Notes to the Accounts

25. Acquisitions

In November 1998 the Group acquired the education, reference and business & professional publishing divisions of Simon & Schuster Inc. All acquisitions have been consolidated applying acquisition accounting principles.

	Simon & Schuster	Other	Total	Total
Acquisition analysis of subsidiaries and businesses
Tangible fixed assets	126	17	143	2
Stocks	299	–	299	36
Debtors	306	5	311	64
Current asset investments	151	–	151	–
Creditors	(236)	(22)	(258)	(80)
Provisions	(86)	–	(86)	(4)
Deferred taxation	(1)	2	1	–
Equity minority interests	–	2	2	1
Net (borrowing)/cash acquired	(3)	1	(2)	(117)
Net assets/(liabilities) acquired at fair value	556	5	561	(98)
Fair value of consideration:
Cash	(2,865)	(53)	(2,918)	(252)
Deferred cash consideration	–	1	1	(19)
Costs accrued	(3)	(1)	(4)	–
Net prior year adjustments	–	(4)	(4)	(15)
Total consideration	(2,868)	(57)	(2,925)	(286)
Goodwill arising	2,312	52	2,364	384
Analysed as:
Goodwill capitalised	2,312	36	2,348	–
Goodwill written off to reserves	–	16	16	384
	2,312	52	2,364	384

NOTE: Goodwill written off to reserves relates to acquisitions made before 1 January 1998.

	Simon & Schuster	Other	Total
Acquisition goodwill and fair values
Acquisition cost	2,868	57	2,925
Book value of net assets acquired	569	15	584
Fair value adjustments	(13)	(10)	(23)
Fair value to the Group	556	5	561
Goodwill arising	2,312	52	2,364

NOTE: Other fair value adjustments comprise the revaluation of net assets £(12)m and adjustments to tax £2m.

	Book value at 27 nov	Accounting policy alignment	Revaluations	Other   items	Provisional  fair value
Simon & Schuster
Tangible fixed assets	137	–	(9) A	(2)	126
Stocks	364	(9)	(19) B	(37)	299
Debtors	389	(41)	(21) C	(21)	306
Current asset investments	–	–	–	151	151
Creditors	(237)	–	(31) D	32	(236)
Provisions	(70)	–	(16) E	–	(86)
Deferred tax	(11)	–	10 F	–	(1)
Net borrowing	(3)	–	–	–	(3)
Net liabilities acquired	569	(50)	(86)	123	556

NOTE: Simon & Schuster was acquired at the end of 1998 and therefore all fair value adjustments are provisional.

Accounting policy alignment

Simon & Schuster’s accounting policies have been changed to make them consistent with Pearson Education’s accounting policies. The main items are to expense internal software product development costs capitalised by Simon & Schuster’s software publishing company and to expense freight costs as incurred.

Revaluations

A. Fixed assets have been reduced to write down certain back office software development costs to their recoverable amount.

B. Pre publication expenditure has been reduced by £12m to its net realisable value. This relates primarily to titles required to be sold under the Department of Justice ruling. Finished goods of £5m have also been written off in respect of obsolete product to bring it to net realisable value.

C. Debtors have been reduced by £19m to bring them to their net realisable value. This is principally to increase the reserve for returns to reflect current return rates.

D. Additional accruals have been made, primarily for remuneration and retention obligations (£28m) existing at acquisition date. A further £6m has been included in provisions in respect of this.

E. Provisions have been made for various outstanding legal claims and other remuneration obligations (refer above) identified at acquisition.

F. Deferred taxation liabilities recorded in respect of the US have been written off as the availability of tax

losses in the Pearson US Group means that these obligations will not crystallise within the reasonably foreseeable future. Deferred tax has not been provided on the revaluations described above to the extent that they arise in the US.

Other items

Other items relate to the businesses of Simon & Schuster that Pearson do not intend to retain. The net assets of these businesses have not been consolidated in the individual balance sheet lines, but are included in current asset investments at the anticipated net proceeds from sale.

	1 january 1998 to 27 november 1998	1 january 1997  to 31 december 1997
Simon & Schuster financial information
Sales	1,001	1,153
Operating profit	54	157
Profit before taxation	51	149

The above results are shown using the accounting policies of Simon & Schuster prior to acquisition (before goodwill amortisation). Taxation numbers are not available as the taxation of Simon & Schuster was accounted for as part of a larger group. Accordingly, no statement of recognised gains and losses is presented.

	Cost	Net assets acquired	Goodwill
Total goodwill arising on acquisitions
Subsidiaries and businesses (see page 79)	2,925	561	2,364
Associates	13	13	–

Cash flow from acquisitions
Cash – current year acquisitions (see page 79)	2,918	252
Deferred payments for prior year acquisitions and other items	18	17
Net cash outflow	2,936	269

NOTE: Contributions to the cash flow from acquisitions in 1998 are as follows: net cash inflow from operating activities £15m, returns on investments and servicing of finance £(1)m, taxation £(1)m, and capital expenditure and financial investment £(7)m.