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12 Intangible assets

12 Intangible assets

All figures in £ millions	Goodwill	Software	Acquired publishing rights	Other intangibles acquired	Total intangibles acquired	Total
Cost
At 1 January 2003	3,610	146	-	-	-	3,756
Exchange differences	(275)	(10)	-	-	-	(285)
Additions	113	26	-	-	-	139
Disposals	(4)	(2)	-	-	-	(6)
Acquisition through business combination	-	-	-	44	44	44
At 31 December 2003	3,444	160	-	44	44	3,648
Exchange differences	(201)	(8)	-	(3)	(3)	(212)
Additions	22	24	-	-	-	46
Disposals	(4)	(11)	-	-	-	(15)
Acquisition through business combination	-	-	10	5	15	15
Transfer to non-current assets held for sale	(101)	-	-	-	-	(101)
At 31 December 2004	3,160	165	10	46	56	3,381
Exchange differences	345	15	2	4	6	366
Transfers	-	(13)	-	-	-	(13)
Additions	155	24	-	-	-	179
Disposals	(6)	(10)	-	-	-	(16)
Acquisition through business combination	-	-	56	33	89	89
At 31 December 2005	3,654	181	68	83	151	3,986
Amortisation
At 1 January 2003	-	(75)	-	-	-	(75)
Exchange differences	-	7	-	-	-	7
Charge for the year	-	(28)	-	(4)	(4)	(32)
Disposals	-	2	-	-	-	2
Acquisition through business combination	-	-	-	-	-	-
At 31 December 2003	-	(94)	-	(4)	(4)	(98)
Exchange differences	-	8	-	1	1	9
Charge for the year	-	(20)	-	(5)	(5)	(25)
Disposals	-	11	-	-	-	11
Acquisition through business combination	-	-	-	-	-	-
At 31 December 2004	-	(95)	-	(8)	(8)	(103)
Exchange differences	-	(10)	-	-	-	(10)
Charge for the year	-	(18)	(5)	(6)	(11)	(29)
Disposals	-	10	-	-	-	10
Acquisition through business combination	-	-	-	-	-	-
At 31 December 2005	-	(113)	(5)	(14)	(19)	(132)
Carrying amounts
At 1 January 2003	3,610	71	-	-	-	3,681
At 31 December 2003	3,444	66	-	40	40	3,550
At 31 December 2004	3,160	70	10	38	48	3,278
At 31 December 2005	3,654	68	63	69	132	3,854

Other intangibles acquired include customer lists and relationships, technology, trade names and trademarks. Amortisation of £4m (2004: £3m; 2003: £5m) is included in the income statement in cost of sales and £25m (2004: £22m; 2003: £27m) in administrative and other expenses.

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	2005	2004	2003
Higher Education	1,106	950	1,007
School Book	861	739	783
School Assessment and Testing	271	232	246
School Technology	385	330	350
Other Assessment and Testing	245	211	223
Other Government Solutions	234	201	213
Other Book	70	60	63
Pearson Education total	3,172	2,723	2,885
Penguin US	149	122	138
Penguin UK	146	146	146
Pearson Australia	45	42	44
Penguin total	340	310	328
IDC	138	123	127
FT Publishing	4	4	4
Recoletos	-	-	100
Total goodwill	3,654	3,160	3,444

The Group has adopted IFRS 3 'Business Combinations' with effect from the date of transition to IFRS. In accordance with IFRS 3, goodwill is no longer amortised but rather tested for impairment on an annual basis. Goodwill has been allocated for impairment purposes to twelve 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.

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 8.5% to 11.5% for the Pearson Education businesses, 8% to 13% for the Penguin businesses and 8.5% to 11.5% for the FT Publishing businesses.

Perpetuity growth rates - The cash flows subsequent to the approval 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 3.0% to 4.0%. 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.

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