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Financial statements Consolidated income statement Year ended 31 December 2009 All figures in f millions Notes 2009 2008 Continuing operations ntroduction Sales 2 5,624 4,811 Cost of goods sold (2,539) (2, 174) Gross profit 3,085 2, 637 Operating expenses 4 (2,360) (1,986) Share of results of joint ventures and associates 12 30 25 Operating profit 755 676 a N Finance costs (122) (136) Finance income 27 ur strategy a 45 Profit before tax 660 585 Income tax 198 ) (172) Profit for the year from continuing operations 462 413 Loss for the year from discontinued operations 3 90) Profit for the year 462 323 Attributable to: Equity holders of the company 425 292 Minority interest Our performance 37 31 Earnings per share for profit from continuing and discontinued operations attributable to the equity holders of the company during the year (expressed in pence per share) - basic 8 53.2p 36.6p - diluted 53.1p 36.6p Earnings per share for profit from continuing operations attributable to the equity holders of the company during the year (expressed in pence per share) - basic 00 53.2p 47.9P diluted ur impact on society 53.1p 47.9P Consolidated statement of comprehensive income Year ended 31 December 2009 All figures in f millions Notes 2009 2008 overnance Profit for the year 462 323 Net exchange differences on translation of foreign operations (388) 1,125 Currency translation adjustment disposed - subsidiaries 49 Currency translation adjustment disposed - joint venture Actuarial losses on retirement benefit obligations - Group 25 (299) (71) Actuarial losses on retirement benefit obligations - associate 12 (3 (3) Net increase in fair values of proportionate holding arising on stepped acquisition 18 Taxation on items recognised in other comprehensive income 91 Financial statements Other comprehensive (expense)/income for the year 581) 1, 110 Total comprehensive (expense)/income for the year (119) 1,433 Attributable to: Equity holders of the company (127) 1,327 Minority interest 8 106Consolidated balance sheet As at 31 December 2009 All figures in f millions Notes 2009 2008 Assets Introduction Non-current assets Property, plant and equipment 10 388 423 Intangible assets 11 5,129 5,353 Investments in joint ventures and associates 12 30 23 Deferred income tax assets 13 387 372 Financial assets - Derivative financial instruments 16 112 181 Retirement benefit assets 25 49 Other financial assets 62 63 Our strategy Other receivables 22 112 152 6,220 6,616 Current assets Intangible assets - Pre-publication 20 650 695 Inventories 21 445 501 Trade and other receivables 22 1,284 1,342 Financial assets - Derivative financial instruments 16 3 Financial assets - Marketable securities 14 63 54 Our performance Cash and cash equivalents (excluding overdrafts) 17 750 585 3,192 3,280 Total assets 9,412 9,896 Liabilities Non-current liabilities Financial liabilities - Borrowings 18 (1,934) (2,019) Financial liabilities - Derivative financial instruments 16 (2) (15) Deferred income tax liabilities 13 (473 (447) Our impact on society Retirement benefit obligations 25 (339) (167) Provisions for other liabilities and charges 23 (50) (33) Other liabilities 24 253 221 (3,051) 2,902) Current liabilities Trade and other liabilities 24 (1,467) (1,429) Governance Financial liabilities - Borrowings 18 (74) 344) Financial liabilities - Derivative financial instruments 16 (7 (5) Current income tax liabilities (159) (136) Provisions for other liabilities and charges 23 18 ) 156) (1,725) 1,970) Total liabilities 4,776) 4,872) Net assets 4,636 5,024 Financial statementsConsolidated balance sheet continued All figures in f millions Notes 2009 2008 Equity Share capital 27 203 202 Share premium 27 2,512 2,505 Treasury shares 28 (226) (222) Translation reserve 227 586 Retained earnings 1,629 1,679 Total equity attributable to equity holders of the company 4,345 4,750 Minority interest 291 274 Total equity 4,636 5,024 These financial statements have been approved for issue by the board of directors on 10 March 2010 and signed on its behalf by Robin Freestone Chief financial officerNotes to the consolidated nancial statements continued 1. Accounting policies continued q. Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services net of value-added tax and other 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. Ifthese estimates do not reect actual returns in future periods then revenues could be understated or overstated for a particular period. Circulation and advertising revenue is recognised when the newspaper or other publication is published. Subscription revenue is recognised on a straight-line basis over the life of the subscription. Where a contractual arrangement consists of two or more separate elements that can be provided to customers either on a stand-alone basis or as an optional extra, such as the provision of supplementary materials with textbooks, revenue is recognised for each element as if it were an individual contractual arrangement. Revenue from multi-year contractual arrangements, such as contracts to process qualifying tests for individual professions and government departments, is recognised as performance occurs. The assumptions, risks, and uncertainties inherent in long-term contract accounting can affect the amounts and timing of revenue and related expenses reported. Certain of these arrangements, either as a result of a single service spanning more than one reporting period or where the contract requires the provision of a number of services that together constitute a single project, are treated as long-term contracts with revenue recognised on a percentage of completion basis. Losses on contracts are recognised in the period in which the loss 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 by the contract. On certain contracts, where the Group acts as agent, only commissions and fees receivable for services rendered are recognised as revenue. Any third-party costs incurred on behalf of the principal that are rechargeable under the contractual arrangement are not included in revenue. Income from recharges of freight and other activities which are incidental to the normal revenue generating activities is included in otherincome. r. Leases Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classied as 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 nance charges to achieve a constant rate on the nance balance outstanding. The corresponding rental obligations, net of nance charges, are included in nancial liabilities borrowings. The interest element of the 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 nance leases are depreciated over the shorter of the useful life of the asset or the lease term. Leases where a signicant portion of the risks and rewards of ownership are retained by the lessor are classied as operating leases by the lessee. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. 5. Dividends Dividends are recorded in the Group's nancial statements in the period in which they are approved by the company's shareholders. Interim dividends are recorded in the period in which they are approved and paid. t. Non-current assets and liabilities held for sale Assets and liabilities are classied as held for sale and stated at the lower of canying amount and fair value less costs to sell if it is intended to recover their carrying amount principally through a sale transaction rather than through continuing use No depreciation is charged in respect of non-current assets classied as held for sale. Amounts relatingto non-current assets and liabilities held for sale are classied 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 1q). Section 6 Financial statements 22. Trade and other receivables All figures in f millions 2009 2008 ntroduction Current Trade receivables 989 1,030 Royalty advances 99 111 Prepayments and accrued income 75 62 Other receivables 121 135 Receivables from related parties 1,284 1,342 Our strategy Non-current Royalty advances 86 102 Prepayments and accrued income 24 Other receivables 2 47 112 152 Trade receivables are stated at fair value, net of provisions for bad and doubtful debts and anticipated future sales returns. The movements on the provision for bad and doubtful debts are as follows: All figures in f millions 2009 2008 Our performance At beginning of year (72) (52) Exchange differences 5 18) Income statement movements (26) (27) Utilised 20 27 Acquisition through business combination (3) (2) At end of year 76) (72 ) Concentrations of credit risk with respect to trade receivables are limited due to the Group's large number of customers, who are internationally dispersed. Our impact on society GovernanceNotes to the consolidated financial statements continued 22. Trade and other receivables continued The ageing of the Group's trade receivables is as follows: All figures in f millions 2009 2008 Within due date 1,096 1,110 Up to three months past due date 228 248 Three to six months past due date 51 60 Six to nine months past due date 20 21 Nine to 12 months past due date 4 15 More than 12 months past due date 20 20 Total trade receivables 1,419 1,474 Less: provision for bad and doubtful debts (76 (72) Less: provision for sales returns 354) 372) Net trade receivable 989 1,030 The Group reviews its bad debt provision at least twice a year following a detailed review of receivable balances and historic payment profiles. Management believe all the remaining receivable balances are fully recoverable. 23. Provisions for other liabilities and charges Deferred All figures in f millions consideration Leases Other Total At 1 January 2009 43 8 38 89 Exchange differences (2) 1 (3) (5) Charged to income statement 3 3 2 8 Released to income statement - (3) (3) Acquisition through business combination - current year 27 - - 27 Acquisition through business combination - prior year adjustments ( 4 ) - - (4) Utilised (29) (2) (13) (44) At 31 December 2009 38 o 21 58 All figures in f millions 2009 2008 Analysis of provisions Non-current 50 33 Current 18 56 68 89 Deferred consideration primarily relates to the acquisition of Fronter in 2009.Practice Set 0 Refer to the following t-account to answer questions 1-5. Refer to questions f.i and f.ii from the Pearson case. Provision for bad and doubtful debts (contra account) A (beginning balance) D (Ending balance) Question 1 (0.5 pts) What is the dollar value for A (beginning balance for 2009)? Question 2 (0.5 pts) What is the dollar value for B (i.e., total credits during 2009)? Question 3 (0.5 pts) What is the dollar value for C (Le, total debits during 2009)? Question 4 (0.5 pts) What account should Pearson debit when recognizing \"bad and doubtful debts expense for 2009\"? 3. Income statement movements (i.e., bad debt expense) b. Provision for bad and doubtful debts (i.e., allowance for bad debts) c. Trade accounts receivable d. Recoveries Question 5 (0.5 pts) How much should Pearson debit the account you selected for question 4? Question 6 (0.5 pts) What account should Pearson debit when writing off accounts receivable (i.e., "utilizing" an allowance for bad debts)? a. Income statement movements (i.e., bad debt expense) b. Provision for bad and doubtful debts (i.e., allowance for bad debts) c. Trade accounts receivable d. Recoveries Question 7 (0.5 pts) How much should Pearson debit the account you selected for question 6? Refer to the following t-account to answer questions 8-10. Refer to questions g.i and g.ii from the Pearson case. Provision for sales returns (contra account) A (beginning balance) D (Ending balance) Question 8 (0.5 pts) What is the net dollar value for B (total credits during 2009)? Question 9 (0.5 pts) What is the net dollar value for C (total debits during 2009)? Question 10 (0.5 pts) What is the dollar value for D (ending balance for 2009)? Question 11 (0.5 pts) What account should Pearson debit when recognizing \"estimated sales returns for 2009\"? a. Sales Returns and Allowances (Le, a reduction in net revenues) b. Provision for sales returns (i.e., an allowance accont) c. Trade accounts receivable d. Cost of Goods Sold Question 12 (0.5 pts) How much should Pearson debit the account you selected for question 11? Question 13 (0.5 pts) What account should Pearson debit when recognizing actual sales returns for 2009 (Le, "utilizing" an allowance for returns account)? a. Sales Returns and Allowances (Le, a reduction in net revenues) b. Provision for sales returns (i.e., an allowance accont) c. Trade accounts receivable d. Cost of Goods Sold Question 14 (0.5 pts) How much should Pearson debit the account you selected for question 13? Refer to the following t-account to answer questions 8-10. Refer to questions g.i and g.ii from the Pearson case. Provision for sales returns (contra account) A (beginning balance) D (Ending balance) Question 8 (0.5 pts) What is the net dollar value for B (total credits during 2009)? Question 9 (0.5 pts) What is the net dollar value for C (total debits during 2009)? Question 10 (0.5 pts) What is the dollar value for D (ending balance for 2009)? Question 11 (0.5 pts) What account should Pearson debit when recognizing \"estimated sales returns for 2009\"? a. Sales Returns and Allowances (i.e., a reduction in net revenues) b. Provision for sales returns (i.e., an allowance accont) c. Trade accounts receivable (1. Cost of Goods Sold Question 12 (0.5 pts) How much should Pearson debit the account you selected for question 11? Question 13 (0.5 pts) What account should Pearson debit when recognizing actual sales returns for 2009 (i.e., "utilizing" an allowance for returns account)? a. Sales Returns and Allowances (i.e., a reduction in net revenues) b. Provision for sales returns (i.e., an allowance accont) c. Trade accounts receivable (1. Cost of Goods Sold Question 14 (0.5 pts) How much should Pearson debit the account you selected for question 13? Refer to the following t-account to answer questions 15-17. Refer to question h from the Pearson case. Trade accounts receivable (gross) A (beginning balance) B f'l'lon F (Ending ba'ance) Question 15 (0.5 pts) B represents gross sales on account during 2009. What is the value for B? Note that the income statement only gives net sales, so you'll need to make an adjustment to calculate gross sales. Question 16 (1 pt) C represents utilized bad and doubtful debts and D represents utilized sales returns, both for 2009. What then should E be? a. Provision for bad and doubtful accounts b. Cash collection on accounts 0. Sales (1. Reinstatements Question 17 (1.5pts) What is the value for E for 2009