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11 Explanation of transition to IFRS

These are the Company's first financial statements prepared in accordance with IFRS as adopted by the EU.

The accounting policies set out in note 1 of the Pearson plc consolidated financial statements have been applied in preparing the financial statements for the year ended 31 December 2005, the comparative information presented in these financial statements for the years ended 31 December 2004 and 31 December 2003 and the preparation of an opening IFRS balance sheet at 1 January 2003 (the Company's date of transition). IAS 39 'Financial Instruments: Recognition and Measurement' and IAS 32 'Financial Instruments: Disclosure and Presentation' have not been applied to the comparative periods because the Company has taken a transitional exemption and adopted those standards prospectively from 1 January 2005. After this date, where hedge accounting cannot be applied under IAS 39, changes in the market value of financial instruments will be taken to the profit and loss account. No adjustment to the 2003 or 2004 UK GAAP financial statements was required due to the chosen adoption date of IAS 32 and IAS 39. The effect of the transitional adjustment on the balance sheet as at 1 January 2005 is set out in the tables below.

In preparing its opening IFRS balance sheet, the Company has made adjustments to amounts previously reported in its financial statements under UK GAAP. An explanation of how the transition from previous UK GAAP to IFRS has affected the Company's financial position is set out below. IFRS has had no effect on the Company's cash flow.

Equity

All figures in £ millions	1 Jan 2003	31 Dec 2003	31 Dec 2004
Total equity UK GAAP	4,008	3,794	4,532
Dividends	115	119	125
Total equity IFRS	4,123	3,913	4,657

Dividends IAS 10 'Events after the Balance Sheet Date' requires that dividends declared after the balance sheet date should not be recognised as a liability at the balance sheet date as they do not represent a present obligation at that date as defined by IAS 37 'Provisions, Contingent Liabilities and Contingent Assets'.

Effect of IAS 32 and IAS 39 transitional adjustment

All figures in £ millions	31 Dec 2004	Adj	1 Jan 2005
Non-current assets
Financial assets - Derivative financial instruments	-	135	135
Current assets
Financial assets - Derivative financial instruments	-	1	1
Current income tax assets	66	1	67
Non-current liabilities
Financial liabilities - Borrowings	(1,132)	(109)	(1,241)
Financial liabilities - Derivative financial instruments	-	(40)	(40)
Current liabilities
Other liabilities	(13)	12	(1)
Financial liabilities - Borrowings	(433)	-	(433)
Financial liabilities - Derivative financial instruments	-	(3)	(3)
Reserves	(1,983)	3	(1,980)

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