Financial Reporting Analysis: An Advanced Study of Pearson Plc

This report provides an in-depth analysis of Pearson Plc's corporate reporting practices, covering key aspects such as cash-generating units (CGUs) under IAS 36, impairment of assets, financial instruments, and employee benefits. It examines how these accounting practices impact the company's financial position and balance sheet, including the management of financial risks, the recognition of employee benefits like pensions, and the sensitivity analysis undertaken by the company. The report highlights the importance of understandability, relevance, comparability, and reliability in financial reporting, adhering to IFRS and IASB conceptual frameworks. It also delves into the assumptions made by Pearson Plc regarding market instruments and the expected credit loss approach for measuring financial assets, offering valuable insights into the company's financial reporting strategies and their effects on its overall financial health. The qualitative characteristics are also mentioned which are kept in mind while reporting such as understandability, relevance, comparability and reliability following IFRS and IASB conceptual framework.

ADVANCED CORPORATE
REPORTING

TABLE OF CONTENTS
1. INTRODUCTION.......................................................................................................................3
Q2. A)..........................................................................................................................................3
Q2. B)..........................................................................................................................................5
Q2. C ).........................................................................................................................................7
3. CONCLUSION............................................................................................................................8
REFERENCES................................................................................................................................9
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1. INTRODUCTION
The report is on accounting practices in an organisation and it speaks about the impact on the
organisation. Pearson Plc is a UK owned education publishing company which provides
assessment service to corporations and schools for students. Pearson has investment and owns
brands like Addison-Wesley, Peachpit, Prentice Hall etc. Pearson has been part of Pearson Plc
which was owned formerly by Financial Times. Pearson has been in partnership with high-
education publishers for creating CourseSmart, which is company selling text books of college in
e-Textbook format. The regulatory framework for the financial reporting for Pearson Plc is
compliance oriented and follows rules of IASB under framework of International Accounting
Standards. These hold value for both internal and external stakeholders of the company.
Q2. A)
Cash generating units according to IAS 36 is defined to be the identifiable smallest group of
assets which generate cash inflows which are independent of cash inflows from other group of
assets. Pearson CGU nature and composition vary from entity to entity and determination is done
largely through specific factors of entity (Kabir and Rahman, 2018). Cash generating unit can
represent:
Entire entity
Departmental or business unit in entity
Production within department or entity
Groups of property items.
The carrying values of intangible assets and goodwill depend on the future cash flow estimates
of cash generating units underlying. The impairment reviews done by management have a
number of prominent estimates and judgements. Change in assumptions may result in
impairment charges which are different.
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The indications of impairment in balance sheet of Pearson Plc is decline in market value, change
being negative in technology or markets, rise in interest rates of market, net assets of company
being higher to capitalisation of market.
The base of recoverable amount for finding probability of future cash flows of asset and discount
on the cash flows by a discount rate giving reflection of cash flow risks (Kabir and Rahman,
2018).
Assumptions for estimating future value of assets at reporting date are regarding debts which are
doubtful, depreciation, liabilities which are contingent, employee benefits and cash flows of
future. The key assumptions may stand different sometimes regarding historical results and
forecasts.
Pearson got management's value in use impairment model for the year ending December 31,
2020, and put it to the test integrity in mathematics The carrying amounts of the net assets
subject to impairment testing were verified to the underlying financial information, ensuring
proper consistency between the two. The assets and liabilities that were considered by
management, as well as the financial flows that flowed from them.
Management matched the projected cash flows to budgets and strategic objectives approved by
the board of directors, and evaluated how these budgets and strategic strategies have been put
together. Pearson assessed management's associated decisions and recommendations, forecasts,
including revenue and operational profit growth rates over the next few years, cash conversion,
and corporate cost-cutting measures and organisation savings Pearson analysed the historical
accuracy of management's budgeting and forecasting by comparing management's estimates and
key assumptions to industry projections and comparable companies when this information was
available.
To assess the impact of reasonably possible changes to key assumptions, Pearson conducted their
own independent sensitivity analysis (André, Dionysiou and Tsalavoutas, 2018). Pearson
compared management's future cash flow predictions to external market economic expectations
to see how the COVID-19 pandemic might affect them. To assess the impact of various COVID-
19 scenarios, Person conducted an independent sensitivity study on the impairment
determinations of the Group.
Given the amount of the underlying investment carrying values and the difference to the market,
the impairment assessment was designated as a critical audit item of the market capitalization of
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the company Pearson. Further deterioration of some signs have been established in relation to
certain as a result of the carrying value of the subsidiaries' investments. Investments have a
higher value than their net assets. The evaluation necessitated the use of managerial judgement,
particularly in assessing if any (André, Dionysiou and Tsalavoutas, 2018). There are now
impairment markers that can be used to start the process, there is a need for an impairment
evaluation as well as a requirement to assess whether each investment's carrying value can be
backed up by the recoverable funds. Changes in these estimations and judgments could have a
significant impact on the business of financial statements of Pearson Plc.
Goodwill can be reallocated between CGU in circumstances which are limited. It is tested for
impairment annually. The impairment identification in CGU is done to which allocation of
goodwill has been done at Pearson Plc, impairment attribution is done for carrying goodwill
value before carrying other assets’ amount. Impairment of goodwill can not be reversed. As the
carrying value of goodwill gets reduced to nil, further impairment of CGU is allocated to CGU’s
other assets which is done on pro rata basis of carrying amount of each asset in CGU.
Impairment loss affects the financial statements as it deceases assets’ value and thus decrease in
fair value has effect on capital structure.
Company’s historical impairment loss may come in investment in subsidiaries which get
accounted for cost less provision for impairment in the balance sheet of the company.
Q2. B)
Financial instruments of Pearson Plc include cash, trade receivables, treasury shares, derivative
instruments of financial assets and liabilities etc.
The financial risks involved are government regulations and decisions, digital services and
acquisitions and divestments. Government regulations keep changing with change in
governments, their decisions influence the market. With digital services coming in, the use of
books for reading may be reduced as Pearson is a book publishing company (Flower and Ebbers,
2018).
The company Pearson has to manage the financial risks associated with adaptation to digital
medium for studies and hedging the risks through investment in different markets.
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The financial position of the company is affected in a way that revenue of the company decreases
and competitors take over market share, company having less revenue affects operations capacity
in units.
Change in financial position can affect material sensitivity as less of returns will bring effect on
raw material quality because of less finance and hampering the quality of the product.
Financial instrument gets recognition in Pearson’s financial statements when an entity becomes a
part of financial instrument. The entity removes financial liability when the obligation expires.
IAS 39 oversees this aspect (Pelger, 2020).
Assumptions made by company Pearson for the market instruments is that they will be estimated
in terms of price of similar instruments which have been in recent transactions and using models
for establishing the risks associated with the instrument.
Impairment of financial assets require that loss of credit on the financial assets measurement is
done by expected credit loss approach which is the difference existing between present value of
contractual cash flow and PV of cash flows which are expected in future (Kvatashidze, Khorava
and Gogrichiani, 2018).
Measurement of financial impaired assets is done by fair value and amortised costs.
The Pearson company’s financial performance is affected by impairment loss being reflected in
value of assets in financial statement, thus lowering total value of assets.
Difference in usual industry practice, depreciation is generally in more practice compared to
impairment as depreciation subtracts the value of asset as it grows old or is used. While
impairment talks of fair value of assets which can account for an unusual drop.
Pearson does use hedge in own accounting system. Hedging affects the financial position in a
positive way for the company by reduction in risk of portfolio overall. The company hedging
policy is a debt instrument being in fair value hedge relationship, then company Pearson does an
adjustment in carrying value of income statement for reflecting the risk hedged. A debt
instrument being in hedge relation the gain and loss on hedge’s effective portion is recognised in
other comprehensive income of the company. Hedging of company is in line with industry and
accounting as it has managed to save portfolio of company from volatile risks.
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Q2. C )
Employee benefits are recognised in form of pensions at Pearson. The assumptions include the
rate of discount, rate of inflation, growth of salary and longevity. The effect of assumptions on
financial statements is that the retirement benefit obligation and asset are recognised in balance
sheet representing the net present value of the benefit obligation defined and fair value of plan
assets at date of balance sheet. The discount rate is determined after the company has done
approximation of free cash flow and is taken usually higher than cost of capital. They are based
on certain assumptions and cannot be said realistic wholly. These assumptions have proven true
sometimes but historical factors cannot be taken in consideration in changing circumstances as
market scenario keeps changing. Estimates are taken by calculations in line with industry
forecasts (Flower and Ebbers, 2018).
The company Pearson has material sensitivity for change in key assumption. The current
financial status of the company is that it is doing well in terms of financial position and there
have been improvements based on planning for segment of product which have been performing
well in the last few quarters. The planning to cash in these segments can increase company’s
profitability and make the financial position of the company better.
The parameters of forecasting defined benefit plan include actuarial measurement of what a
company shall be needing at present for covering liabilities of pension. The benefit obligation
has assumption that plan shall not terminate in the future ahead and can be adjusted for reflection
of compensation expected in future. It is responsibility of actuaries for utilising benefit obligation
for calculating as to whether pension plans are funded or not. Impact of pension plans to the
contribution are that the benefit which employee receives is dependent on investment
performance of plan. The liability of the company ends where the contributions are made.
The current and future financial position of the company Pearson is affected because of capital
structure perspective. It reflects the pension plan claim on firm’s assets and cash flows (Alonso-
García, 2019).
Impact of pension benefits is that firms are answerable for pension benefits, like liabilities of
corporate. The pension liabilities may be senior or on par with financial liabilities which are
unsecured, but not in any case they are less in position to financial debt. Talking of interest
payments, failure of meeting contributions to minimum pension can lead to being bankrupt.
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Pension contribution are deductible at tax at corporate level which is same to payment of interest
on debt.
Pension assets although being segregated legally can be akin to corporate assets. Depreciation
and appreciation in pension value accrue to investors in the form of large or small contributions.
The organisation Pearson can be able to offer retirement benefits which are additional in
exchange for low increase in salaries of employees and utilising the financial slack for
reinvestment, repurchase of shares, reduction in debt. Also, in some cases, organisation excess
pension assets by planning termination or conversion to cash balance plan.
3. CONCLUSION
The report was informative of accounting practices in financial reporting and how it affects the
financial position of the company as well as how it gets affected by the factors such as historical
data. It gave an insight into the company’s financial statements recording of cash generated units,
impairment of assets and effect on balance sheet, financial risks and how they were measured,
accounting policies of companies for recognising employee benefits and sensitivity analysis
undertaken by the company. It can be said that the report was a comprehensive one covering
major aspects and company disclosure is useful for understanding of various terms of financial
reporting. The qualitative characteristics which have been kept in mind are understandability,
relevance, comparability and reliability following IFRS and IASB conceptual framework
(Pelger,2020). Understandability is important information quality provided in financial
statements of the company. Relevance has been present in decision-making needs of the
organisation. Information has been free from error and thus is reliable of Pearson. Comparability
can be seen here as investors can compare the financial statements over time.
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REFERENCES
Books and Journals
Kabir, H. and Rahman, A., 2018. How Does the IASB Use the Conceptual Framework in
Developing IFRSs? An Examination of the Development of IFRS 16 Leases. Journal of
Financial Reporting, 3(1), pp.93-116.
Pelger, C., 2020. The return of stewardship, reliability and prudence–a commentary on the
IASB’s new conceptual framework. Accounting in Europe, 17(1), pp.33-51.
André, P., Dionysiou, D. and Tsalavoutas, I., 2018. Mandated disclosures under IAS 36
Impairment of Assets and IAS 38 Intangible Assets: value relevance and impact on
analysts’ forecasts. Applied Economics, 50(7), pp.707-725.
Kvatashidze, N., Khorava, A. and Gogrichiani, Z., 2018. Issues of assessing the impairment of
assets.
Glaum, M., Landsman, W.R. and Wyrwa, S., 2018. Goodwill impairment: The effects of public
enforcement and monitoring by institutional investors. The accounting review, 93(6),
pp.149-180.
Flower, J. and Ebbers, G., 2018. Global financial reporting. Macmillan International Higher
Education.
Alonso-García, J., 2019. Pension systems. Encyclopedia of Gerontology and Population Aging.
Springer, Cham, Forthcoming.
Ghossoub, M., 2018. A Neyman–Pearson problem with ambiguity and nonlinear
pricing. Mathematics and Financial Economics, 12(3), pp.365-385.
Online:
https://plc.pearson.com/sites/pearson-corp/files/annual-reports/
Pearson_AR20_Online_210426.pdf
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