost of Yale University and until recently
served as vice president for Global & Strategic
Initiatives at Yale, where her duties included
oversight of Yale’s Offi ce of International
Aff airs and Offi ce 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 Offi ce of Sustainability.
Previously, Linda served as president of
Randolph-Macon Woman’s College in Virginia
and was chair of the board of the Association
of American Colleges and Universities. She
also served on the boards of several public
companies, including as presiding director
of the McGraw-Hill Companies.
Harish has an extensive background in
emerging markets and senior experience
in a successful global organisation. He
was previously chief operating offi cer of
consumer products company Unilever, having
joined the company in 1976 as a marketing
management trainee in India, and 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 boards of Whirlpool
Corporation, Qualcomm Inc. and Nielsen
Holdings. He is also on the board of the
Indian School of Business and the Economic
Development Board (EDB) of Singapore, and
is global executive advisor at Blackstone
Private Equity.
Section 4 Governance/Leadership & eff ectiveness
73
Non-executive directors
R
N
RR
A
N
R
N
R
RR
Elizabeth Corley, CBE
Non-executive director
aged 59, appointed 1 May 2014
Vivienne Cox, CBE
Senior independent director
aged 56, appointed 1 January 2012
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 and renewables business
and its alternative energy unit. She is non-
executive director of Stena International
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 was
appointed Commander of the Order of the
British Empire (CBE) in the 2016 New Year
Honours for services to the UK Economy
and Sustainability.
Elizabeth is non-executive vice chair
of Allianz Global Investors, where she
was chief executive offi cer from 2005 to
2016. She was previously at Merrill Lynch
Investment Managers (formerly Mercury
Asset Management) and Coopers & Lybrand.
Elizabeth is acting-chair of the FICC Markets
Standards Board, a member of the ESMA
stakeholder group and an advisory council
member of TheCityUK. She is a non-
executive director of BAE Systems plc and
the Financial Reporting Council. In addition,
she is a member of FEAM’s management
committee, the CFA Future of Finance Council,
the Supervisory Board of Euler SA, a council
member of the City of London IRSG and a
member of the Committee of 200. She is a
fellow of the CFA and the Royal Society of Arts
and is also a crime fi ction author.
Non-executive directors
A
N
R
A
N
Tim Score Non-executive director
aged 55, appointed 1 January 2015
Lincoln Wallen Non-executive director
aged 55, appointed 1 January 2016
Tim has extensive experience of the
technology sector in both developed and
emerging markets, having served as chief
fi nancial offi cer of ARM Holdings plc, the
world’s leading semiconductor IP company,
a position he held for 13 years. He is an
experienced non-executive director and
currently sits on the boards of The British
Land Company plc and HM Treasury. He
served on the board of National Express
Group plc from 2005 to 2014, including time as
interim chairman and six years as the senior
independent director. Earlier in his career Tim
held senior fi nance roles with Rebus Group,
William Baird, BTR plc and others.
Lincoln is chief technology offi cer for
DreamWorks Animation, the global family
entertainment company, a position he has
held since 2012, having joined the company
as head of research and development in
2008. Prior to this, Lincoln served as chief
technology offi cer for the mobile business
of Electronic Arts, Inc., a leading interactive
entertainment software company. He has
held senior positions at Criterion Software,
MathEngine plc and is a non-executive
director of the Smith Institute for Industrial
Mathematics & System Engineering. Lincoln
is also an advisory board member of Hewlett
Packard Enterprise and a member of the
STEM Advisory Committee of the National
Academy foundation. Lincoln was formerly
a lecturer and reader in computation at the
University of Oxford.
Josh Lewis Non-executive director
aged 53, appointed 1 March 2011
Josh’s experience spans fi nance, education
and the development of digital enterprises.
He is the founder of Salmon River Capital
LLC, a New York-based private equity/
venture capital fi rm focused on technology-
enabled businesses in education, fi nancial
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-
profi t education sector, with associations
including New Leaders, New Classrooms,
and the Bill & Melinda Gates Foundation.
He is also a non-executive director of several
enterprises in the fi n-tech/data, education,
and other sectors.
Pearson board
members bring a wide
range of experience,
skills and backgrounds
which complement
our strategy.
Experience of chairman and
non-executive directors
Digital/technology
experience
63%
Emerging market
experience
38%
Education/learning
sector experience
63%
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74
Pearson plc Annual report and accounts 2015
Board governance and activities
Board of directors
Composition of the board The board currently consists
of the chairman, Sidney Taurel, two executive directors
including the chief executive, John Fallon, and seven
independent non-executive directors.
Chairman and chief executive There is a defi ned split
of responsibilities between the chairman and the chief
executive. The roles and responsibilities of the chairman
and chief executive are clearly defi ned, set out in writing
and reviewed and agreed by the board annually.
Chairman’s signifi cant commitments There were no
changes to the chairman’s signifi cant commitments
between his appointment to the Pearson board on
1(cid:98)January 2016 and the date of this report. Mr Taurel
has announced that he will step down from the board
of McGraw Hill Financial, Inc. at its 2016 annual
shareholders’ meeting.
Independence of chairman Sidney Taurel was
considered to be independent upon his appointment
as chairman on 1 January 2016.
Independence of directors All of the non-executive
directors who served during 2015 were considered by
the board to be independent for the purposes of the
Code. Lincoln Wallen was considered to be independent
upon his appointment to the board on 1 January 2016.
The board reviews the independence of each of the
non-executive directors annually. This includes
reviewing their external appointments and any potential
confl icts of interest as well as assessing their individual
circumstances in order to ensure that there are no
relationships or matters likely to aff ect 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.
Key roles
Role
Name
Responsibility
Chairman
Sidney Taurel
Chief executive
John Fallon
The chairman is primarily responsible for the leadership of the board and ensuring its
eff ectiveness. The chairman sets the board’s agenda and promotes open, constructive
debate of all agenda items and eff ective decision-making. He also ensures that the views
of shareholders are communicated to the board.
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 management. He is responsible for developing operational proposals and policies for
approval by the board, and promotes Pearson’s culture and standards.
Senior
independent
director
Committee
chairmen
Vivienne Cox
The senior independent director’s role includes meeting regularly with the chairman and
chief executive to discuss specifi c issues, as well as being available to shareholders generally
should they have concerns that have not been addressed through the normal channels.
Tim Score, Elizabeth
Corley, Vivienne Cox
and Sidney Taurel
The committee chairmen are responsible for leading the board committees and ensuring
their eff ectiveness. They set the committees’ agendas, in consultation with the company’s
management, and report to the board on committee proceedings.
Company
secretary
Stephen Jones
The company secretary acts as secretary to the board and its committees, ensuring
compliance with board procedures and advising on governance matters. He is responsible,
under the direction of the chairman, for ensuring the board receives accurate, timely and
clear information. The company secretary organises new director inductions and ongoing
director training.
Gender split of board
Length of tenure of non-executive directors
Men
Women
7
3
Under 3 years
3 to 6 years
5
2
Figures as at 4 March 2016
Figures as at 4 March 2016
Section 4 Governance/Leadership & eff ectiveness
75
Confl icts of interest Under the Companies Act 2006
(the Act), directors have a statutory duty to avoid
confl icts of interest with the company. The company’s
articles of association (Articles) allow the directors to
authorise confl icts of interest. The company has
established a procedure to identify actual and potential
confl icts 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 confl icts of interest. Once
notifi ed to the chairman or company secretary, such
potential confl icts 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 confl ict or potential confl ict. The board
reviews any authorisations granted on an annual basis.
Board meetings
The board held six scheduled meetings in 2015, with
discussions and debates focused on the key strategic
issues facing the company. Major items covered by the
board in 2015 are shown in the table below. In addition
to the six formal meetings, the board met by telephone
in January 2015 to consider the January trading update
to be issued to the market, and by telephone in October
2015 to consider the market’s reaction to Pearson’s
October trading update and to begin to plan the
proposed strategic course of action.
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 signifi cant business
issues brings an additional discipline to major decisions.
Board meeting focus during the year 2015
Topic
Activity
Governance
Annual review of authorised confl icts of(cid:98)interest
Review of division of responsibilities between
chairman and chief(cid:98)executive
Focus on forthcoming AGM and review of
shareholder issues
Shareholder activism and defence plan
Appointment of company secretary
Treasury policy approval
Update on Pearson System of Courses (PSoC)
including hands-on demonstration of courseware
South African Black Economic Empowerment
(BEE) overview
Supply chain outsourcing arrangements
Strategy
Operating and strategic plan updates
Brand strategy Read more on(cid:98)p7
Regular product demonstrations
Consideration of proposed corporate transactions
including sales of PowerSchool, the Financial Times
and The Economist
Performance
2014 preliminary results and annual report and
accounts
Review of investor relations strategy and share
price performance
Interim results and trading updates
Balance sheet strategy
Risk appetite
Approval of committee terms of reference
Enterprise risk management review Read more
on(cid:98)p38
Approval of schedule of authority limits
Off site strategy meeting in California focusing on
digital disruption in education
Off site strategy meeting in New Delhi focusing on
Brazil, China, India and South Africa Read more
on(cid:98)p93
Triennial pension valuation
Final and interim dividend proposals
Monthly management reports
Draft 2016 operating plan and three-year fi nancials
People
Overview of ‘The Summit’ – Pearson’s senior
leadership conference
India key talent and leadership team dinner at
New Delhi strategy meeting
Rising Stars breakfast at overseas strategy meetings
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76
Pearson plc Annual report and accounts 2015
Board governance and activities continued
A schedule of formal matters reserved for the board’s
decision and approval is available on our website, at
www.pearson.com/governance
The board receives timely, regular and necessary
fi nancial, management and other information to fulfi l 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 meetings are held at the
locations of operating companies, such as during the
board’s 2015 visits to Palo Alto, California and New Delhi,
India. This(cid:98)allows the non-executive directors to share
their experience and expertise with senior managers as
well as(cid:98)allowing them to better understand the abilities
and motivations of senior management, which in turn
will help them assess the company’s prospects and plans
for(cid:98)succession.
Standing committee
A standing committee of the board was established
to approve certain ordinary course of business items
such as banking matters, guarantees, intra-group
transactions and to make routine approvals 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/governance
Culture and values of the board
As evidenced during its externally facilitated evaluation
in 2014, as(cid:98)a whole and at an individual level, the board
feels wholly committed to Pearson’s values and mission.
The reputation & responsibility committee’s remit
includes oversight of Pearson’s values and culture,
and it has continued to monitor work in these areas
throughout the year.
Board attendance
The following table sets out the attendance of the
company’s directors at scheduled board meetings
during(cid:98)2015:
Chairman
Glen Moreno
Executive directors
John Fallon
Robin Freestone (note 1)
Coram Williams (note 2)
Non-executive directors
David Arculus (note 3)
Elizabeth Corley
Vivienne Cox
Ken Hydon (note 4)
Josh Lewis
Linda Lorimer
Harish Manwani
Tim Score
Board
meetings
attended
6/6
6/6
4/4
2/2
2/2
6/6
6/6
1/2
6/6
6/6
6/6
6/6
Note 1: Stood down on 1 August 2015
Note 2: Appointed on 1 August 2015
Note 3: Stood down on 24 April 2015
Note 4: Stood down on 24 April 2015. Unable to attend one meeting due to
personal reasons
Succession planning
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. At board level, the primary
focus during the year was to identify suitable candidates
for the role of chairman.
The company has formal contingency plans in place for
temporary absence of the chief executive for health or
other reasons. The matter of chief executive succession
is a standing item for discussion and review by the
chairman and chief executive annually. Succession
planning for the board and chair is considered annually,
and as part of the recent restructuring programme,
there has been a review of key positions at executive
management level.
Section 4 Governance/Leadership & eff ectiveness
77
Board evaluation
As reported last year, towards the end of 2014, an
externally facilitated board eff ectiveness review was
conducted by external evaluator, JCA Group. In addition
to facilitating this review, JCA Group used the information
and insight they had gleaned from the individual
members of the board to help them form a brief and an
overview of the characteristics that Pearson would be
looking for in a new chairman. JCA then used this insight
to inform the chairman search which took place during
2015, and resulted in the eventual appointment of Sidney
Taurel as Pearson chairman. See p79 for a full review of
chairman succession at Pearson.
The board evaluation for 2015 was conducted on an
internal basis. With the forthcoming departure of
Glen Moreno, the arrival of a new chairman, together
with the appointment of a new CFO and the imminent
appointment of a new company secretary, it was agreed
that the 2015 review should focus mainly on the support
and information that the board and committees receive
in order to ensure that the existing processes are
suffi cient and fi t for purpose. To that end, Stephen Jones,
Pearson’s company secretary, interviewed each of the
non-executive directors to understand their thinking
on a number of board and committee-related support
activities.
Process and recommendations
The review focused on the scheduling, arrangements
and logistics for all board and committee meetings; the
quality and usefulness of the regular information fl ow
to the board and committees, including the use of
electronic board papers, regular CEO and CFO updates
and other information; board induction and training;
the payment of non-executives’ fees and expenses
and any other items or suggestions for improvements.
The exercise proved very useful as an opportunity to
take stock of current practice, to test whether the board
views that as appropriate, and to think about those areas
where improvements could be made. As a result of these
discussions, we are re-thinking the schedule of board
and committee meetings during the course of the year,
including the topics to be considered at those meetings
and their venues. In addition, we are refi ning some of
the information that the board receives in order that the
non-executives be able to be more eff ective. We heard
that more could be done by management to ‘curate’
some of the information that is sent to non-executives
and to make clear to them what is key information
and what is useful to know. We are also refi ning the
regular CEO and CFO updates to the board, in order
to ensure they provide exactly the information that the
board requires to help it track progress against a number
of key milestones. This is an ongoing process, and we will
continue to monitor the eff ectiveness of our internal
processes and to compare what we do against others.
Personal objectives
In addition to the evaluation of the board as a whole,
executives are also evaluated each year on their
performance against personal objectives under the
company’s annual incentive plan.
The non-executive directors, led by the senior
independent director, also conduct a review of the
chairman’s performance.
Committee evaluation
In addition to the review of the board, committees and
individual directors described above, the audit and
remuneration committees each undertook a further
evaluation process to review their performance and
eff ectiveness, as they do each year.
The process involves distribution of questionnaires to
audit and remuneration committee members, as well as
key stakeholders in each committee, seeking views on
matters including committee roles and responsibilities,
quality and timeliness of meeting materials, opportunity
for discussion and debate, dialogue with management
and access to independent advice. Responses are then
evaluated and presented to the respective committee at
a scheduled meeting, with key themes being drawn out
for discussion.
Directors’ training and induction
Directors receive a signifi cant 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 typically includes a series of meetings
with members of the board, the Pearson executive and
senior management, presentations regarding the
business from senior executives and a briefi ng on
Pearson’s investor relations programme. The induction
programme for Lincoln Wallen is ongoing, tailored to
his specifi c areas of focus, such as time with Pearson’s
technology leaders, and relevant to the board
committees he has joined. Read about the induction
programme for Pearson’s new chairman, Sidney Taurel
on p79
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Pearson plc Annual report and accounts 2015
Board governance and activities continued
All directors receive training in the form of presentations
about the company’s operations, through board
meetings held at operational locations and by
encouraging the directors to visit local facilities and
management as and when their schedule allows,
including if they are travelling to a country or region on
non-Pearson business. The company secretary and
general counsel, in conjunction with Pearson’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
A qualifying third party indemnity (QTPI), as permitted
by the Articles and sections 232 and 234 of the Act, has
been granted by the company to each of its directors.
Under the provisions of the QTPI the company
undertakes to indemnify each director against liability
to third parties (excluding criminal and regulatory
penalties) and to pay directors’ costs as incurred,
provided that they are reimbursed to the company
if the director is found guilty, the court refuses to
grant the relief sought or, in an action brought by the
company, judgment is given against the director.
The indemnity has been in force for the fi nancial year
ended 31 December 2015 and is currently in force.
The company has purchased and maintains directors’
and offi cers’ insurance cover against certain legal
liabilities and costs for claims in connection with any
act or omission by such directors and offi cers in the
execution of their duties.
Board committees
The board has established four formal committees:
audit, nomination, remuneration, and reputation &
responsibility. The chairmen and members of these
committees are appointed by the board on the
recommendation (where(cid:98)appropriate) of the nomination
committee and in(cid:98)consultation with each relevant
committee chairman. In(cid:98)addition to these formal board
committees, the standing committee also operates
with board level input.
More committee information:
Audit committee
Nomination committee
Remuneration committee
Reputation & responsibility committee
Standing committee
p82
p80
p94
p90
p76
The committees focus on their own areas of expertise,
enabling the board meetings to focus on governance,
strategy, performance and people, thereby making the
best use of the board’s time together as a whole. The
committee chairmen report to the full board at each
meeting immediately following their sessions, ensuring
a good communication fl ow whilst retaining the ability to
escalate items to the full board’s agenda if appropriate.
Board committee attendance
The following table shows attendance by directors
at committee meetings throughout 2015:
Audit Remuneration Nomination
Reputation &
responsibility
Glen Moreno
–
David Arculus
(note 1)
2/2
Elizabeth Corley
–
Vivienne Cox
4/4
Ken Hydon
(note 2)
Josh Lewis
2/2
–
Linda Lorimer
4/4
Harish Manwani
–
Tim Score
(note 3)
4/4
4/4
2/2
4/4
4/4
1/2
4/4
–
–
1/1
6/6
2/2
6/6
6/6
1/2
6/6
6/6
6/6
6/6
–
–
–
3/3
–
–
3/3
3/3
–
Note 1: Stood down on 24 April 2015
Note 2: Stood down on 24 April 2015. Unable to attend one remuneration committee
and one nomination committee meeting due to personal reasons
Note 3: Joined remuneration committee on 2 October 2015
Chairman’s succession
Commencing the search
Following Glen Moreno’s announcement at the 2015
AGM that he was planning to step down as chairman by
the end of the year, Pearson commenced its search for
a suitable successor. The selection process was led by
Vivienne Cox, our senior independent director, and an
external search fi rm, JCA Group, was engaged to assist
and advise Pearson on the search and appointment
process.
Taking the fi ndings from the 2014 board eff ectiveness
review as a starting point, and in consultation with the
nomination committee and the chief executive, JCA
designed a specifi cation for the desired candidate which
included the following key attributes:
Highly experienced leader of large global businesses,
ideally with a proven track record as a chairman
Truly global player in outlook, approach and
understanding with deep knowledge of and experience
in Pearson’s key geographic markets
Genuine interest in embracing digital technology to
benefi t the customer and the company
In agreeing the specifi cation, the board emphasised the
importance of fi nding someone who was excited by and
demonstrated empathy with Pearson’s mission, values,
goals and people.
Choosing a successor
Candidate profi les were prepared by JCA for
consideration by Ms Cox, who then consulted the
nomination committee and chief executive to agree a
shortlist of strong candidates. She held initial meetings
with the shortlisted candidates, and recommended a
number of them to progress through to the next stage,
where they met with the chief executive, following
which a search sub-committee was formed, comprising
Linda Lorimer and Tim Score, who each met with the
strongest candidates.
Ms Cox reported regularly to the nomination committee
throughout the search and interview stages, and
following consideration of interview feedback it became
clear to the board and the nomination committee that
Sidney Taurel was the most suitable candidate to
succeed Glen Moreno as chairman. Agreement
having been reached, the nomination committee
recommended that the fi nal decision be delegated
to a standing committee of the board to formalise
Mr Taurel’s appointment once the necessary checks
had been satisfactorily completed.
Section 4 Governance/Leadership & eff ectiveness
79
Chairman’s selection process
JCA Group was engaged with a clear set of criteria: to fi nd
a highly experienced global business leader, with proven
ability to lead an industry through a period of change,
of which technology is a key part, and in dealing with a
complex regulatory environment.
1. Identify Using the agreed brief, JCA and the senior
independent director considered and refi ned a list of
potential candidates, seeking input from the nomination
committee on which candidates should be approached.
2. Interview The senior independent director led a series
of interviews with the shortlisted candidates. Preferred
candidates then met with the chief executive and with the
two members of the search committee, following which the
nomination committee met to discuss feedback.
3. Select After further meetings, including with Glen
Moreno, Sidney Taurel was recommended for appointment.
He was selected having successfully led a global
multinational company, operating in some of the most
challenging political and regulatory environments, and
having lived and worked all over the world, including the US,
UK and Brazil – three of Pearson’s(cid:98)most(cid:98)important(cid:98)markets.
4. Appoint Sidney’s appointment as chairman was
approved and announced in October 2015 to take eff ect
on 1 January 2016, the date of his formal appointment to(cid:98)
the Pearson board.
Appointment and induction
Pearson approved and announced the appointment of
Sidney Taurel on 26 October 2015, and he joined the
board on 1 January 2016, assuming the role of chairman
immediately upon appointment.
Mr Taurel met the independence requirements set out in
the Code on appointment and has confi rmed he is able
to dedicate the requisite time to the role.
A comprehensive induction programme was put in
place for Sidney during the three months following the
announcement of his appointment. A series of one to
one meetings was held with members of the Pearson
executive to enable Sidney to understand all aspects
of Pearson’s global business, the challenges facing the
enabling functions such as technology, HR and corporate
aff airs, and the wider trends in education. Sidney also
met with Pearson’s brokers, corporate advisers and
lawyers to understand broader regulatory matters
and obligations. During his US-based induction, Sidney
attended Pearson’s national sales conference focusing
on issues and hot topics in the US business, and spent
time in Washington, DC with the corporate aff airs and
government relations team.
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Pearson plc Annual report and accounts 2015
Nomination committee report
Nomination committee role and composition
The committee primarily monitors the composition and
balance of the board and its committees, and identifi es
and recommends to the board the appointment of
new directors and/or committee members. The
chairman of the board also chairs the nomination
committee, and all non-executive directors serve as
members of the committee. The chief executive attends
committee meetings by invitation.
Chairman role
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, such as during the
search process for Glen Moreno’s replacement during
2015 when Vivienne Cox chaired the committee’s
meetings. Learn(cid:98)more about Chairman succession
on p79
Committee meetings and appointments
The nomination committee meets at least once a year
and at other times as and when required. During 2015,
the committee met six times with its primary focus being
to discuss the search criteria, prepare role descriptions
and consider suitable candidates for the role of chairman
of the board and for an additional non-executive director
with particular experience in digital technology to
complement our strategy. The non-executive search
culminated in the successful appointment of Lincoln
Wallen to the board with eff ect from 1 January 2016.
ommittee
Chairman of nomination committee
Sidney Taurel
Members Elizabeth Corley,
Vivienne Cox, Josh Lewis,
Linda Lorimer, Harish(cid:98)Manwani,
wani,
Tim Score, Sidney Taurel
and Lincoln Wallen
“As chairman of the nomination
committee, one of Glen Moreno’s
outstanding legacies to Pearson
was his ability to attract fi rst-rate
non-executives to the Pearson
board. I look forward to chairing
this committee as we work to
continually refresh the board,
its committees and to think about
succession planning at senior levels.”
Committee responsibilities include:
1. Appointments Identifying and nominating candidates for
board vacancies.
2. Balance Ensuring that the board and its committees have
the(cid:98)appropriate balance of skills, experience, independence,
diversity and knowledge to operate eff ectively.
3. Succession planning Reviewing the company’s leadership
needs with a view to ensuring the continued ability of the
organisation to compete eff ectively in the marketplace.
Key activities in 2015
Objectives
Actions
Succession process and
appointment of new
chairman of the board
Appointment of Sidney Taurel
as chairman
Identify and appoint
additional non-executive
director with digital
technology experience
Appointment of Lincoln
Wallen as non-executive
director with experience
in digital technology
Complete search process
for new chief fi nancial
offi cer
Appointment of
Coram Williams as
chief fi nancial offi cer
For nomination committee attendance
see overview table on p78
Terms of reference
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/governance
Section 4 Governance/Leadership & eff ectiveness
81
Pearson uses a number of leading fi rms in its board
and executive search activities. JCA Group was engaged
to assist with the recruitment of Sidney Taurel. In
addition to board search activity, JCA Group facilitated
Pearson’s board evaluation in 2014. JCA Group has no
other connection to Pearson apart from in relation to
search activity and the external facilitation of the 2014
board evaluation. An external search consultancy,
Spencer Stuart, was used during the recruitment process
for Lincoln Wallen. Spencer Stuart does not have any
other connection to Pearson apart from as a search
consultancy.
Learn(cid:98)more about the Board of directors on p72-73
Diversity
The board embraces the Code’s underlying principles
with regard to board balance and diversity, including
gender diversity. The nomination committee ensures
that the directors of Pearson demonstrate a broad
balance of skills, experience and nationalities, to support
Pearson’s strategic development and refl ect the global
nature of our business.
The nomination 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. We believe the global backgrounds of our
board members contribute to diversity of experience
and thought.
In 2011, Lord Davies set FTSE 100 companies a target
of having 25% female representation on their boards
by 2015. Pearson is proud of the gender diversity of
its board, having exceeded Lord Davies’ target with
30% female representation on the board, and notes
Lord Davies’ recommended next steps for continued
improvement in diversity on boards, including the
extension of good diversity practices to the layers of
executive management below the board.
Immediately below board level, the Pearson executive,
not including the chief executive and chief fi nancial
offi cer who are main board directors, has two female
members out of a total of nine (representing 22%).
Our senior leadership team, up to and including two
reporting levels from the chief executive, shows a strong
pipeline of female talent with women representing 34%
of our senior leaders.
Pearson considers diversity as an important issue across
the company, not just at board level. One of the key aims
of(cid:98)Pearson’s diversity policy is to increase the number
of leaders coming from a diverse background, such
as through our range of networks and advancement
programmes for employees. Learn(cid:98)more about
Diversity and inclusion throughout Pearson on p62
Sidney Taurel
Chairman of nomination committee
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Pearson plc Annual report and accounts 2015
Audit committee report
mittee
Chairman of audit committee
Tim Score
Members Vivienne Cox,
Linda Lorimer, Tim Score
e
and Lincoln Wallen
“During 2015, the committee
conducted a number of deep dives
into selected principal risks, and
as chairman of the committee,
I work closely with Coram Williams
to ensure Pearson’s fi nance
function is well-placed to support
the global business eff ectively.”
Committee responsibilities include oversight of:
1. Reporting The quality and integrity of fi nancial reporting
and statements and related disclosure.
2. Policy Group policies, including accounting policies
and practices.
3. External audit External audit, including the appointment,
qualifi cation, independence and the performance of(cid:98)the
external auditor.
4. Risk and internal control Risk management systems and
internal control environment including the performance of
the internal audit function.
5. Compliance Compliance with legal and regulatory
requirements in relation to fi nancial reporting and
accounting matters.
For audit committee meeting attendance
see overview table on p78
Terms of reference
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/governance
Audit committee role
The committee has been established by the board
primarily for the purpose of overseeing the accounting,
fi nancial reporting, internal control and risk
management processes of the company and the audit
of(cid:98)the fi nancial statements of the company. As a
committee, we are responsible for assisting the board’s
oversight of the quality and integrity of the company’s
external fi nancial reporting and statements and the
company’s accounting policies and practices.
Pearson’s internal auditor has a dual reporting line to the
chief fi nancial offi cer and to me, and external auditors
have direct access to the committee to raise any matters
of concern and to report on the results of work directed
by the committee. As audit committee chairman, I report
to the full board at every board meeting immediately
following a committee meeting. As a committee, we
also review the independence of the external auditors,
including the provision of non-audit services (further
details of which can be found on page 119 and note 4
to the fi nancial statements), ensure that there is an
appropriate audit relationship and that auditor
objectivity and independence are upheld.
Audit committee changes
2015 saw the retirement from Pearson of Ken Hydon,
who had been chairman of the committee for nine years,
and David Arculus, also a long-serving member of the
committee. I took over from Ken as committee chairman
in April, and have since worked with Coram Williams
looking closely at Pearson’s fi nance function to ensure it
is well-placed to support the global business eff ectively.
In March 2016 Lincoln Wallen joined the committee,
bringing extensive technology experience, and together
we have a good balance of skills and knowledge on the
committee with experience covering all aspects of the
sector in which Pearson operates.
Fair, balanced and understandable reporting
We are mindful of the Code’s provision C.1.1 relating to
fair, balanced and understandable reporting and we
build suffi cient time into our annual report timetable to
ensure that the full board receives suffi cient opportunity
to review, consider and comment on the report as it
progresses. Learn more about Fair, balanced and
understandable reporting on p119
Risk assessment, assurance and integrity
A key role of the committee is to provide oversight and
reassurance to the board with regard to the integrity
of the company’s fi nancial reporting, internal control
policies, and procedures for the identifi cation,
assessment and reporting of risk. During 2015 we
Section 4 Governance/Accountability
83
The committee reviewed the overall H&S landscape at
Pearson, in particular evaluating the progress made
since the launch of the global H&S policy in December
2013. It noted that continued improvements are being
implemented in standards, facilitated by the support
of H&S coordinators, and was satisfi ed with the
developments in relation to safeguarding and the
progress that the safeguarding offi cer has made since
appointment in August 2014.
The committee reviewed the ongoing implementation of
ABC policies, where progress to date has been good, and
noted that a more comprehensive and risk-based ABC
training programme would continue to be rolled out in
2016. We also considered how the compliance and legal
functions were working together to ensure appropriate
stances in each jurisdiction, while maintaining Pearson’s
zero tolerance approach to ABC.
Audit committee meetings and activities
The committee met four times during the year with
the following in attendance: the chief fi nancial offi cer;
general counsel; 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.
One of the internal audit directors and the VP compliance
and risk assurance also attend meetings, giving the
committee direct contact with key leadership in those
areas. 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 internal audit and compliance
functions, including the results of internal audits, risk
reviews, project assurance reviews and fraud and
whistleblowing reports. The committee also monitored
the company’s fi nancial reporting, internal controls and
risk management procedures, reviewed the non-audit
services provided by(cid:98)PwC and considered any signifi cant
legal claims and regulatory issues in the context of their
impact on fi nancial(cid:98)reporting.
Learn(cid:98)more about the Key activities of the audit
committee on p84
Tim Score
Chairman of audit committee
conducted a number of deep dives into selected
principal risks. Learn more about Principal risks and
uncertainties on p41-45
Data security and data privacy
Recognising particular sensitivities around the schools
and assessment data held on our systems, the
committee undertook deep dives in each of these risk
areas, and updates from the chief information security
offi cer and newly-appointed chief privacy offi cer feature
as regular items on the committee’s agenda. To ensure
adequate visibility of data security and privacy protocols
throughout the company, new policies and procedures
were developed during the year, including the
introduction of mandatory data security and privacy
training for employees.
Focusing on data security, the committee considered
progress made to date and reviewed the roadmap
for(cid:98)the next two years, including the aim of continuing
to(cid:98)increase Pearson’s data security risk maturity.
Key(cid:98)to(cid:98)developing this maturity has been the shift
of(cid:98)data(cid:98)security from a purely technical risk to a
business(cid:98)critical one.
The risk management framework around data privacy
needs to take Pearson’s global footprint into account.
Challenges exist in North America due to the large
number of federal and state laws on data privacy,
which(cid:98)are coupled with a changing picture globally
as(cid:98)jurisdictions update their laws in a fast moving
environment. Data privacy has been identifi ed as
a(cid:98)global strategic risk for Pearson, leading to the
appointment of a chief privacy offi cer at the start of
2015. Meaningful progress has been made since that
appointment, including the development of a new
governance framework to address data privacy risks.
Business transformation
Ongoing business transformation, the next wave of
which was announced in January 2016, is another of
Pearson’s key risks and opportunities. The committee
receives regular updates on the transformation as a
whole and during the year carried out a deep dive into
The Enabling Program. As an important operational
simplifi cation project, The Enabling Program will feature
as a standing item on the committee’s agenda in 2016
as work progresses. Learn(cid:98)more about The Enabling
Program on p6 and 41
Update on previous areas of focus
Last year, we highlighted health and safety (H&S) and
anti-bribery and corruption (ABC) as areas to which the
committee had paid particular attention. During 2015,
the committee continued to monitor those areas,
reviewing progress made and audit results.
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Pearson plc Annual report and accounts 2015
Audit committee report continued
Audit committee meeting focus during 2015
Reporting
Accounting and technical updates
Impact of legal claims and
regulatory issues on fi nancial
reporting
The 2014 annual report
and accounts: preliminary
announcement, fi nancial
statements and income statement
Form 20-F and related disclosures
including the annual Sarbanes-
Oxley Act section 404 attestation of
fi nancial reporting internal controls
Review of interim results and
trading updates
Policy
Accounting matters and
Group(cid:98)accounting policies
Analysis supporting viability
statement Read more on(cid:98)p40
Annual review of treasury
policy and strategy
Annual review and approval of
external auditor policy
External audit
Provision of non-audit
services by PwC
Receipt of the external auditors’
report on the Form 20-F and
on the year end audit
Remuneration and engagement
letter of the external auditors
Review opinion on interim results
Reappointment of the
external(cid:98)auditors
Confi rmation of auditor
independence
2015 external audit plan
Review of the eff ectiveness
of the external auditors
Risk and
internal control
Internal audit activity reports
and review of key fi ndings
Enterprise risk management
Read more on(cid:98)p38
2016 internal audit plan
Assessment of the eff ectiveness of
the internal control environment
and risk management systems
Review of internal audit terms
of reference
Risk deep dives: data security;
data privacy; health & safety;
legal risks and legal function;
anti-bribery and corruption;
tax
Data security incidents reporting
Treasury risk review
Compliance
and governance
Fraud, whistleblowing reports
and Code of Conduct matters
Compliance with the UK
Corporate Governance Code
Review of the committee’s
terms of reference
Review of The Enabling Program
as it proceeded
Compliance with SEC and
NYSE requirements including
Sarbanes-Oxley Act
Review of the eff ectiveness of
the committee and the group
internal audit function
Members
Audit committee meetings during 2015
During the year, the matters considered by the
committee included those shown in the table above.
In February 2016, the committee also considered
the 2015 annual report and accounts, including the
preliminary announcement, fi nancial statements,
strategic report, directors’ report and corporate
governance compliance statement.
All of the audit committee members are independent
non-executive directors and have fi nancial 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. Tim
Score, who assumed the chairmanship of the committee
in April 2015, is the company’s designated fi nancial
expert, having recent and relevant fi nancial experience,
and is an Associate Chartered Accountant. He also
serves as audit committee chairman for The British
Land Company plc and until 2014 was audit committee
chairman at National Express Group plc.
The qualifi cations and relevant experience of the other
committee members are detailed on p72-73
Section 4 Governance/Accountability
85
External audit
The committee reviews and approves the appointment
of the external auditors, taking account of the views
of management. The committee reviewed the
eff ectiveness and independence of the external
auditors during 2015, as it does every year, and
remains satisfi ed that the auditors provide eff ective
independent challenge to management.
In 2015, the external auditor review was conducted by
distributing a questionnaire to key audit stakeholders
including members of the audit committee, the chief
executive, chief fi nancial offi cer, company secretary,
SVP internal audit and compliance, SVP fi nance for
each Geography and Line of Business and other heads
of corporate functions. Overall, responses to the
questionnaire were very positive, indicating an eff ective
external audit process. As part of the follow-up to
the review, the lead audit partner explained to the
committee how PwC were monitoring and evaluating
each area highlighted in the review and confi rmed that
they would consider how to adapt their approach in light
of specifi c comments received.
In addition, in accordance with Pearson’s external
auditor policy, internal audit performs an annual
assessment of audit fees, services and independence
which forms the basis of a recommendation by the
committee to the board in respect of the appointment
and compensation of the external auditors.
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 Pearson audit every fi ve years.
The current lead audit partner rotated onto Pearson’s
audit in 2013.
Pearson’s last audit tender was in respect of the 1996
year end, and resulted in the appointment of Price
Waterhouse as auditors. Developments at an EU level
regarding mandatory audit rotation for listed companies
have changed the UK landscape on audit tendering and
rotation. The committee has reviewed the timetable
for tendering and has taken into account all relevant
regulation and guidance. New EU regulations and the
ruling by the Competition and Markets Authority (CMA)
has imposed mandatory tendering and rotation
requirements from 2016.
In considering the appropriate audit tender timetable for
Pearson in light of these requirements, the committee
has also taken account of the signifi cant business change
being experienced by the Group and is monitoring the
extent to which the Group is drawing upon the services
of other accounting fi rms. The Group has commenced
a series of programmes to implement major effi ciency
improvements across all our enabling functions –
technology, fi nance, HR – to bring the general and
administrative costs of running Pearson more in line
with global best practice; these include a major
fi nance transformation programme, including the
implementation of new fi nancial systems and changes
to our transaction processing and control activities, that
we expect to continue through 2016, 2017 and into 2018.
The Group is supported in these changes, and more
broadly, by external advisers including accounting fi rms.
It is the committee’s intention to appropriately manage
auditor independence and rotation, fi rstly, to ensure
that a tender has the right level of suitably qualifi ed and
independent fi rms competing, including allowing for a
planned transition and, secondly, to undertake this in a
way that does not unnecessarily disrupt the business
changes underway and provides consistency of
independent oversight from external auditors through
those changes.
Notwithstanding that the above EU mandatory rotation
rules require a new auditor to be appointed no later
than for the 2024 year end, it is the current expectation
of the committee that an audit tender process will be
conducted in 2018 in order for the auditor selected as a
result of the tender to be appointed for the fi nancial year
ending 31 December 2018. For the reasons outlined
above, the committee considers this timing to be in the
best interests of the Group’s members and will continue
to monitor this annually in light of the eff ectiveness and
independence of the current auditors.
Once the next audit tender occurs, the Group will adopt a
policy of putting the audit contract out to tender at least
every ten years.
Compliance with the CMA Order
Pearson confi rms that it was in compliance with the
provisions of The Statutory Audit Services for Large
Companies Market Investigation (Mandatory Use of
Competitive Tender Processes and Audit Committee
Responsibilities) Order 2014 during the fi nancial year
ended 31 December 2015. Learn more about Auditors’
independence and non-audit services on p119
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Pearson plc Annual report and accounts 2015
Audit committee report continued
Signifi cant issues
Area of focus
Issue
Action taken by audit committee
Outcome
Impairment
reviews
Read more in note 11
on p164
Revenue
recognition
Pearson carries signifi cant
goodwill intangible asset
balances. There is judgement
exercised in the identifi cation
of CGUs and the process
of allocating goodwill to
CGUs and aggregate CGUs
and in the assumptions
underlying the impairment
review. In 2015 Pearson made
signifi cant impairments to
goodwill and intangible
assets in certain CGUs.
Pearson has a number of
revenue streams where
revenue recognition practices
are complex and management
assumptions and estimates
are necessary.
Tax
There are a number of issues
in diff erent countries where
management judgements and
assumptions are made as to
the correct tax treatment.
The committee considered the results of the Group’s
annual goodwill impairment review and the key
assumptions which are considered to be the cash
fl ows derived from strategic and operating plans,
long-term growth rates and the weighted average
cost of capital. The committee considered the
sensitivities to changes in assumptions and the related
disclosures required by IAS 36 ‘Impairment of Assets’.
The committee noted that signifi cant impairments
had arisen primarily as a result of deterioration in
expected cash fl ow over the strategic plan period,
and considered sensitivity to assumptions in relation
to other businesses.
The committee regularly reviews revenue recognition
practice and the underlying assumptions and
estimates. In addition, the committee has visibility of
internal audit fi ndings relating to revenue recognition
controls and processes and routinely monitors the
views of external auditors on revenue recognition
issues. During the year the committee reviewed
revenue recognition in respect of services provided
to charter schools through Pearson’s Connections
business, and onerous contracts. The committee also
continued to monitor the impact of the new revenue
recognition standard, IFRS 15 ‘Revenue from Contracts
with Customers’ and noted that although the standard
would not be adopted by Pearson until 2018 the
committee would need to understand the implications
of the change well before that date.
The committee considered Pearson’s approach to tax
provisioning. Pearson operates in a large number of
countries and, accordingly, its earnings are subject to
tax in many jurisdictions. The judgement in relation to
tax provisioning is a combination of the committee’s
assessment of the specifi c open tax issues and also
a review of the time periods in which Pearson’s tax
aff airs are open to enquiry by local tax inspectors in
jurisdictions where it has a larger taxable presence.
The committee addressed this matter through the
presentation of a management report on Pearson’s
tax aff airs by the head of group tax and through a
presentation of the external auditors’ assessment
of the company’s tax provisioning.
Annual impairment
review fi nalised with
confi rmation of an
impairment in China,
Brazil, North America
and other Growth and
Core territories, and
suffi cient headroom
in other CGUs.
Assumptions
underlying revenue
recognition were
reviewed and
challenged and
considered to be
appropriate.
The committee
was satisfi ed with
Pearson’s approach
to tax provisioning
taking account of the
views of management
and the assessment
of the external
auditors.
Disposal
accounting
Pearson disposed of its
interest in The Financial
Times, The Economist
and PowerSchool.
The committee reviewed the disposal accounting
and disclosure and considered the main judgements
relating to tax treatments, and impairment of related
assets on the PowerSchool disposal.
Accounting
treatments and
valuations confi rmed
as appropriate.
Signifi cant issues continued
During the year, the committee discussed the planning,
conduct and conclusions of the external audit as
it proceeded.
At the July 2015 audit committee meeting, the committee
discussed and approved the external audit plan and
reviewed the key risks of misstatement of Pearson’s
fi nancial statements, which were updated at the
December 2015 committee meeting.
The table opposite sets out the signifi cant issues
considered by the audit committee together with
details of how these items have been addressed. The
committee discussed these issues with the auditors at
the time of their review of the half-year interim fi nancial
statements in July 2015 and again at the conclusion of
their audit of the fi nancial statements for the full year
in February 2016.
All the signifi cant issues were areas of focus for the
auditors. Learn more in the Independent auditors’
report on p126
In December 2015, the committee discussed with the
auditors the status of their work, focusing in particular
on internal controls and Sarbanes-Oxley testing, and
covering the signifi cant issues outlined above.
Section 4 Governance/Accountability
87
As the auditors concluded their audit, they explained to
the committee:
The work they had conducted over revenue, working
alongside management to assess several complex
revenue contracts
The work they had done to understand Pearson’s tax
strategy and identify business and legislative risks, to
evaluate key underlying assumptions and assess the
recoverability of deferred tax assets
Their evaluation of the recoverability of digital platforms
and pre-publication assets
Their focus on segments, CGUs and goodwill impairment
and the impact of Pearson’s transformation on those
The results of their controls testing for Sarbanes-Oxley
Act section 404 reporting purposes and in support of
their fi nancial statements audit
The results of the company’s ‘going concern’ and viability
statement reports
The auditors also reported to the committee the
misstatements that they had found in the course of
their work, which were insignifi cant, and the committee
confi rmed that there were no material items remaining
unadjusted in these fi nancial statements.
Audit committee training
The committee receives regular technical updates as well
as specifi c or personal training as appropriate.
Committee members also meet with local management
on an ongoing basis, such as when travelling for overseas
board meetings, in order to gain a better understanding
of how Pearson’s policies are embedded in operations.
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Pearson plc Annual report and accounts 2015
Risk governance and control
Control environment
The board of directors has overall responsibility for
Pearson’s systems of internal control and risk
management, which are designed to manage, and
where possible mitigate, the risks facing Pearson,
safeguard assets and provide reasonable, but not
absolute, assurance against material fi nancial
misstatement or loss. The directors confi rm they have
conducted a review of the eff ectiveness of Pearson’s
systems of risk management and internal control in
accordance with provision C.2.3 of the Code and the
FRC’s Code Guidance. These systems have been
operating throughout the year and to the date of
this report.
Responsibility for monitoring the eff ectiveness of the
company’s 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, internal audit
and the external auditors, with the aim of reviewing
the eff ectiveness of the internal fi nancial and operating
control environment.
Each business area, including the corporate centre,
maintains internal controls and procedures appropriate
to its structure, business environment and risk
assessment, while complying with company-wide
policies, standards and guidelines.
Internal control and risk management
Our internal controls and risk oversight have been
reviewed as a result of the FRC Guidance and changes
made to ensure compliance. These changes include
more robust executive ownership and assessment of
controls and PLC risks as well as the preparation of a
viability statement.
The board, assisted by the assurance the audit
committee provides, oversees the enterprise risk
management (ERM) framework, risk appetite validation
and viability statement verifi cation processes outlined
in the Principal Risks and Uncertainties section on p41.
Day-to-day enterprise risk management is undertaken
by a dedicated team, accountable to the board and
audit committee. The board validates the risk appetite
for each principal risk (as recommended by executive
management) early in the year. The identifi cation
and mitigation of signifi cant business risks is the
responsibility of senior management and leadership
teams for each business area.
The results of risk assessments and reviews are reported
to the Pearson executive, the board and the audit
committee. For example, in 2015, all identifi ed Pearson-
wide top risks were reviewed by executive management,
then by the board and audit committee on a semi-annual
basis. In addition, throughout the year, the audit
committee considered the oversight of specifi c selected
principal risks, through a series of risk deep dives. The
internal audit plan is also aligned to our greatest areas of
risk and the audit committee considers issues and risks
arising from internal audits.
The risk assessment and reporting criteria are designed
to provide the board with a consistent, Pearson-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 eff ectiveness.
Learn more about our risk management process, the
principal risks and mitigating factors on p38-45
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 fi nancial
information, including trading results, balance sheets,
cash fl ow statements, capital expenditures and
indebtedness, is reported against the corresponding
fi gures for the plan and prior years, with corrective
action outlined by the appropriate senior executive.
Pearson’s senior management meet periodically with
business area management to review their business
and fi nancial performance against plan and forecast.
Major risks relevant to each business area as well as
performance against the stated fi nancial and strategic
objectives are reviewed in these meetings.
We have an ongoing process to monitor the risks and
eff ectiveness of controls in relation to the fi nancial
reporting and consolidation process including the
related information systems. This includes up-to-date
Pearson fi nancial policies, formal requirements for
fi nance functions, consolidation reviews and analysis
of material variances, fi nance technical reviews, and
review and sign-off by senior fi nance managers. The PLC
fi nance function also monitors and assesses these
processes, through a fi nance compliance function.
Section 4 Governance/Accountability
89
These controls include those over external fi nancial
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 submits reports to the audit committee. This
committee is chaired by the SVP internal audit and
compliance, and members include the chief fi nancial
offi cer, general counsel, SVP investor relations, company
secretary as well as senior members of fi nancial
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 eff ectiveness of key fi nancial controls is subject
to management review and self-certifi cation and
independent evaluation by the external auditors.
Internal audit
The internal audit function is responsible for providing
independent assurance to management and the audit
committee on the design and eff ectiveness of internal
controls to mitigate strategic, fi nancial, 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 management self-assessments allow
internal audit to monitor business areas’ progress in
implementing management action plans agreed as part
of internal audits to resolve any control defi ciencies.
Progress of management action plans is reported to the
audit committee at each meeting. Internal audit has a
formal collaboration process in place with the external
auditors to ensure effi cient coverage of internal controls.
Regular reports on the work of 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 audit committee
is provided with an update of all signifi cant matters
received through our whistleblowing reporting system,
together with an annual review of the eff ectiveness of
this system. 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 transactions and
procedures are subject to regular internal audit. 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 fi nancial offi cer and regular reports are prepared
for the audit committee and the board. The treasury
policy is described in more detail in note 19 to the
fi nancial statements.
Insurance
Pearson reviews its risk fi nancing options regularly to
determine how the company’s insurable risk exposures
are managed and protected. Pearson purchases
comprehensive insurance cover and annually reviews
coverage, insurers and premium spend, ensuring the
programme is fi t for purpose and cost-eff ective.
Pearson’s insurance subsidiary, Spear Insurance
Company Limited, is used to leverage Pearson’s risk
retention capability and to achieve a balance between
retaining insurance risk and transferring it to external
insurers.
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Pearson plc Annual report and accounts 2015
Reputation & responsibility committee report
Chairman
Vivienne Cox
Members Vivienne Cox,
Josh Lewis, Linda Lorimer,
Harish Manwani
“Throughout the year, the committee
provided oversight and input as
Pearson continued to develop its
sustainability practices, including
the launch of Project Literacy and
progress towards effi cacy reporting.
Our priority is to ensure Pearson’s
activities and policies align
with our business strategy and
stakeholder priorities.”
Reputation & responsibility committee role
Having been formalised in 2014, the remit of the
reputation & responsibility committee expanded during
2015, refl ecting Pearson’s continuing commitment and
ambition around its corporate reputation, our belief
in the importance of fulfi lling our obligations to the
communities in which we work, and maximising
Pearson’s positive impact on society.
The committee’s work is closely aligned with the
company’s sustainable business initiatives and our
meetings are now preceded by meetings of Pearson’s
responsible business leadership council – an internal
governance group – ensuring that we are able to provide
the necessary scrutiny and challenge to the council as
our sustainability strategy is developed and integrated
into the business. Read more about Social impact
on p55-67.
Terms of reference
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/governance
Progress against 2015 targets
At the start of 2015, we set out to achieve a number of ambitious goals during our fi rst full year as a formal board
committee. You can read more about our progress below.
Areas of focus
Progress
Oversee delivery of our strategy for managing our
reputation and maximising our contribution to society
within the organisation
Monitor integration of social impact into Pearson’s
business following the closure of the Pearson
Charitable Foundation
Review progress towards 2018 effi cacy commitments
This was a regular feature of our meetings throughout the year as
Pearson builds its reputation management capabilities through an
increasingly proactive approach. In particular we have explored in
depth the work being done in our US market to proactively manage
Pearson’s reputation.
We also developed and adopted a new process for managing global
reputation risk, which takes into account our expanded activity and
exposure in growth markets, as well as our presence in certain high-
risk countries.
The committee provided input into a number of social impact
projects established and accelerated in 2015, particularly high-profi le
initiatives such as Project Literacy and our Every Child Learning
partnership with Save the Children.
Through focused sessions at two committee meetings, we reviewed
progress toward meeting our effi cacy commitment, and made
recommendations for improving the effi cacy measurement,
reporting and auditing processes. Learn more about Effi cacy
on p46-53
Section 4 Governance/Engagement
91
Key activities in 2015
Committee aims for 2016
In 2016 the committee will continue to maintain a clear
focus on reputational management in the US – our
largest, and most reputationally high-profi le market.
We will oversee Pearson’s continuous progress in
embedding social impact into our strategy and business
model, continue to monitor our corporate culture,
ensuring employee engagement and values remain
strong to help ensure Pearson is in good shape for the
future, and we will undertake a review of the ethical
business priorities identifi ed in 2015.
Vivienne Cox
Chairman of reputation
& responsibility(cid:98)committee
Key areas of focus for the committee were the launch
of Project Literacy, our progress towards external
effi cacy reporting, plans to link the UN’s sustainable
development goals to our business model, and the
ongoing work around Pearson’s brand and culture.
In all of these areas, our priority is to ensure Pearson’s
activities and policies align with our business strategy
and stakeholder priorities, while refl ecting best practice.
In addition, Pearson has formalised a process for its
reputational risk management, involving business
leaders and corporate aff airs representatives, and the
committee now receives a reputational risk report at
every meeting. The committee also conducts deep dives
into areas of particular reputational impact, such as
through a focused session in 2015 on Pearson’s US
reputational strategy.
More detail about the committee’s responsibilities, and
the activities it undertook in each area of its remit, is
given below. For reputation & responsibility committee
meeting attendance see overview table on p78
Committee responsibilities
Topic
Responsibility
Activity
Strategy
Communications
strategies, policies
and plans related to
reputational issues
and the people,
processes and policies
that are in place to
manage them
Reputation
Risk
Social
Brand and
culture
Ethics
Pearson’s reputation among
major stakeholders, including
governments, investors,
employees, customers, learners
and the education community
Oversight of Pearson’s approach
to reputational risk, including
ensuring that clear roles have
been assigned for management
Social impact initiatives, including
Pearson’s non-fi nancial public
commitments and progress
towards them
Management of the Pearson
brand to ensure that its value and
reputation are maintained and
enhanced. Pearson’s approach to
monitoring and supporting the
values and desired behaviours
that form our corporate culture
Ethical business standards,
including Pearson’s approach to
issues relevant to its reputation
as a responsible corporate citizen
Updates on reputational ‘hot topics’ at each meeting
Review of US reputational strategy
Working with the audit committee to ensure that
health & safety issues are properly considered from
a reputation and responsibility perspective
Overview of reputational risk approach in growth and
US markets, through in-country personnel and central
corporate aff airs team
Regular consideration of reputational risk dashboards
Progress on effi cacy, including launch of ‘On the Road’
publication and draft reporting framework
Introduction to new reach and impact strategy
Commitment to UN sustainable development goals
and integration into business model
Launch of Save the Children partnership
Brand tracker update
Review of progress on employee values
and engagement
Employee participation in social impact activities
Consideration of ethical issues in the wider context of
reputational risk identifi cation
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Consultations During the year we also consulted
with our major shareholders and with shareholder
representative bodies on our directors’ remuneration
report, and the signifi cant minority vote against the
2013 annual remuneration report at the 2014 AGM.
Read about Remuneration on p94
Private investors Private investors represent over
80% of the shareholders on our register and we make
a concerted eff ort to engage with them regularly.
Shareholders who cannot attend the AGM are
invited to e-mail questions to the chairman in
advance at chairman-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.html for further information,
or turn to p227 of this report. We also encourage all
shareholders, who have not already done so, to register
their e-mail addresses through our website and with our
registrar. This enables them to receive e-mail alerts when
trading updates and other important announcements
are added to our website. See additional Shareholder
information on p227
92
Pearson plc Annual report and accounts 2015
Shareholder engagement
Engaging with shareholders
Pearson has an extensive programme of communication
with all of its shareholders – large and small, institutional
and private.
Shareholder outreach In 2015, we continued with our
shareholder outreach programme, seeing approximately
790 institutional and private investors at more than 450
diff erent institutions in Australia, Canada, Dubai, Greater
China, Continental Europe, India, Japan, Singapore, South
Korea, Taiwan, the UK and the US.
Trading updates There are fi ve trading updates each
year and the chief executive and chief fi nancial offi cer
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 change
programme, structural changes in our markets, and
risks and opportunities for the future.
Chairman meetings The chairman meets regularly
with signifi cant 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.
Visit pearson.com
Investor relations information
Company announcements and shareholder
presentations, webcasts and(cid:98)conference calls
Past announcements and presentations
Historical fi nancial performance
Share price data
Calendar of events
Information about our businesses
and(cid:98)their(cid:98)websites
Corporate responsibility
policies and(cid:98)activities
Wider engagement
Share dealing
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 signifi cantly reduced dealing rates, or to
donate shares to charity with ease. This service proved
very popular with shareholders, and consequently we
intend to off er it 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.
Annual General Meeting
Our AGM, on 29 April 2016, is an opportunity for
all shareholders to meet the board and to hear
presentations about Pearson’s businesses and results.
Engaging with all stakeholders
We post all company announcements on our website,
www.pearson.com, as soon as they are released, and
key 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 fi nancial 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.
Learn more about our approach to corporate
responsibility in the Social impact section on p55
Section 4 Governance/Engagement
93
Board visit to India
In October 2015, the board visited New(cid:98)Delhi,
India, for a three-day meeting focused on our four
most important Growth markets – Brazil, China,
India and(cid:98)South Africa.
In each of these countries, Pearson’s presence has
grown markedly in the last few years and in each of
them, to varying degrees, Pearson is operating in
a challenging economic climate, whilst continuing
to chart a path to the next phase of sustainable
growth. These are important markets to Pearson’s
long-term future, where the fundamental demand
for good quality education and training, leading to
a job and a better life, remain strong.
Overview of growth markets: Providing context for the meeting,
Pearson’s President, Growth and SVP fi nance, Growth led an
overview of performance and strategy across the four main
Growth markets, following which the business leaders of each
of Brazil, China and South Africa gave a more in-depth review of
the opportunities and challenges in those countries, considering
the macro-economic conditions and demographics particular to
each territory.
Focus on India: Non-executive director Harish Manwani set the
scene for the focus on India, and the board then took a closer look
at Pearson’s operations through a session with the head of our
India business, learning about the huge potential in India and the
demand for better, more job-relevant education. The board also
spent time with Pearson’s India leadership team and key talent and
heard from a range of partners, policymakers and key infl uencers.
Learning in action: The board visited Jaypee public school, which
provided an opportunity to see fi rst-hand the impact of Pearson’s
school management improvement framework, to view the
MyPedia integrated learning tool in action and learn about our
health & safety and safeguarding initiatives. The board also spent
time at a Pearson learning centre, learning about Pearson’s work
to translate education and training into employment, and engaged
with representatives of Avanti Learning Centres and Zaya, two
initiatives funded by the Pearson Aff ordable Learning Fund.
Learn more about our Growth markets on p29-32
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Pearson plc Annual report and accounts 2015
Report on directors’ remuneration
Part 1: Letter from the chairman of the remuneration committee
Chairman of the
remuneration committee
Elizabeth Corley
Current Members
Tim Score, Vivienne Cox,
Elizabeth Corley, Josh Lewis
and Sidney Taurel
“It has been a tough year for Pearson
and our remuneration outcomes
have refl ected this. 2015 brought
challenging market conditions and
signifi cant changes. As we continue
into 2016 we will be considering our
remuneration policy proposals for
2017 in this new environment and
context for the business.”
In this remuneration section:
Part 1: Letter from the chairman
Part 2: Summary of remuneration policy
Part 3: Annual remuneration report
p94
p97
p101
Terms of reference
The committee’s full charter and terms of
reference are available on the Governance
page of the company’s website at
www.pearson.com/governance
Dear shareholder
On behalf of the board, I am pleased to present the
report on directors’ remuneration for 2015. This is my
fi rst report as chairman of Pearson’s remuneration
committee, having succeeded Sir David Arculus at the
Annual General Meeting (AGM) in April 2015. The
opportunity to learn about and study the history, policies
and procedures of remuneration at Pearson, with the
support of fellow committee members, has been
invaluable, as has the feedback and engagement with
key shareholders. My board colleagues and I are aware
of the importance and sensitivity among investors and
the public more generally, of remuneration topics and
we feel our responsibilities keenly.
As outlined in our strategic report, 2015 was a year of
change and challenge for Pearson with continued market
headwinds and the in-year disposals of PowerSchool, the
Financial Times Group and our stake in The Economist.
While we have been performing well competitively and
gained market share across many areas of our business,
year end results were lower than projected at the start of
the year. This was largely driven by the persisting cyclical
and policy-related turbulence in our major education
markets. While this is expected to abate over the next
two years, we saw a reduction in our annual operating
profi t for 2015 of approximately £230m from its peak.
Despite the challenges encountered, we remain focused
on executing the business strategy, transforming
Pearson to be the standout company in education
globally and developing our long-term growth
opportunities. The 2015 divestments were an important
part of these aims. We are confi dent that education
remains an attractive investment opportunity with
Key performance indicators
(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:71)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:519)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:3)(cid:86)(cid:76)(cid:81)(cid:74)(cid:79)(cid:72)(cid:3)(cid:564)(cid:74)(cid:88)(cid:85)(cid:72)(cid:3)(cid:69)(cid:85)(cid:72)(cid:68)(cid:78)(cid:71)(cid:82)(cid:90)(cid:81)
300
250
200
150
100
50
2008
2009
2010
2011
2012
2013
2014
2015
Pearson TSR
FTSE All-share TSR
Pearson EPS
Pearson ROIC
(cid:45)(cid:82)(cid:75)(cid:81)(cid:3)(cid:41)(cid:68)(cid:79)(cid:79)(cid:82)(cid:81)
96%
4%
(cid:101)(cid:20)(cid:17)(cid:21)(cid:25)(cid:22)(cid:80)
(cid:38)(cid:82)(cid:85)(cid:68)(cid:80)(cid:3)(cid:58)(cid:76)(cid:79)(cid:79)(cid:76)(cid:68)(cid:80)(cid:86)
(cid:20)(cid:19)(cid:19)(cid:8)
(cid:101)(cid:19)(cid:17)(cid:21)(cid:26)(cid:25)(cid:80)
(cid:53)(cid:82)(cid:69)(cid:76)(cid:81)(cid:3)(cid:41)(cid:85)(cid:72)(cid:72)(cid:86)(cid:87)(cid:82)(cid:81)(cid:72)
93%
7%
(cid:101)(cid:19)(cid:17)(cid:24)(cid:28)(cid:26)(cid:80)
(cid:37)(cid:68)(cid:86)(cid:72)(cid:3)(cid:86)(cid:68)(cid:79)(cid:68)(cid:85)(cid:92)(cid:15)(cid:3)(cid:68)(cid:79)(cid:79)(cid:82)(cid:90)(cid:68)(cid:81)(cid:70)(cid:72)(cid:86)(cid:15)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:564)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:72)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)
(cid:47)(cid:82)(cid:81)(cid:74)(cid:16)(cid:87)(cid:72)(cid:85)(cid:80)(cid:3)(cid:76)(cid:81)(cid:70)(cid:72)(cid:81)(cid:87)(cid:76)(cid:89)(cid:72)(cid:86)
Initial value of KPIs have been rebased to 100 for same timeframe as
chart on p114.
(cid:38)(cid:82)(cid:85)(cid:68)(cid:80)(cid:3)(cid:58)(cid:76)(cid:79)(cid:79)(cid:76)(cid:68)(cid:80)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:53)(cid:82)(cid:69)(cid:76)(cid:81)(cid:3)(cid:41)(cid:85)(cid:72)(cid:72)(cid:86)(cid:87)(cid:82)(cid:81)(cid:72)(cid:519)(cid:86)(cid:3)(cid:85)(cid:72)(cid:80)(cid:88)(cid:81)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:76)(cid:85)(cid:3)
(cid:73)(cid:88)(cid:79)(cid:79)(cid:3)(cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:81)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:17)
See p114 for alignment of pay with Total Shareholder Return
Section 4 Governance/Report on directors’ remuneration
95
the growth potential to enable us both to serve more
students around the world, and to deliver good,
sustainable returns to our shareholders.
We do not intend to make any remuneration policy
revisions ahead of the 2017 AGM. However, we keep the
eff ectiveness of our current remuneration programmes
under review and, partly in light of recent trading
conditions and the specifi c strategic goals for 2016,
we have concluded that some changes are warranted.
These are detailed in this report and, for those yet to
be fi nalised, we are engaging with our key investors.
What happened in 2015
Remuneration for executive directors is closely tied to
business performance with a high proportion of total
remuneration delivered through variable pay designed
to reward achievement of short and long-term strategic
objectives. As a result of the performance challenges
noted in this report, the outcomes under these schemes
were as follows:
Annual incentives paid to executives for 2015 were zero,
refl ecting below-threshold performance in a tough
trading environment.
Long-term incentives vesting in 2015 did not pay out.
This is the third consecutive year of nil pay-out, refl ecting
below-threshold performance against the company’s
three-year targets for earnings per share growth, return
on invested capital and relative total shareholder return.
Given the environment within which the leadership team
is expected to guide Pearson through a very signifi cant
period of change, without receiving any bonus or long-
term incentive payments, the committee agreed for 2016
incentive and retention arrangements for selected key
employees, which will vest, or not, in 2017. No executive
directors participate in these incentives.
Future measures of performance against pay
We expect our business to stabilise in 2017 and return
to growth in 2018. Our business plan until then focuses
on operational execution, tight cost management
and a sharper, more focused strategy. The focus of
restructuring is not only to reduce costs but also to
make the company faster, leaner and more agile.
We are creating a single global product organisation,
integrating our school, clinical and professional
assessment operations in North America and are scaling
back our exposure to large, direct delivery operations.
We are also making productivity improvements across
all our enabling functions such as Technology, HR and
Finance and we plan to rationalise our property portfolio
and consolidate major agreements to drive greater
cost effi ciency.
Committee responsibilities:
1. Determine and review policy Determine and regularly
review the remuneration policy for the executive directors,
the(cid:98)presidents and other members of the Pearson executive
who(cid:98)report directly to the CEO (executive management).
This(cid:98)policy includes base salary, annual and long-term
incentives, pension arrangements, any other benefi ts
and(cid:98)termination of employment.
2. Review and approve implementation Regularly review
the(cid:98)implementation and operation of the remuneration
policy(cid:98)for executive management and approve the
individual remuneration and benefi ts packages of the
executive directors.
3. Approve performance related plans 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.
4. Review long-term plans Review the design of the
company’s long-term incentive and other share plans
for approval by the board and shareholders.
5. Set termination arrangements Advise and decide on
general and specifi c arrangements in connection with
the termination of employment of executive directors.
6. Review targets Review and approve corporate goals and
objectives relevant to CEO remuneration and evaluate the
CEO’s performance in light of those goals and objectives.
7. Determine chairman’s remuneration Delegated
responsibility for determining the remuneration and
benefi ts package of the chairman of the board.
8. Shareholder engagement Ensure the company maintains
an appropriate level of engagement with its shareholders
and shareholder representative bodies in relation to the
remuneration policy and its implementation.
9. Appoint remuneration consultants Appoint and
set(cid:98)the(cid:98)terms of engagement for any remuneration
consultants who advise the committee and monitor
the(cid:98)cost of such advice.
In these circumstances, we intend to design our incentive
plans for 2016 to ensure that our executive and other
employees are motivated and incentivised to achieve
our important aims over the short term, while sustaining
a strategic focus on longer-term goals. The plan targets
are still to be fi nalised but the current thinking suggests:
For the Annual Incentive Plan (AIP):
The 2016 sales and cash metrics and weightings remain
unchanged from 2015. However, to align the AIP with
the specifi c restructuring achievements required in
2016, as noted in the income statement measure in our
guidance to investors, Operating Profi t after the cost of
restructuring will be added to the metrics with a 30%
weighting. To accommodate this change, the weighting
for earnings per share (EPS) would also be 30% (down
from 60% weight for 2015).
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Pearson plc Annual report and accounts 2015
Part 1: Letter from the chairman of the remuneration committee continued
For 2016, the range of normal rewarded performance
would be wider than in previous years – and, in
consequence, both the threshold performance and
the on-target funding are set to be lower than in 2015.
For the Long-Term Incentive Plan (LTIP):
Targets for the 2016 LTIP awards are planned to be set
following the April remuneration committee meeting,
having allowed key shareholders the opportunity to
consider our plans on how to account for the revised
growth expectations explained in our January 2016
trading update, and in line with policy.
The targets will be fully disclosed in the 2016 report on
directors’ remuneration.
The targets and weightings will continue to be based on
EPS (one-half), ROIC (one-third) and TSR (one-sixth) with
on-target levels planned to be in line with the delivery
of the market guidance operating profi t of £800 million
in 2018.
Looking forward to 2016
The committee has reviewed the base salary levels for
executive directors in light of 2015 business performance
and concluded that it would not be appropriate to award
a salary increase for 2016.
In preparation for the policy vote in 2017, we expect to
conduct a thorough review of our remuneration policy
Principles of remuneration policy
in 2016 to test and ensure its eff ectiveness and
appropriateness for the company, which fi nds itself
in a new operating environment and context to that
prevailing in 2014. We are committed to engagement
with our shareholders during this review and will
welcome comments and feedback.
The operation of the current LTIP will be considered as
part of the policy review, in parallel with a periodic review
of the remuneration committee’s terms of reference.
Our new policy – changed or not – and any new or
renewed plans will be put to shareholders for approval
at the 2017 AGM. For information on our anticipated
changes to remuneration for 2016 see page 116.
My meetings with shareholders in 2015 have been
helpful in understanding perspectives and I look forward
to continuing the dialogue in 2016 and beyond.
We are confi dent that our response to the changes and
challenges described here will make Pearson a simpler,
focused and stronger company and that we will position
the company to achieve a sustained period of growth.
Elizabeth Corley
Chairman of remuneration committee
4 March 2016
The purpose of the remuneration policy is to support the company’s strategy to deliver sustained performance and
create long-term value in the interests of all stakeholders. Our remuneration policy principles are highlighted in the
panel below and a summary of our directors’ remuneration policy report, approved by shareholders at the 2014 AGM,
is provided on pages 97 and 98.
We continue to operate executive remuneration in line with the approved policy and do not anticipate seeking
shareholder approval for our policy again until required to do so at the 2017 AGM. See table on page 98.
Sustainability and
affordability
Pay for performance
Alignment
Base
salary
› Robust and transparent
› Link to pay conditions
across the Group
Annual
incentives
› Strong rationale
for increases
› Funded through
results
› Strong link to
performance
› Malus and clawback
› Strong link to
performance
› Malus and clawback
Annual
incentives
Long-term
incentives
Long-term
incentives
› Pay mix focuses on
variable pay
› Funded through results
› Aligned fully with KPIs:
EPS, operating profi t,
sales and operating
cash fl ow
› Malus and clawback
› Pay mix focuses on
variable pay
› Funded through results
› Aligned with strategy
through KPIs: EPS, ROIC
and TSR
› Malus and clawback
Annual
incentives
› Designed to refl ect
shareholder value
creation
Long-term
incentives
Shareholding
guidelines
› Designed to refl ect
shareholder value
creation
› 2-year holding
post-vesting
› CEO: 300%
CFO: 200%
› Pearson
executive: 100%
Report on directors’ remuneration continued
Part 2: Summary of remuneration policy
Section 4 Governance/Report on directors’ remuneration
97
Introduction to summary of remuneration policy
The company’s policy on directors’ remuneration
was approved by shareholders at the Annual General
Meeting on 25 April 2014. We issued an RNS statement
of further information on the remuneration policy on
9 April 2014, to clarify the use of the committee’s
discretion over certain elements of remuneration in
exceptional circumstances.
To help shareholders understand the context of
remuneration practice reported in the annual
remuneration report that follows, and specifi cally the
limits applied to directors’ remuneration, we have
included below some key points and a summary of
pertinent sections of the remuneration policy for
information only. For further detail, please refer to the
full remuneration policy and the clarifi cation statement
on the Governance page of the company’s website at
www.pearson.com/governance
Scope of policy
The policy 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 nine
in number) who are not directors but who fall within the
committee’s remit.
Duration of policy
The policy took eff ect on 25 April 2014 and is expected
to remain in force until the next binding vote on our
remuneration policy, which is planned for the 2017 AGM.
Use of discretion
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. 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.
As clarifi ed in the RNS statement of further information
on the remuneration policy on 9 April 2014, this
discretion would only be used in the very narrow
circumstances articulated in the policy – that is, in
exceptional or genuinely unforeseen circumstances.
The committee considers that these circumstances
would arise highly infrequently, if at all, in the lifetime
of the policy. The committee would regard reliance
on this discretion as a matter of utmost seriousness
and, in relation to our stated obligation to consult in
advance with major shareholders, would not proceed
unless there was clear consensus in favour among
those consulted. Further, the committee would ensure
that the value of the remuneration arrangement put in
place in reliance on this discretion would fall within the
normal limit (as stated in the policy) for the element of
remuneration to which the arrangement relates.
As part of the approved policy, the committee also has
discretion to award base salary increases, allowances
and benefi ts, and long-term incentive plan awards
in excess of the normal maximum limits to current
or new directors. As clarifi ed in the RNS statement,
this discretion will only be exercised in exceptional
circumstances other than in the case of increases in the
cost of benefi ts that are outside Pearson’s control and
changes in benefi t providers. Again, Pearson would
consult with major shareholders before exercising any
such discretion and such exercise would be limited by
reference to the safeguards described above, including
only proceeding where there was clear consensus in
favour among those consulted. In these circumstances,
the committee would ensure that the maximum value of
the remuneration arrangement put in place in reliance
on this discretion did not exceed a margin of 25% over
the normal maximum limit for the element in question
(as stated in the policy).
Legacy arrangements
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
remained in place at the time that the new policy
became eff ective, including obligations that are
‘grandfathered’ by virtue of being in force at 27 June
2012. Pearson’s policy is to honour pre-existing
obligations, commitments or other entitlements that
were entered into before the eff ective date of this policy.
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Pearson plc Annual report and accounts 2015
Part 2: Summary of remuneration policy continued
Summary of remuneration policy
For more information please refer to the full remuneration policy on the Governance page of the company’s website at
www.pearson.com/governance
Element of
remuneration
Purpose and
link to strategy
Performance conditions
Normal limit
Base salary
Helps to recruit, reward
and retain. Refl ects
competitive market level,
role, skills, experience
and individual
contribution.
Performance of both the
company and the individual
are taken into account when
determining an appropriate
level of base salary increase
each year, if any.
Allowances
and benefi ts
Help to recruit and
retain. Refl ect the local
competitive market.
None.
Base salary increases
are not ordinarily more
than 10% per annum.
Total value not
ordinarily in excess of
15% of base salary in
any year.
Exceptional limit as clarifi ed in
RNS statement of 9 April 2014
Up to 25% over normal limit in
specifi c individual situations
including internal promotions
and material changes to the
business or the role.
Up to 25% over normal limit in
specifi c individual situations
including changes in individual
circumstances such as health
status and changes in the role
such as relocation. In excess of
25% over normal limit in the
case of increases in the cost
of benefi ts that are outside of
Pearson’s control and changes
in benefi t providers.
Retirement
benefi ts
Help to recruit and
retain. Recognise long-
term commitment.
None.
As set out in approved
remuneration policy.
None.
Annual
incentives
Motivate achievement
of annual strategic
goals. Focus on key
fi nancial metrics. Reward
individual contribution.
Long-term
incentives
Help to recruit, reward
and retain. Drive long-
term earnings, share
price growth and value
creation, and align
interests of executives
and shareholders.
Encourage long-
term shareholding
and commitment to
company.
Link management’s
long-term reward and
wealth to corporate
performance in a
fl exible way.
The committee has the
discretion to select the
performance measures,
targets and relative weightings
from year to year. Funded by
Pearson global annual fi nancial
results, normally related to the
performance against targets
for Pearson’s adjusted earnings
per share (or(cid:98)operating profi t),
sales, and operating cash fl ow.
Individual annual incentive
pay-outs also take into account
individual performance against
personal objectives.
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
that the targets are suffi ciently
stretching. Awards vest subject
to the following performance
conditions: one-half on
earnings per share growth;
one-third on return on invested
capital (ROIC); one-sixth on
relative total shareholder
return (TSR). Performance
tested over three years.
See Total single fi gure remuneration chart on page 105
None.
Overall limit 200%
of base salary. 2015
maximum opportunity
is 180% for the chief
executive and no more
than 170% for other
executive directors
and members of the
Pearson executive.
Maximum face
value of 400% of
base salary. 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.
Up to 25% over normal limit in
exceptional circumstances, for
example, for retention purposes
or to refl ect particular business
situations. The discretion to
award restricted shares without
performance conditions to
executive directors will not
be used other than where it is
appropriate to compensate a
new director on a ‘like-for-like’
basis for incentives foregone
at a previous employer.
Section 4 Governance/Report on directors’ remuneration
99
Non-executive directors and chairman
Pay and performance scenario analysis
Non-executive director remuneration has been designed
to attract and retain high calibre individuals, with
appropriate experience or industry relevant skills, by
off ering market competitive fee levels.
The structure of non-executive directors’ fees
with(cid:98)eff ect(cid:98)from 1 May 2014 is as follows:
Director
Non-executive director
Chairmanship of audit committee
Chairmanship of remuneration committee
Chairmanship of reputation &
responsibility committee
Membership of audit committee
Membership of remuneration committee
Membership of reputation &
responsibility committee
Senior independent director
Fee
£70,000
£27,500
£22,000
£10,000
£15,000
£10,000
£5,000
£22,000
The total fees payable to the non-executive directors
(excluding the Chairman) are subject to the limit set out
in the articles of association of the company (currently
£750,000) and are increased by ordinary resolution from
time to time.
The chairman’s fees remain unchanged at £500,000
per year.
For more information on non-executive directors’
remuneration, please refer to the full remuneration
policy on the Governance page of the company’s website
at www.pearson.com/governance
The remuneration policy approved by shareholders
in 2014 required a scenario chart in the format set out
below for 2014 remuneration. Although not required,
the company has updated the scenario charts below
so as to apply to 2016 remuneration.
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 2016 under diff erent performance
scenarios, based on the following defi nitions of
performance:
Performance
scenario
Elements of remuneration
and assumptions
Maximum
Target
Minimum
2016 base salary; allowances, benefi ts, and
retirement benefi ts at the same percentage
of base salary as in 2015; maximum individual
annual incentive as per policy; maximum value
of 2015 long-term incentive award
2016 base salary; allowances, benefi ts, and
retirement benefi ts at the same percentage
of base salary as in 2015; target individual
annual incentive as per policy; target value
of 2015 long-term incentive award (Willis
Towers Watson’s independent assessment
of the expected value of the award, i.e. the
net present value taking into account all the
conditions)
2016 base salary; allowances, benefi ts, and
retirement benefi ts at the same percentage
of base salary as in 2015; 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 fi xed and
performance-related remuneration and the absolute
size of the remuneration packages for the chief executive
and the chief fi nancial offi cer (as represented by the
current incumbent) are set out on the next page.
We will continue to review the mix of fi xed and
performance-linked remuneration on an annual basis,
consistent with our overall policy.
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Pearson plc Annual report and accounts 2015
Part 2: Summary of Remuneration policy continued
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:72)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:82)(cid:605)(cid:70)(cid:72)(cid:85)(cid:3)(cid:11)(cid:45)(cid:82)(cid:75)(cid:81)(cid:3)(cid:41)(cid:68)(cid:79)(cid:79)(cid:82)(cid:81)(cid:12)(cid:3)£000
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:564)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:82)(cid:605)(cid:70)(cid:72)(cid:85)(cid:3)(cid:11)(cid:38)(cid:82)(cid:85)(cid:68)(cid:80)(cid:3)(cid:58)(cid:76)(cid:79)(cid:79)(cid:76)(cid:68)(cid:80)(cid:86)(cid:12)(cid:3)£000
(cid:48)(cid:68)(cid:91)(cid:76)(cid:80)(cid:88)(cid:80)
20%
25%
55%
£5,695
(cid:48)(cid:68)(cid:91)(cid:76)(cid:80)(cid:88)(cid:80)
18%
29%
53%
(cid:55)(cid:68)(cid:85)(cid:74)(cid:72)(cid:87)
32%
21% (cid:23)(cid:26)(cid:8)
(cid:101)(cid:22)(cid:15)(cid:26)(cid:27)(cid:22)
(cid:55)(cid:68)(cid:85)(cid:74)(cid:72)(cid:87)
29%
23% 48%
(cid:48)(cid:76)(cid:81)(cid:76)(cid:80)(cid:88)(cid:80)
100%
£1,216
(cid:48)(cid:76)(cid:81)(cid:76)(cid:80)(cid:88)(cid:80)
100%
(cid:37)(cid:68)(cid:86)(cid:72)(cid:3)(cid:86)(cid:68)(cid:79)(cid:68)(cid:85)(cid:92)(cid:15)(cid:3)(cid:68)(cid:79)(cid:79)(cid:82)(cid:90)(cid:68)(cid:81)(cid:70)(cid:72)(cid:86)(cid:15)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:564)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:72)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)
(cid:36)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:70)(cid:72)(cid:81)(cid:87)(cid:76)(cid:89)(cid:72)
(cid:47)(cid:82)(cid:81)(cid:74)(cid:16)(cid:87)(cid:72)(cid:85)(cid:80)(cid:3)(cid:76)(cid:81)(cid:70)(cid:72)(cid:81)(cid:87)(cid:76)(cid:89)(cid:72)(cid:86)(cid:3)(cid:11)(cid:47)(cid:55)(cid:918)(cid:51)(cid:12)
(cid:37)(cid:68)(cid:86)(cid:72)(cid:3)(cid:86)(cid:68)(cid:79)(cid:68)(cid:85)(cid:92)(cid:3)(cid:68)(cid:79)(cid:79)(cid:82)(cid:90)(cid:68)(cid:81)(cid:70)(cid:72)(cid:86)(cid:15)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:564)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:72)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)
(cid:36)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:70)(cid:72)(cid:81)(cid:87)(cid:76)(cid:89)(cid:72)
(cid:47)(cid:82)(cid:81)(cid:74)(cid:16)(cid:87)(cid:72)(cid:85)(cid:80)(cid:3)(cid:76)(cid:81)(cid:70)(cid:72)(cid:81)(cid:87)(cid:76)(cid:89)(cid:72)s (LTIP)
(cid:38)(cid:40)(cid:50)(cid:3)(cid:564)(cid:91)(cid:72)(cid:71)(cid:3)(cid:89)(cid:86)(cid:3)(cid:89)(cid:68)(cid:85)(cid:76)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:68)(cid:85)(cid:74)(cid:72)(cid:87)
(cid:38)(cid:41)(cid:50)(cid:3)(cid:564)(cid:91)(cid:72)(cid:71)(cid:3)(cid:89)(cid:86)(cid:3)(cid:89)(cid:68)(cid:85)(cid:76)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:68)(cid:85)(cid:74)(cid:72)(cid:87)
£2,978
£1,890
£551
Fixed
Base salary 21%
(cid:3) (cid:51)(cid:72)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:564)(cid:87)(cid:86)(cid:3)(cid:20)(cid:20)(cid:8)
Fixed
Variable
(cid:3) (cid:36)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:70)(cid:72)(cid:81)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:21)(cid:20)(cid:8)
(cid:3)
(cid:47)(cid:82)(cid:81)(cid:74)(cid:16)(cid:87)(cid:72)(cid:85)(cid:80)(cid:3)(cid:76)(cid:81)(cid:70)(cid:72)(cid:81)(cid:87)(cid:76)(cid:89)(cid:72)(cid:86)(cid:3)(cid:23)(cid:26)(cid:8)
(cid:41)(cid:76)(cid:91)(cid:72)(cid:71)
Base salary 27%
(cid:3) (cid:51)(cid:72)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:564)(cid:87)(cid:86)(cid:3)(cid:21)(cid:8)
(cid:41)(cid:76)(cid:91)(cid:72)(cid:71)
(cid:57)(cid:68)(cid:85)(cid:76)(cid:68)(cid:69)(cid:79)(cid:72)
(cid:3) (cid:36)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:70)(cid:72)(cid:81)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:21)(cid:22)(cid:8)
(cid:3)
(cid:47)(cid:82)(cid:81)(cid:74)(cid:16)(cid:87)(cid:72)(cid:85)(cid:80)(cid:3)(cid:76)(cid:81)(cid:70)(cid:72)(cid:81)(cid:87)(cid:76)(cid:89)(cid:72)(cid:86)(cid:3)(cid:23)(cid:27)(cid:8)
Variable
(cid:57)(cid:68)(cid:85)(cid:76)(cid:68)(cid:69)(cid:79)(cid:72)
Further information on remuneration policy
For further information on the following aspects
of the remuneration policy, please refer to the full
remuneration policy and the RNS statement of further
information on the remuneration policy of 9 April 2014
on the Governance page of the company’s website at
www.pearson.com/governance
Selection of performance measures and target setting
Legacy arrangements under the annual bonus share
matching plan
Remuneration policy for other employees
Service contracts and termination provisions
Recruitment policy
Employment conditions elsewhere in the company
Executive directors’ non-executive directorships
Shareholder views
In 2016, we intend to conduct a review of our
remuneration policy to put to shareholders
for(cid:98)our(cid:98)next(cid:98)policy vote in 2017.
Report on directors’ remuneration continued
Part 3: Annual remuneration report
Section 4 Governance/Report on directors’ remuneration
101
This report comprises a number of sections:
The remuneration committee
and its activities
p102-103
Movements in directors’
interests in share options*
Voting outcome at 2015 Annual
General Meeting
Single fi gure of total remuneration and
prior year comparison*
Annual incentive*
Long-term incentives*
Retirement benefi ts*
Remuneration paid to the chairman
and non-executive directors*
Movements in directors’
interests in share awards*
p104
p105
p106
p107
p108
p108
p110
Where required under current regulations, the tables marked * have been subject to audit.
Payments to former directors*
Interests of directors and
value of shareholdings*
Executive directors’
non-executive directorships
Historical performance
and remuneration
Comparative information
Information on changes to
remuneration for 2016
p111
p111
p112
p113
p114
p115
p116-117
Annual remuneration report
Remuneration compliance
The remuneration committee presents the annual
remuneration report, which will be put to shareholders,
along with the annual statement, as an advisory (non-
binding) vote at the Annual General Meeting to be held
on 29 April 2016.
This report was compiled in accordance with Schedule 8
of the Large and Medium-sized Companies and Groups
(Accounts and Reports) (Amendment) Regulations
2013 and was approved by the board of directors on
4 March 2016.
The committee believes that the company has complied
with the provisions regarding remuneration matters
contained within the UK Corporate Governance Code.
Strategic alignment of pay
Financial
objectives
Drive revenue
growth
KPI
Sales
Deliver
sustainable
returns
Total adjusted
earnings
Return on
invested capital
Total shareholder
return
Manage our
cash position
eff ectively
Operating
cash fl ow
Incentive
scheme
AIP
AIP / LTIP
LTIP
LTIP
AIP
Non-fi nancial
objectives
Reduce
our carbon
footprint
KPI
GHG
emissions
Incentive
scheme
AIP (as part of a
scorecard used
to determine
the individual
discretionary
element of the
payout)
KPI
Incentive
scheme
Revenue share
AIP
Revenue share
AIP
Strategic
objectives
Transform
to digital
and services
Grow presence
in emerging
markets
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Pearson plc Annual report and accounts 2015
Part 3: Annual remuneration report continued
The remuneration committee in 2015
Role
Name
Title
Chairman Elizabeth Corley
(from 24 April 2015)
David Arculus
(to 24 April 2015)
Members Vivienne Cox
Independent
non-executive directors
Internal
advisers
Josh Lewis
Tim Score
(from 2 October 2015)
Ken Hydon
(to 24 April 2015)
Elizabeth Corley
(to 24 April 2015)
Glen Moreno
John Fallon
Coram Williams
(from 1 August 2015)
Robin Freestone
(to 1 August 2015)
Melinda Wolfe
Stuart Nolan
Stephen Jones
Chairman of the board
Chief executive
Chief fi nancial offi cer
Chief fi nancial offi cer
Chief human resources
offi cer
SVP, reward
Company secretary
External
advisers
Willis Towers Watson
See remuneration committee activities in 2015
on p103
Sidney Taurel joined the committee as a member
on his appointment as Chairman of the Board on
1 January 2016.
Internal advisers provided material assistance to the
committee during the year. They attended meetings of
the committee, although none of them were involved in
any decisions relating to his or her own remuneration.
To ensure that the committee receives independent
advice, Willis Towers Watson supplies survey data and
advises on market trends, long-term incentives and
other general remuneration matters. Willis Towers
Watson was selected and appointed by the committee
through a formal tendering process. Willis Towers
Watson also advised the company on health and
welfare benefi ts in the US and provided consulting
advice directly to certain Pearson operating companies.
Willis Towers Watson is a member of the Remuneration
Consultants’ Group, the body that oversees the Code of
Conduct in relation to executive remuneration consulting
in the UK.
During the year, Willis Towers Watson was paid fees for
advice to the committee, which were charged on a time
spent basis, of £151,254. As part of its annual review of its
performance and eff ectiveness, the committee remains
satisfi ed that Willis Towers Watson’s advice was objective
and independent and that Willis Towers Watson’s
provision of other services in no way compromises
its independence.
Committee performance
Annually, the committee reviews its own performance,
constitution, and charter and terms of reference to
ensure it is operating at maximum eff ectiveness and
recommends any changes it considers necessary to the
board for approval.
The committee participated in a survey to review its
performance and eff ectiveness in July 2015, 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 shareholders and access to
independent advice.
The committee concluded that it is operating eff ectively.
Section 4 Governance/Report on directors’ remuneration
103
Meetings, activities and decisions in 2015
The remuneration committee met four times during 2015. The key topics were as follows:
Market
Performance
Implementation
Governance
Policy
Noted Willis Towers
Watson’s overview of the
current remuneration
environment and
2014/15 market data
Noted management’s
overview of prior
year and year to
date performance
and(cid:98)business plans
Reviewed and approved
the 2014 annual
incentive pay-out and
2015 remuneration
package for John Fallon
Reviewed and approved
2014 annual incentive
plan pay-outs
Approved nil pay-out of
2012 annual bonus share
matching awards and
release of shares
Noted the activity of the
standing committee of
the board in relation
to the operation of the
company’s equity-based
reward programmes
Noted update to
remuneration aspects
of(cid:98)the UK Corporate
Governance Code
and principles of
remuneration of the
Investment Association
Noted and reviewed
the status of the
outstanding long-term
incentive awards based
on the current view of
likely Pearson fi nancial
performance
Approved nil pay-out
under 2012 long-term
incentive plan
Reviewed and approved
2015 long-term incentive
awards for the Pearson
executive
Considered timeline
and principles for
determining the basis
of Robin Freestone’s
exit arrangements
Noted 2015 long-term
incentive awards for
senior leaders and
managers below
Pearson executive
Noted remuneration
package for a new
appointment to the
Pearson executive
Considered matter of
former CEO’s double
taxation in the US and
UK (cid:98)and related issues
Noted company’s use
of(cid:98)equity for employee
share plans
Reviewed the
committee’s
performance
Reviewed the
committee’s(cid:98)charter
and(cid:98)terms of(cid:98)reference
Reviewed and approved
2014 directors’
remuneration report
Reviewed and approved
increases in base salaries
for 2015 for the Pearson
executive
Reviewed and approved
2015 Pearson annual
incentive plan targets
Reviewed and approved
2015 individual annual
incentive opportunities
for the Pearson
executive
Reviewed 2015
long-term incentive
performance conditions
for the Pearson
executive
Noted guidance notes on
treatment of leavers and
exercise of discretion
Considered approach to
2015 long-term incentive
awards for senior
leaders and managers
below the Pearson
executive
Disclosure and
engagement
Noted shareholder
feedback on 2014
directors’ remuneration
report
Reviewed 2015 Annual
General Meeting season,
shareholder voting and
engagement strategy
Noted template
and outline of 2015
report on directors’
remuneration and
considered shareholder
engagement(cid:98) strategy
Noted feedback from
Committee Chairman’s
meetings with key
shareholders
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Pearson plc Annual report and accounts 2015
Part 3: Annual remuneration report continued
Voting at 2015 Annual General Meeting
Voting on remuneration policy at 2014 AGM
The following table summarises the details of votes cast
in respect of the resolutions on the report on directors’
remuneration at the 2015 Annual General Meeting.
Annual remuneration report votes
Directors’ remuneration policy votes
Votes for
536,330,506
(92.92% of votes cast)
Votes against
40,883,235
(7.08% of votes cast)
Votes for
517,308,446
(95.76% of votes cast)
Votes against
22,905,879
(4.24% of votes cast)
577,213,741
Total votes cast
8,980,804
Votes withheld (abstentions)
540,214,325
Total votes cast
6,004,239
Votes withheld (abstentions)
(70.96% of issued share capital)
(66.00% of issued share capital)
As in previous years and as required by law, details
of the voting on all resolutions at the 2016 Annual
General Meeting will be announced via the RNS
and posted on the Pearson website following the
Annual General Meeting.
Section 4 Governance/Report on directors’ remuneration
105
Single total fi gure of remuneration and prior year comparison
Total aggregate emoluments for executive and non-executive directors were £3.299m in 2015. These emoluments are
included within the total employee benefi t expense in note 5 to the fi nancial statements (page 155).
Executive directors
The remuneration received by executive directors in respect of the fi nancial years ended 31 December 2015 and
31 December 2014 is set out below. Figures for Coram Williams and Robin Freestone are based on their period of
employment – see note on page 106.
Executive director remuneration
John Fallon
Coram Williams
Robin Freestone
Total
£000s
Base salary
2015
776
2014
761
2015
258
Allowances and benefi ts
Travel
Healthcare
Risk
Annual incentives
Percentage of maximum
Percentage of target
Percentage of salary
Long-term incentives
Long-term incentive plan
Annual bonus share-matching plan
Dividend equivalents
Worldwide Save For Shares
Retirement benefi ts
Defi ned contribution plan
Defi ned benefi t accrual
Allowances in lieu of benefi ts
62
28
2
32
0
0%
0%
0%
54
0
0
46
8
371
0
169
202
83
50
2
31
692
51%
91%
91%
74
0
0
74
0
285
0
87
198
0
0
0
0
0
0%
0%
0%
–
–
–
–
–
18
0
18
0
Total remuneration
1,263
1,895
276
See summary of remuneration policy on page 98
2014
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2015
417
2014
553
2015
2014
1,451
1,314
13
11
2
0
0
0%
0%
0%
41
0
0
38
3
126
18
–
108
15
12
2
1
365
39%
78%
66%
63
0
0
63
0
166
23
0
143
75
39
4
32
0
–
–
–
95
0
0
84
11
515
18
187
310
98
62
4
32
1,057
–
–
–
137
0
0
137
0
451
23
87
341
597
1,162
2,136
3,057
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Pearson plc Annual report and accounts 2015
Part 3: Annual remuneration report continued
Notes to single fi gure table
Single total fi gure of remuneration In accordance
with the regulations, we show a single total fi gure of
remuneration, which includes retirement benefi ts and
long-term incentives in addition to the other elements of
remuneration that have been shown in previous reports.
Coram Williams and Robin Freestone Figures relate to
full period of employment; for Coram commencing 1 July
2015, and for Robin ending 30 September 2015. Note that
Coram became an executive director and Robin stepped
down as an executive director on 1 August 2015.
Base salary In accordance with policy, the committee
considered a report from the chief executive and
chief human resources offi cer on general pay trends
in the market and the level of pay increases across
the company as a whole. For 2015, 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 for adjustments to base pay for 2015
was 2%. Local infl ation rates and market conditions were
taken into account in particular markets.
Allowances and benefi ts Travel benefi ts comprise
company car, car allowance and private use of a driver.
Health benefi ts comprise healthcare, health assessment
and gym subsidy. Risk benefi ts comprise additional life
cover and long-term disability insurance. In addition to
the above benefi ts and allowances, executive directors
may also participate in company benefi t or policy
arrangements that have no taxable value.
Annual incentive For more detail, see table below. Annual
incentives for the directors are funded by Pearson global
annual fi nancial results and pay-outs take into account
individual performance against personal objectives.
Executive directors’ annual incentive payments in 2015
For 2015, annual incentives were funded by Pearson global annual fi nancial results based on the performance
measures set out below. Individual pay-outs take into account performance against personal objectives. Actual
performance against the fi nancial targets for 2015, and the respective AIP pool funding level, were as follows:
Measures
Group EPS (p)
Group sales (£m)
Operating cash fl ow (£m)
Total
Weighting
Threshold
for 2015
Target
for 2015
Maximum
for 2015
Actual
performance
in 2015
Funding
in 2015
(% of target)
Weighting ratio
60%
20%
20%
100%
70.4
79.0
87.7
5,046
5,312
5,578
680
765
850
69.8
5,083
435
0%
0%
0%
0%
20%
Measures
John Fallon
Coram Williams
Robin Freestone
Total
Group
funding
Pro-rating
factor
Target AIP
as %
of salary
Actual % of
target in 2015
Final pay-out
in 2015
(000s)
20%
60%
0%
0%
0%
1.0
0.5
0.75
100%
85%
85%
0%
0%
0%
£0
£0
£0
£0
Group EPS (p)
Group sales (£m)
Operating cashfl ow (£m)
Note 1 Although the threshold for the Group sales element was reached in 2015, the committee has exercised its discretion to reduce the bonus
to nil due to poor overall underlying performance
Note 2 Actual performance provided like-for-like with targets, based on plan exchange rates for 2015 and constant portfolio, consistent with
prior years
Note 3 Pro-rated due to part year employed (relates to full period employed rather than period as a director)
Section 4 Governance/Report on directors’ remuneration
107
Worldwide Save For Shares All share options that
become exercisable during a year are included in the
single fi gure of total remuneration for that year. The
value included in the single fi gure of total remuneration
is the number of options multiplied by the diff erence
between the discounted option price and the market
value on the earliest exercise date. Share options which
became exercisable in 2015 are included in the single
fi gure of total remuneration for 2015 based on the share
price on August 1, 2015 of 1,203.0p. See page 111 for
details of share options vesting in the year.
Long-term incentives The single fi gure of remuneration
for 2015 includes all long-term incentive awards that
were subject to a performance condition where the
performance period ended, or was substantially (but
not fully) completed, at 31 December 2015, and awards
where the performance condition has been satisfi ed
but where the release of shares is subject to a further
holding period. The same methodology has been applied
for the single fi gure of remuneration for 2014.
In 2015, the performance conditions for the 2013
Long-Term Incentive Plan (LTIP) and 2013 Annual Bonus
Share-Matching Plan (ABSMP) were not met. The
executive directors both held vested shares under the
2010 LTIP that were released on 5 March 2015 at the end
of the two-year holding period and these shares were
part of the single fi gure of remuneration for 2013 as
reported in the 2012 report on directors’ remuneration.
However, the dividend equivalent shares that were
awarded in respect of these shares and released on
5(cid:98)March 2015 have been included in the single fi gure
of remuneration for 2015, as below:
Long-term incentive plan vesting
Director
John Fallon
Robin
Freestone
Total
Date of
award
Date of
release
Number of
shares
Value
£000
Share price
on release Notes
– 5 Mar 15
3,191
46 1,444.0p Dividend shares relating to fi nal portion of 2010
award vesting
3 Mar 10 5 Mar 15
13,752
199 1,444.0p 25% of 2010 award pay-out subject to
continued employment released
16,943
245
– 5 Mar 15
2,659
38 1,444.0p Dividend shares relating to fi nal portion of 2010
award vesting
3 Mar 10 5 Mar 15
11,460
165 1,444.0p 25% of 2010 award pay-out subject to
continued employment released
14,119
31,062
203
448
Notes
Dividend equivalent shares only included in single fi gure table. The underlying 25% of the 2010 Award having been disclosed in the 2012 single fi gure table.
Shares vested on 3 March 2015 but were released on 5 March together with related dividend shares per RNS announcement.
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Pearson plc Annual report and accounts 2015
Part 3: Annual remuneration report continued
Executive directors’ retirement benefi ts and entitlements
Details of the directors’ pension entitlements and pension related benefi ts during the year are as follows:
Director
John Fallon
Coram Williams
Robin Freestone
Value of
defi ned
benefi t over
the period
£000
Other
pension
costs to the
company
over the
period
£000
169
18
–
–
–
18
Other
allowances
in lieu of
pension
£000
202
–
108
Total annual
value in 2015
£000
Normal
retirement
age
371
18
126
62
62
62
Accrued
pension at
31 Dec 15
£000
90.5
25.7
–
Plans
John Fallon – Pearson Group Pension Plan Accrual rate of 1/30th of pensionable salary
per annum. In addition, he received a taxable and non-pensionable cash supplement.
Coram Williams – Pearson Group Pension Plan Accrual rate of 1/60th of pensionable
salary per annum with continuous service with a service gap, in accordance with
earlier commitments given to him about the arrangements that would apply
should he rejoin Pearson in the UK having moved from Pearson to Penguin US
and subsequently Penguin Random House.
Robin Freestone – Money Purchase 2003 section of the Pearson Group Pension Plan
In addition, he received a taxable and non-pensionable cash supplement.
John, Coram and Robin’s pension benefi ts are subject to the notional earnings cap.
Note 1 The accrued pension at 31 December 2015 is the deferred pension to which
the member would be entitled on ceasing pensionable service on 31 December 2015.
For John Fallon and Coram Williams, it relates to the pension payable from the UK Plan.
Robin Freestone did not accrue defi ned benefi ts.
Note 2 Value of defi ned benefi t over the period comprises the DB input value, less
infl ation, less individual contribution.
Note 3 Other pension costs to the company over the period comprises contributions to
defi ned contribution arrangements for UK benefi ts.
Note 4 Other allowances in lieu of pension represents the cash allowances paid in lieu
of the previous FURBS arrangements.
Note 5 Total annual value is the sum of the previous three columns.
Chairman and non-executive director remuneration
The remuneration paid to the chairman and non-executive directors in respect of the fi nancial years ended
31 December 2015 and 31 December 2014 is as follows:
2015
2014
Director
£000s
Glen Moreno
David Arculus
Elizabeth
Corley
Vivienne Cox
Ken Hydon
Josh Lewis
Linda Lorimer
Harish
Manwani
Tim Score
Total
Salary/
basic
fee
500
22
70
70
22
70
70
70
70
964
Committee
chairmanship
Committee
membership SID
Taxable
benefi ts
Salary/
basic
fee
500
68
47
68
68
68
68
68
–
Total
500
35
89
132
41
92
97
80
97
Committee
chairmanship
Committee
membership SID
Taxable
benefi ts
–
21
–
7
27
–
–
–
–
–
–
14
4
–
22 21
8
8
17
4
–
–
–
–
–
–
–
2
1
6
8
9
8
7
–
Total
500
105
52
124
111
85
93
79
–
–
5
3
–
–
–
25 22
3
10
20
5
7
–
–
–
–
–
–
1
1
5
7
12
7
5
1
78 22
39 1,163
955
55
77 21
41 1,149
–
7
15
10
9
–
–
–
19
60
Note Taxable benefi ts refer to travel, accommodation and subsistence expenses incurred while attending board meetings during 2015 that were paid or reimbursed by the company
which are deemed by HMRC to be taxable in the UK. The amounts in the table above include the grossed-up cost of UK tax to be paid by the company on behalf of the directors.
Section 4 Governance/Report on directors’ remuneration
109
Long-term incentives
The status of outstanding awards under the long-term incentive plan (LTIP) and the legacy annual bonus share
matching plan (ABSMP) and performance against the performance conditions as at 31 December 2015 are described
in the table below.
For each executive director, details of awards under the LTIP and ABSMP that were awarded, vested, released,
lapsed or held during 2015 are summarised in the adjacent table. Notes to this table and the following table are
provided overleaf.
Status of outstanding awards under the long-term incentive plan and annual bonus share matching plan in 2015
Long-term incentive plan (LTIP)
Share price
on date
of award
1,337.0p
Date of
award
1 May
2015
Vesting
date
1 May
2018
Performance
measures Weighting
Performance
period
Pay-out at
threshold
Pay-out at
maximum
Actual
performance
Relative TSR
1/6
1 Jan 2015
to(cid:98)31 Dec
2017
25% at median
100% at upper
quartile
ROIC
1/3
2017
25% for ROIC
of(cid:98)6.5%
100% for ROIC
of(cid:98)7.5%
EPS growth
1/2
2017
compared
to(cid:98)2014
25% for EPS
growth of 6.0%
100% for EPS
growth(cid:98)of 12.0%
1 May
2014
1,102.0p
1 May
2017
Relative TSR
1/6 2014 to(cid:98)2017
30% at median
100% at upper
quartile
ROIC
1/3
2016
EPS growth
1/2
2016
compared
to(cid:98)2013
30% for ROIC
of(cid:98)6.5%
100% for ROIC
of(cid:98)7.5%
30% for EPS
growth of 6.0%
100% for EPS
growth(cid:98)of 12.0%
% of
award
vested
Status
– Outstanding
subject to
performance
– Outstanding
subject to
performance
–
–
1 May
2013
1,183.0p
1 May
2016
Relative TSR
1/3 2013 to(cid:98)2016
30% at median
100% at upper
quartile
17th
percentile
Nil
Estimated to
lapse in 2016
ROIC
1/3
2015
EPS growth
1/3
2015
compared
to(cid:98)2012
0% for ROIC
of(cid:98)8.5%
100% for ROIC
of(cid:98)10.5%
30% for EPS
growth of 6.0%
100% for EPS
growth(cid:98)of 12.0%
5.8%
-5.2%
Nil Will lapse in
2016
Nil Will lapse in
2016
Annual Bonus Share Matching Plan (ABSMP)
Date of
award
Share price
on date
of award
Vesting
date
15 May
2013
1,206.0p 15 May
2016
Performance
measures Weighting
Performance
period
Pay-out at
threshold
Pay-out at
maximum
Actual
performance
Real
compound
annual EPS
growth
2012 to 2015 50% of matching
award for EPS
growth of 3.0%
100% of
matching award
for EPS growth
of 5.0%
-6.9%
% of
award
vested
Status
Nil Performance
condition
not met. Will
lapse in 2016
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Pearson plc Annual report and accounts 2015
Part 3: Annual remuneration report continued
Movements in directors’ interests in share awards during 2015
Plan
John Fallon
LTIP
ABSMP
Total
Coram Williams
LTIP
Total
Robin Freestone
LTIP
Date
of award
Vesting
date
Number
of shares
as at
1 Jan 2015
Awarded Released
Dividends
awarded
and
released
Number of
shares as at
31 Dec 2015
Lapsed
0
230,000
–
–
–
–
–
–
250,000
–
–
230,000
274,000
1 May
2015
1 May
2014
1 May
2013
3 Mar
2010
1 May
2018
1 May
2017
1 May
2016
3 Mar
2013
274,000
250,000
13,752
15 May
2013
15 May
2016
6,083
–
–
–
–
13,752
3,191
–
–
–
6,083
543,835
230,000
13,752
3,191
256,083
504,000
1 Aug
2015
1 Aug
2018
0
0
129,000
129,000
1 May
2014
1 May
2017
162,000
1 May
2013
3 Mar
2010
1 May
2016
3 Mar
2013
150,000
11,460
–
–
–
–
0
–
–
–
150,000
11,460
2,659
–
–
0
–
–
0
–
129,000
129,000
162,000
Status
Outstanding subject to
performance
Outstanding subject to
performance
Expected to lapse in 2016
Released 5 Mar 2015
(balancing 75% of vested
shares released in 2013)
Will lapse in 2016
Outstanding subject to
performance
Outstanding subject to
performance
(also see page 112)
Expected to lapse in 2016
(also see page 112)
Released 5 Mar 2015
(balancing 75% of vested
shares released in 2013)
0
0
0
0
0
Total
323,460
0
11,460
2,659
150,000
162,000
Note 1 For all awards, Pearson’s reported fi nancial results for the relevant period
were used to measure performance and no discretion has been exercised.
Note 2 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 shares 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. Dividends refers
to dividend equivalent shares that have been added without performance conditions
to vested shares under the LTIP and released immediately on award.
Note 3 No variations to terms and conditions of plan interests were made during
the year.
Note 4 TSR is measured relative to the constituents of the FTSE World Media Index over
a three-year period.
Note 5 In relation to the LTIP award made on 1 May 2014, potential vesting is 50% of
maximum(cid:98)for attainment of ROIC of 7%.
Note 6 For the LTIP award made on 1 May 2013 and due to vest on 1 May 2016, we
have(cid:98)estimated the out-turn of the relative TSR performance condition based on
performance as at 26 February 2016 at nil. If actual relative TSR performance is
diff erent on the date of vesting, we will set this out in the annual remuneration report
for 2016.
Note 7 The single fi gure of remuneration for 2015 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 2015 and awards where the performance
condition has been satisfi ed 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 fi gure for earlier reporting periods has been restated where necessary.
Note 8 The value of shares included in the single fi gure of remuneration is
the number of shares multiplied by the share price on release.
Note 9 Coram’s 2015 award was made on his appointment to the board on 1 August
2015 and will vest three years from this date on 1 August 2018, subject to the same
performance conditions and holding periods as for other executives.
Note 10 The value of the LTIP awards in 2015 for the executive directors is shown(cid:98)
below, based on the relevant share price on the date of award also shown:
Date of award
Vesting
date
Number
of shares
Face value
Face value
(% of base salary)
Value for threshold
performance
(% of 2014 salary)
Coram Williams
1 Aug 2015
1 Aug 2018
129,000
£1,551,870
1 May 2015
1 May 2018
230,000
£3,075,100
394%
301%
99%
75%
Director
John Fallon
Share price at
date of award
1,337.0p
1,203.0p
Section 4 Governance/Report on directors’ remuneration
111
Movements in directors’ interests in share options during 2015
John Fallon and Robin Freestone also hold options under the Worldwide Save For Shares plan as follows:
Director
John Fallon
Robin Freestone
Number of
shares under
option held
as at
31 Dec 2015
–
1,109
–
1,109
Date of
grant
7 May 2010
30 Apr 2014
4 May 2012
30 Apr 2014
Option
price
805.6p
811.2p
909.0p
811.2p
Normal
earliest
exercise
date
1 Aug 15
1 Aug 17
1 Aug 15
1 Aug 17
Expiry
date
Value in 2015
single fi gure
£
1 Feb 16
1 Feb 18
1 Feb 16
1 Feb 18
7,670
0
2,911
0
Note 1 The share option awards made in 2010 to John Fallon in respect of 1,930 shares
and 2012 to Robin Freestone in respect of 990 shares vested and became exercisable
in the year and were exercised on 3 August 2015.
Note 2 No variations to terms and conditions of share options were made during
the year.
Note 3 Acquisition of shares under the Worldwide Save For Shares plan is not subject
to a performance condition.
Note 4 All share options that become exercisable during a year are included in the
single fi gure of total remuneration for that year. The value included in the single fi gure
of total remuneration is the number of options multiplied by the diff erence between
the discounted option price and the market value on the earliest exercise date. Share
options which became exercisable in 2015 are included in the single fi gure of total
remuneration for 2015 based on the share price on 1 August,2015 of 1,203.0p.
Note 5 The market price on 31 December 2015 was 736.0p per share and the range
during the year was 695.0p to 1,508.0p.
Payments to former directors
It is the committee’s intention to disclose any payments
to past directors, including any 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 pro-rating for service in the performance period
(where applied).
Former directors Will Ethridge and John Makinson, who
retained the balancing 25% of their 2010 LTIP awards
(which vested in 2013) when they stepped down from
the board in 2013, received a release of shares under
these awards, together with associated dividend shares,
during 2015. Details of the vested awards released in
2015 were reported in the 2012 and 2013 reports on
directors’ remuneration; details of the dividend shares
released in 2015 are Will Ethridge (3,191 shares) and John
Makinson (2,659 shares).
2013 long-term incentive awards
Will Ethridge retained a long-term incentive plan
award made on 1 May 2013, subject to performance.
As disclosed elsewhere in this report, this award is
expected to lapse in 2016.
Robin Freestone
Robin Freestone received no payment for loss of
offi ce when he stepped down from the board with
eff ect from 1 August 2015 and left employment on
30 September 2015.
Robin held LTIP awards granted in 2013 and 2014 and,
in February 2016, the remuneration committee set out
a clear process and engaged with key shareholders
to consider whether those awards should be
preserved. The remuneration committee considered
the circumstances of Robin’s service and the facts
surrounding his departure, taking account of the
following factors that we normally consider whenever
a decision to treat any person within the LTIP as a
good leaver:
the diff erent types of leaver;
the circumstances at the time the award was originally
made;
the individual’s performance; and
the circumstances in which the individual left
employment.
After careful consideration of these factors and
consultation with key shareholders, the remuneration
committee noted that:
Robin is leaving to take up several non-executive director
appointments and so is ceasing full-time employment;
normal conditions applied at date of grant for any award
under the LTIP and no award was made in 2015 (similarly,
he did not receive a base salary increase in 2015);
Robin carried out all duties expected of him during his
period of notice and in the preceding years prior to his
leaving. He gave good service to the Pearson Board for
nine years; and
Robin did not leave to take up employment in an
executive capacity but rather as a non-executive
board member.
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Pearson plc Annual report and accounts 2015
Part 3: Annual remuneration report continued
The remuneration committee also took into account
the eff ective and smooth handover of his role to
Coram(cid:98)Williams.
The remuneration committee determined that Robin
would be treated as a good leaver, so that outstanding
LTIP awards would be preserved on a time pro-rated
basis, would receive no special treatment and remain
subject to all of the applicable performance tests.
Robin will therefore remain eligible to receive up to
116,667 (78%) of the shares awarded on 1 May 2013 and
72,000 (44%) of the shares awarded on 1 May 2014, both
of which will vest, subject to performance, in 2016 and
2017 respectively. The 2013 award is expected to lapse
in(cid:98)2016 due to not meeting the performance targets.
Robin will be treated as a retiree in respect of his
outstanding WWSFS options granted in 2014.
Marjorie Scardino
In the 2014 report, we made shareholders aware of a
payroll processing error during the years 2007 to 2010,
as a result of which taxes deducted from Marjorie
Scardino’s compensation were incorrectly allocated by
Pearson among tax authorities in the UK and the US.
This(cid:98)resulted in her being subject to temporary double
taxation. The committee has concluded that Pearson
would reimburse (on an after-tax basis) certain costs
incurred by Marjorie Scardino in relation to this double
taxation error. As a result, a payment of £27,842 has
been made to her to conclude this matter.
Payments for loss of offi ce
There were no payments for loss of offi ce made
to(cid:98)or(cid:98)agreed for executive directors in 2015.
Directors’ interests in shares and value of shareholdings
Directors’ interests
The share interests of the directors and their connected persons are as follows:
Ordinary
shares
at 31 Dec 15
Conditional
shares
at 31 Dec 15
Total
number of
ordinary and
conditional
shares
at 31 Dec 15
Current
shareholding
Current value
(% salary)
Guideline
(% salary)
Guideline
met
210,000
see Note 8
293,056
10
1,267
2,938
7,740
2,675
2,571
849
see Note 8
–
–
0
0
–
–
–
–
–
–
–
–
–
see Note 8
50,000
–
–
–
–
293,056
293,056
10
5,010
327%
8%
300%
200%
–
–
–
–
–
–
–
1,267
2,938
7,740
2,675
2,571
849
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Yes
n/a
–
–
–
–
–
–
–
Director
Chairman
Glen Moreno
Sidney Taurel
Executive directors
John Fallon
Coram Williams
Non-executive directors
Elizabeth Corley
Vivienne Cox
Josh Lewis
Linda Lorimer
Harish Manwani
Tim Score
Lincoln Wallen
Note 1 Conditional shares means shares which have vested but remain held subject
to continuing employment for a pre-defi ned holding period.
Note 2 The current value of the executive directors’ current shareholdings is based
on the closing market value of Pearson shares of 870.50p on 1 March 2016 against
base salaries at 31 December 2015. 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 fi gures include both shares and ADRs acquired by individuals investing
part of their own after-tax annual bonus in Pearson shares under the annual bonus
share matching plan.
Note 4 The market price on 31 December 2015 was 736.0p per share and the range
during the year was 695.0p to 1,508.0p.
Note 5 On 29 February 2016, Coram Williams purchased 5,000 shares which are
included under current shareholding in the table above and shown in the chart
overleaf. On 2 March 2016, Sidney Taurel purchased 50,000 shares which are also
shown in the table above.
Note 6 Ordinary shares do not include any shares vested but held pending release
under a restricted share plan.
Note 7 As a new appointee, the guidelines are not yet applicable in full for
Coram Williams.
Note 8 Sidney Taurel and Lincoln Wallen were appointed as directors on 1 January 2016.
Glen Moreno left Pearson on 31 December 2015 and as such we have not shown a
current shareholding fi gure in the table above.
Section 4 Governance/Report on directors’ remuneration
113
Interests of directors and value of shareholdings £
John Fallon
Coram Williams
0
100,000
200,000
300,000
400,000
Ordinary shares
Conditional shares
Shareholding guideline
Ordinary shares purchased post year end
Shareholding guidelines
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 eff ect 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 fi ve years from the date
of appointment to reach the guideline.
With eff ect from 2014, these guidelines were extended
to include all members of the Pearson executive at 100%
of salary.
The shareholding guidelines do not apply to the
chairman and non-executive directors. However, 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.
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 share 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.
At 31 December 2015, stock awards to be satisfi ed 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 satisfi ed 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 2015
amounted to 0.8% 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
2015
2014
2013
All Pearson plans
8.4% 8.3%
8.4%
Executive or
discretionary plans
5.0% 5.0%
5.0%
Shares held in trust
4.2% 4.1% 3.9%
Executive directors’ non-executive directorships
Although the policy permits executive directors to serve
as non-executive directors elsewhere with the board’s
agreement, none of the executive directors held an
external directorship during 2015.
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Pearson plc Annual report and accounts 2015
Part 3: Annual remuneration report 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 seven-year period 2008 to
2015. 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, refl ecting share price movements and
assuming reinvestment of dividends. (source: DataStream)
In accordance with the reporting regulations, this section
also presents Pearson’s TSR performance alongside
the single fi gure of total remuneration for the CEO over
the last seven 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 seven years, and
the outcomes of annual and long-term incentive plans as
a proportion of maximum.
Total shareholder return £
Pearson TSR
FTSE All-share TSR
300
250
200
150
100
50
2008
2009
2010
2011
2012
2013
2014
2015
CEO remuneration
Total remuneration
(single fi gure, £000s)
Annual incentive − incumbent
(% of maximum)
Long-term incentive − incumbent
(% of maximum)
Marjorie Scardino
John Fallon
6,370
8,466
8,340
5,330
1,727
1,895
1,263
91.3% 92.1% 75.7% 24.2%
34.3% 50.5%
80.0% 97.5% 68.3% 36.7%
Nil
Nil
Nil
Nil
Annual incentive is the actual annual incentive received by the incumbent as a
percentage of maximum opportunity.
Long-term incentive is the pay-out of performance related restricted shares under
the long-term incentive plan where the year shown is the fi nal year of the performance
period for the purposes of calculating the single total fi gure of remuneration.
Total remuneration - John Fallon John Fallon’s total remuneration opportunity is lower
than that of the previous incumbent. Variable pay-outs under the annual and long-term
incentive plans refl ect performance for the relevant periods.
Section 4 Governance/Report on directors’ remuneration
115
Comparative information
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 2014
and 2015 in three elements of remuneration for the CEO,
in comparison to the average for all employees.
While the committee considers the increase in base pay
for the CEO relative to the broader employee population,
benefi ts are driven by local practices and eligibility is
determined by level and individual circumstances
which do not lend themselves to comparison.
Relative importance of pay spend
The committee considers directors’ remuneration in the
context of the company’s allocation and disbursement of
resources to diff erent stakeholders.
In particular, we chose operating profi t 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.
All fi gures in £ millions
Operating profi t
Dividends
Total wages
and salaries
2015
723
423
2014
722
397
Change
£m
1
26
%
0%
7%
1,507
1,607
-100
-6%
Change in CEO remuneration 2014/15
Note 1 Operating profi t is as set out in the fi nancial statements.
Base salary
Allowances and benefi ts
+2%
-25%
Note 2 Wages and salaries include continuing operations only and include directors.
2014 is restated on the same basis. Average employee numbers for continuing
operations for 2015 were 37,265 (2014: 38,654 ). Further details are set out in
note 5 to the fi nancial statements on page 155.
Annual incentives
Total
-100%
-33%
Change in employee remuneration 2014/15
Base salary
Allowances and benefi ts
+3%
+12%
Annual incentives
Total
-38%
No change
Note 1 The fi gures for all employees refl ect average salaries and average employee
numbers each year. Annual incentives include all plans, including sales incentives.
Note 2 The increase in allowances and annual incentives for John Fallon is attributable
respectively to (a) the fi rst full-year of reporting of his private use of a driver based on
the benefi t-in-kind charge for the 2014/2015 tax year and (b) the year-on-year increase
in his pay-out under the Pearson annual incentive plan.
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Pearson plc Annual report and accounts 2015
Part 3: Annual remuneration report continued
Information on changes to remuneration for 2016
Executive directors’ base salaries
We have undertaken a regular periodic review of base
salaries for 2016, 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 2016 base salaries for the
CEO and CFO are unchanged as follows:
£000s
Base salary at
31 December 2015
Change
John
Fallon
Coram
Williams
£780.3
£515.0
–
0%
–
0%
Base salary at 1 April 2016
£780.3 £515.0
Annual incentive
The key design principles underlying the company’s
approach to annual incentives for 2016 are the same
as(cid:98)for 2015, namely:
Full alignment of annual incentives with the global
business and education strategy to reinforce a ‘one
Pearson’ focus - the size of the overall annual incentive
pay-out will continue to be linked to overall Pearson
performance
A clear, transparent, coherent, consistent, organisation-
wide approach to incentives and performance
management with a common incentive framework
for(cid:98)all(cid:98)business units and enabling functions
It is anticipated that the 2016 sales and cash metrics
and(cid:98)weightings remain unchanged from 2015.
However,(cid:98)to align the AIP with the specifi c restructuring
achievements required in 2016, as noted in the income
statement measure in our guidance to investors,
operating profi t after the cost of restructuring
would(cid:98)be(cid:98)added to the metrics with a 30% weighting.
To(cid:98)accommodate this change, the weighting for EPS
would also be 30% (down from 60% weight for 2015).
The Pearson fi nancial targets are set each year as part
of(cid:98)the normal operating plan process. The CEO and
CFO(cid:98)have recommended the overall Pearson incentive
funding metrics (including performance measures,
targets and weightings) to the committee for approval
in the normal way. For 2016, the range of normal
rewarded performance is expected to be wider than
in previous years – and, in consequence, both the
threshold performance and the on-target funding
are set to be(cid:98)lower than in 2015.
The board considers the performance targets for
2016(cid:98)to(cid:98)be commercially sensitive. Details of all
performance(cid:98)measures, weightings and targets will
be(cid:98)disclosed in the(cid:98)annual remuneration report for
2016(cid:98)unless the committee determines that they
remain(cid:98)commercially sensitive.
There has been no change in individual annual incentive
opportunities for the executive directors and the
Pearson executive.
Annual incentive pay-outs are determined according
to(cid:98)a(cid:98)combination of Pearson-wide performance and
individual goals. The sum of the CEO’s and the Pearson
executives’ ‘on-target’ annual incentive constitutes the
incentive pool for this group which fl exes up or down
based on overall Pearson performance. Individual
performance is assessed against goals set at the start
of(cid:98)the year. 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(cid:98)executive directors, for approval by the committee.
Special incentive and retention arrangements
The committee agreed for 2016 incentive and retention
arrangements for selected key employees, which will
vest, or not, in 2017. No executive directors participate
in(cid:98)these incentives.
Long-term incentives
The committee will continue to operate the long-term
incentive plan for the executive directors and other
members of the Pearson executive in line with the
arrangements outlined in the 2013 report on directors’
remuneration:
The weighting of the performance metrics will remain
half on earnings per share, one-third on return on
invested capital and one-sixth on relative total
shareholder return. However, the EPS target is planned
to be absolute rather than a growth target, and aligned
with our external guidance to the market in January 2016
Performance will be tested over three years and 75% of
the vested shares will be released at that point. However,
there is 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
remaining 25% of the vested shares are subject to
continued employment over the same period
At the time of writing, the committee has yet to approve
the 2016 long-term incentive awards and the associated
performance targets for the executive directors and
other members of the Pearson executive. These are
expected to be determined at the April meeting prior to
the anticipated May grant. We expect to set targets for
the 2016 awards that are consistent with the company’s
market guidance over the period to 2018.
We will set the level of individual awards consistent with
those seen in recent years and within the policy
maximum taking into account:
The face value of individual awards at the time of grant,
assuming that performance targets are met in full
Individual roles and responsibilities
Company and individual performance
Market practice for comparable companies and market
assessments of total remuneration from our
independent advisers
Full details of individual awards for the executive
directors and the performance targets for 2016 will be
set out in the annual remuneration report for 2016.
Section 4 Governance/Report on directors’ remuneration
117
Appointment of chairman
Our new chairman, Mr Sidney Taurel, has agreed to
lead our board for the same package that the outgoing
chairman received, that is a fl at fee of £500,000 per year.
He will not participate in any form of Pearson incentive
arrangement. He became the chairman eff ective
1 January 2016.
Chairman and non-executive directors
The fee for the chairman and fees for the non-executive
directors remain unchanged for 2016. Full details will be
set out in the annual remuneration report and included
in the single fi gure of total remuneration for 2016.
However, we intend to review these fees in line with our
remuneration policy in late 2016 in time for our 2017
policy vote.
The directors’ remuneration report has been
approved(cid:98)by the board on 4 March 2016 and signed
on(cid:98)its behalf by:
Elizabeth Corley
Chairman of the remuneration committee.
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118
Pearson plc Annual report and accounts 2015
Additional disclosures
Report of the directors
Pages 70 to 123 of this document comprise the directors’
report for the year ended 31 December 2015.
Other information that is required by the Companies
Act 2006 (the Act) to be included in the directors’ report,
and which is incorporated by reference, can be located
as follows:
Summary disclosures index
Dividend recommendation
Financial instruments and
fi nancial risk management
Important events since year end
Future development of the business
Research and development activities
Employment of disabled persons
Employee involvement
Greenhouse gas emissions
See more
p11
note 19
p37
p06-07
p53
p62
p59
p64
With the exception of the dividend waiver described
on page 122, there is no information to be disclosed
in accordance with Listing Rule 9.8.4.
Going concern
The directors have made an assessment of the
company’s ability to continue as a going concern and
consider it appropriate to adopt the going concern
basis of accounting.
Share capital
Details of share issues are given in note 27 to the
accounts on page 200. 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(cid:98)December 2015, 821,068,560 ordinary shares were
in issue. At the AGM held on 24 April 2015, the company
was authorised, subject to certain conditions, to acquire
up to 82,027,776 ordinary shares by market purchase.
Shareholders will be asked to renew this authority at
the AGM on 29 April 2016.
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.
As at 31 December 2015, the company had been notifi ed
under DTR 5 of the following holders of signifi cant voting
rights in its shares.
BlackRock, Inc.
Schroders plc
Number
of voting
rights
Percentage
as at date of
notifi cation
42,201,515
42,151,560
5.13%
5.13%
Between 31 December 2015 and 2 March 2016, being
the latest practicable date before the publication of
this report, the company did not receive any further
notifi cations under DTR 5.
Viability statement
Annual General Meeting
As set out on page 40 the board has also reviewed the
prospects of Pearson over the three year period to
December 2018 taking account of the company’s
strategic plans, a ‘severe but plausible’ downside case
and further stress testing based on the principal risks
set out on pages 41-45.
Based on the results of these procedures, and
considering the company’s strong balance sheet
following the sale of the FT group, the directors have
a reasonable expectation that Pearson will be able to
continue in operation and meet its liabilities as they fall
due over the three year period ending December 2018.
This assumes a reasonable level of ongoing access to
capital either via issuing commercial paper or drawing
on our revolving credit facility (see note 18 on p178).
The notice convening the AGM, to be held at 12 noon
on Friday, 29 April 2016 at IET London, 2 Savoy Place,
London WC2R 0BL, is contained in a circular to
shareholders to be dated 23 March 2016.
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.
Section 4 Governance
119
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 defi ning
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:
Pre-approved non-audit services can be authorised by
the chief fi nancial offi cer up to £100,000 per project,
subject to a cumulative limit of £500,000 per annum
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 confi dentiality.
Any project/transaction generating fees in excess
of £100,000 must be specifi cally approved by the
audit committee
Tax compliance and related activities up to the greater of
£1,000,000 per annum or 50% of the external audit fee
For forward-looking tax advisory services we use the
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 2015, Pearson spent considerably more on
non-audit fees with PwC compared to 2014, due to costs
relating to carve-out audits for businesses disposed.
For 2015, non-audit fees represented 56% of external
audit fees (37% in 2014).
For all non-audit work in 2015, PwC were selected only
after consideration that 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 diff erent partner from the
one leading the external audit.
Signifi cant non-audit work performed by PwC during
2015 included:
Audit-related work in relation to potential and actual
corporate fi nance transactions
Tax compliance services related to a routine audit by
the US Internal Revenue Service
Tax advisory work on a number of UK, US and
international tax matters
Assurance services on a corporate bond issued in
May 2015
Consulting services related to the establishment of an
auditable effi cacy framework
Audit of IT general controls mandated by contractual
commitments.
A full statement of the fees for audit and non-audit
services is provided in note 4 to the accounts on
page 154.
Fair, balanced and understandable reporting
As required by the Code, we have established
arrangements to ensure that all information we
report to investors and regulators is fair, balanced
and understandable. A process and timetable for the
production and approval of this year’s report was
agreed by the board at its meeting in December 2015.
The full board then had opportunity to review and
comment on the report as it progressed.
Representatives from fi nancial reporting, corporate
aff airs, company secretarial, legal and internal audit and
compliance are involved in the preparation and review
of the annual report to ensure a cohesive and balanced
approach and, as with all of our fi nancial reporting, our
disclosure committee conducts a thorough verifi cation
of narrative and fi nancial statements.
The audit committee is also available to advise the board
on certain aspects of the report, to enable the directors
to fulfi l their responsibility in this regard.
The directors consider that the annual report and
accounts, taken as a whole, is fair, balanced and
understandable and provides the information necessary
for shareholders to assess the company’s position and
performance, business model and strategy.
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120
Pearson plc Annual report and accounts 2015
Report of the Directors continued
The directors also confi rm that, for each director in offi ce
at the date of this report:
In preparing these fi nancial statements, the directors
are required to:
So far as the director is aware, there is no relevant
audit information of which the company’s auditors
are unaware
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.
Directors in offi ce
The following directors were in offi ce during the year and
up until signing of the fi nancial statements:
G R Moreno
(stepped down 31 December 2015)
J J Fallon
R A D Freestone
(stepped down 1 August 2015)
T D G Arculus
(stepped down 24 April 2015)
E P L Corley
V Cox
K J Hydon
(stepped down 24 April 2015)
S J Lewis
L K Lorimer
H Manwani
T Score
S Taurel
(appointed 1 January 2016)
L Wallen
(appointed 1 January 2016)
C Williams
(appointed 1 August 2015)
The directors’ report has been approved by the board on
4 March 2016 and signed on its behalf by
Stephen Jones
Company secretary
Statement of directors’ responsibilities
The directors are responsible for preparing the annual
report in accordance with applicable law and regulations.
Company law requires the directors to prepare fi nancial
statements for each fi nancial year. Under that law
the directors have prepared the Group and parent
company fi nancial statements in accordance with
International Financial Reporting Standards (IFRSs) as
adopted by the European Union. Under company law
the directors must not approve the fi nancial statements
unless they are satisfi ed that they give a true and fair
view of the state of aff airs of the company and the Group
and of the profi t or loss of the Group for that period.
Select suitable accounting policies and then apply
them consistently
Make judgements and accounting estimates that are
reasonable and prudent
State whether applicable IFRSs as adopted by the
European Union have been followed, subject to any
material departures disclosed and explained in the
fi nancial statements
Prepare the fi nancial statements on a going concern
basis, unless it is inappropriate to presume that the
company will continue in business.
The directors are responsible for keeping adequate
accounting records that are suffi cient to show and
explain the company’s transactions and disclose with
reasonable accuracy at any time the fi nancial position of
the company and the Group and enable them to ensure
that the fi nancial statements and the report on directors’
remuneration comply with the Act and, as regards
the Group fi nancial 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
fi nancial statements may diff er from legislation in
other jurisdictions.
Each of the directors, whose names and functions
are listed on p72-73 confi rms that, to the best of
their knowledge:
The Group fi nancial 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, fi nancial position and profi t of the Group
The strategic report contained in the annual report
includes a fair review of the development and
performance of the business and the position of the
Group, together with a description of the principal
risks and uncertainties that it faces.
This responsibility statement has been approved by
the board on 4 March 2016 and signed on its behalf by
Coram Williams
Chief fi nancial offi cer
Additional shareholder information
Section 4 Governance
121
The board may, if authorised by an ordinary resolution of
the shareholders, off er 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 diff erent
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 benefi t
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.
The board may decide that a shareholder is not 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.
Additional information for shareholders
Set out below is other statutory and regulatory
information that Pearson is required to disclose in
its directors’ report in compliance with DTR 7.2.6.
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 Act by way of a special resolution.
Rights attaching to shares
The rights attaching to the ordinary shares are defi ned
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 certifi cates
(i.e. in certifi cated form) or held electronically (i.e.
uncertifi cated 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, and on a poll, every
shareholder (whether an individual or a corporation)
present in person or by proxy shall have one vote
for every 25 pence of nominal share capital held.
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 fi nal 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 profi ts
of the company must be suffi cient to justify the payment
of the relevant dividend.
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Pearson plc Annual report and accounts 2015
Additional shareholder information continued
Pearson operates an employee benefi t trust to hold
shares, pending employees becoming entitled to them
under the company’s employee share plans. There were
6,704,505 shares held as at 31 December 2015. The trust
has an independent trustee which has full discretion in
relation to the voting of such shares. A(cid:98)dividend waiver
operates on the shares held in the(cid:98)trust.
Pearson also operates two nominee shareholding
arrangements which hold shares on behalf of
employees. There were 2,871,174 shares held in the
Sharestore account and 309,841 shares held in the
Global Nominee account as at 31 December 2015.
The benefi cial owners of shares held in Sharestore
are invited to submit voting instructions online at
www.shareview.co.uk and Global Nominee participants
are invited to submit voting instructions by e-mail to
nominee@equiniti.com. If no instructions are given by
the benefi cial owner by the date specifi ed, the trustees
holding these shares will not exercise the voting rights.
Transfer of shares
The board may refuse to register a transfer of a
certifi cated 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
certifi cated share unless (i) the instrument of transfer is
lodged, duly stamped (if stampable), at the registered
offi ce of the company or any other place decided by the
board, and is accompanied by the certifi cate 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 uncertifi cated shares must be carried out
using CREST and the board can refuse to register a
transfer of an uncertifi cated 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
diff erent 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 be no less than two in number.
Directors may be appointed by the company by ordinary
resolution or by the board. A director appointed by the
board shall hold offi ce 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 offi ce 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 fi rst directors to retire by
rotation shall be those who wish to retire and not off er
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 offi ce
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 off er 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 offi ce.
In(cid:98)addition, the board may terminate an agreement or
arrangement with any director for the provision of his/
her services to the company.
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).
Section 4 Governance
123
Signifi cant agreements
The following signifi cant 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 August 2014 which matures in August
2020 between, amongst others, the company, Barclays
Bank plc (Agent) and the banks and fi nancial 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 notifi cation to the banks by the Agent.
For these purposes, a ‘change of control’ occurs if the
company becomes a subsidiary of any other company
or(cid:98)one or more persons acting either individually or in
concert, obtains control (as defi ned 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(cid:98)these plans set out the consequences of a change of
control of the company.
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Pearson plc Annual report and accounts 2015
Financial statements
Consolidated fi nancial 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 fl ow statement
Notes to the consolidated fi nancial statements
1 Accounting policies
2 Segment information
3 Discontinued operations
4 Operating expenses
5 Employee information
6 Net fi nance 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 Classifi cation of fi nancial instruments
15 Other fi nancial assets
16 Derivative fi nancial 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 benefi t and other post-
retirement obligations
126
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135
136
138
139
140
147
153
153
155
156
157
159
161
162
164
168
171
173
175
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181
187
187
188
189
190
190
Section 5 Financial statements
125
Notes to the consolidated fi nancial
statements continued
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 Cash generated from operations
33 Contingencies
34 Commitments
35 Related party transactions
36 Events after the balance sheet date
37 Accounts and audit exemptions
Company fi nancial statements
Company balance sheet
Company statement of changes in equity
Company cash fl ow statement
Notes to the company fi nancial statements
Five-year summary
Corporate and operating measures
Shareholder information
197
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Pearson plc Annual report and accounts 2015
Independent auditors’ report to the members
of Pearson plc
Report on the fi nancial statements
Our opinion
In our opinion:
Pearson plc’s consolidated fi nancial statements and
company fi nancial statements (the ‘fi nancial
statements’) give a true and fair view of the state of the
Group’s and of the company’s aff airs as at 31 December
2015 and of the Group’s profi t and the Group’s and the
company’s cash fl ows for the year then ended;
The consolidated fi nancial statements have been
properly prepared in accordance with International
Financial Reporting Standards (IFRSs) as adopted by
the European Union;
The company fi nancial 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
The fi nancial statements have been prepared in
accordance with the requirements of the Companies
Act 2006 and, as regards the consolidated fi nancial
statements, Article 4 of the IAS Regulation.
Separate opinion in relation to IFRSs as issued by
the IASB
As explained in note 1 to the fi nancial 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).
Our audit approach Overview
Materiality
Audit scope
Areas of
focus
In our opinion, the consolidated fi nancial statements
comply with IFRSs as issued by the IASB.
What we have audited
The fi nancial statements, included within the annual
report and accounts (the ‘annual report’), comprise:
The consolidated and company balance sheets as at
31 December 2015;
The consolidated income statement and consolidated
statement of comprehensive income for the year then
ended;
The consolidated and company cash fl ow statements
and statements of changes in equity for the year then
ended; and
The notes to the fi nancial statements, which include a
summary of signifi cant accounting policies and other
explanatory information.
Certain required disclosures have been presented
elsewhere in the annual report, rather than in the
notes to the fi nancial statements. These are cross-
referenced from the fi nancial statements and are
identifi ed as audited.
The fi nancial reporting framework that has been
applied in the preparation of the fi nancial statements
is applicable law and IFRSs as adopted by the
European Union and, as regards the company
fi nancial statements, as applied in accordance
with the provisions of the Companies Act 2006.
Overall Group materiality: £27m, which represents 4% of
adjusted profi t before tax as disclosed in note 8 to the fi nancial
statements. Refer to page 130 for further details.
We conducted work in fi ve key territories: US, UK, Brazil, China
and South Africa. In addition we obtained an audit opinion on
the fi nancial information reported by the associate Penguin
Random House (PRH).
The territories where we conducted audit procedures,
together with work performed at corporate functions, shared
service centres and consolidated Group level, accounted for
approximately: 68% of the Group’s revenue; 104% of the
Group’s loss profi t before tax; and 76% of the Group’s adjusted
profi t before tax.
We focused on:
– Revenue recognition including risk of fraud
– Carrying value of goodwill and intangible assets
– Major transactions
– Provision for uncertain tax liabilities
– Returns provisions
– Recoverability of pre-publication assets
Section 5 Financial statements
127
The scope of our audit and our areas of focus
We conducted our audit in accordance with
International Standards on Auditing (UK and Ireland)
(ISAs (UK & Ireland)).
We designed our audit by determining materiality and
assessing the risks of material misstatement in the
consolidated and company fi nancial statements. In
particular, we looked at where management made
subjective judgements, for example in respect of
signifi cant accounting estimates that involved making
assumptions and considering future events that are
inherently uncertain. As in all of our audits we also
addressed the risk of management override of internal
controls, including evaluating whether there was
evidence of bias by management that represented
a risk of material misstatement due to fraud.
The risks of material misstatement that had the
greatest eff ect on our audit, including the allocation
of our resources and eff ort, are identifi ed as areas
of focus in the table below. We have also set out how
we tailored our audit to address these specifi c areas
in order to provide an opinion on the consolidated
and company fi nancial statements as a whole. Any
comments we make on the results of our procedures
should be read in this context. For each area of focus
below, to the extent relevant, we evaluated the design
and tested the operating eff ectiveness of key internal
controls over fi nancial reporting set in place by
management, including testing the operation of IT
systems from which fi nancial information is generated.
Each of the areas of focus below are also referred to in
the audit committee report on pages 86 and 87 and in
the accounting policies on pages 140 and 147. This is not
a complete list of all risks identifi ed by our audit.
Area of focus
How our audit addressed the area of focus
Revenue recognition including risk of fraud
Refer to note 1 to the consolidated fi nancial statements
There are two types of complex contracts that require signifi cant
judgements and estimates, which could be subject to either
accidental errors or deliberate fraud:
› Multiple element arrangements, such as the sale of physical
textbooks accompanied by digital content or supplementary
workbooks, where revenue is recognised for each element as
if it were an individual contractual arrangement requiring the
estimation of its relative fair value; and
› Certain long-term contracts that span year end, where revenue
is recognised using estimated percentage of completion based
on costs. These include contracts to design, develop and deliver
testing and accreditation and contracts to secure students and
support the online delivery of their teaching.
These complex contracts generate material deferred revenue and
accrued income balances and are areas where misstatements in
the underlying assumptions or estimation calculations could have
a material eff ect on the fi nancial statements.
In addition there are material shipments towards the period end
from major distribution locations giving rise to the potential risk of
a cut-off error.
Where books are sold together with workbooks delivered later or
companion digital materials available online we assessed the basis
for allocation of the purchase price between each element and then
tested the detailed calculations supporting these revenue deferrals.
We found the revenue deferrals to be based on reasonable estimates
of the relative fair value of each element and the methods used to
calculate the deferrals properly calculated and consistently applied.
For a selection of the larger, more judgemental and more recent
long-term contracts, covering both testing activities and online
delivery of teaching, we read the contracts and assessed the
accounting methodologies being applied to calculate the proportion
of revenue being recognised. We also tested costs incurred to date
and management’s estimates of forecast costs and revenues by
reference to historical experience and current contract status,
including examining correspondence where contracts are
experiencing disputes.
Our testing showed that revenue recognition practices are in
accordance with Group policies and related accounting standards
with appropriate methods for calculating the revenue recognised.
See our work performed over the returns provisions which includes
our work over the risk of cut-off .
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Pearson plc Annual report and accounts 2015
Independent auditors’ report to the members of Pearson plc continued
Area of focus
How our audit addressed the area of focus
Carrying values of goodwill and intangible assets
Refer to note 11 to the consolidated fi nancial statements
The Group has £4,134m of goodwill and £1,030m of other intangible
assets including software, acquired customer lists, contracts and
relationships, acquired trademarks and brands and acquired
publishing rights at 31 December 2015.
During the year, the Group recognised an £826m goodwill
impairment charge across six aggregated cash generating units
(CGUs): North America (£282m); Brazil (£269m); China (£181m); South
Africa (£48m); Other Growth (£9m); and Core (£37m). In addition,
performance in specifi c businesses also resulted in a £23m
intangibles impairment charge. The total impairment charge from
these items is £849m.
The carrying values of goodwill and intangible assets are dependent
on future cash fl ows of the underlying CGUs and there is risk that
if these cash fl ows do not meet management’s expectations the
assets will be impaired. This risk increases in periods when the
Group’s trading performance and projections do not meet prior
expectations, such as in 2015.
The impairment reviews performed by management contain a
number of signifi cant judgements and estimates including CGU
identifi cation, operating profi t forecasts, cash conversion, perpetuity
growth rates and discount rates. Changes in these assumptions
can result in materially diff erent impairment charges or available
headroom.
We obtained management’s goodwill impairment model and tested
and agreed the reasonableness of key assumptions, including CGU
identifi cation, operating profi t forecasts, perpetuity growth rates
and discount rates. We tested the mathematical integrity of the
forecasts and carrying values in management’s impairment
model and confi rmed that management’s estimate of each CGU’s
recoverable amount is appropriately based on the higher of fair
value less cost of disposal and value-in-use.
We agreed the forecast cash fl ows to board-approved budgets
and market communications, assessed how these budgets are
compiled and understood key judgements and estimates within
them, including short-term growth rates, cost allocations and the
inclusion of restructuring costs and benefi ts in a fair value less cost
of disposal model.
We compared short and long-term growth rates, including cash
conversation, to historical trends and expectations. We also
considered the accuracy of prior period forecasts.
We used valuations specialists to assess the perpetuity growth
rate and discount rate for each CGU by comparison to third party
information, past performance, the Group’s cost of capital and
relevant risk factors.
We performed our own sensitivity analyses to understand the
impact of reasonable changes in the key assumptions. We agree with
management’s decision to provide additional disclosures in note 11
of the fi nancial statements given that reasonably possible changes
in the assumptions could materially impact the impairment charges
or available headroom.
We checked for additional impairment triggers by reading board
minutes, holding regular discussions with Group and local
management, and examining the performance of recently acquired
businesses to identify underperforming operations. We did not
identify any further impairments.
As a result of our work, we determined that the impairment charge
recognised in 2015 was reasonably calculated and recorded at
materially appropriate exchange rates. For those CGUs where
management determined that no impairment charge was required
and that no additional sensitivity disclosures should be given, we
consider these judgements to be well supported by reasonable
assumptions that would require signifi cant downside changes
before an impairment charge was necessary.
Major transactions
Refer to note 31 to the consolidated fi nancial statements
In July 2015 Pearson completed the sale of PowerSchool to Vista
Equity Partners for cash consideration of £222m, resulting in a net
pre-tax impact of £30m within continuing operations (after related
write downs of £70m).
In October 2015 Pearson completed the fi rst tranche of the sale
of its 50% stake in The Economist Group to Exor S.p.A. and to
The Economist Group itself for cash consideration of £377m and
remeasurement of the retained 11% investment of £92m, resulting
in a pre-tax gain on disposal of £473m presented in discontinued
operations. The Group’s remaining 11% investment does not
constitute signifi cant infl uence so is being held as an available for
sale investment at fair value until the second tranche completes
We obtained the sales documents and related contracts and agreed
the elements of the gain calculations to them.
We agreed the cash consideration to bank statements, any retained
investment or assets to the contracts and verifi ed the underlying
carrying value before disposal to fi nancial records. We agreed the
remeasurement of the retained investment of the Economist to
fair value implied by the contract. We reperformed the calculations
for mathematical accuracy, considered the appropriateness of
the disposal costs and related write downs and vouched them
to supporting evidence. We assessed the presentation of each
disposed business (as continuing or discontinued) by reference to
its size and nature. We also considered the related tax judgements
and recoverability of linked pre-publication assets.
In November 2015 Pearson completed the sale of the Financial Times
Group (FT) to Nikkei Inc. for cash consideration of £858m, resulting
in a pre-tax gain on disposal of £711m presented in discontinued
operations.
No material misstatements were identifi ed by our testing. We were
satisfi ed that the presentation of each gain, and the related write
downs, was supportable and we found that appropriate disclosures
were included in the annual report.
These amounts are highly material and include judgements(cid:98)in areas
such as the write downs related to PowerSchool and the retained
investment in The Economist Group.
Area of focus
Provision for uncertain tax liabilities
Refer to notes 7 and 13 to the consolidated fi nancial statements
The Group is subject to several tax regimes due to the geographical
diversity of its businesses.
Management is required to exercise signifi cant judgement in
determining the appropriate amount to provide in respect of
potential tax exposures and uncertain tax provisions. The most
signifi cant of these relate to US tax.
Changes in assumptions about the views that might be taken by tax
authorities can materially impact the level of provisions recorded
in the fi nancial statements and there are signifi cant judgements in
estimating the amount of any provision required.
Returns provisions
Refer to note 22 to the consolidated fi nancial statements
There are material, judgemental provisions for anticipated book
returns on the balance sheet as at 31 December 2015, particularly in
US Higher Education.
As the Group transitions from print to digital the returns profi le will
change with a corresponding impact on returns provisions.
Recoverability of pre-publication assets
Refer to note 20 to the consolidated fi nancial statements
The Group has £841m of pre-publication assets at 31 December
2015. Pre-publication assets represent direct costs incurred in the
development of education platforms, programmes and titles prior to
their public release.
The PowerSchool disposal caused management to assess the
carrying value of a series of pre-publication and platform
investments and consequently record a write down of £70m.
Judgement is required to assess the recoverability of the carrying
value of these assets; this is further complicated by the transition to
digital as the Group invests in new, less proven, inter-linked digital
content and platforms.
Section 5 Financial statements
129
How our audit addressed the area of focus
We engaged with our tax experts and obtained an understanding of
the Group’s tax strategy to identify tax risks relating to business and
legislative developments. To assess the adequacy of the Group’s tax
provisions we fi rst recalculated the valuation of tax provisions and
determined whether the treatments adopted were in line with the
Group’s tax policies and had been applied consistently.
We then evaluated the key underlying assumptions, particularly in
the US and in territories with new cross-border tax structures. In
doing this we considered the status of recent and current tax
authority audits and enquiries, the outturn of previous claims,
judgemental positions taken in tax returns and current year
estimates including those arising from signifi cant disposals, and
developments in the tax environment. We also evaluated the
consistency of management’s approach to establishing or changing
provision estimates.
We were satisfi ed that management’s provision estimates for
uncertain tax positions were consistent with our own assessment
of the related risks and correspondence with the relevant tax
authorities.
We performed testing over returns provisions in a number of
locations, including US Higher Education.
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 performed detailed testing of shipment and returns
provisioning. This included checking cut-off at year end and
evaluating whether any changes in shipping volumes around year
end might increase the risk of returns. No misstatements were
identifi ed.
We evaluated changes in estimates to check they were not indicators
of management bias. We found the estimates used by management
in the determination of the returns provisions to appropriately
refl ect both past experience and changes in the business.
We fi rst assessed the appropriateness of capitalisation policies and
then selected a sample of costs deferred to the balance sheet as
pre-publication assets to test their magnitude and appropriateness
for capitalisation.
We then assessed the amortisation profi les of pre-publication
assets against cash fl ows to test that the existing amortisation
profi les remained appropriate in light of the transition towards
digital products.
We challenged the carrying value of certain pre-publication assets
where products are yet to be launched, are less proven, or where
sales are lower than originally anticipated. We assessed forecast
cash fl ows against historical experience and obtained supporting
evidence for management’s explanations. We compared short and
long-term growth rates to historical trends and expectations.
We challenged the life of the assets compared to similar Pearson
products and found the Group’s policies to be appropriate and
consistently applied. While the carrying value of some assets
depends on considerable future sales growth, overall we considered
the year end carrying values to be reasonable.
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Pearson plc Annual report and accounts 2015
Independent auditors’ report to the members of Pearson plc continued
How we tailored our audit scope
We tailored our audit scope to ensure that we
performed enough work to be able to give an opinion
on the fi nancial statements as a whole, taking into
account the geographic structure of the Group, the
accounting processes and controls, and the industry
in which the Group operates.
The Group is organised into three reportable segments,
being North America, Core and Growth, plus the
associate investment in associate Penguin Random
House. Each segment comprises a number of
reporting units. The consolidated fi nancial 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 fi rms 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
suffi cient appropriate audit evidence had been
obtained as a basis for our opinion on the consolidated
fi nancial statements as a whole.
During the year members of the Group engagement
team visited each of the US, Brazilian, Chinese and
South African component audit teams; held a planning
meeting attended by partners from the Group
engagement team and our UK and US component
teams; and had regular dialogue with component
teams throughout the year.
We identifi ed two reporting units in the US and UK
that required an audit of their complete fi nancial
information due to their fi nancial signifi cance, plus a
further 13 reporting units in the US, UK, Brazil, China
and South Africa that required either an audit or
specifi ed procedures on certain transactions and
balances. We also obtained an audit opinion from PwC
Germany on the fi nancial information of the associate
Penguin Random House. The Group consolidation,
fi nancial statement disclosures and corporate functions
were audited by the Group engagement team. This
included our work over derivative fi nancial instruments,
hedge accounting, goodwill and intangible assets
impairment reviews, litigation, pensions and share-
based payments.
The reporting units where we performed audit work,
together with work performed at corporate functions,
shared service centres and consolidated Group level,
accounted for approximately 68% of the Group’s
revenue, 104% of the Group’s loss before tax and 76%
of the Group’s adjusted profi t before tax. This provided
the evidence we needed for our opinion on the
consolidated fi nancial statements taken as a whole.
Materiality The scope of our audit was infl uenced by our
application of materiality. We set certain quantitative
thresholds for materiality. These, together with
qualitative considerations, helped us to determine the
scope of our audit and the nature, timing and extent
of our audit procedures on the individual fi nancial
statement line items and disclosures and in evaluating
the eff ect of misstatements, both individually and on
the fi nancial statements as a whole.
Based on our professional judgement, we determined
materiality for the fi nancial statements as a whole
as follows:
Overall Group
materiality
How we
determined(cid:98)it
Rationale for
benchmark
applied
Component
materiality
£27m (2014: 26m).
4% of adjusted profi t before tax of £677m.
Note 8 of the fi nancial statements explains
that the Group’s principal measure of
performance is adjusted operating profi t
(£723m), which excludes one-off gains
and losses and acquired intangible asset
amortisation, in order to present results from
operating activities on a consistent basis.
From adjusted operating profi t we deducted
net fi nance costs of £46m (see note 8)
because these mainly refl ect recurring
fi nance charges. To the resulting adjusted
profi t before tax we then applied 4%
(rather(cid:98)than the usual 5%) as our materiality
calculation was based on an adjusted
measure.
For each component in our audit scope, we
allocated a materiality that is less than our
overall Group materiality. The(cid:98)range of
materiality allocated across components was
between £3m(cid:98)and £24m.
Section 5 Financial statements
131
As noted in the directors’ statement, the directors have
concluded that it is appropriate to adopt the going
concern basis in preparing the fi nancial statements.
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 fi nancial
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
company’s ability to continue as a going concern.
We agreed with the audit committee that we would
report to them misstatements identifi ed during our
audit above £2m (2014: £2m) as well as misstatements
below that amount that, in our view, warranted
reporting for qualitative reasons.
Going concern Under the Listing Rules we are required
to review the directors’ statement, set out on page 118,
in relation to going concern. We have nothing to report
having performed our review.
Under ISAs (UK & Ireland) we are required to report
to you if we have anything material to add or to draw
attention to in relation to the directors’ statement
about whether they considered it appropriate to adopt
the going concern basis in preparing the fi nancial
statements. We have nothing material to add or to
draw attention to.
Other required reporting
Consistency of other information
Companies Act 2006 opinions
In our opinion:
The information given in the strategic report and the report of the directors for the fi nancial year for which the
fi nancial statements are prepared is consistent with the fi nancial statements; and
The information given in the Governance Report set out on pages 69 to 93 with respect to internal control and
risk management systems and about share capital structures is consistent with the fi nancial statements.
ISAs (UK & Ireland) reporting
Under ISAs (UK & Ireland) we are required to report to you if, in our opinion:
Information in the annual report is:
– materially inconsistent with the information in the audited fi nancial statements;
– 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
We have no
exceptions to report.
– otherwise misleading.
The explanation given by the directors on page 119, in accordance with provision C.1.1
of(cid:98)the UK Corporate Governance Code (the ‘Code’), as to why the annual report does not
include a statement 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 and company’s position and performance, business model and strategy
is materially inconsistent with our knowledge of the Group and company acquired in the
course of performing our audit.
We have no
exceptions to report.
The section of the annual report on pages 82 to 87, as required by provision C.3.8 of the
Code, 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.
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Pearson plc Annual report and accounts 2015
Independent auditors’ report to the members of Pearson plc continued
The directors’ assessment of the prospects of the Group and of the principal risks that would threaten
the(cid:98)solvency or liquidity of the Group
Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention
to(cid:98)in relation to:
The directors’ confi rmation on pages 40 and 118 of the annual report, in accordance with
provision C.2.1 of the Code, that they have carried out a robust assessment of the principal
risks facing the Group, including those that would threaten its business model, future
performance, solvency or liquidity.
We have nothing
material to add or to
draw attention to.
The disclosures in the annual report that describe those risks and explain how they are
being managed or mitigated.
The directors’ explanation on pages 40 and 118 of the annual report, in accordance with
provision C.2.2 of the Code, as to how they have assessed the prospects of the Group, over
what period they have done so and why they consider that period to be appropriate, and
their statement as to whether they have a reasonable expectation that the Group will be
able to continue in operation and meet its liabilities as they fall due over the period of their
assessment, including any related disclosures drawing attention to any necessary
qualifi cations or assumptions.
We have nothing
material to add or to
draw attention to.
We have nothing
material to add or to
draw attention to.
Directors’ remuneration
Directors’ remuneration report - Companies Act 2006
opinion In our opinion, the part of the directors’
remuneration report to be audited has been properly
prepared in accordance with the Companies Act 2006.
Other Companies Act 2006 reporting Under the
Companies Act 2006 we are required to report to you
if, in our opinion, certain disclosures of directors’
remuneration specifi ed by law are not made. We have
no exceptions to report arising from this responsibility.
Corporate governance statement
Under the Companies Act 2006 we are required to
report to you if, in our opinion, a corporate governance
statement has not been prepared by the company.
We have no exceptions to report arising from this
responsibility.
Under the Listing Rules we are required to review the
part of the Corporate Governance Statement relating
to ten further provisions of the Code. We have nothing
to report having performed our review.
Under the Listing Rules we are required to review the
directors’ statement that they have carried out a robust
assessment of the principal risks facing the Group and
the directors’ statement in relation to the longer-term
viability of the Group. Our review was substantially less
in scope than an audit and only consisted of making
inquiries and considering the directors’ process
supporting their statements; checking that the
statements are in alignment with the relevant
provisions of the Code; and considering whether the
statements are consistent with the knowledge acquired
by us in the course of performing our audit. We have
nothing to report having performed our review.
Adequacy of accounting records and information
and(cid:98)explanations received
Under the Companies Act 2006 we are required to
report to you if, in our opinion:
We have not received all the information and
explanations we require for our audit; or
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
The company fi nancial 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.
Section 5 Financial statements
133
We test and examine information, using sampling and
other auditing techniques, to the extent we consider
necessary to provide a reasonable basis for us to draw
conclusions. We obtain audit evidence through testing
the eff ectiveness of controls, substantive procedures or
a combination of both.
In addition, we read all the fi nancial and non-fi nancial
information in the Annual report to identify material
inconsistencies with the audited fi nancial 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.
Stuart Newman
(Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
4 March 2016
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Responsibilities for the fi nancial 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 120, the directors
are responsible for the preparation of the fi nancial
statements and for being satisfi ed that they give a
true and fair view.
Our responsibility is to audit and express an opinion on
the fi nancial 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.
What an audit of fi nancial statements involves
An audit involves obtaining evidence about the
amounts and disclosures in the fi nancial statements
suffi cient to give reasonable assurance that the
fi nancial statements are free from material
misstatement, whether caused by fraud or error.
This includes an assessment of:
Whether the accounting policies are appropriate to the
Group’s and the company’s circumstances and have
been consistently applied and adequately disclosed;
The reasonableness of signifi cant accounting estimates
made by the directors; and
The overall presentation of the fi nancial statements.
We primarily focus our work in these areas by assessing
the directors’ judgements against available evidence,
forming our own judgements, and evaluating the
disclosures in the fi nancial statements.
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Pearson plc Annual report and accounts 2015
Consolidated income statement
Year ended 31 December 2015
All fi gures in £ millions
Sales
Cost of goods sold
Gross profi t
Operating expenses
Impairment of intangible assets
Share of results of joint ventures and associates
Operating (loss)/profi t
Finance costs
Finance income
(Loss)/profi t before tax
Income tax
(Loss)/profi t for the year from continuing operations
Profi t for the year from discontinued operations
Profi t for the year
Attributable to:
Equity holders of the company
Non-controlling interest
Earnings per share for profi t from continuing and discontinued operations
attributable to equity holders of the company during the year
(expressed in pence per share)
– basic
– diluted
(Loss)/earnings per share for (loss)/profi t from continuing operations
attributable to equity holders of the company during the year
(expressed in pence per share)
– basic
– diluted
Notes
2015
2014
restated
2
4
4
11
12
2
6
6
7
3
8
8
8
8
4,468
4,540
(1,981)
(2,021)
2,487
2,519
(2,094)
(2,125)
(849)
52
(404)
(100)
71
(433)
81
(352)
1,175
823
823
–
(77)
31
348
(140)
47
255
(56)
199
271
470
471
(1)
101.2p
101.2p
58.1p
58.0p
(43.3)p
(43.3)p
24.7p
24.6p
Consolidated statement of comprehensive income
Year ended 31 December 2015
Section 5 Financial statements
135
All fi gures in £ millions
Profi t for the year
Items that may be reclassifi ed to the income statement
Net exchange diff erences on translation of foreign operations – Group
Net exchange diff erences on translation of foreign operations – associates
Currency translation adjustment disposed – Group
Attributable tax
Items that are not reclassifi ed to the income statement
Remeasurement of retirement benefi t obligations – Group
Remeasurement of retirement benefi t obligations – associates
Attributable tax
Other comprehensive income for the year
Total comprehensive income for the year
Attributable to:
Equity holders of the company
Non-controlling interest
Notes
7
25
7
2015
823
(85)
16
(10)
5
110
8
(24)
20
843
845
(2)
2014
470
150
25
(2)
(6)
23
(15)
(1)
174
644
645
(1)
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Pearson plc Annual report and accounts 2015
Consolidated balance sheet
As at 31 December 2015
All fi gures in £ millions
Assets
Non-current assets
Property, plant and equipment
Intangible assets
Investments in joint ventures and associates
Deferred income tax assets
Financial assets – derivative fi nancial instruments
Retirement benefi t assets
Other fi nancial assets
Trade and other receivables
Current assets
Intangible assets – pre-publication
Inventories
Trade and other receivables
Financial assets – derivative fi nancial instruments
Financial assets – marketable securities
Cash and cash equivalents (excluding overdrafts)
Total assets
Liabilities
Non-current liabilities
Financial liabilities – borrowings
Financial liabilities – derivative fi nancial instruments
Deferred income tax liabilities
Retirement benefi t obligations
Provisions for other liabilities and charges
Other liabilities
Notes
2015
2014
10
11
12
13
16
25
15
22
20
21
22
16
14
17
18
16
13
25
23
24
320
5,164
1,103
276
78
337
143
115
334
6,310
1,118
295
90
190
54
82
7,536
8,473
841
211
820
224
1,284
1,310
32
28
1,703
4,099
24
16
530
2,924
11,635
11,397
(2,048)
(1,883)
(136)
(560)
(139)
(71)
(356)
(73)
(714)
(163)
(82)
(310)
(3,310)
(3,225)
Consolidated balance sheet continued
As at 31 December 2015
Section 5 Financial statements
137
All fi gures in £ millions
Current liabilities
Trade and other liabilities
Financial liabilities – borrowings
Financial liabilities – derivative fi nancial instruments
Current income tax liabilities
Provisions for other liabilities and charges
Total liabilities
Net assets
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
Notes
2015
2014
24
18
16
23
27
27
28
(1,390)
(1,601)
(282)
(29)
(164)
(42)
(342)
(1)
(190)
(53)
(1,907)
(2,187)
(5,217)
(5,412)
6,418
5,985
205
2,590
(72)
(7)
3,698
6,414
4
205
2,579
(75)
70
3,200
5,979
6
6,418
5,985
These fi nancial statements have been approved for issue by the board of directors on 4 March 2016 and signed on its
behalf by
Coram Williams
Chief fi nancial offi cer
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Pearson plc Annual report and accounts 2015
Consolidated statement of changes in equity
Year ended 31 December 2015
Equity attributable to equity holders of the company
Share
capital
Share
premium
Treasury
shares
Translation
reserve
Retained
earnings
Total
Non-
controlling
interest
All fi gures in £ millions
At 1 January 2015
Profi t for the year
Other comprehensive income
Total comprehensive income
Equity-settled transactions
Tax on equity-settled transactions
Issue of ordinary shares under
share option(cid:98)schemes
Purchase of treasury shares
Release of treasury shares
Changes in non-controlling interest
Dividends
205
2,579
(75)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
11
–
–
–
–
–
–
–
–
–
–
(23)
26
–
–
70
–
(77)
(77)
–
–
–
–
–
–
–
3,200
5,979
823
99
922
26
(1)
–
–
(26)
–
823
22
845
26
(1)
11
(23)
–
–
(423)
(423)
At 31 December 2015
205
2,590
(72)
(7)
3,698
6,414
All fi gures in £ millions
At 1 January 2014
Profi t for the year
Other comprehensive income
Total comprehensive income
Equity-settled transactions
Tax on equity-settled transactions
Issue of ordinary shares under
share option(cid:98)schemes
Purchase of treasury shares
Release of treasury shares
Changes in non-controlling interest
Dividends
Equity attributable to equity holders of the company
Share
capital
Share
premium
Treasury
shares
Translation
reserve
Retained
earnings
Total
205
2,568
(98)
(103)
3,128
5,700
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
11
–
–
–
–
–
–
–
–
–
–
(9)
32
–
–
–
173
173
–
–
–
–
–
–
–
471
1
472
32
(3)
–
–
(32)
–
471
174
645
32
(3)
11
(9)
–
–
(397)
(397)
At 31 December 2014
205
2,579
(75)
70
3,200
5,979
Total
equity
5,985
823
20
843
26
(1)
11
(23)
–
–
(423)
6,418
Total
equity
5,706
470
174
644
32
(3)
11
(9)
–
2
6
–
(2)
(2)
–
–
–
–
–
–
–
4
Non-
controlling
interest
6
(1)
–
(1)
–
–
–
–
–
2
(1)
6
(398)
5,985
The translation reserve includes exchange diff erences arising from the translation of the net investment in foreign
operations and of borrowings and other currency instruments designated as hedges of such investments. Changes
in non-controlling interest in 2014 relate to the disposal of a non-controlling interest in a Chinese business.
Consolidated cash fl ow statement
Year ended 31 December 2015
Section 5 Financial statements
139
All fi gures in £ millions
Cash fl ows from operating activities
Net cash generated from operations
Interest paid
Tax paid
Net cash generated from operating activities
Cash fl ows 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
Notes
2015
2014
32
30
518
(75)
(232)
211
(9)
(11)
(7)
(86)
704
(86)
(163)
455
(448)
(12)
(3)
(75)
(161)
(107)
Disposal of subsidiaries, net of cash disposed
31
1,030
Proceeds from sale of associates
Proceeds from sale of investments
Proceeds from sale of property, plant and equipment
32
Proceeds from sale of intangible assets
Proceeds from sale of liquid resources
Loans repaid by/(advanced to) related parties
Loans advanced
Investment in liquid resources
Interest received
Dividends received from joint ventures and associates
Net cash received from/(used in) investing activities
Cash fl ows from fi nancing activities
Proceeds from issue of ordinary shares
Purchase of treasury shares
Proceeds from borrowings
Repayment of borrowings
Finance lease principal payments
Dividends paid to company’s shareholders
Dividends paid to non-controlling interest
Net cash used in fi nancing activities
Eff ects of exchange rate changes on cash and cash equivalents
Net increase/(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 fl ow statement includes discontinued operations (see note 3).
27
28
9
17
379
13
2
1
17
7
–
(29)
24
162
1,332
11
(23)
372
(300)
(1)
(423)
–
(364)
(19)
1,160
511
1,671
327
39
9
9
2
12
(10)
(2)
(22)
13
120
(148)
11
(9)
404
(538)
(4)
(397)
(1)
(534)
(2)
(229)
740
511
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Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements
General information
Pearson plc (the company), its subsidiaries and
associates (together the Group) are international
businesses covering educational courseware,
assessments and services, and consumer publishing
through its associate interest in Penguin Random
House.
The company is a public limited company incorporated
and domiciled in England. The address of its registered
offi ce is 80 Strand, London WC2R 0RL.
The company has its primary listing on the London
Stock(cid:98)Exchange and is also listed on the New York
Stock(cid:98)Exchange.
These consolidated fi nancial statements were
approved for issue by the board of directors on
4(cid:98)March 2016.
1. Accounting policies
The principal accounting policies applied in the
preparation of these consolidated fi nancial statements
are set out below.
a. Basis of preparation
These consolidated fi nancial 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 diff erence between EU-adopted and IASB-
adopted IFRS.
These consolidated fi nancial statements have been
prepared under the historical cost convention as
modifi ed by the revaluation of fi nancial assets and
liabilities (including derivative fi nancial instruments)
to fair value through profi t or loss.
The prior year fi nancial statements have been
restated to refl ect the classifi cation of FT Group
as a discontinued operation.
1. Interpretations and amendments to published
standards eff ective 2015 The following amendments
and interpretations were adopted in 2015:
Amendments to IAS 19 ‘Employee Benefi ts: Defi ned
Benefi t Plans - Employee Contributions’
Amendments to IFRS 2 ‘Share based Payment:
Defi nition of vesting conditions’
Amendments to IFRS 3 ‘Business Combinations:
Accounting for contingent consideration in a business
combination and scope exemptions for joint ventures’
Amendments to IFRS 8 ‘Operating Segments:
Aggregation of operating segments and reconciliation
of segment assets to entity’s assets’
Amendments to IAS 24 ‘Related Party Disclosures:
Key management personnel’
Amendments to IFRS 13 ‘ Fair Value Measurement:
Short term receivables and payables’
The adoption of these new pronouncements from
1(cid:98)January 2015 does not have a material impact on
the consolidated fi nancial statements.
2. Standards, interpretations and amendments
to(cid:98)published standards that are not yet eff ective
The Group has not early adopted the following new
pronouncements that are not yet eff ective:
IFRS 9 ‘Financial Instruments’, eff ective for annual
reporting periods beginning on or after 1 January 2018.
The new standard details the requirements for the
classifi cation, measurement and recognition of fi nancial
assets and liabilities. The Group is yet to assess the full
impact of IFRS 9.
IFRS 15 ‘Revenue from Contracts with Customers’,
eff ective for annual reporting periods beginning on
or after 1 January 2018. The new standard specifi es
how and when an entity will recognise revenue, and
requires more detailed disclosure. Adoption of the
new standard is likely to have an impact on the Group
and management is currently assessing the impact.
IFRS 16 ‘Leases’, eff ective for annual reporting periods
beginning on or after 1 January 2019. The new standard
details the requirements for the classifi cation,
measurement and recognition of lease arrangements.
Adoption of the new standard is likely to have an impact
on the Group and management is currently assessing
the impact.
In June 2015 the IASB issued an exposure draft
ED/2015/5 ‘Remeasurement on a Plan Amendment,
Curtailment or Settlement/Availability of a Refund from
a Defi ned Benefi t Plan (Proposed Amendments to IAS
19 and IFRIC 14).’ Management are currently evaluating
these proposals and although the proposals have not
yet been fi nalised, it should be noted that the current
draft, if adopted, may restrict the Group’s ability to
recognise a pension asset in respect of pension
surpluses in its UK defi ned benefi t pension plan.
Section 5 Financial statements
141
1. Accounting policies continued
a. Basis of preparation continued
In addition, the current draft may require certain
elements of committed minimum funding
contributions to be recognised as a liability on
the balance sheet.
3. Critical accounting assumptions and judgements
The preparation of fi nancial 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 signifi cant to the
consolidated fi nancial statements, are discussed in
the relevant accounting policies under the following
headings and in the notes to the accounts where
appropriate:
Consolidation: Business combinations – classifi cation
of investments
Consolidation: Business combinations – determination
of fair values
Intangible assets: Goodwill
Intangible assets: Pre-publication assets
Taxation
Revenue recognition
Employee benefi ts: Pensions
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.
Identifi able assets and contingent assets acquired and
identifi able liabilities and contingent liabilities assumed
in a business combination are measured initially at their
fair values at the acquisition date. The determination
of fair values often requires signifi cant judgements
and the use of estimates, and, 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 identifi able net assets
acquired is recorded as goodwill.
See note 1e(1) for the accounting policy on goodwill.
If(cid:98)this is less than the fair value of the net assets of
the subsidiary acquired, in the case of a bargain
purchase, the diff erence 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.
Management exercises judgement in determining the
classifi cation of its investments in its businesses, in line
with the following:
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 aff ect 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 defi cit arising
from disposals to a non-controlling interest is recorded
in equity. For purchases from a non-controlling interest,
the diff erence 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 signifi cant infl uence
but not the power to control the fi nancial 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.
The Group’s share of its joint ventures’ and associates’
post-acquisition profi ts or losses is recognised in the
income statement and its share of post-acquisition
movements in reserves is recognised in reserves.
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Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
1. Accounting policies continued
b. Consolidation continued
The Group’s share of its joint ventures’ and associates’
results is recognised as a component of operating profi t
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.
5. Contribution of a subsidiary to an associate or joint
venture The gain or loss resulting from the contribution
or sale of a subsidiary to an associate or a joint venture
is recognised in full. Where such transactions do not
involve cash consideration, signifi cant judgements and
estimates are used in determining the fair values of the
consideration received.
c. Foreign currency translation
1. Functional and presentation currency Items included
in the fi nancial 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 fi nancial
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 fi nancial position
of all Group companies that have a functional currency
diff erent 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 diff erences are recognised as
a separate component of equity.
On consolidation, exchange diff erences 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 specifi c 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 diff erences 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(cid:98)dollar. The average rate for the year against sterling
was $1.53 (2014: $1.65) and the year end rate was $1.47
(2014: $1.56).
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):
20–50 years
Buildings (leasehold): over the period of the lease
Plant(cid:98)and equipment: 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
identifi able 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 identifi able 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
an acquisition over the fair value of the Group’s share
Section 5 Financial statements
143
1. Accounting policies continued
e. Intangible assets continued
of(cid:98)the net identifi able assets acquired. Goodwill on
acquisitions of associates and joint ventures is included
in(cid:98)investments in associates and joint ventures.
Goodwill is tested at least annually for impairment and
carried at cost less accumulated impairment losses.
An impairment loss is recognised to the extent that
the carrying value of(cid:98)goodwill exceeds the recoverable
amount. The recoverable amount is the higher of fair
value less costs of disposal and value in use. These
calculations require the use of(cid:98)estimates and signifi cant
management judgement. A(cid:98)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 benefi t 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 benefi ts
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(cid:98)years.
4. Acquired intangible assets Acquired intangible assets
include customer lists, contracts and relationships,
trademarks and brands, publishing rights, content,
technology and software rights. 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 refl ects 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 benefi ts and costs can be measured
reliably. Pre-publication assets are amortised upon
publication of the title over estimated economic lives
of fi ve 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 fl ow statement (see note 32).
The assessment of the recoverability of pre-publication
assets and the determination of the amortisation
profi le involve a signifi cant degree of judgement based
on historical trends and management estimation of
future potential sales. An incorrect amortisation profi le
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 fi nancial assets
Other fi nancial assets, designated as available for sale
investments, are non-derivative fi nancial 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.
g. Inventories
Inventories are stated at the lower of cost and net
realisable value. Cost is determined using the fi rst in
fi rst out (FIFO) method. The cost of fi nished 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.
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Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
1. Accounting policies continued
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 profi tability of individual author
contracts. If the estimated realisable value of author
contracts is overstated, this will have an adverse eff ect
on(cid:98)operating profi ts as these excess amounts will be
written(cid:98)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 eff ective 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 fl ow 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
fi nancial instruments are classifi ed as cash fl ows from
fi nancing activities in the cash fl ow statement where
these amounts are used to off set the borrowings of
the Group or as cash fl ows from investing activities
where these amounts are held to generate an
investment return.
j. Share capital
Ordinary shares are classifi ed 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 eff ects, 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 diff erence 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 eff ective 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 refl ect the hedged
risk. Interest on borrowings is expensed in the income
statement as(cid:98)incurred.
l. Derivative fi nancial 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 fl ow 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).
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 eff ective 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 ineff ective portion are
recognised immediately in fi nance income or fi nance
costs in the income statement.
Certain derivatives do not qualify or are not designated
as hedging instruments. Such derivatives are classifi ed
at fair value and any movement in their fair value is
recognised immediately in fi nance income or fi nance
costs in the income statement.
Section 5 Financial statements
145
n. Employee benefi ts
1. Pensions The retirement benefi t asset and obligation
recognised in the balance sheet represents the net of
the present value of the defi ned benefi t obligation and
the fair value of plan assets at the balance sheet date.
The defi ned benefi t obligation is calculated annually by
independent actuaries using the projected unit credit
method. The present value of the defi ned benefi t
obligation is determined by discounting estimated
future cash fl ows using yields on high quality corporate
bonds which have terms to maturity approximating the
terms of the related liability.
When the calculation results in a potential asset, the
recognition of that asset is limited to the asset ceiling –
that is the present value of any economic benefi ts
available in the form of refunds from the plan or a
reduction in future contributions. Management uses
judgement to determine the level of refunds available
from the plan in recognising an asset.
The determination of the pension cost and defi ned
benefi t obligation of the Group’s defi ned benefi t
pension schemes depends on the selection of certain
assumptions, which include the discount rate, infl ation
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 benefi ts 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 defi ned benefi t obligation
and is presented as fi nance costs or fi nance income.
Obligations for contributions to defi ned 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 medical and life assurance
benefi ts are accrued over the period of employment,
using a similar accounting methodology as for
defi ned benefi t pension obligations. The liabilities
and costs relating to signifi cant other post-retirement
obligations are assessed annually by independent
qualifi ed actuaries.
1. Accounting policies continued
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 diff erences 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 profi t will be
available against which the temporary diff erences
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. Signifi cant 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 fi nal
tax outcome of these matters is diff erent from the
amounts that were initially recorded, such diff erences
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, signifi cant 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.
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Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
1. Accounting policies continued
n. Employee benefi ts continued
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 outfl ow of
resources will be required to settle the obligation
and the amount can be reliably estimated. Provisions
are discounted to present value where the eff ect
is material.
The Group recognises a provision for deferred
consideration at fair value. Where this is contingent
on future performance or a future event, judgement
is exercised in establishing the fair value.
The Group recognises a provision for onerous lease
contracts when the expected benefi ts 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
The Group’s revenue streams are courseware,
assessments and services. Courseware includes
curriculum materials provided in book form and/or
via access to digital content. Assessments includes
test development, processing and scoring services
provided to governments, educational institutions,
corporations and professional bodies. Services includes
the operation of schools, colleges and universities,
including sistemas in Brazil and English language
teaching centres around the world as well as the
provision of online learning services in partnership
with universities and other academic institutions.
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 refl ect actual returns in future periods
then revenues could be understated or overstated for
a particular period.
Revenue from the sale of off -the-shelf software is
recognised on delivery or on installation of the software
where that is a condition of the contract. In certain
circumstances, where installation is complex, revenue
is recognised when the customer has completed their
acceptance procedures. Where software is provided
under a term licence, revenue is recognised on a
straight-line basis over the period of the license.
Revenue from the provision of services to academic
institutions, such as programme development, student
acquisition, education technology and student support
services, is recognised as performance occurs.
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 to long-term contract
accounting can aff ect 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. Percentage of
completion is calculated on a cost basis using the
proportion of the total estimated costs incurred to date.
Losses on contracts are recognised in the period in
which the loss fi rst 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.
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 or online access with textbooks and multiple
deliverables within testing or service contracts, revenue
is recognised for each element as if it were an individual
contractual arrangement.
Section 5 Financial statements
147
1. Accounting policies continued
p. Revenue recognition continued
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.
Income from recharges of freight and other activities
which are incidental to the normal revenue generating
activities is included in other income.
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.
q. Leases
Leases of property, plant and equipment where the
Group has substantially all the risks and rewards of
ownership are classifi ed as fi nance 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 fi nance charges to achieve
a constant rate on the fi nance balance outstanding.
The corresponding rental obligations, net of fi nance
charges, are included in fi nancial liabilities –
borrowings. The interest element of the fi nance 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
fi nance leases are depreciated over the shorter of the
useful life of the asset or the lease term.
Leases where a signifi cant portion of the risks and
rewards of ownership are retained by the lessor are
classifi ed 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(cid:98)lease.
r. Dividends
Dividends are recorded in the Group’s fi nancial
statements in the period in which they are approved
by the company’s shareholders.
s. Discontinued operations
A discontinued operation is a component of the Group’s
business that represents a separate major line of
business or geographical area of operations that has
been disposed of or meets the criteria to be classifi ed
as held for sale.
Discontinued operations are presented in the income
statement as a separate line and are shown net of tax.
t. Assets and liabilities held for sale
Assets and liabilities are classifi ed as held for sale and
stated at the lower of carrying amount and fair value
less costs to sell if it is highly probable that the carrying
amount will be recovered principally through a sale
transaction rather than through continuing use. No
depreciation is charged in respect of non-current assets
classifi ed as held for sale. Amounts relating to non-
current assets and liabilities held for sale are classifi ed
as discontinued operations in the income statement
where appropriate.
u. 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 primary segments for management and reporting
are geographies as outlined below. In addition, the
Group separately discloses the results from the
Penguin Random House (PRH) associate.
The chief operating decision-maker is the Pearson
Executive.
Continuing operations:
North America School, Higher Education and
Professional businesses in US and Canada.
Growth School, Higher Education and Professional
businesses in emerging markets which are investment
priorities, including Brazil, China, India and South Africa.
Core School, Higher Education and Professional
businesses in more mature markets including UK,
Australia and Italy.
The results of the FT Group segment (to 30 November
2015) and Mergermarket (to 4 February 2014) are
shown as discontinued in the relevant periods.
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148
Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
2. Segment information continued
For more detail on the services and products included in each business segment refer to the strategic report.
All fi gures in £ millions
Continuing operations
Sales
Adjusted operating profi t/(loss)
Intangible charges
Other net gains and losses
Operating (loss)/profi t
Finance costs
Finance income
Loss before tax
Income tax
Loss 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
Impairment
Notes
North
America
Core
Growth
PRH Corporate
Discontinued
operations
2,940
480
(386)
19
113
836
114
692
(12)
(79)
(583)
(5)
30
–
(595)
–
90
(41)
(1)
48
–
–
–
–
–
6,399
1,573
719
1
–
–
6
3
–
–
–
1,093
1,841
–
–
6,400
1,579
722
1,093
1,841
6
6
7
12
12
12
10, 11
20
10
11, 20
11
(9)
85
218
42
338
282
–
33
63
9
95
37
(3)
110
66
18
109
530
64
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
16
15
–
6
15
–
2015
Group
4,468
672
(1,089)
13
(404)
(100)
71
(433)
81
(352)
10,532
4
1,099
11,635
68
243
347
75
557
849
Section 5 Financial statements
149
Notes
North
America
Core
Growth
PRH Corporate
Discontinued
operations
Group
2014
restated
2,906
444
(108)
(2)
2
910
122
724
32
–
69
(21)
(132)
(54)
(1)
–
(3)
–
–
–
15
336
100
(103)
6
6
7
–
–
–
–
–
–
–
–
–
–
–
–
4,540
667
(315)
(6)
2
348
(140)
47
255
(56)
199
6,580
1,426
1,394
12
12
1
1
–
8
3
–
–
–
1,095
660
219
10,279
–
–
9
1
13
1,105
6,582
1,434
1,397
1,095
660
229
11,397
12
10, 11
20
10
11, 20
11
–
97
209
41
306
–
(1)
32
77
10
99
–
(3)
49
72
16
121
77
35
–
–
–
–
–
–
–
–
–
–
–
20
16
–
7
16
–
51
194
358
74
542
77
2. Segment information continued
All fi gures in £ millions
Continuing operations
Sales
Adjusted operating profi t
Intangible charges
Acquisition costs
Other net gains and losses
Operating profi t/(loss)
Finance costs
Finance income
Profi t before tax
Income tax
Profi t 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
Impairment
For further information on adjusted measures above, see note 8.
There were no material inter-segment sales in either 2014 or 2015.
Included in other net gains and losses within continuing operations in 2015 in the North America segment is the
profi t on disposal of PowerSchool of £30m, net of small losses on other investments. In the Core segment the loss
on disposal relates to adjustments to prior year disposals.
Included in other net gains and losses in continuing operations in 2014 are gains on the sale of joint venture interests
in Safari Books Online and CourseSmart (£40m) and a loss on disposal of an investment in Nook Media (£38m).
Both operating profi t and adjusted operating profi t in 2015 are stated after the following restructuring charges:
North America £24m (2014: £37m); Core £nil (2014: £21m); Growth £11m, (2014: £6m); Penguin Random House
£12m (2014: £19m).
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150
Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
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; therefore the segment result is equal to the Group operating profi t. Segment
assets consist of property, plant and equipment, intangible assets, inventories, receivables, deferred taxation and
other fi nancial assets and exclude cash and cash equivalents and derivative assets. Corporate assets comprise cash
and cash equivalents, marketable securities and derivative fi nancial 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 £1m (2014:
£263m) (see note 30).
The following tables analyse the Group’s revenue streams. Courseware includes curriculum materials provided in
book form and/or via access to digital content. Assessments includes test development, processing and scoring
services provided to governments, educational institutions, corporations and professional bodies. Services includes
the operation of schools, colleges and universities, including sistemas in Brazil and English language teaching centres
around the world as well as the provision of online learning services in partnership with universities and other
academic institutions. School Systems includes PowerSchool and Family Education Network, both of which were
disposed during 2015.
All fi gures in £ millions
Courseware
School Courseware
Higher Education Courseware
English Courseware
Assessments
School and Higher Education Assessments
Clinical Assessments
Professional Certifi cation
Services
School Services
Higher Education Services
English Services
School Systems
North
America
406
1,207
22
1,635
420
126
269
815
209
223
18
40
490
2015
Core
Growth
Group
186
96
84
366
301
32
82
415
1
26
28
–
55
104
55
79
696
1,358
185
238
2,239
15
–
36
51
47
70
286
–
403
736
158
387
1,281
257
319
332
40
948
Total
2,940
836
692
4,468
2. Segment information continued
All fi gures in £ millions
Courseware
School Courseware
Higher Education Courseware
English Courseware
Assessments
School and Higher Education Assessments
Clinical Assessments
Professional Certifi cation
Services
School Services
Higher Education Services
English Services
School Systems
Section 5 Financial statements
151
2014
restated
Core
Growth
Group
214
114
92
420
312
34
93
439
–
22
29
–
51
120
66
75
261
14
–
19
33
56
90
284
–
430
723
1,359
189
2,271
742
149
340
1,231
309
327
333
69
1,038
North
America
389
1,179
22
1,590
416
115
228
759
253
215
20
69
557
Total
2,906
910
724
4,540
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152
Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
2. Segment information continued
The Group operates in the following main geographic areas:
All fi gures in £ millions
Continuing operations
UK
Other European countries
US
Canada
Asia Pacifi c
Other countries
Total continuing
Discontinued operations
UK
Other European countries
US
Canada
Asia Pacifi c
Other countries
Total discontinued
Total
Sales
Non-current assets
2014
restated
2015
2014
2015
421
246
444
281
991
121
2,800
2,762
5,000
107
590
304
109
565
379
235
211
144
1,056
180
5,243
288
416
661
4,468
4,540
6,702
7,844
134
170
64
72
2
35
5
66
68
1
34
4
312
343
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4,780
4,883
6,702
7,844
Sales are allocated based on the country in which the customer is located. This does not diff er 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 diff erent 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.
Section 5 Financial statements
153
3. Discontinued operations
Discontinued operations relate to FT Group, Penguin and Mergermarket. An analysis of the results and cash fl ows of
discontinued operations is as follows:
Penguin Mergermarket
FT Group
FT Group
312
48
–
48
(8)
40
–
473
711
(49)
–
–
2015
Total
312
48
–
48
(8)
40
–
473
711
(49)
–
–
–
–
–
–
–
–
29
–
–
–
–
–
9
2
–
2
(1)
1
–
–
–
–
244
(46)
1,175
1,175
29
199
31
3
–
34
31
3
–
34
–
–
–
–
2
–
–
2
All fi gures in £ millions
Sales
Operating profi t
Finance income
Profi t before tax
Income tax
Profi t after tax
Profi t on disposal of Penguin
Profi t on disposal of The Economist
Profi t on disposal of Financial Times
Attributable tax expense
Profi t on disposal of Mergermarket
Attributable tax expense
Profi t for the year from
discontinued operations
Operating cash fl ows
Investing cash fl ows
Financing cash fl ows
Total cash fl ows
4. Operating expenses
All fi gures 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
Impairment of intangible assets
Total
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S
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n
a
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i
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l
s
t
a
t
e
m
e
n
t
s
2014
restated
Total
343
52
–
52
(8)
44
29
–
–
–
244
(46)
271
26
(5)
–
21
334
50
–
50
(7)
43
–
–
–
–
–
–
43
24
(5)
–
19
2015
2014
restated
1,981
2,021
80
895
84
931
1,195
1,168
35
(13)
(98)
2,094
849
4,924
64
(2)
(120)
2,125
77
4,223
Included in other income is service fee income from Penguin Random House of £16m (2014: £41m). Included in
administrative and other expenses are research and effi cacy costs of £33m (2014: £22m). In addition to the
restructuring costs shown above there were restructuring costs in Penguin Random House of £12m (2014: £19m)
and in discontinued operations of £nil (2014: £1m).
154
Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
4. Operating expenses continued
All fi gures in £ millions
By nature:
Royalties expensed
Other product costs
Employee benefi t expense
Contract labour
Employee related expense
Promotional costs
Depreciation of property, plant and equipment
Amortisation of intangible assets – pre-publication
Amortisation of intangible assets – software
Amortisation of intangible assets – other
Impairment of intangible assets
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
2015
2014
restated
249
566
242
620
5
1,742
1,832
10
20
11
11
11
182
127
163
69
281
61
199
849
219
153
262
132
183
136
149
67
292
51
184
77
204
123
253
121
(219)
(195)
–
(13)
(98)
6
(2)
(120)
4,924
4,223
During the year the Group obtained the following services from the Group’s auditors:
All fi gures in £ millions
2015
2014
The audit of parent company and consolidated fi nancial statements
The audit of the company’s subsidiaries
Total audit fees
Other assurance services
Other non-audit services
Total other services
Tax compliance services
Tax advisory services
Total tax services
Total non-audit services
Total
4
2
6
2
1
3
1
–
1
4
10
5
2
7
1
–
1
1
–
1
2
9
Section 5 Financial statements
155
4. Operating expenses continued
Reconciliation between audit and non-audit service fees is shown below:
All fi gures in £ millions
Group audit fees including fees for attestation under section 404 of the Sarbanes-Oxley Act
Non-audit fees
Total
2015
2014
6
4
10
7
2
9
Fees for attestation under section 404 of the Sarbanes-Oxley Act are allocated between fees payable for the audits
of(cid:98)consolidated and subsidiary accounts.
Included in non-audit fees are amounts related to carve out audits for disposals of £1m.
5. Employee information
All fi gures in £ millions
Employee benefi t expense
Wages and salaries (including termination benefi ts and restructuring costs)
Social security costs
Share-based payment costs
Retirement benefi ts – defi ned contribution plans
Retirement benefi ts – defi ned benefi t plans
Other post-retirement benefi ts
Total
Notes
2015
2014
restated
1,507
124
1,607
122
26
66
19
–
32
61
21
(11)
1,742
1,832
26
25
25
25
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 America
Core
Growth
Other
Continuing operations
2015
2014
restated
19,951
20,927
5,936
6,139
11,114
11,406
264
182
37,265
38,654
The employee benefi t expense relating to discontinued operations was £132m (2014: £151m) and the average
number employed was 2,282 (2014: 2,295).
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156
Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
6. Net fi nance costs
All fi gures in £ millions
Interest payable
Net foreign exchange losses
Derivatives not in hedging relationships
Finance costs
Interest receivable
Notes
2015
2014
restated
(61)
(36)
(3)
(81)
(53)
(6)
(100)
(140)
15
4
43
9
71
17
1
17
12
47
(29)
(93)
(46)
17
(29)
(64)
(29)
(93)
Net fi nance income in respect of retirement benefi ts
25
Net foreign exchange gains
Derivatives not in hedging relationships
Finance income
Net fi nance costs
Analysed as:
Net interest payable refl ected in adjusted earnings
Other net fi nance income/(costs)
Total net fi nance costs
Included in interest receivable is £1m (2014: £1m) of interest receivable from related parties. There was a net
movement of £nil on fair value hedges in 2015 (2014: £nil), comprising a gain of £22m (2014: loss of £27m) on the
underlying bonds, off set by a loss of £22m (2014: gain of £27m) on the related derivative fi nancial instruments.
For further information on adjusted measures above, see note 8.
Section 5 Financial statements
157
7. Income tax
All fi gures 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 diff erences
Other adjustments in respect of prior years
Total deferred tax credit
Total tax credit/(charge)
Notes
2015
2014
restated
(155)
42
(113)
185
9
194
81
(96)
30
(66)
8
2
10
(56)
13
The adjustments in respect of prior years in both 2015 and 2014 mainly relate to changes in estimates arising from
uncertain tax positions following agreement of historical tax positions.
The tax on the Group’s (loss)/profi t before tax diff ers from the theoretical amount that would arise using the UK tax
rate as(cid:98)follows:
All fi gures in £ millions
(Loss)/profi t before tax
Tax calculated at UK rate (2015: 20.25%, 2014: 21.5%)
Eff ect of overseas tax rates
Joint venture and associate income reported net of tax
Net expense not subject to tax
Gains and losses on sale of businesses not subject to tax
Unutilised tax losses
Adjustments in respect of prior years
Total tax credit/(charge)
UK
Overseas
Total tax credit/(charge)
Tax rate refl ected in earnings
2015
(433)
88
52
10
(66)
(32)
(22)
51
81
(25)
106
81
2014
restated
255
(55)
(10)
7
(11)
–
(19)
32
(56)
–
(56)
(56)
18.7%
22.0%
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158
Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
7. Income tax continued
The tax rate refl ected in adjusted earnings is calculated as follows:
All fi gures in £ millions
(Loss)/profi t before tax
Adjustments:
Other net gains and losses
Acquisition costs
Intangible charges
Other net fi nance (income)/costs
Adjusted profi t before tax – continuing operations
Adjusted profi t before tax – discontinued operations
Total adjusted profi t before tax
Total tax credit/(charge)
Adjustments:
Tax charge on other net gains and losses
Tax benefi t on acquisition costs
Tax benefi t on intangible charges
Tax charge/(benefi t) on other net fi nance costs
Tax amortisation benefi t on goodwill and intangibles
Adjusted income tax charge – continuing operations
Adjusted income tax charge – discontinued operations
Total adjusted income tax charge
Tax rate refl ected in adjusted earnings
For further information on adjusted measures above, see note 8.
The tax (charge)/benefi t recognised in other comprehensive income is as follows:
All fi gures in £ millions
Net exchange diff erences on translation of foreign operations
Remeasurement of retirement benefi t obligations
2015
(433)
(13)
–
1,089
(17)
626
51
677
81
40
–
(257)
7
33
(96)
(9)
(105)
2014
restated
255
(2)
6
315
29
603
55
658
(56)
1
(1)
(72)
(5)
24
(109)
(9)
(118)
15.5%
17.9%
2015
2014
5
(24)
(19)
(6)
(1)
(7)
A tax charge of £1m (2014: tax charge £3m) relating to share-based payments has been recognised directly in equity.
Section 5 Financial statements
159
8. Earnings per share
Basic
Basic earnings per share is calculated by dividing the profi t 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 profi t attributable, if applicable, to account for
any tax consequences that might arise from conversion of those shares.
All fi gures in £ millions
(Loss)/profi t for the year from continuing operations
Non-controlling interest
Earnings from continuing operations
Profi t for the year from discontinued operations
Earnings
Weighted average number of shares (millions)
Eff ect of dilutive share options (millions)
Weighted average number of shares (millions) for diluted earnings
Earnings per share from continuing and discontinued operations
Basic
Diluted
(Loss)/earnings per share from continuing operations
Basic
Diluted
Earnings per share from discontinued operations
Basic
Diluted
Notes
3
2015
(352)
–
(352)
1,175
823
813.3
–
813.3
101.2p
101.2p
(43.3)p
(43.3)p
144.5p
144.5p
2014
restated
199
1
200
271
471
810.9
1.0
811.9
58.1p
58.0p
24.7p
24.6p
33.4p
33.4p
Adjusted
In order to show results from operating activities on a consistent basis, an adjusted earnings per share is presented.
The company’s defi nition 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 profi ts and losses on the acquisition and disposal of subsidiaries, joint
ventures, associates and other fi nancial assets that are included within continuing or discontinued operations but
which distort the performance of the Group.
Amortisation and impairment 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 refl ective of the
underlying performance(cid:98)of the Group.
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160
Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
8. Earnings per share continued
Other net fi nance income/costs include fi nance costs in respect of retirement benefi ts, fi nance costs of deferred
consideration and foreign exchange and other gains and losses. Finance costs relating to retirement benefi ts are
excluded as the consolidated income statement presentation under IAS 19 does not refl ect 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 refl ect cash expended. Foreign exchange
and other gains and losses are excluded as they represent short-term fl uctuations in market value and are subject to
signifi cant 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 fi nance costs of Group companies are included in fi nance costs or
fi nance income as appropriate. Other net fi nance costs of joint ventures and associates are included within the share
of results of joint ventures and associates within operating profi t.
Tax on the above items is excluded from adjusted earnings. Where relevant the Group also excludes the benefi t from
recognising previously unrecognised pre-acquisition and capital losses. The tax benefi t from tax deductible goodwill
and intangibles is added to the adjusted income tax charge as this benefi t 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.
Statutory
income
statement
Discontinued
operations
Other net
gains and
losses
Acquisition
costs
Intangible
charges
2015
Other net
fi nance
income/
costs
Tax
amortisation
benefi t
Adjusted
income
statement
All fi gures in £ millions
Operating (loss)/profi t
Net fi nance costs
(Loss)/profi t before tax
Income tax
(404)
(29)
(433)
81
51
–
51
(9)
(13)
–
(13)
40
(Loss)/profi t for the year from
continuing operations
(352)
42
27
(42)
(1,135)
–
–
–
(1,108)
–
(1,108)
Profi t for the year from
discontinued operations
Profi t for the year
Non-controlling interest
Earnings
Weighted average number
of(cid:98)shares (millions)
Weighted average number
of(cid:98)shares (millions) for
diluted earnings
Earnings per share (basic)
Earnings per share (diluted)
1,175
823
–
823
813.3
813.3
101.2p
101.2p
–
–
–
–
–
–
–
–
–
1,089
–
1,089
(257)
–
(17)
(17)
7
832
(10)
2
834
–
834
–
(10)
–
(10)
–
–
–
33
33
–
33
–
33
723
(46)
677
(105)
572
–
572
–
572
813.3
813.3
70.3p
70.3p
8. Earnings per share continued
All fi gures in £ millions
Operating profi t
Net fi nance costs
Profi t before tax
Income tax
Profi t for the year from
continuing operations
Profi t for the year from
discontinued operations
Profi t for the year
Non-controlling interest
Earnings
Weighted average number
of(cid:98)shares (millions)
Weighted average number
of(cid:98)shares (millions) for
diluted earnings
Earnings per share (basic)
Earnings per share (diluted)
9. Dividends
All fi gures in £ millions
Section 5 Financial statements
161
Statutory
income
statement
Discontinued
operations
Other net
gains and
losses
Acquisition
costs
Intangible
charges
Other net
fi nance
income/
costs
Tax
amortisation
benefi t
Adjusted
income
statement
2014
restated
55
–
55
(9)
46
(46)
–
–
–
(2)
–
(2)
1
(1)
(227)
(228)
–
(228)
6
–
6
(1)
5
–
5
–
5
315
–
315
(72)
243
2
245
–
245
–
29
29
(5)
24
–
24
–
24
–
–
–
24
24
–
24
–
24
348
(93)
255
(56)
199
271
470
1
471
810.9
811.9
58.1p
58.0p
722
(64)
658
(118)
540
–
540
1
541
810.9
811.9
66.7p
66.6p
2014
259
138
397
2015
277
146
423
Final paid in respect of prior year 34.0p (2014: 32.0p)
Interim paid in respect of current year 18.0p (2014: 17.0p)
The directors are proposing a fi nal dividend in respect of the fi nancial year ended 31 December 2015 of 34.0p per
share which will absorb an estimated £277m of shareholders’ funds. It will be paid on 6 May 2016 to shareholders
who are on the register of members on 8 April 2016. These fi nancial statements do not refl ect this dividend.
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162
Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
10. Property, plant and equipment
All fi gures in £ millions
Cost
At 1 January 2014
Exchange diff erences
Additions
Disposals
Acquisition through business combination
Disposal through business disposal
Reclassifi cations
Transfer to software
At 31 December 2014
Exchange diff erences
Additions
Disposals
Acquisition through business combination
Disposal through business disposal
Reclassifi cations
At 31 December 2015
Land and
buildings
Plant and
equipment
Assets in
course of
construction
375
11
10
(9)
–
–
1
–
388
8
15
(20)
–
(48)
16
359
568
17
58
(46)
2
(1)
3
–
601
10
42
(86)
–
(76)
17
508
32
–
19
(2)
–
–
(4)
(16)
29
1
25
–
–
–
(33)
22
Total
975
28
87
(57)
2
(1)
–
(16)
1,018
19
82
(106)
–
(124)
–
889
Section 5 Financial statements
163
10. Property, plant and equipment continued
All fi gures in £ millions
Depreciation
At 1 January 2014
Exchange diff erences
Charge for the year
Disposals
At 31 December 2014
Exchange diff erences
Charge for the year
Disposals
Disposal through business disposal
At 31 December 2015
Carrying amounts
At 1 January 2014
At 31 December 2014
At 31 December 2015
Land and
buildings
Plant and
equipment
Assets in
course of
construction
(210)
(423)
(7)
(23)
9
(15)
(51)
36
(231)
(453)
(5)
(22)
18
48
(12)
(53)
82
59
(192)
(377)
165
157
167
145
148
131
–
–
–
–
–
–
–
–
–
–
32
29
22
Total
(633)
(22)
(74)
45
(684)
(17)
(75)
100
107
(569)
342
334
320
Depreciation expense of £19m (2014: £16m) has been included in the income statement in cost of goods sold and
£50m (2014: £51m) in operating expenses. In 2015 £6m (2014: £7m) relates to discontinued operations.
The Group leases certain equipment under a number of fi nance lease agreements. The net carrying amount of
leased plant and equipment included within property, plant and equipment was £8m (2014: £13m).
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164
Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
11. Intangible assets
All fi gures in £ millions
Goodwill
Software
Acquired
customer lists,
contracts and
relationships
Acquired
trademarks
and brands
Acquired
publishing
rights
Other
intangibles
acquired
Cost
At 1 January 2014
Exchange diff erences
Impairment
Additions – internal development
Additions – purchased
Disposals
Acquisition through business
combination
Disposal through business disposal
Transfer from PPE
At 31 December 2014
Exchange diff erences
Impairment
Additions – internal development
Additions – purchased
Disposals
Acquisition through business
combination
Disposal through business disposal
At 31 December 2015
4,666
469
198
(67)
–
–
–
238
(5)
–
5,030
105
(826)
–
–
–
–
(175)
4,134
17
–
54
53
(7)
–
(5)
16
597
17
–
125
36
(18)
–
(138)
619
855
34
–
–
–
–
5
–
–
894
25
–
–
–
–
–
(59)
860
237
198
–
–
–
–
–
–
(1)
–
197
(7)
–
–
–
5
–
–
–
–
69
(3)
–
308
(17)
–
–
–
(4)
–
(6)
Total
6,823
268
(67)
54
53
(7)
498
(14)
16
7,624
83
(826)
125
36
(61)
398
14
–
–
–
–
186
–
–
598
(40)
–
–
–
(10)
(29)
–
–
1
1
(21)
(399)
281
180
509
6,583
Section 5 Financial statements
165
11. Intangible assets continued
All fi gures in £ millions
Amortisation
At 1 January 2014
Exchange diff erences
Impairment
Charge for the year
Disposals
Disposal through business disposal
At 31 December 2014
Exchange diff erences
Impairment
Charge for the year
Disposals
Disposal through business disposal
At 31 December 2015
Carrying amounts
At 1 January 2014
At 31 December 2014
At 31 December 2015
Goodwill
Software
Acquired
customer lists,
contracts and
relationships
Acquired
trademarks
and brands
Acquired
publishing
rights
Other
intangibles
acquired
Total
–
–
–
–
–
–
–
–
–
–
–
–
(316)
(249)
(93)
(148)
(216)
(1,022)
(13)
–
(63)
5
1
(386)
(14)
–
(74)
18
99
(11)
(6)
(83)
–
–
(3)
(2)
(25)
–
1
–
–
(12)
–
–
(12)
(2)
(67)
–
–
(39)
(10)
(250)
5
2
(349)
(122)
(160)
(297)
(1,314)
(8)
(13)
(99)
–
39
1
(1)
(40)
4
3
6
(9)
(10)
10
–
(6)
–
(21)
(23)
(53)
(276)
29
13
61
154
(357)
(430)
(155)
(163)
(314)
(1,419)
4,666
5,030
4,134
153
211
262
606
545
430
144
186
126
50
37
17
182
301
195
5,801
6,310
5,164
Goodwill
The goodwill carrying value of £4,134m 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(cid:98)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 signifi cant value would have been ascribed to other intangible assets,
which would be subject to amortisation, and the carrying value of goodwill would be signifi cantly 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 fl ow method. The majority of acquired intangibles are amortised using an amortisation profi le
based on the projected cash fl ows underlying the acquisition date valuation of the intangible asset, which generally
results in a larger proportion of amortisation being recognised in the early years of the asset’s life. The Group keeps
the expected pattern of consumption under review.
Amortisation of £13m (2014: £12m) is included in the income statement in cost of goods sold and £247m (2014:
£223m) in operating expenses. In 2015, £16m (2014: £15m) of amortisation relates to discontinued operations.
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p
a
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G
o
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166
Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
11. Intangible assets continued
The range of useful economic lives for each major class of intangible asset (excluding goodwill and software)
is(cid:98)shown(cid:98)below:
Class of intangible asset
Acquired customer lists, contracts and relationships
Acquired trademarks and brands
Acquired publishing rights
Other intangibles acquired
The expected amortisation profi le of acquired intangible assets is shown below:
2015
Useful economic life
3–20 years
2–20 years
5–20 years
2–20 years
All fi gures in £ millions
Class of intangible asset
Acquired customer lists, contracts and relationships
Acquired trademarks and brands
Acquired publishing rights
Other intangibles acquired
One to
fi ve years
Six to
ten years
More than
ten years
268
56
15
146
122
47
2
43
40
23
–
6
2015
Total
430
126
17
195
Impairment tests for cash-generating units (CGUs) containing goodwill
Impairment tests have been carried out where appropriate as described below.
Following a reorganisation of the business eff ective 1 January 2014 goodwill was allocated to CGUs, or an
aggregation of CGUs, where goodwill could not be reasonably allocated to individual business units. Impairment
reviews were conducted on these CGUs. The carrying value of the goodwill in each of the CGUs, after the impact
of impairments, is summarised below:
All fi gures in £ millions
North America
Core
Growth (includes Brazil, China, India and South Africa)
Pearson VUE
Financial Times Group
Total
2015
3,155
635
–
344
–
2014
3,422
618
612
327
51
4,134
5,030
The recoverable amount of each aggregated cash generating unit (CGU) is based on fair value less costs of disposal
or value in use calculations as appropriate. Goodwill is tested at least annually for impairment. Other than goodwill
there are no intangible assets with indefi nite lives. The goodwill is generally denominated in the currency of the
relevant cash fl ows and therefore the impairment review is not materially sensitive to exchange rate fl uctuations.
Section 5 Financial statements
167
11. Intangible assets continued
Impairment tests for cash-generating units containing goodwill continued
Following signifi cant economic and market deterioration in the Group’s operations in emerging markets and ongoing
cyclical and policy-related pressures in the Group’s mature market operations, management’s expectations of future
returns were revised down in the course of 2015. It was determined during the impairment review that the fair
value less costs of disposal of the Growth, North America and Core CGUs no longer supported the carrying value
of the goodwill. An impairment of £507m was booked in respect of the Group’s Growth operations, representing
impairments of £269m in the Brazil CGU, £181m in the China CGU, £48m in the South Africa CGU and £9m in the
Other Growth CGU, thereby bringing the carrying value of goodwill in those CGUs down to £nil. Impairments of
£10m and £13m were also booked in respect of other acquired intangibles in the South Africa and Other Growth
CGUs respectively, bringing their carrying value down to £nil. Impairments of £282m and £37m were also booked in
respect of the North America and Core CGUs respectively, bringing the carrying value of the goodwill in those CGUs
down to fair value less costs of disposal. Fair value less costs of disposal was determined using post-tax discount
rates of 17.4% for Brazil, 11.0% for China, 13.6% for South Africa, 12.8% for Other Growth, 8.6% for North America
and 8.7% for Core. Following the above impairments, the recoverable amounts of the Growth, North America and
Core CGUs are £350m, £4,750m and £926m respectively.
Key assumptions
For the purpose of estimating the fair value less costs of disposal of the CGUs, management has used an income
approach based on present value techniques. The calculations use cash fl ow projections based on fi nancial budgets
approved by management covering a fi ve-year period, management’s best estimate about future developments and
market assumptions. The fair value less costs of disposal measurement is categorised as Level 3 on the fair value
hierarchy. The key assumptions used by management in the fair value less costs of disposal calculations were:
Discount rates The discount rate is based on the risk-free rate for government bonds, adjusted for a risk premium
to refl ect the increased risk in investing in equities. The risk premium adjustment is assessed for each specifi c CGU.
The average post-tax discount rates range from 7.2% to 17.4%. Discount rates are lower for those businesses
which operate in more mature markets with low infl ation and higher for those operating in emerging markets
with higher infl ation.
Perpetuity growth rates A perpetuity growth rate of 2.0% (2014: 2.0%) was used for cash fl ows subsequent to the
approved budget period for CGUs operating in mature markets. This perpetuity growth rate is a conservative rate
and is considered to be lower than the long-term historical 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. CGU growth rates
between 5.0% and 8.5% were used for cash fl ows subsequent to the approved budget period for CGUs operating in
emerging markets with high infl ation. These growth rates are also below the long-term historical growth rates in
these markets.
The key assumptions used by management in setting the fi nancial budgets for the initial fi ve-year period were
as follows:
Forecast sales growth rates Forecast sales growth rates are based on past experience adjusted for the strategic
direction and near-term investment priorities within each CGU. Key factors include USA and UK college enrolment
rates, assessment growth rates, the success of new product launches, growth rates and economic conditions in
emerging markets and the rate of growth in new services businesses. The fi ve-year sales forecasts use average
nominal growth rates between 1.1% and 1.6% for mature markets and between 0.1% and 5.6% for emerging markets
with high infl ation.
Operating profi ts Operating profi ts are forecast based on historical experience of operating margins, adjusted for
the impact of changes to product costs and cost saving initiatives, including the impact of the global restructuring
programme planned in 2016.
Cash conversion Cash conversion is the ratio of operating cash fl ow to operating profi t. Management forecasts cash
conversion rates based on historical experience, adjusted for the impact of product investment priorities and the
shift to digital and service based business.
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a
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168
Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
11. Intangible assets continued
Sensitivities
The Group’s impairment review is sensitive to a change in assumptions used, most notably the discount rates and
the perpetuity growth rates. As the carrying value of goodwill in the Growth market CGUs has been written down to
£nil, the value of other intangible assets in Brazil and China is sensitive to any increase in discount rates or reduction
in perpetuity growth rates. In the North America and Core CGUs goodwill has been written down to fair value less
costs of disposal and any further increase in discount rates or reduction in perpetuity growth rates would give rise to
further impairment. A 0.1% increase in discount rates would cause the fair value less costs of disposal of the Brazil,
China, North America and Core CGUs to reduce by £3m, £5m, £120m and £25m respectively. A 0.1% reduction in
perpetuity growth rates would cause the fair value less costs of disposal of the Brazil, China, North America and Core
CGUs to reduce by £2m, £5m, £100m and £21m respectively. All CGUs which have been written down to fair value
less costs of disposal are highly sensitive to any reductions in short-term cash fl ows, whether driven by lower sales
growth, lower operating profi ts or lower cash conversion. A 5% reduction in total annual operating profi ts, spread
evenly across all CGUs, would give rise to an impairment of £29m in the Growth CGUs, £241m in the North America
CGU and £62m in the Core CGU.
2014 impairment tests
In 2014 following deterioration in the market conditions for the Group’s online tutoring business based in India, it
was determined in the course of the impairment review that the value in use of the India CGU no longer supported
the carrying value of the goodwill in that CGU. An impairment of £67m was booked, thereby bringing the carrying
value of goodwill in the India CGU down to £nil. An impairment of £10m was also booked in respect of other acquired
intangibles in that CGU, bringing their carrying value to £nil. The India CGU incorporates all the Group’s trading
operations in India. A pre-tax discount rate of 13.6% was used to determine the value in use of the India CGU.
No previous assessment had been made of the value in use of that CGU as the Group’s India operations, prior
to the 1 January 2014 reorganisation, were previously part of a larger Emerging Markets aggregated CGU.
12. Investments in joint ventures and associates
The amounts recognised in the balance sheet are as follows:
All fi gures in £ millions
Associates
Joint ventures
Total
The amounts recognised in the income statement are as follows:
All fi gures in £ millions
Associates
Joint ventures
Total
2015
1,099
4
1,103
2014
1,105
13
1,118
2015
2014
72
(4)
68
54
(3)
51
Included within the 2015 results are discontinued operations consisting of £17m profi t from associates (2014: £21m
profi t) and £1m loss from joint ventures (2014: £1m loss). For further information on discontinued operations and the
profi t on sale of associates and joint ventures, see notes 3 and 31.
Section 5 Financial statements
169
12. Investments in joint ventures and associates continued
Investment in associates
On 16 October 2015, the Group sold 39% of its 50% stake in The Economist (see note 31 for further information).
As at 31 December 2015, the Group holds an 11% stake in The Economist which has been classifi ed as an ‘Other
fi nancial asset’ (see note 15).
The Group has the following material associates:
Penguin Random House Ltd
Penguin Random House LLC
Principal
place of
business
Ownership
interest
Nature of
relationship
Measurement
method
UK/Global
47% See below
US
47% See below
Equity
Equity
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. Management considers
ownership percentage, board composition and the additional protective rights, and exercises judgement to
determine that Pearson has signifi cant infl uence over Penguin Random House and Bertelsmann has the power to
direct the relevant activities and therefore control. Penguin Random House does not have a quoted market price.
The summarised fi nancial information of the material associates is detailed below:
All fi gures in £ millions
Assets
Current assets
Non-current assets
Liabilities
Current liabilities
Non-current liabilities
Net assets
2015
2014
Penguin
Random
House
The
Economist
Penguin
Random
House
The
Economist
1,354
1,244
(1,034)
(358)
1,206
–
–
–
–
–
1,355
1,429
(1,113)
(424)
1,247
110
166
(190)
(86)
–
Sales
2,453
276
2,416
320
Profi t from continuing operations
Profi t from discontinued operations
Other comprehensive income/(expense)
Total comprehensive income
Dividends received from associate
136
–
51
187
142
–
34
–
34
20
74
–
42
116
95
–
42
(20)
22
21
The information above refl ects the amounts presented in the fi nancial statements of the associates, adjusted for
fair value and similar adjustments. Amounts presented for The Economist cover the period up until the date of the
partial disposal. The tax on Penguin Random House LLC is settled by the partners. For the purposes of clear and
consistent presentation, the tax has been shown in the associate line items in the consolidated income statement
and consolidated balance sheet, recording the Group’s share of profi t after tax consistently for the Penguin Random
House associates.
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i
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p
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f
o
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a
n
c
e
O
u
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S
o
c
i
a
l
i
m
p
a
c
t
G
o
v
e
r
n
a
n
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a
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170
Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
12. Investments in joint ventures and associates continued
Investment in associates continued
A reconciliation of the summarised fi nancial information to the carrying value of the material associates is
shown below:
All fi gures in £ millions
Opening net assets
Exchange diff erences
Profi t for the period
Other comprehensive income/(expense)
Dividends, net of tax paid
Additions
Distribution from associate in excess of carrying value
Reversal of distribution from associate in excess of carrying value
Disposal
Closing net assets
Share of net assets
Goodwill
Carrying value of associate
2015
2014
Penguin
Random
House
1,247
(1)
136
51
(229)
2
–
–
–
1,206
567
526
1,093
The
Economist
–
–
34
–
Penguin
Random
House
1,232
(1)
74
42
(40)
(100)
–
–
(3)
9
–
–
–
–
–
–
–
–
1,247
586
509
1,095
The
Economist
16
–
42
(20)
(42)
–
4
–
–
–
–
–
–
Information on other individually immaterial associates is detailed below:
All fi gures in £ millions
Loss from continuing operations
Other comprehensive income
Total comprehensive expense
2015
2014
(9)
–
(9)
(2)
–
(2)
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 2015 was £47m (2014: £54m). The loans are provided under a
working capital facility and fl uctuate during the year. The loan outstanding at 31 December 2015 was repaid in its
entirety in January 2016.
The Group also has a current asset receivable of £27m (2014: £41m) from Penguin Random House arising from the
provision of services. Included in other income (note 4) is £16m (2014: £41m) of service fees.
Section 5 Financial statements
171
12. Investments in joint ventures and associates continued
Investment in joint ventures
Information on joint ventures, all of which are individually immaterial, is detailed below:
All fi gures in £ millions
Loss from continuing operations
Loss from discontinued operations
Other comprehensive income
Total comprehensive expense
13. Deferred income tax
All fi gures in £ millions
Deferred income tax assets
Deferred income tax liabilities
Net deferred income tax
2015
2014
(3)
(1)
–
(4)
2015
276
(560)
(284)
(3)
–
–
(3)
2014
295
(714)
(419)
Substantially all of the deferred income tax assets are expected to be recovered after more than one year.
Deferred income tax assets and liabilities may be off set when there is a legally enforceable right to off set current
income tax assets against current income tax liabilities and when the deferred income taxes relate to the same
fi scal authority. At 31 December 2015 the Group has unrecognised deferred income tax assets of £nil (2014: £4m)
in respect of UK losses, £11m (2014: £14m) in respect of US losses and approximately £70m (2014: £44m) in respect
of losses in other territories. The US losses relate to state taxes and therefore have expiry periods of between fi ve
and 20 years.
The recognition of the deferred income tax assets is supported by management’s forecasts of the future profi tability
of(cid:98)the relevant business units.
The movement on the net deferred income tax account is as follows:
All fi gures in £ millions
At beginning of year
Exchange diff erences
Income statement benefi t
Disposal through business disposal
Tax charge to other comprehensive income or equity
Transfer to current tax
At end of year
Notes
7
2015
(419)
(26)
196
1
(36)
–
2014
(362)
(22)
10
(1)
(18)
(26)
(284)
(419)
Included in the income statement above for 2015 is a £2m benefi t (2014: £nil) relating to discontinued operations.
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p
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G
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e
n
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172
Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
13. Deferred income tax continued
The movement in deferred income tax assets and liabilities during the year is as follows:
All fi gures in £ millions
Deferred income tax assets
At 1 January 2014
Exchange diff erences
Acquisition through business combination
Income statement benefi t
Tax benefi t/(charge) to other comprehensive
income or equity
Transfer to current tax
Disposal through business disposal
At 31 December 2014
Exchange diff erences
Income statement charge
Tax charge to other comprehensive income or equity
At 31 December 2015
Trading
losses
Returns
provisions
Retirement
benefi t
obligations
15
1
2
10
–
–
–
28
5
(14)
–
19
39
2
–
3
–
–
–
44
3
(4)
–
43
42
4
–
7
10
–
(1)
62
4
(3)
(4)
59
Other
Total
154
250
5
–
35
(7)
(26)
–
161
9
(15)
–
155
12
2
55
3
(26)
(1)
295
21
(36)
(4)
276
Other deferred income tax assets include temporary diff erences on goodwill, deferred income, share-based
payments, inventory and other provisions.
All fi gures in £ millions
Deferred income tax liabilities
At 1 January 2014
Exchange diff erences
Acquisition through business combination
Income statement benefi t/(charge)
Tax charge to other comprehensive income or equity
At 31 December 2014
Exchange diff erences
Income statement benefi t
Disposal through business disposal
Tax charge to other comprehensive income or equity
At 31 December 2015
Goodwill and
intangibles
Other
Total
(584)
(30)
(2)
18
–
(598)
(41)
180
1
–
(458)
(28)
(4)
–
(63)
(21)
(116)
(6)
52
–
(32)
(102)
(612)
(34)
(2)
(45)
(21)
(714)
(47)
232
1
(32)
(560)
Other deferred income tax liabilities include temporary diff erences in respect of depreciation and royalty advances.
Section 5 Financial statements
173
14. Classifi cation of fi nancial instruments
The accounting classifi cation of each class of the Group’s fi nancial assets and fi nancial liabilities, together with their
carrying values and market(cid:98)values, is as follows:
Fair value
Amortised cost
Notes
Available
for sale
Derivatives
deemed
held for
trading
Derivatives
in hedging
relationships
Other
liabilities
Loans and
receivables
Other
liabilities
All fi gures in £ millions
Investments in listed securities
Investments in unlisted
securities
Cash and cash equivalents
Marketable securities
Derivative fi nancial instruments
Trade receivables
Total fi nancial assets
Derivative fi nancial instruments
Trade payables
Bank loans and overdrafts
Borrowings due within one year
Borrowings due after more than
one year
Total fi nancial liabilities
15
15
17
16
22
16
24
18
18
18
–
143
–
28
–
–
171
–
–
–
–
–
–
–
–
–
–
29
–
29
–
–
–
–
81
–
81
(36)
(129)
–
–
–
–
–
–
–
–
(36)
(129)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,703
–
–
963
2,666
–
–
–
–
–
–
2015
Total
carrying
value
Total
market
value
–
–
143
143
1,703
1,703
28
110
963
28
110
963
–
–
–
–
–
–
– 2,947 2,947
–
(165)
(165)
(319)
(319)
(319)
(38)
(38)
(38)
(244)
(244)
(244)
(2,048) (2,048) (2,009)
(2,649) (2,814) (2,775)
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i
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s
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p
a
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t
G
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a
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a
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i
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t
a
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174
Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
14. Classifi cation of fi nancial instruments continued
Fair value
Amortised cost
Notes
Available
for sale
Derivatives
deemed
held for
trading
Derivatives
in hedging
relationships
Other
liabilities
Loans and
receivables
Other
liabilities
All fi gures in £ millions
Investments in listed securities
Investments in unlisted
securities
Cash and cash equivalents
Marketable securities
Derivative fi nancial instruments
Trade receivables
Total fi nancial assets
Derivative fi nancial instruments
Trade payables
Bank loans and overdrafts
Borrowings due within one year
Borrowings due after more than
one year
Total fi nancial liabilities
15
15
17
16
22
16
24
18
18
18
9
45
–
16
–
–
70
–
–
–
–
–
–
–
–
–
–
6
–
6
(33)
–
–
–
–
–
–
–
–
108
–
108
(41)
–
–
–
–
(33)
(41)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
530
–
–
989
1,519
–
–
–
–
–
–
2014
Total
carrying
value
Total
market
value
9
9
45
45
530
530
16
114
989
16
114
989
1,703
1,703
(74)
(74)
–
–
–
–
–
–
–
–
(329)
(329)
(329)
(42)
(42)
(42)
(305)
(305)
(319)
(1,878)
(1,878)
(1,888)
(2,554) (2,628) (2,652)
Certain of the Group’s derivative fi nancial instruments are classifi ed as held for trading either as they do not meet
the hedge accounting criteria specifi ed in IAS 39 ‘Financial Instruments: Recognition and Measurement’ or as 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 fi nancial 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 fi nancial instruments as hedges of the fair value of its bonds
(fair(cid:98)value hedges). Changes in the fair value of these derivative fi nancial 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 fi nancial instruments as hedges of its
investments in(cid:98)foreign operations (net investment hedges). Movements in the fair value of these fi nancial
instruments (to the extent they are eff ective) are recognised in other comprehensive income.
None of the Group’s fi nancial assets or liabilities are designated at fair value through the income statement upon
initial(cid:98)recognition.
More detail on the Group’s accounting for fi nancial instruments is included in the Group’s accounting policies.
The(cid:98)Group’s approach to managing risks in relation to fi nancial instruments is described in note 19.
Section 5 Financial statements
175
15. Other fi nancial assets
All fi gures in £ millions
At beginning of year
Exchange diff erences
Acquisition of investments
Disposal of investments
At end of year
2015
2014
54
3
101
(15)
143
94
6
12
(58)
54
Other fi nancial assets comprise listed securities of £nil (2014: £9m) and unlisted securities of £143m (2014: £45m).
Acquisition of investments includes the remaining 11% stake in The Economist, see note 31 for further information.
16. Derivative fi nancial instruments
The Group’s approach to the management of fi nancial risks is set out in note 19. The Group’s outstanding derivative
fi nancial instruments are as follows:
All fi gures 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 hedge relationship
Cross-currency rate derivatives –
not in a hedge relationship
Total
Analysed as expiring:
In less than one year
Later than one year and not later
than fi ve years
Later than fi ve years
Total
2015
2014
Gross
notional
amounts
Assets
Liabilities
Gross
notional
amounts
Assets
Liabilities
1,952
848
1,879
120
4,799
324
1,255
3,220
4,799
70
–
10
30
110
32
44
34
110
(10)
1,607
(6)
(119)
(30)
(165)
673
889
451
3,620
(29)
200
(4)
(132)
(165)
1,386
2,034
3,620
84
–
24
6
114
24
67
23
114
(5)
(7)
(36)
(26)
(74)
(1)
(8)
(65)
(74)
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s
s
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f
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m
a
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c
e
O
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S
o
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i
a
l
i
m
p
a
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t
G
o
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n
a
n
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e
i
F
n
a
n
c
i
a
l
s
t
a
t
e
m
e
n
t
s
176
Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
16. Derivative fi nancial instruments continued
The carrying value of the above derivative fi nancial instruments equals their fair value. Fair values are determined
by using market data and the use of established estimation techniques such as discounted cash fl ow and option
valuation models.
At the end of 2015, 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 £(917)m, sterling £102m, euro £759m and Brazilian real
£nil (2014: US dollar £(607)m, sterling £214m, euro £430m and Brazilian real £4m).
The fi xed interest rates on outstanding rate derivative contracts at the end of 2015 range from 1.10% to 14.48%
(2014: 1.10% to 14.48%) and the fl oating rates are based on LIBOR in US dollar, euro and sterling.
The Group’s portfolio of rate derivatives is diversifi ed by maturity, counterparty and type. Natural off sets between
transactions within the portfolio and the designation of certain derivatives as hedges signifi cantly reduce the risk
of income statement volatility. The sensitivity of the portfolio to changes in market rates is set out in note 19.
Derivative fi nancial assets and liabilities subject to off setting arrangements are as follows:
All fi gures in £ millions
Counterparties in an asset position
Counterparties in a liability position
Total as presented in the balance sheet
Gross
derivative
assets
Gross
derivative
liabilities
50
60
110
(22)
(143)
(165)
2015
Net
derivative
assets/
liabilities
28
(83)
(55)
Gross
derivative
assets
Gross
derivative
liabilities
94
20
114
(28)
(46)
(74)
2014
Net
derivative
assets/
liabilities
66
(26)
40
All of the Group’s derivative fi nancial instruments are subject to enforceable netting arrangements with individual
counterparties, allowing net settlement in the event of default of either party. Off set 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 refl ect published credit ratings and by reference to other market measures (e.g.
market prices for credit default swaps) to ensure that there is no signifi cant 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
177
17. Cash and cash equivalents (excluding overdrafts)
All fi gures in £ millions
Cash at bank and in hand
Short-term bank deposits
2015
627
1,076
1,703
2014
483
47
530
Short-term bank deposits are invested with banks and earn interest at the prevailing short-term deposit rates.
At the end of 2015 the currency split of cash and cash equivalents was US dollar 23% (2014: 18%), sterling 57%
(2014: 13%), euro 2% (2014: 3%), renminbi 8% (2014: 28%) and other 10% (2014: 38%).
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 fl ow statement:
All fi gures in £ millions
Cash and cash equivalents – continuing operations
Bank overdrafts – continuing operations
2015
1,703
(32)
1,671
The Group has the following cash pooling arrangements in US dollars, sterling, euro and canadian dollars where
both the company and the bank have a legal right of off set.
2015
2014
530
(19)
511
2014
All fi gures in £ millions
US dollars
Sterling
Euro
Canadian dollars
Total for continuing operations as
presented(cid:98)in the balance sheet
Off set
asset
Off set
liability
Net off set
asset
Off set
asset
Off set
liability
Net off set
asset
446
290
5
36
(442)
(289)
(3)
(10)
4
1
2
26
33
267
430
9
10
(266)
(427)
(8)
–
1
3
1
10
15
Off set arrangements in respect of derivatives are shown in note 16.
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Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
18. Financial liabilities – borrowings
The Group’s current and non-current borrowings are as follows:
All fi gures in £ millions
Non-current
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)
1.875% Euro notes 2021 (nominal amount €500m)
3.75% US dollar notes 2022 (nominal amount $500m)
3.25% US dollar notes 2023 (nominal amount $500m)
1.375% Euro notes 2025 (nominal amount €500m)
Bank loans and overdrafts
Finance lease liabilities
Current
Due within one year or on-demand:
6.0% Sterling bonds 2015 (nominal amount £300m)
4.0% US dollar notes 2016 (nominal amount $350m)
Bank loans and overdrafts
Finance lease liabilities
Total borrowings
2015
2014
–
403
218
386
342
336
359
–
4
231
390
210
408
319
315
–
5
5
2,048
1,883
–
240
38
4
282
300
–
37
5
342
2,330
2,225
Included in the non-current borrowings above is £15m of accrued interest (2014: £13m). Included in the current
borrowings above is £1m of accrued interest (2014: £1m).
The maturity of the Group’s non-current borrowing is as follows:
All fi gures in £ millions
Between one and two years
Between two and fi ve years
Over fi ve years
2015
3
622
1,423
2,048
2014
239
602
1,042
1,883
Section 5 Financial statements
179
18. Financial liabilities – borrowings continued
The carrying amounts and market values of borrowings are as follows:
All fi gures in £ millions
Bank loans and overdrafts
6.0% Sterling bonds 2015
4.0% US dollar notes 2016
6.25% Global dollar bonds 2018
4.625% US dollar notes 2018
1.875% Euro notes 2021
3.75% US dollar notes 2022
3.25% US dollar notes 2023
1.375% Euro notes 2025
Finance lease liabilities
Eff ective
interest rate
Carrying
value
Market
value
Eff ective
interest rate
Carrying
value
2015
n/a
–
4.26%
6.46%
4.69%
2.04%
3.94%
3.36%
1.44%
n/a
38
–
240
403
218
386
342
336
359
8
38
–
240
405
213
380
335
322
350
8
n/a
6.27%
4.26%
6.46%
4.69%
2.04%
3.94%
3.36%
n/a
n/a
42
300
231
390
210
408
319
315
–
10
2014
Market
value
42
314
233
397
205
407
327
314
–
10
2,330
2,291
2,225
2,249
The market values stated above are based on clean market prices at the year end or, where these are not available,
on(cid:98)the quoted market prices of comparable debt issued by other companies. The eff ective interest rates above relate
to the underlying debt instruments.
The carrying amounts of the Group’s borrowings are denominated in the following currencies:
All fi gures in £ millions
US dollar
Sterling
Euro
Other
2015
1,563
1
759
7
2014
1,491
303
408
23
2,330
2,225
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Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
18. Financial liabilities – borrowings continued
The Group has the following undrawn capacity on its committed borrowing facilities as at 31 December:
All fi gures in £ millions
Floating rate
– expiring within one year
– expiring beyond one year
2015
2014
–
1,187
1,187
–
1,122
1,122
In addition to the above facilities, there are a number of short-term facilities that are utilised in the normal course
of(cid:98)business.
All of the Group’s borrowings are unsecured. In respect of fi nance lease obligations, the rights to the leased asset
revert to the lessor in the event of default.
The maturity of the Group’s fi nance lease obligations is as follows:
All fi gures in £ millions
2015
2014
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 fi ve years
Later than fi ve years
Future fi nance charges on fi nance leases
Present value of fi nance lease liabilities
The present value of fi nance lease liabilities is as follows:
All fi gures in £ millions
Not later than one year
Later than one year and not later than fi ve years
Later than fi ve years
The carrying amounts of the Group’s lease obligations approximate their fair value.
4
3
1
–
–
–
–
8
5
3
1
1
–
–
–
10
2015
2014
4
4
–
8
5
5
–
10
Section 5 Financial statements
181
19. Financial risk management
The Group’s approach to the management of fi nancial risks together with sensitivity analyses of its fi nancial
instruments is set out below.
Treasury policy
The Group holds fi nancial instruments for two principal purposes: to fi nance its operations and to manage the
interest rate and currency risks arising from its operations and its sources of fi nance. The Group fi nances its
operations by a mixture of cash fl ows 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, euros
and sterling, at both fl oating and fi xed rates of interest, using derivative fi nancial instruments (‘derivatives’), where
appropriate, to generate the desired currency profi le 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 fi nancial instruments are interest rate risk, liquidity and refi nancing risk,
counterparty risk and foreign currency risk. These risks are managed by the chief fi nancial offi cer under policies
approved by the board, which are summarised in this note. All the key treasury policies remained unchanged
throughout the year, except for revisions to the Group’s bank counterparty risk limits and clarifi cations in respect
of the Group’s approach to compliance with laws and regulations.
The audit committee receives regular reports on the Group’s treasury activities, policies and procedures.
The treasury department is not a profi t centre and its activities are subject to regular internal audit.
Liquidity and refi nancing 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 is to maintain the
weighted average maturity of its core gross borrowings (treating short-term advances as having the fi nal maturity of
the facilities available to refi nance them) to be between three and ten years. At the end of 2015 the average maturity
of gross borrowings was 5.1 years (2014: 4.7 years) of which bonds represented 98% (2014: 97%) of these borrowings.
The Group believes that ready access to diff erent funding markets also helps to reduce its liquidity risk, and that
published credit ratings and published fi nancial policies improve such access. At the year end, the long-term ratings
were Baa1 from Moody’s and BBB+ from Standard & Poor’s, and the short-term ratings were P2 and A2 respectively.
All of the Group’s credit ratings remained unchanged during the year, although in October 2015, Standard & Poor’s
changed the outlook on their long-term rating from ‘Stable’ to ‘Negative’. In February 2016, Moody’s changed
Pearson’s long-term rating from Baa1 (negative) to Baa2 (stable). In March 2016, Standard & Poor’s changed
Pearson’s long-term rating from BBB+ (Negative) to BBB (Stable). The short-term ratings from Moody’s and Standard
& Poor’s remain unchanged at P2 and A2. The Group’s policy is to strive to maintain a rating of Baa1/BBB+ over the
long term. The Group also uses a range of ratios to monitor and manage its fi nances internally. These include interest
cover, net debt to operating profi t and cash fl ow to debt measures. The Group also maintains undrawn committed
borrowing facilities. At the end of 2015 the committed facilities amounted to $1,750m (£1,187m) and their weighted
average maturity was 4.6 years.
Interest rate risk management
The Group’s exposure to interest rate fl uctuations on its borrowings is managed by borrowing on a fi xed rate basis
and by entering into rate swaps, rate caps and forward rate agreements. The Group also aims to avoid undue
exposure to a single interest rate setting. Refl ecting this objective, the Group has predominantly swapped its fi xed
rate bond issues to fl oating rate at their launch. This creates a group of derivatives, under which the Group is a
receiver of fi xed rates and a payer of fl oating rates.
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 fl oating rate debt and before certain adjustments for IAS 39) to be hedged (i.e.
fi xed 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 2015 the fi xed to fl oating hedging ratio, on the above basis, was
approximately 90%:10%. The higher than policy ratio is a result of higher cash balances due to divestments in 2015.
Our policy is to not close out contracts where we anticipate reverting to compliance with the policy over the longer
term. A simultaneous 1% change on 1 January 2016 in the Group’s variable interest rates in US dollar and sterling,
taking into account forecast seasonal debt, would have a £6m eff ect on profi t before tax.
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182
Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
19. Financial risk management continued
Interest rate risk management continued
The policy described above creates a further group of derivatives, under which the Group is a payer of fi xed rates
and a receiver of fl oating rates. The Group’s accounting objective in relation to 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 identifi es which derivatives are eligible for fair value hedge accounting (which reduces 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.
Financial counterparty risk management
Counterparty credit limits, which take published credit rating and other factors into account, are set to cover the
Group’s total aggregate exposure to a single fi nancial institution. The limits applicable to published credit ratings
bands are approved by the chief fi nancial offi cer within guidelines approved by the board. Exposures and limits
applicable to each fi nancial institution are reviewed on a regular basis.
Foreign currency risk management
Although the Group is based in the UK, it has its most signifi cant investment in overseas operations. The most
signifi cant 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 profi ts are hedged with foreign exchange contracts, as the company
judges it inappropriate to hedge non cash fl ow translational exposure with cash fl ow 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 profi t 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 profi t 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. The
Group policy does not require existing currency debt to be terminated to match declines in that currency’s share of
Group operating profi t before depreciation and amortisation. In addition, currencies that account for less than 15%
of Group operating profi t before depreciation and amortisation can be included in the above hedging process at the
request of the chief fi nancial offi cer.
Included within year end net debt, the net borrowings/(cash) in the hedging currencies above (taking into account
the eff ect of cross-currency swaps) were: US dollar £1,345m and sterling £(385)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 off set 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.
Section 5 Financial statements
183
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 fi gures in £ millions
Cash and cash equivalents
Marketable securities
Derivative fi nancial instruments
Bank loans, overdrafts and loan notes
Bonds
Finance lease liabilities
Net debt
2015
1,703
28
(55)
(38)
2014
530
16
40
(42)
(2,284)
(2,173)
(8)
(10)
(654)
(1,639)
The split of net debt between fi xed and fl oating rate, stated after the impact of rate derivatives, is as follows:
All fi gures in £ millions
Fixed rate
Floating rate
Total
2015
577
77
654
Gross borrowings, after the impact of cross-currency rate derivatives, analysed by currency are as follows:
2014
597
1,042
1,639
2014
2,099
104
22
2015
2,308
1
21
2,330
2,225
All fi gures in £ millions
US dollar
Sterling
Other
Total
As at 31 December 2015 the exposure of the borrowings of the Group to interest rate changes when the borrowings
re-price is as follows:
All fi gures in £ millions
Re-pricing profi le of borrowings
Eff ect of rate derivatives
Total
Less than
one year
One to
fi ve years
More than
fi ve years
Total
282
1,449
1,731
625
(33)
592
1,423
2,330
(1,416)
–
7
2,330
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184
Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
19. Financial risk management continued
The maturity of contracted cash fl ows associated with the Group’s fi nancial liabilities is as follows:
All fi gures in £ millions
Not later than one year
Later than one year and not later than fi ve years
Later than fi ve years
Total
Analysed as:
Bonds
Rate derivatives – infl ows
Rate derivatives – outfl ows
Trade payables
Total
All fi gures in £ millions
Not later than one year
Later than one year and not later than fi ve years
Later than fi ve years
Total
Analysed as:
Bonds
Rate derivatives – infl ows
Rate derivatives – outfl ows
Trade payables
Total
USD
470
705
1,578
2,753
1,745
(335)
1,155
188
2,753
USD
398
877
1,126
2,401
1,711
(379)
893
176
2,401
GBP
58
–
–
58
–
(858)
858
58
58
GBP
160
–
–
160
318
(656)
444
54
160
Other
73
–
–
73
829
(919)
90
73
73
Other
99
–
–
99
439
(537)
98
99
99
2015
Total
601
705
1,578
2,884
2,574
(2,112)
2,103
319
2,884
2014
Total
657
877
1,126
2,660
2,468
(1,572)
1,435
329
2,660
All cash fl ow projections shown above are on an undiscounted basis. Any cash fl ows based on a fl oating rate are
calculated using interest rates as set at the date of the last rate reset. Where this is not possible, fl oating 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.
Section 5 Financial statements
185
19. Financial risk management continued
Financial instruments – fair value measurement
The following table provides an analysis of those fi nancial instruments that are measured subsequently 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(cid:98)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).
All fi gures in £ millions
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
2015
Financial assets at fair value
Derivative fi nancial assets
Marketable securities
Available for sale fi nancial assets
Investments in listed securities
Investments in unlisted securities
Financial liabilities at fair value
Derivative fi nancial liabilities
Total
–
–
–
–
–
–
110
28
–
–
–
–
–
110
28
–
143
143
(165)
–
(165)
(27)
143
116
–
–
–
–
–
–
114
16
9
–
(74)
65
–
–
–
45
–
45
2014
Total
114
16
9
45
(74)
110
The following table analyses the movements in level 3 fair value measurements:
All fi gures in £ millions
At beginning of year
Exchange diff erences
Additions
Fair value movements
Disposals
At end of year
2015
2014
Investments
in unlisted
securities
Investments
in unlisted
securities
45
3
101
–
(6)
143
94
6
3
–
(58)
45
The fair value of the 11% stake in The Economist is valued by reference to the disposal transaction terms. The fair
value of the remaining investments in unlisted securities is determined by reference to the fi nancial performance
of the underlying asset and amounts realised on the sale of similar assets.
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186
Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
19. Financial risk management continued
Financial instruments – sensitivity analysis
As at 31 December 2015 the sensitivity of the carrying value of the Group’s fi nancial instruments to fl uctuations
in(cid:98)interest rates and exchange rates is as follows:
All fi gures in £ millions
Investments in listed securities
Investments in unlisted securities
Cash and cash equivalents
Marketable securities
Derivative fi nancial instruments
Bonds
Other borrowings
Other net fi nancial assets
Total fi nancial 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
–
143
1,703
28
(55)
(2,284)
(46)
644
133
–
–
–
–
(93)
97
–
–
4
–
–
–
–
99
(103)
–
–
(4)
–
(4)
(67)
–
14
208
5
(57)
99
–
5
82
–
(18)
(254)
(6)
68
(123)
The table shows the sensitivities of the fair values of each class of fi nancial instruments to an isolated change in
either(cid:98)interest rates or foreign exchange rates. The class ‘Other net fi nancial assets’ comprises trade receivables
less trade(cid:98)payables.
The sensitivities of derivative instruments are calculated using established estimation techniques such as
discounted cash fl ow 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.
Section 5 Financial statements
187
2015
2014
2,138
1,933
66
347
(90)
(260)
–
80
358
–
(234)
1
2,201
2,138
(1,318)
(1,216)
(47)
(281)
26
260
–
(60)
(292)
–
234
16
(1,360)
(1,318)
841
820
20. Intangible assets – Pre-publication
All fi gures in £ millions
Cost
At beginning of year
Exchange diff erences
Additions
Disposal through business disposal
Disposals
Acquisition through business combination
At end of year
Amortisation
At beginning of year
Exchange diff erences
Charge for the year
Disposal through business disposal
Disposals
Transfer to receivables
At end of year
Carrying amounts
At end of year
Included in the above are pre-publication assets amounting to £580m (2014: £546m) which will be realised in more
than one year.
Amortisation is included in the income statement in cost of goods sold. There was no amortisation within
discontinued operations in either year.
Disposal through business disposal amounts relate to the disposal of PowerSchool, see note 31 for further
information.
21. Inventories
All fi gures in £ millions
Raw materials
Work in progress
Finished goods
2015
2014
8
8
195
211
9
10
205
224
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 £331m (2014: £379m). In 2015, £33m (2014: £38m) of inventory
provisions was charged in the income statement. None of the inventory is pledged as security.
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Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
22. Trade and other receivables
All fi gures 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
2015
2014
938
20
118
208
963
18
107
222
1,284
1,310
25
13
43
34
115
26
8
30
18
82
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 fi gures in £ millions
At beginning of year
Exchange diff erences
Income statement movements
Utilised
Acquisition through business combination
Disposal through business disposal
At end of year
2015
(73)
3
(31)
32
–
5
(64)
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:
2014
(58)
–
(21)
17
(11)
–
(73)
2014
869
203
40
15
15
11
2015
754
253
58
19
13
16
1,113
1,153
(150)
963
(164)
989
All fi gures 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
The Group reviews its bad debt provision at least twice a year following a detailed review of receivable balances and
historical payment profi les. Management believes all the remaining receivable balances are fully recoverable.
Section 5 Financial statements
189
23. Provisions for other liabilities and charges
All fi gures in £ millions
At 1 January 2015
Exchange diff erences
Charged to income statement
Released to income statement
Disposal through business disposal
Utilised
At 31 December 2015
Analysis of provisions:
All fi gures in £ millions
Current
Non-current
Current
Non-current
Deferred
consideration
Property
Disposals
and closures
Legal
and other
57
3
–
(1)
–
(6)
53
7
–
–
–
(1)
–
6
20
–
–
–
–
–
20
51
(4)
12
(4)
(1)
(20)
34
Deferred
consideration
Property
Disposals
and closures
Legal
and other
5
48
53
7
50
57
3
3
6
4
3
7
15
5
20
20
–
20
19
15
34
22
29
51
Total
135
(1)
12
(5)
(2)
(26)
113
2015
Total
42
71
113
2014
53
82
135
Deferred consideration primarily relates to the formation of a venture in a North America business in 2011.
Disposals and closures include liabilities related to the disposal of Penguin. Legal and other includes legal claims,
contract disputes and potential contract losses.
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Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
24. Trade and other liabilities
All fi gures in £ millions
Trade payables
Social security and other taxes
Accruals
Deferred income
Interest payable
Other liabilities
Less: non-current portion
Accruals
Deferred income
Interest payable
Other liabilities
Current portion
2015
319
22
371
766
19
249
2014
329
21
501
801
28
231
1,746
1,911
20
262
–
74
356
1,390
22
201
19
68
310
1,601
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 and college businesses; and obligations to deliver digital content in future periods.
25. Retirement benefi t and other post-retirement obligations
Background
The Group operates a number of defi ned benefi t and defi ned 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
defi ned benefi t and defi ned contribution pension benefi ts. The defi ned benefi t section was closed to new members
from 1 November 2006. The defi ned contribution 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 defi ned benefi t section
of the UK Group plan is a fi nal salary pension plan which provides benefi ts to members in the form of a guaranteed
level of pension payable for life. The level of benefi ts depends on the length of service and fi nal pensionable pay.
The UK Group plan is funded with benefi t payments from trustee administered funds. The UK Group plan is
administered in(cid:98)accordance with the Trust Deed and Rules in the interests of its benefi ciaries by Pearson Group
Pension Trustee(cid:98)Limited.
At 31 December 2015 the UK Group plan has approximately 25,000 members, analysed in the following table:
All fi gures in %
Defi ned benefi t
Defi ned contribution
Total
Active
Deferred
Pensioners
Total
1
14
15
27
24
51
34
–
34
62
38
100
Section 5 Financial statements
191
25. Retirement benefi t and other post-retirement obligations continued
Background continued
The other major defi ned benefi t plans are based in the US. These are also fi nal salary pension plans which provide
benefi ts to members in the form of a guaranteed pension payable for life, with the level of benefi ts dependent on
length of service and fi nal pensionable pay. The majority of the US plans are funded.
The Group also has several post-retirement medical benefi t plans (PRMBs), principally in the US. PRMBs are
unfunded but are accounted for and valued similarly to defi ned benefi t pension plans.
The defi ned benefi t schemes expose the Group to actuarial risks, such as life expectancy, infl ation risks, and
investment risk including asset volatility and changes in bond yields. The Group is not exposed to any unusual,
entity specifi c or plan specifi c risks.
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.
UK Group
plan
Other
plans
UK Group
plan
Other
plans
All fi gures in %
Infl ation
Rate used to discount plan liabilities
Expected rate of increase in salaries
3.1
3.7
3.6
Expected rate of increase for pensions in
payment and deferred pensions
1.9 to 5.10
Initial rate of increase in healthcare rate
Ultimate rate of increase in healthcare rate
–
–
2.5
4.0
3.0
–
–
–
2015
PRMB
2.5
4.0
3.0
3.0
3.6
3.5
–
1.9 to 5.05
7.0
5.0
–
–
2014
PRMB
2.5
3.7
4.0
–
7.0
5.0
2.5
3.7
3.9
–
–
–
The UK discount rate is based on corporate bond yields adjusted to refl ect the duration of liabilities. The US discount
rate is set by reference to a US bond portfolio matching model.
The infl ation rate for the UK Group plan of 3.1% refl ects the RPI rate. In line with changes to legislation in 2010, certain
benefi ts have been calculated with reference to CPI as the infl ationary measure and in these instances a rate of 2.1%
has been used.
The expected rate of increase in salaries has been set at 3.6% for 2015 with a short-term assumption of 2.0% 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 refl ect 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 both
males and females.
For the US plans, the mortality table (RP – 2014) and 2014 Improvement scale (MP – 2014) with no adjustments have
been adopted from 2014, refl ecting the mortality assumption most prevalent in the US.
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Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
25. Retirement benefi t and other post-retirement obligations continued
Assumptions continued
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:
All fi gures in years
Male
Female
2015
23.5
25.6
UK
2014
24.4
24.5
2015
21.2
23.2
US
2014
21.6
23.8
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:
All fi gures in years
Male
Female
2015
25.5
27.8
UK
2014
26.6
26.4
2015
22.9
24.9
US
2014
23.3
25.5
Although the Group anticipates that plan surpluses will be utilised during the life of the plan to address member
benefi ts, the Group recognises its pension surplus in full in respect of the UK Group plan on the basis that it is
management’s judgement that there are no substantive restrictions on the return of residual plan assets in the
event of a winding up of the plan after all member obligations have been met.
Financial statement information
The amounts recognised in the income statement are as follows:
All fi gures in £ millions
Current service cost
Curtailments
Administration expenses
Total operating expense
Interest on plan assets
Interest on plan liabilities
Net fi nance (income)/expense
Net income statement charge
UK Group
plan
Defi ned
benefi t
other
Sub-total
Defi ned
contribution
PRMB
Total
2015
20
(3)
5
22
(98)
90
(8)
14
2
–
–
2
22
(3)
5
24
(5)
(103)
7
2
4
97
(6)
18
74
–
–
74
–
–
–
74
–
–
–
–
–
2
2
2
96
(3)
5
98
(103)
99
(4)
94
Section 5 Financial statements
193
25. Retirement benefi t and other post-retirement obligations continued
Financial statement information continued
UK Group
plan
Defi ned
benefi t
other
Sub-total
Defi ned
contribution
PRMB
Total
2014
All fi gures in £ millions
Current service cost
Curtailments
Administration expenses
Total operating expense
Interest on plan assets
Interest on plan liabilities
Net fi nance (income)/expense
Net income statement charge/(income)
20
(5)
4
19
(103)
98
(5)
14
2
–
–
2
(7)
8
1
3
22
(5)
4
21
(110)
106
(4)
17
69
–
–
69
–
–
–
69
2
(13)
–
(11)
–
3
3
(8)
Included within the 2015 results are discontinued operations consisting of a £5m charge (2014: £nil) relating to
defi ned benefi t schemes and a £8m charge (2014: £8m charge) relating to defi ned contribution schemes.
The amounts recognised in the balance sheet are as follows:
All fi gures in £ millions
Fair value of plan assets
Present value of defi ned
benefi t obligation
2015
UK Group
plan
Other
funded
plans
Other
unfunded
plans
Total
UK Group
plan
Other
funded
plans
Other
unfunded
plans
2,803
135
–
2,938
2,714
164
–
2,878
(2,466)
(157)
(18)
(2,641)
(2,524)
(196)
(23)
(2,743)
Net pension asset/(liability)
337
(22)
(18)
297
190
(32)
(23)
135
Other post-retirement medical
benefi t obligation
Other pension accruals
Net retirement benefi t asset
Analysed as:
Retirement benefi t assets
Retirement benefi t obligations
(76)
(23)
198
337
(139)
(81)
(27)
27
190
(163)
93
(18)
4
79
(110)
109
(1)
78
2014
Total
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Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
25. Retirement benefi t and other post-retirement obligations continued
Financial statement information continued
The following gains/(losses) have been recognised in other comprehensive income:
All fi gures in £ millions
Amounts recognised for defi ned benefi t plans
Amounts recognised for post-retirement medical benefi t plans
Total recognised in year
The fair value of plan assets comprises the following:
2015
104
6
110
All fi gures in %
Equities
Bonds
Property
Qualifying investment fund
Other
UK Group
plan
Other
funded
plans
12
8
9
50
17
2
2
–
–
–
2015
Total
14
10
9
50
17
UK Group
plan
Other
funded
plans
26
42
9
–
17
2
3
–
–
1
2014
36
(13)
23
2014
Total
28
45
9
–
18
The plan assets do not include any of the Group’s own fi nancial 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:
All fi gures in %
UK equities
Non-UK equities
Fixed-interest securities
Index-linked securities
Property
Qualifying investment fund
Other
Total
The liquidity profi le of the UK Group plan assets is as follows:
All fi gures in %
Liquid – call <1 month
Less liquid – call 1–3 months
Liquid – call >3 months
2015
2014
Quoted
market price
No quoted
market price
Quoted
market price
No quoted
market price
–
11
6
4
–
50
–
71
1
2
–
–
9
–
17
29
5
20
19
26
–
–
–
70
1
2
–
–
9
–
18
30
2015
2014
73
2
25
72
2
26
Section 5 Financial statements
195
25. Retirement benefi t and other post-retirement obligations continued
Financial statement information continued
Changes in the values of plan assets and liabilities of the retirement benefi t plans are as follows:
All fi gures in £ millions
Fair value of plan assets
UK Group
plan
Other
plans
2015
Total
UK Group
plan
Other
plans
2014
Total
Opening fair value of plan assets
2,714
164
2,878
2,353
156
2,509
Exchange diff erences
Interest on plan assets
Return on plans assets excluding interest
Contributions by employer
Contributions by employee
Benefi ts paid
Transfer
–
98
(8)
72
2
(95)
20
Closing fair value of plan assets
2,803
Present value of defi ned
benefi t obligation
2
5
(4)
5
–
(17)
(20)
135
2
103
(12)
77
2
(112)
–
–
103
286
62
2
(92)
–
2,938
2,714
4
7
9
4
–
(16)
–
164
4
110
295
66
2
(108)
–
2,878
Opening defi ned benefi t obligation
(2,524)
(219)
(2,743)
(2,267)
(191)
(2,458)
Exchange diff erences
Current service cost
Administration expenses
Curtailments
Interest cost
Actuarial gains/(losses) – experience
Actuarial gains/(losses) – demographic
Actuarial gains/(losses) – fi nancial
Contributions by employee
Transfer
Benefi ts paid
–
(20)
(5)
3
(90)
107
(33)
33
(2)
(30)
95
(3)
(2)
–
–
(7)
2
1
6
–
30
17
(3)
(22)
(5)
3
(97)
109
(32)
39
(2)
–
112
–
(20)
(4)
5
(98)
11
–
(5)
(2)
–
–
(8)
(1)
(8)
(5)
(22)
(4)
5
(106)
10
(8)
(241)
(20)
(261)
(2)
–
92
–
–
16
(2)
–
108
Closing defi ned benefi t obligation
(2,466)
(175)
(2,641)
(2,524)
(219)
(2,743)
The weighted average duration of the defi ned benefi t obligation is 17.1 years for the UK and 8.7 years for the US.
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Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
25. Retirement benefi t and other post-retirement obligations continued
Financial statement information continued
Changes in the value of the US PRMB are as follows:
All fi gures in £ millions
Opening defi ned benefi t obligation
Exchange diff erences
Current service cost
Curtailments
Interest cost
Actuarial gains/(losses) – experience
Actuarial gains/(losses) – demographic
Actuarial gains/(losses) – fi nancial
Benefi ts paid
Closing defi ned benefi t obligation
2015
(81)
(3)
–
–
(2)
2
2
2
4
2014
(77)
(4)
(2)
13
(3)
–
(7)
(6)
5
(76)
(81)
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 benefi ciaries. The most recent triennial
actuarial valuation for funding purposes was completed as at 1 January 2015 and this valuation revealed a technical
provisions funding shortfall of £27m which was eliminated by contributions paid during 2015.
As a consequence of the disposal of the FT Group, an agreement has been made between Pearson and the Plan
Trustee to accelerate the funding of the plan so that it becomes fully funded on a ‘self-suffi ciency’ basis in the near
future. This is a much higher level of funding than technical provisions. As a result the plan expects to be able to
provide benefi ts (in accordance with the plan rules) with a very low level of reliance on future funding from Pearson.
A commitment has also been made to maintain that level of funding in future years. In addition to a substantial
company contribution following the Penguin Random House merger (to be paid before July 2017), an upfront
contribution will be made to the plan following the disposal of the FT Group. This is expected to be approximately
£90m and there will be further annual contributions to eliminate any remaining shortfall in the self-suffi ciency
funding.
At 31 December 2015, assets of the plan are divided into two elements: matching assets, which are assets that
produce cash fl ows that can be expected to match the cash fl ows for a proportion of the membership, and include
a Liability Driven investment mandate (UK Bonds, interest rate/infl ation swaps and other derivative instruments),
infl ation-linked property and infrastructure; and return seeking assets, which are assets invested with a longer-term
horizon to generate the returns needed to provide the remaining expected cash fl ows for the benefi ciaries, and
include equities, property and alternative asset classes. During the fourth quarter of 2015 the plan’s long-term
investment strategy was updated to an allocation of 84.2% Matching Assets and 15.8% Return Seeking Assets as
at 31 December 2015.
Regular contributions to the plan in respect of the defi ned benefi t sections are estimated to be £8m for 2016.
The Group expects to contribute $10m in 2016 and $10m in 2017 to its US defi ned benefi t pension plans.
Section 5 Financial statements
197
25. Retirement benefi t and other post-retirement obligations continued
Sensitivities
The eff ect of a one percentage point increase and decrease in the discount rate on the defi ned benefi t obligation and
the total pension expense is as follows:
All fi gures in £ millions
Eff ect:
2015
1% increase 1% decrease
(Decrease)/increase in defi ned benefi t obligation – UK Group plan
(Decrease)/increase in defi ned benefi t obligation – US plan
(372)
(16)
The eff ect of members living one year more or one year less on the defi ned benefi t obligation is as follows:
495
19
2015
All fi gures in £ millions
Eff ect:
Increase/(decrease) in defi ned benefi t obligation – UK Group plan
Increase/(decrease) in defi ned benefi t obligation – US plan
The eff ect of a half percentage point increase and decrease in the infl ation rate is as follows:
All fi gures in £ millions
Eff ect:
Increase/(decrease) in defi ned benefi t obligation – UK Group plan
Increase/(decrease) in defi ned benefi t obligation – US plan
1 year
increase
1 year
decrease
100
7
(96)
(7)
2015
0.5%
increase
0.5%
decrease
113
–
(103)
–
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 defi ned benefi t obligation as has been applied
when calculating the liability recognised in the balance sheet. This methodology is the same as prior periods.
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 fi gures in £ millions
Pearson plans
2015
26
2014
32
Share-based payment charges included in discontinued operations amounted to £3m (2014: £3m). 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 or fi ve 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.
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Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
26. Share-based payments continued
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 fi rst introduced in 2001, renewed in 2006 and again in 2011. The plan
consists of(cid:98)restricted shares. The vesting of restricted shares is normally dependent on continuing service over a
three to fi ve-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 2014 and May 2015 vest dependent on relative total
shareholder return, return on invested capital and earnings per share growth. Restricted shares awarded to senior
management in November 2014 vest dependent on earnings per share growth. Other restricted shares awarded in
2014 and 2015 vest depending on continuing service over a three-year period.
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
2015
Weighted
average
exercise
price
£
8.48
11.49
8.78
9.12
8.85
9.24
8.89
Number of
share options
000s
2,792
1,985
(727)
(538)
(5)
3,507
43
2014
Weighted
average
exercise
price
£
8.73
8.11
8.24
8.76
7.43
8.48
8.24
Number of
share options
000s
3,507
1,024
(578)
(696)
(7)
3,250
138
Options were exercised regularly throughout the year. The weighted average share price during the year was
£11.86 (2014: £11.41). 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
2015
Weighted
average
contractual
life
Years
–
2.08
3.26
2.40
Number of
share options
000s
–
3,507
–
3,507
2014
Weighted
average
contractual
life
Years
–
2.68
–
2.68
Number of
share options
000s
–
2,361
889
3,250
In 2015 and 2014 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.
Section 5 Financial statements
199
26. Share-based payments continued
The weighted average estimated fair values and the inputs into the Black-Scholes model are as follows:
Fair value
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk-free rate
Expected dividend yield
Forfeiture rate
2015
Weighted
average
2014
Weighted
average
£1.99
£13.37
£11.49
£2.41
£11.09
£8.11
23.00%
21.27%
3.7 years
3.9 years
0.90%
4.44%
3.2%
1.3%
4.33%
3.4%
The expected volatility is based on the historical 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
2015
Weighted
average fair
value
£
Number of
shares
000s
2014
Weighted
average fair
value
£
Number of
shares
000s
1,942
12.27
5,875
11.44
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(cid:98)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.
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.
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Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
27. Share capital and share premium
At 1 January 2014
Issue of ordinary shares – share option schemes
At 31 December 2014
Issue of ordinary shares – share option schemes
At 31 December 2015
Number of
shares
000s
Ordinary
shares
£m
Share
premium
£m
818,580
1,303
819,883
1,185
821,068
205
–
205
–
205
2,568
11
2,579
11
2,590
The ordinary shares have a par value of 25p per share (2014: 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 fi nancial risk policies outlined in note 19.
28. Treasury shares
At 1 January 2014
Purchase of treasury shares
Release of treasury shares
At 31 December 2014
Purchase of treasury shares
Release of treasury shares
At 31 December 2015
Number of
shares
000s
9,282
907
(2,997)
7,192
1,987
(2,474)
6,705
Pearson plc
£m
98
9
(32)
75
23
(26)
72
The Group holds Pearson plc shares in trust to satisfy its obligations under its restricted share plans (see note 26).
These shares, representing 0.8% (2014: 0.9%) 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 £1.7m (2014: £1.8m).
At 31 December 2015 the market value of Pearson plc treasury shares was £49.3m (2014: £85.6m).
Section 5 Financial statements
201
Attributable to equity holders
of the company
Translation
reserve
Retained
earnings
Total
Non-
controlling
interest
2015
Total
(83)
(2)
(85)
–
–
–
5
110
8
(24)
99
16
(10)
5
110
8
(24)
22
–
–
–
–
–
–
(2)
29. Other comprehensive income
All fi gures in £ millions
Items that may be reclassifi ed to the income statement
Net exchange diff erences on translation of foreign
operations – Group
Net exchange diff erences on translation of foreign
operations – associate
Currency translation adjustment disposed – subsidiaries
Attributable tax
Items that are not reclassifi ed to the income statement
Remeasurement of retirement benefi t obligations – Group
Remeasurement of retirement benefi t obligations – associate
Attributable tax
Other comprehensive expense for the year
(77)
Attributable to equity holders
of the company
Translation
reserve
Retained
earnings
Total
Non-
controlling
interest
All fi gures in £ millions
Items that may be reclassifi ed to the income statement
Net exchange diff erences on translation of foreign
operations – Group
Net exchange diff erences on translation of foreign
operations – associate
Currency translation adjustment disposed – subsidiaries
Attributable tax
Items that are not reclassifi ed to the income statement
Remeasurement of retirement benefi t obligations – Group
Remeasurement of retirement benefi t obligations – associate
Attributable tax
Other comprehensive expense for the year
173
–
–
–
(6)
23
(15)
(1)
1
150
25
(2)
(6)
23
(15)
(1)
174
–
–
–
–
–
–
–
–
(83)
16
(10)
–
–
–
–
150
25
(2)
–
–
–
–
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16
(10)
5
110
8
(24)
20
2014
Total
150
25
(2)
(6)
23
(15)
(1)
174
202
Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
30. Business combinations
There were no signifi cant acquisitions in 2015. On 11 February 2014, the Group acquired 100% of Grupo Multi, the
leading adult English language training company in Brazil. Fair values for the assets and liabilities arising from the
Grupo Multi acquisition and other smaller acquisitions completed in the year are set out below.
Fair values for the assets and liabilities arising from acquisitions completed in the year are as follows:
All fi gures in £ millions
Property, plant and equipment
Intangible assets
Intangible assets – pre-publication
Inventories
Trade and other receivables
Cash and cash equivalents (excluding overdrafts)
Financial liabilities – borrowings
Provisions for other liabilities and charges
Trade and other liabilities
Current income tax liabilities
Net assets acquired at fair value
Goodwill
Total
Satisfi ed by:
Cash
Total consideration
2015
2014
Notes
Total
fair value
Total
fair value
10
11
20
23
11
–
1
–
–
–
–
–
–
–
–
1
–
1
2
260
1
4
36
3
(49)
(14)
(24)
(20)
199
238
437
(1)
(1)
(437)
(437)
The goodwill arising on these acquisitions results from cost and revenue synergies and from assets and benefi ts that
cannot be separately recognised.
There is no goodwill arising on 2015 acquisitions. Goodwill of £240m arising on 2014 acquisitions is expected to be
deductible for tax purposes.
Intangible assets acquired in 2014 have the following useful economic lives: customer lists, contracts and
relationships four years; trademarks and brands 20 years, and other acquired intangibles 12 years.
All fi gures in £ millions
Cash fl ow 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 outfl ow
2015
2014
(1)
(6)
–
(2)
(9)
(437)
(5)
3
(9)
(448)
Section 5 Financial statements
203
31. Disposals including business closures
All fi gures in £ millions
FT Group PowerSchool
Other
Total Mergermarket Penguin
Other
Total
2015
2014
Disposal of subsidiaries
Property, plant and equipment
Intangible assets
Investments in joint ventures
and associates
Intangible assets – pre-publication
Inventories
(15)
(46)
(8)
–
(1)
(2)
(19)
–
(64)
–
–
(5)
–
–
–
Trade and other receivables
(72)
(16)
(3)
(17)
(70)
(8)
(64)
(1)
(91)
(29)
(2)
7
2
109
1
–
(50)
4
(100)
858
–
(47)
711
–
–
–
–
35
–
–
(4)
(33)
3
–
–
6
–
–
1
7
2
150
1
–
(119)
(6)
(175)
6
(179)
222
–
(13)
30
10
(9)
(288)
9 1,089
–
(9)
(9)
–
(69)
732
Cash and cash equivalents
(excluding overdrafts)
Net deferred income tax
(assets)/liabilities
Retirement benefi t obligations
Provisions for other liabilities
and charges
Trade and other liabilities
Current income tax liabilities
Non-controlling interest
Attributable goodwill
Cumulative translation adjustment
Net assets disposed
Cash received
Deferred proceeds
Costs
Gain/(loss) on disposal
All fi gures in £ millions
Cash fl ow from disposals
Cash – current year disposals
Cash and cash equivalents disposed
Costs and other disposal liabilities paid
Net cash infl ow
(2)
(12)
–
–
–
(23)
(19)
1
–
4
69
6
–
(156)
2
(130)
375
–
(1)
244
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
29
29
(1)
–
–
–
–
(3)
(12)
–
–
–
(2)
(25)
(11)
(30)
–
–
–
12
–
(2)
(1)
1
–
4
81
6
(2)
(157)
2
(5)
(135)
–
6
(2)
(1)
375
6
26
272
2015
2014
1,089
(33)
(26)
1,030
375
(30)
(18)
327
Included in the gain on sale of PowerSchool is the write down of related software assets of £70m. The write down
of the software assets refl ects the reduced market opportunity for software which was to be integrated with
PowerSchool and the recognition that adoption of such software in US schools is now unlikely to occur at the rate
originally envisaged.
Disposal of associates
On 16 October 2015, the Group sold 39% of its 50% stake in The Economist resulting in a gain on disposal of £473m.
The gain comprises proceeds of £377m, gain on revaluation of remaining 11% investment to fair value of £92m and
liabilities disposed of £4m.
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204
Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
32. Cash generated from operations
All fi gures in £ millions
Profi t
Adjustments for:
Income tax
Depreciation
Amortisation and impairment of acquired intangibles and goodwill
Amortisation of software
Net fi nance costs
Share of results of joint ventures and associates
Profi t on disposal of subsidiaries, associates, investments and fi xed assets
Acquisition costs
Net foreign exchange adjustment from transactions
Share-based payment costs
Pre-publication
Inventories
Trade and other receivables
Trade and other liabilities
Retirement benefi t 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 fl ow
Operating tax paid
Net operating fi nance costs paid
Operating free cash fl ow
Non operating tax paid
Free cash fl ow
Dividends paid (including to non-controlling interests)
Net movement of funds from operations
Acquisitions and disposals
Loans repaid/(advanced) (including to related parties)
Purchase of treasury shares
New equity
Other movements on fi nancial instruments
Net movement of funds
Exchange movements on net debt
Total movement in net debt
Notes
10
11
11
12
26
28
2015
823
(24)
75
1,051
74
29
(68)
(1,194)
–
22
26
(57)
10
(99)
(80)
(57)
(13)
518
162
(86)
(161)
2
1
(1)
435
(129)
(51)
255
(103)
152
(423)
(271)
1,395
7
(23)
11
(1)
1,118
(133)
985
2014
470
110
74
264
63
93
(51)
(272)
6
27
32
(52)
6
(69)
72
(58)
(11)
704
120
(75)
(107)
9
2
(4)
649
(163)
(73)
413
–
413
(398)
15
(137)
(12)
(9)
11
15
(117)
(143)
(260)
Section 5 Financial statements
205
32. Cash generated from operations continued
Net cash generated from operations is translated at an exchange rate approximating the rate at the date of cash
fl ow. The diff erence between this rate and the average rate used to translate profi t gives rise to a currency
adjustment in the reconciliation between net profi t and net cash generated from operations. This adjustment
refl ects the timing diff erence between recognition of profi t and the related cash receipts or payments.
Operating cash fl ow, operating free cash fl ow and total free cash fl ow are non-GAAP measures and have been
disclosed as they are part of Pearson’s corporate and operating measures.
In the cash fl ow statement, proceeds from sale of property, plant and equipment comprise:
All fi gures in £ millions
Net book amount
Loss on sale of property, plant and equipment
Proceeds from sale of property, plant and equipment
33. Contingencies
2015
2014
6
(4)
2
12
(3)
9
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(cid:98)loss to the Group.
34. Commitments
At the balance sheet date there were no commitments for capital expenditure contracted for but not yet incurred.
The Group leases various offi ces 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 £156m (2014: £157m).
The future aggregate minimum lease payments in respect of operating leases are as follows:
All fi gures 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 fi ve years
Later than fi ve years
2015
164
146
143
130
123
685
2014
161
150
126
122
115
701
1,391
1,375
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206
Pearson plc Annual report and accounts 2015
Notes to the consolidated fi nancial statements continued
35. 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 Pearson Executive (see page 7). It is this
committee which had responsibility for planning, directing and controlling the activities of the Group in 2015.
Key management personnel compensation is disclosed below:
All fi gures in £millions
Short-term employee benefi ts
Retirement benefi ts
Share-based payment costs
Total
2015
7
1
1
9
2014
10
1
2
13
There were no other material related party transactions. No guarantees have been provided to related parties.
36. Events after the balance sheet date
In January 2016, Pearson announced that it was embarking on a restructuring programme to simplify the business,
reduce costs and position the company for growth in its major markets. The majority of the programme is expected
to be complete by mid-year 2016 and will involve implementation costs in 2016 of approximately £320m.
Section 5 Financial statements
207
37. 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
00872828
07970304
02911143
07210654
03099304
07679091
06337129
03755464
Aldwych Finance Limited
04720439
Pearson Education Limited
ASET Limited
ASET Group Limited
04231636
Pearson Funding Four plc
03964551
Pearson Funding One plc
ASET Management Limited
03139404
Pearson Funding Two plc
Blue Wharf Limited
04344573
Pearson Heinemann Limited
Burmedia Investments Limited
03060487
Pearson in Practice ATA Limited
Edexcel Limited
04496750
Pearson in Practice Holdings Limited
Education Development International plc
03914767
Embankment Finance Limited
EQL Assessment Limited
Green Wharf Limited
Icodeon Limited
04460625
05224778
07009228
05068195
Pearson in Practice Skills Based
Learning Limited
Pearson in Practice Technology Limited
03786989
Pearson International Finance Limited
02496206
Pearson Loan Finance No. 2 Unlimited
05632021
Longman Group (Overseas Holdings)
Limited
Pearson Loan Finance No. 3 Limited
00690236
Pearson Loan Finance No. 4 Limited
Midlands Educational Technology Limited
01448842
Pearson Loan Finance Unlimited
05052661
02635107
05144467
Pearson Aff ordable Learning Fund Limited 08038068
Pearson Management Services Limited
00096263
Pearson Amsterdam Finance Limited
03041245
Pearson Overseas Holdings Limited
Pearson Australia Finance Unlimited
05578463
Pearson PRH Holdings Limited
Pearson Books Limited
02512075
Pearson Services Limited
Pearson Brazil Finance Ltd
08848874
Pearson Shared Services Limited
Pearson Canada Finance Unlimited
05578491
Testchange Limited
Pearson Dollar Finance plc
05111013
The Coaching Space Limited
Pearson Dollar Finance Two plc
06507766
TQ Catalis Limited
Pearson Education Holdings Limited
00210859
TQ Clapham Limited
Pearson Education Investments Limited
08444933
TQ Global Limited
00145205
08561316
01341060
04623186
02496240
05333023
07307943
07307925
07802458
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208
Pearson plc Annual report and accounts 2015
Company balance sheet
As at 31 December 2015
All fi gures in £ millions
Assets
Non-current assets
Investments in subsidiaries
Amounts due from subsidiaries
Financial assets – derivative fi nancial instruments
Other fi nancial assets
Current assets
Amounts due from subsidiaries
Amounts due from related parties
Current income tax assets
Financial assets – derivative fi nancial instruments
Cash and cash equivalents (excluding overdrafts)
Other assets
Total assets
Liabilities
Non-current liabilities
Amounts due to subsidiaries
Financial liabilities – borrowings
Financial liabilities – derivative fi nancial instruments
Current liabilities
Amounts due to subsidiaries
Current income tax liabilities
Financial liabilities – borrowings
Financial liabilities – derivative fi nancial instruments
Other liabilities
Total liabilities
Net assets
Equity
Share capital
Share premium
Treasury shares
Special reserve
Retained earnings
Total equity attributable to equity holders of the company
Notes
2015
2014
2
6
7
6
4
5
6
5
6
8
8
9
7,744
3,953
78
92
8,740
27
84
–
11,867
8,851
446
47
–
3
1,168
–
1,664
13,531
5,220
54
28
24
13
2
5,341
14,192
(3,760)
(2,346)
(218)
(136)
(210)
(73)
(4,114)
(2,629)
(1,431)
(4,414)
(108)
(580)
(29)
(12)
(2,160)
(6,274)
7,257
205
2,590
(27)
447
4,042
7,257
–
(629)
(1)
(2)
(5,046)
(7,675)
6,517
205
2,579
1
447
3,285
6,517
These fi nancial statements have been approved for issue by the board of directors on 4 March 2016 and signed on its
behalf by
Coram Williams
Chief fi nancial offi cer
Company statement of changes in equity
Year ended 31 December 2015
Section 5 Financial statements
209
All fi gures in £ millions
At 1 January 2015
Profi t for the year
Issue of ordinary shares under
share option schemes*
Purchase of treasury shares
Contribution refund to subsidiaries
Release of treasury shares
Dividends
At 31 December 2015
All fi gures in £ millions
At 1 January 2014
Profi t for the year
Issue of ordinary shares under
share option schemes*
Purchase of treasury shares
Release of treasury shares
Dividends
At 31 December 2014
Equity attributable to equity holders of the company
Share
capital
Share
premium
Treasury
shares
Special
reserve
Retained
earnings
205
2,579
–
–
–
–
–
–
–
11
–
–
–
–
205
2,590
1
–
–
(23)
(31)
26
–
(27)
447
–
–
–
–
–
–
3,285
1,206
–
–
–
(26)
(423)
447
4,042
Total
6,517
1,206
11
(23)
(31)
–
(423)
7,257
Equity attributable to equity holders of the company
Share
capital
Share
premium
Treasury
shares
Special
reserve
Retained
earnings
205
2,568
(22)
447
–
–
–
–
–
–
11
–
–
–
205
2,579
–
–
(9)
32
–
1
2,447
1,267
–
–
(32)
(397)
–
–
–
–
–
447
3,285
Total
5,645
1,267
11
(9)
–
(397)
6,517
The special reserve represents the cumulative eff ect of cancellation of the company’s share premium account.
Included within retained earnings is an amount of £162m (2014: £131m) relating to profi t on intra-Group disposals
that is(cid:98)not distributable.
* Full details of the share-based payment plans are disclosed in note 26 to the consolidated fi nancial statements.
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Pearson plc Annual report and accounts 2015
Company cash fl ow statement
Year ended 31 December 2015
All fi gures in £ millions
Cash fl ows from operating activities
Net profi t
Adjustments for:
Income tax
Net fi nance costs
Impairment charges
Profi t on disposals
Amounts due to subsidiaries
Net cash generated from operations
Interest paid
Tax received
Net cash generated from operating activities
Cash fl ows from investing activities
Disposal of subsidiaries, net of cash disposed
Loans repaid by/(advanced to) related parties
Interest received
Net cash received from investing activities
Cash fl ows from fi nancing activities
Proceeds from issue of ordinary shares
Net purchase of treasury shares
Proceeds from/(repayment of) borrowings
Dividends paid to company’s shareholders
Net cash used in fi nancing activities
Eff ects of exchange rate changes on cash and cash equivalents
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Notes
2015
2014
1,206
1,267
(154)
68
736
(279)
(909)
668
(56)
289
901
747
7
11
765
11
(53)
17
(423)
(448)
(14)
1,204
(616)
588
(9)
24
–
–
(1,058)
224
(73)
6
157
–
(10)
15
5
11
(9)
(250)
(397)
(645)
(15)
(498)
(118)
(616)
8
4
Notes to the company fi nancial statements
Section 5 Financial statements
211
1. Accounting policies
The fi nancial statements on pages 208 to 221 comprise the separate fi nancial statements of Pearson plc.
As permitted by section 408 of the Companies Act 2006, only the consolidated income statement and statement
of(cid:98)comprehensive income have been presented.
The company has no employees.
The accounting policies applied in the preparation of these company fi nancial statements are the same as those
set out in note 1 to the consolidated fi nancial 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 fi gures in £ millions
At beginning of year
Subscription for share capital in subsidiaries
Disposals/liquidations
Impairments
Currency revaluations
At end of year
2015
8,740
120
(444)
(736)
64
2014
8,537
138
–
–
65
7,744
8,740
Impairments relate to the carrying value of intermediate holding company investments following impairment
reviews, and subsequent impairment of assets, in emerging markets.
3. Financial risk management
The company’s fi nancial instruments comprise amounts due to/from subsidiary undertakings, cash and cash
equivalents, derivative fi nancial instruments and current and non-current borrowings. Derivative fi nancial
instruments are held at fair value, with all other fi nancial instruments held at amortised cost. The company’s
approach to the management of fi nancial risks is consistent with the Group’s treasury policy, as discussed in
note 19 to the consolidated fi nancial statements. The company believes the value of its fi nancial assets to be
fully recoverable.
The company designates certain qualifying derivative fi nancial instruments as hedges of the fair value of its bonds
(fair value hedges). Changes in the fair value of these derivative fi nancial 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 fi nancial 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 £93m decrease in the carrying value of its fi nancial instruments, with a 1% decrease in interest rates
resulting in a £99m increase in their carrying value. The company also estimates that a 10% strengthening in sterling
would decrease the carrying value of its fi nancial instruments by £182m, while a 10% weakening in the value of
sterling would increase the carrying value by £100m. These increases and decreases in carrying value would be
recorded through the income statement. Sensitivities are calculated using estimation techniques such as discounted
cash fl ow 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%.
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Pearson plc Annual report and accounts 2015
Notes to the company fi nancial statements continued
3. Financial risk management continued
The maturity of contracted cash fl ows on the company’s borrowings and all of its derivative fi nancial instruments are
as(cid:98)follows:
All fi gures in £ millions
Not later than one year
Later than one year and not later than fi ve years
Later than fi ve years
Total
Analysed as:
Bonds
Rate derivatives – infl ows
Rate derivatives – outfl ows
Total
All fi gures in £ millions
Not later than one year
Later than one year and not later than fi ve years
Later than fi ve years
Total
Analysed as:
Bonds
Rate derivatives – infl ows
Rate derivatives – outfl ows
Total
USD
70
202
853
1,125
227
(257)
1,155
1,125
USD
172
224
418
814
224
(303)
893
814
–
–
–
–
–
(858)
858
–
GBP
(212)
–
–
(212)
–
(656)
444
(212)
GBP
Other
(60)
(48)
(769)
(877)
2015
Total
10
154
84
248
–
227
(919)
(2,034)
42
(877)
2,055
248
Other
(16)
(97)
(403)
(516)
2014
Total
(56)
127
15
86
–
224
(537)
(1,496)
21
(516)
1,358
86
All cash fl ow projections shown above are on an undiscounted basis. Any cash fl ows based on a fl oating rate are
calculated using interest rates as set at the date of the last rate reset. Where this is not possible, fl oating 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.
Section 5 Financial statements
213
4. Cash and cash equivalents (excluding overdrafts)
All fi gures in £ millions
Cash at bank and in hand
Short-term bank deposits
2015
98
1,070
1,168
2014
2
11
13
Short-term bank deposits are invested with banks and earn interest at the prevailing short-term deposit rates.
At the end of 2015 the currency split of cash and cash equivalents was US dollar 10% (2014: 33%), sterling 90%
(2014: 54%) and other 0% (2014: 13%).
Cash and cash equivalents have fair values that approximate their carrying amounts due to their short-term nature.
Cash and cash equivalents include the following for the purpose of the cash fl ow statement:
All fi gures in £ millions
Cash and cash equivalents
Bank overdrafts
5. Financial liabilities – borrowings
All fi gures in £ millions
Non-current
4.625% US dollar notes 2018 (nominal amount $300m)
Current
Due within one year or on-demand:
Bank loans and overdrafts
Total borrowings
2015
1,168
(580)
588
2014
13
(629)
(616)
2015
2014
218
218
580
580
798
210
210
629
629
839
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214
Pearson plc Annual report and accounts 2015
Notes to the company fi nancial statements continued
5. Financial liabilities – borrowings continued
The maturity of the company’s non-current borrowings is as follows:
All fi gures in £ millions
Between one and two years
Between two and fi ve years
Over fi ve years
2015
–
218
–
218
2014
–
210
–
210
As at 31 December 2015 the exposure to interest rate changes of the borrowings and amounts due to subsidiaries
when the borrowings re-price is as follows:
All fi gures in £ millions
Re-pricing profi le of borrowings
Amounts due to subsidiaries
Eff ect of rate derivatives
The carrying amounts and market values of borrowings are as follows:
Less than
one year
One to
fi ve years
More than
fi ve years
218
1,868
Total
798
–
1,892
5,191
(33)
(1,416)
–
2,053
476
5,989
580
1,431
1,449
3,460
2015
All fi gures in £ millions
Bank loans and overdrafts
4.625% US dollar notes 2018
Eff ective
interest rate
Carrying
amount
Market
value
Eff ective
interest rate
Carrying
amount
n/a
4.69%
580
218
798
580
213
793
n/a
4.69%
629
210
839
2014
Market
value
629
205
834
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 eff ective interest rates above relate to the
underlying debt instruments.
The carrying amounts of the company’s borrowings are denominated in the following currencies:
All fi gures in £ millions
US dollar
Sterling
Euro
2015
660
136
2
798
2014
477
354
8
839
Section 5 Financial statements
215
6. Derivative fi nancial instruments
The company’s outstanding derivative fi nancial instruments are as follows:
All fi gures 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 fi ve years
Later than fi ve years
Total
2015
2014
Gross
notional
amounts
Assets
Liabilities
Gross
notional
amounts
Assets
Liabilities
203
2,597
1,924
4,724
249
1,255
3,220
4,724
70
–
11
81
3
44
34
81
(10)
192
(6)
(149)
(165)
2,404
952
3,548
(29)
200
(4)
(132)
(165)
1,314
2,034
3,548
18
67
23
108
24
61
23
108
–
(31)
(43)
(74)
(1)
(8)
(65)
(74)
The carrying value of the above derivative fi nancial instruments equals their fair value. Fair values are determined
by(cid:98)using market data and the use of established estimation techniques such as discounted cash fl ow and option
valuation models.
7. Other fi nancial assets
Other fi nancial assets comprise unlisted securities of £92m (2014: £nil).
8. Share capital and share premium
At 1 January 2014
Issue of ordinary shares – share option schemes
At 31 December 2014
Issue of ordinary shares – share option schemes
At 31 December 2015
Number of
shares
000s
Ordinary
shares
£m
Share
premium
£m
818,580
1,303
819,883
1,185
821,068
205
–
205
–
205
2,568
11
2,579
11
2,590
The ordinary shares have a par value of 25p per share (2014: 25p per share). All issued shares are fully paid. All shares
have the same rights.
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216
Pearson plc Annual report and accounts 2015
Notes to the company fi nancial statements continued
9. Treasury shares
At 1 January 2014
Purchase of treasury shares
Release of treasury shares
At 31 December 2014
Purchase of treasury shares
Refund of contribution to subsidiaries
Release of treasury shares
At 31 December 2015
Number of
shares
000s
9,282
907
(2,997)
7,192
1,987
–
(2,474)
6,705
£m
22
9
(32)
(1)
23
31
(26)
27
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 £1.7m (2014: £1.8m). At 31 December 2015 the market value of the company’s
treasury shares was £49.3m (2014: £85.6m). The gross book value of the shares at 31 December 2015 amounts to
£72m. This value has been netted off with contributions received from operating companies of £45m, resulting in
a net debit value of £27m.
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(cid:98)to the company.
11. Audit fees
Statutory audit fees relating to the company were £35,000 (2014: £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 £150m (2014: £143m) and interest receivable from subsidiaries for the
year of £82m (2014: £73m). Management fees payable to subsidiaries in respect of centrally provided services
amounted to £80m (2014: £19m). Management fees receivable from subsidiaries in respect of centrally provided
services amounted to £70m (2014: £nil). Dividends received from subsidiaries were £1,555m (2014: £1,300m).
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(cid:98)rates. The amount outstanding at 31 December 2015 was £47m (2014: £54m). The loans are provided under
a working capital facility and fl uctuate during the year. The loan outstanding at 31 December 2015 was repaid in its
entirety in January 2016.
Key management personnel
Key management personnel are deemed to be the members of the Pearson Executive.
It is this committee which had responsibility for planning, directing and controlling the activities of the company in
2015. Key(cid:98)management personnel compensation is disclosed in note 35 to the consolidated fi nancial statements.
There were no other material related party transactions. No guarantees have been provided to related parties.
Section 5 Financial statements
217
13. Group companies
In accordance with section 409 of the Companies Act 2006 a full list of subsidiaries, partnerships, associates, joint
ventures and joint arrangements, the country of incorporation and the eff ective percentage of equity owned,
as at 31 December 2015 is disclosed below. Unless otherwise stated the shares are indirectly held by Pearson plc.
All wholly-owned subsidiaries are included in the consolidation and all associated undertakings are included in
the Group’s fi nancial statements using the equity method of accounting. Principal group companies are identifi ed
in bold.
Wholly-owned subsidiaries
Company name
Country of Inc.
Company name
Country of Inc.
US
US
US
US
US
US
US
US
US
US
US
US
US
US
US
US
US
US
US
US
US
US
US
US
US
US
US
US
US
A Plus Education Solutions Private Limited
India
Connections Academy of Indiana, LLC
Addison Wesley Longman Australia Pty Limited1 Australia
Connections Academy of Iowa, LLC
Addison Wesley Longman, Inc.
Addison-Wesley Educational Publishers Inc.
US
US
Connections Academy of Kansas, LLC
Connections Academy of Kentucky, LLC
AEL (S) PTE Limited
Aldwych Finance Limited
America’s Choice, Inc.
ASET Group Limited
ASET Limited
ASET Management Limited
ASET Solutions Limited4
ATI Professional Development LLC
Atkey Finance Limited
Aulis Verwaltungs GmbH
Axis Finance Inc.
Singapore
Connections Academy of Louisiana, LLC
UK
US
UK
UK
UK
UK
US
Ireland
Germany
US
Connections Academy of Maine, LLC
Connections Academy of Maryland, LLC
Connections Academy of Massachusetts, LLC
Connections Academy of Minnesota, LLC
Connections Academy of Missouri, LLC
Connections Academy of Nevada, LLC
Connections Academy of New Jersey, LLC
Connections Academy of New Mexico, LLC
Connections Academy of New York, LLC
Connections Academy of North Carolina, LLC
Beijing Global Education & Technology Co., Ltd.
China
Connections Academy of Ohio, LLC
Beijing Wall Street English Training Centre
Company Limited
Berrisford Finance Limited
Blue Wharf Limited
Burmedia Investments Limited2
CA of Michigan, LLC
Camsaw College Publishing Company, Inc.
Camsaw, Inc.
CAMSAWUSA, Inc.
Casapsi Livraria e Editora Ltda
Centro Cultural Americano Franquias e
Comércio Ltda.
Century Consultants, Ltd.
Certiport China Holding, LLC
Certiport, Inc.
Cogmed Systems AB
Connections Academy of Alaska, LLC
Connections Academy of Arizona, LLC
Connections Academy of Arkansas, LLC
Connections Academy of California, LLC
Connections Academy of Colorado, LLC
Connections Academy of DC, LLC
Connections Academy of Florida, LLC
Connections Academy of Georgia, LLC
Connections Academy of Idaho, LLC
China
Ireland
UK
UK
US
US
US
US
Brazil
Brazil
US
US
US
Sweden
US
US
US
US
US
US
US
US
US
Connections Academy of Oklahoma, LLC
Connections Academy of Oregon, LLC
Connections Academy of Pennsylvania LLC
Connections Academy of South Carolina, LLC
Connections Academy of Tennessee, LLC
Connections Academy of Texas, LLC
Connections Academy of Utah, LLC
Connections Academy of Virginia LLC
Connections Academy of Washington LLC
Connections Academy of Wisconsin LLC
Connections Academy of Wyoming, LLC
Connections Education, LLC
Connections Education, Inc.
CTI Education Group (Pty) Limited
South Africa
Dale Seymour Publications, Inc.
Dominie Press Inc
Dorian Finance Limited
Dorling Kindersley Australasia Pty Limited
E Q L Assessment Limited
EBNT Canada Holdings ULC
EBNT Holdings Limited
EBNT USA Holdings Inc.
eCollege.com
Edexcel Limited2
US
US
Ireland
Australia
UK
Canada
Canada
US
US
UK
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218
Pearson plc Annual report and accounts 2015
Notes to the company fi nancial statements continued
13. Group companies continued
Wholly-owned subsidiaries continued
Company name
Country of Inc.
Company name
Edexcel South Africa Pty Ltd
South Africa
Joint Examining Board Limited1
Éditions Du Renouveau Pédagogique Inc.
Canada
Kagiso Education Pty Ltd
Country of Inc.
UK
South Africa
Education by Association (Pty) Ltd
South Africa
Knowledge Analysis Technologies, LLC
US
Education Development International Plc2
UK
Education Resources (Cyprus) Limited
Educational Management Group Inc
Educational Resources (HK) Limited
Educational Resources Pte Ltd
Educomp Higher Initiatives Pte Ltd
Embanet ULC
Embanet-Compass Knowledge Group, Inc.
Embankment Finance Limited
English Language Learning and Instruction
System, Inc.
eNVQ Limited1
Escape Studios Limited
Falstaff Holdco Inc.
Falstaff Inc.
FastExpress Centro de Idiomas Ltda
FBH, Inc.
Florida Connections Academy, L.L.C.
Franchise Support & Services, SL
Cyprus
US
Hong Kong
Singapore
Singapore
Canada
US
UK
US
UK
UK
US
US
Brazil
US
US
Spain
LCCI International Qualifi cations
(Malaysia) Sdn. Bhd.
LCCIEB Training Consultancy., Ltd
LessonLab, Inc.
Lignum Oil Company
Linx Brasil Distribuidora Ltda.
Longman (Malawi) Limited
Longman Australasia Pty Ltd
Longman Group (Overseas Holdings) Limited
Longman Indochina Acquisition, L.L.C.
Longman Kenya Limited
Longman Mocambique Ltda
Longman Swaziland (Pty) Limited
Longman Tanzania Limited
Malaysia
China
US
US
Brazil
Malawi
Australia
UK
US
Kenya
Mozambique
Swaziland
Tanzania
Longman Zambia Educational Publishers Pty Ltd Zambia
Longman Zambia Limited
Longman Zimbabwe (Private) Ltd
Longmaned Ecuador S.A.
Zambia
Zimbabwe
Ecuador
Maskew Miller Longman (Pty) Limited
South Africa
Gamma Master China, Limited
Hong Kong
MeasureUp, LLC
Global Education & Technology (HK) Limited
Hong Kong
Midlands Educational Technology Limited
US
UK
Global Education & Technology Group Limited
Cayman Is
Midrand Graduate Institute Pty Ltd
South Africa
Global Elite Education & Technology
(Shanghai) Co. Limited
GlobalEnglish Asia, Inc.
GlobalEnglish Brasil Ltda.
GlobalEnglish France SARL
China
US
Brazil
France
GlobalEnglish Germany GmbH
Germany
Modern Curriculum Inc.
Multi Treinamento e Editora Ltda.
Multilingua Limited1
National Computer Systems Japan Co. Ltd
NCS Information Services Technology
(Beijing) Co Ltd
GlobalEnglish Hong Kong Limited
Hong Kong
NCS Pearson Pty Ltd
GlobalEnglish India Private Limited
Global English-Mexico S. de R.L.
Globe Fearon Inc.
GOAL Limited1
Green Wharf Limited
India
Mexico
US
UK
UK
Guangzhou Crescent Software Co., Ltd
China
Heinemann Educational Botswana
(Publishers) (Pty) Limited
Heinemann Lesotho(Pty) Ltd
Heinemann Publishers (Pty) Ltd
Icodeon Limited
IndiaCan Education Private Limited
Integral 7, Inc.
Intellipro, Inc.
Botswana
Lesotho
South Africa
UK
India
US
US
JM Soluções Exportação e Importação Ltda.
Brazil
NCS Pearson Puerto Rico, Inc.
NCS Pearson, Inc.
Ordinate Corporation
P.Ed. Aust Pty Ltd
Pearson (Beijing) Management Consulting
Co., Ltd.
Pearson (Guizhou) Education Technology
Co., Ltd.
Pearson (Singapore) Pte. Ltd.
Singapore
Pearson Aff ordable Learning Fund Limited
Pearson America LLC
Pearson Amsterdam B.V.
UK
US
Netherlands
Pearson Amsterdam Finance Limited2
UK
Pearson Assessment & Information B.V.
Netherlands
Pearson Assessment and Information GmbH
Germany
US
Brazil
UK
Japan
China
Australia
Puerto Rico
US
US
Australia
China
China
Section 5 Financial statements
219
13. Group companies continued
Wholly-owned subsidiaries continued
Company name
Country of Inc.
Company name
Pearson Education South Africa (Pty) Ltd
Pearson Education South Asia Pte. Ltd.
Pearson Education, Inc.
Country of Inc.
South Africa
Singapore
US
Pearson Educational Measurement Canada, Inc. Canada
Netherlands
Pearson Educational Publishers, LLC
US
Pearson Egitim Cozumleri Tikaret Limited Sirketi Turkey
Pearson Business (Asia Pacifi c) Pte. Ltd
Singapore
Pearson Australia Finance Unlimited
Pearson Australia Group Pty Ltd
Pearson Australia Holdings Pty Ltd
Pearson Australia Pty Ltd
Pearson Benelux B.V.
Pearson Books Limited2
Pearson Brazil Finance Limited
Pearson Business Services Inc.
Pearson Canada Assessment Inc
Pearson Canada Finance Unlimited
Pearson Canada Holdings Inc
Pearson Canada Inc.
Pearson Central Europe sp. z o.o.
Pearson Charitable Foundation
Pearson College Limited
Pearson DBC Holdings Inc.
Pearson Desarrollo y Capacitación
Profesional Chile Limitada
UK
Australia
Australia
Australia
UK
UK
US
Canada
UK
Canada
Canada
Poland
US
UK
US
Pearson English (Shanghai) Software
Technology Co., Ltd.
Pearson English Corporation
Pearson English KK
Pearson Falstaff (Holdings) Inc.
Pearson France SAS
Pearson Funding Five plc2
Pearson Funding Four plc2
Pearson Funding One plc2
Pearson Funding Two plc2
Pearson Group FURBS Trustee Limited2
Pearson Group Pension Trustee Limited
Pearson Deutschland GmbH
Germany
Pearson Holdings Inc.
Chile
Pearson Heinemann Limited
Pearson Digital Learning Puerto Rico, Inc.
Puerto Rico
Pearson Holdings Southern Africa (Pty) Limited
South Africa
Pearson Dollar Finance plc2
Pearson Dollar Finance Two plc
Pearson Educacion de Chile Limitada
UK
UK
Chile
Pearson in Practice ATA Limited
Pearson in Practice Holdings Limited
UK
UK
Pearson in Practice Skills Based Learning Limited UK
Pearson Educacion de Colombia S A S
Colombia
Pearson in Practice Technology Limited
Pearson Educacion de Mexico, S.A. de C.V.
Pearson Educacion de Panama S.A.
Pearson Educacion de Peru S.A.
Mexico
Panama
Peru
Pearson Inc.
Pearson India Education Services Private Limited India
Pearson International Finance Limited2
Pearson Educacion de Venezuela C.A.
Venezuela
Pearson Investment Holdings, Inc.
Pearson Educacion S.A.
Spain
Pearson Ioki sp. z o.o.
Pearson Education (Singapore) Pte Ltd
Singapore
Pearson Italia S.p.A
Pearson Education Africa (Pty) Ltd
South Africa
Pearson Japan KK
Pearson Education and Assessment, Inc.
US
Pearson Lanka (Private) Limited
Pearson Education Asia Limited
Hong Kong
Pearson Learning China (HK) Limited
Pearson Education Botswana (Pty) Limited
Botswana
Pearson Lesotho (Pty) Ltd
Pearson Education do Brasil S.A
Pearson Education Hellas S.A.
Pearson Education Holdings Inc.
Pearson Education Holdings Limited2
Brazil
Greece
US
UK
Pearson Loan Finance No. 3 Limited
Pearson Loan Finance No. 4 Limited
Pearson Loan Finance No.2 Unlimited
Pearson Loan Finance Unlimited
Pearson Education Indochina Limited
Thailand
Pearson Longman LLC
Pearson Education Investments Limited
UK
Pearson Longman Uganda Limited
Pearson Education Korea Limited
South Korea
Pearson Luxembourg No. 2. Sarl
Pearson Education Limited
Pearson Education Namibia (Pty) Limited
Pearson Education Publishing Limited
Pearson Education S.A.
Pearson Education S.A.
UK
Namibia
Nigeria
Uruguay
Pearson Netherlands B.V.
Argentina
Pearson Netherlands Holdings B.V.
Pearson Malaysia Sdn. Bhd.
Pearson Management Services Limited2
UK
Pearson Management Services Philippines Inc.
Philippines
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m
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n
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s
China
US
Japan
US
France
UK
UK
UK
UK
UK
UK
UK
US
UK
US
UK
US
Poland
Italy
Japan
Sri Lanka
Hong Kong
Lesotho
UK
UK
UK
UK
US
Uganda
Luxembourg
Malaysia
Netherlands
Netherlands
220
Pearson plc Annual report and accounts 2015
Notes to the company fi nancial statements continued
13. Group companies continued
Wholly-owned subsidiaries continued
Company name
Country of Inc.
Company name
Pearson New Zealand Limited1
New Zealand
Sound Holdings Inc.
Pearson Nominees Limited2
Pearson Online Tutoring LLC
Pearson Overseas Holdings Limited2
UK
US
UK
Spear Insurance Company Limited2
Stark Holding GmbH
Stark Verlagsgesellschaft mbH & Co. KG
Pearson PEM P.R., Inc.
Puerto Rico
Stark Verwaltungsgesellschaft mbH
Country of Inc.
US
Bermuda
Germany
Germany
Germany
Pearson Pension Property Fund Limited
Pearson PRH Holdings Limited
Pearson Professional Assessments Limited
Pearson Publications Inc.
Pearson Real Estate Holdings Inc.
Pearson Real Estate Holdings Limited
Pearson Schweiz AG
Pearson Services Limited2
Pearson Shared Services Limited2
UK
UK
UK
US
US
UK
Sunnykey International Holdings Limited (BVI)
BVI
Tecquipment Services Limited
Testchange Limited2
Texas Connections Academy at Houston, LLC
The Assessment Company Limited
The Coaching Space Limited
UK
UK
US
UK
UK
Switzerland
The Learning Edge International pty Ltd
Australia
UK
UK
The SIOP Institute, LLC
The Waite Group Inc
Pearson Sweden AB
Sweden
TQ Catalis Limited
Pearson VUE Philippines, Inc.
Philippines
TQ Clapham Limited
Peisheng Yucai (Beijing) Technology
Development Limited
Penguin Capital, LLC
Peter Honey Publications Ltd1
Phumelela Publishers (Pty) Ltd
PN Holdings Inc.
China
US
UK
South Africa
US
Prentice-Hall Hispanoamericana S.A. de C.V.
Mexico
TQ Education and Training Limited
TQ Global Limited
TQ Group Limited
TQ Holdings Limited
TQ Training Limited1
TQ Training Services Limited1
TQ Trustees Limited1
Prentice-Hall Holdings B.V.
ProctorCam, Inc.
PT Effi cient English Services
Reading Property Holdings LLC
Rebus Planning Associates Inc
Regents Publishing Co., Inc.
Reston Publishing Co., Inc
Rycade Capital Corporation
Sector Training Limited1
Servicios Administrativos Pearson Educacion
S.A. de C.V.
Shanghai AWL Education Software Ltd
Silver Burdett Ginn Inc.
Skylight Training and Publishing Inc
Smarthinking, Inc.
Netherlands
US
Indonesia
US
US
US
US
US
UK
Mexico
China
US
US
US
Training for Advancement Holdings Limited1
Training for Advancement Limited1
Vue Testing Services Israel Ltd
Wall Street English Training Centre (Shanghai)
Co., Ltd.
Wall Street Institute Kft
Wall Street Institute Master Italia Srl
WP Group Pension Trustees Limited
WSE Education Brazil Licenciamentos e Cursos
de Idiomas Ltda.
WSE Training Centre (Guangdong) Co., Ltd.
WSI Education GmbH
WSI International, Inc.
WSI Korea, Inc.
US
US
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
Israel
China
Hungary
Italy
UK
Brazil
China
Germany
US
South Korea
Section 5 Financial statements
221
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13. Group companies continued
Subsidiaries where the eff ective interest is less
than 100%
Company name
Country of Inc.
Certiport China Co. Ltd.
CG Manipal Schools Private Limited
(in Deregistration)
China
Nepal
Chongqing WSE Training Centre Co Ltd China
Educational Publishers LLP
GED Domains LLC
GED Testing Service LLC
UK
US
US
Heilongjiang WSE Training Centre Co Ltd China
Learn Capital Venture Partners II, L.P.
LRTE VOXY, LLC
LRTE Voxy, L.P.
US
US
US
% Pearson-
Owned
50.69%
51.00%
95.00%
85.00%
70.00%
70.00%
95.00%
81.00%
50.00%
83.33%
Pearson Education Achievement
Solutions (RF) (Pty) Ltd
South Africa 90.00%
Pearson Education Taiwan Ltd
Taiwan
99.80%
Pearson South Africa (Pty) Ltd
(formerly Pearson Marang (Pty) Ltd)
South Africa 90.00%
Revolution Pearson Special
Revolution Learning Capital
Partners, L.P.
US
US
99.50%
99.00%
TQ Education and Training Limited
Saudi Arabia 90.00%
Associated undertakings
Company name
ACT Aspire LLC
Country of Inc.
US
% Pearson-
Owned
50.00%
Aff ordable Private Education Centre Inc Philippines 40.00%
Avanti Learning Centres Private Limited India
20.90%
eAdvance Pty Limited
Gazelle Transform Limited
South Africa 40.00%
UK
33.66%
Institute for Private Education &
Training KSCC4
Intellus Learning, Inc.3
Karadi Path Education Company
Private Limited
Omega Schools Franchise Limited
Peking University Pearson (Beijing)
Cultural Development Co., Ltd.
Penguin Random House Limited
Penguin Random House LLC
Scala(cid:98)Higher Education , S.C.(cid:98)
Scala(cid:98)Latin America S.A.P.I. de C.V.(cid:98)
Scala(cid:98)Student, S.A. de C.V.(cid:98)
The Egyptian International Publishing
Company-Longman
Zaya Learning Labs Private Limited
Kuwait
US
India
Ghana
China
UK
US
Mexico
Mexico
Mexico
Egypt
India
49.00%
14.14%
26.25%
49.50%
45.00%
47.00%
47.00%
45.00%
45.00%
45.00%
49.00%
20.00%
In liquidation
Notes
1
2 Directly owned by Pearson plc
3 Signifi cant infl uence is based on mangement’s assessment
4
In liquidation
222
Pearson plc Annual report and accounts 2015
Five-year summary
All fi gures in £ millions
Sales: By geography*
North America
Core
Growth
Continuing
Discontinued
Total sales
Sales: By line of business*
School
Higher Education
Professional
Continuing
Discontinued
Total sales
Adjusted operating profi t: By geography*
North America
Core
Growth
Penguin Random House
Continuing
Discontinued
Total adjusted operating profi t
Adjusted operating profi t: By line of business*
School
Higher Education
Professional
Penguin Random House
Continuing
Discontinued
Total adjusted operating profi t
2011
2012
2013
2014
2015
3,008
1,008
712
2,906
2,940
910
724
836
692
4,728
4,540
4,468
962
343
312
5,690
4,883
4,780
2,303
1,664
761
4,728
962
5,690
2,027
1,695
818
1,880
1,736
852
4,540
4,468
343
4,883
312
4,780
464
103
35
50
652
84
736
268
295
39
50
652
84
736
444
122
32
69
667
55
722
236
309
53
69
667
55
722
480
114
(12)
90
672
51
723
183
354
45
90
672
51
723
4,390
1,472
5,862
4,615
1,497
6,112
4,390
1,472
5,862
4,615
1,497
6,112
751
187
938
–
751
187
938
785
147
932
–
785
147
932
* Periods prior to 2013 have not been restated to refl ect the new organisation structure as there is no appropriate basis for restatement of those
periods. 2011 onwards refl ect the adoption of IAS 19 revised and have been restated, as appropriate. Prior periods have not been restated.
Section 5 Financial statements
223
All fi gures in £ millions
Operating margin – continuing
2011
17.1%
2012
2013
2014
2015
17.0%
13.8%
14.7%
15.0%
Adjusted earnings
Total adjusted operating profi t
Net fi nance costs
Income tax
Non-controlling interest
Adjusted earnings
938
(55)
(196)
1
688
932
(65)
(200)
(3)
664
Weighted average number of shares (millions)
Adjusted earnings per share
800.2
86.0p
804.3
82.6p
736
(72)
(97)
(1)
566
807.8
70.1p
722
(64)
(118)
1
541
723
(46)
(105)
–
572
810.9
66.7p
813.3
70.3p
All fi gures in £ millions
Cash fl ow
Operating cash fl ow
Operating cash conversion
Operating free cash fl ow
Operating free cash fl ow per share
Total free cash fl ow
Total free cash fl ow per share
Net assets
Net debt
Return on invested capital (gross basis)
Total adjusted operating profi t
Cash tax paid
Return
Average invested capital
Return on invested capital
2011
2012
2013
2014
2015
983
105%
772
96.5p
772
96.5p
788
85%
657
81.7p
657
81.7p
588
80%
324
40.1p
269
33.3p
649
90%
413
50.9p
413
50.9p
435
60%
255
31.4p
152
18.7p
5,962
5,710
5,706
5,985
6,418
499
918
1,379
1,639
654
938
(151)
787
8,731
9.0%
932
(65)
867
9,578
9.1%
736
(191)
545
10,130
5.4%
722
(163)
559
9,900
5.6%
723
(129)
594
10,317
5.8%
Dividend per share
42.0p
45.0p
48.0p
51.0p
52.0p
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224
Pearson plc Annual report and accounts 2015
Corporate and operating measures
Sales – underlying and constant exchange rate movement
Underlying sales movements exclude the impact of acquisitions/disposals, movements in exchange(cid:98)rates and
changes in revenue recognition policies.
All fi gures in £ millions
Underlying decrease
Portfolio changes
Exchange diff erences
Total sales decrease
Underlying decrease
Constant exchange rate decrease
Adjusted income statement
2015
(80)
(129)
137
(72)
(2)%
(5)%
Reconciliation of the consolidated income statement to the adjusted numbers presented as non-GAAP measures
in(cid:98)the fi nancial statements.
Statutory
income
statement
Discontinued
operations
Other
net gains
and losses
Acquisition
costs
Intangible
charges
2015
Other net
fi nance
income/
costs
Tax
amortisation
benefi t
Adjusted
income
statement
All fi gures in £ millions
Operating (loss)/profi t
Net fi nance costs
(Loss)/profi t before tax
Income tax
(404)
(29)
(433)
81
51
–
51
(9)
(13)
–
(13)
40
(Loss)/profi t for the year
from continuing operations
(352)
42
27
Profi t for the year from
discontinued operations
Profi t for the year
Non-controlling interest
Earnings
1,175
823
–
823
(42)
(1,135)
–
–
–
(1,108)
–
(1,108)
–
–
–
–
–
–
–
–
–
1,089
–
1,089
(257)
–
(17)
(17)
7
832
(10)
2
834
–
834
–
(10)
–
(10)
–
–
–
33
33
–
33
–
33
723
(46)
677
(105)
572
–
572
–
572
Section 5 Financial statements
225
Adjusted income statement continued
Statutory
income
statement
Discontinued
operations
Other
net gains
and losses
Acquisition
costs
Intangible
charges
2014
Other net
fi nance
income/
costs
Tax
amortisation
benefi t
Adjusted
income
statement
All fi gures in £ millions
Operating profi t
Net fi nance costs
Profi t before tax
Income tax
Profi t for the year from
continuing operations
Profi t for the year from
discontinued operations
Profi t for the year
Non-controlling interest
Earnings
398
(93)
305
(63)
242
228
470
1
471
2
–
2
(1)
1
(1)
–
–
–
(2)
–
(2)
1
(1)
(227)
(228)
–
(228)
6
–
6
(1)
5
–
5
–
5
318
–
318
(73)
245
–
245
–
245
–
29
29
(5)
24
–
24
–
24
–
–
–
24
24
–
24
–
24
Adjusted operating profi t – underlying and constant exchange rate movement
Operating profi t movement excluding the impact of acquisitions, disposals and movements in exchange rates.
All fi gures in £ millions
Underlying decrease
Portfolio changes
Exchange diff erences
Total adjusted operating profi t increase
Underlying decrease
Constant exchange rate decrease
722
(64)
658
(118)
540
–
540
1
541
2015
(12)
(9)
22
1
(2)%
(3)%
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226
Pearson plc Annual report and accounts 2015
Corporate and operating measures continued
Free cash fl ow per share
Operating cash fl ow for continuing and discontinued operations before tax and fi nance charges, divided by the
weighted average number of shares in issue.
All fi gures in £ millions
Adjusted operating profi t
Cash conversion
Operating cash fl ow
Operating tax paid
Net operating fi nance costs paid
Total operating free cash fl ow
Non operating tax paid
Total free cash fl ow
Weighted average number of shares in issue (millions)
Operating free cash fl ow per share
Total free cash fl ow per share
Return on invested capital
All fi gures in £ millions
Total adjusted operating profi t
Operating tax paid
Return
Average goodwill and other intangibles
Average net operating assets
Average invested capital
Return on invested capital
2015
723
60%
435
(129)
(51)
255
(103)
152
813.3
31.4p
18.7p
2014
722
90%
649
(163)
(73)
413
–
413
810.9
50.9p
50.9p
Invested capital
2015
723
(129)
594
8,715
1,602
10,317
5.8%
2014
722
(163)
559
8,557
1,343
9,900
5.6%
Return on invested capital is calculated as total adjusted operating profi t less operating cash tax paid expressed as a
percentage of average invested capital. Invested capital includes the original unamortised goodwill and intangibles.
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 e-mail alerts for reports and
press releases relating to Pearson at
www.pearson.com/news/newsletter-subscribe.html
Shareholder information online
Shareholder information can be found on our website
www.pearson.com/investors/
investor-information.html
Our registrar, Equiniti, also provides a range of
shareholder information online. You can check your
holding and fi nd 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 0371 384 2233*
or, for those shareholders with hearing diffi culties,
textphone number 0371 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 fi nancial
columns of the national press.
2015 dividends
Payment date
Amount per share
Interim
11 September 2015
18 pence
Final
6 May 2016
34 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 0371 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 0371 384 2268*.
Section 5 Financial statements
227
Individual Savings Accounts (ISAs)
Equiniti off ers ISAs in Pearson shares. For more
information, please go to www.shareview.co.uk/dealing
or call customer services on 0345 300 0430*.
Share dealing facilities
Equiniti off ers telephone and internet services for
dealing in Pearson shares. For further information,
please contact their telephone dealing helpline on
03456 037 037* or, for online dealing, log on to
www.shareview.co.uk/dealing. You will need your
shareholder reference number as shown on your
share certifi cate.
A postal dealing service is also available through
Equiniti. Please telephone 0371 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 Bank of New York Mellon, Shareholder
Correspondence (ADR), PO Box 30170, College Station,
TX 77842-3170, telephone 1 (866) 259 2289 (toll free
within the US) or 001 201 680 6825 (outside the US).
Alternatively, you may e-mail
shrrelations@cpushareownerservices.com
Voting rights for registered ADR holders can be
exercised through Bank of New York Mellon, and for
benefi cial ADR(cid:98)holders (and/or nominee accounts)
through your US(cid:98)brokerage institution. Pearson will
fi le with the Securities and Exchange Commission
a Form 20-F.
* Lines open 8.30am to 5.30pm Monday to Friday (excluding UK
public holidays).
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228
Pearson plc Annual report and accounts 2015
Shareholder information continued
Share register fraud: protecting your investment
2016 fi nancial calendar
Pearson does not contact its shareholders directly
to(cid:98)provide recommendation advice and neither does
it(cid:98)appoint third parties to do so. As required by law,
our(cid:98)shareholder register is available for public
inspection but we cannot control the use of information
obtained by(cid:98)persons inspecting the register. Please
treat any approaches purporting to originate from
Pearson with(cid:98)caution.
For more information, please log on to our website at
www.pearson.com/investors/
investor-information.html
Ex-dividend date
Record date
7 April
8 April
Last date for dividend reinvestment(cid:98)election 14 April
Annual General Meeting
29 April
Payment date for dividend and share
purchase date for dividend reinvestment
Interim results
Payment date for interim dividend
* to be announced during 2016.
6 May
tbc*
tbc*
Tips on protecting your shares
Keep any documentation that contains your
shareholder reference number in a safe place
and shred any unwanted documentation.
Inform our registrar, Equiniti, promptly when you
change(cid:98)address.
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.
Consider holding your shares electronically in a CREST
account via a nominee.
›
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Reliance on this document
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
Except for the historical information contained
herein, the matters discussed in this document
include forward-looking statements. 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
fi nancing, anticipated costs savings and synergies
and the execution of Pearson’s strategy, are forward-
looking statements. By their nature, forward-looking
statements involve risks and uncertainties because
they relate to events and depend on circumstances
that will occur in future. They are based on numerous
assumptions regarding Pearson’s present and future
business strategies and the environment in which it
will operate in the future. There are a number of factors
which could cause actual results and developments
to diff er materially from those expressed or implied
by these forward-looking statements, including a
number of factors outside Pearson’s control. These
include international, national and local conditions,
as well as competition. They also include other risks
detailed from time to time in Pearson’s publicly-fi led
documents and you are advised to read, in particular,
the risk factors set out in this document. Any forward-
looking statements speak only as of the date they are
made, and Pearson gives no undertaking to update
forward-looking statements to refl ect any changes in
its(cid:98)expectations with regard thereto or any changes to
events, conditions or circumstances on which any such
statement is based. No reliance should be placed on
forward-looking statements.
Designed and Produced by Friend. www.friendstudio.com
Print: Pureprint Group
Illustrations
Lauren Rolwing, p17 laurenrolwing.com
Kanae Sato, p55 kanaes.com
Lucy Vigrass, p69 lucyvigrass.co.uk
Tang Yau Hoong, p125 tangyauhoong.com
Pearson has supported the planting of 137 square metres of new
native woodland with the Woodland Trust, helping to remove
5.48 metric tonnes of carbon dioxide generated by the production
of this report and associated documents.
This report has been printed on Edixion Challenger Off set which is
FSC® certifi ed and made from 100% Elemental Chlorine Free (ECF) pulp.
The mill and the printer are both certifi ed 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.
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Pearson plc
Registered number 53723 (England)