COCHLEAR LIMITED — Annual Report 2010

Sep 15, 2010

Annual Report 2010 Innovation driving performance

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Toni Vourantonis
Bilateral cochlear
implant recipient
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Financial Report

31

• 734,803 694,699 Contents 32 Directors’ Report 48 Income Statement 49 Statement of Comprehensive Income 50 Balance Sheet 51 Statement of Changes in Equity 52 Statement of Cash Flows3,245 (202,191) (196,244) 53 Notes to the Financial Statements 53 1. Reporting entity 53 2. Basis of preparation 54 3. Significant accounting policies 62 4. Financial risk management 65 5. Revenue and expenses532,612 498,45566 6. Net finance (expense)/income 66 7. Auditors’ remuneration 67 8. Income tax expense 68 9. Dividends 69 10. Segment reporting 71 11. Earnings per share 72 12. Trade and other receivables 9,064 3,08172 13. Inventories 3,154 73 14. Property, plant and equipment 74 15. Intangible assets 77 16. Deferred tax assets and liabilities 78 17. Loans and borrowings 2079 18. Commitments 80 19. Provisions 81 20. Contingent liabilities39, 6 9 (183,705) (185,230) 82 21. Capital and reserves 83 22. Notes to the statements of cash flows 84 23. Controlled entities 85 24. Related parties 89 25. Employee benefits 92 26. Financial instruments 99 27. Events subsequent to reporting date39,42 (43,722) (44,979) 99 28. Construction of Headquarters 101 29. Parent entity disclosures 102 Directors’ Declaration 103 Independent Audit Report 104 Additional Information - (94,897) (96,682)

32 Directors’ Report Cochlear Limited for the year ended 30 June 2010

The directors present their report, together with the Consolidated Financial Report of the Consolidated Entity (Cochlear), being Cochlear Limited (the Company) and its controlled entities, for the year ended 30 June 2010, and the Auditor’s Report thereon.

Directors

The directors of the Company at any time during or since the end of the financial year were Mr TCE Bergman (retired 30 June 2010), Mr PR Bell, Prof E Byrne, AO, Mr A Denver, Mr R Holliday-Smith, Mr DP O’Dwyer, Mrs Y Allen (appointed 2 August 2010) and Dr CG Roberts.

Mr R Holliday-Smith was appointed Chairman effective from 1 July 2010.

Information on the directors is presented in the Annual Report.

Directors’ meetings

The number of directors’ meetings (including meetings of committees of directors) and number of meetings attended by each of the directors of the Company during the financial year are:

	Board of directors	Audit Committee	Medical Science Committee	Nominations Committee	Remuneration Committee	Technology and Innovation Committee
	Held Attended	Held Attended	Held Attended	Held Attended	Held Attended	Held Attended
Mr TCE Bergman	12 12	5 5	- -	3 2	4 4	2 2 2 2 2 2 2 2 - - 2 2 2 2
Mr PR Bell	12 12	- -	- -	3 3	4 4
Prof E Byrne, AO	12 12	- -	2 2	3 3	- -
Mr A Denver	12 12	5 5	- -	3 3	- -
Mr R Holliday-Smith	12 12	5 5	- -	3 3	4 4
Mr DP O’Dwyer	12 12	5 5	2 2	3 3	- -
Dr CG Roberts	12 12	- -	2 2	- -	- -

Principal activities and review of operations and results

The principal activities and a review of the operations of Cochlear during the year ended 30 June 2010, and the results of these operations are set out in the CEO/President’s Report and the Financial Discussion and Analysis sections of the Annual Report.

Other than as discussed in the CEO/President’s Report and the Financial Discussion and Analysis, there were no significant changes in the nature of those activities during the year ended 30 June 2010.

Consolidated results

The consolidated results for the financial year are:

The consolidated results for the fnancial year are:
	2010 $000	2009 $000
Revenue	734,803	694,699 176,268 130,540 233.7 233.2
Profit before income tax	209,351
Net profit	155,152
Basic earnings per share (cents)	275.7
Diluted earnings per share (cents)	274.2

33

Dividends

Dividends paid or declared by the Company to members since the end of the previous financial year are:

Type	Cents per share	Total amount $000	Date of payment	Tax rate for franking credit
In respect of the previous financial year: Final – ordinary shares	95.0	53,384	24 September 2009	30%
In respect of the current financial year: Interim – ordinary shares	95.0	53,705	16 March 2010	30%

All the dividends paid or declared by the Company since the end of the previous financial year were 100% franked.

The final dividend in respect of the current financial year has not been provided for in the Financial Report as it was not declared until after 30 June 2010. Since the end of the financial year, the directors declared a final 105.0 cents per share dividend, 60% franked at the tax rate of 30%, amounting to a total of $59,370,571.

Environmental regulations

Cochlear’s operations are not subject to any significant environmental regulations under either Commonwealth of Australia or State/Territory legislation. However, the Board believes that Cochlear has adequate systems in place to manage its environmental obligations and is not aware of any breach of those environmental requirements as they apply to Cochlear.

Non-audit services

During the year, KPMG, the Company’s auditor, has performed certain other services in addition to its statutory duties. The Board has considered the non-audit services provided during the year by the auditor and in accordance with written advice provided by resolution of the Audit Committee, is satisfied that the provision of those non-audit services during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons:

• all non-audit services were subject to the corporate governance procedures adopted by the Company and have been reviewed by the Audit Committee to ensure that they do not impact the integrity and objectivity of the auditor; and

• the non-audit services provided do not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Company, acting as an advocate for the Company or jointly sharing risks and rewards.

34 Directors’ Report Cochlear Limited for the year ended 30 June 2010

Details of the amounts paid to the auditor of the Company, KPMG, and its related practices for audit and non-audit services during the year are set out below:

out below:
	Consolidated
	2010 $	2009 $
Audit services		572,000 111,934 17,000 639,309 38,218
Auditors of the Company:
KPMG Australia:
- audit and review of fnancial reports	552,700
- other audit services	-
- other regulatory compliance services	6,978
Overseas KPMG frms:
- audit and review of fnancial reports	564,978
- other regulatory compliance services	12,579
Total audit services	1,137,235	1,378,461 1,621,676 106,739 557,366
Non-auditservices
Auditors of the Company:
KPMG Australia:
- taxation compliance services	589,651
- other tax related services	107,043
Overseas KPMG frms:
- taxation compliance services	461,149
Total non-audit services	1,157,843	2,285,781

State of affairs

There were no significant changes to the state of affairs of Cochlear during the financial year.

Likely developments

Further information as to likely developments in the operations of Cochlear and the expected results of those operations in subsequent financial years has not been included in this Directors’ Report because the directors believe, on reasonable grounds, that to include such information would be likely to result in unreasonable prejudice to Cochlear.

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Remuneration Report – audited

Remuneration Committee

The Remuneration Committee operates under delegated authority of the Board. The Remuneration Committee approves the remuneration policy and structure for executives and executive directors (senior executives) and makes recommendations to the Board on the total remuneration packages of each senior executive.

External advice on remuneration matters is obtained and is made available for the Remuneration Committee.

Remuneration policies

The Board recognises that Cochlear’s performance is dependent on the quality of its people. To successfully achieve its financial and operating objectives in a complex and global environment, Cochlear must be able to attract, motivate and retain highly skilled senior executives who are dedicated to the interests of shareholders. Cochlear adopts a total remuneration approach for senior executives. The key principles that underpin Cochlear’s remuneration policy include:

• a competitive total remuneration strategy provided to attract, motivate and retain senior executive talent;

• a significant proportion (up to 50% of total fixed remuneration) of total senior executive remuneration linked to financial performance and business objectives, under the Cochlear Management Short Term Incentive Plan (CMSTIP);

• a significant proportion (up to 50% of total fixed remuneration) of total senior executive remuneration linked to the creation of long-term value for shareholders under the Cochlear Executive Long Term Incentive Plan (CELTIP); and

• a requirement that all directors and members of the senior executive team achieve and then maintain a holding of shares or vested options equivalent to or greater than one year’s fixed remuneration through direct acquisition of shares or by acquiring and retaining rights to vested options and performances shares.

The remuneration policy assists Cochlear to achieve its business strategy and objectives. The Remuneration Committee recognises that, while remuneration is a key factor in recruiting the right people, it is not the only factor. Cochlear’s corporate reputation, its ethical culture and values and its ability to provide interesting and challenging career opportunities, also play an important role.

36 Directors’ Report Cochlear Limited for the year ended 30 June 2010

Remuneration structure

Senior executives

Remuneration of the senior executives is based on policies and programs under the following categories:

• total fixed remuneration made up of base salary and superannuation, retirement benefits and other incidental benefits; and

• variable remuneration made up of an annual short-term incentive plan and long-term incentives.

The remuneration structure is designed to strike a balance between fixed and variable remuneration. Variable remuneration is tied to performance and is at risk. The table below details the percentage remuneration components of the directors and senior executives at target levels of performance:

	Fixed	Variable or at risk remuneration	Variable or at risk remuneration
	Base salary	Short-term bonus	Long-term equity
Directors		- - - - - - 25% 22% 19% 22% 22% 20% 20% 20%	- - - - - - 25% 22% 23% 22% 22% 20% 20% 20%
Mr TCE Bergman (Chairman)	100%
Mr PR Bell	100%
Prof E Byrne, AO	100%
Mr A Denver	100%
Mr R Holliday-Smith	100%
Mr DP O’Dwyer	100%
Dr CG Roberts (CEO/President)	50%
Senior executives – Consolidated Entity
Mr R Brook (President, European Region)	56%
Mr NJ Mitchell (Chief Financial Offcer and Company Secretary)	58%
Mr MD Salmon (President, Asia Pacifc Region)	56%
Mr CM Smith (President, Americas Region)	56%
Mr DN Morris (President, Bone Anchored Solutions)	60%
Senior executives – Company
Mr D Howitt (Senior Vice President, Manufacturing and Logistics)	60%
MrJ Janssen (Senior Vice President, Design and Development)	60%

Service contracts

Cochlear does not enter into service contracts for senior executives, other than the CEO/President. Senior executives operate under standard termination and redundancy conditions with the following exceptions:

• the President, Asia Pacific Region has a notice period of three months; the President, European Region has a notice period of six months; and the President, Americas Region has a notice period of 60 calendar days;

• the President, European Region will receive a maximum of Swiss francs (CHF) 30,000 for repatriation costs in the case of termination or resignation; and

• the President, Americas Region will be entitled to 12 months base pay if his employment is terminated for reasons other than serious misconduct.

The CEO/President’s conditions are set out separately in this Remuneration Report.

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Base salary and benefits

Base salaries are determined by reference to appropriate benchmark information, taking into account an individual’s responsibilities, performance, qualifications, experience and geographical location.

In addition to base salary, selected overseas based executives receive additional benefits including health insurance, a car allowance and a relocation allowance. In Australia, retirement benefits are paid in line with the statutory Superannuation Guarantee legislation levels. In July 2005, members of the legacy defined benefit plan were given the opportunity to transfer to the accumulation fund. Ongoing contributions are based on the estimated required company contributions, using the plan actuarial assessments to ensure that employees are not adversely prejudiced by the move. The transfer of all executive members was completed in the first half of the 2006 financial year.

Globally, retirement benefits are paid in line with local legislation and practice.

Variable remuneration

The Board believes that well designed and managed short-term and long-term incentive plans are important elements of employee remuneration, providing tangible incentives for senior executives to achieve Cochlear’s short-term and long-term performance goals. Participation in these plans encourages greater involvement by senior executives to share in the future growth, prosperity and profitability of Cochlear in a way that gives them a community of interest with shareholders.

The proportions of variable remuneration opportunity vary for senior executives within Cochlear, reflecting an individual’s responsibilities, performance and experience.

Cochlear Management Short Term Incentive Plan

Short-term incentives for senior executives are determined under the CMSTIP. The short-term incentive is structured in such a way that a significant part of the senior executive’s package depends upon achievement of individual performance goals linked to the business objectives and the financial performance of Cochlear. Financial measures include revenue and earnings before interest and taxes targets. Short-term incentives are paid on both the half and full year results.

The percentage of total remuneration that is allocated to short-term incentives varies according to the senior executive’s position and the range is 30% to 50% of total fixed remuneration for achieving all budgeted targets. In years of exceptional performance, the short-term incentives could increase to 100% of total fixed remuneration.

The process of determining relevant performance measures and whether they are met is as follows:

• at the beginning of the financial year, the Remuneration Committee recommends to the Board the targets for the CEO/President and the other senior executives. These are dependent on financial objectives and agreement between the CEO/President and the senior executive on individual performance goals; and

• the CEO/President and the other senior executives and then the CEO/President and Chairman assess progress towards the financial and individual performance goals. The Remuneration Committee reviews, and the Board approves, these assessments prior to any payment.

The Remuneration Committee also evaluates the proposed short-term incentive awards in aggregate and determines their appropriateness having regard to Cochlear’s overall financial results. After this assessment, the Remuneration Committee makes its recommendation to the Board for payment. Once approved by the Board, the short-term incentive awards are paid to participants. This occurs on a half and full year basis.

Cochlear Executive Long Term Incentive Plan

The CELTIP was approved by shareholders at the 2003 Annual General Meeting (AGM). The CELTIP is designed to reward senior executives for achieving long-term growth in shareholder value.

Senior executives are offered a mixture of options (being options to acquire ordinary shares of Cochlear Limited) and performance shares (being fully paid ordinary shares of Cochlear Limited).

The number of options and performance shares offered to a senior executive depends on their fixed remuneration and Cochlear’s target remuneration package for the senior executive’s position. The mixture of options and performance shares is determined at the discretion of the Board.

The exercise price of the options is based on the weighted average price of Cochlear Limited’s shares traded during the five business days following the date of the provision of the preliminary final report to the Australian Securities Exchange (ASX) in August each year. All options refer to options over ordinary shares of Cochlear Limited. Each option is convertible to one ordinary share. All performance shares are ordinary shares of Cochlear Limited. Each performance share equates to one ordinary share.

38 Directors’ Report Cochlear Limited for the year ended 30 June 2010

Both the options and performance shares are subject to performance hurdles and vesting restrictions, which will ultimately determine the final number of options that will be exercisable and the number of performance shares receivable by a senior executive. The relevant performance hurdles and vesting restrictions are:

• a three year vesting period – during which time the senior executive must remain in employment and will be unable to exercise the options or trade the performance shares; and

• the performance of Cochlear over the vesting period – measured by using growth in earnings per share (EPS) and total shareholder return (TSR) as measured against the S&P/ASX 100 comparator group. Half the offer will be assessed against EPS growth and the other half using TSR as follows:

Compound annual growth rate of EPS over a three year period	Compound annual growth rate of EPS over a three year period	Ranking of TSR against S&P/ASX 100 comparator group over a three year period	Ranking of TSR against S&P/ASX 100 comparator group over a three year period
Performance	% of options and performance shares vesting	Performance	% of options and performance shares vesting
<10%	0%	<50th percentile	0% 50% to 100% pro-rata 100%
10% to 20%	50% to 100% pro-rata	50th to 75th percentile
>20%	100%	>75th percentile

Options and performance shares only vest if time qualifications and relevant performance hurdles are met.

There are no voting or dividend rights attached to options. There are no voting rights attached to the unvested ordinary shares. Voting rights will be attached to the unissued ordinary shares when the options have been exercised. Performance shares are held in trust for the senior executives.

Dividends paid to the trust are subsequently paid to the relevant senior executives upon share issuance. Voting rights are not transferred but are attached to the performance shares once ownership is transferred. Dividends are no longer payable once shares are forfeited.

The following factors and assumptions were used in determining the fair value of options on grant date using the Black-Scholes model:

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Grant date Option life Fair value per option Exercise price Price of shares on Expected volatility Risk free interest Dividend yield
grant date rate per annum per annum
17 August 2009 3 – 5 years $9.04 $60.04 $61.15 33.2% 4.92% 2.62%
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Performance of Cochlear in current CELTIP cycle

Depicted in the charts below is a comparison of basic EPS of Cochlear for the financial years 2006 to 2010 and the TSR performance of Cochlear relative to the S&P/ASX 100 for financial years 2008 to 2010:

Cochlear EPS performance

Cochlear TSR performance

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300
250
200 100
150 75
100 50
50 25
0 0
FO6 F07 F08 F09 F10 July 07 July 08 July 09 July 10
275.7
233.7 233.7
208.1
182.9
Cents per share 146.8
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For the year ended 30 June 2010, the growth in basic EPS was 18% and the increase in total return to Cochlear Limited shareholders (as measured from the change in share price plus dividends paid) was 30%.

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Consequences of performance on shareholder wealth

In considering Cochlear’s performance and benefits for shareholder wealth, the Remuneration Committee has regard to the following indices in respect of the current financial year and the previous four financial years:

Amounts $	2010	2009	2008	2007	2006
Net proft attributable to equity holders of the parent entity (million)	155.2	130.5 89.5 57.70	115.2 77.9 43.65	100.1 60.4 61.00	80.0 49.1 54.63
Dividends paid (million)	107.1
Share price at 30 June	74.32

Executive director

At the date of this Remuneration Report, there is one executive director in office, Dr CG Roberts.

Dr CG Roberts was appointed to the Board on 1 February 2004 at the time of his appointment as CEO/President.

Dr CG Roberts’ appointment has no fixed term and a notice period of six months. If Cochlear terminates Dr CG Roberts’ employment without cause, he will be entitled to receive an amount equivalent to 12 months of his total fixed remuneration plus the amount of benefits under the CMSTIP pro-rated to the date of termination.

Dr CG Roberts participates in the CMSTIP at a value equal to 50% of total fixed remuneration.

Dr CG Roberts participates in the CELTIP at a value equal to 50% of total fixed remuneration. The proportion of CELTIP that is provided between options and performance shares is determined by the Board.

Non-executive directors

Fees for non-executive directors are based on the nature of the directors’ work and their responsibilities. The remuneration rates reflect the complexity of Cochlear and the extent of the geographical regions in which Cochlear operates. In determining the level of fees, survey data on comparable companies is considered. Non-executive directors’ fees are recommended by the Remuneration Committee and determined by the Board. Shareholders approve the aggregate amount of non-executive director fees.

Fees are within the aggregate amount approved by shareholders at the AGM in October 2007 of $1,500,000 a year.

At the date of this report, the Chairman of Cochlear is Mr R Holliday-Smith. His director’s fees are set at three times the base fee for non-executive directors. He does not receive any additional fees for serving on committees of the Board.

From 2003, no new non-executive director was entitled to join the Cochlear Limited directors’ retirement scheme. Non-executive directors appointed prior to this were members of the scheme, which provided directors with more than five years’ service, retirement benefits of up to three times their annual remuneration over the previous three years.

On 23 October 2006, the Board determined that it should implement changes to non-executive director remuneration consistent with developing market practice and guidelines by discontinuing the ongoing accrual of benefits under the existing retirement scheme once the remaining members of the scheme reached their five year service period. The benefits accrued to that date will be indexed by reference to the 90 day bank bill rate.

All directors transitioned from the retirement scheme during the year ended 30 June 2007.

Non-executive directors do not receive any performance related remuneration, options or performance shares.

There are no commitments to non-executive directors arising from non-cancellable contracts with the Company or the Consolidated Entity.

40 Directors’ Report Cochlear Limited for the year ended 30 June 2010

Directors’ and senior executives’ remuneration details

The following table provides the details of all the directors and the executives of the Company and the Consolidated Entity with the authority and responsibility for planning, directing and controlling the activities of the Company and the Consolidated Entity (key management personnel), including the five most highly remunerated executives of the Company and the Consolidated Entity.

Details of the nature and amount of each major element of remuneration are:

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Year Fixed remuneration Variable remuneration Total Proportion of total
remuneration
Short-term Long-term Total Short- Equity Total Performance Equity related
term compensation [(i), (iv)] related
Amounts $ Salary Non- Super- Termination Long Bonus [(i)] Value Value of % %
and fees monetary annuation benefits [(iii)] service of perform-
benefits [(ii)] benefits leave options ance
shares
Directors
Non-executive
Mr TCE Bergman 2010 424,805 - 14,461 36,476 - 475,742 - - - - 475,742 - -
(Chairman)
2009 396,981 - 13,745 37,787 - 448,513 - - - - 448,513 - -
Mr PR Bell 2010 167,563 - 14,282 - - 181,845 - - - - 181,845 - -
2009 157,096 - 13,415 - - 170,511 - - - - 170,511 - -
Prof E Byrne, AO 2010 149,909 - 13,492 14,937 - 178,338 - - - - 178,338 - -
2009 142,173 - 12,677 15,474 - 170,324 - - - - 170,324 - -
Mr A Denver 2010 162,371 - 14,178 - - 176,549 - - - - 176,549 - -
2009 152,142 - 13,318 - - 165,460 - - - - 165,460 - -
Mr R Holliday- 2010 188,332 - 14,544 - - 202,876 - - - - 202,876 - -
Smith
2009 176,981 - 13,745 - - 190,726 - - - - 190,726 - -
Mr DP O’Dwyer 2010 170,678 - 14,345 - - 185,023 - - - - 185,023 - -
2009 160,142 - 13,539 - - 173,681 - - - - 173,681 - -
Executive
Dr CG Roberts 2010 1,137,844 - 14,461 - 28,398 1,180,703 490,951 461,393 - 952,344 2,133,047 44.6% 21.6%
(CEO/President)
2009 1,045,000 - 13,745 - 28,789 1,087,534 455,684 449,812 9,226 914,722 2,002,256 45.7% 22.9%
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	Year	Fixed remuneration	Fixed remuneration	Fixed remuneration	Variable remuneration	Variable remuneration	Total	Proportion of total remuneration
		Short-term	Long-term	Total	Short- term Equity compensation(i), (iv)	Total		Performance related Equity related
Amounts $		Salary and fees Non- monetary benefts(ii)	Super- annuation benefts Long service leave		Bonus(i) Value of options Value of perform- ance shares			% %
Executives
Consolidated Entity
Mr R Brook(v), (vi) (President European Region)	2010	422,945 66,293	36,208 -	525,446	141,396 142,283 -	283,679	809,125	35.1% 17.6%
,	2009	457,653 73,345	39,132 -	570,130	154,943 142,528 4,196	301,667	871,797	34.6% 16.8%
Mr NJ Mitchell(v), (vi), (vii) (Chief Financial Offcer and Company	2010	425,506 -	108,188 16,898	550,592	140,589 146,475 -	287,064	837,656	34.3% 17.5%
Secretary)	2009	391,917 -	100,019 17,155	509,091	132,832 133,193 3,245	269,270	778,361	34.6% 17.5%
Mr MD Salmon(v), (vi), (vii) (President Asia Pacifc Region)	2010	457,002 -	14,461 12,702	484,165	131,833 137,905 -	269,738	753,903	35.8% 18.3%
,	2009	423,613 -	13,745 9,414	446,772	115,786 126,905 3,154	245,845	692,617	35.5% 18.8%
Mr CM Smith(v), (vi) (President Americas Region)	2010	486,021 23,969	14,023 -	524,013	196,218 136,739 39,690	372,647	896,660	41.6% 19.7%
,	2009	540,496 26,720	16,757 -	583,973	175,813 138,490 39,424	353,727	937,700	37.7% 19.0%
Mr DN Morris(v) (President Bone Anchored Solutions)	2010	412,168 -	14,461 9,379	436,008	118,891 110,085 -	228,976	664,984	34.4% 16.6%
,	2009	383,833 -	13,745 9,432	407,010	113,322 106,318 2,653	222,293	629,303	35.3% 17.3%
Company
Mr D Howitt(v) (Senior Vice President Manufacturing	2010	396,557 -	14,461 12,454	423,472	114,939 103,360 -	218,299	641,771	34.0% 16.1%
, and Logistics)	2009	367,417 -	13,745 12,464	393,626	108,309 96,908 2,374	207,591	601,217	34.5% 16.5%
Mr J Janssen(v), (vi), (vii) (Senior Vice President Design and	2010	404,345 -	14,461 8,984	427,790	117,415 112,279 -	229,694	657,484	34.9% 17.1%
, Development)	2009	378,497 -	13,745 10,412	402,654	111,262 114,722 1,952	227,936	630,590	36.1% 18.5%

(i) Short-term and long-term incentive bonuses are granted annually. The grant date is tied to the performance appraisal, which for the current year was completed by 30 June 2010. The service and performance criteria are set out in this report.

(ii) Benefits include the provision of car allowances, health insurance and relocation costs.

(iii) Amounts accrued for interest during the financial year to the directors’ retirement scheme.

(iv) The value disclosed above is the proportion of the fair value of the options and performance shares allocated to the financial year. The ability to exercise the options and performance shares is conditional on Cochlear achieving certain performance hurdles. The estimated value of options for the current financial year is calculated at the date of grant using the Black-Scholes model. Further details of options granted during the financial year are set out below. The value of performance shares for the current financial year is calculated as the share price at the date of issue discounted for vesting probabilities.

(v) Executive is included as one of the five named Company executives or Consolidated Entity executives who received the highest remuneration in the current financial year in accordance with section 300A of the Corporations Act 2001.

(vi) Executive is included as a key management person in accordance with AASB 124 Related Party Disclosures.

(vii) Denotes Consolidated Entity and Company executives.

42 Directors’ Report Cochlear Limited for the year ended 30 June 2010

Exercise of options granted as remuneration

During the financial year, the following shares were issued on the exercise of options previously granted as compensation:

	Number of shares	Amount paid $/share
Executive director Dr CG Roberts Executives Consolidated Entity Mr MD Salmon Mr CM Smith Mr DN Morris Company Mr D Howitt Mr J Janssen	78,991 27,011 23,474 22,706 20,325 16,713	39.93 39.93 43.98 39.93 39.93 39.93

During the previous financial year, 127,702 options were exercised. There are no amounts unpaid on the shares issued as a result of the exercise of the options in prior years.

Analysis of bonuses included in remuneration

Details of the vesting profile of the short-term incentive cash bonuses awarded as remuneration to each executive director of the Company and each of the five named Company executives and relevant Consolidated Entity executives are detailed below:

	Short-term incentive bonus	Short-term incentive bonus	Short-term incentive bonus
Amounts $	Included in remuneration	% vested in fnancial year(i)	% forfeited during fnancial year(ii)
Executive director Dr CG Roberts Executives Consolidated Entity Mr R Brook Mr NJ Mitchell Mr MD Salmon Mr CM Smith Mr DN Morris Company Mr D Howitt Mr J Janssen	490,951 141,396 140,589 131,833 196,218 118,891 114,939 117,415	88.3% 83.6% 87.6% 72.6% 100.5% 88.1% 88.1% 87.9%	11.7% 16.4% 12.4% 27.4% - 11.9% 11.9% 12.1%

(i) Amounts included in remuneration for the financial year represent the amounts that vested in the financial year based on achievement of personal goals and satisfaction of specified performance goals. No amounts vest in future financial years in respect of the CMSTIP for the 2010 financial year.

(ii) The amounts forfeited in short-term incentive bonuses are due to the personal and specified performance service goals not being met in the current financial year.

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Analysis of share based payments granted as remuneration

Details of the vesting profile of the options and performance shares granted as remuneration to each director of the Company and each of the five named Company executives and relevant Consolidated Entity executives are set out below:

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Options Performance shares
Date of Number % vested % forfeited Value yet to vest Number % vested % forfeited Value yet to vest
grant [(iv)] granted in financial in financial Min [(ii) ] Max [(iii)] granted in financial in financial Min [(ii)] Max [(iii)]
year year [(i)] $ $ year year [(i)] $ $
Executive director
Dr CG Roberts 21 August 2006 70,422 92% 8% - - - - - - -
20 August 2007 59,088 - - - 481,565 - - - - -
18 August 2008 101,412 - - - 529,371 - - - - -
17 August 2009 58,599 - - - 529,735 - - - - -
Executives
Consolidated Entity
Mr R Brook 21 August 2006 23,239 92% 8% - - - - - - -
20 August 2007 17,422 - - - 141,987 - - - - -
18 August 2008 30,285 - - - 158,088 - - - - -
17 August 2009 19,663 - - - 177,754 - - - - -
Mr NJ Mitchell 21 August 2006 18,980 92% 8% - - - - - - -
20 August 2007 15,644 - - - 127,501 - - - - -
18 August 2008 35,824 - - - 187,001 - - - - -
17 August 2009 20,686 - - - 187,001 - - - - -
Mr MD Salmon 21 August 2006 18,422 92% 8% - - - - - - -
20 August 2007 14,891 - - - 121,362 - - - - -
18 August 2008 33,446 - - - 174,588 - - - - -
17 August 2009 19,344 - - - 174,870 - - - - -
Mr CM Smith 21 August 2006 28,849 92% 8% - - - - - - -
20 August 2007 12,577 - - - 102,500 2,377 - - - 68,333
18 August 2008 29,714 - - - 155,107 1,726 - - - 38,783
17 August 2009 22,379 - - - 202,306 - - - - -
Mr DN Morris 21 August 2006 16,157 92% 8% - - - - - - -
20 August 2007 13,296 - - - 108,361 - - - - -
18 August 2008 25,074 - - - 130,886 - - - - -
17 August 2009 14,505 - - - 131,125 - - - - -
Company
Mr D Howitt 21 August 2006 13,974 92% 8% - - - - - - -
20 August 2007 12,211 - - - 99,517 - - - - -
18 August 2008 24,032 - - - 125,447 - - - - -
17 August 2009 13,903 - - - 125,683 - - - - -
Mr J Janssen 21 August 2006 21,217 92% 8% - - - - - - -
20 August 2007 13,396 - - - 109,174 - - - - -
18 August 2008 24,819 - - - 129,555 - - - - -
17 August 2009 14,358 - - - 129,796 - - - - -
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(i) The percentage forfeited in the financial year represents the reduction from the maximum number of options and performance shares available to vest due to EPS, TSR or employee service periods not being met.

(ii) The minimum value of options and performance shares yet to vest is nil as the performance criteria may not be met and consequently, the options and performance shares may not vest.

(iii) The maximum value of options and performance shares yet to vest is not determinable as it depends on the market price of shares of the Company on the ASX at the date the option and performance shares vest. The maximum values disclosed above are based on the valuations as per this report.

(iv) Options and performance shares vest three years after their initial grant date.

44 Directors’ Report Cochlear Limited for the year ended 30 June 2010

Analysis of movements in options

The movement in value during the financial year of options over ordinary shares of Cochlear Limited held by each Company director and each of the five named Company executives and relevant Consolidated Entity executives is detailed below:

	Value of options	Value of options	Value of options
Amounts $	Granted in year(i)	Exercised in year(ii)	Forfeited in year(ii)
Executive director Dr CG Roberts Executives Consolidated Entity Mr R Brook Mr NJ Mitchell Mr MD Salmon Mr CM Smith Mr DN Morris Company Mr D Howitt Mr J Janssen	529,735 177,754 187,001 174,870 202,306 131,125 125,683 129,796	1,798,983 - - 484,847 466,498 518,832 492,068 299,998	102,215 33,740 27,545 26,747 19,675 23,449 20,288 30,794

(i) The value of options granted in the year is the fair value of the options calculated at grant date using a Black-Scholes model. The total value of the options granted is included in the table above. This amount is allocated to remuneration over the vesting period (i.e. in years 30 June 2010 to 30 June 2013).

(ii) The value of options exercised and forfeited during the year is calculated as the market price of shares of the Company on the ASX as at close of trading on the date the options were exercised or forfeited after deducting the price paid or payable to exercise the option.

Other items – unaudited

Unissued shares under option

At the date of this report, unissued ordinary shares of the Company under options are:

Number of options	Plan	Exercise price per share	Exercise period
312,058 378,811 696,113 431,619	CELTIP CELTIP CELTIP CELTIP	$49.43 $63.18 $49.91 $60.04	August 2009 – September 2011 August 2010 – September 2012 August 2011 – September 2013 August 2012 – September 2014

These options do not entitle the holder to participate in any share issue of the Company or any other body corporate.

The closing share price at 30 June 2010 was $74.32.

During the financial year, the Company granted 435,606 options over ordinary shares to employees under the CELTIP. The options are exercisable in the two years following lodgement with the ASX of the Company’s preliminary final report for the year ending 30 June 2012. The number of options which will be exercisable is dependent on the performance measures and retention requirements set out in this Remuneration Report.

During the year, 51,930 options granted by the Company were forfeited.

45

Directors’ interests

The relevant interest of each director in the share capital of the Company, as notified by the directors to the ASX in accordance with section 205G(1) of the Corporations Act 2001, at the date of this report is as follows:

	Cochlear Limited ordinary shares	Options over ordinary shares
Mr PR Bell Prof E Byrne, AO Mr A Denver Mr R Holliday-Smith Mr DP O’Dwyer Dr CG Roberts	2,500 2,000 2,500 2,500 3,350 660,592	- - - - - 283,817

Indemnification of officers

Under the terms of Article 35 of the Company’s Constitution, and to the extent permitted by law, the Company has indemnified the directors of the Company named in this Directors’ Report, the Company Secretary, Mr NJ Mitchell, and other persons concerned in or taking part in the management of the Consolidated Entity. The indemnity applies when persons are acting in their capacity as officers of the Company in respect of:

• liability to third parties (other than the Company or related bodies corporate), if the relevant officer has acted in good faith; and

• costs and expenses of successfully defending legal proceedings in which relief under the Corporations Act 2001 is granted to the relevant officer.

Insurance premiums

During the financial year, the Company paid a premium for Directors’ and Officers’ Liability Insurance policy and a Supplementary Legal Expenses Insurance policy. The insurance provides cover for the directors named in this Directors’ Report, the Company Secretary, and officers and former directors and officers of the Company. The insurance also provides cover for present and former directors and officers of other companies in the Consolidated Entity. The directors have not included details of the nature of the liabilities covered and the amount of the premium paid in respect of the Directors’ and Officers’ Liability and Supplementary Legal Expenses Insurance policies, as such disclosure is prohibited under the terms of the contract.

Events subsequent to the reporting date

Other than the matter noted below, there has not arisen in the interval between the end of the financial year and the date of this Directors’ Report, any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Company, to affect significantly the operations of Cochlear, the results of those operations, or the state of affairs of Cochlear in future financial years:

Dividends

For dividends declared after 30 June 2010, see Note 9 to the financial statements.

46 Directors’ Report Cochlear Limited for the year ended 30 June 2010

Lead auditor’s independence declaration

The lead auditor’s independence declaration is set out on page 47 and forms part of the Directors’ Report for the financial year ended 30 June 2010.

Rounding off

The Company is of a kind referred to in Australian Securities and Investments Commission (ASIC) Class Order 98/100 dated 10 July 1998 and in accordance with that Class Order, amounts in the Directors’ Report and Financial Report have been rounded off to the nearest one thousand dollars, unless otherwise indicated.

Dated at Sydney this 10th day of August 2010.

Signed in accordance with a resolution of the directors:

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Director

==> picture [111 x 39] intentionally omitted <==

Director

Auditor’s Independence Declaration

47

Lead auditor’s independence declaration under section 307C of the Corporations Act 2001

I declare that, to the best of my knowledge and belief, in relation to the audit for the year ended 30 June 2010 there have been:

(i) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and

(ii) no contraventions of any applicable code of professional conduct in relation to the audit.

KPMG Sydney, 10 August 2010

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Kevin Leighton, Partner

48 Income Statement Cochlear Limited and its controlled entities for the year ended 30 June 2010

		2010	2009 $000
	Note	$000
Revenue	5(a)	734,803	694,699 (196,244)
Cost of sales	5(b)	(202,191)
Gross proft		532,612	498,455 3,081 (185,230) (44,979) (96,682)
Other income	5(c)	9,064
Selling and general expenses		(183,705)
Administration expenses		(43,722)
Research and development expenses	5(b)	(94,897)
Results from operating activities		219,352	174,645 10,474 (8,851)
Finance income	6	2,406
Finance expense	6	(12,407)
Net fnance (expense)/income		(10,001)	1,623 176,268 (45,728)
Proft before income tax		209,351
Income tax expense	8	(54,199)
Net proft		155,152	130,540 233.7 233.2
Basic earnings per share (cents)	11	275.7
Diluted earnings per share (cents)	11	274.2

The notes on pages 53 to 101 are an integral part of these consolidated financial statements.

Statement of Comprehensive Income Cochlear Limited and its controlled entities for the year ended 30 June 2010

49

		2010	2009 $000
	Note	$000
Net proft		155,152	130,540 (12,084) (15,376) 11,990
Other comprehensive income
Foreign currency translation differences	6	(28,562)
Effective portion of changes in fair value of cash fow hedges, net of tax	6	52,921
Net change in fair value of cash fow hedges transferred to the income statement, net of tax	6	(27,056)
Total other comprehensive income		(2,697)	(15,470)
Total comprehensive income		152,455	115,070

The notes on pages 53 to 101 are an integral part of these consolidated financial statements.

50 Balance Sheet Cochlear Limited and its controlled entities as at 30 June 2010

		2010	2009 $000
	Note	$000
Assets			80,016 173,256 - 105,944 3,898 8,205
Cash and cash equivalents	22(a)	42,808
Trade and other receivables	12	210,690
Capitalised building costs – construction of Headquarters	28	74,326
Inventories	13	104,407
Current tax assets	16	7,695
Prepayments		7,962
Total current assets		447,888	371,319 20,456 10,630 46,794 208,275 21,899
Trade and other receivables	12	25,143
Capitalised building costs – construction of Headquarters	28	-
Property, plant and equipment	14	49,597
Intangible assets	15	211,839
Deferred tax assets	16	17,252
Total non-current assets		303,831	308,054
Total assets		751,719	679,373 64,881 - 5,362 32,222 14,678
Liabilities
Trade and other payables		70,763
Loans and borrowings – construction of Headquarters	17, 28	73,811
Current tax liabilities	16	12,630
Provisions	19	36,896
Deferred revenue		19,048
Total current liabilities		213,148	117,143 56 176,586 11,997 9,178 179
Trade and other payables		5,724
Loans and borrowings – operations	17	82,934
Loans and borrowings – construction of Headquarters	17, 28	-
Provisions	19	11,605
Deferred tax liabilities	16	-
Total non-current liabilities		100,263	197,996
Total liabilities		313,411	315,139
Net assets		438,308	364,234
Equity			97,435 15,839 250,960
Share capital		117,016
Reserves		22,269
Retained earnings		299,023
Total equity		438,308	364,234

The notes on pages 53 to 101 are an integral part of these consolidated financial statements.

Statement of Changes in Equity Cochlear Limited and its controlled entities for the year ended 30 June 2010

51

Amounts $000	Issued capital	Treasury reserve	Translation reserve	Hedging reserve	Share based payment reserve	Retained earnings	Total equity
2009 Balance at 1 July 2008 Total comprehensive income Net proft Other comprehensive income Foreign currency translation differences Effective portion of changes in fair value of cash fow hedges, net of tax Net change in fair value of cash fow hedges transferred to the income statement, net of tax	85,064 - - - -	(2,092) - - - -	(10,130) - (12,084) - -	23,165 - - (15,376) 11,990	13,398 - - - -	209,936 130,540 - - -	319,341 130,540 (12,084) (15,376) 11,990
Total other comprehensive income	-	-	(12,084)	(3,386)	-	-	(15,470)
Total comprehensive income	-	-	(12,084)	(3,386)	-	130,540	115,070
Transactions with owners, recorded directly in equity Shares issued Share based payment transactions Dividends to shareholders	14,363 - -	100 - -	- - -	- - -	- 4,876 -	- - (89,516)	14,463 4,876 (89,516)
Balance at 30 June 2009	99,427	(1,992)	(22,214)	19,779	18,274	250,960	364,234
2010
Balance at 1 July 2009	99,427	(1,992)	(22,214)	19,779	18,274	250,960	364,234
Total comprehensive income
Net proft	-	-	-	-	-	155,152	155,152
Other comprehensive income
Foreign currency translation differences	-	-	(28,562)	-	-	-	(28,562)
Effective portion of changes in fair value of cash fow hedges, net of tax	-	-	-	52,921	-	-	52,921
Net change in fair value of cash fow hedges transferred to the income statement, net of tax	-	-	-	(27,056)	-	-	(27,056)
Total other comprehensive income	-	-	(28,562)	25,865	-	-	(2,697)
Total comprehensive income	-	-	(28,562)	25,865	-	155,152	152,455
Transactions with owners, recorded directly in equity
Shares issued	20,415	(834)	-	-	-	-	19,581
Share based payment transactions	-	-	-	-	9,127	-	9,127
Dividends to shareholders	-	-	-	-	-	(107,089)	(107,089)
Balance at 30 June 2010	119,842	(2,826)	(50,776)	45,644	27,401	299,023	438,308

The notes on pages 53 to 101 are an integral part of these consolidated financial statements.

52 Statement of Cash Flows Cochlear Limited and its controlled entities for the year ended 30 June 2010

		2010	2009 $000
	Note	$000
Cash fows from operating activities			689,079 (491,288) 2,846 1,302 (9,359) (45,952)
Cash receipts from customers		704,205
Cash paid to suppliers and employees		(474,824)
Grant and other income received		9,064
Interest received		1,510
Interest paid		(9,373)
Income taxes paid		(51,036)
Net cash provided by operating activities	22(b)	179,546	146,628 (19,900) 156 (2,644) (17,437) (6,687)
Cash fows from investing activities
Acquisition of property, plant and equipment		(17,506)
Proceeds from sale of non-current assets		-
Acquisition of enterprise resource planning system		(4,385)
Acquisition of intangible assets		(6,786)
Payments for construction of Headquarters	28	(63,696)
Net cash used in investing activities		(92,373)	(46,512) 100,424 (269,569) 208,000 (34,000) 11,997 14,463 (89,516)
Cash fows from fnancing activities
Proceeds of borrowings – secured loans		-
Repayments of borrowings – secured loans		-
Proceeds of borrowings – multi-option credit facility		64,500
Repayments of borrowings – multi-option credit facility		(158,500)
Proceeds of borrowings – construction of Headquarters		61,814
Proceeds from issue of share capital		19,581
Dividends paid by the parent entity	9	(107,089)
Net cash used in fnancing activities		(119,694)	(58,201)
Net (decrease)/increase in cash and cash equivalents		(32,521)	41,915 36,687 1,414
Cash and cash equivalents, net of overdrafts at 1 July		80,016
Effects of exchange fuctuation on cash held		(4,687)
Cash and cash equivalents, net of overdrafts at 30 June	22(a)	42,808	80,016

The notes on pages 53 to 101 are an integral part of these consolidated financial statements.

Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2010

53

1. Reporting entity

Cochlear Limited (the Company) is a company domiciled in Australia. The consolidated financial statements of the Company as at and for the year ended 30 June 2010 comprise the Company and its controlled entities (together referred to as Cochlear or the Consolidated Entity). Cochlear operates in the implantable hearing device industry.

2. Basis of preparation

(a) Statement of compliance

The Financial Report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards (AASBs) (including Australian Accounting Interpretations) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The Financial Report of the Consolidated Entity and the Financial Report of the Company comply with International Financial Reporting Standards (IFRS) and Interpretations adopted by the International Accounting Standards Board (IASB).

The consolidated financial statements were approved by the Board of directors on 10 August 2010.

(b) Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis except for derivative financial instruments which are measured at fair value. The method used to measure the fair value of derivative instruments is discussed further in Note 3(e).

(c) Functional and presentation currency

These consolidated financial statements are presented in Australian dollars, which is the Company’s functional currency.

The Company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that Class Order, all financial information presented in Australian dollars has been rounded to the nearest one thousand dollars unless otherwise stated.

(d) Use of judgements and estimates

The preparation of financial statements in conformity with AASBs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and then reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.

Management discussed with the Audit Committee the development, selection and disclosure of Cochlear’s critical accounting policies and estimates and the application of these policies and estimates.

In particular, information about critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements is included in the following note:

Note 15 – Intangible assets.

Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year is included in the following notes:

Note 19 – Provisions

Note 20 – Contingent liabilities Note 25 – Employee benefits

Note 26 – Financial instruments.

(e) Changes in accounting policies

Starting as of 1 July 2009, Cochlear has changed its accounting policies in the following areas:

• Presentation of financial statements;

• Determination and presentation of operating segments;

• Accounting for business combinations; and

• Accounting for borrowing costs.

54 Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2010

3. Significant accounting policies

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and have been applied consistently by all entities in Cochlear.

(a) Basis of consolidation

Controlled entities

Controlled entities are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of controlled entities are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of controlled entities have been changed when necessary to align them with the policies adopted by the Consolidated Entity.

Acquisitions of a minority interest in a controlled entity are treated as a transaction with owners. Consequently, the difference between the purchase consideration and the carrying amount of Cochlear’s interest in the net assets of the controlled entity is treated as goodwill.

Transactions eliminated on consolidation

Intra-group balances and any unrealised gains and losses or income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements.

Special purpose entities

Cochlear has established special purpose entities (SPEs) for trading and investment purposes. An SPE is consolidated if, based upon an evaluation of the substance of its relationship with Cochlear and the SPE’s risks and rewards, Cochlear concludes that it controls the SPE. SPEs controlled by Cochlear were established under terms that impose strict limitations on decision-making powers of the SPE’s management.

(b) Income recognition

Revenues are recognised at fair value of the consideration received net of the amount of goods and services tax (GST).

Sales revenue

Sales revenue comprises revenue earned (net of returns, discounts and allowances) from the provision of products or services. Revenue from the sale of goods is recognised in the income statement when the significant risks and rewards of ownership have been transferred to the buyer. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due or if there is a risk of return of goods or there is continuing management involvement with the goods. Revenue from the sale of services is recognised when the service has been provided to the customer and where there are no continuing unfulfilled service obligations.

The accounting policy for foreign exchange gains/losses arising from hedges of forecast sales transactions is set out in accounting policy (e).

Other income

Other income, including government grants, is recognised on a systematic basis over the periods necessary to match it with the related costs for which it is intended to compensate or, if the costs have already been incurred, in the period in which it becomes receivable. The income is deemed to be receivable when the entitlement is confirmed. Dividend income from subsidiaries is recognised by the parent entity when the dividends are declared by the subsidiary.

(c) Goods and services tax

Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense.

Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the relevant taxation authority is included as a current asset or liability in the balance sheet.

Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the relevant taxation authority are classified as operating cash flows.

(d) Foreign currency

Foreign currency transactions

Transactions in foreign currencies are translated to the respective functional currencies of controlled entities at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities denominated in foreign currencies that are stated at historical cost are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to the functional currency at the foreign exchange rates ruling at the date the fair value was determined.

Foreign exchange differences arising on translation are recognised in the income statement.

Financial statements of foreign operations

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, generally are translated to the functional currency at foreign exchange rates ruling at the reporting date.

55

The revenues and expenses of foreign operations are translated to the functional currency at rates approximating the foreign exchange rates ruling at the dates of transactions.

Foreign currency differences arising from translation of controlled entities with a different functional currency to that of Cochlear are recognised in the foreign currency translation reserve (FCTR). When a foreign operation is disposed of, in part or in full, the relevant amount of its FCTR is transferred to the income statement.

Foreign exchange gains and losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation and are recognised directly in equity in the FCTR.

(e) Financial instruments

Derivative financial instruments

Cochlear holds derivative financial instruments to hedge its exposure to foreign exchange risk and interest rate risk arising from operating, investing and financing activities. In accordance with its treasury policy, Cochlear does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments.

On initial designation of the hedge, Cochlear formally documents the relationship between the hedging instrument and hedged item, including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. Cochlear makes an assessment, both at inception of the hedge relationship as well as on an ongoing basis, whether the hedging instruments are expected to be highly effective in offsetting the changes in the fair value or cash flows of the respective hedged items during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80% to 125%. For a cash flow hedge of a forecast transaction, the transaction should be highly probable to occur and should present an exposure to variations in cash flows that could ultimately occur.

Derivative financial instruments are recognised initially at fair value. Attributable transaction costs are recognised in the income statement when incurred. Subsequent to initial recognition, derivative financial instruments are measured at fair value with changes in fair value accounted for as described below.

Non-derivative financial assets and liabilities

Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables.

Non-derivative financial instruments are recognised initially at fair value plus, for instruments not at fair value through the income statement, any attributable transaction costs. Subsequent to initial recognition, non-derivative financial instruments are measured as described below.

Accounting for finance income and expense is discussed in accounting policy (q).

Determination of fair values

The fair value of forward exchange contracts is based upon the listed market price, if available. If a listed market price is not available, the fair value is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using a risk free interest rate based upon government bonds.

The fair value of interest rate swaps is based upon broker quotes which are then tested for reasonableness by discounting future estimated cash flows based upon the terms and maturity of each contract and using market interest rates for similar instruments.

Other

Other non-derivative financial instruments are measured at amortised cost using the effective interest rate method, less any impairment losses.

Cash flow hedges

Changes in the fair value of the derivative financial instrument designated as a cash flow hedge are recognised directly in equity to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognised in the income statement.

If the derivative financial instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in equity remains there until the forecast transaction occurs or when cash flows arising from the transaction are received.

When the forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, the associated cumulative gain or loss is removed from equity and transferred to the carrying amount of the non-financial asset or liability. If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or a financial liability, then the associated gains and losses that were previously recognised directly in equity are reclassified into the income statement in the same period or periods during which the asset acquired or liability assumed affects the income statement.

For cash flow hedges, other than those covered by the preceding statement, the associated cumulative gain or loss is removed from equity and recognised in the income statement in the same period or periods during which the hedged forecast transaction affects the income statement and on the same line item as that hedged forecast transaction. The ineffective part of any gain or loss is recognised immediately in the income statement.

56 Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2010

Hedges of net investment in foreign operations

Foreign currency differences arising on the retranslation of a financial liability designated as a hedge of a net investment in a foreign operation are recognised in other comprehensive income to the extent that the hedge is effective, and are presented within equity in the FCTR. To the extent that the hedge is ineffective, such differences are recognised in the income statement. When the hedged part of a net investment is disposed of, the relevant amount in the FCTR is transferred to the income statement as part of the profit or loss on disposal.

(f) Cash and cash equivalents

Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less. Bank overdrafts that are repayable on demand and form an integral part of Cochlear’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.

(g) Provisions

A provision is recognised in the balance sheet when Cochlear has a present legal or constructive obligation as a result of a past event that can be measured reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the liability. The unwinding of the discount rate is recognised as a finance cost.

Warranties

Provisions for warranty claims are made for claims in relation to sales made prior to the reporting date, based on historical claim rates and respective product populations. Warranty periods on hardware products extend for three to 10 years. Cochlear is expected to incur the majority of the liability over the next 10 years.

Onerous contracts

A provision for onerous contracts is recognised when expected benefits to be derived by Cochlear from a contract are lower than the unavoidable cost of meeting contractual obligations. The provision is measured at the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, Cochlear recognises any impairment loss on the assets associated with the contract.

Self-insurance

Cochlear self-insures to manage certain risks associated with operating in its line of business. Claims are recognised when an incident occurs that may give rise to a claim and are measured at the cost that Cochlear expects to incur in settling the claims, discounted using a rate that reflects current market assessments of the time value of money and the risks specific to the liability.

Make good lease costs

Cochlear has a number of operating leases over its offices that require the premises to be returned to the lessor in its original condition. The operating lease payments do not include an element for the repairs/overhauls.

A provision for make good lease costs is recognised at the time it is determined that it is probable that such costs will be incurred in a future period, measured at the expected cost of returning the asset to the lessor in its original condition. An offsetting asset of the same value is also recognised and is classified in property, plant and equipment. This asset is amortised to the income statement over the life of the lease.

(h) Intangible assets

Goodwill

As from 1 July 2009, Cochlear adopted the revised AASB 3 Business Combinations (2008) and the amended AASB 127 Consolidated and Separate Financial Statements (2008). Revised AASB 3 and amended AASB 127 have been applied prospectively to business combinations with an acquisition date on or after 1 July 2009.

The change in accounting policy had no material impact on net profit or EPS.

All business combinations are accounted for by applying the purchase method. Goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired.

Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash generating units and is tested annually for impairment (see accounting policy (i)). Negative goodwill arising on an acquisition is recognised directly in the income statement.

Enterprise resource planning system

The expenditure incurred on hardware and software and the costs necessary for the implementation of the system are recognised as an intangible asset, to the extent that Cochlear controls future economic benefits as a result of the costs incurred, and are stated at cost less accumulated amortisation. Costs include expenditure that is directly attributable to the development and implementation of the system and includes direct labour.

Research and development expenditure

Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in the income statement as an expense as incurred.

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Development activities involve a plan or design for production of new or substantially improved products or processes before the start of commercial production or use. Development expenditure is capitalised only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable and Cochlear intends to and has sufficient resources to complete development and use or sell the asset.

The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Other development expenditure is recognised in the income statement as an expense as incurred. Capitalised development expenditure is stated at cost less accumulated amortisation (see below) and impairment losses (see accounting policy (i)).

Other intangible assets

Other intangible assets, comprising acquired technology, patents and licences, customer relationships and intellectual property, are acquired individually or through business combinations and are stated at cost less accumulated amortisation (see below) and impairment losses (see accounting policy (i)). Expenditure on internally generated goodwill and brands is recognised in the income statement as an expense as incurred.

Subsequent expenditure

Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred.

Amortisation

Amortisation is calculated over the cost of the asset, or an other amount substituted for cost, less its residual value.

Amortisation is recognised in the income statement on a straight-line basis over the estimated useful lives of the intangible assets from the date they are available for use unless such lives are indefinite. Goodwill and intangible assets with an indefinite useful life are systematically tested for impairment annually. The estimated useful lives for the current and comparative periods are as follows:

Acquired technology, patents and licences 4 – 15 years Enterprise resource planning system 2.5 – 5 years Customer relationships 4 years Capitalised development expenditure 1 – 3 years.

(i) Impairment

Non-financial assets

The carrying amounts of Cochlear’s non-financial assets, other than inventories (see accounting policy (k)), employee benefit assets (see accounting policy (l)), and deferred tax assets (see accounting policy (n)), are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated (see below).

For goodwill and intangible assets that have indefinite useful lives, and intangible assets that are not yet available for use, the recoverable amount is estimated at each balance sheet date.

The recoverable amount of an asset or cash generating unit is the greater of its value in use, and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that is largely independent of the cash inflows of other assets or groups of assets (cash generating unit). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash generating units that are expected to benefit from the processes, intellectual property acquired and synergies of the combination.

An impairment loss is recognised whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement unless the asset has previously been revalued, in which case the impairment loss is recognised as a reversal to the extent of that previous revaluation, with any excess recognised through the income statement.

Impairment losses recognised in respect of cash generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash generating unit or a group of units and then, to reduce the carrying amount of the other assets in the unit or a group of units on a pro-rata basis.

An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

Financial assets

Cochlear’s financial assets (cash and cash equivalents, trade and other receivables, and investments in controlled entities) are assessed at each reporting date to determine whether there is any objective evidence of impairment. A financial asset is considered impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset.

The recoverable amount of financial assets is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (i.e. the effective interest rate computed at initial recognition of these financial assets). Financial assets with a short duration are not discounted. An impairment loss of a financial asset is measured as the difference between the asset’s carrying amount and its recoverable amount.

58 Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2010

Impairment of financial assets is not recognised until objective evidence is available that a loss event has occurred. Individual significant financial assets are individually assessed for impairment. Impairment testing of financial assets not assessed individually is performed by placing them into portfolios of similar risk profiles and undertaking a collective assessment of impairment based on objective evidence from historical experience adjusted for any effects of conditions existing at the balance date.

All impairment losses are recognised in the income statement. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. The reversal of impairment losses on financial assets is recognised in the income statement.

In assessing collective impairment, Cochlear uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends.

(j) Property, plant and equipment

Owned assets

Items of property, plant and equipment are stated at cost less accumulated depreciation (see below) and impairment losses (see accounting policy (i)). An asset’s cost is determined as the consideration provided plus incidental costs directly attributable to the acquisition.

The cost of self-constructed assets includes the cost of material and direct labour, an appropriate share of fixed and variable overheads, and capitalised interest and any other costs directly attributable to bringing the asset to a working condition for its intended use.

Subsequent costs in relation to replacing a part of property, plant and equipment are recognised in the carrying amount of the item if it is probable that future economic benefits embodied within the part will flow to Cochlear and its cost can be measured reliably. All other costs are recognised in the income statement as incurred.

In respect of borrowing costs relating to qualifying assets, Cochlear capitalises borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset.

Leased assets

Operating leases

Payments made under operating leases are expensed on a straight-line basis over the term of the lease, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased property. Minimum lease payments include fixed rate increases.

Depreciation

Depreciation is calculated over the depreciable amount, which is the cost of an asset, or other amount substituted for cost, less its residual value.

Depreciation is recognised in the income statement on a straight-line basis. Items of property, plant and equipment, including leasehold assets, are depreciated using the straight-line method over their estimated useful lives, taking into account estimated residual values. Assets are depreciated from the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and held ready for use. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that Cochlear will obtain ownership by the end of the lease term.

Depreciation rates and methods, useful lives and residual values are reviewed at each balance sheet date. When changes are made, adjustments are
refected prospectively in current and future fnancial periods only. The estimated useful lives in the current and comparative periods are as follows:
Leasehold improvements 2 – 12 years
Plant and equipment 3 – 14 years.

(k) Inventories

Inventories are measured at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less estimated costs of completion and selling, marketing and distribution expenses.

Cost is based on the first-in-first-out principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing condition and location. In the case of manufactured inventories and work in progress, cost includes an appropriate share of both variable and fixed overhead costs. Fixed overhead costs are allocated on the basis of normal operating capacity.

(l) Employee benefits

Defined contribution plans

A defined contribution plan is a post-employment benefit plan under which the entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts.

Prepaid contributions are recognised as an asset. Contributions to a defined contribution plan that are due more than 12 months after the end of the period in which the employees render the service are discounted to their present value.

Obligations for contributions to defined contribution plans are recognised as an expense in the income statement as incurred.

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Defined benefit plans

A defined benefit plan is a post-employment benefit plan other than a defined contribution plan.

A liability or asset in respect of defined benefit plans is recognised in the balance sheet, and is measured as the present value of the defined benefit obligation at the reporting date adjusted for unrecognised actuarial gains or losses less the fair value of the plan’s assets at that date and any unrecognised past service cost. The present value of the defined benefit obligation is based on expected future payments which arise from membership of the plan to the reporting date, calculated by independent actuaries using the projected unit credit method.

When the calculation results in plan assets exceeding liabilities to Cochlear, the recognised asset is limited to the net total of any unrecognised actuarial losses and past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan.

Past service cost is the increase in the present value of the defined benefit obligation for employee services in prior periods, resulting in the current period from the introduction of, or changes to, post-employment benefits or other long-term employee benefits. Past service costs may either be positive (where benefits are introduced or improved) or negative (where existing benefits are reduced).

Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currency that match the estimated future cash flows.

When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognised as an expense in the income statement on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognised immediately in the income statement.

The full amount of actuarial gains and losses that arise are recognised directly in equity.

Wages, salaries and annual leave

Liabilities for employee benefits for wages, salaries and annual leave expected to settle within 12 months of the year end represent present obligations resulting from employees’ services provided up to the reporting date, calculated at undiscounted amounts based on remuneration wage and salary rates that Cochlear expects to pay as at the reporting date including related on-costs, such as workers’ compensation insurance and payroll tax.

Long service leave

The provision for employee benefits for long service leave represents the present value of the estimated future cash outflows to be made by the employer resulting from employees’ services provided up to the reporting date.

The provision is calculated using expected future increases in remuneration rates, including related on-costs, and expected settlement dates based on turnover history, and is discounted using the rates attaching to national government securities at the reporting date, which most closely match the terms to maturity of the related liabilities. The unwinding of the discount is treated as a long service leave expense.

Share based payments

The Company has granted options and performance shares to certain employees under the Cochlear Executive Long Term Incentive Plan (CELTIP).

The fair value of options and shares granted is recognised as an employee benefits expense with a corresponding increase in equity. The fair value is measured at the date the options or shares are granted taking into account market based criteria and expensed over the vesting period after which the employees become unconditionally entitled to the options and shares. The fair value of the options granted is measured using the Black-Scholes method, taking into account the terms and conditions attached to the options.

The fair value of the performance shares granted is measured using the weighted average share price of ordinary shares in the Company, taking into account the terms and conditions attached to the shares.

The amount recognised as an expense is adjusted to reflect the actual number of options and shares that vest except where forfeiture is due to market related conditions.

When the Company grants options over its shares to employees of controlled entities, the fair value at grant date is recognised as an increase in the investment in subsidiaries, with a corresponding increase in equity over the vesting period of the grant.

Treasury shares

The Company operates the Cochlear Executive Long Term Incentive Plan (Performance Shares) Trust (Trust). The main purpose of the Trust is to hold unvested performance shares as part of the CELTIP. Under IFRS, the Trust qualifies as an equity compensation plan special purpose entity and its results are included in those for the Company and the Consolidated Entity.

Any shares held by the Trust are accounted for as treasury shares and treated as a reduction in the share capital of the Company and the Consolidated Entity.

(m) Receivables

Trade and other receivables are stated at amortised cost less impairment losses (see accounting policy (i)).

(n) Taxation

Income tax expense in the income statement comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

60 Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2010

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is calculated using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Temporary differences are not provided for the initial recognition of goodwill and other assets or liabilities in a transaction that affects neither accounting nor taxable profit, or differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future.

Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based upon the laws that have been enacted at the reporting date.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend is recognised.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same taxation authority on the same taxable entity or on a different tax entity but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.

Tax consolidation

The Company and its wholly-owned Australian resident entities are part of a tax-consolidated group. As a consequence, all members of the taxconsolidated group are taxed as a single entity. The head entity within the tax-consolidated group is Cochlear Limited.

Current tax expenses/income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the taxconsolidated group are recognised in the separate financial statements of the members of the tax-consolidated group using the separate taxpayer within group approach, by reference to the carrying amounts of assets and liabilities in the separate financial statements of each entity and the tax values applying under tax consolidation.

Any current tax liabilities or assets and deferred tax assets arising from unused tax losses of subsidiaries are assumed by the head entity in the tax-consolidated group and are recognised by the Company as amounts payable/receivable to/from other entities in the tax-consolidated group in conjunction with any tax funding arrangement amounts. Any difference between these amounts is recognised by the Company as an equity contribution or distribution.

The Company recognises deferred tax assets arising from unused tax losses of the tax-consolidated group to the extent that it is probable that future taxable profits of the tax-consolidated group will be available against which the assets can be utilised.

Any subsequent period adjustments to deferred tax assets arising from unused tax losses as a result of revised assessments of the probability of recoverability are recognised by the head entity only.

Nature of tax funding arrangements and tax sharing arrangements

The Company, in conjunction with other members of the tax-consolidated group, has entered into a tax funding arrangement which sets out the funding obligations of members of the tax-consolidated group in respect of tax amounts. The tax funding arrangements require payments to and from the Company equal to the current tax liability, current tax asset or deferred tax asset assumed by the Company. This results in the Company recognising an inter-entity receivable or payable equal in amount to the tax liability or asset assumed.

Contributions to fund the tax liabilities are payable as per the tax funding arrangement and reflect the timing of the Company’s obligation to make payments for tax liabilities to the relevant taxation authorities.

The Company, in conjunction with other members of the tax-consolidated group, has also entered into a tax sharing agreement. This tax sharing agreement provides for the determination of the allocation of income tax liabilities between the entities should the Company default on its tax payment obligations. No amounts have been recognised in the financial statements in respect of this agreement as payment of any amounts under the tax sharing agreement is considered remote.

(o) Payables

Trade and other payables are stated at amortised cost.

(p) Loans and borrowings

Loans and borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, loans and borrowings are stated at amortised cost, with any difference between amortised cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest rate basis.

(q) Finance income and expense

Interest income is recognised as it accrues in the income statement using the effective interest rate method. Borrowing costs are recognised as they accrue in the income statement as a finance expense except to the extent that borrowing costs relate to the purchase of qualifying assets in which

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case they are capitalised into the purchase cost of the qualifying asset as permitted by AASB 123 Borrowing Costs (2007). Debt establishment costs are capitalised and recognised as a reduction in loans and borrowings. They are calculated based on the effective interest rate method and are amortised over the period of the loan. Foreign exchange differences net of the effect of hedges on borrowings, are recognised in net finance income/(expense).

(r) Earnings per share

Cochlear presents basic and diluted earnings per share (EPS) for its ordinary shares. Basic EPS is calculated by dividing the net profit attributable to equity holders of the parent entity for the financial period, after excluding any costs of servicing equity (other than ordinary shares) by the weighted average number of ordinary shares of the Company, adjusted for any bonus issue.

Diluted EPS is calculated using the basic EPS earnings as the numerator. The weighted average number of shares used as the denominator is adjusted by the after-tax effect of financing costs associated with the dilutive potential ordinary shares and the effect on revenues and expenses of conversion to ordinary shares associated with dilutive potential ordinary shares adjusted for any bonus issue.

(s) Segment reporting

Determination and presentation of operating segments

As of 1 July 2009, Cochlear determines and presents operating segments based on the information that internally is provided to the Chief Executive Officer (CEO), who is Cochlear’s chief operating decision maker. This change in accounting policy is due to the adoption of IFRS 8 Operating Segments. Previously, operating segments were determined and presented in accordance with AASB 114 Segment Reporting. The new accounting policy in respect of segment operating disclosures is presented as follows.

Comparative segment information has been re-presented in conformity with the transitional requirements of IFRS 8. Since the change in accounting policy only impacts presentation and disclosure aspects, there is no impact on net profit or EPS.

An operating segment is a component of Cochlear that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of Cochlear’s other components if separately reported and monitored. An operating segment’s operating results are reviewed regularly by the CEO to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

Segment results that are reported to the CEO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate head office results.

(t) Share capital

Ordinary shares

Ordinary shares are classified as equity.

Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any income tax benefit.

Repurchase of share capital (treasury shares)

When share capital recognised as equity is repurchased, the amount of the consideration paid, including directly attributable costs, is recognised as a deduction from equity, net of any tax effects. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity. When treasury shares are subsequently sold or reissued, the amount received is recognised as an increase in equity, and the surplus or deficit on the transaction is transferred to or from retained earnings.

Dividends

A liability for dividends payable is recognised in the financial period in which the dividends are declared.

(u) Construction contracts

Construction contract revenue includes the initial amount agreed in the contract plus any variations in contract work, claims and incentive payments to the extent that it is probable that they will result in revenue and can be measured reliably. As soon as the outcome of a construction contract can be estimated reliably, construction contract revenue and expenses are recognised in the income statement.

Construction contract revenue and expenses are estimated and recognised in accordance with the percentage of completion method which is assessed by reference to surveys of work performed.

When the outcome of a construction contract cannot be reliably estimated, construction contract revenue is recognised only to the extent of contract costs incurred that are likely to be recoverable. An expected loss on a contract is recognised immediately in the income statement.

Construction activities are not part of the ordinary course of Cochlear’s business. Cochlear will be exposed to the usual risks associated with construction.

(v) Presentation of financial statements

Cochlear applies revised AASB 101 Presentation of Financial Statements (2007), which became effective as of 1 January 2009. As a result, Cochlear presents in the statement of changes in equity all owner changes in equity, whereas all non-owner changes in equity are presented in the statement

62 Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2010

of comprehensive income. This presentation has been applied in this Financial Report at and for the year ended 30 June 2010.

Comparative information has been re-presented so that it also is in conformity with the revised standard. Since the change in accounting policy only impacts presentation aspects, there is no impact on net profit or EPS.

(w) New standards and interpretations not yet adopted

The following standards, amendments to standards, and interpretations have been identified as those which may impact the entity in the period of initial application. They are available for early adoption at 30 June 2010, but have not been applied in preparing this Financial Report:

• AASB 9 Financial Instruments;

• AASB 124 Related Party Disclosures;

• AASB 2009-5 Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project;

• AASB 2009-8 Amendments to Australian Accounting Standards – Group Cash-settled Share-based Payment Transactions;

• AASB 2009-10 Amendments to Australian Accounting Standards – Classification of Rights Issues;

• AASB 2009-14 Amendments to Australian Interpretation – Prepayments of a Minimum Funding Requirement; and

• IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments.

The impact of these standards and interpretations is not considered to be significant and will be applied by Cochlear on the relevant application date.

4. Financial risk management

Overview

Cochlear has exposure to the following risks from the use of financial instruments:

• Credit risk;

• Liquidity risk;

• Market risk; and

• Operational risk.

This note presents information about Cochlear’s exposure to each of the above risks, its objectives, policies and processes for measuring and managing risk, and the management of capital. Further quantitative disclosures are included throughout these consolidated financial statements.

The Board of directors has overall responsibility for the establishment and oversight of the risk management framework. The fundamentals of risk management are set by the risk policy. Under instruction of the Board, management has established a Risk Management Committee which is responsible for monitoring operational and financial risk management throughout Cochlear. Monitoring risk management includes ensuring appropriate policies and procedures are published and adhered to. The Risk Management Committee reports to the Audit Committee on a regular basis.

A Treasury Management Committee has been established to administer aspects of risk management involving currency exposure and cash and funding management in accordance with the treasury risk policy. The treasury risk policy aims to manage the impact of short-term fluctuations on Cochlear’s earnings. Over the longer term, permanent changes in market rates will have an impact on earnings.

Cochlear is exposed to risks from movements in exchange rates and interest rates that affect revenues, expenses, assets, liabilities and forecast transactions. Financial risk management aims to limit these market risks through ongoing operational and finance activities. Selected derivative and non-derivative hedging instruments are used for this purpose.

Exposure to credit, foreign exchange and interest rate risks arises in the normal course of Cochlear’s business. Derivative financial instruments are used to hedge exposure to fluctuations in foreign exchange rates and interest rates.

The Company only hedges the risks that affect the cash flows between the parent entity and the controlled entities. Cochlear does not enter, hold or issue derivative financial instruments for trading purposes. Hedging transactions are only concluded with leading financial institutions whose credit rating is at least A on the Standard & Poor’s rating index.

The Audit Committee oversees how management monitors compliance with Cochlear’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by Cochlear. The Audit Committee is assisted in its oversight by Internal Audit. Internal Audit undertakes regular reviews of risk management controls and procedures, the results of which are reported to the Audit Committee.

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Credit risk

Credit risk is the risk of financial loss to Cochlear if a customer, controlled entity or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from Cochlear’s receivables from customers.

Trade and other receivables

Cochlear’s exposure to credit risk is influenced mainly by the geographical location and characteristics of individual customers. Cochlear does not have a significant concentration of credit risk with a single customer.

Policies and procedures of credit management and administration of receivables are established and executed at a regional level. Individual regions deliver reports to management and the Board on debtor ageing and collection activities on a monthly basis.

In monitoring customer credit risk, the ageing profile of total receivables balances and individually significant debtors is reported by geographic region to the Board of directors on a monthly basis. Regional management is responsible for identifying high risk customers and placing restrictions on future trading, including suspending future shipments and administering dispatches on a prepayment basis. These actions are also reported to the Board on a monthly basis.

Cochlear has established an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures and a collective loss component established for groups of assets meeting certain ageing profiles and customer types.

Guarantees

Details of guarantees provided by Cochlear are provided in Note 20.

Liquidity risk

Liquidity risk is the risk that Cochlear will not be able to meet its financial obligations as they fall due. Cochlear’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to Cochlear’s reputation.

Cochlear monitors cash flow requirements and produces cash flow projections for the short and long term with a view to optimising return on investments. Typically, Cochlear ensures that it has sufficient funds on demand to meet expected operational net cash flows for a period of at least 30 days, including the servicing of financial obligations. This excludes the potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters. In addition, Cochlear maintains lines of credit which are set out in Note 17.

Market risk

Market risk is the risk that changes in market prices such as foreign exchange rates, interest rates and equity prices will affect Cochlear’s net profit or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return.

Cochlear buys and sells derivatives in accordance with the treasury risk policy, and also incurs financial liabilities, in order to manage market risks. All such transactions are carried out within the guidelines set out by the treasury risk policy. Generally, Cochlear seeks to apply hedge accounting in order to manage volatility in earnings.

Currency risk

Cochlear is exposed to currency risk on sales, purchases and borrowings that are denominated in a currency other than the respective functional currencies of the controlled entities, primarily Australian dollars (AUD), but also United States dollars (USD), Euros (EUR), Sterling (GBP), Swedish kroner (SEK), Japanese yen (JPY) and Swiss francs (CHF). The currencies in which these transactions primarily are denominated are AUD, USD, EUR, GBP, SEK and JPY.

Over 90% of Cochlear’s revenues and over 50% of costs are denominated in currencies other than AUD. Currency risk is hedged in accordance with the treasury risk policy. Risk resulting from the translation of assets and liabilities of foreign operations into Cochlear’s reporting currency is generally not hedged.

Interest rate risk

Cochlear is exposed to interest rate risks in Australia and Japan. See Note 26 for effective interest rates, repayment and repricing analysis of outstanding debt.

Interest rate risk is hedged on a case-by-case basis by assessing the term of borrowings and the purpose for which the funds are obtained. Hedging against interest rate risk is achieved by entering into interest rate swaps.

Operational risk

Operational risk is the risk of direct and indirect loss arising from a wide variety of causes associated with Cochlear’s processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of Cochlear’s operations.

Cochlear’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to Cochlear’s reputation with overall cost effectiveness and to avoid control procedures that restrict initiative and creativity.

64 Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2010

The primary responsibility for the development and implementation of controls to address operational risk is assigned to the Risk Management Committee. This responsibility is supported by the development of standards for the management of operational risk in the following areas:

• requirements for appropriate segregation of duties, including the independent authorisation of transactions;

• requirements for the reconciliation and monitoring of transactions;

• compliance with regulatory and other legal requirements;

• documentation of controls and procedures;

• requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified;

• development of contingency plans;

• training and professional development;

• ethical and business standards; and

• risk mitigation, including insurance where this is effective.

Compliance with standards is supported by a program of periodic reviews undertaken by Internal Audit. The results of Internal Audit reviews are discussed with the management of the business unit to which they relate, with summaries submitted to the Audit Committee and senior management of Cochlear.

Capital management

Cochlear’s objectives when managing capital are to safeguard its ability to continue as a going concern, to provide returns to shareholders, to provide benefits to other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

The Board aims to maintain and develop a capital base appropriate to Cochlear’s objectives and monitors a number of qualitative metrics as follows:

• net debt to equity ratio – defined as net debt as a proportion of net debt plus total equity;

• dividend payout ratio – defined as dividends as a proportion of net profit after tax for a given period;

• growth in EPS – defined as a compound annual growth percentage in EPS over a three year period; and

• total shareholder return (TSR) – defined as the percentage growth in share price over a three year period plus the cumulative three year dividend return calculated against the opening share price in the same three year period.

In order to maintain or adjust the capital structure, Cochlear may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

Senior management tracks, manages and reports against these capital management metrics periodically as part of broader corporate governance responsibilities. In addition, the Board of directors undertakes periodic reviews of Cochlear’s capital management position to assess whether the metrics continue to be appropriate and to assess whether the capital management structure is appropriate to meet Cochlear’s medium and longterm strategic requirements.

Neither Cochlear nor any of its subsidiaries is subject to externally imposed capital requirements.

There were no significant changes in Cochlear’s approach to capital management during the year.

Cochlear’s net debt to equity ratio was as follows:

Cochlear’s net debt to equity ratio was as follows:
		2010	2009 $000
	Note	$000
Total loans and borrowings		156,745	188,583 (80,016)
Less: Cash and cash equivalents		(42,808)
Group net debt		113,937	108,567 (11,997) 2,088
Less: Loans and borrowings – construction of Headquarters	28	(73,811)
Add: Cash and cash equivalents – construction of Headquarters	28	994
Net debt		41,120	98,658 364,234
Total equity		438,308
Net debt to equity ratio at 30 June		9%	21%

65

		2010	2009 $000
	Note	$000
5. Revenue and expenses			708,365 (17,128)
(a) Revenue
Sale of goods before hedging		690,538
Foreign exchange gains/(losses) on hedged sales		38,652
Revenue from the sale of goods		729,190	691,237 3,462
Rendering of services		5,613
Revenue		734,803	694,699
(b) Expenses			193,723 2,521
Cost of sales
Carrying amount of inventories recognised as an expense		196,055
Write-down in value of inventories		6,136
Total cost of sales		202,191	196,244
Research and development expenses			96,497 185
Research and development expenditure		94,881
Capitalised development expenditure – amortisation expense		16
Total research and development expenses		94,897	96,682
(c) Other income			1,888 - 1,193
Grant received or due and receivable		760
Construction contract revenue, net of expense	28	-
Other income		8,304
Total other income		9,064	3,081
(d) Employee benefts expense			165,332 11,196 2,493 4,876
Wages and salaries		167,667
Contributions to superannuation plans		11,745
Increase in leave liabilities		150
Equity settled share based payment transactions		5,068
Total employee benefts expense		184,630	183,897
(e) Proft before income tax has been arrived at after charging the following items:			13,221 446 1,185 5,570
Operating lease rental expense		11,289
Increase in provisions		4,499
Loss on disposal of property, plant and equipment		470
Legal fees defending patent infringement complaint		655

66 Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2010

	2010	2009 $000
	$000
6. Net fnance (expense)/income		1,779 8,695
Recognised in the income statement
Interest income	1,248
Net foreign exchange income	1,158
Finance income	2,406	10,474 (8,851)
Interest expense	(12,407)
Finance expense	(12,407)	(8,851)
Net fnance (expense)/income recognised in the income statement	(10,001)	1,623
Recognised in other comprehensive income		(12,084) (15,376) 11,990
Foreign currency translation differences	(28,562)
Effective portion of changes in fair value of cash fow hedges, net of tax	52,921
Net change in fair value of cash fow hedges transferred to the income statement, net of tax	(27,056)
Net fnance expense recognised in other comprehensive income, net of tax	(2,697)	(15,470)
	2010	2009 $
	$
7. Auditors’ remuneration		572,000 111,934 17,000 639,309 38,218
Audit services
Auditors of the Company
KPMG Australia:
- audit and review of fnancial reports	552,700
- other audit services	-
- other regulatory compliance services	6,978
Overseas KPMG frms:
- audit and review of fnancial reports	564,978
- other regulatory compliance services	12,579
Total audit services	1,137,235	1,378,461 1,621,676 106,739 557,366
Non-audit services
Auditors of the Company
KPMG Australia:
- taxation compliance services	589,651
- other tax related services	107,043
Overseas KPMG frms:
- taxation compliance services	461,149
Total non-audit services	1,157,843	2,285,781

67

		2010	2009 $000
	Note	$000
8. Income tax expense			50,183 (1,413)
Recognised in the income statement
Current tax expense
Current year		61,122
Adjustment for prior years		(3,329)
		57,793	48,770 (3,554) 512
Deferred tax (beneft)/expense
Origination and reversal of temporary differences		(3,594)
Recognition of previously unrecognised tax losses		-
	16	(3,594)	(3,042)
Total income tax expense		54,199	45,728 130,540 45,728 176,268
Numerical reconciliation between income tax expense and proft before income tax
Net proft		155,152
Income tax expense		54,199
Proft before income tax		209,351
Income tax expense using the Company’s domestic tax rate of 30% (2009: 30%)		62,805	52,880 3,256 (6,184) (1,813) (998)
Increase in income tax expense due to:
Non-deductible expenses		2,770
Decrease in income tax expense due to:
Research and development allowances		(7,688)
Share based payment deductions		(305)
Effect of tax rate in foreign jurisdictions		(54)
		57,528	47,141 (1,413)
Adjustment for prior years		(3,329)
Income tax expense on proft before income tax		54,199	45,728 -
Deferred tax recognised directly in equity relating to share based payments		(4,059)
Total deferred tax recognised directly in equity	16	(4,059)	- (803)
Deferred tax recognised in other comprehensive income relating to derivative fnancial instruments		11,585
Total deferred tax recognised in other comprehensive income	16	11,585	(803)

68 Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2010

	Cents per share	Total amount $000	Franked/unfranked	Date of payment
9. Dividends Dividends recognised in the current fnancial year by the Company are:
2010
Interim 2010 ordinary	95.0	53,705	100% Franked	16 March 2010
Final 2009 ordinary	95.0	53,384	100% Franked	24 September 2009
Total amount	190.0	107,089
2009 Interim 2009 ordinary Final 2008 ordinary	80.0 80.0	44,834 44,682	100% Franked 100% Franked	17 March 2009 25 September 2008
Total amount	160.0	89,516

Franked dividends declared or paid during the financial year were franked at the tax rate of 30%.

Subsequent events

Franked dividends declared or paid during the fnancial year were franked at the tax rate of 30%.	Franked dividends declared or paid during the fnancial year were franked at the tax rate of 30%.	Franked dividends declared or paid during the fnancial year were franked at the tax rate of 30%.	Franked dividends declared or paid during the fnancial year were franked at the tax rate of 30%.	Franked dividends declared or paid during the fnancial year were franked at the tax rate of 30%.
Subsequent events
Since the end of the fnancial year, the directors declared the following dividends:
Final 2010 ordinary	105.0	59,371	60% Franked	23 September 2010
Total amount	105.0	59,371

The financial effect of the 2010 final dividend has not been brought to account in the financial statements for the year ended 30 June 2010 and will be recognised in the subsequent financial period.

There are no further tax consequences as a result of paying dividends other than a reduction in the franking account as shown below:

	Company	Company
	2010	2009 $000
	$000
Dividend franking account
30% franking credits available to shareholders of Cochlear Limited for subsequent fnancial years	5,509	11,133

The above amounts are based on the balance of the dividend franking account at year end adjusted for:

• franking credits that will arise from the payment of the current tax liability;

• franking debits that will arise from the payment of dividends recognised as a liability at the year end; and

• franking credits that the Company may be prevented from distributing in subsequent financial years.

The ability to utilise the franking account credits is dependent upon the ability to declare dividends. The impact on the dividend franking account of dividends proposed after the balance sheet date but not recorded as a liability is to reduce it by $15,266,718 (2009: $22,821,067).

No additional current tax liability will arise to the extent that franking credits are available with which to pay fully franked dividends. Dividends in excess of the balance of the dividend franking account will either be unfranked or result in a franking deficit tax liability payable by the Company to the extent that franking credits are provided that do not exist. The Company’s policy is not to pay dividends with franking credits that will result in a franking deficit tax liability.

69

10. Segment reporting

Cochlear has three reportable segments, which are determined on a geographical basis and are the strategic business units of Cochlear. Segment results, assets and liabilities include items directly attributable to a segment. Unallocated items comprise corporate and other net expenses and corporate and manufacturing assets and liabilities.

Information about each reportable segment is included below. Performance is measured based on segment profit before income tax as included in the internal management reports that are reviewed by Cochlear’s CEO, who is also the chief operating decision maker. Segment profit before income tax is used to measure performance as management believes that such information is the most relevant in evaluating the results of each operating segment.

Comparative segment information has been re-presented in conformity with the requirement of AASB 8 Operating Segments.

Information about reportable segments

Information about reportable segments
	Americas		Europe		Asia Pacifc		Total
	2010	2009	2010	2009	2010	2009	2010	2009 $000
	$000	$000	$000	$000	$000	$000	$000
External revenues	307,568	300,391	291,456	318,917	97,127	92,519	696,151	711,827 356,639 280,505 145,441 4,660 1,867 5,478
Reportable segment proft before income tax	158,305	156,011	138,451	167,734	30,888	32,894	327,644
Reportable segment assets	93,498	96,193	142,863	156,139	34,761	28,173	271,122
Reportable segment liabilities	43,545	69,252	59,899	62,394	14,269	13,795	117,713
Other material items
Depreciation and amortisation	733	1,896	1,600	1,942	650	822	2,983
Write-down in value of inventories	225	57	207	1,531	194	279	626
Segment acquisition of non-current assets	631	1,462	758	3,239	264	777	1,653

Reconciliations of reportable segment revenues, profit or loss, assets and liabilities and other material items

	2010	2009 $000
	$000
Revenues		711,827 (17,128)
Total segment revenue	696,151
Foreign exchange gains/(losses) on hedged sales	38,652
Consolidated revenue	734,803	694,699
Proft or loss		356,639 (181,994) 1,623
Total segment proft before income tax	327,644
Corporate and other net expenses	(108,292)
Net fnance (expense)/income	(10,001)
Consolidated proft before income tax	209,351	176,268
Assets		280,505 398,868
Reportable segment assets	271,122
Unallocated corporate and manufacturing assets	480,597
Consolidated total assets	751,719	679,373
Liabilities		145,441 169,698
Reportable segment liabilities	117,713
Unallocated corporate and manufacturing liabilities	195,698
Consolidated total liabilities	313,411	315,139

70 Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2010

==> picture [516 x 345] intentionally omitted <==

----- Start of picture text -----

Reportable segment Corporate and Consolidated
total manufacturing total total
$000 $000 $000
2010
Other material items
Depreciation and amortisation 2,983 20,114 23,097
Write-down in value of inventories 626 5,510 6,136
Acquisition of property, plant and equipment and enterprise resource planning system 1,653 20,238 21,891
2009
Other material items
Depreciation and amortisation 4,660 17,588 22,248
Write-down in value of inventories 1,867 654 2,521
Acquisition of property, plant and equipment and enterprise resource planning system 5,478 17,066 22,544
Revenue by product
2010 2009
$000 $000
Cochlear implants 603,671 614,067
Bone anchored hearing aids (Baha) 92,480 97,760
Total 696,151 711,827
----- End of picture text -----

71

	2010	2009
11. Earnings per share		$130,540,000 55,524,746 310,459 12,862
Basic earnings per share
The calculation of basic earnings per share for the year ended 30 June 2010 was based on net proft attributable to equity holders of the parent entity of $155,152,000 (2009: $130,540,000) and a weighted average number of ordinary shares on issue during the year ended 30 June 2010 of 56,279,542 (2009: 55,848,067) calculated as follows:
Net proft attributable to equity holders of the parent entity	$155,152,000
Weighted average number of ordinary shares (basic):
Issued ordinary shares at 1 July (number)	55,977,555
Effect of options and performance shares exercised (number)	295,353
Effect of shares issued under Employee Share Plan (number)	6,634
Weighted average number of ordinary shares (basic) at 30 June	56,279,542	55,848,067 233.7
Basic earnings per share (cents)	275.7
Diluted earnings per share		$130,540,000 55,848,067 133,789
The calculation of diluted earnings per share for the year ended 30 June 2010 was based on net proft attributable to equity holders of the parent entity of $155,152,000 (2009: $130,540,000) and a weighted average number of ordinary shares on issue during the year ended 30 June 2010 of 56,576,557 (2009: 55,981,856) calculated as follows:
Net proft attributable to equity holders of the parent entity	$155,152,000
Weighted average number of ordinary shares (diluted):
Weighted average number of shares (basic) (number)	56,279,542
Effect of options and performance shares (number)	297,015
Weighted average number of ordinary shares (diluted) at 30 June	56,576,557	55,981,856 233.2
Diluted earnings per share (cents)	274.2

72 Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2010

	2010	2009 $000
	$000
12. Trade and other receivables		153,326 9,207 10,723 -
Current
Trade receivables net of allowance for impairment losses	159,529
Other receivables	6,330
Forward exchange contracts	44,627
Interest rate swap on loan for construction of Headquarters	204
Total current trade and other receivables	210,690	173,256
Non-current		707 19,749
Other receivables	929
Forward exchange contracts	24,214
Total non-current trade and other receivables	25,143	20,456
Cochlear’s exposure to credit and currency risks and impairment losses related to trade and other receivables is disclosed in Note 26.
13. Inventories		40,250 15,779 49,915
Raw materials and stores	41,806
Work in progress	12,650
Finished goods	49,951
Total inventories	104,407	105,944

	Total non-current trade and other receivables 25,143	Total non-current trade and other receivables 25,143	Total non-current trade and other receivables 25,143	20,456
	Cochlear’s exposure to credit and currency risks and impairment losses related to trade and other receivables is disclosed in Note 26.
	13. Inventories
	Raw materials and stores	41,806		40,250
	Work in progress	12,650		15,779
	Finished goods	49,951		49,915
	Total inventories	104,407		105,944

73

	2010	2009 $000
	$000
14. Property, plant and equipment		29,440 (21,569)
Leasehold improvements
At cost	32,722
Accumulated amortisation	(24,576)
	8,146	7,871 92,191 (53,268)
Plant and equipment
At cost	105,078
Accumulated depreciation	(63,627)
	41,451	38,923
Total property, plant and equipment, at net book value	49,597	46,794
Reconciliations		9,542 2,502 (146) (4,325) 298
Reconciliations of the carrying amounts of each class of property, plant and equipment are set out below:
Leasehold improvements
Carrying amount at beginning of fnancial year	7,871
Additions	4,016
Disposals	(13)
Amortisation	(3,273)
Effect of movements in foreign exchange	(455)
Carrying amount at end of fnancial year	8,146	7,871 33,677 17,398 (1,186) (11,714) 748
Plant and equipment
Carrying amount at beginning of fnancial year	38,923
Additions	16,842
Disposals	(457)
Depreciation	(12,598)
Effect of movements in foreign exchange	(1,259)
Carrying amount at end of fnancial year	41,451	38,923

74 Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2010

	2010	2009 $000
	$000
15. Intangible assets		173,599 1,800
Intangible assets with indefnite useful lives
Goodwill, at cost	159,877
Technology relationship, at cost	1,800
Total intangible assets with indefnite useful lives	161,677	175,399
Intangible assets with defnite useful lives		19,196 (3,289)
Acquired technology, patents and licences
At cost	39,242
Accumulated amortisation	(5,673)
	33,569	15,907 32,831 (18,850)
Enterprise resource planning system
At cost	36,773
Accumulated amortisation	(22,615)
	14,158	13,981 4,822 (4,822)
Customer relationships
At cost	4,472
Accumulated amortisation	(4,472)
	-	- 7,759 (7,743)
Capitalised development expenditure
At cost	7,759
Accumulated amortisation	(7,759)
	-	16 3,871 (899)
Other intangible assets
At cost	3,652
Accumulated amortisation	(1,217)
	2,435	2,972
Total intangible assets with defnite useful lives	50,162	32,876
Total intangible assets	211,839	208,275

75

	2010	2009 $000
	$000
Reconciliations		187,741 680 (14,822)
Reconciliations of the carrying amounts of each class of intangible assets are set out below:
Goodwill
Carrying amount at beginning of fnancial year	173,599
Acquisitions through business combinations	-
Effect of movements in foreign exchange	(13,722)
Carrying amount at end of fnancial year	159,877	173,599 1,800
Technology relationship
Carrying amount at beginning of fnancial year	1,800
Carrying amount at end of fnancial year	1,800	1,800 275 16,023 (393) 2
Acquired technology, patents and licences
Carrying amount at beginning of fnancial year	15,907
Acquisitions	20,563
Amortisation	(2,721)
Effect of movements in foreign exchange	(180)
Carrying amount at end of fnancial year	33,569	15,907 15,227 2,644 (3,893) 3
Enterprise resource planning system
Carrying amount at beginning of fnancial year	13,981
Acquisitions	4,385
Amortisation	(4,139)
Effect of movements in foreign exchange	(69)
Carrying amount at end of fnancial year	14,158	13,981 976 (1,169) 193
Customer relationships
Carrying amount at beginning of fnancial year	-
Amortisation	-
Effect of movements in foreign exchange	-
Carrying amount at end of fnancial year	-	- 201 (185)
Capitalised development expenditure
Carrying amount at beginning of fnancial year	16
Amortisation	(16)
Carrying amount at end of fnancial year	-	16 2,739 734 (569) 68
Other intangible assets
Carrying amount at beginning of fnancial year	2,972
Acquisitions	-
Amortisation	(350)
Effect of movements in foreign exchange	(187)
Carrying amount at end of fnancial year	2,435	2,972

76 Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2010

Amortisation charge

Amortisation is recognised in the administration expenses line in the income statement except for amortisation of capitalised development expenditure which is recognised in the research and development expenses line.

Impairment tests for cash generating units containing goodwill

For the purpose of impairment testing, goodwill is allocated to Cochlear’s operating divisions which represent the lowest level within Cochlear at which the goodwill is monitored for internal management purposes, which is not higher than Cochlear’s operating segments as reported in Note 10. The aggregate carrying amounts of goodwill allocated to each unit are as follows:

The aggregate carrying amounts of goodwill allocated to each unit are as follows:
	2010	2009 $000
	$000
Americas	80,750	79,015 88,137 6,447
Europe	69,771
Asia Pacifc	9,356
	159,877	173,599

The recoverable amount of each cash generating unit is based on value-in-use calculations. Those calculations use cash flow projections based on actual operating results and the three year business plan. Cash flows for further periods are extrapolated using a conservative growth rate of 3.0% (2009: 3.0%) per annum which is consistent with the long-term economic growth rates. A post-tax discount rate of 10.0% (2009: 10.0%) per annum has been used in discounting the projected post-tax cash flows.

The key assumptions and the approach to determining their value in the current period are:

Assumption How determined Discount rate Based on weighted average cost of capital

Sales volume growth rate Based on a three year forecast taking into account historical growth rates and product lifecycle

Terminal value growth rate Based on a three year forecast taking into account historical growth rates and product lifecycle.

The recoverable amount of each cash generating unit including unallocated corporate assets is in excess of their carrying amount and therefore no impairment charge was required. The excess of recoverable amount over carrying amount is such that a reasonably possible change in assumptions is unlikely to reduce the recoverable amount below the carrying amount.

77

	Assets	Assets	Liabilities	Liabilities	Net	Net
	2010	2009	2010	2009	2010	2009 $000
	$000	$000	$000	$000	$000
16. Deferred tax assets and liabilities						2,457 - 10,673 (151) 12,839 1,594 (9,142) 2,363 1,087
Recognised deferred tax assets and liabilities
Property, plant and equipment	2,480	2,993	(192)	(536)	2,288
Intangible assets	62	-	-	-	62
Inventories	12,461	10,796	-	(123)	12,461
Prepayments	-	-	-	(151)	-
Provisions	14,253	12,839	-	-	14,253
Deferred revenue	2,091	1,594	-	-	2,091
Forward exchange contracts	-	-	(20,713)	(9,142)	(20,713)
Other	11,932	2,409	(5,453)	(46)	6,479
Tax loss carry-forwards	331	1,087	-	-	331
Deferred tax assets/(liabilities)	43,610	31,718	(26,358)	(9,998)	17,252	21,720 -
Set off of tax	(26,358)	(9,819)	26,358	9,819	-
Net deferred tax assets/(liabilities)	17,252	21,899	-	(179)	17,252	21,720

Unrecognised deferred tax liabilities

At 30 June 2010, a deferred tax liability of $20.1 million (2009: $9.5 million) relating to investments in subsidiaries has not been recognised because the Company controls whether the liability will be incurred and it is satisfied that it will not be incurred in the foreseeable future.

Current tax assets and liabilities

The current tax assets for the Consolidated Entity of $7.7 million (2009: $3.9 million) represent the amount of income taxes recoverable in respect of prior periods and arise from the payment of tax in excess of the amounts due to the relevant taxation authority. The current tax liabilities for the Consolidated Entity of $12.6 million (2009: $5.4 million) represent the amount of income taxes payable in respect of current and prior financial periods.

Movement in temporary differences during the year

		2010	2009 $000
	Note	$000
Carrying amount at beginning of fnancial year		21,720	17,227 3,042 - 803 648
Recognised in the income statement	8	3,594
Recognised directly in equity	8	4,059
Recognised in other comprehensive income	8	(11,585)
Effects of movements in foreign exchange		(536)
Carrying amount at end of fnancial year		17,252	21,720

78 Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2010

	2010	2009 $000
	$000
17. Loans and borrowings		-
Current
Secured bank loan – construction of Headquarters	73,811
Total current loans and borrowings	73,811	- 176,586 11,997
Non-current
Secured bank loans – operations(i)	82,934
Secured bank loan – construction of Headquarters	-
Total non-current loans and borrowings	82,934	188,583 2,981 4,056 299,206 210 1,480 110,000 1,000
Financing arrangements
Cochlear had access to the following lines of credit at the reporting date:
Unsecured bank overdrafts	409
Secured bank loans	3,843
Secured bank loan – multi-option credit facility	292,042
Standby letters of credit	7,313
Bank guarantees	5,329
Secured bank loan – construction of Headquarters	110,000
Bank guarantees – construction of Headquarters	1,000
	419,936	418,933 - 3,899 174,000 210 1,036 11,997 -
Facilities utilised at the reporting date
Unsecured bank overdrafts	-
Secured bank loans	3,843
Secured bank loan – multi-option credit facility	80,000
Standby letters of credit	7,313
Bank guarantees	4,859
Secured bank loan – construction of Headquarters	73,811
Bank guarantees – construction of Headquarters	1,000
	170,826	191,142 2,981 157 125,206 - 444 98,003 1,000
Facilities not utilised at the reporting date
Unsecured bank overdrafts	409
Secured bank loans	-
Secured bank loan – multi-option credit facility	212,042
Standby letters of credit	-
Bank guarantees	470
Secured bank loan – construction of Headquarters	36,189
Bank guarantees – construction of Headquarters	-
	249,110	227,791

(i) Included within secured bank loans – operations is an amount of $909,000 (2009: $1,312,500) in relation to unamortised loan establishment fees.

79

Unsecured bank overdrafts

Certain unsecured bank overdrafts are payable on demand and are subject to annual review. Interest on unsecured bank facilities is variable and is charged at prevailing market rates.

Secured bank loans

Cochlear has a JPY300 million bank facility maturing September 2012, which is secured by a letter of guarantee. Interest is charged at prevailing market rates.

Secured bank loans – multi-option credit facility

Cochlear’s corporate debt facility is a secured $300.0 million multi-option credit facility maturing in June 2012. The facility provides Cochlear with the option to reallocate a sub-limit of up to $15.0 million for the purpose of drawing either bank guarantees or letters of credit. The facility is secured by interlocking guarantees provided by certain controlled entities. Interest on the facility is variable and is charged at prevailing market rates.

Secured bank loans – bank guarantee facility

In December 2009, Cochlear secured a GBP1.0 million bank guarantee line which is supported by corporate indemnities and guarantee of up to GBP2.0 million.

Secured bank loan – construction of Headquarters

Details of loans and borrowings in relation to the construction of the Headquarters are set out in Note 28.

Details of loans and borrowings in relation to the construction of the Headquarters are set out in Note 28.
	2010	2009 $000
	$000
18. Commitments		11,753 60,406 153,042
Operating lease commitments
Future non-cancellable operating lease rentals not provided for in the fnancial statements are payable as follows:
Not later than one year	19,487
Later than one year but not later than fve years	71,912
Later than fve years	152,145
Total operating lease commitments	243,544	225,201 1,852
Capital expenditure commitments
Contracted but not provided for and payable:
Not later than one year	8,035
Total capital expenditure commitments	8,035	1,852

Cochlear leases property under non-cancellable operating leases expiring from one to 12 years. Leases generally provide Cochlear with a right of renewal at which time all terms are renegotiated. Lease payments comprise a base amount plus an incremental contingent rental. Contingent rentals are based on movements in the Consumer Price Index.

Operating lease commitments include rental commitments to occupy the new Headquarters. The commencement of the lease and the underlying rental commitments is subject to satisfactory completion of the building which is estimated to be in October 2010.

Details of commitments in relation to the Headquarters under construction are set out in Note 28.

80 Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2010

		2010	2009 $000
	Note	$000
19. Provisions			19,802 8,008 4,412 - -
Current
Employee benefts	25	22,474
Warranties		8,542
Legal and other		4,907
Directors’ retirement scheme	25	888
Make good lease costs		85
Total current provisions		36,896	32,222 4,390 2,129 1,200 1,459
Non-current
Employee benefts	25	4,267
Warranties		2,271
Directors’ retirement scheme	25	364
Make good lease costs		4,703
Total non-current provisions		11,605	9,178 11,137 15,886 (16,886)
Reconciliations
Reconciliations of the carrying amounts of each class of provision, except for the employee benefts provision, are set out below:
Warranties
Carrying amount at beginning of fnancial year		10,137
Provisions made		23,350
Provisions used		(22,674)
Carrying amount at end of fnancial year		10,813	10,137 3,864 1,529 (1,098) 117
Legal and other
Carrying amount at beginning of fnancial year		4,412
Provisions made		2,359
Provisions used		(1,855)
Effects of movements in foreign exchange		(9)
Carrying amount at end of fnancial year		4,907	4,412 1,147 53
Directors’ retirement scheme
Carrying amount at beginning of fnancial year		1,200
Provisions made		52
Carrying amount at end of fnancial year		1,252	1,200 1,399 81 (66) 45
Make good lease costs
Carrying amount at beginning of fnancial year		1,459
Provisions made		3,346
Provisions used		-
Effects of movements in foreign exchange		(17)
Carrying amount at end of fnancial year		4,788	1,459

81

Employee benefits

Employee benefits include entitlements measured at the present value of future amounts expected to be paid, based on a 5% per annum projected weighted average increase in remuneration rates over an average period of eight years. The present value is calculated using a weighted average discount rate of 3% per annum based on national government securities with similar maturity terms.

Warranties

Refer to Note 3(g) for details of how the provision balance is determined.

Legal and other

Refer to Note 3(g) for details of how the provision balance is determined.

Directors’ retirement scheme

Non-executive directors appointed prior to 2003 were entitled to retirement benefits of up to three times their annual remuneration over the previous three years once they had more than five years’ service. The ongoing accrual of benefits under the directors’ retirement scheme ceased from 30 June 2007. The benefits accrued to that date are indexed by reference to the bank bill rate.

Make good lease costs

Refer to Note 3(g) for details of how the provision balance is determined.

20. Contingent liabilities

The details and estimated maximum amounts of contingent liabilities are set out below. The directors are of the opinion that provisions are either adequate or are not required in respect of these matters, as it is either not probable that a future sacrifice of economic benefits will be required, or the amount is not capable of reliable measurement.

Patent infringement complaint

During the year ended 30 June 2008, the Company was served with a complaint for patent infringement by the Alfred E. Mann Foundation for Scientific Research (Mann Foundation). The complaint, filed in a US District Court of California, alleges that two patents have been infringed.

In May 2009, the complaint was dismissed for lack of standing to sue by the Mann Foundation. The dismissal was reversed by the US Court of Appeals in May 2010 and the complaint has returned to the District Court for further proceedings.

Guarantees

Cochlear has a secured $300.0 million multi-option credit facility maturing in June 2012. The facility provides Cochlear with the option to reallocate a sub-limit of up to $15.0 million for the purpose of drawing either bank guarantees or letters of credit. The facility is secured by interlocking guarantees provided by certain controlled entities.

In December 2009, Cochlear secured a GBP1.0 million bank guarantee line which is supported by corporate indemnities and guarantee of up to GBP2.0 million.

82 Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2010

21. Capital and reserves

Share capital

Share capital
	Number of issued shares in market circulation		Number of shares held in Trust under CELTIP		Total number of issued shares
	2010	2009	2010	2009	2010	2009
On issue 1 July – fully paid	55,977,555	55,524,746	74,188	98,104	56,051,743	55,622,850 17,887 23,082 387,924 -
Issued for nil consideration under the Employee Share Plan	18,207	17,887	-	-	18,207
Shares issued into Trust	-	-	12,956	23,082	12,956
Issued from the exercise of options	460,495	387,924	-	-	460,495
Performance shares vesting from Trust	26,089	46,998	(26,089)	(46,998)	-
On issue 30 June – fully paid	56,482,346	55,977,555	61,055	74,188	56,543,401	56,051,743

Cochlear has also issued options (see Note 25(b)).

The Company does not have authorised capital or par value in respect of its issued shares.

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at shareholders’ meetings.

Treasury reserve

The treasury reserve comprises the cost of shares acquired by the Trust at the date of purchase.

Translation reserve

The translation reserve records the foreign currency differences arising from the translation of the financial statements of foreign operations as well as from the translation of liabilities that hedge the Company’s net investment in a foreign subsidiary, where their functional currency is different to the presentation currency of the reporting entity. Refer to Note 3(d) for further details.

Hedging reserve

The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to underlying transactions that have not yet occurred.

Share based payment reserve

The share based payment reserve comprises the cost of shares distributed to eligible executives under the CELTIP, as detailed in Note 25(b).

83

22. Notes to the statement of cash flows

Cash assets

The operating account received an average interest rate of 1.0% (2009: 2.9%) per annum.

Cash held on deposit for periods not exceeding 90 days received an average interest rate of 2.8% (2009: 4.0%) per annum.

(a) Reconciliation of cash and cash equivalents

For the purpose of the statement of cash flows, cash includes cash on hand and at bank and short-term deposits, net of outstanding bank overdrafts. Cash and cash equivalents at the reporting date as shown in the statement of cash flows are reconciled to the related items in the balance sheet as follows:

the balance sheet as follows:
	2010	2009 $000
	$000
Cash on hand	28,504	68,839 11,177
Cash on deposit	14,304
Cash and cash equivalents	42,808	80,016
(b) Reconciliation of net proft to net cash provided by operating activities		130,540 1,185 42,524 22,248 4,876
Net proft	155,152
Add items classifed as investing activities
Loss on disposal of property, plant and equipment	470
Add non-cash items
Amounts set aside to provisions	56,309
Depreciation and amortisation	23,097
Equity settled share based payment transactions	5,068
Net cash provided by operating activities before changes in assets and liabilities	240,096	201,373 (11,056) (6,775) (701) (3,059) 4,051 2,818 (41,273) 320 930
Changes in assets and liabilities
Change in trade and other receivables	(3,752)
Change in inventories	1,537
Change in prepayments	243
Change in deferred tax assets	(7,103)
Change in trade and other payables	11,550
Change in current tax liabilities	3,471
Change in provisions	(49,208)
Change in deferred revenue	4,370
Effects of movements in foreign exchange	(21,658)
Net cash provided by operating activities	179,546	146,628

84 Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2010

	Note	Interest held	Interest held	Country of incorporation/formation
		2010 %	2009 %
23. Controlled entities			- 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - 100 100 - 100 - 100 100 100 100 100 100 99.99 100 100 100 100 100 100 100 100 100	Australia China Switzerland USA Belgium Sweden Canada Germany Australia Germany UK Australia Australia France Australia Belgium Australia Australia Italy Korea Malaysia USA India Sweden UK Sweden Australia Turkey Germany Hong Kong UK Australia Australia Australia Singapore Belgium Australia Japan Sweden
Particulars in relation to controlled entities
Company
Cochlear Limited
Controlled entities
AU Cochlear Medical Device Beijing Co., Ltd		100
Cochlear AG		100
Cochlear Americas		100
Cochlear Benelux NV		100
Cochlear Bone Anchored Solutions AB		100
Cochlear Canada Inc		100
Cochlear Deutschland & Co KG		100
Cochlear Employee Share Trust		100
Cochlear Europe Finance GmbH		100
Cochlear Europe Limited		100
Cochlear Executive Long Term Incentive Plan (Performance Shares) Trust		100
Cochlear Finance Pty Limited		100
Cochlear France SAS		100
Cochlear German Holdings Pty Limited		100
Cochlear Holdings NV		100
Cochlear Incentive Plan Pty Limited		100
Cochlear Investments Pty Ltd		100
Cochlear Italia SRL		100
Cochlear Korea Limited		100
Cochlear Malaysia Sdn. Bhd.		100
Cochlear Manufacturing Corporation		100
Cochlear Medical Device Company India Private Limited		100
Cochlear Nordic AB		100
Cochlear Research and Development Limited		100
Cochlear Sweden Holdings AB		100
Cochlear Technologies Pty Limited	(i)	100
Cochlear Tibbi Cihazlar ve Saglik Hizmetleri Limited Sirketi		100
Cochlear Verwaltungs GmbH		100
Cochlear (HK) Limited		99.99
Cochlear (UK) Limited	(i)	100
Lachlan Project Development Pty Ltd		100
Lachlan Project Holdings Pty Ltd		100
Lachlan Project Security Holdings Pty Ltd		100
Medical Insurance Pte Limited		100
Miaki NV		100
Neopraxis Pty Limited	(i)	100
Nihon Cochlear Co Limited		100
Percutis AB		100

(i) Dormant.

85

24. Related parties

Key management personnel

The following were key management personnel of Cochlear at any time during the financial year and unless otherwise indicated were key management personnel for the entire period:

Non-executive directors

Mr TCE Bergman (Chairman - retired 30 June 2010)

Mr PR Bell

Prof E Byrne, AO Mr A Denver

Mr R Holliday-Smith Mr DP O’Dwyer

Executive director

Dr CG Roberts

Executives

Mr R Brook

Mr J Janssen Mr NJ Mitchell Mr MD Salmon Mr CM Smith.

Key management personnel disclosures

The key management personnel compensation is included in employee benefits expense as follows:

	2010	2009 $
	$
Short-term employee benefts	5,905,985	5,684,505 330,843 65,770 53,261 1,166,847
Post-employment benefts	287,104
Other long-term benefts	66,982
Directors’ retirement benefts	51,413
Share based payments	1,176,764
	7,488,248	7,301,226

Information regarding individual directors’ and executives’ remuneration and some equity instruments disclosures as permitted by section 300A of the Corporations Act 2001 is provided in the Remuneration Report in the Directors’ Report on pages 35 to 44.

The key management personnel have not received any loans from the Company and there have been no other related party transactions with any of Cochlear’s key management personnel unless where noted throughout this Financial Report.

86 Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2010

Options and performance shares granted as compensation

The movement during the financial year in the number of options over ordinary shares and performance shares of Cochlear Limited held, directly, indirectly or beneficially, by each key management person, including their personally related entities, is as follows:

	Held at 1 July 2009	Granted as remuneration	Vested and exercised	Forfeited	Held at 30 June 2010	Vested and exercisable at 30 June 2010
Option holdings Executive director Dr CG Roberts Executives Mr R Brook Mr J Janssen Mr NJ Mitchell Mr MD Salmon Mr CM Smith Performance share holdings Executive director Dr CG Roberts Executives Mr R Brook Mr J Janssen Mr NJ Mitchell Mr MD Salmon Mr CM Smith	309,913 70,946 76,145 70,448 93,770 84,614 - 2,678 1,245 - - 4,103	58,599 19,663 14,358 20,686 19,344 22,379 - - - - - -	(78,991) - (16,713) - (27,011) (23,474) - (2,678) (1,245) - - -	(5,704) (1,883) (1,718) (1,537) (1,493) (2,337) - - - - - -	283,817 88,726 72,072 89,597 84,610 81,182 - - - - - 4,103	64,718 21,356 19,499 17,443 16,929 16,512 - - - - - -

87

	Held at 1 July 2008	Granted as remuneration	Vested and exercised	Forfeited	Held at 30 June 2009	Vested and exercisable at 30 June 2009
Option holdings Executive director Dr CG Roberts Executives Mr R Brook Mr J Janssen Mr NJ Mitchell Mr MD Salmon Mr CM Smith Performance share holdings Executive director Dr CG Roberts Executives Mr R Brook Mr J Janssen Mr NJ Mitchell Mr MD Salmon Mr CM Smith	208,978 125,799 51,427 62,573 60,487 70,072 5,923 2,694 1,253 2,083 2,025 4,512	101,412 30,285 24,819 35,824 33,446 29,714 - - - - - 1,726	- (84,921) - (27,781) - (15,000) (5,887) - - (2,071) (2,013) (2,122)	(477) (217) (101) (168) (163) (172) (36) (16) (8) (12) (12) (13)	309,913 70,946 76,145 70,448 93,770 84,614 - 2,678 1,245 - - 4,103	78,991 - 16,713 - 27,011 13,474 - - - - - -

No options held by key management personnel were vested but not exercisable at 30 June 2009 or 2010.

All options and performance shares granted in the 2010 financial year were granted on 17 August 2009 and vest in August 2012. Options have an expiration date of 17 August 2014. No options or performance shares have been granted since the end of the financial year. The options and performance shares were provided at no cost to the recipients.

All options granted during the financial year have an exercise price of $60.04 per share and a fair value of $10.03 per share at grant date for options with performance based conditions and $8.06 per share at grant date for options with market based conditions. The performance shares granted during the financial year had a fair value at grant date of $40.78 per share for performance shares with performance based conditions and $32.27 per share at grant date for performance shares with market based conditions.

88 Notes to the Financial Statements

Movement in shares

The movement during the financial year in the number of ordinary shares of Cochlear Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows:

	Held at 1 July 2009	Purchases	Received on exercise of options and performance shares	Sales	Held at 30 June 2010
Directors
Non-executive
Mr TCE Bergman	12,000	-	-	-	12,000
Mr PR Bell	2,500	-	-	-	2,500
Prof E Byrne, AO	2,000	-	-	-	2,000
Mr A Denver	2,500	-	-	-	2,500
Mr R Holliday-Smith	2,500	-	-	-	2,500
Mr DP O’Dwyer	3,350	-	-	-	3,350
Executive
Dr CG Roberts	602,821	-	78,991	(21,220)	660,592
Executives
Mr R Brook	11,128	-	2,678	(5,000)	8,806
Mr J Janssen	556	-	17,958	(16,713)	1,801
Mr NJ Mitchell	59,852	-	-	(39,852)	20,000
Mr MD Salmon	9,740	-	27,011	(27,011)	9,740
Mr CM Smith	2,122	-	23,474	(21,632)	3,964
	Held at 1 July 2008	Purchases	Received on exercise of options and performance shares	Sales	Held at 30 June 2009
Directors Non-executive Mr TCE Bergman Mr PR Bell Prof E Byrne, AO Mr A Denver Mr R Holliday-Smith Mr DP O’Dwyer Executive Dr CG Roberts Executives Mr R Brook Mr J Janssen Mr NJ Mitchell Mr MD Salmon Mr CM Smith	12,000 2,500 2,000 1,500 2,500 3,350 596,934 11,128 556 60,000 7,727 30,000	- - - 1,000 - - - - - - - -	- - - - - - 5,887 84,921 - 29,852 2,013 17,122	- - - - - - - (84,921) - (30,000) - (45,000)	12,000 2,500 2,000 2,500 2,500 3,350 602,821 11,128 556 59,852 9,740 2,122

89

Controlled entity related parties

The Company engages in purchases and sales of goods with its controlled entities and pays a licence fee for the use of intellectual property. These transactions are in the ordinary course of business at arm’s length on a transfer pricing basis and 45 day terms apply.

transactions are in the ordinary course of business at arm’s length on a transfer pricing basis and	45 day terms apply.	45 day terms apply.	45 day terms apply.
	2010			2009 $
	$
The aggregate amounts included in the proft before income tax for the Company that resulted from transactions with non-director related parties are:				453,301,994 50,575,726 2,751,765 16,777,982 7,846,650 317,959 209,459,742
Revenue from the sale of goods	457,154,111
Licence fee costs (included in cost of sales)	31,091,699
Interest income	11,259,529
Proft on sale of branch operation	-
Dividends from controlled entities	632,431
Interest expense	831,611
The aggregate amounts receivable from wholly-owned controlled entities by the Company at the reporting date are:
Current and non-current receivables	175,240,691
			2010		2009 $000
		Note	$000
25. Employee benefits					3,398 11,835 4,569 -
Current
Provision for long service leave		19	4,220
Provision for annual leave		19	11,286
Provision for short-term incentives		19	6,968
Directors’ retirement scheme		19	888
			23,362		19,802 3,304
Salary and wages accrued			4,663
Total current employee benefts			28,025		23,106 4,390 1,200
Non-current
Provision for long service leave		19	4,267
Directors’ retirement scheme		19	364
Total non-current employee benefts			4,631		5,590
Total employee benefts			32,656		28,696

Cochlear has benefit plans that provide pension benefits to employees upon retirement. These defined benefit plans cover, in aggregate, 64 employees. Cochlear contributed cash of $0.9 million (2009: $0.8 million) to defined benefit plans in the year ended 30 June 2010 and expects to contribute $0.8 million in the year ending 30 June 2011. The net assets of the plans at 30 June 2010 were $0.3 million (2009: $0.3 million).

90 Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2010

(a) Defined contribution superannuation plans

Cochlear makes contributions to defined contribution plans. The amount recognised as expense was $11.7 million for the year ended 30 June 2010 (2009: $11.2 million).

(b) Share based payments

Cochlear’s Employee Share Plan (Plan) was approved by special resolution at the Annual General Meeting held on 19 October 1999. Under the Plan, the directors can at their discretion, allocate at nil consideration up to a maximum of $2,000 worth of shares per eligible employee in any one year. The fair value of shares issued during the financial year is the market price of the Company’s shares on the ASX as at the start of trading on the issue date. Shares under the Plan vest with the employee immediately but are non-transferable for a period of up to three years.

The CELTIP was approved and adopted at the Annual General Meeting on 20 October 2003 and replaced the Executive Share Option Plan. The CELTIP offers a mixture of options over unissued shares and performance shares. Both the options and the performance shares are subject to a three year vesting period. The number of options and performance shares exercisable by the executives will depend on the performance of Cochlear over the vesting period. Half of the offer will be assessed against the compound annual growth rate of the EPS achieved by Cochlear, and the other half against the TSR as measured against the S&P/ASX 100. If the minimum compound annual growth rate in EPS of 10% is not achieved, 50% of shares will not be issued or released to the executives. If the TSR of Cochlear is below the 50th percentile against the S&P/ASX 100 over the three years, the remaining 50% of shares will not be issued or released.

To achieve a 100% allocation of options and shares, a compound annual growth rate in EPS of more than 20% must be achieved and the TSR of Cochlear must be above the 75th percentile against the S&P/ASX 100.

At the date of this report, unissued ordinary shares of the Company under option and issued shares held in the Trust and the terms and conditions of the grants and issues are as follows:

of the grants and issues are as follows:
Grant date	Number of instruments	Conditions for minimum vesting	Contractual life of options
Option grant in August 2006 Option grant in August 2007 Option grant in August 2008 Option grant in August 2009	156,029 156,029 189,406 189,406 348,057 348,057 215,809 215,808	Three years of service, a minimum compound annual growth rate in EPS of 10%. The Consolidated Entity’s TSR is above the 50th percentile against the S&P/ASX 100 over three years. Three years of service, a minimum compound annual growth rate in EPS of 10%. The Consolidated Entity’s TSR is above the 50th percentile against the S&P/ASX 100 over three years. Three years of service, a minimum compound annual growth rate in EPS of 10%. The Consolidated Entity’s TSR is above the 50th percentile against the S&P/ASX 100 over three years. Three years of service, a minimum compound annual growth rate in EPS of 10%. The Consolidated Entity’s TSR is above the 50th percentile against the S&P/ASX 100 over three years.	5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years
Total options	1,818,601

91

Issue date	Number of instruments	Conditions for minimum vesting	Contractual life of shares in the Trust
Performance shares issued in August 2006 Performance shares issued in August 2007 Performance shares issued in August 2008 Performance shares issued in August 2009	- - 9,358 9,358 10,679 10,679 9,089 9,089	Three years of service, a minimum compound annual growth rate in EPS of 10%. The Consolidated Entity’s TSR is above the 50th percentile against the S&P/ASX 100 over three years. Three years of service, a minimum compound annual growth rate in EPS of 10%. The Consolidated Entity’s TSR is above the 50th percentile against the S&P/ASX 100 over three years. Three years of service, a minimum compound annual growth rate in EPS of 10%. The Consolidated Entity’s TSR is above the 50th percentile against the S&P/ASX 100 over three years. Three years of service, a minimum compound annual growth rate in EPS of 10%. The Consolidated Entity’s TSR is above the 50th percentile against the S&P/ASX 100 over three years.	5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years
Total performance shares	58,252

The number and weighted average exercise prices of options are as follows:

	Weighted average exercise price $	Number of options	Weighted average exercise price $	Number of options
	2010	2010	2009	2009
Outstanding at 1 July	50.71	1,895,423	47.83 51.73 37.28 49.91	1,600,944 (29,928) (387,924) 712,331
Forfeited during the fnancial year	51.53	(51,930)
Exercised during the fnancial year	42.52	(460,498)
Granted during the fnancial year	60.04	435,606
Outstanding at 30 June	55.00	1,818,601	50.71	1,895,423
Exercisable at 30 June	49.43	312,058	39.93	334,864

The weighted average share price at date of exercise was $61.83 (2009: $53.41).

The estimated value of options for the current financial year is calculated at the date of grant using the Black-Scholes model, applying a 33.2% volatility, as reflected in the historical volatility.

For options outstanding at 30 June 2010, 312,058 options have an exercise price of $49.43, 378,811 options have an exercise price of $63.18, 696,113 options have an exercise price of $49.91 and 431,619 options have an exercise price of $60.04 (2009: 334,864 options at $39.93, 476,273 options at $49.43, 383,494 options at $63.18 and 700,792 options at $49.91). The weighted average remaining contractual life of options outstanding at the end of the year is three years (2009: three years).

92 Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2010

26. Financial instruments

Credit risk

Exposure to credit risk

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:

	2010	2009 $000
	$000
Cash and cash equivalents	42,808	80,016 163,240 30,472 -
Trade receivables and other receivables	166,788
Forward exchange contracts	68,841
Interest rate swap on loan for construction of Headquarters	204
	278,641	273,728

The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was:

	2010	2009 $000
	$000
Americas	56,578	52,173 78,460 22,693
Europe	77,735
Asia Pacifc	25,216
	159,529	153,326

Impairment losses

The ageing of Cochlear’s trade receivables at the reporting date was:

Impairment losses The ageing of Cochlear’s trade receivables at the reporting date was:
	2010	2009 $000
	$000
Gross receivables		112,874 15,761 12,834 5,237 10,860
Not past due	125,729
Past due 0 – 30 days	16,573
Past due 31 – 120 days	9,319
Past due 121 – 270 days	10,008
Past due 271 days and over	3,724
	165,353	157,566 (4,240)
Impairment losses	(5,824)
Trade receivables net of allowance for impairment losses	159,529	153,326

There are certain jurisdictions in which Cochlear operates where it is customary practice for customers to make payment beyond 270 days. As such, Cochlear discloses the balance as overdue; however, it is not indicative of a higher than normal credit risk as payments are typically received by Cochlear within the extended timeframes.

93

The movement in the allowance for impairment losses in respect of trade receivables during the year was as follows:

	2010	2009 $000
	$000
Balance at 1 July	(4,240)	(2,743) (1,118) (379)
Impairment losses recognised	(1,980)
Effect of movements in foreign exchange	396
Balance at 30 June	(5,824)	(4,240)

Impairment losses recognised in the year relate to significant individual customers or portfolios of customers which have been assessed as impaired under Cochlear’s accounting policy as detailed in Note 3(i).

Based upon past experience, Cochlear believes that no impairment allowance is necessary in respect of trade receivables not past due.

The allowance accounts used in respect of trade receivables are used to record impairment losses unless Cochlear is satisfied that no recovery of the amount owing is possible; at that point, the amount considered non-recoverable is written off against the financial asset directly.

94 Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2010

Liquidity risk

The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements:

	Effective interest rate Per annum	Carrying amount $000	Contractual cash fows $000	6 months or less $000	6 – 12 months $000	1 – 2 years $000	2 – 5 years $000	More than 5 years $000
Financial liabilities 30 June 2010
AUD foating rate loan	6.97%	79,091	90,774	2,812	2,766	85,196	-	-
AUD foating rate loan for construction of Headquarters	6.17%	73,811	75,342	75,342	-	-	-	-
JPY foating rate loan	1.85%	3,843	3,999	36	35	71	3,857	-
Trade and other payables	-	70,763	70,763	70,763	-	-	-	-
Total		227,508	240,878	148,953	2,801	85,267	3,857	-
	Effective interest rate Per annum	Carrying amount $000	Contractual cash fows $000	6 months or less $000	6 – 12 months $000	1 – 2 years $000	2 – 5 years $000	More than 5 years $000
Financial liabilities 30 June 2009 AUD foating rate loan AUD foating rate loan for construction of Headquarters Interest rate swap on loan for construction of Headquarters JPY foating rate loan Trade and other payables	5.80% 5.20% 4.01% 1.85% -	172,687 11,997 56 3,899 64,881	203,585 12,829 70 4,130 64,881	5,087 314 55 36 64,881	5,005 309 71 36 -	10,092 12,206 (56) 72 -	183,401 - - 3,986 -	- - - - -
Total		253,520	285,495	70,373	5,421	22,314	187,387	-

It is not expected that the cash flows included in the maturity analysis could occur significantly earlier, or at significantly different amounts.

95

Cash flow hedges

In the year ended 30 June 2010, Cochlear designated some sales and purchases of various currencies as cash flow hedges to hedge the amount converted into AUD for forecast future transactions. These are hedges of forecast future transactions to manage the currency risk arising from exchange rate fluctuations. The hedged items were highly probable foreign currency transactions.

The effectiveness of the hedging relationship is calculated prospectively using regression analysis on market values. An effectiveness test is carried out retrospectively using the cumulative dollar offset method. For this, the changes in the fair values of the hedged item and the hedging instrument attributable to spot rate changes are calculated and a ratio is created. If this ratio is between 80% and 125%, the hedge is effective.

All material hedges were effective at the reporting date.

The following table indicates the periods in which the cash flows associated with Cochlear’s derivatives that are cash flow hedges are expected to occur:

The following table indicates the periods in which the cash fows associated with Cochlear’s derivatives that are cash fow hedges are expected to occur:	The following table indicates the periods in which the cash fows associated with Cochlear’s derivatives that are cash fow hedges are expected to occur:	The following table indicates the periods in which the cash fows associated with Cochlear’s derivatives that are cash fow hedges are expected to occur:	The following table indicates the periods in which the cash fows associated with Cochlear’s derivatives that are cash fow hedges are expected to occur:	The following table indicates the periods in which the cash fows associated with Cochlear’s derivatives that are cash fow hedges are expected to occur:	The following table indicates the periods in which the cash fows associated with Cochlear’s derivatives that are cash fow hedges are expected to occur:	The following table indicates the periods in which the cash fows associated with Cochlear’s derivatives that are cash fow hedges are expected to occur:
30 June 2010
Amounts $000	Carrying amount	Expected cash fows	6 months or less	6 – 12 months	1 – 2 years	2 – 5 years
Forward exchange contracts	68,841	69,334	21,570	23,154	23,374	1,236
30 June 2009
Amounts $000	Carrying amount	Expected cash fows	6 months or less	6 – 12 months	1 – 2 years	2 – 5 years
Forward exchange contracts	30,472	30,745	4,760	5,578	10,065	10,342

The expected impact on the income statement is not considered to be significantly different to the cash flow impact noted above.

96 Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2010

Currency risk

Exposure to currency risk

Cochlear’s exposure to foreign currency risk was as follows, based upon notional amounts:

Amounts local currency thousands	USD	EUR	GBP	SEK	JPY
30 June 2010
Trade receivables	60,792	36,770	3,488	11,000	428,804
Secured bank loans	-	-	-	-	(300,000)
Trade payables	(11,734)	(4,793)	(5,845)	(37,873)	(52,615)
Gross balance sheet exposure	49,058	31,977	(2,357)	(26,873)	76,189
Amounts local currency thousands	USD	EUR	GBP	SEK	JPY
30 June 2009 Trade receivables Secured bank loans Trade payables	48,245 - (9,128)	30,627 - (3,813)	4,442 - (5,945)	7,543 - (23,792)	412,784 (300,000) (93,759)
Gross balance sheet exposure	39,117	26,814	(1,503)	(16,249)	19,025

Cochlear enters into forward exchange contracts to hedge anticipated sales and purchases in USD, EUR, SEK and JPY.

The amounts of forward cover taken are in accordance with approved policy and internal forecasts.

97

The following table sets out the gross value to be received (sell) or paid (buy) under forward exchange contracts and the weighted average contracted exchange rates of outstanding contracts:

exchange rates of outstanding contracts:
	Foreign exchange rates		Gross value
	2010	2009	2010	2009 $000
			$000
Sell USD				182,564 114,232 59,633 154,629 86,196 31,187 12,106 4,259 859
Not later than one year			217,940
Later than one year but not later than two years			155,102
Later than two years but not later than three years			51,599
Weighted average exchange rates contracted	0.78	0.75
Sell EUR
Not later than one year			187,329
Later than one year but not later than two years			94,591
Later than two years but not later than three years			40,457
Weighted average exchange rates contracted	0.57	0.53
Sell JPY
Not later than one year			8,327
Later than one year but not later than two years			5,016
Later than two years but not later than three years			608
Weighted average exchange rates contracted	76.66	83.16

The following significant exchange rates applied to Cochlear during the year:

The following signifcant exchange rates applied to Cochlear during the year:
	Average rate		Reporting date spot rate
AUD 1 =	2010	2009	2010	2009
USD	0.877	0.762	0.874	0.808 0.575 0.489 6.303 76.938 0.876
EUR	0.634	0.548	0.708
GBP	0.554	0.466	0.580
SEK	6.421	5.654	6.764
JPY	80.497	75.873	78.064
CHF	0.932	0.844	0.950

98 Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2010

Interest rate risk

Profile

At the reporting date, the interest rate profile of Cochlear’s interest-bearing financial instruments was:

Profle At the reporting date, the interest rate profle of Cochlear’s interest-bearing fnancial instruments was:
	2010 $000	2009 $000
Carrying amount		80,016 188,583
Variable rate instruments
Financial assets	42,808
Financial liabilities	156,745

Sensitivity analysis

In managing interest rate and currency risks, Cochlear aims to reduce the impact of short-term fluctuations on Cochlear’s earnings. However, over the longer term, permanent changes in foreign exchange and interest rates will have an impact on profit.

For the year ended 30 June 2010, it is estimated that a general increase of one percent in interest rates would have decreased Cochlear’s profit after income tax and equity by approximately $0.5 million (2009: $0.7 million). A one percent decrease in interest rates would have had the equal but opposite effect on Cochlear’s profit and equity.

It is estimated that a general increase of ten percent in the value of the AUD against other foreign currencies would have decreased Cochlear’s profit for the year ended 30 June 2010, including hedging results and after income tax, by approximately $4.1 million (2009: $7.1 million) and decreased Cochlear’s equity by $4.4 million (2009: $2.5 million). A ten percent decrease in the value of the AUD against other foreign currencies would have increased Cochlear’s profit by $4.5 million (2009: $8.1 million) and increased equity by $4.9 million (2009: $2.5 million).

Details relating to financial instruments in relation to the construction of the Headquarters are set out in Note 28.

Fair values

The fair values of financial assets and liabilities, together with carrying amounts shown in the balance sheet, are as follows:

		2010	2010	2009	2009
	Note	Carrying amount $000	Fair value $000	Carrying amount $000	Fair value $000
Cash and cash equivalents		42,808	42,808	80,016 173,256 20,456 (64,881) (56) (176,586) (11,997)	80,016 173,256 20,456 (64,881) (56) (177,899) (11,997)
Trade and other receivables – current	12	210,690	210,690
Trade and other receivables – non-current	12	25,143	25,143
Trade and other payables – current		(70,763)	(70,763)
Trade and other payables – non-current		(5,724)	(5,724)
Secured bank loans – operations	17	(82,934)	(83,843)
Secured bank loan – construction of Headquarters	17	(73,811)	(73,811)
Total		45,409	44,500	20,208	18,895

Basis for determining fair values

The following summarises the significant methods and assumptions used in estimating the fair values of financial instruments reflected in the table above.

99

Derivatives

The fair value of forward exchange contracts is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using a risk free rate based on government bonds. These fair values are provided by independent third parties.

Non-derivative financial assets and liabilities

The fair value of cash, receivables, payables and short-term borrowings is considered to approximate their carrying amount because of their short maturity.

The directors consider the carrying amount of long-term borrowings recorded in the financial statements approximates their fair value.

Fair value hierarchy

The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

• Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

• Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (ie. as prices) or indirectly (ie. derived from prices); and

• Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

	2010 $000	2009 $000
30 June 2010		68,841 204
Derivative fnancial assets
Forward exchange contracts	68,841
Interest rate swap on loan for construction of Headquarters	204
30 June 2009		30,472 56
Derivative fnancial assets
Forward exchange contracts	30,472
Derivative fnancial liabilities
Interest rate swap on loan for construction of Headquarters	56

There have been no transfers between levels during the year.

27. Events subsequent to the reporting date

Other than the matter noted below, there has not arisen in the interval between the reporting date and the date of this Financial Report, any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Company, to significantly affect the operations of Cochlear, the results of those operations, or the state of affairs of Cochlear in future financial years:

Dividends

For dividends declared after 30 June 2010, see Note 9.

28. Construction of Headquarters

Cochlear is building its new Headquarters at the Macquarie University (MU) site. Upon practical completion, MU will pay Cochlear a development fee of approximately $128.0 million at which time the building will be transferred to MU. There are no progress payments.

During the year ended 30 June 2009, Cochlear entered into agreements with MU to develop its new global Headquarters on MU’s behalf. The Headquarters is being constructed on land owned by MU by a special purpose entity, Lachlan Project Development Pty Ltd. Adjacent land has been reserved by MU for future expansion by Cochlear over the next 25 years. Cochlear has subcontracted the construction of the Headquarters and, upon completion, will lease the premises for a minimum of 15 years. A MU entity will own the building.

Construction activities are not part of the ordinary course of Cochlear’s business. Cochlear will be exposed to the usual risks associated with construction.

100 Notes to the Financial Statements Cochlear Limited and its controlled entities for the year ended 30 June 2010

Construction contract revenue is determined as the sum of costs incurred plus interest capitalised during the year. Revenue is recognised on a percentage of completion basis. The following amounts have been recorded in the consolidated income statement for the year ended 30 June 2010:

	Note	2010 $000	2009 $000
Construction contract revenue		63,696	6,687 (6,687)
Construction contract expense		(63,696)
Construction contract revenue, net of expense	5(c)	-	-

Financing for the construction has been received via a dedicated draw-down facility of $110.0 million which includes an interest capitalisation limit of $11.0 million. The facility provides Cochlear with funding for construction of the building project and excludes funding for specialist fit out work required by Cochlear to undertake its manufacturing operations. The facility makes specific reference to the building agreement, allowing for Cochlear to receive the full development fee from MU before repaying the facility. As at 30 June 2010, $73.8 million (2009: $12.0 million) of the facility was utilised.

The draw-down facility requires Cochlear to hedge at least 80% of its interest exposure on these borrowings. Hedging of borrowings is achieved by entering into interest rate swap agreements.

The facility is subject to a corporate guarantee requiring the Company to repay the facility if practical completion of the building work (and therefore, payment by MU) is not achieved by 3 June 2012.

Cochlear has signed an agreement to lease the premises for a minimum of 15 years upon completion. The newly constructed building will serve as Cochlear’s global Headquarters, manufacturing and research facilities. The estimated commitments for lease rentals are disclosed in Note 18.

The following balances related to the construction of the Headquarters are incorporated in the balance sheet:

	Note	2010 $000	2009 $000
Assets			2,088 - -
Cash and cash equivalents		994
Trade and other receivables		223
Capitalised building costs – construction of Headquarters		74,326
Total current assets		75,543	2,088 10,630 17
Capitalised building costs – construction of Headquarters		-
Deferred tax assets		-
Total non-current assets		-	10,647
Total assets		75,543	12,735 47 - -
Liabilities
Trade and other payables		-
Loans and borrowings – construction of Headquarters	17	73,811
Current tax liabilities		61
Total current liabilities		73,872	47 56 11,997
Trade and other payables		-
Loans and borrowings – construction of Headquarters	17	-
Total non-current liabilities		-	12,053
Total liabilities		73,872	12,100
Net assets		1,671	635

101

29. Parent entity disclosures

At, and throughout the financial year ended, 30 June 2010, the parent company of Cochlear was Cochlear Limited.

	Company	Company
	2010	2009 $000
	$000
Result of the parent entity		117,914 (3,343)
Net proft	129,846
Other comprehensive income	25,699
Total comprehensive income	155,545	114,571
Financial position of the parent entity at year end		161,249 525,688 45,521 225,358 99,427 (1,992) 19,817 18,274 164,804
Current assets	208,174
Total assets	587,794
Current liabilities	113,286
Total liabilities	211,228
Total equity of the parent entity comprising of:
Issued capital	119,842
Treasury reserve	(2,826)
Hedging reserve	45,516
Share based payment reserve	26,350
Retained earnings	187,684
Total equity	376,566	300,330

Parent entity contingencies

The details of all contingent liabilities in respect to Cochlear Limited are disclosed in Note 20.

Parent entity capital commitments for acquisition of plant and equipment

Parent entity capital commitments for acquisition of plant and equipment
	Company
	2010	2009 $000
	$000
Plant and equipment		1,852
Contracted but not yet provided for and payable:
Within one year	7,628
Total parent entity capital commitments for acquisition of plant and equipment	7,628	1,852

102 Directors’ Declaration Cochlear Limited and its controlled entities for the year ended 30 June 2010

• 1 In the opinion of the directors of Cochlear Limited (the Company):

• (a) the financial statements and notes, and the Remuneration Report in the Directors’ Report set out on pages 35 to 101, are in accordance with the Corporations Act 2001, including:

• (i) giving a true and fair view of the Consolidated Entity’s financial position as at 30 June 2010 and of its performance for the financial year ended on that date; and

• (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001;

• (b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 2(a); and

• (c) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

• 2 The directors have been given the declarations required by section 295A of the Corporations Act 2001 from the Chief Executive Officer and Chief Financial Officer for the financial year ended 30 June 2010.

Dated at Sydney this 10th day of August 2010.

Signed in accordance with a resolution of the directors:

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Director

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Director

to the Members of Cochlear Limited Independent Audit Report

103

Report on the financial report

We have audited the accompanying financial report of Cochlear Limited (the Company) and the entities it controlled at the year’s end or from time to time during the financial year, which comprises the balance sheet as at 30 June 2010, and the income statement, statement of comprehensive income, statement of changes in equity and statement of cash flows for the year ended on that date, a description of significant accounting policies and other explanatory Notes 1 to 29 and the directors’ declaration.

Directors’ responsibility for the financial report

The directors of the Company are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal control relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. In Note 2(a), the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the financial report, comprising the financial statements and notes, complies with International Financial Reporting Standards.

Auditor’s responsibility

Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.

We performed the procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001 and Australian Accounting Standards (including the Australian Accounting Interpretations), a view which is consistent with our understanding of the Consolidated Entity’s financial position and of its performance.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Independence

In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001.

Auditor’s opinion

In our opinion:

(a) the financial report of Cochlear Limited is in accordance with the Corporations Act 2001, including:

• (i) giving a true and fair view of the Consolidated Entity’s financial position as at 30 June 2010 and of its performance for the year ended on that date; and

(ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001.

(b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 2(a).

Report on the Remuneration Report

We have audited the Remuneration Report included in the Directors’ Report for the year ended 30 June 2010. The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with Section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with auditing standards.

Auditor’s opinion

In our opinion, the Remuneration Report of Cochlear Limited for the year ended 30 June 2010, complies with Section 300A of the Corporations Act 2001.

KPMG

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Kevin Leighton, Partner
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Sydney, 10 August 2010

104 Additional Information

Additional information required by Australian Securities Exchange Listing Rules and not disclosed elsewhere in this report – the information presented is as at 4 August 2010:

Shareholdings

Substantial shareholders

Substantial shareholders
Shareholder	Number of ordinary shares held	%
Capital (Institutional Group)	5,050,049	8.93
Total	5,050,049	8.93
Distribution of shareholders
Number of shares held Number of ordinary shareholders
1 – 1,000 22,627 1,001 – 5,000 3,025 5,001 – 10,000 203 10,001 – 100,000 101 100,001 and over 21
Total 25,977

Non-marketable parcels – 151 shareholders held less than a marketable parcel of ordinary shares

Twenty largest shareholders

Twenty largest shareholders
Shareholder	Number of ordinary shares held	%
HSBC Custody Nominees (Australia) Limited JP Morgan Nominees Australia Limited National Nominees Limited Citicorp Nominees Pty Limited Cogent Nominees Pty Limited Citicorp Nominees Pty Limited (CFS WSLE Geared Share Fund a/c) Dr Christopher Graham Roberts ANZ Nominees Limited (Cash Income a/c) Australian Reward Investment Alliance UBS Wealth Management Australia Nominees Pty Ltd AMP Life Limited Citicorp Nominees Pty Limited (Cwlth Bank Off Super a/c) RBC Dexia Investor Services Australia Nominees Pty Limited (GSAM a/c) Perpetual Trustee Company Limited Warbont Nominees Pty Ltd (Settlement Entrepot a/c) Bainpro Nominees Pty Limited Agro Investments Limited Queensland Investment Corporation CS Fourth Nominees Pty Ltd (Unpaid a/c) The Australian National University	13,512,394 10,226,384 9,394,455 1,524,789 696,417 681,524 660,592 491,286 277,317 250,804 229,572 198,853 194,061 152,679 141,636 132,173 128,000 121,475 119,139 90,000	23.90 18.09 16.61 2.70 1.23 1.21 1.17 0.87 0.49 0.44 0.41 0.35 0.34 0.27 0.25 0.23 0.23 0.21 0.21 0.16
		69.37

The 20 largest shareholders held 69.37% of the ordinary shares of the Company.

On market buy-back

There is no current on market buy-back.

Glossary

AGM Annual General Meeting.

ASIC Australian Securities and Investments Commission.

ASX Australian Securities Exchange.

DACS Direct acoustic cochlear stimulator.

DPS Dividends per share.

EBIT Earnings before interest and taxes.

EBITDA Earnings before interest, tax, depreciation and amortisation.

EPS Earnings per share.

F09 Financial Year 2009: 1 July 2008 to 30 June 2009.

F10 Financial Year 2010: 1 July 2009 to 30 June 2010. F11 Financial Year 2011: 1 July 2010 to 30 June 2011.

FDA United States Food and Drug Administration.

IFRS International Financial Reporting Standards. NPAT Net profit after tax.

Previous GAAP Previous Australian Generally Accepted Accounting Principles.

Processor/speech processor/sound processor The externally worn part of the cochlear implant.

R&D Research and development.

SmartSound Set of sound processing algorithms which enhance hearing performance.

TSR Total shareholder return.

Company Information

Stock exchange listing Australian Securities Exchange

ASX code COH

Solicitors Clayton Utz

Share registrar

Computershare Investor Services Pty Limited Level 3, 60 Carrington Street Sydney NSW 2000, Australia Tel: 61 2 8234 5000

Auditor KPMG

Bankers

Australia Westpac Banking Corporation

Company ASX Announcement Record

4 June 2010 Settlement agreement

Cochlear Limited announced that its subsidiary, Cochlear Americas, had signed a settlement agreement with the US Department of Justice and the Office of Inspector General of the US Department of Health and Human Services. Under the agreement, Cochlear Americas agreed to pay USD950,000. Cochlear Americas specifically disputes and denies the factual and legal allegations made in this case.

17 March 2010 New Chairman

Cochlear Limited announced that Mr Tommie Bergman would retire as Chairman and nonexecutive director of Cochlear Limited, effective 30 June 2010, to be succeeded by Mr Rick Holliday-Smith as Chairman.

9 February 2010 Record earnings for half year ended 31 December 2009

Cochlear Limited announced record net profit after tax of $75.2 million for the six months ended 31 December 2009, up 8% on the first half of F09. Total revenue of $347.6 million was down 2%, with sales up in constant currency. The interim dividend of $0.95 per share was up 19%.

20 October 2009 Chairman’s address

Cochlear Limited Chairman, Mr Tommie Bergman, addressed shareholders at the Annual General Meeting.

9 September 2009 Technology purchase

Cochlear Limited advised that it has signed an exclusive licence agreement to purchase patent rights, know-how as well as joint development activities with Otologics LLC. The purchase price was US$25 million.

4 September 2009 FDA approval

Cochlear Limited advised that it had received approval from the US Food and Drug Administration of the two Premarket Approval Supplements covering the new Cochlear Nucleus 5 System.

11 August 2009 Record revenue and earnings for year ended 30 June 2009

Cochlear Limited announced record net profit after tax of $130.5 million for the year ended 30 June 2009, up 13% on the previous year. Cochlear would pay a fully franked final dividend of 95 cents per share, representing a 19% increase on the previous corresponding period.

Japan The Bank of Tokyo-Mitsubishi UFJ, Limited Sweden Skandinaviska Enskilda Banken AB (publ)

United Kingdom NatWest Bank

United States Wells Fargo Bank West, NA

Annual General Meeting

The Annual General Meeting will be held at 10am on Tuesday 19 October 2010 at the Menzies Sydney Hotel, Australia Ballroom, 14 Carrington Street, Sydney. A Notice of Meeting and Proxy Form are enclosed with this Annual Report.

Financial calendar

2010 Dividend record date 2 September Payment of final dividend 23 September Annual General Meeting 19 October 2011 Interim profit announcement 8 February Interim dividend record date 25 February Payment of interim dividend 15 March Final profit announcement 9 August Annual General Meeting 18 October * Indicative dates only.

Nucleus is a registered trademark of Cochlear Limited. Baha is a registered trademark of Cochlear Bone Anchored Solutions AB, a Cochlear group company. Cochlear, the elliptical logo, Freedom, Hybrid and SmartSound are trademarks of Cochlear Limited. Baha Intenso and Vistafix are trademarks of Cochlear Bone Anchored Solutions AB, a Cochlear group company.

13 July 2009 Market update

Cochlear Limited advised that it anticipated F09 total revenue to grow 15% to $695 million. net profit after tax was anticipated to grow 13% to $130.5 million and core earnings 12% to $137.7 million. The update also included information of product releases in key markets.

Design Cross Media Communications Pty Ltd

Cochlear Ltd (ABN 96 002 618 073) 14 Mars Road, Lane Cove NSW 2066, Australia Tel: 61 2 9428 6555 Fax: 61 2 9428 6352 Cochlear Bone Anchored Solutions AB Konstruktionsvägen 14, SE - 435 33 Mölnlycke, Sweden Tel: 46 31 792 44 00 Fax: 46 41 792 46 95 Cochlear Americas 13059 E Peakview Avenue, Centennial, CO 80111, USA Tel: 1 303 790 9010 Fax: 1 303 792 9025 Cochlear AG European Headquarters, Peter Merian-Weg 4, CH - 4052 Basel, Switzerland Tel: 41 61 205 0404 Fax: 41 61 205 0405 European Representative, Cochlear Deutschland GmbH & Co. KG Karl-Wiechert-Allee 76A, D-30625 Hannover Germany Tel: 49 511 542 770 Fax: 49 511 542 7770

Cochlear Europe Ltd 9 Weybridge Business Park, Addlestone Road, Addlestone, Surrey KT15 2UF, United Kingdom Tel: 44 1932 87 1500 Fax: 44 1932 87 1526 Nihon Cochlear Co Ltd Ochanomizu-Motomachi Bldg, 2-3-7 Hongo, Bunkyo-Ku, Tokyo 113-0033, Japan Tel: 81 3 3817 0241 Fax: 81 3 3817 0245 Cochlear (HK) Limited Unit 1810, Hopewell Centre, 183 Queens Road East, Wan Chai, Hong Kong SAR Tel: 852 2530 5773 Fax: 852 2530 5183 Cochlear (HK) Ltd Beijing Representative Office Unit 2208 Gemdale Tower B, 91 Jianguo Road, Chaoyang District, Beijing 100022 P.R. China Tel: 86 10 5909 7800 Fax: 86 10 5909 7900

Cochlear Limited (Singapore Branch) 6 Sin Ming Road, #01-16 Sin Ming Plaza Tower 2, Singapore 575585 Tel: 65 6553 3814 Fax: 65 6451 4105 Cochlear Korea Ltd 1st floor, Cheongwon building, 828-5, Yuksam dong, Kangnam gu, Seoul, Korea Tel: 82 2 533 4663 Fax: 82 2 533 8408 Cochlear Benelux NV Schaliënhoevedreef 20 1, B - 2800 Mechelen, Belgium Tel: 32 1579 5511 Fax: 32 1579 5500 Cochlear Italia SRL Via Augusto Murri, 45/L, 40137 Bologna, Italia Tel: 39 051 7419811 Fax: 39 051 392062

Cochlear France S.A.S. Route de l’Orme aux Merisiers, Z.I. Les Algorithmes - Bât. Homère, 91190 Saint Aubin, France Tel: 33 811 111 993 Fax: 33 160 196 499 Cochlear Nordic AB Konstruktionsvägen 14, SE - 435 33 Mölnlycke, Sweden Tel: 46 31 335 14 61 Fax: 46 31 335 14 60 Cochlear Tıbbi Cihazlar ve Sağlık Hizmetleri Ltd. Sti. Cubuklu Mah. Bogazici Cad., Bogazici Plaza No: 6/1, Kavacik TR - 34805 Beykoz-Istanbul, Turkey Tel: 90 216 538 5900 Fax: 90 216 538 5919 Cochlear Canada Inc 2500-120 Adelaide Street West, Toronto, ON M5H 1T1 Canada Tel: 1 416 972 5082 Fax: 1 416 972 5083 www.cochlear.com

© Cochlear Limited 2010

N34674F ISS1 SEP10