a.?Note to the instructor:  Chapter 5 does not specifically address many of the complex issues raised by part a of the case, but most students will find the list of the suggested discussion points to be intuitive and easy to identify with.  Keep it simple by highlighting the points that you believe are worth emphasizing.  A “guided tour” in-class approach may work well with this case (rather than using it as a take-home assignment where frustration may set in quickly for less mature students). 

•?The most obvious and immediately noticeable difference is that Pearson’s data are presented in GBP (£) rather than USD ($).  Pearson plc (meaning “public limited company” like a U.S.-based “corporation”) is headquartered in London, England, UK, although 63% of the company’s 2008 consolidated revenues were derived from North American markets.

•?To make “absolute” comparisons of financial data expressed in different currencies, you must convert one set of data (in the base currency they are stated in) to the other (target) currency you wish them to be expressed in.  With respect to balance sheet data such as current assets, you would use the year-end exchange rate (often called the “spot” rate) to make this conversion.  The spot rate between the USD and GBP was 1.4619 at December 31, 2008.  (See www.x-rates.com, click on “Historical Lookup, use British Pound as the Base Currency and American Dollar as the Target Currency.)  This means that each of the amounts expressed in British Pounds (£) for Pearson would be multiplied by 1.4619 to make the data comparable to Mc-Graw-Hill’s data as expressed in American Dollars ($).  Keep in mind, however, that exchange rates between major currencies fluctuate on a daily basis, so depending on what types of comparisons are being made, it may be appropriate to use the current spot rate rather than an historical spot rate.

•?To make “relative” comparisons of financial data expressed in different currencies, such as current ratios, ROI, ROE, or other key financial ratios, it is not necessary to do currency conversions.

•?McGraw-Hill, a U.S.-based corporation, must present its financial statement data in accordance to U.S. generally accepted accounting principles, as established by the FASB and its predecessors.  Pearson’s financial statements must instead be prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU) of which the UK is a member nation.  As a result, there will be important differences in the accounting for and related note disclosures of a variety of different types of transactions and events.  You may have noticed some differences in the terminology used by Pearson as compared to McGraw-Hill’s more familiar (U.S.-based) terminology.  For example, you may be surprised to learn that Pearson’s balance sheet presents non-current assets before current assets, and that “Cash and cash equivalents” is actually the last current asset listed!  (See www.pearson.com, then click on “Investors” and “Financial Results” to download their most recent annual report.)

•?Were you to review Pearson’s annual report, you would see that we’ve taken some liberties in the presentation of its data.  As already noted, “Cash and cash equivalents” is the last item listed among current assets, rather than first (as shown in C5.31. in the book).  Likewise, the description provided for the “Trade and other receivables” caption beginning with the word “net” was not presented on Pearson’s balance sheet; this description (including the £72 and £52 amounts) was taken from the notes to Pearson’s 2008 financial statements in order to provide a more familiar style of data presentation for this case.  Similarly, we’ve excluded one of Pearson’s current assets (“Intangible Assets—Pre-Publication”) from the data presented in C5.31. because McGraw-Hill (under U.S. GAAP) does not treat such items as current assets.  These examples are just surface-level illustrations of some of the differences that you would encounter in attempting to make detailed comparisons of the two companies.