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Financial risk management
 12 Months Ended
Dec. 31, 2023
Statement [line items]  
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 2023 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   
 
   2023
        2022  
Cash and cash equivalents   
 
312
 
     558  
Overdrafts   
 
(3
) 
     (15 ) 
Derivative financial instruments   
 
5
 
     (6 ) 
Bonds   
 
(611
) 
     (610 ) 
Investment in finance lease receivable   
 
100
 
     121  
Lease liabilities   
 
(547
) 
     (605 ) 
Net debt
   
 
(744
) 
     (557 ) 
 
 
Interest and foreign exchange rate management
The Group’s principal currency exposure is to the US dollar which represents 68% 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 2023 and 2022, the Group’s debt of £1,161m (2022: £1,230m) 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 2023, the sensitivity of the carrying value of the Group’s financial instruments to fluctuations in interest rates and exchange rates is as follows:
 
                                
 
2023
  
         
Impact of
    
Impact of
          
Impact
  
         
1% increase
    
1% decrease
    
Impact of 10%
    
of 10%
  
   
Carrying
    
in interest
    
in interest
    
strengthening
    
weakening in
  
All figures in £ millions  
value
    
rates
    
rates
    
in sterling
    
sterling
  
Investments in unlisted securities  
 
143
 
  
 
–
 
  
 
–
 
  
 
(10
) 
  
 
12
 
Other receivable  
 
12
 
  
 
–
 
  
 
–
 
  
 
(1
) 
  
 
1
 
Cash and cash equivalents  
 
312
 
  
 
–
 
  
 
–
 
  
 
(24
) 
  
 
30
 
Derivative financial instruments  
 
5
 
  
 
15
 
  
 
(15
)
  
 
(5
) 
  
 
19
 
Bonds  
 
(611
) 
  
 
2
 
  
 
(2
) 
  
 
24
 
  
 
(29
) 
Other borrowings  
 
(550
) 
  
 
–
 
  
 
–
 
  
 
21
 
  
 
(26
) 
Investment in finance lease receivable  
 
100
 
  
 
–
 
  
 
–
 
  
 
(9
) 
  
 
11
 
Deferred and contingent consideration  
 
(57
) 
  
 
–
 
  
 
–
 
  
 
3
 
  
 
(4
) 
Other net financial assets  
 
378
 
  
 
–
 
  
 
–
 
  
 
(31
) 
  
 
38
 
Total
  
 
(268
) 
  
 
17
 
  
 
(17
)
  
 
(32
) 
  
 
52
 
                                
 
2022
 
  
       
          Impact of 1%     Impact of 1%     Impact of 10%     Impact of 10%  
    Carrying     increase in     decrease in     strengthening     weakening in  
All figures in £ millions   value     interest rates     interest rates     in sterling     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  
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.
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 2023, the Group had cash of £0.3bn (2022: £0.5bn) and no outstanding drawings (2022: £nil) on the US dollar denominated revolving credit facility due 2026 of $1bn (2022: $1.19bn).
The $1bn facility contains interest cover and leverage covenants which the Group has complied with for the year ended 31 December 2023. 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 2023, the currency split of the Group’s trade payables was US dollar £228m (2022: £234m), sterling £64m (2022: £71m) and other currencies £25m (2022: £43m). Trade payables are all due within one year (2022: 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 2023
                  
Bonds
   
 
–
 
  
 
257
 
  
 
354
 
   
 
611
 
  
 
–
 
  
 
354
 
  
 
257
 
  
 
611
 
Rate derivatives – inflows
   
 
(13
) 
  
 
(262
) 
  
 
–
 
   
 
(275
) 
  
 
(6
) 
  
 
(9
) 
  
 
(260
) 
  
 
(275
) 
Rate derivatives – outflows
   
 
5
 
  
 
268
 
  
 
–
 
   
 
273
 
  
 
178
 
  
 
89
 
  
 
6
 
  
 
273
 
FX forwards – inflows
   
 
(428
) 
  
 
–
 
  
 
–
 
   
 
(428
) 
  
 
–
 
  
 
(428
) 
  
 
–
 
  
 
(428
) 
FX forwards – outflows
   
 
421
 
  
 
–
 
  
 
–
 
   
 
421
 
  
 
421
 
  
 
–
 
  
 
–
 
  
 
421
 
Total
   
 
(15
) 
  
 
263
 
  
 
354
 
   
 
602
 
  
 
593
 
  
 
6
 
  
 
3
 
  
 
602
 
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
 
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 2023, 75% (2022: 77%) of cash and cash equivalents was held with investment grade bank counterparties, 10% (2022: 8%) with AAA money market funds and 15% (2022: 15%) 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.