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12 Intangible assets
| All figures in £ millions | Goodwill | Software | Acquired publishing rights |
Other intangibles acquired |
Total intangibles acquired |
Total |
|---|---|---|---|---|---|---|
| Cost | ||||||
| At 1 January 2005 | 3,160 | 181 | 10 | 46 | 56 | 3,397 |
| Exchange differences | 345 | 15 | 2 | 4 | 6 | 366 |
| Transfers | – | (13) | – | – | – | (13) |
| Additions | – | 24 | – | – | – | 24 |
| Disposals | (6) | (10) | – | – | – | (16) |
| Acquisition through business combination | 155 | – | 56 | 33 | 89 | 244 |
| At 31 December 2005 | 3,654 | 197 | 68 | 83 | 151 | 4,002 |
| Exchange differences | (396) | (17) | (8) | (8) | (16) | (429) |
| Transfers | – | 6 | – | – | – | 6 |
| Additions | – | 29 | – | – | – | 29 |
| Disposals | (5) | (2) | – | – | – | (7) |
| Acquisition through business combination | 246 | 4 | 36 | 117 | 153 | 403 |
| Adjustment on recognition of pre-acquisition deferred tax |
(7) | – | – | – | – | (7) |
| Transfer to non-current assets held for sale | (221) | (16) | – | – | – | (237) |
| At 31 December 2006 | 3,271 | 201 | 96 | 192 | 288 | 3,760 |
| All figures in £ millions | Goodwill | Software | Acquired publishing rights |
Other intangibles acquired |
Total intangibles acquired |
Total |
|---|---|---|---|---|---|---|
| Amortisation | ||||||
| At 1 January 2005 | – | (111) | – | (8) | (8) | (119) |
| Exchange differences | – | (10) | – | – | – | (10) |
| Charge for the year | – | (18) | (5) | (6) | (11) | (29) |
| Disposals | – | 10 | – | – | – | 10 |
| At 31 December 2005 | – | (129) | (5) | (14) | (19) | (148) |
| Exchange differences | – | 13 | 1 | 2 | 3 | 16 |
| Transfers | – | (5) | – | – | – | (5) |
| Charge for the year | – | (23) | (11) | (17) | (28) | (51) |
| Disposals | – | 1 | – | – | – | 1 |
| Acquisition through business combination | – | (1) | – | – | – | (1) |
| Transfer to non-current assets held for sale | – | 9 | – | – | – | 9 |
| At 31 December 2006 | – | (135) | (15) | (29) | (44) | (179) |
| Carrying amounts | ||||||
| At 1 January 2005 | 3,160 | 70 | 10 | 38 | 48 | 3,278 |
| At 31 December 2005 | 3,654 | 68 | 63 | 69 | 132 | 3,854 |
| At 31 December 2006 | 3,271 | 66 | 81 | 163 | 244 | 3,581 |
Other intangibles acquired include customer lists and relationships, software rights, technology, trade names and trademarks. Amortisation of £4m (2005: £4m) is included in the income statement in cost of goods sold and £47m (2005: £25m) in administrative and other expenses. In 2006 £3m of software amortisation (2005: £3m) relates to discontinued operations.
Impairment tests for cash-generating units containing goodwill
Impairment tests have been carried out where appropriate as described below. The recoverable amount for each unit tested exceeds its carrying value.
Goodwill is allocated to the Group's cash-generating units identified according to the business segment. Goodwill has been allocated as follows:
| All figures in £ millions | Notes | 2006 | 2005 |
|---|---|---|---|
| Higher Education | 780 | 903 | |
| School Book | 683 | 714 | |
| School Assessment and Testing | 342 | 310 | |
| School Technology | 356 | 408 | |
| Other Assessment and Testing | 490 | 531 | |
| Other Government Solutions | – | 249 | |
| Other Book | 56 | 57 | |
| Pearson Education total | 2,707 | 3,172 | |
| Penguin US | 156 | 179 | |
| Penguin UK | 114 | 114 | |
| Pearson Australia | 44 | 47 | |
| Penguin total | 314 | 340 | |
| IDC | 149 | 138 | |
| Mergermarket | 28 | 97 | – |
| Other FT Publishing | 4 | 4 | |
| FT Publishing total | 101 | 4 | |
| Total goodwill – continuing operations | 3,271 | 3,654 | |
| Goodwill held for sale | 29 | 221 | – |
| Total goodwill | 3,492 | 3,654 |
Goodwill has been allocated for impairment purposes to 13 cash-generating units. The recoverable amount of each cash-generating unit is based on value in use calculations, with the exception of IDC which is assessed on a market value basis. Goodwill is tested for impairment annually. Following a review in 2006, the allocation of corporate items has been revised. The 2005 comparative has been revised accordingly.
The value in use calculations use cash flow projections based on financial budgets approved by management covering a five year period. The key assumptions used by management in the value in use calculations were:
Discount rate - The discount rate is based on the risk-free rate for government bonds, adjusted for a risk premium to reflect the increased risk in investing in equities. The risk premium adjustment is assessed for each specific cash-generating unit. The average pre-tax discount rates used are in the range of 10.3% to 11.9% for the Pearson Education businesses, 7.8% to 10.3% for the Penguin businesses and 10.5% to 11.0% for the FT Publishing businesses.
Perpetuity growth rates - The cash flows subsequent to the approved budget period are based upon the long-term historic growth rates of the underlying territories in which the cash-generating unit operates and reflect the long-term growth prospects of the sectors in which the cash-generating unit operates. The perpetuity growth rates used vary between 2.5% and 3.5%. The perpetuity growth rates are consistent with appropriate external sources for the relevant markets.
Cash flow growth rates - The cash flow growth rates are derived from forecast sales growth taking into consideration past experience of operating margins achieved in the cash-generating unit. Historically, such forecasts have been reasonably accurate.
The valuation of IDC is determined using an observable market price for each share. Other than goodwill there are no intangible assets with indefinite lives.