Financial Accounting Analysis of Pearson Group - Case Study Example

The Company operates a variety of pension plans, the largest being the UK Group plan which includes both defined benefit plans and defined contribution plans. It also operates a few smaller defined benefit plans in the U.S [(401 [K)] and Canada. Defined contribution pension plans and post-retirement medical benefit plans (PRMB) are principally for employees located in the U.S. The plan assets for the UK Group plan are held by a trust independently of the Company and hence are accounted for at their net value in the balance sheet as per IAS 19 (European Financial Reporting Advisory Group, 2008).

Based on the discount rate of 5.80% (FY06: 5.20%), present value of this obligation was 1,682m (FY06: 1,683m) and the fair value of plan assets were 1,744m (FY06: 1,528). The net value of 62m was carried to the balance sheet as Retirement Benefit Asset. Deficit in FY06 amounting to 155m was reported under non-current liability as Retirement Benefit Obligations. In FY07, the Company contributed 121m (including a special contribution of 100m) to fund this shortfall and disclosed it as a reduction from cash flow from operations.

The Management expects to eliminate this shortfall by FY14 and has agreed to further contribute 21m in FY08 and 21.9m per annum thereafter in excess of an estimated 30m of regular contributions. Any further deficit in funding can add significant burden on the Company's cash flows from operations. As per IAS 19, service cost of 29m (FY06: 27m) for UK Group plan was charged to income statement as an operating expense. Excess of expected returns on these plan assets over the interest paid on plan liabilities amounting to 12m was reported as finance income.

While the expected return was 96m (FY06: 85m), the interest paid was 84m (FY06:78m). The rate used for discounting these plan assets is based on the annualized yield on the iBoxx over 15-year AA-rated corporate bond index. As required by IFRS, the Company has disclosed the details of retirement benefits arrangement for its directors and the assumptions used for estimating the present value of benefit obligations. The expected sensitivity of present value of obligations to changes in discount rate and the changes in the value of plan assets and liabilities are also disclosed under notes to consolidated financial statement.

The Company has also reported Retirement Benefit Obligations amounting to 95m (FY06: 95m) under non-current liabilities as their present value of obligations were exceeded the fair value of their plan assets. These liabilities relate to other defined benefit obligation pension plans, US PRMS and other pension accruals. Service costs of these plans amounting to 3m were charged as an operating expense; whereas and the interest on the PRMS liabilities of 2m was recognized as finance expense in income statement.

PRMS are unfunded but are accounted for and valued similarly to defined benefit pension plans.The total actuarial gains on defined pension benefit plans and post retirement plans amounting to 80m (FY06: 107m) was directly charged to equity and reported under Statement of Recognized Income and Expense (SORIE). Discount rate for all the U.S plans are based on a U.S bond portfolio matching model, which