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Financial risk management
 12 Months Ended
Dec. 31, 2022
Text block [abstract]  
Financial risk management
19. Financial risk management
The Group’s approach to the management of financial risks together with sensitivity analyses of its financial instruments is set out below.
Treasury policy
Pearson’s treasury policies set out the Group’s principles for addressing key financial risks including capital risk, liquidity risk, foreign exchange risk and interest rate risk, and sets out measurable targets for each. The Audit Committee receives quarterly reports incorporating compliance with measurable targets and reviews and approves any changes to treasury policies annually.
The treasury function is permitted to use derivatives where their use reduces a risk or allows a transaction to be undertaken more cost effectively. Derivatives permitted include swaps, forwards and collars to manage foreign exchange and interest rate risk, with
foreign exchange swap and forward contracts the most commonly executed. Speculative transactions are not permitted.
Capital risk
The Group’s objectives when managing capital are:
 
—
To maintain a strong balance sheet and a solid investment grade rating;
 
—
To continue to invest in the business organically and through acquisitions; and
 
—
To have a sustainable and progressive dividend policy.
At 31 December 2022 the Group and its bonds were rated
BBB-(stable
outlook) with Fitch Ratings Limited and Baa3 (stable outlook) with Moody’s Investor Services.
Net debt
The Group’s net debt position is set out below:
 
     
All figures in £ millions
   
                2022
    
                2021
  
     
Cash and cash equivalents
   
 
558
 
  
 
937
 
     
Overdrafts
   
 
(15
) 
  
 
–
 
     
Derivative financial instruments
   
 
(6
) 
  
 
(2
) 
     
Bonds
   
 
(610
) 
  
 
(767
) 
     
Investment in finance lease receivable
   
 
121
 
  
 
115
 
     
Lease liabilities
   
 
(605
) 
  
 
(633
) 
     
Net debt
   
 
(557
) 
  
 
(350
) 
There are no balances held for sale as at 31 December 2022 or 31 December 2021.
Interest and foreign exchange rate management
The Group’s principal currency exposure is to the US dollar which represents almost 70% of the Group’s sales.
The Group’s long-term debt is primarily held in US dollars to provide a natural hedge of this exposure, which is achieved through issued US dollar debt or converting euro debt to US dollars using cross-currency swaps, forwards and collars. As at 31 December 2022 and 2021, the Group’s debt of £1,230m (2021: £1,400m) is all held at fixed rates.
See note 16 for details of the Group’s hedging programme which addresses interest rate risk and foreign currency risk.
Overseas profits are converted to sterling to satisfy sterling cash outflows such as dividends at the prevailing spot rate at the time of the transaction. To the extent the Group has sufficient sterling, US dollars may be held as dollar cash to provide a natural offset to the Group’s debt or to satisfy future US dollar cash outflows.
The Group does not have significant cross-border foreign exchange transactional exposures.
As at 31 December 2022, the sensitivity of the carrying value of the Group’s financial instruments to fluctuations in interest rates and exchange rates is as follows:
 
           
                             
2022
  
           
All figures in £ millions
   
        Carrying
value
    
Impact of 1%
increase in
  interest rates
     
Impact of 1%
decrease in
  interest rates
    
  Impact of 10%
strengthening
in sterling
    
Impact of
10%
  weakening in
sterling
  
           
Investments in unlisted securities
   
 
133
 
  
 
–
 
   
 
–
 
  
 
(10
) 
  
 
12
 
           
Other receivable
   
 
3
 
  
 
–
 
   
 
–
 
  
 
–
 
  
 
–
 
           
Cash and cash equivalents
   
 
558
 
  
 
–
 
   
 
–
 
  
 
(25
) 
  
 
31
 
           
Derivative financial instruments
   
 
(6
) 
  
 
7
 
   
 
(6
) 
  
 
(10
) 
  
 
12
 
           
Bonds
   
 
(610
) 
  
 
4
 
   
 
(4
) 
  
 
24
 
  
 
(30
) 
           
Other borrowings
   
 
(620
) 
  
 
–
 
   
 
–
 
  
 
26
 
  
 
(32
) 
           
Investment in finance lease receivable
   
 
121
 
  
 
–
 
   
 
–
 
  
 
(11
) 
  
 
13
 
           
Deferred and contingent consideration
   
 
(79
) 
  
 
–
 
   
 
–
 
  
 
4
 
  
 
(5
) 
           
Other net financial assets
   
 
477
 
  
 
–
 
   
 
–
 
  
 
(38
) 
  
 
47
 
           
Total
   
 
(23
) 
  
 
11
 
   
 
(10
) 
  
 
(40
) 
  
 
48
 
 
           
                                 
2021
  
           
All figures in £ millions
   
          Carrying
value
    
    Impact of 1%
increase in
interest rates
     
    Impact of 1%
decrease in
interest rates
    
  Impact of 10%
strengthening
in sterling
    
  Impact of 10%
weakening in
sterling
  
           
Investments in unlisted securities
   
 
113
 
  
 
–
 
   
 
–
 
  
 
(9
) 
  
 
11
 
           
Other receivable
   
 
87
 
  
 
–
 
   
 
–
 
  
 
(8
) 
  
 
10
 
           
Cash and cash equivalents
   
 
937
 
  
 
–
 
   
 
–
 
  
 
(43
) 
  
 
53
 
           
Derivative financial instruments
   
 
(2
) 
  
 
6
 
   
 
(6
) 
  
 
(1
) 
  
 
1
 
           
Bonds
   
 
(767
) 
  
 
5
 
   
 
(5
) 
  
 
37
 
  
 
(45
) 
           
Other borrowings
   
 
(633
) 
  
 
–
 
   
 
–
 
  
 
57
 
  
 
(70
) 
           
Investment in finance lease receivable
   
 
115
 
  
 
–
 
   
 
–
 
  
 
(11
) 
  
 
13
 
           
Other net financial assets
   
 
503
 
  
 
–
 
   
 
–
 
  
 
(42
) 
  
 
51
 
           
Total
   
 
353
 
  
 
11
 
   
 
(11
) 
  
 
(20
) 
  
 
24
 
The table above shows the sensitivities of the fair values of each class of financial instrument to an isolated change in either interest rates or foreign exchange rates. Other net financial assets comprise trade receivables less trade payables. A significant proportion of the movements shown above would impact equity rather than the income statement due to the location and functional currency of the entities in which they arise and the availability of net investment hedging.
The Group’s income statement is reported at average rates for the year while the balance sheet is translated at the
year-end
closing rate. Differences between these rates can distort ratio calculations such as debt to EBITDA and interest cover. 
Liquidity and refinancing risk management
The Group regularly reviews the level of cash and debt facilities required to fund its activities. This involves preparing a prudent cash flow forecast for the next three to five years, determining the level of debt facilities required to fund the business, planning for shareholder returns and repayments of maturing debt, and identifying an appropriate amount of headroom to provide a reserve against unexpected outflows.
At 31 December 2022, the Group had cash of £0.5bn (2021: £0.9bn) and no outstanding drawings (2021: £nil) on the US dollar denominated revolving credit facility due 2026 of $1.19bn (2021: $1.19bn).
The $1.19bn facility contains interest cover and leverage covenants which the Group has complied with for the year ended 31 December 2022. The maturity of the carrying values of the Group’s borrowings and trade payables are set out in notes 18 and 24 respectively.
At the end of 2022, the currency split of the Group’s trade payables was US dollar £234m (2021: £199m), sterling £71m (2021: £76m) and other currencies £43m (2021: £76m). Trade payables are all due within one year (2021: all due within one year).
The table below analyses the Group’s bonds and derivative assets and liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. Short dated derivative instruments have not been included in this table. The amounts disclosed in the table are the contractual undiscounted cash flows (including interest) and as such may differ from the amounts disclosed on the balance sheet.
Any cash flows based on a floating rate are calculated using interest rates as set at the date of the last rate reset. Where this is not possible, floating rates are based on interest rates prevailing at 31 December in the relevant year.
Financial counterparty and credit risk management
Financial counterparty and credit risk arises from cash and cash equivalents, favourable derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables. Counterparty credit limits, which take published credit rating and other factors into account, are set to cover the Group’s total aggregate exposure to a single financial institution. The limits applicable to published credit rating bands are approved by the Chief Financial Officer within guidelines approved by the Board. Exposures and limits applicable to each financial institution are reviewed on a regular basis.
 
         
    
Analysed by maturity
           
Analysed by currency
        
                 
All figures in £ millions
   
Greater than
one month and
less than
one year
    
Later than
one year
but less than
five years
    
      Five years
or more
     
Total
    
USD
    
GBP
    
Other
    
Total
  
                 
At 31 December 2022
                                                                  
                 
Bonds
   
 
–
 
  
 
342
 
  
 
389
 
   
 
731
 
  
 
–
 
  
 
455
 
  
 
276
 
  
 
731
 
                 
Rate derivatives – inflows
   
 
(11
) 
  
 
(471
) 
  
 
–
 
   
 
(482
) 
  
 
(24
) 
  
 
(170
) 
  
 
(288
) 
  
 
(482
) 
                 
Rate derivatives – outflows
   
 
1
 
  
 
490
 
  
 
–
 
   
 
491
 
  
 
224
 
  
 
255
 
  
 
12
 
  
 
491
 
                 
FX forwards – inflows
   
 
(304
) 
  
 
–
 
  
 
–
 
   
 
(304
) 
  
 
–
 
  
 
(304
) 
  
 
–
 
  
 
(304
) 
                 
FX forwards – outflows
   
 
313
 
  
 
–
 
  
 
–
 
   
 
313
 
  
 
–
 
  
 
313
 
  
 
–
 
  
 
313
 
                 
Total
   
 
(1
) 
  
 
361
 
  
 
389
 
   
 
749
 
  
 
200
 
  
 
549
 
  
 
–
 
  
 
749
 
                 
At 31 December 2021
                                                                  
                 
Bonds
   
 
107
 
  
 
386
 
  
 
403
 
   
 
896
 
  
 
162
 
  
 
468
 
  
 
266
 
  
 
896
 
                 
Rate derivatives – inflows
   
 
(7
) 
  
 
(331
) 
  
 
–
 
   
 
(338
) 
  
 
(9
) 
  
 
(150
) 
  
 
(179
) 
  
 
(338
) 
                 
Rate derivatives – outflows
   
 
12
 
  
 
339
 
  
 
4
 
   
 
355
 
  
 
203
 
  
 
150
 
  
 
2
 
  
 
355
 
                 
FX forwards – inflows
   
 
(148
) 
  
 
–
 
  
 
–
 
   
 
(148
) 
  
 
–
 
  
 
(148
) 
  
 
–
 
  
 
(148
) 
                 
FX forwards – outflows
   
 
148
 
  
 
–
 
  
 
–
 
   
 
148
 
  
 
90
 
  
 
–
 
  
 
58
 
  
 
148
 
                 
Total
   
 
112
 
  
 
394
 
  
 
        407
 
   
 
          913
 
  
 
          446
 
  
 
          320
 
  
 
          147
 
  
 
          913
 
 
Cash deposits and derivative transactions are made with approved counterparties up to
pre-agreed
limits. To manage counterparty risk associated with cash and cash equivalents, the Group uses a mixture of money market funds as well as bank deposits. As at 31 December 2022, 77% (2021: 81%) of cash and cash equivalents was held with investment grade bank counterparties, 8% (2021: 9%) with AAA money market funds and 15% (2021: 10%) with
non-investment
grade bank counterparties.
For trade receivables and contract assets, the Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. However, risk associated with the industry and country in which customers operate may also influence the credit risk. The credit quality of customers is assessed by taking into account financial position, past experience and other relevant factors. Individual credit limits are set for each customer based on internal ratings. The compliance with credit limits is regularly monitored by the Group. A default on a trade receivable is when the counterparty fails to make contractual payments within the stated payment terms. Trade receivables and contract assets are written off when there is no reasonable expectation of recovery.
The carrying amounts of financial assets, trade receivables and contract assets represent the maximum credit exposure.
Trade receivables and contract assets are subject to impairment using the expected credit loss model. The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected credit loss allowance for all trade receivables and contract assets. To measure the expected credit losses, trade receivables and contract assets have been grouped based on shared credit risk characteristics and the days past due. See note 22 for further details about trade receivables and contract assets including movements in provisions for bad and doubtful debts.