Innovate for value

ANNUAL REPORT 2016

The Strategic Report, which has been prepared in accordance with the requirements of the Companies Act 2006, comprises the above sections and has been approved and signed on behalf of the Board.

The Directors' Report comprises pages 33 to 34, 36 to 38, 47 to 75, 102, 110, 112, 114 and pages 169 to 190 of the Annual Report.

OVERVIEW
CHAIRMAN'S STATEMENT	2
CEO REVIEW OF STRATEGY	4
WHO WE ARE	6
OUR BUSINESS & MARKETPLACE
BUSINESS MODEL	8
STRATEGIC PRIORITIES	10
MARKET OVERVIEW	16
OPERATIONAL REVIEW
OUR PRODUCTS	18
OUR RESOURCES	27
SUSTAINABILITY	36
FINANCIAL REVIEW
FINANCIAL REVIEW	39
RISK
PRINCIPAL RISKS	42
GOVERNANCE
BOARD OF DIRECTORS	48
GOVERNANCE REPORT	54
NOMINATION COMMITTEE REPORT	65
ETHICS & COMPLIANCE COMMITTEE REPORT	67
AUDIT COMMITTEE REPORT	69
REMUNERATION COMMITTEE REPORT	76
STATEMENT OF DIRECTORS' RESPONSIBILITIES	102
ACCOUNTS
INDEPENDENT AUDITOR'S REPORT	103
GROUP INCOME STATEMENT	109
GROUP STATEMENT OF	109
COMPREHENSIVE INCOME
GROUP BALANCE SHEET	111
GROUP CASH FLOW STATEMENT	113
GROUP STATEMENT OF CHANGES IN EQUITY	115
NOTES TO THE GROUP ACCOUNTS	116
COMPANY ACCOUNTS	165
NOTES TO THE COMPANY ACCOUNTS	167
GROUP INFORMATION	169
OTHER FINANCIAL INFORMATION	173
INFORMATION FOR SHAREHOLDERS	182

Front cover: WEREWOLF™ COBLATION™ System, our next generation COBLATION platform delivers an unparalleled range of performance capabilities and advanced safety features for soft tissue ablation.

GLOSSARY OF TERMS 193

Find more online

To learn more about Smith & Nephew, to register to receive our news, or to explore opportunities to join us, please visit www.smith-nephew.com

Innovate for value

We are driven by pushing innovation through the business and into our products. We look to challenge the status quo of how our industry supports a healthcare market facing major economic and social challenges. Every one of us is focused RQGHOLYHULQJJUHDWHUYDOXHE\²QGLQJ ways to meet the new needs of our FXVWRPHUV:HDUHDOOSURXGRIRXU history of innovation, and excited by our strong portfolio of products and QHZZD\VRIZRUNLQJ

REVIEW OPERATIONAL RISK

CHAIRMAN'S STATEMENT

Succeeding in challenging times In 2016 Smith & Nephew faced and overcame challenges.

DEAR SHAREHOLDER,

A good Board pressure tests strategy, provides leadership on matters of governance and ensures their company is equipped to handle risk. In 2016 Smith & Nephew faced and overcame challenges in all these areas, confirming my strong belief that this is a Company set well to succeed in challenging times.

In early 2016 we announced that our Chief Executive Officer, Olivier Bohuon, had been diagnosed with cancer, and would require treatment across much of the year. We were delighted to welcome him back to work full time in October.

During the intervening months my Board colleagues and I were able to provide additional support to the executive team. I attended the Managing Directors' annual meeting, and engaged with various members of the executive team, supporting them on a number of matters. The Board met with numerous commercial and operational leaders across the year. This culminated in a visit to our Andover, Massachusetts site in November where we saw first-hand the exciting progress being made by our Sports Medicine business.

These meetings gave Board members firsthand experience of the high quality team that has been assembled by Olivier to deliver on his strategy to transform Smith & Nephew. Following a number of changes implemented in recent years, the structure of the organisation is fully aligned to the strategic priorities, and the commitment and dedication to the business at all levels was evident for us to see.

FINANCIAL PERFORMANCE

Smith & Nephew's financial performance is shown on these pages.

Although the Group delivered revenue growth in 2016, the outturn is below where we had set our sights at the start of the year. Whilst some geographies and franchises performed well, we were buffeted by trading conditions in the Gulf States and China, as well as a few areas where we believe we can execute better in 2017. We faced a headwind in China entering the year, and it is pleasing to see how management delivered the improvements in this market as they said they would.

The Board continues to have great confidence in the business and is proposing a final dividend for the year of 18.5¢ per share, giving a total dividend distribution for 2016 of 30.8¢. In-line with our dividend policy, the declared dividend is flat year-on-year despite the decline in adjusted earnings per share.

Directors' biographies start on page 48

GOVERNANCE AND CULTURE

Corporate governance, especially Director responsibilities, remuneration and diversity, has been in the spotlight in 2016. The Board has welcomed our discussions with shareholders around such important topics and we are mindful of how the landscape is changing in some areas. The Board is committed to continuing to refine our governance structure and practices to reflect what is in the best interests of all stakeholders.

Culturally, we believe that openness and transparency, accountability and responsibility should run throughout the Company. The Board takes matters of ethics and compliance very seriously, and aims to set a tone at the top which pervades throughout the organisation. We review processes and practices and oversee quality and regulatory matters. We take great interest in how we attract, retain and develop talent and the work underway to make Smith & Nephew a great place to work for all employees.

Our Chief Financial Officer, Julie Brown, left the Company in January 2017. We are grateful for her contribution during her four years at Smith & Nephew and wish her well in her new career at Burberry plc. Graham Baker will join as Chief

Financial Officer on 1 March 2017 when he will also be appointed to the Board as an Executive Director. Having held multiple senior roles at AstraZeneca and elsewhere, I have no doubt that he will successfully ensure effective financial stewardship and I welcome him to Smith & Nephew.

Brian Larcombe will be retiring from the Board at the Annual General Meeting on 6 April 2017. Brian has served Smith & Nephew for many years, as our Senior Independent Director since 2014, and as a member of the Audit, Nomination & Governance and Remuneration Committees. I am personally grateful that he agreed to stay on one extra year to provide continuity while Olivier was receiving treatment. We will miss his great wisdom and experience. On behalf of the whole Board I thank him for his service. We are fortunate that Ian Barlow has agreed to become Senior Independent Non-Executive Director. Ian has been a Non-Executive Director since 2010, and has been a diligent Chair of our Audit Committee. Robin Freestone will be appointed Chairman of the Audit Committee in his place.

Finally, Joe Papa has graciously agreed to stay on beyond his nine-year term as we undertake a search for a new Chair of the Remuneration Committee. As we make this, and indeed all appointments, we are conscious of the need to continue to seek individuals who bring diversity in its broadest sense, including background, thinking and gender.

In conclusion, 2016 has been a year where we have continued to make progress in the face of a number of headwinds. As a result, I believe we enter 2017 as a stronger business. There is no doubt that the world is facing a period of greater geo-political risk and companies need to be robust. The Board takes its responsibilities very seriously, to ensure that we perform financially, strategically and ethically against this changing and challenging backdrop. We thank you for your continued support and look forward to serving you in 2017.

Yours sincerely,

Roberto Quarta Chairman

Financial review page 39

\$4,669m +1% +2%

Revenue Reported Underlying1

*URXSUHYHQXHZDVPLOOLRQXSRQDUHSRUWHGEDVLVDQGRQDQ underlying basis. Reported growth includes a foreign exchange headwind of ZKLOVWDFTXLVLWLRQVDGGHGDQGGLVSRVDOV¥

30.8¢ 0% Dividend per share

,QOLQHZLWKRXUGLYLGHQGSROLF\WKHGHFODUHGGLYLGHQGLV³DW\HDURQ\HDU despite the decline in adjusted earnings.

\$801m +28%

2SHUDWLQJSUR²W

2SHUDWLQJSUR²WPDUJLQRILVEHIRUHRQHRII \$326 million gain from Gynaecology disposal.

\$1,020m -7%

7UDGLQJSUR²W¹

7UDGLQJSUR²WPDUJLQRIUH³HFWVSUHYLRXVO\ disclosed transactional FX headwind, loss of leverage from lower sales growth and investment LQ%OXH%HOWRIIVHWE\HI²FLHQFLHV

88.1¢ +92%

Earnings per share EPS

7KHLQFUHDVHLQ(36LVPDLQO\GXHWREHQH²WIURP the 2016 Gynaecology disposal and the absence RIDOHJDOPHWDORQPHWDOFKDUJH

82.6¢ -3%

Adjusted Earnings per share EPSA1

7KHUHGXFWLRQLQ(36\$IURPWKHSULRUSHULRGUH³HFWV WKHUHGXFWLRQLQDGMXVWHGDWWULEXWDEOHSUR²W

5%

R&D expenditure

To drive innovation, we maintain our investment in 5 'DWDURXQGRI*URXSUHYHQXH

7KHQRQ,)56²QDQFLDOPHDVXUHVDUHH[SODLQHG and reconciled to the most directly comparable ²QDQFLDOPHDVXUHSUHSDUHGLQDFFRUGDQFHZLWK ,)56RQSDJHV

REVIEW OPERATIONAL RISK

CEO REVIEW OF STRATEGY

Innovative products and deep customer relationships

We now have the right structure and capability LQSODFHDQGDUHIRFXVHG RQLPSURYLQJH[HFXWLRQ DFURVVWKH*URXS

DEAR SHAREHOLDER,

In 2016 I was pleased with our performance in areas such as Sports Medicine and Knee Implants, where we maintained strong momentum. However, whilst we delivered growth in 2016, it was not at the level we had wanted. Market conditions in China and the Gulf States together shaved more than a percentage point of growth off the Group in the year.

As we enter 2017, I am confident we now have the right structure and capability in place and are focused on improving execution across the Group, with a clear set of actions underway. As a result, I expect us to deliver a stronger performance in 2017.

COMMERCIAL PROGRESS

In our Established Markets, 2016 highlights included the performance across Sports Medicine, where we continue to reap the benefits of the acquisition of ArthroCare. PICO™, our novel single-use Negative Pressure Wound Therapy (NPWT) system, is transforming the use of this therapy option. Our world class Knee Implant portfolio was further strengthened by the acquisition of NAVIO™, an exciting robotics-assisted surgery platform, from which ZHGHOLYHUHGPRUHWKDQUHYHQXHJURZWK in 2016.

We have spent the last five years UHVKDSLQJ6PLWK 1HSKHZWRPDNH the Company more agile, stronger, PRUHHIILFLHQWDQGVLPSOHU:HDUH proud of what we have done.

Most of our Emerging Markets businesses generated double-digit growth as we benefited from our investments in recent years. In China, the slow-down in end-markets seen since mid-2015 was compounded by destocking in the distributor channel. By the end of the year most franchises had returned to positive growth as the level of stock in the channel was adjusted. In the oil-dependent Gulf States we also saw difficult trading conditions. As a matter of course we expect to see some volatility in the Emerging Markets, but we continue to see significant long-term growth potential and are very well positioned in our chosen markets.

DELIVERING INNOVATION

We continue to innovate for value with new product launches and disruptive business models. A number of important new platforms were introduced in 2016. In Sports Medicine we successfully launched our new LENS™ Surgical Imaging System and the WEREWOLF™ COBLATION™ System for resecting soft tissue. We also introduced the ULTRABUTTON™ Adjustable Fixation Device which provides advanced fixation strength for soft tissue to bone fixation in ACL/PCL repair and reconstruction.

In Knee Implants we began limited market release of our JOURNEY™ II XR, an innovative bi-cruciate retaining knee and the newest addition to the JOURNEY II Active Knee family. We also conducted the first total knee procedures on the NAVIO platform in 2016. In Hip Implants we added to the REDAPT™ Revision System with a new Acetabular Fully Porous Cup designed for cases where compromised bone makes implant fixation and stability more difficult.

In 2016 we also delivered significant efficiencies. Our Group Optimisation programme realised the expected \$120 million of savings one year ahead of schedule.

And we created compelling value when we divested our Gynaecology business for \$350 million. We returned the proceeds to shareholders through a \$300 million share buy-back.

FOCUSED ON EXECUTION

Over the last few years we have undertaken a fundamental restructuring of Smith & Nephew to improve both our ability to serve our customers in market, and our efficiency. This has included changing the management structure and teams in every market to bring them under a single country managing director, a process we completed in 2016. This has not been without disruption, partly caused by some office re-locations, but now the new teams are bedding into their new roles. We now have the appropriate structure to succeed and are focused on serving our customers without any distractions in 2017.

We are also developing the tools to support better execution. In 2016 we strengthened our commercial platform by creating a global commercial organisation under a newly created role of Chief Commercial Officer. Tasked with driving commercial performance across the Group, this organisation includes our commercial regions and the global marketing teams for our product franchises. It also includes a Commercial Excellence team which is focused on bringing material improvements in areas such as pricing strategy and sales force excellence across the Group, starting in 2017.

We are targeting an increase in disruptive innovation. In 2016 I appointed a President of Research and Development, reporting directly to me, to lead a newly formed single global R&D organisation. In addition to executing our technology pipeline, this leader will be responsible for driving breakthrough innovation and defining a clear path from concept to market. In 2017 the team is focused on increasing productivity, improving processes and better leveraging our resources and expertise.

A more aligned organisation has also allowed us to centralise our approach to developing evidence that demonstrates the clinical and economic benefits of our products, supporting our commercial teams in positioning our products more effectively.

Finally, we will continue to drive efficiency, with programmes underway to optimise global manufacturing, strengthen our supply chain, upgrade our IT infrastructure and deliver shared business services across the Group.

We are well set to deliver a stronger performance, generating higher revenue growth and a better trading profit margin in the future.

THANK YOU

As you know I undertook medical treatment during 2016 and I want to thank shareholders and employees who sent me their best wishes during this time. Moreover, I want to thank all of our employees who continue to strive to deliver on our commitments, embodying a Smith & Nephew culture immersed in our values of innovation, trust and performance. It is good to be back at work full-time amongst such inspiring people.

We have spent the last five years reshaping Smith & Nephew to make the Company more agile, stronger, more efficient and simpler. We are proud of what we have done. 2017 will see a strong emphasis on execution. Beyond this, with our innovative products and deep customer relationships, we are well set to deliver a stronger performance, generating higher revenue growth and a better trading profit margin in the future.

I am energised by our prospects and I look forward to updating you on our progress during the year.

Yours sincerely,

Olivier Bohuon &KLHI([HFXWLYH2I²FHU

One global business selling nine product franchises…

	Revenue		% of Group
KNEE IMPLANTS	\$932m
Smith & Nephew offers an innovative range of products for specialised knee replacement procedures. Knee replacement surgery involves replacing the	Reported	Underlying1
ZRUQGDPDJHGRUGLVHDVHGSRUWLRQRIDNQHHZLWKDQDUWL²FLDOMRLQW	+6%	+4%	20%
HIP IMPLANTS	\$597m
Our Hip Implant franchise offers a range of specialist products for UHFRQVWUXFWLRQRIWKHKLSMRLQW7KLVPD\EHQHFHVVDU\GXHWRFRQGLWLRQV	Reported	Underlying1
VXFKŸDVDUWKULWLVFDXVLQJSHUVLVWHQWSDLQDQGRUDVDUHVXOWRIKLSIUDFWXUH	-1%	-1%	13%
SPORTS MEDICINE JOINT REPAIR	\$587m
We offer surgeons a broad array of instruments, technologies and implants QHFHVVDU\WRSHUIRUPPLQLPDOO\LQYDVLYHVXUJHU\RIWKHMRLQWVLQFOXGLQJWKH	Reported	Underlying1
UHSDLURIVRIWWLVVXHLQMXULHVDQGGHJHQHUDWLYHFRQGLWLRQVRIWKHNQHHKLS and shoulder.	+7%	+8%	13%
ARTHROSCOPIC ENABLING TECHNOLOGIES	\$631m
3URGXFWVLQWKLVIUDQFKLVHDUHRIWHQXVHGLQFRQMXQFWLRQZLWKSURGXFWVIURP 6SRUWV0HGLFLQH-RLQW5HSDLUWRIDFLOLWDWHDFFHVVWRMRLQWVSDFHVYLVXDOLVH	Reported	Underlying1
WKHŸSDWLHQWªVDQDWRP\UHVHFWGHJHQHUDWHGRUGDPDJHGWLVVXHDQGSUHSDUH WKHŸMRLQWŸIRUDVRIWWLVVXHUHSDLU	+0%	+2%	13%
TRAUMA & EXTREMITIES	\$475m
Our Trauma & Extremities franchise supports healthcare professionals with pioneering solutions used by surgeons to stabilise severe fractures, correct	Reported	Underlying1
bone deformities, treat arthritis and heal soft tissue complications.	-4%	-4%	10%
OTHER SURGICAL BUSINESSES	\$214m
The Other Surgical Businesses franchise includes our Ear, Nose & Throat (ENT) business and the NAVIO™ robotic surgical business, acquired at the start of	Reported	Underlying1
2016. It included our Gynaecology business until its disposal in August 2016.	+5%	+15%	5%
ADVANCED WOUND CARE	\$719m
The Advanced Wound Care franchise consists of several groups of brands, including exudate management, infection management and our cornerstone	Reported	Underlying1
ranges of products.	-5%	-3%	15%
ADVANCED WOUND BIOACTIVES	\$342m
Our Advanced Wound Bioactives franchise comprises novel, cost-effective biopharmaceuticals that provide a unique approach to debridement, dermal	Reported	Underlying1
repair and tissue regeneration.	-1%	0%	7%
ADVANCED WOUND DEVICES	\$172m
Our Advanced Wound Devices franchise is comprised of our Negative 3UHVVXUHŸ:RXQG7KHUDS\13:7?DQGVXUJLFDOGHEULGHPHQWEXVLQHVVHV	Reported	Underlying1
	+3%	+5%	4%

to over 100 countries

7KHQRQ,)56²QDQFLDOPHDVXUHVDUHH[SODLQHGDQGUHFRQFLOHGWRWKHPRVWGLUHFWO\FRPSDUDEOH²QDQFLDOPHDVXUHSUHSDUHGLQDFFRUGDQFHZLWK,)56RQSDJHV

-3%

-1%

+4%

+3%

BUSINESS MODEL

How we create value

Smith & Nephew aims to bring together the sharpest minds in the industry to create and supply the most exciting and differentiated products and services to our customers, supporting them in the most noble of missions: to improve the lives of patients worldwide.

Resources A key differentiator is our drive to push innovation throughout the business

RESEARCH & DEVELOPMENT

Innovation is part of our culture and we invest 5% of our revenue to develop new products that will help improve people's lives.

ETHICS & COMPLIANCE

We are committed to doing business the right way and apply strict business principles to WKHZD\ZHGHDOZLWKRXUFOLHQWVDQGSDUWQHUV

MANUFACTURING & QUALITY

We operate our global manufacturing HI²FLHQWO\DQGDWWKHKLJKHVWSRVVLEOH standards, to ensure product quality at sensible pricing.

TRAINING & EDUCATION

Every year, thousands of healthcare professionals attend our training courses around the world. Education is a fundamental part of our vision.

SALES & MARKETING

We support our customers in over FRXQWULHV2XUFRPPHUFLDOWHDPVDUH highly specialised with an in-depth knowledge DFURVVWKHIXOOUDQJHRISURGXFWIUDQFKLVHV

OUR PEOPLE

Engaging, developing and retaining our 15,000+ employees is important to us and ZHZRUNKDUGWREHDJUHDWSODFHWRZRUN DVZHOODVDUHVSRQVLEOHFRUSRUDWHFLWL]HQ

Our resources section starts on page 27

Our values are included in our people section on page 33

OUR VALUE PROPOSITION

Our mission is to support healthcare professionals by providing advanced medical devices that they use in their daily efforts to improve the lives of WKHLUSDWLHQWV

PIONEERING APPROACH We take a pioneering approach to the GHVLJQRIRXUSURGXFWVDQGVHUYLFHV

OUR PRODUCTS

We have leadership positions in Orthopaedic Reconstruction, Advanced Wound Management, Sports Medicine and Trauma & Extremities.

1 KNEE IMPLANTS
2 HIP IMPLANTS
3 SPORTS MEDICINE JOINT REPAIR
4 ARTHROSCOPIC ENABLING TECHNOLOGIES
5 TRAUMA & EXTREMITIES
6 OTHER SURGICAL BUSINESSES
7 ADVANCED WOUND CARE
8 ADVANCED WOUND BIOACTIVES
9 ADVANCED WOUND DEVICES

OUR VALUES AND HOW WE ACT

Our values shape everything that we do as a business and form the basis of our relationships ZLWKDOORXUVWDNHKROGHUV

PERFORMANCE

3HUIRUPDQFHPHDQVEHLQJUHVSRQVLYH WRWKHQHHGVRIRXUFXVWRPHUVVHWWLQJ ourselves clear goals and standards DQGDFKLHYLQJWKHP

Outputs

ENSURING WIDER ACCESS We strive to secure wide access to our diverse technologies for more customers globally.

ENABLING BETTER OUTCOMES We enable better outcomes for SDWLHQWVDQGKHDOWKFDUHV\VWHPV

OUR CUSTOMERS

We service our healthcare professional customers through our dedicated and highly trained global sales IRUFHDQGVHOHFWHGWKLUGSDUW\VHOOHUV

1 SURGEONS

2 NURSES, NURSE SPECIALISTS 3 HEALTHCARE SYSTEMS, PROCUREMENT GROUPS
4 PAYERS. ADMINISTRATORS
5 PHYSICIANS, GPS
6 RETAIL CONSUMERS, PATIENTS

INNOVATION

,QQRYDWLRQPHDQVEHLQJHQHUJHWLF FUHDWLYHDQGSDVVLRQDWHDERXW HYHU\WKLQJZHGRDQWLFLSDWLQJ FXVWRPHUVªQHHGVDQGRYHUFRPLQJ EDUULHUVDQGGHYHORSLQJRSSRUWXQLWLHV

TRUST 7UXVWLVVRPHWKLQJZHXQGHUVWDQGWKDW ZHKDYHWRHDUQDQGZHVWULYHWRRSHUDWH with integrity and take an ethical approach to business.

7KHQRQ,)56²QDQFLDOPHDVXUHVDUHH[SODLQHGDQGUHFRQFLOHG WRWKHPRVWGLUHFWO\FRPSDUDEOH²QDQFLDOPHDVXUHSUHSDUHGLQ accordance with IFRS on pages 175-177.

FINANCIAL PERFORMANCE

Targeting higher revenue growth and a better WUDGLQJSUR²WPDUJLQ

\$4,669m Revenue

\$801m \$1,020m1 2SHUDWLQJ3UR²W 7UDGLQJ3UR²W

CAPITAL ALLOCATION FRAMEWORK Prioritising the use of cash and ensuring an appropriate capital structure.

\$279m \$300m Dividend Share buy-back

IMPROVED QUALITY OF PATIENT LIVES

Providing our advanced medical devices in more than 100 countries.

100+ countries

TRAINING AND EDUCATION Supporting HCPs and ensuring the safe and effective use of our products.

40,000 surgeon training instances

GREAT PLACE TO WORK Supporting and encouraging employees to live our values.

15,000+ employees

A SUSTAINABLE BUSINESS

Working in a sustainable, ethical and responsible manner everywhere we operate.

160+ years of proud history

OVERVIEW

FINANCIAL REVIEW OPERATIONAL RISK GOVERNANCE

STRATEGIC PRIORITIES

Maximising our performance

Smith & Nephew has a clear vision to build a successful, sustainable business. This vision is encapsulated in our corporate value proposition – supporting healthcare professionals by taking a pioneering approach to the design of our advanced medical products and services, by securing wider access to our diverse technologies for more customers globally, and by enabling better outcomes for patients and healthcare systems.

Moreover, we are focused on transforming the growth profile of the business while delivering this proposition. We are working to rebalance the Group towards higher growth. Over the last five years, Smith & Nephew has materially improved the mix of higher growth potential to lower growth businesses, shifting from one-third higher growth to over 50% today.

Our strategic priorities, introduced in 2011, guide our actions in delivering these twin aspirations of supporting healthcare professionals and transforming our growth profile.

OUR STRATEGIC PRIORITIES

BUILD A STRONG POSITION IN ESTABLISHED MARKETS

Build on existing strong positions, win market share through greater product and commercial innovation and drive efficiencies to liberate resources.

FOCUS ON EMERGING MARKET

Deliver leadership in the Emerging Markets by building strong, direct customer relationships, widening access to our premium products and developing portfolios designed for the economic mid-tier population.

INNOVATE FOR VALUE

Deliver pioneering products and business models that improve clinical and economical outcomes and widen access across geographies and patient groups.

SIMPLIFY AND IMPROVE OUR OPERATING MODEL

Pursue maximum efficiency in everything we do, streamline our operations and manufacturing, remove duplication and build strong global functions to support our commercial teams.

SUPPLEMENT ORGANIC GROWTH WITH ACQUISITIONS

Build our platform by acquiring complementary technologies, manufacturing and distribution capabilities in the Emerging Markets and complementary products or businesses in our higher growth segments.

Build a strong position in Established Markets

We delivered 4% reported and 3% underlying growth LQWKH8QLWHG6WDWHVRXUODUJHVWPDUNHW

Established Markets for Smith & Nephew are Australia, Canada, Europe, Japan, New Zealand and the US.

Smith & Nephew delivered 85% of its revenue from these Established Markets in 2016. Within this, we delivered 4% reported growth and 3% underlying revenue growth in the United States, our largest market. Reported Growth was down -1% and underlying growth was flat across our other Established Markets. Overall, reported revenue growth was 1% and underlying revenue growth was 2% across all our Established Markets.

The Sports Medicine franchises continue to perform strongly as we build on our broad portfolio of joint repair products, instruments and enabling technologies. It is now two years since we completed the acquisition of ArthroCare. The expected benefits are coming through and we are on track to deliver the expected \$85 million of sales synergies by the end of 2017.

Our Reconstruction business continues to have good momentum, driven by our Knee Implant franchise. The Knee Implant portfolio was further strengthened by the acquisition of NAVIO, an exciting robotics platform, from which we delivered more than 50% revenue growth in 2016, in line with previous guidance.

In early 2016 we undertook further changes to our organisational structure, creating a single Commercial Organisation led by Mike Frazzette, Chief Commercial Officer, who is overseeing all commercial activities (sales, marketing, market access, and commercial strategy) across the Group for our full line of business. Its mission is to define and drive best practice in commercial execution across our geographies and in marketing across the franchises.

We also brought all of our US franchises under one leader, completing the roll-out of our single managing director (MD) model globally. The single MD model is enabling us to improve our customer focus, commercial agility and operating efficiency.

IMPROVING PATIENT OUTCOMES

Unplanned readmissions are costly to hospitals, surgeons and patients and, in the US, can result in significant financial implications for hospitals and other healthcare organisations under the Comprehensive Care for Joint Replacement Model (CJR) and Bundled Payments for Care Improvement (BPCI) initiative. For patients, an unplanned readmission can complicate and extend the recovery period and the resumption of normal activities. For hospitals and surgeons focused on value, as defined by quality outcomes achieved through efficiency, unplanned readmissions can negatively influence overall quality scores.

In response, Smith & Nephew pioneered its Episode of Care Assurance Program (eCAP), an innovation designed to mitigate risk for our customers. It pairs together Smith & Nephew's entire line of primary total hip and knee reconstructive systems with two of its most innovative wound care products: PICO™ Single Use NPWT and ACTICOAT™ Flex 7 Silver-coated Antimicrobial Barrier Dressing. Smith & Nephew warrants that the products will perform as expected, based on the product labels. If a patient is readmitted within 90 days following a procedure for a surgical site infection or to revise the implant due to a failure of a Smith & Nephew product, we will pay a hospital's unreimbursed costs for the readmission up to the aggregate purchase prices of the implant, PICO and ACTICOAT Flex 7.

7KHQRQ,)56²QDQFLDOPHDVXUHVDUHH[SODLQHGDQGUHFRQFLOHG WRWKHPRVWGLUHFWO\FRPSDUDEOH²QDQFLDOPHDVXUHSUHSDUHGLQ accordance with IFRS on pages 175-177.

STRATEGIC PRIORITIES

Focus on Emerging Markets

Our Emerging Markets represent 15% of 6PLWK 1HSKHZªVUHYHQXHXSIURPLQ

Our Emerging Markets represent those outside the Established Markets, including the BRIC group of Brazil, Russia, India and China. These countries represent 15% of Smith 1HSKHZªVUHYHQXHXSIURPLQ

In the Emerging Markets revenue was down -3% on a reported basis and flat on an underlying basis. Most of our Emerging Markets businesses continue to generate double-digit growth as we benefit from our investments in our business platform in recent years.

In China, the slow-down in end-markets first seen in mid-2015 was compounded by destocking in the distributor channel during 2016. We first saw this in Sports Medicine, subsequently followed by Trauma and Advanced Wound Management. The effect was not so visible in the more mature Reconstruction market, where stock levels were not geared to a rapid market expansion. As we progressed

through 2016, Sports Medicine returned to growth and Trauma followed. We expect Advanced Wound Management to continue to be impacted in the first half of 2017. Strategically, the growth prospects in China remain very attractive and we believe current end-market growth rates are solid double-digit. We are confident that we have taken all necessary measures and that China remains a very attractive market in which we are committed to building our business.

In the oil-dependent Gulf States we saw very difficult trading conditions, particularly in our tender business, which are likely to persist.

As a matter of course we expect to see some volatility in the Emerging Markets, but we continue to see significant long-term growth potential and are very well positioned in our chosen markets.

ANTHEM™ TOTAL KNEE LAUNCHES ,1(0(5*,1* MARKETS

2016 saw the commercial launch of the ANTHEM Total Knee System. This platform was developed specifically to address the needs of patients and surgeons across Asia, the Middle East, Africa and Latin America. The unique design creates a knee offering fit for all ethnicities based on both intraoperative measurements and the analysis RI&7LPDJHVIURPSDWLHQWVDFURVVWKHZRUOG

ANTHEM utilises the ORTHOMATCH™ instrumentation platform which reduces weight, footprint and unnecessary cost without compromising on quality or clinical outcomes.

Smith & Nephew has partnered with Touch Surgery to develop a surgical simulation app for the ANTHEM Total Knee System, providing surgeons and healthcare professionals with a virtual training platform to learn, simulate and rehearse the knee replacement procedure in a 3D operating room environment. ANTHEM, ORTHOMATCH and Touch Surgery together provide an advanced and globally relevant knee implant that is accessible to all orthopaedic surgeons and patients in the Emerging Markets.

7KHQRQ,)56²QDQFLDOPHDVXUHVDUHH[SODLQHGDQGUHFRQFLOHG WRWKHPRVWGLUHFWO\FRPSDUDEOH²QDQFLDOPHDVXUHSUHSDUHGLQ accordance with IFRS on pages 175-177.

Innovate for value

In 2016 we took a significant step to increase RXUGLVUXSWLYHLQQRYDWLRQ

We continue to innovate for value with new product launches and disruptive business models. A number of exciting new platforms were introduced in 2016.

In Sports Medicine we introduced our new LENS™ Surgical Imaging System and WEREWOLF™ COBLATION™ System for resecting soft tissue. We also launched the ULTRABUTTON™ Adjustable Fixation Device which provides advanced fixation strength for soft tissue to bone fixation in ACL/PCL repair and reconstruction.

In Knee Implants we began limited market release of our JOURNEY™ II XR, an innovative bi-cruciate retaining knee and the newest addition to the JOURNEY II Active Knee family. We are augmenting our own work with acquisitions, such as the purchase of NAVIO™, which has given us an exciting robotics platform with opportunities across the spectrum of knee reconstruction. We conducted the first total knee procedures using our NAVIO surgical robotics platform in 2016.

In Hip Implants we added to the REDAPT™ Revision System with a new Acetabular Fully Porous Cup designed for cases where compromised bone makes implant fixation DQGVWDELOLW\PRUHGLIILFXOW

In 2016 we took a significant step to increase our disruptive innovation, appointing a President of Research and Development, Vasant Padmanabhan, to lead a newly formed single global R&D organisation. In addition to executing our technology pipeline, this leader will be responsible for driving breakthrough innovation and defining a clear path from concept to market. In 2017 the team is focused on increasing productivity, improving processes and better leveraging our resources and expertise. A more aligned organisation has also allowed us to centralise our approach to developing evidence that demonstrates the clinical and economic benefits of our products, supporting our commercial teams in positioning our products more effectively.

,1129\$7,1,1 7+(23(5\$7,15220

Developed in-house and launched in 2016, the LENS™ Integrated Visualisation System provides integrated three in one design, incorporating a Console (which consists of the Camera Control Unit, LED Light Source and Image Management System), Camera Head (1080p broadcast grade image technology), and iPad® Application.

Employing the latest in CMOS chip technology, the LENS System captures High Definition images and produces clear live video. The Camera Head is autoclavable, durable and ergonomic, and the Smith & Nephew proprietary iPad® application takes media management and versatility to a whole new level.

New innovations such as LENS and the WEREWOLF™ COBLATION™ System are vital components to advance our operating room (OR) tower strategy. A tower is made up of visualisation or camera system, COBLATION resection controllers, mechanical resection or blade controllers and fluid management or pump components. Customers look at a tower as a solution to complete an arthroscopic procedure and Smith & Nephew is well positioned with our new products and established strength in DYONICS™ Shaver Blades and GoFLO™ Pumps.

FINANCIAL REVIEW OPERATIONAL RISK GOVERNANCE

STRATEGIC PRIORITIES

Simplify and improve our operating model

Focusing on efficiencies has realised annual savings of \$120 million.

In 2016 we continued to simplify and improve our operating model and delivered significant efficiencies. In Manufacturing, our Global Operations leadership team is focused on supporting the Group's strategic priorities by ensuring our footprint and expertise are ready to respond to geographical growth, new product development, greater external regulatory scrutiny and the commercial pressure to be ever more efficient. We made good progress across these areas in the year. Highlights included the opening of a new state-of-the-art facility in Costa Rica, which will provide a more efficient operation for current products as well as valuable capacity for future growth. We also created more than 100 positions for newly qualified graduate engineers across facilities LQWKH86DQGHOVHZKHUH

Quality has always been paramount to Smith & Nephew. We have a unified Quality Assurance and Regulatory Affairs team to ensure

consistency across our country business units. Requirements of global regulatory agencies have become more stringent in recent years and we expect them to continue to do so. We are continuing to expand our portfolio globally through new product development and by registering our existing products in new markets. In order to meet the expectations of regulators and support this added complexity we continued to invest in our Quality and Regulatory expertise in 2016.

The Group Optimisation Plan was announced in May 2014 with a stated savings target of annualised benefits of \$120 million by the end of 2017. We delivered ahead of plan and reached our target at the end of 2016. These savings have been driven by our focus on efficient procurement, the greater agility of the single country managing director model and rationalisation of our facility footprint in a number of countries.

NEW MANUFACTURING FACILITY OPENS

In 2016 we opened a new manufacturing facility in Costa Rica. The new plant will support the global demand for Smith & Nephew's COBLATION™ technology. COBLATION is an arthroscopic procedure that involves the creation and application of an energy field, which is used for the precise removal of soft tissue with minimal damage to untargeted tissue.

Smith & Nephew's position within the global sports medicine market was strengthened significantly in 2014, with the acquisition of ArthroCare Corporation. The transaction added highly complementary products to the existing portfolio, as well as manufacturing expertise in Costa Rica.

7KHQRQ,)56²QDQFLDOPHDVXUHVDUHH[SODLQHGDQGUHFRQFLOHG WRWKHPRVWGLUHFWO\FRPSDUDEOH²QDQFLDOPHDVXUHSUHSDUHGLQ accordance with IFRS on pages 175-177.

Supplement organic growth with acquisitions

Our two largest acquisitions are delivering good returns.

In recent years we have undertaken a number of acquisitions, strengthening both our technology and product portfolio and our Emerging Markets business. We have delivered good returns with the success of our two larger acquisitions, Healthpoint and ArthroCare, establishing a strong track record in Mergers and Acquisitions (M&A).

With Healthpoint Biotherapeutics, acquired in 2012 for \$782 million, our third year return on capital has exceeded our expectations. ArthroCare, acquired in 2014 for \$1.5 billion, is performing in line with our expectations. :HDUHDKHDGRIRXUSODQWRGHOLYHUPLOOLRQ of synergies by 2017 and have achieved almost all our targeted cost savings.

In 2016, we continued to invest in acquisitions. The acquisition of Blue Belt Technologies, completed in January, has given us a leading position in the fast growing area of roboticsassisted orthopaedic surgery. Its NAVIO™ surgical system provides robotics-assistance in partial knee replacement surgery and we intend to expand it into total knee, bi-cruciate retaining knee and revision knee implants, potentially delivering further upside. The expansion of our NAVIO robotics platform is progressing at pace, with the first total knee completed in 2016.

In addition, we created compelling value by selling our Gynaecology business for \$350 million (2015 revenue: \$56 million) in August 2016. We had built this business rapidly on the back of Smith & Nephew's resection technology and expertise. We completed the associated \$300 million share buy-back programme in December 2016, returning the value created directly to shareholders.

The Board periodically reviews acquisitions to evaluate longer-term performance and capture lessons learned to help improve strategy and process. As you would expect, some of our recent smaller acquisitions have out-performed our initial expectations, whereas others have underperformed. Collectively we are pleased with the performance of the technology and Emerging Markets acquisitions we have made.

STRENGTHENING SPORTS MEDICINE

When we acquired ArthroCare in 2014, we stated that it would fundamentally strengthen our Sports Medicine business. Subsequently we have delivered strong growth across the highly complementary product portfolio.

We are ahead of our plan to deliver \$85 million to annual profit in 2017, E\UHDOLVLQJFRVWDQGUHYHQXHV\QHUJLHV the consolidated product pipelines, with new products in Shoulder Repair, Knee Repair and the launches of LENS™ Surgical Imaging System and WEREWOLF™ COBLATION™ System in 2016.

OUR MARKETPLACE

Our marketplace is driven by longer-term trends

The major trends that drive the markets in which Smith & Nephew operates have remained consistent for many years. Ageing populations, together with obesity, diabetes and other lifestyle diseases (often linked with increased prosperity), all contribute to rising demand for healthcare.

According to the World Health Organisation (WHO), between 2015 and 2050 the proportion of the world's population over 60 years will nearly double from 12% to 22%. In 2014, the WHO estimated that more than 1.9 billion adults were overweight. Of these, over 600 million were classified as obese, a major risk factor for diseases such as diabetes and musculoskeletal disorders.

Additionally, the WHO estimates that by 2020, people aged 60 years and older around the world will outnumber children younger than five. This changing dynamic will decrease the level of funds available for healthcare raised through taxes. As a result governments and healthcare providers are under pressure to look for ways to reduce their overall healthcare expenditure, while at the same time maintaining the quality of care and treatment provided. Healthcare reform therefore is near the top of many national agendas.

CUSTOMERS

Our customers include surgeons, nurses, healthcare payers and administrators, and healthcare systems and procurement groups.

In certain parts of the world, including the UK, much of Continental Europe, Canada and Japan, healthcare providers are often government

organisations funded by tax revenues. In the US, our major customers are public and private hospitals, which receive revenue from private health insurance and government reimbursement programmes. Medicare is the major source of reimbursement in the US for knee and hip reconstruction procedures and for wound treatment regimes. In the Emerging Markets, demand is driven by self-pay patients.

New commercial purchasing models are being adopted by health systems as a solution to improving resource allocation. One notable trend is the greater focus on payment-for-outcomes rather than fee-for-service reward models, particularly in the US where the Comprehensive Care for Joint Replacement (CJR) model began on 1 April 2016. The CJR model aims to drive better and more efficient care by incentivising hospitals, physicians, and post-acute care providers to work together through a bundled payment system.

There is also a desire for more patients to be treated in an outpatient or community setting. Treatment in hospitals, often entailing operating room time and overnight stays, is expensive. New models such as ambulatory care centres now offer outpatient orthopaedic treatment and there is pressure for more wound care to be provided in the community setting.

Product innovation remains of vital importance with increasing focus on products which simplify and increase the efficiency of procedures as well as robotics which increase precision and enhance procedure outcomes.

Pricing pressures also remain pertinent. In many cases, highly regulated markets employ various controls on pricing.

Pricing of products is largely influenced in most developed markets by governmental reimbursement programmes. Initiatives sponsored by government agencies, legislative bodies and the private sector to limit the growth of healthcare costs are ongoing and include price regulation, excise taxes and competitive pricing. Governments and healthcare providers are increasingly requesting health economic data to justify the pricing of products and procedures or reimbursement requests. More collaboration between industry and data research institutions is emerging as a result.

REGULATORY STANDARDS AND COMPLIANCE IN THE HEALTHCARE INDUSTRY

Alongside healthcare provision and payment becoming more complex, the regulation of the medical device industry is also intensifying. Regulatory requirements are important in determining whether substances and materials can be developed into effective products in an environmentally sustainable way.

600 million

Obese adults in 2014, a major risk factor for diseases such as diabetes and musculoskeletal disorders (WHO).

2020

The WHO estimates that by 2020, people aged 60 years and older around the world will outnumber children younger than five.

22%

Proportion of the world's population over 60 years will nearly double from 12% to 22% by 2050 (WHO).

The major regulatory agencies for Smith & Nephew's products include the Food and Drug Administration (FDA) in the USA, the Medicines and Healthcare products Regulatory Agency in the UK, the Ministry of Health, Labour and Welfare in Japan, the China Food and Drug Administration and the Australian Therapeutic Goods Administration.

In general, with the aforementioned industry trends, safety standards and regulations in the medical device industry are becoming more stringent. Regulatory agencies are intensifying audits of manufacturing facilities and the approval time for new products has lengthened. Regulation for marketing medical devices in the European Union will tighten with the introduction of the Medical Device Regulations (MDR), a draft of which was published in June 2016 and is expected to be fully implemented by late 2019.

Legislation covering corruption and bribery, such as the UK Bribery Act and the US Foreign Corrupt Practices Act, also applies to all our global operations. We are committed to ensuring regulatory compliance and to doing business with integrity and we welcome the trend towards higher standards in the healthcare industry. We and other companies in the industry are subject to regular inspections and audits by regulatory agencies and notified bodies, and in some cases remediation activities have required and will continue to require significant financial and resource investment.

SEASONALITY

Orthopaedic and sports medicine procedures tend to be higher in the winter months when accidents and sports related injuries are highest. Elective procedures tend to slow down in the summer months due to holidays. Due to the nature of our product range, there is little seasonal impact on our Advanced Wound Management franchises.

In the US out-of-pocket costs for health insurance plans are tied to medical expenses in a calendar year. As a result, households who have reached their deductible (or out-of-pocket) cap may find that accessing care later in the year comes at a lower cost, which can encourage more of them to try and schedule any required treatments or procedures in the final months of any given year.

	Range
A SMITH & NEPHEW	20-24%
B ARTHREX	29-33%
C DEPUY (MITEK) 2	12-16%
D STRYKER	9-13%
E OTHERS	Balance

\$15bn				+3%

Market size Hips & Knees (Recon)

	Range
A SMITH & NEPHEW	9-11%
B ZIMMER BIOMET	34-36%
C DEPUY SYNTHES 2	20-22%
D STRYKER	19-21%
E OTHERS	Balance

A SMITH & NEPHEW	14-18%
B ACELITY	17-21%
C MOLNLYCKE	9-13%
D CONVATEC	5-9%
E OTHERS	Balance

E D A C B \$5bn +3% Market size Trauma & Extremities

	Range
A SMITH & NEPHEW	6-10%
B DEPUY SYNTHES 2	44-48%
C STRYKER	23-27%
D ZIMMER BIOMET	9-13%
E OTHERS	Balance

Data: 2016 estimates generated by Smith & Nephew based on publicly available sources and internal analysis.

1 Representing access, resection and repair products.

2 A division of Johnson & Johnson.

THE PRODUCTS WE TAKE TO MARKET

KNEE IMPLANTS

SMITH & NEPHEW HAS NINE GLOBAL PRODUCT FRANCHISES

Revenue by product

	A KNEE IMPLANTS	\$932m
	B HIP IMPLANTS	\$597m
	C SPORTS MEDICINE JOINT REPAIR	\$587m
	D ARTHROSCOPIC ENABLING TECHNOLOGIES	\$631m
	E TRAUMA & EXTREMITIES	\$475m
	F OTHER SURGICAL BUSINESSES	\$214m
	G ADVANCED WOUND CARE	\$719m
	H ADVANCED WOUND BIOACTIVES	\$342m
I	ADVANCED WOUND DEVICES	\$172m

Smith & Nephew offers an innovative range of products for specialised knee replacement procedures. Knee replacement surgery involves replacing the worn, damaged or diseased portion of a knee with an artificial joint. Every year more than two million patients receive total, partial or revision knee replacements.

Smith & Nephew's knee systems include the LEGION™/GENESIS™ II Total Knee System, a comprehensive system designed to allow surgeons to address a wide range of knee procedures, and our JOURNEY™ II family of Active Knees. JOURNEY II has been engineered to empower patients with a renewed active lifestyle by breaking through traditional knee replacement barriers and delivering function, motion and durability through PHYSIOLOGICAL MATCHING™.

In 2016 we began limited market release of our JOURNEY II XR product, an innovative bi-cruciate retaining knee implant, which is designed to retain the anterior and posterior cruciate ligaments (ACL/PCL) and deliver normal proprioception and muscle control2 .

These systems also feature VERILAST™ Technology, our advanced bearing surface. The LEGION™ Primary Knee with VERILAST Technology has been laboratory-tested to \HDUVRIVLPXODWHGZHDU:KLOHODEWHVWLQJLV not the same as clinical performance, the tests showed significant reduction in wear compared to conventional technologies.

Our knee systems utilise our VISIONAIRE™ Patient-Matched Instrumentation, whereby a patient's MRI and X-rays are used to create customised cutting guides that allow the surgeon to achieve optimal alignment of the new implant.

In 2016 we launched the ANTHEM™ Total Knee System. This was designed from both intraoperative measurements and the analysis of CT images from patients, to create a knee offering fit for all ethnicities. ANTHEM utilises the ORTHOMATCH™ instrumentation platform, reduces weight, footprint and unnecessary cost without compromising on quality or clinical outcomes.

During 2015, we acquired the Zimmer® Unicompartmental High Flex Knee (ZUK) system in the US market, giving us a strong position in the attractive partial knee joint reconstruction segment.

In early 2016 we completed the acquisition of Blue Belt Technologies, securing a leading position in the fast-growing area of orthopaedic robotics assisted surgery. Blue Belt's NAVIO™ surgical system provides robotics assistance in partial knee replacement surgery. We anticipate significant upside from a range of new product launches that will expand into indications beyond partial knees, the first of which is the total knee application with the first procedures being completed in 2016.

⁷KHQRQ,)56²QDQFLDOPHDVXUHVDUHH[SODLQHGDQGUHFRQFLOHGWRWKHPRVWGLUHFWO\FRPSDUDEOH²QDQFLDOPHDVXUHSUHSDUHGLQ accordance with IFRS on pages 175-177.

² Moro-Oka, Taka-Aki, Marc Muenchinger, Jean Pierre Canciani, and Scott A Banks. 'Comparing in Vivo Kinematics of Anterior Cruciate-retaining and Posterior Cruciate-retaining Total Knee Arthroplasty'. Knee Surgery, Sports Traumatology, Arthroscopy 15.1. ?:HE

HIP IMPLANTS

Preserving active lifestyles

We continued to drive strong uptake of JOURNEY II, our kinematic knee platform. Looking ahead, we expect this momentum to continue as we train new surgeons and expand the JOURNEY II family of products to include our bi-cruciate retaining design, JOURNEY II XR.

7KH²UVWVXUJHULHVXVLQJWKH-2851(<,,;5 were completed in 2016. With the kinematic design, the expectation is that patients will experience a more natural feeling knee, with better rotational stability – retaining both cruciate ligaments. This, along with early, high mobility, and higher patient satisfaction are the goals we set out to achieve with XR. We are on track for the launch of JOURNEY II XR in mid-2017, and the plan is to make XR available on the NAVIO platform in due course.

Journey II XR Kinematic knee platform

Smith & Nephew's Hip Implant franchise offers a range of specialist products for reconstruction of the hip joint. This may be necessary due to conditions such as arthritis, causing persistent pain, and/or as a result of hip fracture. Every year more than two million patients worldwide undergo total, resurfacing and revision hip replacement procedures.

For Hip Implants, Smith & Nephew has developed a range of primary hip systems. Core systems include the ANTHOLOGY™ Hip System, SYNERGY™ Hip System, the POLARSTEM™ Femoral Hip System, the R3™ Acetabular System and the POLARCUP™ Dual Mobility Hip System. This diversity exemplifies our commitment to providing surgeons with implant and instrumentation options that meet the specific demands of their patients and preferred surgical approach, most notably the direct anterior or posterolateral approach. We also market the BIRMINGHAM HIP™ Resurfacing (BHR) System, an important option for surgeons treating suitable patients.

7KHQRQ,)56²QDQFLDOPHDVXUHVDUHH[SODLQHGDQGUHFRQFLOHG WRWKHPRVWGLUHFWO\FRPSDUDEOH²QDQFLDOPHDVXUHSUHSDUHGLQ accordance with IFRS on pages 175-177.

THE PRODUCTS WE TAKE TO MARKET

HIP IMPLANTS continued TRAUMA & EXTREMITIES

Smith & Nephew's portfolio includes the new REDAPT™ Revision Femoral System. The need to perform a revision can occur for a variety of reasons including infection, dislocation, or failure of the implants to achieve biologic fixation. REDAPT is designed to turn such complex hip revisions into efficient, reproducible surgeries, allowing surgeons to effectively recreate a patient's unique functionality, while quickly and easily addressing issues such as poor bone quality. The REDAPT Revision Femoral System comprises a monolithic stem and a Fully Porous Shell. The use of additive manufacturing (also called 3D printing) to create a titanium shell, with first to market features that improve intraoperative usability and greatly enhance implant stability, was received with great enthusiasm amongst hip surgeons.

Making good technology spectacular

The REDAPT™ Fully Porous Acetabular Cup with CONCELOC™ Technology was launched in 2016. To allow ingrowth, an additive, or 3D printing, manufacturing process is used to produce an entirely porous implant that mimics the structure of cancellous bone. New variable-angle locking screws can be used to enhance implant stability and minimise micromotion after surgery, which when coupled with placement of hole SDWWHUQVRSWLPLVHVVXUJLFDO³H[LELOLW\DQG DFFHVVSDUWLFXODUO\LQGLI²FXOWWRUHDFKDUHDV of revision cases.

The 3D printing method allows for complex GHVLJQJHRPHWULHVWKDWZRXOGEHGLI²FXOW expensive or impossible to achieve with traditional manufacturing methods. For example, solid reinforcements can be built directly into the porous structure to provide extra strength in precise locations.

REDAPT™ Fully Porous Acetabular Cup with CONCELOC™ Technology

Our Trauma & Extremities franchise supports healthcare professionals by pioneering solutions for surgeons to stabilise severe fractures, correct bone deformities, treat arthritis, and heal soft tissue complications. Performance in 2016 in this franchise was held back by the destocking in our China business and reduced tender activity in the Gulf States.

For Trauma, the principal internal fixation products are the TRIGEN™ family of intramedullary (IM) nails (TRIGEN META-NAIL™ System, TRIGEN Humeral Nail System and TRIGEN INTERTAN™), EVOS™ Plating System and the PERI-LOC™ Plating System. In 2016 we unveiled new evidence showing that the TRIGEN INTERTAN hip fracture system allows patients to experience lower risk of implant failure and re-operation; faster time to fracture union; and DKLJKUHWXUQWRSUHIUDFWXUHVWDWXV² .

SPORTS MEDICINE JOINT REPAIR

The EVOS Mini Fragment Plate and Screw System is a dedicated Trauma mini fragment system. This is a stainless steel highly versatile system with a multitude of plate geometries and longer screw lengths than standard mini fragment systems. Complementing this is our VLP™ MINI-MOD™ Small Bone Plating System for the fixation of small bones and small bone fragments, specifically designed to match the contour of small bones needed in treating hand, wrist, elbow, foot and ankle fractures.

For extremities and limb restoration, we offer the TAYLOR SPATIAL FRAME™ Circular Fixation System as well as a range of plates, screws, arthroscopes, instrumentation, resection and suture anchor products for orthopaedic surgeons including foot and ankle and hand and wrist specialists, and trauma surgeons. This year, TAYLOR SPATIAL FRAME External Fixator celebrated its 20 year anniversary, and we conducted a systematic review of the clinical outcomes. The results showed post-operative VXFFHVVLQPRUHWKDQRISDWLHQWV³ .

2016 saw the first implantation of the ATLAS HF Nail in South Africa and India. It is the first Smith & Nephew nail specifically designed for the Emerging Markets.

Our Sports Medicine Joint Repair franchise offers surgeons a broad array of instruments, technologies and implants necessary to perform minimally invasive surgery of the joints, including the repair of soft tissue injuries and degenerative conditions of the knee, hip and shoulder. Our franchise operates in a large, growing market where unmet clinical needs lend room for procedural and technological innovation. Smith & Nephew is well positioned both to innovate and to reach customers globally.

We produced double-digit growth in the US in 2016, driven by the benefits of our combined portfolio following the 2014 acquisition of ArthroCare. Our overall performance was held back by conditions in China in the first half of the year, where we saw a slowdown in capital and consumable sales compounded by de-stocking in our distribution channel.

Key products in this franchise include the FAST-FIX™ family of meniscal repair systems, the ENDOBUTTON™ family for knee ligament reconstruction, HEALICOIL™ PK, FOOTPRINT™ PK and TWINFIX™ Suture anchors for repairs of the hip and rotator cuff. The open architecture of the HEALICOIL™ PK Suture Anchor allows for new bone to fill the fenestrations between threads and into the central channel. The SUTUREFIX™ Ultra soft suture anchor is an attractive option for procedures in which anatomic space is very limited 4 while still delivering high fixation strength 5-7.

Smith & Nephew also offers products made from REGENESORB™, an advanced biocomposite shown to be absorbed and completely replaced by bone within 24 months in pre-clinical studies 8,9.

Smith & Nephew markets a suite of products for Rotator Cuff Repair (RCR), one of the most common sports medicine procedures. These include ULTRATAPE™, a suture that provides greater tendon-to-bone contact when compared to traditional #2 suture, and may enhance repair 10; FIRSTPASS™ ST, a sterile-packaged retrograde suture passer that eliminates the steps of loading and unloading needles and cartridges; and MULTIFIX™ S, an all-PEEK knotless screw-in anchor. All these recently launched products can be used together or in conjunction with existing products from the Smith & Nephew portfolio in a single procedure, significantly expanding the breadth of our RCR Solutions. The Q-FIX™ All-Suture Anchor is ideal for a variety of arthroscopic shoulder and hip repairs, offering fixation performance superior to commonly used all-suture anchors and traditional anchors 11,12.

7KHQRQ,)56²QDQFLDOPHDVXUHVDUHH[SODLQHGDQGUHFRQFLOHGWRWKHPRVWGLUHFWO\FRPSDUDEOH²QDQFLDOPHDVXUHSUHSDUHGLQDFFRUGDQFHZLWK,)56RQSDJHV

2 05036 V1 INTERTAN Claims Brochure 0616.

9%RQH -RLQW2XWFRPH7KH7\$</2563\$7,\$/)5\$0(IRU([WHUQDO)L[DWLRQ\$6\VWHPDWLF/LWHUDWXUH5HYLHZ)ROORZLQJ<HDUVRI&OLQLFDO2XWFRPHV
4 Smith & Nephew Evaluation Reports 15002113, 15002112, 15002117.
5 Smith & Nephew 2011. Validation REPORT ULTRABRAID II SUTURE BIOCOMPATIBILITY 15001076.
6 Smith & Nephew 2013. Competitive Claims REPORT, SutureFix 15002059.
6PLWK 1HSKHZ9DOLGDWLRQ5(3257+LS6XWXUH²[;/¥
8 Data on File, Smith & Nephew report 15000897.
9 Results of in vivo simulation have not been shown to quantitatively predict clinical performance.
10 Potter L, Moore C. Increased contact area utilizing the ULTRATAPE Suture for rotator cuff repair. Bone&JointScience: Our Innovation in Focus. 2014;4(3):1-4. Lit no: 02056.
11 ArthroCare Report #P/N 54231-01 Rev. A; ArthroCare Report #P/N 49193-01 Rev. A; ArthroCare Report #P/N 51963-01 Rev. A.
12 Douglass NP, Behn AW, Safran MR. Cyclic and Load to Failure Properties of All-Suture Anchors in Synthetic Acetabular and Glenoid Cancellous Bone. Arthroscopy. 26 January 2017.

FINANCIAL REVIEW OPERATIONAL RISK ACCOUNTS

THE PRODUCTS WE TAKE TO MARKET

Unparalleled performance capabilities1

The WEREWOLF™ COBLATION™ System is the latest innovation in COBLATION technology. Featuring an all new controller and designed to support a broad variety of wands, WEREWOLF delivers an unparalleled range of performance capabilities and advanced safety features – WEREWOLF carries broad indications across Sports Medicine.

The COBLATION process involves the creation and application of an energy ²HOGFDOOHG©JORZGLVFKDUJHSODVPDª which acts to ablate molecules in the tissue. COBLATION Technology provides advantages to the surgeon by operating at lower temperatures than other radio frequency-based technologies, and allowing for precise removal of soft tissue with minimal damage to untargeted tissue.

1 Smith & Nephew 2016. Pioneering a new standard of COBLATION technology. COBLATION WEREWOLF Brochure. P/N 82740 Rev. A 09/16.

WEREWOLF WEREWOLF COBLATION System

ARTHROSCOPIC ENABLING TECHNOLOGY

OTHER SURGICAL BUSINESSES

Our Arthroscopic Enabling Technologies (AET) franchise offers a high performance array of minimally invasive surgery-enabling systems and devices.

AET platforms work in concert to facilitate access to various joint spaces, visualise the patient's anatomy, resect degenerated or damaged tissue and prepare the joint for a soft tissue repair. Products in this franchise are often used in conjunction with products from our Sports Medicine Joint Repair franchise.

Systems include high definition imaging solutions, industry leading energy based and mechanical resection platforms, fluid management and access portfolios, along with anatomic repair-aiding limb positioners and holders.

Key products include the LENS™ Integrated system which provides an integrated three in one design incorporating the Console (CCU, LED Light Source and Image Management System), Camera Head and iPad app. Also, WEREWOLF™ and Quantum 2™ COBLATION™ controllers and a wide range of high performance COBLATION Technology radio frequency (RF) wands ablate, resect and coagulate soft tissue and enable haemostasis of blood vessels.

We also market the DYONICS™ Shaver blades, handpiece, and controller, which provide superior resection due to their sharpness and reduce clogging with their debris evacuation capabilities, GoFLO™ and DoublePump fluid management consoles that distend joint space while providing haemostasis and a medium to perform arthroscopic procedures, SPIDER2™/ T-MAX procedure-enabling limb positioning systems, and ACUFEX™ Hand Held Instruments.

Within an operating room our AET products are typically kept in tower, often comprising a visualisation or camera system, COBLATION or energy based resection controllers, mechanical resection or blade controllers and fluid management or pump components. Our customers often think about a tower solution to complete an arthroscopic procedure more than the individual components that make up this tower. Our strategy is to showcase our industry leading tower components, such as COBLATION wands and DYONICS shaver blades, when selling the LENS camera system and GoFLO Pump. We articulate this through our 'Own the Tower' strategy.

The Other Surgical Businesses franchise includes our Ear, Nose & Throat (ENT) business and the NAVIO™ robotic surgical business, acquired at the start of 2016. This franchise included our Gynaecology business sold in August 2016.

Within ENT we offer a wide variety of products including our COBLATION Technology for tissue removal and haemostasis, various articulating instruments and implants for sinus surgery such as balloon sinuplasty, and our RAPID RHINO™ Carboxymethylcellulose (CMC) Technology which is featured in both dissolvable and removable nasal and sinus dressings, and epistaxis treatment products. Our NASASTENT™ Dissolvable Nasal Dressing is a structural intranasal splint used to minimise bleeding and prevent post-operating adhesions after sinus surgery. Unlike other nasal dressings which fragment as they degrade, once the NASASTENT dressing absorbs sufficient nasal fluid, it converts into hydrocolloidal gel that simply drains from the cavity as part of WKHQDWXUDORXWIORZ

The acquisition of Blue Belt Technologies was announced in October 2015 and completed in January 2016. This has given us a leading position in the fast growing area of roboticsassisted orthopaedic surgery. Its NAVIO surgical system provides robotics-assistance in partial knee replacement surgery through a unique hand-held, bone-shaping device. NAVIO and our own partial knee implant portfolio form a strong combined business from which to accelerate growth in this attractive area of surgery. Additionally, we intend to expand NAVIO into total knee, bi-cruciate retaining NQHHDQGUHYLVLRQNQHHLPSODQWVGHOLYHULQJ significant further upside.

THE PRODUCTS WE TAKE TO MARKET

ADVANCED WOUND CARE

Consistent and accurate results

,Q-XO\ZHDQQRXQFHGWKH²UVWVXUJLFDO case for our robotics-assisted total knee replacement procedure. The new approach can use the NAVIO™ Surgical System to implant the JOURNEY™ II BCS and CR total knee systems.

During a total knee replacement surgery, the NAVIO system is designed to deliver consistent and accurate results through the utilisation of a robotics-assisted hand piece, QDYLJDWLRQDQG1\$9,2VSHFL²FFXWJXLGHV all of which enable better patient outcomes. The NAVIO intraoperative planning software uses 3D surface capture and kinematic registration to predict joint laxity, enable SUHFLVHLPSODQWSRVLWLRQLQJDQGGH²QHD SDWLHQWVSHFL²FVXUJLFDOSODQ8QOLNHRWKHU robotics-assisted platforms, the NAVIO system does not require a pre-operative CT scan.

This new indication has the potential to increase system utilisation, as approximately 80% of global knee replacement procedures are primary total knee replacements, compared to less than 10% for partial knee replacements.

The Advanced Wound Care (AWC) franchise consists of several groups of brands, including exudate management, infection management and our cornerstone range of products. Performance in this franchise in 2016 reflected the effect of destocking in China and weakness in a couple of European countries, which more than offset the performance in the US.

Exudate management products focus on providing appropriate wound fluid absorption and evaporation properties to promote optimal wound healing environment. This will reduce the burden a wound has on the patients and help them to get on with their lives and at the same time diminish costs for materials and nursing time.

Our key growth brand in this space is ALLEVYN™ Life, an innovative dressing designed to improve the quality of life for patients with chronic wounds, as well as helping healthcare professionals reduce the costs of frequent dressing changes. During the year we announced the publication of a new research paper showing how a comprehensive ulcer prevention programme which included the use of ALLEVYN Life can significantly decrease hospital-acquired pressure ulcers (HAPUs) by 69% in an adult intensive care unit2 .

Two core technologies drive our infection management portfolio: silver and iodine.

Our silver-based products (ACTICOAT™, DURAFIBER™ Ag and ALLEVYN Ag) provide clinicians a range of solutions to address individual patient needs in managing wound infection. ACTICOAT is very well positioned to address the need for highly effective, fast-acting local antimicrobials in the care of serious wound infection on a wide range of wounds including surgical incisions and chronic wounds.

Our iodine based product, IODOSORB™, has a unique mode of action to deliver low level, slow release elemental iodine without cytotoxic effects.

Smith & Nephew's cornerstone range offers a wide selection of wound care products, which means we have one of the most comprehensive ranges of wound care solutions in the industry. These products include our film and postoperative dressings, skincare products and gels.

OPSITE™ is one of our most successful and pioneering products and has become the global standard of care in post-operative dressings. IV3000™, a specialist premium dressing for intravenous lines, continues to perform well. SECURA™ is a proven preventative skin care product which helps maintain and protect skin integrity.

7KHQRQ,)56²QDQFLDOPHDVXUHVDUHH[SODLQHGDQGUHFRQFLOHGWRWKHPRVWGLUHFWO\FRPSDUDEOH²QDQFLDOPHDVXUHSUHSDUHGLQ accordance with IFRS on pages 175-177.
2 Swafford K, Culpepper R, Dunn C. Use of a Comprehensive Program to Reduce the Incidence of Hospital-Acquired Pressure Ulcers in an Intensive Care Unit. Am J Crit Care. 2016;25(2):152-5.

ADVANCED WOUND BIOACTIVES

No idea in wound management is bigger than aiming to get closer to zero pressure ulcer incidence, zero delay in wound healing, zero surgical site complications, zero venous ulcer recurrence, zero diabetic amputations, zero waste of healthcare resources. Zero is WKHRQO\WDUJHWZRUWKDLPLQJIRUDQGZHVWULYH to help our customers get closer to it.

This is why in 2016 we introduced 'Closer to Zero', our new communication platform for the wound business, which demonstrates how these franchises contribute towards our overall corporate vision of supporting KHDOWKFDUHSURIHVVLRQDOV&ORVHUWR=HUR was launched at the World Union of Wound Healing Societies global meeting in Florence, ,WDO\LQ2FWREHU

Our Advanced Wound Bioactives (AWB) franchise focuses on the development and commercialisation of novel, cost-effective biopharmaceuticals to provide a unique approach to debridement, dermal repair DQGWLVVXHUHJHQHUDWLRQ

Currently, our Advanced Wound Bioactives products on the market include Collagenase SANTYL® Ointment (the only FDA-approved biologic enzymatic debriding agent for chronic dermal ulcers and severe burns), OASIS® Wound Matrix and Ultra Tri-Layer Matrix (a naturally-derived, extracellular matrix replacement products indicated for the management of both chronic and traumatic wounds) and REGRANEX® (becaplermin) Gel 0.01% (an FDA-approved platelet-derived growth factor for the treatment of Diabetic Foot Ulcers).

Our most significant product by sales is SANTYL Ointment, which plays an integral role in removing necrotic or dead tissue in chronic dermal ulcers (such as pressure ulcers, diabetic ulcers, and venous ulcers) and severely burned patients. In 2016 we continued to see significant growth in the use of SANTYL Ointment by office-based physicians while we experienced some challenges in the long-term care market as patients experienced shorter stays in nursing homes and transitioned to care in home health. We are concentrated on further establishing the value of SANTYL Ointment in treating patients despite the shift of cost from insurers to the patients. This is being supported through costeffectiveness data focused on patient outcomes and overall treatment costs. This information is assisting us to further educate physicians, patients, and payers on the critical role that SANTYL Ointment plays in moving the healing process forward.

The wound bioactives market growth has been impacted by changes in the reimbursement landscape that are driving increases in co-pay, deductibles and access in general across the sites of care.

The US is the largest market and represents the current focus for our AWB franchise. SANTYL Ointment is also available in Canada. OASIS is accessible in a number of other Established Markets.

THE PRODUCTS WE TAKE TO MARKET

ADVANCED WOUND DEVICES

Our Advanced Wound Devices (AWD) franchise is comprised of our Negative Pressure Wound Therapy (NPWT) and VXUJLFDOGHEULGHPHQWEXVLQHVVHV

The PICO™ system, our pioneering singleuse, canister-free NPWT solution, performed strongly in 2016. PICO brings the effectiveness of traditional NPWT in a modern, small portable system2 ,WLVGHVLJQHGIRUERWKRSHQZRXQGV and closed incisions and leverages our leading dressing technology. More than one million PICO systems have now been used to treat patients, changing the treatment landscape for NPWT.

A number of new pieces of evidence supporting PICO were published in 2016. This included new clinical evidence highlighting improved patient outcomes when using PICO following orthopaedic surgery3 , as well as evidence and expert opinion highlighting the clinical and aesthetic benefits of PICO in mammoplasty DQGRQFRORJLFDOEUHDVWUHFRQVWUXFWLYHVXUJHU\⁴ .

In traditional NPWT, we secured regulatory approval for both RENASYS GO™ and RENASYS TOUCH™ in the US and Europe in 2016. RENASYS TOUCH is in a limited launch LQ(XURSHDQG86DQGZHDUHUHVXSSO\LQJ H[LVWLQJ86FXVWRPHUVZLWK5(1\$6<6*2

This franchise also includes the VERSAJET™ Hydrosurgery system, a mechanical debridement device used by surgeons to excise and evacuate non-viable tissue, bacteria and contaminants from wound, burns and soft tissue injuries.

More than a million PICO systems

In 2011, Smith & Nephew launched a breakthrough in NPWT – the PICO Single Use NPWT System. In 2016, the millionth application of PICO was used to treat a patient.

The revolutionary four-layer multi-function dressing technology makes the PICO System canister-free and disposable. Each layer works together to ensure that negative pressure is delivered to the wound bed DQGH[XGDWHLVUHPRYHGWKURXJKDEVRUSWLRQ DQGHYDSRUDWLRQ¹ .

Today PICO is used in the community and hospitals to treat patients. PICO is as easy to apply as a conventional wound dressing, reducing the need for the staff time, intensive training and administrative paperwork associated with traditional NPWT.

For the patient, the PICO system's onebutton pump is easy-to-use and its small size and silent operation provide a discreet, unobtrusive way to carry on daily life with NPWT. For the payer, the PICO system is more affordable than traditional NPWT, DQGFDQVLJQL²FDQWO\UHGXFHWKHUDS\FRVWV associated with traditional NPWT.

1 Malmsjo, M; Huddleston, E; Martin, R; Biological Effects of a Disposable, Canisterless Negative Pressure Wound Therapy System; Eplasty 2014.

7KHQRQ,)56²QDQFLDOPHDVXUHVDUHH[SODLQHGDQGUHFRQFLOHGWRWKHPRVWGLUHFWO\FRPPSDUDEOH²QDQFLDOPHDVXUHSUHSDUHGLQ accourdance with IFRS on pages 175-177.
2 Bullough L, Burns S, Timmons J, Truman P, Megginson S. Reducing C-Section wound complications. Clinical Svcs J 2015;Apr:43-47.
3 Karlakki SL, Hamad AK, Whittall C, Graham NM, Banerjee RD, Kuiper JH. Incisional negative pressure wound dressings (NPWTd) in routine primary hip and knee replacements – A randomised controlled trial. Bone Joint Res. 2016;5:328-337.
4 Galiano R, Djohan R, Shin J, et al. The effects of a single use canister-free Negative Pressure Wound Therapy (NPWT) System* on the prevention of postsurgical wound complications in patients undergoing bilateral breast reduction surgery. Poster presented at: British \$VVRFLDWLRQRI\$HVWKHWLF3ODVWLF6XUJHRQV%\$\$3ªV?WK\$QQXDO6FLHQWL²F0HHWLQJ6HSWHPEHU/RQGRQ8.

THE RESOURCES WE NEED TO DELIVER OUR PRODUCTS

RESEARCH & DEVELOPMENT

Innovation is part of our culture and we LQYHVWRIRXUUHYHQXHWR²QGQHZ products that will help improve people's lives.

ETHICS & COMPLIANCE

We are focused on doing business the right way and apply strict business principles to the way we deal with our clients and partners.

MANUFACTURING & QUALITY

We operate our global manufacturing HI²FLHQWO\DQGWRWKHKLJKHVWSRVVLEOH standards, to ensure product quality at sensible pricing.

TRAINING & EDUCATION

Every year, thousands of healthcare professionals attend our training courses around the world. Education is a fundamental part of our vision.

SALES & MARKETING

We support our customers in over FRXQWULHV2XUFRPPHUFLDOWHDPVDUH highly specialised with an in-depth knowledge across the full range of product franchises.

OUR PEOPLE

Engaging, developing and retaining our 15,000+ employees is important to us and we work hard to be a great place to work as well as a responsible corporate citizen.

ETHICS & COMPLIANCE

CODE OF CONDUCT AND %86,1(6635,1&,3/(6

Smith & Nephew earns trust with patients, customers, healthcare professionals, government authorities and the public by acting in an honest and fair manner in all aspects of its operations.

We expect the same from those with whom we do business, including vendors who provide us with services and distributors and independent agents that sell our products. Our Code of Conduct and Business Principles governs the way we operate to achieve these objectives.

Smith & Nephew takes into account ethical, social, environmental, legal and financial considerations as part of its operating methods. We have a robust whistle-blowing system in all jurisdictions in which we operate. We are committed to upholding our promise in our Code of Conduct that we will not retaliate against anyone who makes a report in good faith.

/2%\$/&203/,\$1&(3525\$00(

Smith & Nephew has implemented a worldclass Global Compliance Programme that helps our businesses comply with laws and regulations. Our comprehensive compliance programme includes: Board and executive oversight committees; global policies and procedures; on-boarding and annual training for employees and managers; training for distributors and agents and higher risk vendors; monitoring and auditing processes; reporting channels and recognition for demonstrating our values.

Through our global intranet, we provide resources and tools to guide employees to make decisions that comply with the law, local industry code and our Company Code of Conduct. We conduct review and approval in advance for significant interactions with healthcare professionals or government officials. We regularly assess existing and emerging risks in the countries in which we operate.

Country managing directors are required to complete an annual certification to the Chief Executive Officer to confirm the implementation of required policies. Managers and employees make an annual compliance certification and conflict of interest disclosure, and executive management, managers and employees have a compliance performance objective customised to their role.

New distributors and other higher-risk third parties are subject to screening and are contractually obligated to comply with applicable laws and our Code of Conduct. Compliance training and certifications are included in this process. In 2016, we made compliance resources, including customisable templates for use by our distributors and agents, available via the Smith & Nephew external website. Our third parties can use these resources to develop an appropriate compliance programme based on their company's size and risk areas. We also updated the Additional Compliance Standards, first launched in March 2015, to provide more specific compliance restrictions and requirements. We also continue our oversight of independent agents and distributors with on-site assessments to review compliance controls and audits of books and records.

In 2016 we expanded the Compliance Ambassador Programme into additional markets. This programme is a key part of our strategy to embed ethical values and compliance standards in the business. 5HVSHFWHGVDOHVPDQDJHUVDUHQRPLQDWHGWR become Compliance Ambassadors and act as a mentor to their peers and their teams, providing practical solutions to compliance challenges based on real life experience.

We have continued to recognise employees who earn trust with their actions with our Spotlight on Trust Programme, whereby employees nominate their peers for actions that earn trust.

We also began conducting increased follow-up with internal reporters of potential compliance issues. The follow-up process includes several touchpoints with the reporter during the investigation process, as well as a follow-up call with the reporter approximately 60 days after the close of the investigation. The goal of the programme is to ensure that reporters understand their concerns are being actively investigated, and to confirm after the close of the investigation whether the reporter has feedback on the process or any additional concerns to raise.

We had positive feedback on our approach to the annual manager certification, so we followed the same model in 2016. Managers were required to have an 'ethics/compliance conversation' with some of their direct reports. They were given centrally-created materials focusing on the importance of earning trust and then provided with specific, topic-based scenarios to discuss with their staff actions that would demonstrate this core Smith & Nephew value. This model enhanced dialogue on ethics, compliance and the importance of earning trust between managers and staff.

Finally, we continue to improve our controls testing universe. We refreshed our programme to require auditors to dig deeper when they encounter potential risks. We also moved to a new reporting format that allows the auditors to provide more detail about their testing process and the results. We continued with our early warning Local Monitoring Programme, where 5HJLRQDO&RPSOLDQFH2IILFHUVWHVWKLJKHUULVN activities within their markets.

Young professionals driving innovation

Smith & Nephew is proud to support young professionals' development within our Company. We recognise that we need to create an environment where our employees have opportunities to grow. We are actively working to put young professionals at the forefront of our business.

Angela Blackburn, based in Memphis, Tennessee was hired in April 2016 as an Engineer and quickly expressed an interest in networking with her peers across the wider business. From this, she and two colleagues developed the 'Young Professionals Organisation' that brings together graduates and new starters with the aim of providing networking and career development opportunities in addition to sharing their experiences. The kick-off meeting, held in Memphis, was attended by over 150 young professionals and continues to be well supported.

5HFRJQLVLQJ\$QJHODªVWDOHQWDQGGHVLUHWR create opportunities for her peers, she was promoted to become Programme Manager for Graduate Hires. This is a global role UHVSRQVLEOHIRUPRUHWKDQQHZO\TXDOL²HG engineers recruited by Smith & Nephew LQWRVXSSRUWRXU5 'TXDOLW\DQG manufacturing programmes.

Angela has relished in connecting diverse young professionals who are all working together to drive innovation in our Company.

" My main ambition is to continue engaging, inspiring and educating people – helping them to embrace the opportunities they are given and the challenges that come with them. I take great pride in creating an environment where young professionals can reach their full potential and I enjoy assisting them in turning their great ideas LQWRDFWLRQ¨

7+(5(6285&(6:(1(('72'(/,9(5285352'8&76

0\$18)\$&785,1* 48\$/,7<

*/2%\$/23(5\$7,216

Smith & Nephew takes great pride in its expertise in manufacturing products to the highest quality and ensuring they reach our customers in a timely manner. We operate manufacturing facilities in a number of countries across the globe, and a number of central distribution facilities in key geographical areas. Products are shipped to individual country locations which hold small amounts of inventory locally for immediate supply to meet customer requirements.

Manufacturing is a dynamic process and our Global Operation leadership team is focused on successfully supporting delivery of the Group's strategic priorities by ensuring our footprint and expertise is ready to respond to geographical growth, new product development, greater external regulatory scrutiny and the commercial pressure to be ever more efficient.

In 2016 we made good progress across these priorities. Highlights included the opening of DQHZVWDWHRIWKHDUWIDFLOLW\LQ&RVWD5LFD which will provide a more efficient operation for current products as well as valuable space for future growth. We also created more than 100 positions for newly qualified graduate engineers across facilities in the US and elsewhere. These individuals, who began their careers with us in 2016, will deliver the pioneering advanced medical devices that enable our healthcare professional customers to continue to improve outcomes for patients during the years to come.

4XDOLW\KDVDOZD\VEHHQSDUDPRXQWWR6PLWK 1HSKHZ:HKDYHDXQLILHG4XDOLW\$VVXUDQFH DQG5HJXODWRU\$IIDLUVWHDPWRHQVXUH consistency across our country business units. 5HTXLUHPHQWVRIJOREDOUHJXODWRU\DJHQFLHV have become more stringent in recent years and we expect them to continue to do so. We are continuing to expand our portfolio globally through new product development and by registering our existing products in new markets. In order to meet the expectations of regulators and support this added complexity we FRQWLQXHGWRLQYHVWLQRXU4XDOLW\DQG5HJXODWRU\ expertise in 2016.

2850\$18)\$&785,1*)\$&,/,7,(6

Our largest manufacturing operation is based in Memphis, Tennessee, USA. The Memphis facilities produce key products DQGLQVWUXPHQWDWLRQLQRXU.QHH,PSODQW+LS Implant and Trauma franchises. These include WKH-2851(<,,DQG/(*,21NQHHVWKH \$17+2/2*<3ULPDU+LS6\VWHPDQGNH\ 7UDXPDSURGXFWVVXFKDVWKH3(5,/2& \$QNOH)XVLRQ3ODWLQJ6\VWHPDQG75,*(1 Intramedullary Nails. In addition to this, Memphis is home to the design and manufacturing SURFHVVRIWKH9,6,21\$,5(SDWLHQWPDWFKHG LQVWUXPHQWDWLRQVHWVDQG2;,1,802[LGLVHG Zirconium, a patented metal alloy available for many of our knee and hip implant systems.

Our Mansfield, Massachusetts, US facility focuses on Sports Medicine related products for minimally invasive surgery including the )\$67),;0HQLVFDO5HSDLU6\VWHP )22735,173.6XWXUH\$QFKRU'<21,&6 3ODWLQXP6KDYHU%ODGHV(1'2%87721 &/8OWUDDQGWKH+(\$/,&2,/3.VXWXUHDQFKRU 2XUQHZ&RVWD5LFDIDFLOLW\PDQXIDFWXUHV COBLATION technology.

The Aarau, Switzerland; Tuttlingen, Germany; Beijing, China; and Devrukh, India facilities manufacture a number of surgical device products including key reconstruction and WUDXPDSURGXFWVWKH3/86NQHHDQGKLS UDQJH7KH:DUZLFN8.IDFLOLW\SURGXFHVWKH %,50,1*+\$0+LS5HVXUIDFLQJ6\VWHP

Our Oklahoma City, Oklahoma, USA facility produces and services electro/mechanical capital equipment as well as single use sterile devices and also assembles our NPWT devices using components brought in from third parties.

The majority of our wound management products are manufactured at our facilities in +XOO8.6X]KRX&KLQDDQG&XUDoDR

In Hull we manufacture some of the most high-technology wound care products on the market. Over the last few years we have introduced pioneering products such as PICO, '85\$),%(5DQG\$//(9<1/LIHDOORIZKLFK are manufactured in Hull. Since 2011, we have invested approximately £50 million in capital projects at our Hull site. This has included bringing the manufacturing of our complex silver coating technology for ACTICOAT to Hull and installing a Film Extrusion manufacturing line. We run second lines for some of our products in Suzhou, China, and this site also manufactures our wound care products for the mid-tier in the Emerging Markets.

Manufacturing of our Advanced Wound %LRDFWLYHSURGXFWVWDNHVSODFHLQ&XUDoDR DQGDWYDULRXVWKLUGSDUW\IDFLOLWLHVLQWKH86

352&85(0(17

We procure raw materials, components, finished products and packaging materials from suppliers in various countries. These purchases include metal forgings and castings for orthopaedic products, optical and electronic sub-components for sports medicine products, active ingredients and semi-finished goods for Advanced Wound Management as well as packaging materials across all product ranges.

Suppliers are selected, and standardised contracts negotiated, by a centralised procurement team wherever possible, with a view to ensuring value for money based on the total spend across the Group. On an ongoing basis, we work closely with our key suppliers to ensure high quality, delivery performance and continuity of supply.

We outsource certain parts of our manufacturing processes where necessary to obtain specialised expertise or to lower cost without undue risk to our intellectual property. Suppliers of outsourced products and services are selected based on their ability to deliver products and services to our specification, and adhere to and maintain an appropriate quality system. Our specialist teams work with and monitor suppliers through on-site assessments and performance audits to ensure the required levels of quality, service and delivery.

GLOBAL SUPPLY CHAIN

Our Global Supply Chain function ensures that our products reach our internal and external customers where and when they are needed, in a compliant and efficient manner. Bringing together people, knowledge and expertise helps us meet our objectives and our customers' expectations, driving us to become more competitive, responsive and integrated.

We operate three main holding warehouses, one in each of Memphis (Tennessee, US), Baar (Switzerland) and Singapore. These facilities consolidate and ship to local country and distributor facilities. Our distribution hubs for advanced wound products are located LQ1HXQNLUFKHQ*HUPDQ\?'HUE\8.?DQG Lawrenceville (Georgia, USA).

75\$,1,1* ('8&\$7,21

Connecting experts, enabling innovation

Smith & Nephew is proud to support healthcare professionals by connecting them ZLWKRWKHUH[SHUWVLQWKHLU²HOGRIVSHFLDOLW\

We do this at our state-of-the art training and innovation centres. We bring healthcare professionals – surgeons and nurses – across multiple disciplines together to enable them to learn from and with their peers in an advanced, supportive setting.

In early 2017 we opened our newest centre in Croxley Park, Watford, on the outskirts RI/RQGRQ8.7KLVZLOOEHD³DJVKLS GHVWLQDWLRQIRU+&3VIURPWKH8.(XURSH and the Emerging Markets.

In 2016 Smith & Nephew provided more than 40,000 instances of surgeon training.

Smith & Nephew is dedicated to helping healthcare professionals improve the quality of care for patients. We are proud to support the development of surgeons and nurses by providing skills training and education on our products and techniques.

Every year, thousands of customers attend our VWDWHRIWKHDUWWUDLQLQJFHQWUHVLQWKH868. and China and Smith & Nephew courses at multiple hospitals and facilities around the world.

In 2016, we provided training to more than 40,000 surgeons. Working under expert guidance, attendees learn new techniques and refine skills, to ensure the safe and effective use of our products. These courses are attended by residents, fellows and practicing surgeons who work together to review, discuss and train on current and forward-looking surgical techniques in their areas of clinical expertise. Our courses help up-and-coming surgeons develop trust and gain the experience and confidence necessary to become experts in their field.

We also support nurses across the world, with many thousands receiving face-to-face training from our representatives every year. For instance, in 2016 we completed our first :RXQG&DUH\$FDGHP\IRUWKH.LQJGRPRI Saudi Arabia. The week long intensive course was a theoretical and practical based learning initiative that aimed to enhance the wound care knowledge of local healthcare professionals.

We also support healthcare professionals through our online resources such as the Global Wound Academy, The Wound Institute and, for surgeons, our Education and Evidence website. In 2016 more than 90,000 healthcare professionals trained digitally with 6PLWK 1HSKHZ

7+(5(6285&(6:(1(('72'(/,9(5285352'8&76

6\$/(6 0\$5.(7,1*

Starting conversations with clinical evidence

In September 2016, Smith & Nephew served as a Diamond Sponsor at the World Union of Wound Healing Societies 2016 (WUHWS) FRQIHUHQFHKHOGLQ)ORUHQFH,WDO.QRZQDV the 'Olympics of Wound Care', the conference unites the greatest thought-leaders in wound management under one roof every four years.

This year, our Sales & Marketing team combined their efforts with the 6FLHQWL²F 0HGLFDO\$IIDLUV60\$?WHDP conducting hundreds of on-stand product demonstrations as well as three wellattended symposia presented in front of more than 1,000 delegates, each delivering a strong message based on clinical data and evidence. Working together enabled us to engage visitors in evidence-based conversations, reinforcing our position as thought-leaders in wound healing.

Our customers are the providers of medical and surgical treatments and services in over 100 countries worldwide.

We serve our customers through our sales force. Our sales representatives are highly trained and skilled individuals. Becoming a sales representative requires intense training, including passing a strict certification programme, before engaging in discussions with, and ultimately selling products to, customers. Depending on their area of specialism, representatives must be able to demonstrate a detailed knowledge of all the surgical instruments used to implant a device, or have specific understanding of the various surgical techniques a customer might use. In our advanced wound franchises, sales representatives will have a detailed understanding of how patients live with wounds and how clinicians seek to prevent and treat them, as well as deep knowledge of the clinical and economic benefits of using our products within treatment protocols.

Once a sales representative is certified, they typically spend the majority of their time working directly with and supporting customers, or identifying and contacting new customers. They help to provide in-hospital support to aid in the effective use of our range of advanced medical technologies and techniques.

Our Global Commercial Organisation, led by the Chief Commercial Officer, oversees all commercial activities (sales, marketing, market access, and commercial strategy) across the Group for our full line of business. Its mission is to define and drive best practice in commercial execution across our geographies and in marketing across the franchises.

Our sales force is structured by region, with three commercial organisations serving the US, Europe & Canada, and Asia Pacific and the Emerging Markets. Each is led by a regional President, who reports to the Chief Commercial Officer.

Our US sales forces are specialised by channel. They consist of a mixture of independent contract workers and employees. Sales agents are contractually prohibited from selling products that compete with our products. In most Established Markets outside of the US, country-specific commercial organisations led by the country managing director lead employee sales forces directly. The largest single customer worldwide is the National Health Service (NHS) DQGDVVRFLDWHGSXUFKDVLQJJURXSVLQWKH8.

LQWKH8.ZKLFKUHSUHVHQWOHVVWKDQRIRXU worldwide revenue in 2016. In our Emerging Markets we operate through direct selling and marketing operations led by country managing directors, and/or through distributors.

Smith & Nephew has three global marketing teams who set the strategic direction of our businesses and develop all the promotional assets and guidance to commercialise our products in Advanced Wound Management, Sports Medicine and Orthopaedics. For that they utilise a variety of traditional and novel means to market to our customers. For example, congresses (educational conferences or trade shows) represent a traditional and efficient way for Smith & Nephew to reach a large number of healthcare professionals at once, often in terms of both advertising/promotion and education. From an awareness perspective, Smith & Nephew displays its latest innovative products and, from an educational standpoint, may also provide satellite symposia or other forms of medical education around these products.

The Global Commercial Organisation also includes a global Commercial Excellence team, who support both the commercial teams and the global marketing teams with several expertise groups. These include strategic planning, business intelligence and market research, digital marketing, pricing, sales force excellence and marketing communications.

We also leverage digital media to connect with our customers. Our digital communications activities have been evolving as technologies and user habits evolve. Content and messaging is currently delivered via global market websites, social media channels and mobile applications. One core use of digital technology to communicate and market to our customers has been Education & Evidence, a membershipdriven clinical education website.

§:KDWZDVPRVWSOHDVLQJIURPD6FLHQWL²FDQG Medical Affairs point of view, was the level of spontaneous attendance we received at the booth. The team, comprising both internal and external experts, were challenged with inquisitive questions which led to numerous FRQVWUXFWLYHFRQYHUVDWLRQVRQLPSURYLQJ FOLQLFDORXWFRPHV¨

9LFH3UHVLGHQWRI6FLHQWL²F 0HGLFDO\$IIDLUV

2853(23/(

%8,/',1&8/785(%</,9,12859\$/8(6

Smith & Nephew is proud of its culture. This culture both endures and evolves, having been shaped by thousands of employees over more than 160 years. Today, it is framed by our values of trust, innovation and performance.

Our Chief Executive Officer, Olivier Bohuon, is responsible for ensuring that we support and encourage our employees to live these values. This includes the multiple programmes and actions that align how we work – our culture – with what we do – our strategy.

9\$/8( We build trust

COMMUNICATION

Building trust requires open and transparent sharing of information through regular and timely communication. We clearly communicate our business goals and performance standards and also provide employees with the training and information that empowers them to succeed. We listen to our employees, holding regular surveys, open dialogue at town hall meetings and focus groups and small group discussions on topics of importance to employees and our business.

Two years ago, Smith & Nephew conducted its biennial employee survey. The Company had recently reorganised to a less siloed but more matrixed structure, moving from Global Business Units to a regional structure with centralised global functions. The results of the survey showed employees wanted a greater feeling of team and connectivity at our major sites. In response to this, site Leadership Councils were formed at our major locations. These councils were dedicated to enhancing the Smith & Nephew culture and making our Company a great place to work. Each council includes representatives from various functional areas across the site location. Each organises site and community events, and takes ownership for ensuring that employees at the site feel informed and engaged.

CODE OF CONDUCT AND BUSINESS 35,1&,3/(6

Our Code of Conduct and Business Principles defines our expectations for ethical and legal behaviour not only for our employees but to all who conduct business on our behalf. In this way we build trust with our customers, and with each other. All employees review and reaffirm their commitment to the Code of Conduct on an annual basis. The positive impact of clearly defined expectations and regular training has been evident in the results of our Global Employee Survey, which shows employees know and understand the expectations for ethical behaviour and how to report behaviour that does not meet our high standards.

5(&2*1,7,21

To reinforce our core value of trust, we regularly recognise employees who go above and beyond to earn trust through our Spotlight on Trust awards programme. At the same time, we encourage employees to report incidents of noncompliance or misconduct, and ensure they are protected from retaliation. This process applies to all employees, suppliers, agents, contractors and customers alike.

EMPLOYEE WELLNESS

As a Company we are committed to ensuring our employees work in a safe and healthy environment. Smith & Nephew offers wellness programmes which include annual wellness days, fitness support and healthy HDWLQJVXSSRUW)RUH[DPSOHWKH9LUJLQ3XOVH programme offered to US-based employees, promotes health and wellness by helping them track their activity, providing fun wellness challenges and allowing them to earn discounts on their healthcare plans. Global Employee Assistance Programmes (EAPs) also support wellness by helping employees manage stress and work/life issues and problems. Through EAP, we provide counselling, webinars and web tools and other resources across many work/life topics. Counselling can span from traditional EAP counselling to financial, legal and everyday family assistance.

9\$/8( We innovate

We view innovation as an essential skill to be demonstrated by all employees. Everyone is empowered to innovate in their job, to question the status quo, to propose new solutions, to continuously improve and to seek the best for the benefit of our customers.

2%-(&7,9(6(77,1*

Innovation is captured formally in the annual objective setting process and employees are encouraged to continuously and pro-actively innovate to improve our costs, processes, services and products.

5(&2*1,7,21

Our annual CEO Award, open to all employees, recognises employees who deliver exceptional results in line with our core values, encouraging innovation and a spirit of continuous improvement at all levels. In 2016 the winners included Bill McGee, who saved the Company \$500,000 by suggesting enhancements to our shaver blade manufacturing process in Mansfield, US and Nham Nguyen, who works at our Oklahoma City facility and was instrumental LQLPSURYLQJSURGXFWLYLW\E\LQKHUXQLW

Our global employee recognition programme, Going the Extra Mile (GEM), encourages employees to recognise the performance of colleagues and the demonstration of our values of Performance, Innovation and Trust. The GEM programme includes non-monetary and monetary options based on the level of achievement – from a simple note of 'thanks' to valuable merchandise. Going the Extra Mile also serves as our platform for a global Long Service Award programme.

7+(5(6285&(6:(1(('72'(/,9(5285352'8&76

2853(23/(continued

(;(&87,9(63216256+,3

Each year we hold a CEO Forum for our Top Talent, providing them with the opportunity to work closely with our executive team and with their peers on strategic challenges. One recent output from the Forum has been the creation of the Innovation Task Force to define what innovation looks like in Smith & Nephew and the characteristics that we should seek to embed to encourage innovation across the organisation.

',9(56,7<

We believe that diversity fuels innovation. We are committed to employment practices based on equality of opportunity, regardless of colour, creed, race, national origin, sex, age, marital status, sexual orientation or mental or physical disability unrelated to the ability of the person to perform the essential functions of the job. 2XU9DOXLQJ'LIIHUHQFHSURJUDPPHLVGHVLJQHG to reinforce this belief and to feature examples of the value of diversity across our business.

2XUORFDO9DOXLQJ'LIIHUHQFH&RXQFLOVDUH run by passionate and dedicated people. They meet as a global team quarterly and work to translate strategy to local needs, execute specific actions and share best practice. In 2016 we implemented Communication Toolkits which provide interactive exercises for teams to improve their awareness and education, along with employee case studies placed on the Company's intranet. We also launched an

online development programme for female professionals and eLearning programmes ZLWKDVSHFLILFIRFXVRQ9DOXLQJ'LIIHUHQFH

We recruit, employ and promote employees on the sole basis of the qualifications and abilities needed for the work to be performed. We do not tolerate discrimination on any grounds and provide equal opportunity based on merit. We do not use any form of forced, compulsory or child labour. We support the Universal 'HFODUDWLRQRI+XPDQ5LJKWVRIWKH8QLWHG Nations. This means we respect the human rights, dignity and privacy of the individual and the right of employees to freedom of association, freedom of expression and the right to be heard.

9\$/8( We perform

7\$/(17\$1'&\$3\$%,/,7<'(9(/230(17

Attracting the best talent and developing our employees is critical to achieving our business objectives. We are committed to working with employees to develop each individual's talents, skills and abilities. Employee advancement is merit-based, reflecting performance as well as demonstration of core competencies which include our values, with an emphasis on ethics and integrity. We prioritise the development

and promotion of our existing employees whenever possible.

Each year Smith & Nephew conducts a comprehensive global development and capability review process to identify highpotential employees and ensure they have robust career development plans. Employees are provided with opportunities to develop their skills and career through new assignments and on the job experiences. In addition, the Board reviews succession plans for key executive roles and succession plans are in place for other critical positions across our business.

3(5)250\$1&(0\$1\$*(0(17

We provide fair recognition and reward based on performance. Our performance management process ensures all employees set objectives which align to our overall business goals and have clear line-of-sight to how their individual contributions benefit the Company. Our performance management system assesses and rewards both performance and behaviour, in line with our Code of Conduct. All employees have a specific annual objective to adhere to the Code of Conduct and to complete training certifying their compliance ZLWKWKLV&RGH

804

Senior Managers2 and above in 2016

B FEMALE 210

*5(\$73/\$&(72:25.

Being a Great Place to Work is one of our goals as a Company. To earn this recognition, employees in each country must complete the Great Place to Work Trust Index survey and country management must participate in a Culture Audit. Both evaluate performance on key GLPHQVLRQVRIHQJDJHPHQW&UHGLELOLW\5HVSHFW Fairness, Pride and Camaraderie.

Smith & Nephew uses the Great Place to Work Institute's Trust Index as the basis for our Global Employee Survey. Our last full survey was in 2014, which demonstrated improvement from 2012 across all four areas of focus; understanding of our Strategic Direction LPSURYHGE(PSRZHUPHQWE\ &URVVEXVLQHVVFRRUGLQDWLRQE\DQG &XVWRPHUIRFXVE\:HDUHFRQGXFWLQJRXU FXUUHQWHPSOR\HHVXUYH\LQWZRZDYHV:DYH was completed in some countries in 2016 and all other countries where Smith & Nephew operates will take part in Wave 2 during 2017.

In 2016 Canada, Denmark and Greater China joined Spain and Italy as countries where we have been recognised. As the Great Place to Work Institute did not have an accreditation component in South Africa at that time, we carried out a similar survey there that does have accreditation capabilities – Deloitte's 'Best Company to Work for Survey' – following which South Africa received a Gold Seal from Deloitte.

In Canada, a winning attitude, improved communications and celebrating successes have created a team spirit based on trust. )RU'HQPDUNLQLWLDWLYHVVXFKDV©PLQXWHV with management' and activities focused on day-to-day employee wellbeing and career development have led to a strong culture. In Greater China, recognition was achieved through initiatives such as regular town halls, a People Development Forum, an employee 'Juice Club' and communicating via the WeChat platform.

A Family Day, quarterly employee town halls and leadership team lunches with new starters, along with a successful graduate internship programme and the day to day focus on employee wellbeing, are examples of why 6RXWK\$IULFDDFKLHYHGWKLVUHFRJQLWLRQ

For Smith & Nephew, being a Great Place to Work means having a workplace where employees are proud and excited to come to work each day because they are making a difference for customers and patients. It is not about programmes or initiatives, it is about people and we believe our people make 6PLWK 1HSKHZD*UHDW3ODFHWR:RUN

For information on the composition of our %RDUGVHHSDJH

A place where employees enjoy their work

In the US alone, more than 150 employees volunteer their time to manage Camaraderie Councils. These councils lead and uphold the Smith & Nephew culture through various team and charitable activities. Their primary objective is to make the Company a place where employees enjoy their work, as well as take pride in the work they do.

A critical aspect of the Council is helping our teams support dozens of local non-SUR²WRUJDQLVDWLRQV)RUH[DPSOH6PLWK Nephew's Fort Worth, Texas site conducted a community clean up event where 20 employees volunteered on a Saturday to paint houses in a local neighbourhood. In Andover, Massachusetts, the site FHOHEUDWHG©9ROXQWHHU0RQWKªLQ0D\ZKHUH employees could choose from a number of scheduled activities or coordinate their own HYHQW7KHVLWHDOVRKRVWHGLWV²UVW.)XQ 5XQZKHUHPRUHWKDQHPSOR\HHVIULHQGV and family took part in support of a local children's hospital.

In Austin, Texas, employees volunteered to create a menu, grocery shop, and prepare PHDOVIRUIDPLOLHVVWD\LQJDWWKHORFDO5RQDOG 0F'RQDOG+RXVHDJOREDOQRWIRUSUR²W organisation. Our Memphis, Tennessee employees conducted community focused events every month in 2016 including taking part in a 'Walk to Cure Arthritis' where more than 100 employees attended. The US Field Camaraderie Council manages community outreach events for Smith & Nephew's more than 2,000 sales representatives across the nation. Since inception in June 2016 it has hosted more than 15 events in support of 15 GLIIHUHQWQRQSUR²WRUJDQLVDWLRQV7KDQNVWR the efforts of the US Camaraderie Councils, we improve morale, promote camaraderie and make a positive impact on the communities where we live and work.

1XPEHURIHPSOR\HHVDVDW'HFHPEHULQFOXGLQJSDUW time employees and employees on leave of absence.

2 Senior Managers and above includes all employees classed DV'LUHFWRUV6HQLRU'LUHFWRUV9LFH3UHVLGHQWVDQG([HFXWLYH 2I²FHUVDQGLQFOXGHVDOOVWDWXWRU\GLUHFWRUVDQG'LUHFWRUVRI RXUVXEVLGLDU\FRPSDQLHV

SUSTAINABILITY

A Future Focus

7\$.,1*6867\$,1\$%,/,7<72 7+(&25(2)7+(%86,1(66

We significantly advanced our commitment to sustainability in 2016 through ratification of a Group Sustainability Strategy which is fully aligned to the Group Business Strategy. The Group Sustainability Strategy both drives and is driven by implementation of the Group Business Strategy, ensuring that all three main aspects of sustainability – economic prosperity, social responsibility and environmental stewardship – advance as one. This shift in focus communicates clearly that in order to be successful we must advance simultaneously LQDOOWKUHHDVSHFWV

This is a summary report of our sustainability activities and progress in 2016. Our annual 6XVWDLQDELOLW\5HSRUWWREHSXEOLVKHGLQ\$SULO 2017, will provide further detail regarding our 2016 progress, describe the Group Sustainability Strategy and its associated goals, and specify targets to move our performance toward these goals.

52836867\$,1\$%,/,7<675\$7(<

Smith & Nephew has been committed to working in a sustainable, ethical and responsible manner everywhere we do business. We are proud of our achievements over many years, as witnessed by our recurring inclusion in leading indices such as FTSE4Good and the Dow Jones Sustainability Index.

Sustainability is a journey, and in 2016 we thought deeply about our destination for the longer-term. The result was a new Group Sustainability Strategy. At the heart of this are ten long-term aspirational goals. These encompass all aspects of our business, and will inform and drive our business strategy for years to come. The Board has endorsed these and executive management is behind them. These goals are set out on this page.

The Board has evaluated the social and environmental risks as part of their ongoing risk management duties and has concluded that none of these risks are material in the context of the Group as a whole.

Of course, longer-term goals need medium term 60\$57WDUJHWVWRHQVXUHZHDUHPDNLQJWKH right progress. We are finalising these for the next five years and will provide more detail in RXU6XVWDLQDELOLW\5HSRUWGXHWREHSXEOLVKHG LQ\$SULO

2016 was not just a year of planning. We continued to focus on delivering improvements across many areas of our business such as health, safety and environment, energy and water consumption and waste management. The highlights are found on the opposite page, and much greater detail will also be included in the 6XVWDLQDELOLW\5HSRUW

Our ten long-term aspirational goals

1 Zero work-related injuries and illnesses across the value chain
² Water: Total water impacts of our products and solutions are balanced with local human and ecosystem needs
Waste: All materials are either shipped as part of product or returned for beneficial use
⁴ &DUERQDEVROXWHUHGXFWLRQLQWRWDOOLIHF\FOHJUHHQKRXVHJDVHPLVVLRQVE\
⁵ Ethical Business Practices: All activities are conducted in compliance with applicable International Labour Organisation (ILO) conventions, involve no environmental degradation, and are free from corruption
⁶ Zero product-related and service-related patient injuries
⁷ 5REXVWVRFLDOUHVSRQVLELOLW\SURJUDPPHVZKLFKFRQWULEXWHWRWKHDWWUDFWLRQDQGUHWHQWLRQ of top talent
⁸ Products and services are aligned to market economic, social and environmental expectations and anticipate future market conditions:

All products have identified and clearly-described sustainability attributes

5 'DQG1HZ3URGXFW'HYHORSPHQW13'?SURFHVVHVGHOLYHUHQYLURQPHQWDOVRFLDO and healthcare economically-advantaged innovations
⁹ Strategic risks and opportunities are understood and business activities are aligned to risk appetite

¹⁰ Environmental, social, and economic impacts of (1) potential acquisitions, (2) WHFKQRORJLHVWREHH[WHQGHGWR(PHUJLQJ0DUNHWV?LQQRYDWLYHEXVLQHVVPRGHOV? cost of quality reduction initiatives, and (5) manufacturing siting, functional optimisation and site utilisation alternatives are fully understood and appropriately balanced

6867\$,1\$%,/,7<\$&7,9,7,(6 \$1'352*5(66

(PSOR\HHVDIHW\ZHOOQHVV DQGYROXQWHHULQJ

A healthy and safe working environment is fundamental to the way we work at Smith & Nephew. We must ensure that the safety of our employees and those who work with us is given the highest priority when we perform our daily activities in our offices around the world, when we visit customers and in our manufacturing environment.

Engagement with the communities in which we operate was significantly extended through employee volunteering and we have strengthened and deepened employee wellness programmes with a focus on enabling healthy lifestyle choices.

,QRXUHPSOR\HHWRWDOLQFLGHQWUDWH7,5? RUUHFRUGDEOHLQMXU\UDWHUHGXFHGE\WR 0.52, from 0.54 which continues to confirm our position in the top quartile of safety performance in our sector. This was achieved through the implementation of our sustainability management system, an active Internal Audit programme, a number of behavioural based safety campaigns and robust incident reporting and investigation systems across the Group. This was offset by a slight increase in the accident severity as there was an increase in our ORVWWLPHLQFLGHQWIUHTXHQF\UDWH/7,)5?RI WRIURP7KHUHZHUHQRHPSOR\HHRU contractor fatalities.

Our headline safety performance includes all employees and supervised contractors, it excludes unsupervised contractors. We adopt the industry standard USA Occupational Safety and Health Administration (OSHA) system to record incidents of occupational injury and ill-health.

Lost-time incidents are defined as those which result in a person not being able to report for work on the day or shift following the incident. Performance is expressed as a rate of the number of incidents per 200,000 hours worked.

:DVWH

Growth and acquisitions within the business have resulted in a wider environmental footprint. As a direct result the volume of waste arising IURPRXURSHUDWLRQVLQFUHDVHGE\LQ We continue to identify recycling opportunities and ways of diverting our waste away from ODQGILOO,QZHUHF\FOHGRIRXUZDVWH including waste diverted for energy recovery.

:DWHU

Significant progress was made in 2016 to reduce our water consumption, particularly at our Memphis, US manufacturing location where we replaced water-cooled air compressor units with air-cooled radiator units. This investment reduced water consumption by the equivalent of the volume of fifteen Olympic-sized swimming pools, contributing to an annual reduction in ZDWHUXVDJHDFURVVWKH*URXSRI

(QHUJ\DQGJUHHQKRXVHJDVHPLVVLRQV

Over the past year our energy use has increased E\ZLWKDFRUUHVSRQGLQJLQFUHDVHLQ carbon dioxide equivalent (CO2e) emissions, driven by organic growth, acquisitions and changes in our manufacturing footprint.

0HWKRGRORJ\PDWHULDOLW\DQGVFRSH

The data reported relates to areas of largest environmental impact including manufacturing sites, warehouses, research and offices. 6PDOOHUORFDWLRQVUHSUHVHQWLQJOHVVWKDQ of our overall emissions are not included. Acquisitions completed before 2016 are included in the data. Each year we work with an independent partner to verify our sustainability data and gain assurance.

All emissions fall within the scope of our consolidated financial statement and we have used the Greenhouse Gas Protocol: A &RUSRUDWH\$FFRXQWLQJDQG5HSRUWLQJ6WDQGDUG 5HYLVHG(GLWLRQ?DVJXLGDQFHIRUWKLVSURFHVV Primary data from energy suppliers has been used wherever possible. The acquisitions of Blue Belt Technologies and DC Manufacturing LQ5XVVLDDUHLQFOXGHGLQIRUWKHILUVWWLPH this is in line with our established policy for integration of acquired assets.

Our emissions have been calculated by using specific emissions factors for each country outside the USA and regional factors within the USA. We have used the US EPA 'Emissions *HQHUDWLRQ5HVRXUFH,QWHJUDWHG'DWDEDVHª H*5,'?IRU86UHJLRQVDQGWKH8.*RYHUQPHQW '()5\$&RQYHUVLRQ)DFWRUVIRU*UHHQKRXVH*DV 5HSRUWLQJIRUHOVHZKHUH7KHHPLVVLRQVIURP 2015 were calculated using the most up to date

29(59,(:

Direct emissions include fugitive emissions from the manufacturing and research locations and arise from the losses of refrigerant gases, they also include the combustion of fuels on site for the operation of facilities. Indirect emissions include purchased electricity.

factors available and likewise in 2016.

	2016	2015	2014
CO2e Emissions (tonnes) from:
Direct emissions	9,822	11,011	11,208
Indirect emissions	82,415	77,191	74,178
Total		88,202
,QWHQVLW\UDWLR
CO2e (t) per \$m sales revenue	19.6	19.2	19.4
CO2e (t) per full time employee	5.9	6.0	6.9

5HYHQXHEQEQ 2014: \$4.4bn.

Full-time employee data 2016: 15,584;

Notes

2014 data adjusted to exclude ArthroCare. 2015 data adjusted to exclude recent acquisitions in 5XVVLDDQG&RORPELD

2016 data includes all data, including acquisitions since 2015. Direct CO2e emissions exclude purchased steam DWRQHPDQXIDFWXULQJORFDWLRQZKLFKKDVQRZEHHQ correctly included in indirect emissions.

Target Zero

In 2016, we ran various campaigns to improve employee safety awareness. These included launching an 'HSE' brand to promote health, safety and environmental matters across the business. This was called ©7DUJHW=HURª1R,QFLGHQWV1R,QMXULHV1R Harm. We also provided useful safety posters called 'safety splashes' that could be printed or used at locations on video screens in our buildings for employees, contractors and visitors to read.

Strong platform to build on

REVENUE

Group revenue in 2016 was \$4,669 million PLOOLRQ?DQLQFUHDVHRIRQD UHSRUWHGEDVLVDQGRQDQXQGHUO\LQJEDVLV¹ .

In 2016, we delivered reported revenue growth RIDQGXQGHUO\LQJUHYHQXHJURZWK¹ RILQ the United States. Revenue growth on a reported EDVLVZDVDQGRQDQXQGHUO\LQJEDVLV¹ ZDVIODWDFURVVRXURWKHU(VWDEOLVKHG0DUNHWV DOWKRXJK-DSDQDQG)UDQFHGHOLYHUHGVWURQJ SHUIRUPDQFHV,QRXU(PHUJLQJ0DUNHWVUHSRUWHG UHYHQXHJURZWKZDVDQGXQGHUO\LQJJURZWK¹ ZDVIODWLQ0RVWRIRXU(PHUJLQJ0DUNHWV businesses generated double-digit growth ZKLFKZDVRIIVHWE\ZHDNQHVVLQ&KLQDDQGWKH Gulf States. In China, the slow-down in end-PDUNHWVVHHQVLQFHPLGZDVFRPSRXQGHG E\GHVWRFNLQJLQWKHGLVWULEXWRUFKDQQHOGXULQJ %\WKHHQGRIPRVWIUDQFKLVHVLQ China had returned to growth as the level of VWRFNLQWKHFKDQQHOZDVDGMXVWHGDOWKRXJK ZHH[SHFW\$GYDQFHG:RXQG0DQDJHPHQWWR FRQWLQXHWREHLPSDFWHGLQWKHILUVWKDOIRI ,QWKHRLOGHSHQGHQW*XOI6WDWHVZHVDZYHU\ GLIILFXOWWUDGLQJFRQGLWLRQVSDUWLFXODUO\LQRXU WHQGHUEXVLQHVVZKLFKDUHOLNHO\WRSHUVLVW\$VD PDWWHURIFRXUVHZHH[SHFWWRVHHVRPHYRODWLOLW\ LQWKH(PHUJLQJ0DUNHWVEXWZHFRQWLQXHWRVHH VLJQLILFDQWORQJWHUPJURZWKSRWHQWLDODQGDUH YHU\ZHOOSRVLWLRQHGLQRXUFKRVHQPDUNHWV

7KHJOREDOSURGXFWIUDQFKLVHKLJKOLJKWVLQ LQFOXGHGRXUVWURQJSHUIRUPDQFHDFURVV 6SRUWV0HGLFLQHZKHUHZHFRQWLQXHWRUHDS WKHEHQHILWVRIWKHDFTXLVLWLRQRI\$UWKUR&DUH 3,&2RXUQRYHOVLQJOHXVH13:7V\VWHPLV WUDQVIRUPLQJWKHXVHRIWKLVWKHUDS\RSWLRQ 2XUZRUOGFODVV.QHH,PSODQWSRUWIROLRZDV IXUWKHUVWUHQJWKHQHGE\WKHDFTXLVLWLRQRI 1\$9,2DQH[FLWLQJURERWLFVSODWIRUPIURP ZKLFKZHGHOLYHUHGPRUHWKDQUHSRUWHG revenue growth in 2016.

PROFIT

Operating profit of \$801 million (2015: PLOOLRQ?LQFOXGHVDFTXLVLWLRQDQG GLVSRVDOUHODWHGLWHPVDVZHOODVUHVWUXFWXULQJ DQGUDWLRQDOLVDWLRQFRVWVDPRUWLVDWLRQDQG LPSDLUPHQWRIDFTXLVLWLRQLQWDQJLEOHVDQGOHJDO DQGRWKHULWHPVLQFXUUHGLQWKH\HDU7KH RSHUDWLQJSURILWLVEHIRUHDRQHRIIPLOOLRQ JDLQIURPWKHGLVSRVDORQWKH*\QDHFRORJ\ business in August 2016. The operating profit PDUJLQLQFUHDVHGWR?SULPDULO\ GULYHQE\WKHFRVWVLQUHODWLQJWRDQWLFLSDWHG DQGVHWWOHGPHWDORQPHWDOKLSFODLPV

Trading profit1 was \$1,020 million (2015: PLOOLRQ?7KHWUDGLQJSURILWPDUJLQ1 was ?7KLVUHGXFWLRQSULPDULO\ UHIOHFWVWKHVLJQLILFDQWWUDQVDFWLRQDOFXUUHQF\ headwind seen in 2016 resulting from the VXVWDLQHGVWUHQJWKRIWKH86'ROODU\$GGLWLRQDOO\ we lost some operational leverage from the ORZHUWKDQDQWLFLSDWHGVDOHVJURZWKDQGRXU LQYHVWPHQWLQ%OXH%HOW7HFKQRORJLHVZDV GLOXWLYH7KHVHIDFWRUVZHUHVRPHZKDWRIIVHW E\WKH*URXS2SWLPLVDWLRQSURJUDPPH

Selling, general and administrative expenses GHFUHDVHGE\PLOOLRQ?IURP PLOOLRQLQWRPLOOLRQLQ ,QDGPLQLVWUDWLYHH[SHQVHVLQFOXGHG amortisation of software and other intangible DVVHWVRIPLOOLRQPLOOLRQ? PLOOLRQRIUHVWUXFWXULQJDQGUDWLRQDOLVDWLRQ H[SHQVHVPLOOLRQ?DQDPRXQW RIPLOOLRQUHODWLQJWRDPRUWLVDWLRQ DQGLPSDLUPHQWRIDFTXLUHGLQWDQJLEOHV

PLOOLRQ?PLOOLRQRIDFTXLVLWLRQ UHODWHGFRVWVPLOOLRQ?DQGPLOOLRQ QHWFUHGLWSULPDULO\UHODWHGWRDPLOOLRQ FXUWDLOPHQWFUHGLWRQ8.SRVWUHWLUHPHQWEHQHILWV PLOOLRQFKDUJHIRUOHJDODQGRWKHU FKDUJHV?([FOXGLQJWKHDERYHLWHPVVHOOLQJ general and administrative expenses were PLOOLRQLQDGHFUHDVHRIPLOOLRQ from \$2,104 million in 2015.

5HVHDUFKDQGGHYHORSPHQWH[SHQGLWXUHDV DSHUFHQWDJHRIUHYHQXHUHPDLQHGEURDGO\ FRQVLVWHQWDWLQ? \$FWXDOH[SHQGLWXUHZDVPLOOLRQLQ FRPSDUHGWRPLOOLRQLQ7KH*URXS FRQWLQXHVWRLQYHVWLQLQQRYDWLYHWHFKQRORJLHV DQGSURGXFWVWRGLIIHUHQWLDWHLWIURPFRPSHWLWRUV

PROFIT ON DISPOSAL

The Group realised a profit on the disposal RILWV*\QDHFRORJ\EXVLQHVVRIPLOOLRQ 7KHEXVLQHVVKDGEHHQSULPDULO\LQWHUQDOO\ generated and the disposed assets had a net ERRNYDOXHRIPLOOLRQ7KHSURFHHGVZHUH PLOOLRQZLWKDVVRFLDWHGGLVSRVDOUHODWHG FRVWVRIPLOOLRQDQGOLDELOLWLHVRIPLOOLRQ

TAXATION

2XUUHSRUWHGWD[UDWHRI? LQFOXGHVWKHRQHRIIEHQHILWRID86WD[ VHWWOHPHQWZKLFKLVSDUWO\RIIVHWE\WKHWD[ UDWHRQWKHGLVSRVDORIWKHSUHGRPLQDQWO\ 86*\QDHFRORJ\EXVLQHVV

7KHVHQRQ,)56²QDQFLDOPHDVXUHVDUHH[SODLQHGDQG UHFRQFLOHGWRWKHPRVWGLUHFWO\FRPSDUDEOH²QDQFLDOPHDVXUH SUHSDUHGLQDFFRUGDQFHZLWK,)56RQSDJHV

OUR BUSINESS GOVERNANCE 0\$5.(73/\$&( OPERATIONAL 5,6. REVIEW ACCOUNTS 40 FINANCIAL REVIEW OVERVIEW

FINANCIAL REVIEW

2012 \$846m 2013 \$810m 2014 \$749m 2015 \$628m 2016 \$801m \$801m +28% 2SHUDWLQJSUR²W

7KHXQGHUO\LQJLQFUHDVHLQUHYHQXHVE\PDUNHWUHFRQFLOHVWRUHSRUWHGJURZWKWKHPRVWGLUHFWO\ FRPSDUDEOHILQDQFLDOPHDVXUHFDOFXODWHGLQDFFRUGDQFHZLWK,QWHUQDWLRQDO)LQDQFLDO5HSRUWLQJ 6WDQGDUGV,)56?DVIROORZV

						5HFRQFLOLQJLWHPV
	2016 \$ million	2015 \$ million	Reported growth	8QGHUO\LQJ growth	\$FTXLVLWLRQV Disposals	&XUUHQF\ LPSDFW
US	2,299		4		1	–
2WKHU(VWDEOLVKHG0DUNHWV				–	–
(PHUJLQJ0DUNHWV	691			–	2
Total	4,669		1	2	–

7UDGLQJSURILWUHFRQFLOHVWRRSHUDWLQJSURILWWKHPRVWGLUHFWO\FRPSDUDEOHILQDQFLDOPHDVXUH FDOFXODWHGLQDFFRUGDQFHZLWK,)56DVIROORZV

	2016 \$ million	2015 \$ million
2SHUDWLQJSUR²W	801	628
\$FTXLVLWLRQUHODWHGFRVWV	9	12
5HVWUXFWXULQJDQGUDWLRQDOLVLQJFRVWV	62	65
\$PRUWLVDWLRQRIDFTXLVLWLRQLQWDQJLEOHDQGLPSDLUPHQWV		204
Legal and other		190
7UDGLQJSUR²W	1,020	1,099

82.6¢ -3%

Earnings per share adjusted1

⁷KHQRQ*\$\$3PHDVXUHVDUHH[SODLQHGDQGUHFRQFLOHGWRWKHPRVWGLUHFWO\FRPSDUDEOH²QDQFLDOPHDVXUHSUHSDUHGLQDFFRUGDQFHZLWK ,)56RQSDJHVDQGSDJH

CAPITAL RETURNS

The efficient use of capital on behalf of shareholders is important to Smith & Nephew. The Board believes in maintaining an efficient, but prudent, capital structure, while retaining the flexibility to make value enhancing acquisitions. This approach is set out in our Capital Allocation Framework which we used to prioritise the use of cash and ensure an appropriate capital structure.

Our commitment, in order of priority, is to:

1. continue to invest in the business to drive organic growth;
1. maintain our progressive dividend policy;
1. realise acquisitions in-line with strategy; and
1. return any excess capital to shareholders.

This is underpinned by maintaining leverage ratios commensurate with solid investment grade credit metrics.

ENHANCING GROUP EFFICIENCY

In 2016 we continued to simplify and improve our operating model and delivered significant efficiencies. In Manufacturing, our Global Operations leadership team is focused on supporting the Group's strategic priorities by ensuring our footprint and expertise are ready to respond to geographical growth, new product development, greater external regulatory scrutiny and the commercial pressure to be ever more efficient. We made good progress across these areas in the year. The Group Optimisation Plan was announced in May 2014 with a stated savings target of annualised benefits of \$120 million by the end of 2017. We delivered ahead of plan and reached our target at the end of 2016. These savings have been driven by our focus on efficient procurement, the greater agility of the single country managing director model and rationalisation of our facility footprint in a number of countries.

SUCCESSFUL ACQUISITION TRACK RECORD

In recent years we have undertaken a number of acquisitions, strengthening both our technology and product portfolio, and our Emerging Markets business. We have delivered good returns, establishing a strong track record in M&A. With Healthpoint, acquired in 2012 for \$782 million, our third year return on capital exceeded our expectations. ArthroCare, acquired in 2014 for \$1.5 billion, is performing well. We have achieved our targeted cost savings and are ahead of our plan to deliver \$85 million of synergies by the end of 2017.

In 2016, we continued to invest in acquisitions such as Blue Belt Technologies with its NAVIO robotics surgical platform. In addition, we created compelling value by selling our Gynaecology business for \$350 million (2015 revenue: \$56 million). We had built this business rapidly on the back of Smith & Nephew's resection technology and expertise. We completed the associated \$300 million share buy-back programme in December 2016, returning the value created directly to shareholders

MEASURING PERFORMANCE

In 2016 we have worked to develop Return On Invested Capital (ROIC) as a performance metric for the Group. In response to feedback from investors, this metric is proposed as an element of our Performance Share Plan beginning in 2017.

NEW CFO

Julie Brown was the CFO during 2016 until she left Smith & Nephew in January 2017. During her time at Smith & Nephew the Finance function was refocused as a global function supporting the commercial business and providing excellence in finance operations and specialist areas. From March 2017 the Finance function will be led by Graham Baker who will join Smith & Nephew from Alvogen.

OUTLOOK

We expect the dynamics in our markets to be similar in 2017 to those seen in 2016. Against this backdrop, the Group expects to deliver higher underlying revenue growth and an improved trading profit margin in 2017.

Our reported revenue growth is a combination of underlying revenue growth, impact of acquisitions and disposals and foreign exchange. We expect reported revenue growth in the range of 1.2%-2.2% at prevailing1 exchange rates. We expect 2017 underlying revenue growth to be in the 3-4% range, reflecting not only the dissipation of the headwinds we faced in China and the Gulf States but also, most importantly, our improving execution.

RISK REPORT

Our approach to risk

OUR RISK MANAGEMENT PROCESS

The following chart shows how our risk management process is an integral part of our business. Individual risk owners within the business areas carry out day-to-day risk management activities within the framework established by the Group Risk Office, including the identification of risks, undertaking risk assessments and treating them. These activities are reviewed by Internal Audit and other control functions, which provide assurance to the Group Risk Committee chaired by the Chief Executive Officer and then to the Board and its committees.

BOARD OF DIRECTORS AND BOARD COMMITTEES

Responsible for regular oversight of risk management and for annual strategic risk review

Monitors risks through Board processes (Strategy Review, Disclosures, M&A, Investments, Disposals) and Committees (Audit and Ethics & Compliance), management reports DQGGHHSGLYHVRIVHOHFWHGULVNDUHDV

Audit Committee reviews effectiveness with support from Internal Audit

GROUP RISK COMMITTEE

Reviews external/internal environment IRUHPHUJLQJULVNV

Reviews risk register updates from Business Areas

Identifies significant risks and assess effectiveness of mitigating actions

BUSINESS AREA

Carries out day-to-day risk management activities
,GHQWL²HVDQGDVVHVVHVULVN
Implements strategy and actions WRWUHDWULVNZLWKLQEXVLQHVVDUHD
Assigns Risk Owners to lead WUHDWPHQWDFWLRQV
Assigns Risk Champions to support regular risk register updates

GROUP RISK OFFICE

Establishes risk management framework
Facilitates implementation and coordination through Risk Champions
Provides resources and training to support process
Prepares Board and Group Risk Committee reports based on %XVLQHVV\$UHDDQGRWKHUXSGDWHV
Assessment of effectiveness of the risk management process

INTERNAL AUDIT AND CONTROL FUNCTIONS

Reviews risk management process periodically
All Control Functions (Legal, Compliance, HSE, Quality & Regulatory) provide independent assurance to management and Board on assertions of risk exposure

OUR RISK APPETITE

The Group operates in global markets with long-term growth potential. We are pursuing ambitious growth targets and are prepared to accept a certain level of risk to remain competitive and to continue operating in an ever-changing world. We are very clear about the specific risks our businesses face and the level of risk that we are prepared to accept in each part of our business. We have put in place robust plans for managing those risks, through elimination, avoidance, sharing or mitigation.

Our approach to each risk varies depending on the circumstances and we accept that, over time, our approach towards each risk might change as our business or the external environment evolves.

During the year, the Board undertook an exercise to evaluate its tolerance for risk, recognising that our appetite for risk varies depending on the category of commercial risk. Even within categories of risk, our tolerance for risk may vary from one to another. Our tolerance for each risk is set out opposite in our table of Principal Risks.

Our Principal Risks

Our risk management programme has identified a broad range of risks which we believe could seriously impact the profitability or future prospects of the Company. We define our Principal Risks as those risks which could threaten our business model or the future long-term performance, solvency or liquidity of the Company. These are listed below and each is linked to one or more of our Strategic Priorities as detailed below.

PRICING AND REIMBURSEMENT

Our success depends on governments providing adequate funding to meet increasing demands arising from demographic trends. The prices we charge are therefore impacted by budgetary constraints and our ability to persuade governments of the economic value of our products, based on clinical data, cost, patient outcomes and comparative effectiveness.

In implementing innovative pricing strategies, we have a moderate to high tolerance for risk and are willing to accept certain risks in pursuit of new business opportunities.

Link to strategy	Actions taken by management
Our Strategic Priorities to 'Build a Strong Position in Established Markets' and to 'Focus on Emerging Markets' depends on our ability to sell our products profitably in spite of increased pricing pressures from governments.	– Developing innovative economic product and service solutions for both Established and Emerging Markets, VXFKŸDV6\QFHUDŒ
	– Maintaining an appropriate breadth of portfolio and
Examples of risks	geographic spread to mitigate exposure to localised risks.
– Reduced reimbursement levels and increasing pricing pressures. – Reduced demand for elective surgery. – Lack of compelling health economics data to support reimbursement requests. – Trading margin will be impacted when the currencies in our main manufacturing countries (US, UK, Costa Rica and China) move against WKHŸFXUUHQFLHVLQWKHUHVWRIWKHZRUOGZKHUHRXUSURGXFWVDUHVROG	– Incorporating health economic components into the design and development of new products. Emphasising YDOXHSURSRVLWLRQVWDLORUHGWRVSHFL²FVWDNHKROGHUV and geographies through strategic investment and marketing programmes. – Holding prices within acceptable ranges through global pricing corridors.

PRODUCT INNOVATION, DESIGN AND DEVELOPMENT

The medical devices industry has a history of rapid new product innovation. The sustainability of our business depends on finding and developing suitable products and solutions to meet the needs of our customers and patients to support long-term growth.

In acquiring and developing new technologies and products, we have a moderate to high tolerance for risk and are willing to accept certain risks in pursuit of innovation, whilst having a very low tolerance for product safety risk.

Link to strategy	Actions taken by management
Our Strategic Priority to 'Innovate for Value' depends heavily on our ability to continue to develop new innovative products and bring them to market.	– R&D processes focused on identifying new products and potentially disruptive technologies and solutions. – Increasing prioritisation and allocation of funds for R&D.
Examples of risks	– Pursuing business development opportunities, which
– ,QVXI²FLHQWLQQRYDWLRQGXHWRORZ5 'LQYHVWPHQW5 'VNLOOVJDSRUSRRU product development execution. – Competitors introduce disruptive technologies or business models. – Inability to prioritise and focus on key projects, investments and strategic initiatives.	augment our portfolio. – ,PSOHPHQWLQJHI²FLHQWSURFHVVHVWRUROORXWQHZSURGXFWV to customers. – Monitoring of external market trends and collation of customer insights to develop product strategies. – Ensuring that 'design for manufacture' is embedded into product development.

RISK REPORT

OPERATIONAL RISKS – QUALITY AND BUSINESS CONTINUITY

The Company faces a number of operational risks. Many of our products are implanted or used within the human body. Product safety and quality is therefore of critical importance. Our business also depends on smart procurement of materials, efficient manufacturing, controlled inventory management and the timely supply of our products to our customers. Some of our key products are reliant on one production facility or one supplier for raw materials, components, finished products and packaging materials.

In operating our business, managing our suppliers, and managing our facilities, we have a very low tolerance for risk. We aim to be as efficient as possible and adopt a cautious approach, but recognise that we need to accept certain risks in order to take full advantage of the opportunities open to us.

The Company implements and certifies its Quality Management Systems to accepted national and international standards in order to assure the quality of our products. To manage our exposure to disruptive incidents that could threaten business continuity, we operate a comprehensive framework of emergency management, incident management and business continuity management.

Link to strategy Actions taken by management Our Strategic Priority to 'Simplify and Improve our Business Model' requires us to operate effectively and efficiently, to produce products of quality and to ensure continuity of supply of products and services to customers. – Ensuring that we have comprehensive product quality processes and controls from design to customer supply. – Ensuring emergency and incident management and business recovery plans are in place at major facilities and for key products and key suppliers. – Validating second sources for critical components or products. – Undertaking risk based review programmes for critical suppliers. – Enhancing travel security and protection programme. Examples of risks – Defects in design or manufacturing of products supplied to, and sold by, the Company could lead to product recalls or product removal or UHVXOWLQORVVRIOLIHRUPDMRULQMXU\DQGDOVRFDXVHQHJDWLYH²QDQFLDO DQGUHSXWDWLRQDOLPSDFWV – Failure or performance issues at a critical/single source facility or supplier RINH\SURGXFWVRUVHUYLFHVPD\LPSDFWUHYHQXHVRUSUR²WV – If a key facility were rendered unusable by a catastrophe, or we lost a number of leaders or employees in a catastrophe, business plans and targets may not be met.

MERGERS AND ACQUISITIONS

As the Company grows to meet the needs of our customers and patients, we recognise that we are not able to develop all the products and services required using internal resources and therefore need to undertake mergers and acquisitions in order to expand our offering and to complement our existing business. In other areas, we may divest businesses which are no longer core to our activities. It is crucial for our long term success that we make the right choices around acquisitions and divestments.

In acquiring new businesses and business models, we have a moderate to high tolerance for commercial risk and are willing to accept certain risks in pursuit of new business. However, we have an extremely low tolerance for regulatory or compliance risk.

We have a well-defined cross-functional process for managing risks associated with mergers and acquisitions that is subject to scrutiny from executive management and the Board of Directors.

Link to strategy	Actions taken by management
Our Strategic Priority to 'Supplement Organic Growth with Acquisitions' depends on our ability to identify the right acquisitions, to conduct thorough due diligence and to integrate acquisitions effectively.	– Acquisition activity is aligned with corporate strategy and prioritised towards products, franchises and markets LGHQWL²HGWRKDYHWKHJUHDWHVWORQJWHUPSRWHQWLDO – &OHDUO\GH²QHGLQYHVWPHQWDSSUDLVDOSURFHVVEDVHG
Examples of risks	on return on capital, in accordance with Capital Allocation Framework.
– Failure to identify appropriate acquisitions or to conduct effective acquisition due diligence. – Failure to integrate newly acquired businesses effectively. – Inheriting regulatory or compliance risks from previous owners. – )DLOXUHWRHPEHG&RPSDQ\VWDQGDUGVSROLFLHVDQG²QDQFLDOFRQWUROV quickly enough following acquisition. – Failure to allocate capital resources effectively.	– Undertaking detailed and comprehensive cross-functional due diligence prior to acquisitions. – Implementing consistent integration processes designed to identify and mitigate risks in the early stages post completion. – Early embedding of our desired standards of compliance with laws, internal policies and controls. – Comprehensive post-acquisition review programme.
		– Proactively clearing new products from competitive patents and monitoring.
			– Compliance risks included as part of due diligence reviews, integration plans and reporting for acquisitions.

LEGAL, REGULATORY AND COMPLIANCE RISKS

The Company operates in an industry which is subject to heavy regulation in multiple jurisdictions. There is increasing public scrutiny of ethics in business and 'doing the right thing' has become part of our licence to operate. We also seek to secure appropriate protection for our intellectual property and defend against claims of infringement by others. National regulatory authorities enforce a complex pattern of laws and regulations that govern the design, development, approval, manufacture, labelling, marketing and sale of healthcare products. They also review data supporting the safety and efficacy of such products and may inspect them for compliance with appropriate standards, including those relating to Quality Management Systems or Good Manufacturing Practice regulations.

In complying with laws and regulations, including those relating to bribery and corruption, product safety and patient and employee safety, we have an extremely low tolerance for risk. Despite our efforts, we recognise that, as in any human system, compliance mistakes may occur. We respond to issues as they arise and revise our programme as appropriate.

Link to strategy	Actions taken by management
Compliance with applicable laws and regulations and doing the right thing is part of our licence to operate and underlies all our Strategic Priorities.	– Leadership from the top with Ethics & Compliance Committees at Board and executive level overseeing our ethical and compliance practices. – All employees are required to certify compliance
Examples of risks
– Failure to act in an ethical manner consistent with our Code of Conduct. – Violation of anti-corruption or healthcare laws, breach by employee or third party representative. – Competitors may assert patents or other intellectual property rights against the Company, or fail to respect the Company's intellectual property rights. – 6LJQL²FDQWQRQFRPSOLDQFHZLWKSROLF\UHJXODWLRQVRUVWDQGDUGVJRYHUQLQJ products and operations regarding registration, manufacturing, distribution, sales or marketing. – Failure to obtain proper approvals for new or changed technologies, products or processes. – Failure to implement programmes and supporting resources to ensure product quality and regulatory compliance, including analysis of customer complaints and adverse event data.	on an annual basis with our Code of Conduct and Business Principles. – Training programmes are in place for all employees, and third parties with ethical and compliance responsibilities; plus monitoring and auditing programmes to verify implementation. – &RQ²GHQWLDOLQGHSHQGHQWUHSRUWLQJFKDQQHOVIRU employees and third parties to report concerns. – Careful attention to intellectual property considerations. – Standardising and monitoring compliance with quality management and practices through Global Quality Assurance and Regulatory Affairs organisation. – Incident management teams in place to respond in the event of an incident relating to patient safety.

– Reviewing product safety and complaint data.

OTHER RISKS

Other risks, foreseen or unforeseen, may also threaten the profitability or future prospects of the Company, either in the short-term or – like the risks set forth above – more profoundly. Following, are examples of other such risks.

Risk	Response
Cyber security	We have analysed the possible impact of a cyber security attack on the Company and recognise that this could cause significant disruption and reputational damage.
Political and economic forces	We have analysed the implications of Brexit, the changing political landscape in the US and political and economic conditions in a number of other countries. Whilst the changing environment in some of these countries could be expected to impact our revenues and profits, we believe that our business is sufficiently geographically diverse.
Talent management	We recognise that people management, effective succession planning and the ability to attract and retain talent is of great importance to the success of our Company.

RISK REPORT

RISK MANAGEMENT ACTIVITIES IN 2016

The Board and its Committees undertook a number of risk management activities throughout the year as follows:

IDENTIFICATION OF RISKS

We review risk through two processes:

The 'bottom-up process' undertaken by the Risk Champions in the business areas and functions across the Group to identify and manage the risks in their areas; and
The 'top-down process' undertaken by the members of the executive committee to identify the key risks to the strategic priorities, top products and product platforms.

During the year, the key risks identified through these two processes were mapped against each other and regrouped to produce a revised schedule of Significant Risks, which were discussed at the Strategy Review in September. Each Board member was then interviewed to ascertain tolerance for each principal risk.

ASSESSMENT OF MANAGEMENT ACTIONS

The effectiveness of actions undertaken by management to address the key risks identified is assessed in a number of ways:

The Risk Champions in the business areas and functions across the Group assess the effectiveness of mitigating actions being undertaken locally and regionally;
All control functions provide independent assurance to management, the Audit Committee and the Board on the effectiveness of management actions and the Internal Audit function periodically reviews the risk management process; and
We have undertaken a number of 'deep dives' at Board and Committee level into the management of the risks being examined (see below).

DEEP DIVES INTO RISKS

We have reviewed at the Board and its Committees a number of different topics during the year relating to risk, including the following areas:

Strategic: R&D presentation to the Board, hands on demonstrations of innovative products at site visits, presentations to the Board DQGWKH\$XGLW&RPPLWWHHRQ&KLQDDQGWKH*XOI
Operational: Presentations to the Board on inventory and the supply chain, the manufacturing network and dependency on single manufacturing sites, regular reports on quality issues, and complaints to the Ethics & Compliance Committee, pricing and commercial excellence presentation to the Board
Financial: Presentations to the Audit Committee on the tax and treasury functions
IT/cyber: Report to the Audit Committee on IT and cyber security
Compliance and legal: Regular reports on compliance matters and risks to the Ethics & Compliance Committee, covering M&A FRPSOLDQFHULVNDQGWKLUGSDUW\GLVWULEXWRUVUHJXODUOHJDOUHSRUWVWRWKH%RDUGLQFOXGLQJXSGDWHVRQLQWHOOHFWXDOSURSHUW\DQGOLWLJDWLRQ
Talent management: Annual discussion on succession planning at the Board, presentation on culture and values at the Strategy Review.

SINCE THE YEAR END

In February 2017, the Board reviewed the effectiveness of the risk management process, considering the Principal Risks, actions taken by management to manage those risks and the Board's risk appetite in respect of each risk. The Board considered that the risk management process was effective. We recognise that this is an ongoing process and work will continue in 2017 and beyond to ensure that this remains the case.

RISK MANAGEMENT PLAN FOR 2017

In 2017, we shall be further developing our approach of looking at risk management through a product focused lens. We have identified the key products which will drive our multi-year strategic plan and have formed cross functional risk working groups for each of these products and product platforms. Each risk working group consists of members from the commercial, operational, R&D and risk functions and is headed by a senior product risk leader. The risk working groups will evaluate all the risks which could impact the product or product platform through its life from design and development, sourcing of raw materials, the manufacturing process, product launch, marketing, commercialisation, regulatory, legal and compliance risks. The risk working groups will also ensure that appropriate treatment actions are in place. The Risk Champions will continue their work to ensure that any non-product related risks continue to be appropriately identified and managed. Further work will also be undertaken in reviewing the effectiveness RIWKHULVNPDQDJHPHQWSURJUDPPH

Our Viability Statement

During the year, the Board has carried out a robust assessment of the Principal Risks affecting the Company, particularly those which could threaten the business model. These risks and the actions being taken to manage or mitigate them are explained in detail on pages 43 to 46 of this Annual Report.

Having assessed the principal risks, the Board has determined that we have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over a period of three years from 1 January 2017. In our long term planning we consider horizons of both five and ten years. However, as most of our efforts are focused on the coming three years, we have chosen this period when considering our viability.

In reaching this conclusion, we have undertaken the following process:

The Audit Committee reviewed the risk management process at their meetings in February, July and November, receiving presentations from the Group Risk function, explaining the processes followed by management in identifying and managing risk throughout the business.
As part of the annual Strategy Review in September, the Board considered and discussed the principal risks which could impact the business model over the next three years and discussed with the management team how these risks were being managed and mitigated.
Throughout the year, a number of deep dives into different risks were conducted by the Board, the Audit Committee and the Ethics & Compliance Committee looking into the nature of the risks and how they were mitigated, as detailed on page 46 of this Annual Report.
Towards the end of the year, a series of detailed one-to one discussions were held with each member of the Board and the Company Secretary and the Group Risk Director. In these discussions, the Directors were asked to consider the

VLJQL²FDQWULVNVZKLFKWKH\EHOLHYHG FRXOGVHULRXVO\LPSDFWWKHSUR²WDELOLW\ and future prospects of the Company and the principal risks that would threaten its business model, future performance, solvency or liquidity.

For the purpose of stress testing the viability of the Company, we have undertaken a robust assessment of the principal risks and some other risks, which could threaten the viability or existence of the Company. The principal DQGRWKHUULVNVZHKDYHLGHQWL²HGLQ WKLVSURFHVVDUH
- Pricing and reimbursement pressures or currency exchange volatility (Principal Risk) – leading to a major ORVVRIUHYHQXHVDQGSUR²WV
- Operational risk (Principal Risk):
  - ç Execution risk meaning that we were unable to launch new products DQGORVHVLJQL²FDQWPDUNHWVKDUHWR the competition;
  - ç Product liability claims giving rise WRVLJQL²FDQWFODLPVDQGOHJDOIHHV or
  - ç Temporary loss of key production capability – meaning that we were unable to manufacture a key product for a period of time;
- Legal regulatory and compliance risks (Principal Risk):
  - ç Regulatory measures impacting our ability to continue to sell a key product;
  - ç Bribery and corruption claims JLYLQJULVHWRDVLJQL²FDQW²QH
- Other risks:
  - ç Cyber security for example meaning that we were unable to issue invoices or collect money for a period of time;
  - ç Political and economic forces for example political upheaval, which could cause us to withdraw from a major market for a period of time;
We have carried out a scenario analysis RIWKHVHSULQFLSDODQGVLJQL²FDQWULVNV to evaluate the impact of a severe but plausible combination of these risks actually occurring over the three year period.
We have considered and discussed a report setting out the terms of our current ²QDQFLQJDUUDQJHPHQWVDQGSRWHQWLDO FDSDFLW\IRUDGGLWLRQDO²QDQFLQJVKRXOG this be required in the event of one of the scenarios modelled occurring.
:HDUHVDWLV²HGWKDWZHKDYHUREXVW mitigating actions in place as detailed on pages 43-46 of this Annual Report.
We recognise, however, that the longterm viability of the Company could also be impacted by other, as yet unforeseen, risks or that the mitigating actions we have put in place could turn out to be less effective than intended. Based on this analysis, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.

Our conclusion is based on our current Strategic Plan approved by the Board in September 2016, having regard to longer-term strategic intentions, yet to be formulated in detail. However, we operate in a changing marketplace, which might cause us to adapt our Strategic Plans. In responding to changing external conditions, we will continue to evaluate any additional risks involved which might impact the business model.

By order of the Board, 22 February 2017

Susan Swabey Company Secretary

FINANCIAL REVIEW OPERATIONAL RISK

OUR BOARD OF DIRECTORS

ROBERTO QUARTA (67) CHAIRMAN

Joined the Board in December 2013 and appointed Chairman following election by shareholders at the April 2014 Annual General Meeting. He was also appointed Chairman of the Nomination & Governance Committee and a Member of the Remuneration Committee on that day.

CAREER AND EXPERIENCE

Roberto is a graduate and a former Trustee of the College of the Holy Cross, Worcester (MA), US. He started his career as a manager trainee at David Gessner Ltd, before moving on to Worcester Controls Corporation and then BTR plc, where he was a divisional Chief Executive. Between 1985 and 1989 he was Executive VP of Hitchiner Manufacturing Co. Inc. He returned to BTR plc in 1989 as Divisional Chief Executive, where he was appointed to the main board. From here he moved to BBA Aviation plc, as CEO and then as Chairman, until 2007. He has held several board positions, including NED of Powergen plc, Equant N.V., BAE Systems plc and Foster Wheeler AG. His previous Chairmanships include Italtel SpA, Rexel S.A. and IMI plc. He was also a Member of the Investment Committee of Fondo Strategico Italiano until 31 March 2016. He is currently Chairman of :33SOFDQG63,(6\$DQGDSDUWQHUDW&OD\WRQ'XELOLHU 5LFH

SKILLS AND COMPETENCIES

Roberto's career in private equity brings valuable experience to Smith & Nephew, particularly when evaluating acquisitions and new business opportunities. He has an in-depth understanding of differing global governance requirements having served as a director and Chairman of a number of UK and international companies. Since his appointment as Chairman in April 2014, he has conducted a comprehensive review into the composition of the Board and its Committees, and conducted the search for new Non-Executive Directors, resulting in the appointment of Vinita Bali in 2014, Erik Engstrom DQG5RELQ)UHHVWRQHGXULQJ

NATIONALITY

American/Italian

OLIVIER BOHUON (58) CHIEF EXECUTIVE OFFICER

*Joined the Board and was appointed Chief ([HFXWLYH2I²FHULQ\$SULO+HUHVLJQHGDV a Member of the Nomination & Governance &RPPLWWHHRQ)HEUXDU*

CAREER AND EXPERIENCE

Olivier holds a doctorate in Pharmacy from the University of Paris and an MBA from HEC, Paris. He started his career in Morocco with Roussel Uclaf S.A. and then, with the same company, held a number of positions in the Middle East with increasing levels of responsibility. He joined Abbott in Chicago as head of their anti-infective franchise with Abbott International before becoming Pharmaceutical General Manager in Spain. He subsequently joined GlaxoSmithKline, rising to Senior Vice President & Director for European Commercial Operations. He then re-joined Abbott as President for Europe, became President of Abbott International), and then President of their Pharmaceutical Division. He joined Smith & Nephew from Pierre Fabre, where he was Chief Executive.

SKILLS AND COMPETENCIES

Olivier has extensive international healthcare leadership experience within a number of significant pharmaceutical and healthcare companies. His global experience provides the skillset required to innovate a FTSE 100 company with a deep heritage and provide inspiring leadership. He is a Non-Executive Director of Virbac Group and Shire plc, where he is also a member of the Remuneration Committee.

NATIONALITY

French

GRAHAM BAKER (48) CHIEF FINANCIAL OFFICER -RLQLQJWKH%RDUGDV&KLHI)LQDQFLDO2I²FHULQ March 2017.

CAREER AND EXPERIENCE

Graham holds an MA degree in Economics from Cambridge University and qualified as a Chartered Accountant and Chartered Tax Advisor with Arthur Andersen. In 1995, he joined AstraZeneca PLC where he worked for 20 years, holding multiple senior roles, including Vice President, Finance, International (2013- 2015) with responsibility for all emerging markets, Vice President, Global Financial Services (2011-2013) and Vice President Finance & Chief Financial Officer, North America (2008-10). Most recently, Graham was Chief Financial Officer of generic pharmaceuticals company Alvogen.

SKILLS AND COMPETENCIES

Graham has deep sector knowledge and has had extensive exposure to established and emerging markets which will be extremely relevant to his role at Smith & Nephew. He has a strong track record of delivering operational excellence and has relevant experience across major finance roles and geographic markets, leading large teams responsible for significant budgets.

NATIONALITY

British

49 SMITH & NEPHEW ANNUAL REPORT 2016 WWW.SMITH-NEPHEW.COM

VINITA BALI (61)

INDEPENDENT NON-EXECUTIVE DIRECTOR

Appointed Independent Non-Executive Director in December 2014 and Member of the Remuneration Committee and Ethics & Compliance Committee.

CAREER AND EXPERIENCE

Vinita holds an MBA from the Jamnalal Bajaj Institute of Management Studies, University of Bombay and a BA in Economics from the University of Delhi. She commenced her career in India, and subsequently worked with Cadbury Schweppes plc in the UK, Nigeria and South Africa. She joined the Coca-Cola Company in 1994 and held senior positions in marketing and general management, based in the USA and Latin America, becoming President of the Andean Division in 1999 and VP, Corporate Strategy in 2001. In 2003, she joined Zyman Group, LLC, a US based consultancy, as Managing Principal. From 2005 to 2014 Vinita was MD and CEO of Britannia Industries Limited, a leading Indian publicly listed company. Currently, Vinita is NED of Syngenta AG, Titan Company Ltd and Credit Rating Information Services of India Ltd. She is also Chair of the board of Global Alliance for Improved Nutrition and a member of the Advisory Board of PwC India.

SKILLS AND COMPETENCIES

Vinita has an impressive track record of achievement with blue-chip global corporations in multiple geographies including India, Africa, Latin America, US and UK, all key markets for Smith & Nephew. Additionally, her strong appreciation of customer service and marketing brings deep insight as we continue to develop innovative ways to serve our markets and grow our business.

NATIONALITY

IAN BARLOW (65) INDEPENDENT NON-EXECUTIVE DIRECTOR

Appointed Independent Non-Executive Director in March 2010, Chairman of the Audit Committee in May 2010 and Member of the Ethics & Compliance Committee in October 2014.

CAREER AND EXPERIENCE

Ian is a Chartered Accountant with considerable financial experience both internationally and in the UK. He was a Partner at KPMG, latterly Senior Partner, London, until 2008. At KPMG, he was Head of UK tax and legal operations. He has also been Chairman of WSP Group plc, and currently is NED and Chairman of the Audit Committees of The Brunner Investment Trust PLC, Foxtons Group plc and Urban&Civic plc.

SKILLS AND COMPETENCIES

Ian's longstanding financial and auditing career and extensive board experience add value to his role as Chairman of the Audit Committee. His appointment as a member of the Ethics & Compliance Committee has proved useful in coordinating the oversight role of both Committees. His work for a number of international companies gives added insight when reviewing our global businesses.

NATIONALITY British

THE RT. HON BARONESS VIRGINIA BOTTOMLEY OF NETTLESTONE DL (68)

INDEPENDENT NON-EXECUTIVE DIRECTOR Appointed Independent Non-Executive Director in April 2012 and Member of the Remuneration Committee and Nomination & Governance Committee in April 2014.

CAREER AND EXPERIENCE

Virginia gained her MSc in Social Administration from the London School of Economics following her first degree. She was appointed a Life Peer in 2005 following her career as a Member of Parliament between 1984 and 2005. She served successively as Secretary of State for Health and then Culture, Media and Sport. Virginia was formerly a director of Bupa and AkzoNobel NV. She is currently a director of International Resources Group Limited, member of the International Advisory Council of Chugai Pharmaceutical Co, Chancellor of University of Hull and Sheriff of Hull and Trustee of The Economist Newspaper. She is the Chair of Board & CEO Practice at Odgers Berndtson.

SKILLS AND COMPETENCIES

Virginia's extensive experience within government, particularly as Secretary of State for Health, brings a unique insight into the healthcare system both in the UK and globally, whilst her experience on the Board of Bupa brings an understanding of the private healthcare sector and an insight into the needs of our customers. Her experience running the board practice at a search firm gives her a valuable skillset as a member of the Nomination & Governance Committee and Remuneration Committee. Her long association with Hull, the home of many of our UK employees, also brings an added perspective.

NATIONALITY British

FINANCIAL REVIEW OPERATIONAL RISK

OUR BOARD OF DIRECTORS

ERIK ENGSTROM (53)

INDEPENDENT NON-EXECUTIVE DIRECTOR Appointed Non-Executive Director on 1 January 2015 and Member of the Audit Committee.

CAREER AND EXPERIENCE

Erik is a graduate of the Stockholm School of Economics (BSc) and of the Royal Institute of Technology in Stockholm (MSc). In 1988, he graduated with an MBA from Harvard Business School as a Fulbright Scholar. Erik commenced his career at McKinsey & Company and then worked in publishing, latterly as President and COO of Random House Inc. and as President and CEO of Bantam Doubleday Dell, N America. In 2001 he moved on to be a partner at General Atlantic Partners, a private equity investment firm. Between 2004 and 2009 he was CEO of Elsevier, the division specialising in scientific and medical information and then from 2009 CEO of RELX Group.

SKILLS AND COMPETENCIES

Erik has successfully reshaped RELX Group's business in terms of portfolio and geographies. He brings a deep understanding of how technology can be used to transform a business and insight into the development of new commercial models that deliver attractive economics. His experience as a CEO of a global company gives him valuable insights as a member of our Audit Committee.

NATIONALITY

Swedish

ROBIN FREESTONE (58) INDEPENDENT NON-EXECUTIVE DIRECTOR

Appointed Independent Non-Executive Director and Member of the Audit Committee and the Remuneration Committee on 1 September 2015.

CAREER AND EXPERIENCE

Robin graduated with a BA in Economics from The University of Manchester and later qualified and commenced his career as a Chartered Accountant at Deloitte. He held a number of senior financial positions throughout his career, including at ICI plc, Henkel Ltd and at Amersham plc. Robin was the Deputy CFO and then later the CFO of Pearson plc between 2006 and August 2015, where he was heavily involved with the transformation and diversification of Pearson. He was previously NED at eChem Ltd, Chairman of the 100 Group and Senior Independent Director and Chairman of the Audit Committee of Cable and Wireless Communications plc from 2015 until May 2016. Robin is a NED and Chairman of the Audit Committee at Moneysupermarket.com Group plc and a NED at Michael Kors Holdings Ltd. Currently, Robin sits on the advisory panel to the ICAEW's Financial Reporting Committee.

SKILLS AND COMPETENCIES

Robin has been a well-regarded FTSE 100 CFO who has not only been heavily involved with transformation and diversification, but also the healthcare industry at Amersham, where his acquisition experience will be of value to Smith & Nephew as it continues to grow globally and in different markets. He brings financial expertise and insight to the Audit Committee and an understanding of how to attract and retain talent in a global business to the Remuneration Committee.

NATIONALITY

British

MICHAEL FRIEDMAN (73)

INDEPENDENT NON-EXECUTIVE DIRECTOR Appointed Independent Non-Executive Director in April 2013 and Chairman of the Ethics & Compliance Committee in August 2014.

CAREER AND EXPERIENCE

Michael graduated with a Bachelor of Arts degree, magna cum laude from Tulane University and a Doctorate in Medicine from the University of Texas Southwestern Medical Center. He completed postdoctoral training at Stanford University and the National Cancer Institute, and is board certified in Internal Medicine and Medical Oncology. In 1983, he joined the Division of Cancer Treatment at the National Cancer Institute and went on to become the Associate Director of the Cancer Therapy Evaluation Program. Michael was most recently CEO of City of Hope in California, and also served as Director of the institution's cancer centre and held the Irell & Manella Cancer Center Director's Distinguished Chair. He was formerly Senior VP of research, medical and public policy for Pharmacia Corporation and also Deputy Commissioner and Acting Commissioner at the US Food and Drug Administration (FDA). He has served on a number of Boards in a non-executive capacity, including Rite Aid Corporation. Currently, Michael is a NED of Celgene Corporation, NED of MannKind Corporation and Intuitive Surgical, Inc.

SKILLS AND COMPETENCIES

Michael understands the fundamental importance of research, which is part of Smith & Nephew's value creation process. His varied career in both the public and private healthcare sector has given him a deep insight and a highly respected career. In particular his work with the FDA and knowledge relating to US compliance provides the skillset required to Chair the Ethics & Compliance Committee.

NATIONALITY American

JOSEPH PAPA (61)

INDEPENDENT NON-EXECUTIVE DIRECTOR

Appointed Independent Non-Executive Director in August 2008 and Chairman of the Remuneration Committee in April 2011, Member of the Audit Committee and Ethics & Compliance Committee.

CAREER AND EXPERIENCE

Joe graduated with a Bachelor of Science degree in Pharmacy from the University of Connecticut and MBA from Northwestern University's Kellogg Graduate School of Management. In 2012, he received an Honorary Doctor of Science degree from the University of Connecticut School of Pharmacy. He began his career at Novartis International AG as an Assistant Product Manager and eventually rose to VP, Marketing, having held senior positions in both Switzerland and US. He moved on to hold senior positions at Searle Pharmaceuticals and was later President & COO of DuPont Pharmaceuticals and later Watson Pharma, Inc. He was previously Chairman and CEO of Cardinal Health Inc. and Chairman and CEO of Perrigo Company plc from 2006 to April 2016. Joe was appointed Chairman and CEO of Valeant Pharmaceuticals International, Inc. in May 2016.

SKILLS AND COMPETENCIES

With over 30 years' experience in the global pharmaceutical industry, Joe brings deep insight into the wider global healthcare industry and the regulatory environment. As Chairman and Chief Executive of a significant US company, Joe has a comprehensive understanding both of how to attract and retain global talent and use remuneration arrangements that incentivise performance, leading to maximum returns for investors.

NATIONALITY

DIRECTORS WHO SERVED DURING 7+(<(\$51276((.,1*5((/(&7,21

BRIAN LARCOMBE (63)

INDEPENDENT NON-EXECUTIVE DIRECTOR

5HWLULQJIURPWKH%RDUGRQ\$SULO? Appointed Independent Non-Executive Director in March 2002, Senior Independent Director in April 2014, Member of the Audit Committee, Nomination & Governance Committee and Remuneration Committee.

CAREER AND EXPERIENCE

Brian graduated with a Bachelor's of Commerce degree from University of Birmingham. He spent most of his career in private equity with 3i Group plc, becoming Finance Director and then Chief Executive of the Group following its flotation. He has held a number of Non-Executive Directorships and is currently Non-Executive Director of Kodak Alaris Holdings Limited and Cape plc.

NATIONALITY

British

JULIE BROWN (54)

CHIEF FINANCIAL OFFICER *&KLHI)LQDQFLDO2I²FHUWR-DQXDU*

CAREER AND EXPERIENCE

Julie is a graduate, Chartered Accountant and Fellow of the Institute of Taxation. She qualified with KPMG before working with AstraZeneca plc, where she served as Vice President Group Finance, and ultimately, as Interim CFO. Prior to that she undertook Commercial and Strategic roles and was Regional VP Latin America, Marketing Company President AstraZeneca Portugal, and Vice President Corporate Strategy and R&D CFO. Julie is a member of the Board of Directors of Roche Holding Ltd and Chair of the Audit Committee. She has also fulfilled two Non-Executive Directorships with the NHS in the UK and the British Embassy.

NATIONALITY

SUSAN SWABEY (55) COMPANY SECRETARY Appointed Company Secretary in May 2009.

SKILLS AND EXPERIENCE

Susan has 30 years' experience as a Company Secretary in a wide range of companies including Prudential plc, Amersham plc and RMC Group plc. Her work has covered Board support, corporate governance, corporate transactions, Group risk management, share registration, listing obligations, corporate social responsibility, pensions, insurance and employee and executive share plans. Susan is joint Vice-Chair of the GC100 Group, a member of the CBI Companies Committee and is a frequent speaker on corporate governance and related matters. She is also a Trustee of ShareGift, the share donation charity.

NATIONALITY British

OUR BUSINESS 0\$5.(73/\$&( REVIEW ACCOUNTS 52 OVERVIEW GOVERNANCE

FINANCIAL REVIEW OPERATIONAL 5,6.

OUR LEADERSHIP TEAM

*5\$+\$0%\$.(5? CHIEF FINANCIAL OFFICER

Joining the Board as Chief Financial Officer in March 2017. Graham holds an MA degree in Economics from Cambridge University and qualified as a Chartered \$FFRXQWDQWDQG&KDUWHUHG7D[\$GYLVRUZLWK\$UWKXU Andersen. He will be based in London.

6.,//6\$1'&203(7(1&,(6

NATIONALITY

British

MICHAEL FRAZZETTE (55) CHIEF COMMERCIAL OFFICER

Joined Smith & Nephew in July 2006 as President of the Endoscopy Global Business Unit. From 2011 to 2015, he headed up the Advanced Surgical Devices division with responsibility for the Orthopaedic Reconstruction, Trauma, Sports Medicine, GYN and ENT Global Franchises, as well as the ASD commercial business in the US. The scope of Mike's role was expanded in 2014 to include the Latin American commercial business, together with Advanced Wound Management. Mike is based in London.

6.,//6\$1'(;3(5,(1&(

Mike has held a number of senior positions within the global medical devices industry. Prior to joining Smith & Nephew, he was President and CEO of MicroGroup, a privately held US manufacturer of medical devices, and he spent 15 years at Tyco Healthcare (Coviden) in various commercial and operating roles including President of the Patient Care and Health Systems divisions. Mike also spent four years serving on the AdvaMed Board of Directors and chaired the Orthopaedic Sector committee.

NATIONALITY American

BRAD CANNON (49) PRESIDENT, EUROPE AND CANADA Joined Smith & Nephew in 2012 and became President, Europe and Canada in March 2016. +HLVEDVHGLQ%DDU6ZLW]HUODQG

6.,//6\$1'(;3(5,(1&(

Brad was most recently President of Global Orthopaedic Franchises, leading Smith & Nephew's 5HFRQVWUXFWLRQ(QGRVFRS\7UDXPDDQG([WUHPLWLHV businesses. Prior to Smith & Nephew, Brad worked in Medtronic's Spine and Biologics division. From 2009 he was responsible for Spine's International division and held positions heading US sales and global commercial operations. Brad is a graduate of Washington and Lee University, and the Wharton School of Business at the University of Pennsylvania.

NATIONALITY

American

RODRIGO BIANCHI (57) PRESIDENT, ASIA PACIFIC AND (0(5,10\$5.(76

Joined Smith & Nephew in July 2013 with responsibility for Greater China, India, Russia, Asia, Middle East and Africa, focusing on continuing our strong momentum in these regions. He is based in Dubai. With effect from 1 January 2016, Rodrigo became responsible, not only for the IRAMEA markets, but Latin America, Australia, New Zealand and Japan as well.

6.,//6\$1'(;3(5,(1&(

Rodrigo's experience in the healthcare industry includes 26 years with Johnson & Johnson in progressively senior roles. Most recently, he was Regional Vice President for the Medical Devices and Diagnostics division in the Mediterranean region and prior to that President of Mitek and Ethicon. He started his career at Procter & Gamble Italy.

NATIONALITY

Italian

GLENN WARNER (54) PRESIDENT, US

Joined Smith & Nephew in June 2014 with responsibility for Advanced Wound Management's global franchise strategy, marketing and product development, as well as its US commercial business. With effect from 1 January 2016, Glenn became the President of Smith & Nephew's US business responsible for all the US commercial business. +HLVEDVHGLQ)RUW:RUWK

6.,//6\$1'(;3(5,(1&(

Glenn has a broad-based background in pharmaceuticals and medical products including extensive international experience, having served most recently as AbbVie Vice President and Corporate Officer, Strategic Initiatives, where he was responsible for the development and execution of pipeline and asset management strategies. Prior to that he was President and Officer, Japan Commercial Operations in Abbott's international pharmaceutical business and Executive Vice President, TAP Pharmaceutical Products, Inc. Additional senior level roles included international positions in Germany and Singapore for Abbott's Diagnostics business.

NATIONALITY American

53 SMITH & NEPHEW ANNUAL REPORT 2016 WWW.SMITH-NEPHEW.COM

-\$&.&\$032

CHIEF LEGAL OFFICER

-RLQHG6PLWK 1HSKHZLQ-XQHDQGKHDGVXS the Global Legal function. Initially based in London, KHKDVEHHQEDVHGLQ\$QGRYHU0DVVDFKXVHWWV VLQFHODWH

6.,//6\$1'(;3(5,(1&(

Prior to joining Smith & Nephew, Jack held a number of senior legal roles within the General Electric &RPSDQ\LQFOXGLQJVHYHQ\HDUVDW*(+HDOWKFDUH *(0HGLFDO6\VWHPV?LQWKH86DQG\$VLD+HEHJDQ KLVFDUHHUZLWK'DYLV3RON :DUGZHOO//3

NATIONALITY

American

CYRILLE PETIT (46)

CHIEF CORPORATE DEVELOPMENT OFFICER \$1'35(6,'(17

GLOBAL BUSINESS SERVICES

Joined Smith & Nephew in May 2012 and leads the Corporate Development function and from October 2015 the Global Business Services. He is based in London.

6.,//6\$1'(;3(5,(1&(

Cyrille spent the previous 15 years of his career with General Electric Company, where he held progressively senior positions beginning with GE Capital, GE Healthcare and ultimately as the General Manager, Global Business Development of the Transportation Division. Cyrille's career began in investment banking at BNP Paribas and then Goldman Sachs.

NATIONALITY

French

ELGA LOHLER (49) CHIEF HUMAN RESOURCES OFFICER

Joined Smith & Nephew in 2002 and became Chief Human Resources Officer in December 2015. Elga leads the Global Human Resources, Internal Communication and Sustainability Functions. 6KHLVEDVHGLQ/RQGRQ

6.,//6\$1'(;3(5,(1&(

Prior to being appointed as Chief Human Resources Officer, Elga held progressively senior positions in Human Resources at Smith & Nephew in Wound Management, Operations, Corporate Functions and Group. Elga has more than 25 years' Human Resources experience.

NATIONALITY

American/South African

MATTHEW STOBER (49)

35(6,'(17*/2%\$/23(5\$7,216

Joined Smith & Nephew on 1 October 2015 with responsibility for global manufacturing, supply chain, distribution, quality assurance, regulatory affairs, GLUHFWSURFXUHPHQWDQGPDQXIDFWXULQJ,7RSWLPLVDWLRQ Initially based in Memphis, Matt is now based in Andover, Massachusetts.

6.,//6\$1'(;3(5,(1&(

Matt has more than 25 years' experience in healthcare manufacturing operations for global companies LQFOXGLQJ0HUFN &R,QFDQG*OD[R6PLWK.OLQHSOF Most recently, he served as Senior Vice President, Corporate Officer and Member of the Executive Committee at Hospira Pharmaceuticals. As a senior pharmaceutical operations executive with extensive technical and cross functional experience in start-up and complex challenging environments, Matt has led global and multi-company development projects, new product launches, critical quality-related turnarounds, network rationalisations and organisational transformations. He also has extensive experience working directly with external regulatory bodies, VXFKDVWKH86)RRGDQG'UXJ\$GPLQLVWUDWLRQ

VASANT PADMANABHAN (50) PRESIDENT OF

RESEARCH & DEVELOPMENT Joined Smith & Nephew in August 2016 and is responsible for Research and Innovation, New Product Development, Safety Affairs, Clinical Affairs, Medical Device/Pharmacovigilance and Clinical Operations. He is based in Andover, Massachusetts.

6.,//6\$1'(;3(5,(1&(

Vasant brings extensive experience in research & development and technology. Prior to Smith & Nephew, Vasant was Senior Vice President of Technical Operations at Thoratec Corporation, a leader in mechanical circulatory support solutions for the treatment of heart failure. In this role, he provided leadership to a 600 member team, with responsibility for global R&D, Program Management, Operations and Quality.

3ULRUWR7KRUDWHF9DVDQWKDGDQ\HDUFDUHHU at Medtronic, starting as a Staff Scientist and, progressing through more senior roles, ultimately becoming Vice President of Product Development IRUWKH,PSODQWDEOH'HILEULOODWRU%XVLQHVV Vasant holds a Ph.D degree in Biomedical Engineering IURP5XWJHUV8QLYHUVLW\86\$DQGDQ0%\$GHJUHHIURP the Carlson School of Management, Minnesota.

OVERVIEW

Committed to the highest standards RIFRUSRUDWHJRYHUQDQFH

:HPDLQWDLQWKHVHVWDQGDUGVWKURXJKDFOHDUGHILQLWLRQ RIRXUUROHVFRQWLQXLQJGHYHORSPHQWDQGHYDOXDWLRQDQG DFFRXQWDELOLW\WKURXJKWKHZRUNRIWKH%RDUG&RPPLWWHHV

LEADERSHIP

The Board sets the tone at the top of the Company through:

\$FOHDUGH²QLWLRQRIWKHUROHVRIWKH LQGLYLGXDOPHPEHUVRIWKH%RDUG
\$FRPSUHKHQVLYHFRUSRUDWH JRYHUQDQFHIUDPHZRUN
'H²QHGSURFHVVHVWRHQVXUHWKH LQGHSHQGHQFHRI'LUHFWRUVDQGWKH PDQDJHPHQWRIFRQ³LFWVRILQWHUHVW

5HDGPRUHDERXWRXU%RDUGªV /HDGHUVKLSRQSDJHVWR

The Board carries out its duties through:
5HJXODUPHHWLQJVIRFXVLQJRQWKH RYHUVLJKWRIVWUDWHJ\ULVNLQFOXGLQJ YLDELOLW\DQGVXFFHVVLRQSODQQLQJ
\$QDQQXDOUHYLHZLQWRWKHHIIHFWLYHQHVV RIWKH%RDUG
\$FRPSUHKHQVLYHSURJUDPPHRI GHYHORSPHQWDFWLYLWLHVWKURXJKRXW WKH\HDU
5HDGPRUHDERXWRXU%RDUGªV (IIHFWLYHQHVVRQSDJHVWR

ACCOUNTABILITY

The Board delegates some of its detailed work to the Board Committees:

(DFK&RPPLWWHHPHHWVUHJXODUO\ DQGUHSRUWVEDFNWRWKH%RDUGRQ LWVDFWLYLWLHV
7KHWHUPVRIUHIHUHQFHRIHDFK &RPPLWWHHPD\EHIRXQG RQWKH&RPSDQ\ZHEVLWHDW ZZZVPLWKQHSKHZFRP
\$UHSRUWIURPWKH&KDLUPDQRI HDFK&RPPLWWHHLVLQFOXGHGLQ WKLV\$QQXDO5HSRUW

⁵HDGPRUHDERXWRXU%RDUGªV \$FFRXQWDELOLW\RQSDJHVWR

REMUNERATION

+DYLQJDIRUPDODQGWUDQVSDUHQWSURFHGXUHIRUGHYHORSLQJSROLF\RQUHPXQHUDWLRQIRU([HFXWLYH'LUHFWRUVLVFUXFLDO 2XU5HPXQHUDWLRQ3ROLF\DLPVWRDWWUDFWUHWDLQDQGPRWLYDWHE\OLQNLQJUHZDUGWRSHUIRUPDQFH,QWKLVVHFWLRQ\RXZLOO ²QGLQIRUPDWLRQRQWKH5HPXQHUDWLRQ3ROLF\WREHSUHVHQWHGWRVKDUHKROGHUVIRUDSSURYDODWWKH\$QQXDO*HQHUDO0HHWLQJ RQ\$SULODQGKRZZHLPSOHPHQWHGRXU5HPXQHUDWLRQ3ROLF\LQDQGSODQWRLPSOHPHQWLWLQ

5HDGPRUHDERXWRXU%RDUGªV 5HPXQHUDWLRQRQSDJHVWR

7KH%RDUGLVFRPPLWWHGWRWKHKLJKHVWVWDQGDUGVRIFRUSRUDWHJRYHUQDQFHDQGZHFRPSO\ZLWKDOOWKHSURYLVLRQVRIWKH8.&RUSRUDWH*RYHUQDQFH&RGHWKH&RGH? 7KH&RPSDQ\ª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ªV)&\$?/LVWLQJ5XOHV'LVFORVXUH 7UDQVSDUHQF\5XOHV'75V?DQGWKH&RGHWKURXJKRXWWKH\HDU7KH&RGHFDQEHIRXQGDWKWWSVZZZIUFRUJXN2XU:RUN3XEOLFDWLRQV&RUSRUDWH*RYHUQDQFH 8.&RUSRUDWH*RYHUQDQFH&RGH\$SULOSGI

,QDGGLWLRQZHKDYHUHYLHZHGWKHUHTXHVWVRIWKH8.&RUSRUDWH*RYHUQDQFH&RGHDQGEHOLHYHWKDWZHFRPSO\ZLWKDOOWKHSURYLVLRQVLQWKDWFRGHZKLFKZLOOEHHIIHFWLYH IRUWKHQH[W²QDQFLDO\HDU

7KH'LUHFWRUVª5HSRUWFRPSULVHVSDJHVWRWRWRDQGSDJHVWRRIWKH\$QQXDO5HSRUW

60,7+ 1(3+(:\$118\$/5(3257 :::60,7+1(3+(:&20

&20326,7,21 52/(6

LEADERSHIP

COMPOSITION OF BOARD \$6\$7'(&(0%(5

:HEHOLHYHWKH%RDUGªVFRPSRVLWLRQJLYHVXVWKHQHFHVVDU\GLYHUVLW\VNLOOV DQGH[SHULHQFHWRHQVXUHZHFRQWLQXHWRUXQWKHEXVLQHVVHIIHFWLYHO\DQG GHOLYHUVXVWDLQDEOHJURZWK

BRITISH AMERICAN FRENCH INDIAN \$0(5,&\$1

ITALIAN

SWEDISH

5RELQ)UHHVWRQHWREHDSSRLQWHG&KDLUPDQ RIWKH\$XGLW&RPPLWWHHVXFFHHGLQJ ,DQ%DUORZRQ0DUFK

,DQ%DUORZWREHDSSRLQWHG6HQLRU ,QGHSHQGHQW'LUHFWRUVXFFHHGLQJ %ULDQ/DUFRPEHRQ\$SULO

GOVERNANCE

RESPONSIBILITY & ACTIVITY

LEADERSHIP continued

ROLE OF DIRECTORS

Whilst we all share collective responsibility for the activities of the Board, some of our roles have been defined in greater detail. In particular, the roles of the Chairman and the Chief Executive Officer are clearly defined.

CHAIRMAN

Building a well-balanced Board.
Chairing Board meetings and setting Board agendas.
Ensuring effectiveness of Board and enabling the annual review of effectiveness
Encouraging constructive challenge and facilitating effective communication between Board members.
Promoting effective Board relationships.
Ensuring appropriate induction and development programmes.
Ensuring effective two-way communication and debate with shareholders.
Promoting high standards of corporate governance.
Maintaining appropriate balance between stakeholders.

CHIEF EXECUTIVE OFFICER

Developing and implementing Group strategy.
Recommending the annual budget and five-year strategic and financial plan.
Ensuring coherent leadership of the Group.
Managing the Group's risk profile and establishing effective internal controls
Regularly reviewing organisational structure, developing executive team and planning for succession.
Ensuring the Chairman and Board are kept advised and updated regarding key matters.
Maintaining relationships with shareholders and advising the Board accordingly.
Setting the tone at the top with regard to compliance and sustainability matters.
Day-to-day running of the business.

CHIEF FINANCIAL OFFICER

Supporting the Chief Executive Officer in developing and implementing the Group strategy.
Leading the global finance function, developing key finance talent and planning for succession.
Ensuring effective financial reporting, processes and controls are in place.
Recommending the annual budget and five-year strategic and financial plan.
Maintaining relationships with shareholders.

NON-EXECUTIVE DIRECTORS

Providing effective challenge to management.

and the Company Secretary are defined as follows:

Assisting in development and approval of strategy.

The roles of the Non-Executive Directors, Senior Independent Director

Serving on the Board Committees.
Providing advice to management.

SENIOR INDEPENDENT DIRECTOR

Chairing meetings in the absence of the Chairman.
Acting as a sounding board for the Chairman on Board-related matters
Acting as an intermediary for the other Directors where necessary.
Available to shareholders on matters which cannot otherwise be resolved
Leading the annual evaluation into the Board's effectiveness.
Leading the search for a new Chairman, if necessary.

COMPANY SECRETARY

Advising the Board on matters of corporate governance.
Supporting the Chairman and Non-Executive Directors.
Point of contact for investors on matters of corporate governance.
Ensuring good governance practices at Board level and throughout the Group.

CORPORATE GOVERNANCE FRAMEWORK

The Board is responsible to shareholders for approving the Group, for overseing the performance of the Group and evaluating and monitoring the management of risk.

Each member of the Board has access collectively and individually to the Company Secretary and is also entitled to obtain independent professional advice at the Company's expense, should they decide it is necessary in order to fulfil their responsibilities as Directors.

The Board delegates certain matters, as follows, to Board Committees, consisting of members of the Board:

BOARD
AUDIT	REMUNERATION	NOMINATION &	ETHICS &	AD HOC
COMMITTEE	COMMITTEE	GOVERNANCE	COMPLIANCE	COMMITTEES
Provides independent	Determines Remuneration	COMMITTEE	COMMITTEE	Ad hoc committees may be
assessment of the financial	Policy and packages for	Reviews size and composition	Reviews and monitors ethics	established to review and
affairs of the Company,	Executive Directors and	of the Board, succession	and compliance, quality and	approve specific matters
reviews financial statements and controls and the risk management process. Manages use of internal and external auditors.	Executive Officers.	planning, diversity and governance matters.	regulatory matters across the Group.	or projects.
Read more	Read more	Read more	Read more
See page 69	See page 88	See page 65	See page 67

The Board delegates the day running of the business to Olivier Bohuon, Chief Executive Officer, who is assisted in his role by the Executive Committee comprising the Executive Officers who are shown on pages 52 to 53 and certain other senior executives. In January 2016, the governance framework below the Executive Committee was rearranged to reflect the new organisational structure as follows:

EXECUTIVE COMMITTEE

Recommends and implements strategy, approves budget and thee-year plans laison between commercial and corporale functions, receives regular reports from sub-committees, reviews major investments and capital expenditure proposals and approves business development projects.

COMMERCIAL COMMITTEE Recommends and implements strategy for global commercial functions and regions, managing sales, marketing, market access and commercial strategy and	CORPORATE FUNCTIONS COMMITTEE Recommends and implements strategy for corporate tunctions identitying and executing new processes, systems and practices to improve operational efficiency	PORTFOLIO INNOVATION BOARD Defines portfolio allocation principles, reviewing and challenging current shape of portfolio, identifying gaps and opportunities and re-prioritising segments	REGIONAL STAFF MEETINGS Regional management through committees to drive regional performance.	FUNCTIONAL STAFF MEETINGS Functional leadership teams to drive functional performance.
identifying and executing new processes, systems and practices to improve operational efficiency in commercial regions.	in corporate functions.	and geographies.
FINANCE & BANKING COMMITTEE	DISCLOSURES COMMITTEE	MERGERS & ACQUISITIONS COUNCIL	GROUP RISK COMMITTEE	GROUP ETHICS & COMPLIANCE COMMITTEE
Approves banking and treasury matters, guarantees, Group structure changes, acquisitions and disposals.	Approves release of communications to investors and Stock Exchanges.	Oversees Corporate Development Strategy, monitors status of transactions and approves various stages in acquisition process.	Reviews risk registers and risk management programme.	Reviews compliance matters and country business unit or tunction compliance reports.
DIVERSITY & INCLUSION	GLOBAL BENEFITS	HEALTH, SAFETY &	IT GOVERNANCE	CAPITAL GOVERNANCE
COUNCIL	COMMITTEE	ENVIRONMENT COMMITTEE	BOARD Oversees IT and	BOARD Determines and monitors
Implements strategies to promote diversity and inclusion.	Oversees all policies and processes relating to pensions and employee benefit plans.	Oversees health, satety and environmental matters.	cyber security.	capital expenditure in line with corporate strategy.

GOVERNANCE

RESPONSIBILITY & ACTIVITY CONTINUED

LEADERSHIP continued

SPECIAL GOVERNANCE ARRANGEMENTS DURING THE YEAR

During the year, the Chief Executive Officer, Olivier Bohuon, successfully underwent treatment for cancer. During his period of treatment, whilst he remained in touch on a regular basis and was kept advised of all developments in the business, he was unable to travel and to fulfil his full duties for a period. We therefore put in place a governance structure to ensure continued oversight of the business during his period of absence. The Executive Committee continued to meet on a monthly basis and additional Executive Leadership Team meetings were arranged in the intervening weeks so that the executive team could handle matters collectively as they arose. The Chairman, Roberto Quarta, was also in touch with both Olivier Bohuon and other members of the executive team throughout this period of absence, providing advice, guidance and counsel. Whilst the Chairman was available to step into the role as Chief Executive Officer had the need arisen, this contingency was not actually required as Olivier Bohuon was able to remain sufficiently in contact with the executive team to be able to continue to run the business whilst away from the office. Olivier Bohuon returned to work and led the executive team at the Board Strategy Review in September 2016.

INDEPENDENCE OF DIRECTORS

We require our Non-Executive Directors to remain independent from management so that they are able to exercise independent oversight and effectively challenge management. We therefore continually assess the independence of each of our Non-Executive Directors. The Executive Directors have determined that all our Non-Executive Directors are independent in accordance with both UK and US requirements. None of our Non-Executive Directors or their immediate families has ever had a material relationship with the Group. None of them receives additional remuneration apart from Directors' fees, nor do they participate in the Group's share plans or pension schemes. None of them serve as directors of any companies or affiliates in which any other Director is a director.

More importantly, each of our Non-Executive Directors is prepared to question and challenge management, to request more information and to ask the difficult questions. They insist on robust responses both within the Boardroom and, sometimes, between meetings. The Chief Executive Officer is open to challenge from the Non-Executive Directors and uses this positively to provide more detail and to reflect further on issues.

Brian Larcombe has served as an independent Non-Executive Director for a period of 14 years and will be retiring from the Board at the Annual General Meeting. Throughout 2016, Brian Larcombe continued to maintain an independent view within Board discussions and his experience on the Board, wise counsel and corporate memory was valued by the rest of the Board. We thank Brian for his years of service to the Board and to the Company.

MANAGEMENT OF CONFLICTS OF INTEREST

None of our Directors or their connected persons, has any family relationship with any other Director or Officer, nor has a material interest in any contract to which the Company or any of its subsidiaries are, or were, a party during the year or up to 22 February 2017.

Each Director has a duty under the Companies Act 2006 to avoid a situation in which we have or may have a direct or indirect interest that conflicts or might conflict with the interests of the Company. This duty is in addition to the existing duty owed to the Company to disclose to the Board any interest in a transaction or arrangement under consideration by the Company.

If any Director becomes aware of any situation which might give rise to a conflict of interest, they must, and do, inform the rest of the Board immediately and the Board is then permitted under the Company's Articles of Association to authorise such conflict. This information is then recorded in the Company's Register of Conflicts, together with the date on which authorisation was given. In addition, each Director certifies on an annual basis that the information contained in the Register of Conflicts is correct.

When the Board decides whether or not to authorise a conflict, only the Directors who have no interest in the matter are permitted to participate in the discussion and a conflict is only authorised if the Board believes that it would not have an impact on the Board's ability to promote the success of the Company in the long term. Additionally, the Board may determine that certain limits or conditions must be imposed when giving authorisation. No actual conflicts have been identified, which have required approval by the Board. However, six situations have been identified which could potentially give rise to a conflict of interest and these have been duly authorised by the Board and are reviewed on an annual basis.

OUTSIDE DIRECTORSHIPS

We encourage our Executive Directors to serve as a Non-Executive Director of external companies. We believe that the work they do as Non-Executive Directors of other companies has benefits for their executive roles with the Company, giving them a fresh insight into the role of a Non-Executive Director. Olivier Bohuon is a Non-Executive Director of Shire plc and of Virbac Group. Olivier Bohuon discussed his external roles with the Chairman prior to accepting these appointments and the Chairman was satisfied that he had the capacity for the time commitment required.

RF-APPOINTMENT OF DIRECTORS

In accordance with the Code, all Directors offer themselves to shareholders for re-election annually, except those who are retiring immediately after the Annual General Meeting. Each Director may be removed at any time by the Board or the shareholders.

DIRECTOR INDEMNITY ARRANGEMENTS

Each Director is covered by appropriate directors' and officers' liability insurance and there are also Deeds of Indemnity in place between the Company and each Director. These Deeds of Indemnity mean that the Company indemnifies Directors in respect of any proceedings brought by third parties against them personally in their capacity as Directors of the Company. The Company would also fund ongoing costs in defending a legal action as they are incurred rather than after judgement has been given. In the event of an unsuccessful defence in an action against them, individual Directors would be liable to repay the Company for any damages and to repay defence costs to the extent funded by the Company.

I IAISON WITH SHARFHOI DERS

The Board meets with retail investors at the Annual General Meeting and responds to many letters and emails from shareholders throughout the year.

The Executive Directors also meet regularly with institutional investors to discuss the Company's business and financial performance both at the time of the announcement of results and at industry investor events. During 2016, the Executive Directors held meetings with institutional investors, including investors representing approximately 41% of the share capital.

During the year, in line with good practice, an Investor perception survey was undertaken by an independent third party, Investor Perceptions. This survey sought the views of 20 shareholders holding approximately 21.8% of the Company's shares, on a range of topics relating to the Company, its performance and management. These views were shared anonymously with the Chief Executive Officer and the Board and led to refinements in our ongoing investor relations programme.

During 2016, Roberto Quarta met with investors to hear their views of the Company. He held 12 meetings and telephone calls with investors holding just over 20% of the share capital.

Joseph Papa, the Chairman of the Remuneration Committee also met with key institutional investors during 2016. Ahead of the Annual General Meeting in April 2016, he engaged with 24 shareholders holding just under 30% of the share capital. In September and October, he offered to meet with our top 30 shareholders and all institutional shareholders who had contacted us around the time of the Annual General Meeting to discuss the vote on remuneration. As a result of this offer, he met, held telephone calls and exchanged views by email with 24 shareholders holding just under 40% of the share capital. At these meetings, he presented the Remuneration Committee's proposals for our remuneration arrangements going forward and discussed investor views regarding different performance measures. These discussions have helped to formulate the Remuneration Policy which will be presented to shareholders for approval at the Annual General Meeting in April this year.

lan Barlow, the Chairman of the Audit Committee, met with investors to discuss audit related matters. He held one meeting with an investor holding approximately 1.5% of the share capital.

Members of the Board are always happy to engage with investors, if they have matters they wish to raise with the non-executive team. Please contact the Company Secretary to arrange a suitable time to meet.

A short report on our major shareholders and any significant changes in their holdings since the previous meeting is reviewed at each Board meeting. The Chairman and Non-Executive Directors report back to the Board following their meetings with investors. Olivier Bohuon routinely reports on any concerns or issues that shareholders have raised with him in their meetings. Copies of the analyst reports on the Company and its peers are also circulated to Directors.

PURCHASE OF ORDINARY SHARES

In order to avoid shareholder dilution, shares allotted to employees through employee share schemes are bought back on a quarterly basis and subsequently cancelled as we stated in Note 19.2 of the accounts on page 152.

RESPONSIBILITY & ACTIVITY CONTINUED

EFFECTIVENESS

RESPONSIBILITY OF THE BOARD

The work of the Board falls into the following key areas:

STRATFGY

Approving the Group strategy including major changes to corporate and management structure.
Approving acquisitions, mergers, disposals, capital transactions in excess of \$50 million.
Setting priorities for capital investment across the Group.
Approving annual budget, financial plan, five-year business plan.
Approving major borrowings and finance and banking arrangements.
Approving changes to the size and structure of the Board and the appointment and removal of Directors and the Company Secretary
Approving Group policies relating to sustainability, health and safety, Code of Conduct and Code of Share Dealing and other matters.
Approving the appointment and removal of key professional advisers.

PERFORMANCE

Reviewing performance against strategy, budgets and financial and business plans.
Overseeing Group operations and maintaining a sound system of internal control.
Determining the dividend policy and dividend recommendations.
Approving the appointment and removal of the external auditor on the recommendation of the Audit Committee.
Approving significant changes to accounting policies or practices.
Overseeing succession planning at Board and Executive Officer level.
Approving the use of the Company's shares in relation to employee and executive share incentive plans on the recommendation of the Remuneration Committee.

RISK

Overseeing the Group's risk management programme.
Regularly reviewing the risk register.
Overseeing risk management processes (see pages 42 to 46 for further details)

SHAREHOLDER COMMUNICATIONS

Approving preliminary announcement of annual results, the publication of the Annual Report, the half-yearly report, the quarterly financial announcements, the release of price sensitive announcements and any listing particulars, circulars or prospectuses.
Approving the Sustainability Report prior to publication.
Maintaining relationships and continued engagement with shareholders.

PROVIDING ADVICE

Using experience gained within other companies and organisations to advise management both within and between Board meetings.

The Schedule of Matters Reserved to the Board describes the role and responsibilities of the Board more fully and can be found on our website at www.smith-nephew.com

%2\$5'7,0(7\$%/(

EARLY FEBRUARY

Approval of Preliminary Announcement

5HYLHZHGWKHUHVXOWVIRUWKHIXOO\HDUDQGWKHSUHOLPLQDU\ DQQRXQFHPHQWDQGDSSURYHGWKH²QDOGLYLGHQGWREH UHFRPPHQGHGWRVKDUHKROGHUVIRUDSSURYDO
5HYLHZHGDQGDSSURYHGWKHDQQXDOULVNPDQDJHPHQWUHSRUW
5HYLHZHGDQGDSSURYHGWKHSD\PHQWRIWKHGLYLGHQG
\$SSURYHGWKH%XGJHWIRUDQGWKH/RQJ5DQJH3ODQIRU
5HFHLYHGXSGDWHVRQWKHEXVLQHVVLQ&KLQDDQG6DXGL\$UDELD
5HYLHZHGWKH*URXS2SWLPLVDWLRQ3ODQ
5HYLHZHGWKHUHVXOWVRIWKHUHYLHZLQWRWKHHIIHFWLYHQHVVRIWKH %RDUGLQDQGDJUHHGDFWLRQSRLQWVIRU
5HYLHZHGDQGDFFHSWHGDQLQFUHDVHLQWKHIHHVSDLGWR 1RQ([HFXWLYH'LUHFWRU)HHV

/\$7()(%58\$5<9,\$92,&(&21)(5(1&(

Approval of Financial Statements

5HYLHZHGDQGDSSURYHGWKH\$QQXDO5HSRUWDQG\$FFRXQWV IRUKDYLQJGHWHUPLQHGWKDWWKH\ZHUHIDLUEDODQFHG DQGXQGHUVWDQGDEOH
5HYLHZHGDQGDSSURYHGWKH1RWLFHRI\$QQXDO*HQHUDO0HHWLQJ DQGUHODWHGGRFXPHQWDWLRQ

APRIL

5HFHLYHGDUHYLHZRIUHFHQWDFTXLVLWLRQV
\$SSURYHGWKH6XVWDLQDELOLW\5HSRUW
3UHSDUHGIRUWKH\$QQXDO*HQHUDO0HHWLQJWREHKHOGODWHU WKDWGD\

0\$<9,\$92,&(&21)(5(1&(

– 5HYLHZHGWKHUHVXOWVIRUWKH²UVWTXDUWHUDQGDSSURYHGWKH 4WUDGLQJVWDWHPHQWDQQRXQFHPHQW

JULY

5HYLHZHGWKHUHVXOWVIRUWKH²UVWKDOIDQGDSSURYHG WKH+DQQRXQFHPHQWKDYLQJFRQVLGHUHGPDQDJHPHQWªV MXGJHPHQWLQDQXPEHURIDUHDVDQGDSSURYHGSD\PHQWRIWKH LQWHULPGLYLGHQG
5HFHLYHGDQGFRQVLGHUHGDUHSRUWDQDO\VLQJWKHSURJUHVV RIUHFHQWDFTXLVLWLRQVDJDLQVWH[SHFWDWLRQVDWWKHWLPH RIDFTXLVLWLRQ
5HFHLYHGDQGGLVFXVVHGWKHDQQXDOUHYLHZRI*URXS,QVXUDQFHV
5HYLHZHGWKH1RUWK\$PHULFDQ3URFHVV2SWLPLVDWLRQ3URMHFW

6(37(0%(5,11,&()5\$1&(

Strategy Review

5HFHLYHGDQXSGDWHRQ&RUSRUDWH'HYHORSPHQW
\$SSURYHGWKHUHQHZDORIWKH'LUHFWRUVªDQG2I²FHUVª /LDELOLW\,QVXUDQFH

(\$5/<129(0%(5,1%267210\$66\$&+86(776

Approval of Q3 Trading Statement

5HYLHZHGWKHUHVXOWVIRUWKHWKLUGTXDUWHUDQGDSSURYHGWKH 4WUDGLQJVWDWHPHQWDQQRXQFHPHQW
5HFHLYHGDQXSGDWHRQ5HVHDUFK 'HYHORSPHQW
5HFHLYHGDQXSGDWHRQWKH&RPSOLDQFH3URJUDPPH
\$SSURYHGWKH6XVWDLQDELOLW\3ROLF\

LATE NOVEMBER

Approval of Budget

\$SSURYHGWKH%XGJHWIRU
5HFHLYHGDQXSGDWHUHODWLQJWRWKH8.'H²QHG%HQH²W 3HQVLRQ3ODQ
5HFHLYHGDQXSGDWHRQ/DWLQ\$PHULFD
5HYLHZHGWKHDQQXDO6XFFHVVLRQ3ODQQLQJ5HSRUW
5HYLHZHGWKH5HSRUWRQ6DOHV)RUFH([FHOOHQFH

RESPONSIBILITY & ACTIVITY CONTINUED

EFFECTIVENESS continued

Since the year end, we have also approved the Annual Report and Accounts for 2016 and have concluded that, taken as a whole, they are fair, balanced and understandable. We have approved the Notice of Annual General Meeting, recommended the final dividend to shareholders and have received and discussed the report on the effectiveness of the Board in 2016.

Each meeting was preceded by a meeting between the Chairman and the Non-Executive Directors without the Executive Directors and management in attendance. Unless otherwise stated, meetings are held in London, UK.

At each meeting, we approved the minutes of the previous meetings, reviewed matters arising and received reports and updates from the Chief Executive Officer, the Chief Financial Officer, the Chief Corporate Development Officer, the Chief Legal Officer and the Company Secretary. We also received reports from the chairmen of the Board Committees on the activities of these Committees since the previous meeting.

BOARD AND COMMITTEE ATTENDANCE

Director	Board Member since	Board meetings (8 meetings)	Audit Committee meetings (7 meetings)	Remuneration Committee meetings (6 meetings)	Nomination & Governance Committee meetings (5 meetings)	Ethics & Compliance Committee meetings (4 meetings)
Roberto Quarta	December 2013	8/8		6/6	2/5
Olivier Bohuon'	April 2011	6/8
Julie Brown	February 2013	8/8
Vinita Bali²	December 2014	7/8		5/6		4/4
lan Barlow	March 2010	8/8	7/7			4/4
Virginia Bottomley	April 2012	8/8		6/6	5/5
Erik Engstrom	1 January 2015	8/8	7/7
Robin Freestone	1 September 2015	8/8	7/7	6/6
Michael Friedman	April 2013	8/8				4/4
Brian Larcombe3	March 2002	7/8	5/7	5/6	5/5
Joseph Papa	August 2008	8/8	7/7	6/6		4/4

Olivier Bohuon missed two Board meetings due to illness.

2 Vinita Bali missed one Board meeting of the Remuneration Committee, on the same day, due to a prior appointment.

3 Brian Larcontee missed one Board neeting of the Audi Comnittee, and one neeting of the Remuneration Comnittee, all on he same de do a prior appirinent. He also nissed one meeting of the Audit Committee due to a funeral.

BOARD EFFECTIVENESS REVIEW

The last externally facilitated Board Effectiveness Review was carried out in 2015 by Independent Audit. Progress against the areas identified for attention last year are shown in the table below.

The Board Effectiveness Review in 2016 was internally facilitated by Brian Larcombe, Senior Independent Director assisted by the Company Secretary. The 2016 review comprised a questionnaire of the Board. This questionnaire focused on the progress made addressing the issues raised in previous Board Evaluations as well as looking into handled particular topics throughout the year. Brian Larcombe then conducted interviews with each Board member. He also chaired a meeting of the Non-Executive Directors specifically to discuss the performance of the Chairman.

In January 2017, he prepared a report, detailings, which he shared with the Chairman. The report was then discussed by the full Board in February 2017.

In discussion, we concluded that the Board was a committed and engaged Board and that there were good processes in place to enable the directors to fulfil their duties responsibly. We noted that a number of enhancements had been made to some of the year to enable the Board to perform more effectively and efficiently. Overall, we were satisfied that effective controls were in place.

However, we also observed that the finance of the Company had been below our expectations in 2016. This had led us to consider whether the Board was actually as effective as our processes implied. We then considered ways in which we as a Board could better support management to improve performance, help frame future action plans and to hold management more accountable for delivery. The areas for improvement we have identified for 2017 are:

Gaining a deeper understanding of why our competiors are enjoying superior growth rates compared with us so that we can help management identify, acquire and develop the resources they need to compete more effectively in our chosen markets.
Gaining a better understanding of the changing markets, focusing on identifying the different categories of customer and the pricing and reimbursement drivers which are in play, so that we can support and challenge management more effectively when they seek approval for projects to address these changing conditions.
Playing a more active role in supporting management develop the robust succession plans for senior executive positions.
Encouraging management to develop metrics and dashboards on a wider range of issues beyond financial metrics, particularly in the areas of Human Resources and R&D and ensuring that we regularly monitor progress against these metrics.

The areas for attention identified in the 2015 review have been addressed as follows:

ACTIONS DENTIFIED	ACTION TAKEN
Further opportunities to be identified to enable greater engagement There have been increased opportunities during the year tor Non- brought before the Board.	with the Non-Executive Drectors for them to provide input on matters Executive Directors to work more closely with management, providing guidance and expertise between Board meetings, particularly in the areas of determining appropriate measures for incentive plans and enhancing the risk management programme. However, both the Board and the executive team recognise that this is an area which could be developed further in 2017.
The development of a programme for Non-Executive Directors to get to know the business better outside the scheduled Board visits.	During the year, some of the Non-Executive Directors have accompanied our sales representatives on hospital visits, have met with surgeons using our products and observed operations. The Board recognises that this is an area which could be developed further in 2017.
Continuous review of the Board agenda to ensure sufficient time is devoted to HR and people related matters, risk and mitigations and the innovation pipeline.	A comprehensive review of agenda planning was carried out during the year to ensure that sufficient time was set aside at Board and Committee meetings throughout the year to discuss the matters identified at the previous Board Evaluation. In addition, the Strategy Review in September included sessions on our culture and values, the development of new products and our risk management programme.

RESPONSIBILITY & ACTIVITY CONTINUED

EFFECTIVENESS continued

BOARD DEVELOPMENT PROGRAMME

Our Board Development Programme is directed to the specific needs and interests of our Directors. We focus the development sessions on facilitating a greater awareness and understanding of our business rather than formal training in what it is to be a Director. We value our visits to the different Smith & Nephew sites around the world, where we meet with the local managers of our businesses and see the daily operations in action. Meeting our local managers helps us to understand the challenges they face and their plans to meet those challenges. We also take these opportunities to look at our products and in particular the new products being developed by our R&D teams. This direct contact with the business in the locations in which we operate around the world helps us to make investment and strategic decisions. Meeting our local managers also helps us when making succession planning decisions below Board level.

During the course of the year, we receive updates at the Board and Committee meetings on external corporate governance changes likely to impact the Company in the future. In 2016, we particularly focused on the new requirements under the European Market Abuse Regulations.

New Directors receive tailored induction programmes when they join the Board, although there were no new Directors appointed in 2016. All Non-Executive Directors are encouraged to visit our overseas businesses, if they happen to be travelling for other purposes. Our local management teams enjoy welcoming Non-Executive Directors to their business and it emphasises the interest the Board takes in all our operations. The Chairman regularly reviews the development needs of individual Directors and the Board as a whole.

SUCCESSION PLANNING

The Board is responsible for ensuring that there are effective succession plans in place to ensure the orderly appointment of Directors to the Board, as and when vacancies arise. The report from the Nomination & Governance Committee on pages 65 to 66 explains the process the Board and the Nomination & Governance Committee followed in 2016 to build a balanced Board for the future in undertaking the search for new Non-Executive Directors.

Building a successful executive team is the responsibility of the Chief Executive Officer, although this process is also overseen by the Board. The Chief Executive Officer and Chief Human Resources Officer present a report to the Board on Succession Planning on an annual basis, at which the performance and potential of members of the executive team are discussed and considered. The Board is also given a number of opportunities during the course of the year to meet key members of the executive team at the Strategy Review held annually in September and at the site visits held in November each year. Executive Officers and their direct reports also make regular presentations on different aspects of the business. The Board recognises the importance of getting to know the executive team below Board level both for the purpose of understanding the business better but also in order to plan for executive succession.

DEVELOPMENT ACTIVITIES

The following development sessions covering both the Smith & Nephew business and wider market issues were held during the year:

APRIL

Internal presentation on the competitive landscape facing the Company.

JULY

Presentation from our Auditor, KPMG, on External Reporting trends, covering changing accounting standards and updates on financial reporting, the SEC and corporate governance changes relating to Audit Committees and Auditors.

SEPTEMBER

Presentations from the entire executive team as part of the Board's Strategy Review.
Board discussion on Risk as part of the Board's Strategy discussions.

NOVEMBER

Visit to the Company's site in Andover, Massachusetts and meetings with the US executive team.
Series of presentations from our Sports Medicine management team and leading surgeons in the field on developments and innovation in sports medicine and looking at our response to changing demands in this area and the development of new products to address these demands.
Presentation on the US Wound business.

By order of the Board, on 22 February 2017

Roberto Quarta Chairman

NOMINATION & GOVERNANCE COMMITTEE REPORT

ACCOUNTABILITY

Nomination *RYHUQDQFH &RPPLWWHH

CURRENT MEMBERS IN 2016

	Member since	Meetings attended
Roberto Quarta (Chairman)	\$SULO	5/5
Virginia Bottomley	\$SULO	5/5
Brian Larcombe1	\$SULO	5/5

%ULDQ/DUFRPEHZLOOUHWLUHIURPWKH%RDUGDWWKH\$QQXDO*HQHUDO0HHWLQJ +HZLOOEHUHSODFHGDV6HQLRU,QGHSHQGHQW'LUHFWRUDQGPHPEHURIWKH 1RPLQDWLRQ *RYHUQDQFH&RPPLWWHHE\,DQ%DUORZ

2017 FOCUS

&RQWLQXHWKHVHDUFKIRUD1RQ([HFXWLYH'LUHFWRUWRMRLQWKH%RDUG GXULQJDQGWRUHSODFH-RVHSK3DSDDV&KDLUPDQRIWKH 5HPXQHUDWLRQ&RPPLWWHHRQKLVUHWLUHPHQWIURPWKH%RDUGLQ

'(\$56+\$5(+2/'(5

,DPSOHDVHGWRSUHVHQWWKHUHSRUWRIWKH1RPLQDWLRQ *RYHUQDQFH&RPPLWWHH

ROLE OF THE NOMINATION & GOVERNANCE COMMITTEE

2XUZRUNIDOOVLQWRWKHIROORZLQJWZRDUHDV

Board Composition

5HYLHZLQJWKHVL]HDQGFRPSRVLWLRQRIWKH%RDUG
2YHUVHHLQJ%RDUGVXFFHVVLRQSODQV
5HFRPPHQGLQJWKHDSSRLQWPHQWRI'LUHFWRUV
0RQLWRULQJ%RDUGGLYHUVLW\

Corporate Governance

2YHUVHHLQJJRYHUQDQFHDVSHFWVRIWKH%RDUGDQGLWV&RPPLWWHHV
2YHUVHHLQJWKHUHYLHZLQWRWKHHIIHFWLYHQHVVRIWKH%RDUG
&RQVLGHULQJDQGXSGDWLQJWKH6FKHGXOHRI0DWWHUV5HVHUYHGWRWKH %RDUGDQGWKH7HUPVRI5HIHUHQFHRIWKH%RDUG&RPPLWWHHV
0RQLWRULQJH[WHUQDOFRUSRUDWHJRYHUQDQFHDFWLYLWLHVDQGNHHSLQJ WKH%RDUGXSGDWHG
2YHUVHHLQJWKH%RDUG'HYHORSPHQW3URJUDPPHDQGWKHLQGXFWLRQ SURFHVVIRUQHZ'LUHFWRUV

7KHWHUPVRIUHIHUHQFHRIWKH1RPLQDWLRQ *RYHUQDQFH&RPPLWWHH GHVFULEHRXUUROHDQGUHVSRQVLELOLWLHVPRUHIXOO\DQGFDQEHIRXQGRQRXU ZHEVLWHZZZVPLWKQHSKHZFRP

ACTIVITIES OF THE NOMINATION & GOVERNANCE &200,77((,1\$1'6,1&(7+(<(\$5(1'

,QZHKHOGWKUHHSK\VLFDOPHHWLQJVDQGRQHYLDYRLFHFRQIHUHQFH (DFKPHHWLQJZDVDWWHQGHGE\DOOPHPEHUVRIWKH&RPPLWWHH 7KH&RPSDQ\6HFUHWDU\DOVRDWWHQGHGE\LQYLWDWLRQ,QEHWZHHQHDFK PHHWLQJYDULRXVGLVFXVVLRQVZHUHKHOGEHWZHHQPHPEHUVRIWKH 1RPLQDWLRQ *RYHUQDQFH&RPPLWWHHDQGWKHH[WHUQDOVHDUFKDJHQW 2XUSURJUDPPHRIZRUNLQZDVDVIROORZV

EARLY FEBRUARY

Activities related to the year end

&RQVLGHUHGDQGDSSURYHGWKHUHDSSRLQWPHQWRI'LUHFWRUV ZKRKDGFRPSOHWHGWKUHHRUVL[\HDUVªVHUYLFHDQGWKHDQQXDO DSSRLQWPHQWRI'LUHFWRUVVHUYLQJLQH[FHVVRIQLQH\HDUV
5HYLHZHGWKHFRPSRVLWLRQRIHDFKFRPPLWWHH
5HYLHZHGDQGQRWHGWKH6FKHGXOHRI0DWWHUV5HVHUYHGWRWKH %RDUGDQGWKH7HUPVRI5HIHUHQFHRIWKH%RDUG&RPPLWWHHV
5HYLHZHGWKHSURSRVHG*RYHUQDQFH6WUXFWXUHRI H[HFXWLYHFRPPLWWHHV

-8/<

Resignation of Julie Brown (via voice conference)

5HFHLYHGDQGDFFHSWHGWKHUHVLJQDWLRQRI-XOLH%URZQDV &KLHI)LQDQFLDO2I²FHU
\$JUHHGWREHJLQDVHDUFKIRUDQHZ&KLHI)LQDQFLDO2I²FHU

0,'129(0%(5

\$SSRLQWPHQWRIQHZ&KLHI)LQDQFLDO2I²FHU

– 5HVROYHGWRUHFRPPHQGWRWKH%RDUGWKDW*UDKDP%DNHUEH RIIHUHGWKHSRVLWLRQRI&KLHI)LQDQFLDO2I²FHU

GOVERNANCE

NOMINATION & GOVERNANCE COMMITTEE REPORT

ACCOUNTABILITY continued

LATE NOVEMBER

Appointment of Chief Financial Officer and Committee Chairs

Received an update that Graham Baker had accepted the position of Chief Financial Officer, effective 1 March 2017.
Resolved that Robin Freestone should replace lan Barlow as Chairman of the Audit Committee effective 1 March 2017,
Received an update regarding potential replacements for Joseph Papa as Chairman of the Remuneration Committee.
Received an update from the Chairman regarding the appointment of a new Senior Independent Director in 2017.

Since the year end, we have also discussed the future structure of the Board

CHIEF FINANCIAL OFFICER

In July 2016, Julie Brown resigned as Chief Financial Officer to take up an alternative position outside the Company, in January 2017. The Nomination & Governance Committee together with Olivier Bohuon (Chief Executive Officer) and Elga Lohler (Chief Human Resources Officer) and, advised by Russell Reynolds, undertook a search for her replacement. A number of candidates were interviewed by the Chief Executive Officer, the Chairman of the Board, the Chairman of the Audit Committee and a number of other Non-Executive Directors. Graham Baker will be joining the Board on 1 March 2017 as Chief Financial Officer. In the interim period, members of the finance team have been carrying out the duties of the Chief Financial Officer. They have been supported in this by Robin Freestone.

NON-EXECUTIVE DIRECTORS

Following a number of appointments in 2015, there were no changes to the Non-Executive Directors in 2016. In February 2016, we asked Brian Larcombe to remain as Senior Independent Director for an additional year in order to support me as Chairman, should I have been required to provide additional executive oversight during the Chief Executive Officer's period of illness. Now that Olivier Bohuon has fully returned to work and I will not be called upon to carry out any executive duties, Brian Larcombe will retire from the Board at the Annual General Meeting on 6 April 2017 after 16 years' service to the Company, a period during which we have all been indebted to him for his wise counsel, advice and insight. Ian Barlow will replace Brian Larcombe as Senior Independent Director on 6 April 2017, subject to his re-election at the Annual General Meeting.

lan Barlow has served on our Board as Chairman of the Audit Committee since 2010. He knows the Company well and has a sound understanding of the governance and regulatory requirements of the Board. He has also met some of our shareholders in his previous role.

Robin Freestone will take over the role of Chairman of the Audit Committee from lan Barlow with effect from 1 March 2017. Robin has served as a Non-Executive Director of the Board and member of the Audit Committee and the Remuneration Committee for a period of 18 months. Prior to his appointment to the Board, he was a well-regarded FTSE 100 Chief Financial Officer and he has brought relevant expertise and insight to the Audit Committee. His appointment as Chairman of the Audit Committee is designed to coincide with the appointment of Graham Baker to enable the Chief Financial Officer and Chairman of the Audit Committee to build a constructive working relationship together.

In August 2017, Joseph Papa will have served on the Board for nine years, the past six years as Chairman of the Remuneration Committee. We are in the process of conducting a search for his successor. The intention is

that we shall appoint a new Non-Executive Director who will join the Board and serve for a period of one year, before taking over from Joseph Papa as Chairman of the Remuneration Committee sometime in 2018, at which point Joseph Papa will retire from the Board. In selecting this new Board member, we are following a similar process as in previous years, advised by Zygos. Candidates will be interviewed by myself and a number of Non-Executive Directors. We will announce the appointment in due course, when a final decision has been made

DIVERSITY

We aim to have a Board which represents a wide range of backgrounds, skills and experiences. We also value a diversity of outlook, approach and style in our Board members. We believe that a balanced Board is better equipped to consider matters from a broader perspective and therefore come to decisions that have considered a wider range of issues and perspectives than would be the case in a more homogenous Board. Diversity is not simply a matter of gender, ethnicity or other easily measurable characteristics. Diversity of outlook and approach is harder to measure than gender or ethnicity but is equally important. A Board needs a range of skills from technical adherence to governance or regulatory matters to understand the business in which we operate. It needs some members with a long corporate memory and others who bring new insights from other fields. There needs to be both support and challenge on the Board as well as a balance of gender and commercial and international experience. When selecting new members for the Board, we take these considerations into account, as well as professional background. A new Board member needs to fit in with their fellow Board members, but also needs to provide a new way of looking at things.

In 2012, we stated that our expectation would be that by 2015, 25% of our Board would be female and we have met this expectation. During 2016, 27% of our Board was female. However, with the departures of Julie Brown and Brian Larcombe from the Board and the upcoming appointment of Graham Baker as the new Chief Financial Officer, this percentage will drop to 20%. We have always recognised that the number of Board members will fluctuate from time to time and that we would not necessarily expect to replace any retiring Director with a new Director of the same gender. We have continued to appoint our Directors on merit, valuing the unique contribution that they will bring to the Board, regardless of gender. We are still committed to the principles of diversity and would aim to meet or exceed the expected target of 25% of the Board being female as future appointments are made. Looking forward, we shall work towards a Board with 33% being female in line with the Hampton-Alexander Review.

GOVERNANCE

During the year, the Nomination & Governance Committee also addressed a number of governance matters. We also received updates from the Company Secretary on new developments in corporate governance and reporting in both the UK and Europe. We reviewed the independence of our Non-Executive Directors, considered potential conflicts of interest and the diversity of the Board and made recommendations concerning these matters to the Board.

Roberto Quarta Chairman of the Nomination & Governance Committee

ETHICS & COMPLIANCE COMMITTEE REPORT

(WKLFV &RPSOLDQFH &RPPLWWHH

CURRENT MEMBERS IN 2016

	Member since	Meetings attended
Michael A. Friedman (Chairman)	\$XJXVW
Vinita Bali	\$SULO
Ian Barlow	2FWREHU
Joseph Papa	\$SULO

2017 FOCUS

&RQWLQXHWRHQKDQFHRYHUVLJKWRITXDOLW\DQGUHJXODWRU\ PDWWHUVLQFOXGLQJUHYLHZRIGDWDIRUWUHQGVDQGSDWWHUQV DQGSURDFWLYHO\ZRUNLQJWRPLQLPLVHDVVRFLDWHGULVNV
&RQWLQXHWRUHYLHZSRWHQWLDOO\VLJQL²FDQWFRPSOLDQFH LVVXHVGHWHFWHGWKURXJKWKHDXGLWLQJPRQLWRULQJDQG UHSRUWLQJSURFHVVHV
&RQWLQXHWRUHYLHZFRPSOLDQFHSURFHVVHQKDQFHPHQWVDQG LPSURYHPHQWVLQFOXGLQJUHYLVHGVWDQGDUGVIRUKHDOWKFDUH SURIHVVLRQDOLQWHUDFWLRQDQGIRUGLVWULEXWRUVDQGDJHQWV

'(\$56+\$5(+2/'(5

,DPSOHDVHGWRSUHVHQWWKHUHSRUWRIWKH(WKLFV &RPSOLDQFH&RPPLWWHH

ROLE OF THE ETHICS & COMPLIANCE COMMITTEE

2XUZRUNIDOOVLQWRWKHIROORZLQJWZRJHQHUDODUHDV

Ethics & Compliance

2YHUVHHLQJHWKLFVDQGFRPSOLDQFHSURJUDPPHV
0RQLWRULQJHWKLFVDQGFRPSOLDQFHSROLFLHVDQG WUDLQLQJSURJUDPPHV
5HYLHZLQJFRPSOLDQFHSHUIRUPDQFHEDVHGRQPRQLWRULQJDXGLWLQJ DQGLQWHUQDODQGH[WHUQDOLQYHVWLJDWLRQVGDWD
5HYLHZLQJDOOHJDWLRQVRIVLJQL²FDQWFRPSOLDQFHLVVXHV
5HFHLYLQJUHSRUWVIURPWKH*URXSªV(WKLFV &RPSOLDQFH&RPPLWWHH PHHWLQJVDQGIURPWKH&KLHI&RPSOLDQFH2I²FHUDQGWKH&KLHI /HJDO2I²FHU

Quality Assurance and Regulatory Affairs (QARA)

2YHUVHHLQJWKHSURFHVVHVE\ZKLFKUHJXODWRU\DQGTXDOLW\ ULVNVUHODWLQJWRWKH&RPSDQ\DQGLWVRSHUDWLRQVDUHLGHQWL²HG DQGPDQDJHG
5HFHLYLQJDQGFRQVLGHULQJUHJXODUIXQFWLRQDOUHSRUWVDQG SUHVHQWDWLRQVIURPWKH3UHVLGHQWRI*OREDO2SHUDWLRQV693RI 4XDOLW\$VVXUDQFHDQGRWKHU2I²FHUV

7KHWHUPVRIUHIHUHQFHRIWKH(WKLFV &RPSOLDQFH&RPPLWWHHGHVFULEH RXUUROHDQGUHVSRQVLELOLWLHVPRUHIXOO\DQGFDQEHIRXQGRQRXUZHEVLWH ZZZVPLWKQHSKHZFRP

ACTIVITIES OF THE ETHICS & COMPLIANCE COMMITTEE IN 2016 \$1'6,1&(7+(<(\$5(1'

,QZHKHOGIRXUSK\VLFDOPHHWLQJV(DFKPHHWLQJZDVDWWHQGHGE\ DOOPHPEHUVRIWKH&RPPLWWHH7KH&RPSDQ\6HFUHWDU\WKH&KLHI/HJDO 2IILFHUWKH&KLHI&RPSOLDQFH2IILFHUWKH693RI4XDOLW\DQGWKH3UHVLGHQW RI*OREDO2SHUDWLRQVDOVRDWWHQGHGDOORIWKHPHHWLQJVE\LQYLWDWLRQ

2XUSURJUDPPHRIZRUNLQLQFOXGHGWKHIROORZLQJ

FEBRUARY

1RWHGWKDWWKH'HIHUUHG3URVHFXWLRQ\$JUHHPHQWHQWHUHGLQWR E\$UWKUR&DUHKDGH[SLUHGRQ-DQXDU\DQGWKHUHODWHG FULPLQDOFDVHZDVGLVPLVVHGRQ-DQXDU\
5HFHLYHGDQXSGDWHUHJDUGLQJWKH4\$5\$IXQFWLRQ
1RWHGWKH&RPSOLDQFH3URJUDPPHSHUIRUPDQFHPHDVXUHVIRU DQGUHYLHZHGXSGDWHRQ&KLQDFRPSOLDQFH

APRIL

5HFHLYHGDUHSRUWUHJDUGLQJWKHFRPSOLDQFHSURJUDPPHLQ,QGLD
5HFHLYHGDUHSRUWUHJDUGLQJWKH7KLUG3DUW\6HOOHU FRPSOLDQFHSURJUDPPH
5HFHLYHGDQXSGDWHGUHJDUGLQJWKH4\$5\$IXQFWLRQ

-8/<

– 5HFHLYHGDQXSGDWHUHJDUGLQJWKH4\$5\$IXQFWLRQ

ETHICS & COMPLIANCE COMMITTEE REPORT

ACCOUNTABILITY continued

NOVEMBER (IN BOSTON, MASSACHUSETTS)

Received an update regarding the QARA function.
Received a report on Product Complaints.
Received a report reviewing the lessons learned from the Mergers & Acquisitions process.
Received a report on distributor levels and growth and audit findings.

At each meeting we noted and considered the activities of compliance and enforcement agencies and investigation of possible improprieties. We also reviewed a report on the activities of the Group Ethics & Compliance Committee and reviewed the progress of the Global Compliance Programme.

Since the year end, we have also reviewed the work of the Group Ethics & Compliance Committee meeting held in November 2016, considered the compliance implications of recent acquisitions and continued our oversight of the QARA function.

OVERSIGHT OF QUALITY AND REGULATORY

Product safety is at the heart of our business. Regulatory authorities across the world enforce a complex series of laws and regulations that govern the design, development, approval, manufacture, labelling, marketing and sale of healthcare products. During the year, we oversaw the quality and regulatory activities of our business. At each meeting, we received a report on quality and regulatory matters from the SVP Quality and the President of Global Operations.

We reviewed the results of inspections carried out by the US Food and Drug Administration and other regulators and monitored the progress of improvement works required following some of these inspections, using a dashboard which highlighted progress being made. We also monitored the work being undertaken to help our manufacturing sites to prepare for future inspections.

We requested an in-depth report from management into our complaint handling process. This report explained our approach to complaint handling, our progress at reducing a backlog of complaints, how we categorised different complaints and how we trained our staff to recognise and escalate complaints received by the business appropriately.

We reviewed the results of quality audits undertaken during the year, approved follow up actions and monitored progress made to address these actions.

OVERSIGHT OF ETHICS & COMPLIANCE

'Doing the right thing' is part of our licence to operate. Business practices in the healthcare industry are subject to increasing scrutiny by government authorities in many countries. During the year, we oversaw the ethics and compliance activities of our business. At each meeting we received a report on ethics and compliance matters from the Chief Compliance Officer and a legal update on these matters from the Chief Legal Officer.

We continually review our compliance programme as it relates to third party sellers (such as distributors and sales agents), particularly in higher risk markets. This programme includes due diligence, contracts with compliance terms, compliance training, site assessments to check compliance controls and monitoring visits to review books and records. During the year, we undertook a review into our third party sellers in India

We ensure that comprehensive due diligence is carried out prior to an acquisition and throughout the acquisition process to ensure that new businesses are integrated into the Smith & Nephew compliance culture as soon and as consistently as possible and that all new employees are immediately aware of how we do things at Smith & Nephew. During the year, we received a report from management on the ethics and compliance lessons learned from our mergers and acquisitions process.

We oversee the employee compliance training programme, ensuring that all new employees are trained on our Code of Conduct, which sets out our basic legal and ethical principles for conducting business. We are updated on significant calls made to our whistle-blower line, which enables employees and members of the public to contact us anonymously through an independent provider (where allowed by local law) and are updated on any potentially significant improprieties and the Company's response. We received reports from management on the number of employees not completing required ethics and compliance training on time.

Michael A. Friedman Chairman of the Ethics & Compliance Committee

Audit Committee

CURRENT MEMBERS IN 2016

	Member since	Meetings attended
lan Barlow (Chairman)1,2	May 2010	111
Erik Engstrom	January 2015	7/1
Robin Freestone1,2	September 2015	7/1
Brian Larcombe3	January 2003	5/1
Joseph Papa	February 2011	717

Robin Freestone will be appointed Chairman of the Audit Committee on 1 March 2017, succeeding Ian Barlow, who will remain as a member of the Committee

2 Designated financial expert.

3 Brian Larcombe will be retiring from the Board and the Audit Committee at the Annual General Meeting to be held on 6 April 2017.

2017 FOCUS

To provide assurance over the next phase of the Group's ERP implementation across the North American businesses.
To extend the breadth of the assurance activities to include other risk areas such as product risk linking into the Group's top risk items.

DEAR SHAREHOLDER,

Your Audit Committee has had another busy year, meeting seven times. Aside from the routine matters that form the backbone of the Committee's activities, which are detailed in our report, we spent significant time monitoring a number of improvement initiatives summarised below.

We continue to benefit from an experienced set of Committee members comprising Robin Freestone and I, with significant accounting and finance backgrounds and our three other members, Joe Papa and Erik Engstrom, both serving Chief Executive Officers of large listed global companies and Brian Larcombe, a former FTSE 100 Chief Executive Officer and Chief Financial Officer. Brian will be retiring as a Director at this year's AGM and I would like to thank him for his support over many years on this Committee.

Our Head of Internal Audit, Jenny Morgan, is also leaving us this spring. She had done a great job in improving the capabilities and scope of our Internal Audit function and, on behalf of our Committee, I would like to thank her for her leadership and wish her well in her future career.

With the appointment of a new Chief Financial Officer, Graham Baker, and prospectively of a new Head of Internal Audit, I thought it was the right time after serving for seven years to hand on the Chairmanship of the Committee to Robin Freestone, a former Chief Financial Officer of a large listed company and now Audit Chairman of a listed company. I will remain as a member of the Committee. These changes are effective from 1 March 2017.

Our auditor, KPMG, has completed their second year's audit and continue to provide robust challenge and to suggest areas where we can improve our internal controls. You will see more detail of their work and conclusions in their audit report.

The main non-routine matters we dealt with during the year were:

Improvements in our risk management; led by Susan Swabey, -Company Secretary, who has assumed leadership for risk management, developing our processes for risk management, our approach to risk appetite and improving alignment between the Board's assessment of risk and the underlying risk registers generated by management. This work will continue into 2017 with deep dives planned for the Board to examine risk through the lens of our products and also considering risk from a cross functional perspective.
Further improvements in our internal controls to ensure -Sarbanes-Oxley compliance under robust challenge from our external auditors.
Monitoring the Company's Minimum Acceptable Practices (MAPs) for internal control which are most relevant to our smaller markets which are outside the scope of Sarbanes-Oxley. We have set a goal of 100% compliance (currently 95%, as self-assessed by management) with these practices and expect this to be achieved during 2017.
Monitoring the Finance Transformation project which is planned to deliver significant cost savings and improvements to internal control and be completed by the end of 2018.
Reviewing correspondence with the US Securities and Exchange Commission (SEC) ensuring any necessary action is reflected in the 2016 Annual Report and 20-F.

lan Barlow Chairman of the Audit Committee

\$8',7&200,77((5(3257

ACCOUNTABILITY FRQWLQXHG

52/(2)7+(\$8',7&200,77((

2XUZRUNIDOOVLQWRWKHIROORZLQJVL[DUHDV

Financial reporting

5HYLHZLQJVLJQL²FDQW²QDQFLDOUHSRUWLQJMXGJHPHQWVDQGDFFRXQWLQJ SROLFLHVDQGFRPSOLDQFHZLWKDFFRXQWLQJVWDQGDUGV
(QVXULQJWKHLQWHJULW\RIWKH²QDQFLDOVWDWHPHQWVDQGWKHLU FRPSOLDQFHZLWK8.DQG86VWDWXWRU\UHTXLUHPHQWV
(QVXULQJWKH\$QQXDO5HSRUWDQG\$FFRXQWVDUHIDLUEDODQFHGDQG XQGHUVWDQGDEOHDQGUHFRPPHQGLQJWKHLUDGRSWLRQE\WKH%RDUG
0RQLWRULQJDQQRXQFHPHQWVUHODWLQJWRWKH*URXSªV ²QDQFLDOSHUIRUPDQFH

Internal controls

0RQLWRULQJWKHHIIHFWLYHQHVVRILQWHUQDOFRQWUROVDQGFRPSOLDQFH ZLWKWKH8.&RUSRUDWH*RYHUQDQFH&RGHDQGWKH6DUEDQHV 2[OH\$FWVSHFL²FDOO\VHFWLRQVDQG
5HYLHZLQJWKHRSHUDWLRQRIWKH*URXSªVULVNPDQDJHPHQWSURFHVVHV DQGWKHFRQWUROHQYLURQPHQWRYHU²QDQFLDOULVNV

Risk management

2QEHKDOIRIWKH%RDUGUHYLHZLQJDQGHQVXULQJRYHUVLJKWRIWKH SURFHVVHVE\ZKLFKULVNVDUHPDQDJHGWKURXJKUHJXODUIXQFWLRQDO UHSRUWVDQGSUHVHQWDWLRQVDQGUHSRUWLQJDQ\LVVXHVDULVLQJRXWRI VXFKUHYLHZVWRWKH%RDUG
5HYLHZLQJWKHSURFHVVXQGHUWDNHQDQGGHHSGLYHZRUNUHTXLUHG WRFRPSOHWHWKH9LDELOLW\6WDWHPHQWDQGUHFRPPHQGLQJLWVDGRSWLRQ WRWKH%RDUG

Fraud and whistle-blowing

5HFHLYLQJUHSRUWVRQWKHSURFHVVHVLQSODFHWRSUHYHQWIUDXGDQG WRHQDEOHZKLVWOHEORZLQJ
,IUHTXLUHGUHFHLYLQJUHSRUWVRIIUDXGLQFLGHQWV

Internal audit

\$JUHHLQJ,QWHUQDO\$XGLWSODQVDQGUHYLHZLQJUHSRUWVRI,QWHUQDO \$XGLWZRUN
0RQLWRULQJWKHHIIHFWLYHQHVVRIWKH,QWHUQDO\$XGLWIXQFWLRQ
5HYLHZLQJWKHFRQWUROREVHUYDWLRQVPDGHE\WKH,QWHUQDO\$XGLWRU WKHDGHTXDF\RIPDQDJHPHQWªVUHVSRQVHWRUHFRPPHQGDWLRQV DQGWKHVWDWXVRIDQ\XQUHPHGLDWHGDFWLRQV

External audit

2YHUVHHLQJWKH%RDUGªVUHODWLRQVKLSZLWKWKHH[WHUQDODXGLWRU
0RQLWRULQJDQGUHYLHZLQJWKHLQGHSHQGHQFHDQGSHUIRUPDQFH RIWKHH[WHUQDODXGLWRUDQGHYDOXDWLQJWKHLUHIIHFWLYHQHVV
0DNLQJUHFRPPHQGDWLRQVWRWKH%RDUGIRUWKHDSSRLQWPHQWRU UHDSSRLQWPHQWRIWKHH[WHUQDODXGLWRU

7KHWHUPVRIUHIHUHQFHRIWKH\$XGLW&RPPLWWHHGHVFULEHRXUUROH DQGUHVSRQVLELOLWLHVPRUHIXOO\DQGFDQEHIRXQGRQRXUZHEVLWH ZZZVPLWKQHSKHZFRPZKHUHIXUWKHULQIRUPDWLRQFDQEHIRXQG IRUSHUPLWWHGQRQDXGLWVHUYLFHV

\$&7,9,7,(62)7+(\$8',7&200,77((,1\$1'6,1&( 7+(<(\$5(1'

,QZHKHOGILYHSK\VLFDOPHHWLQJVDQGWZRPHHWLQJVYLDYRLFH FRQIHUHQFH(DFKPHHWLQJZDVDWWHQGHGE\DOODSSRLQWHGPHPEHUVRIWKH &RPPLWWHHH[FHSW%ULDQ/DUFRPEHZKRPLVVHGWZRPHHWLQJVWKLV\HDU? 7KH&KDLUPDQWKH&KLHI([HFXWLYH2IILFHUWKH&KLHI)LQDQFLDO2IILFHU WKH+HDGRI,QWHUQDO\$XGLWWKHH[WHUQDODXGLWRUDQGNH\PHPEHUVRIWKH ILQDQFHIXQFWLRQWKH&RPSDQ\6HFUHWDU\DQG'HSXW\&RPSDQ\6HFUHWDU\ DOVRDWWHQGHGE\LQYLWDWLRQ:HDOVRPHWZLWKWKHH[WHUQDODXGLWRUDQGWKH ,QWHUQDO\$XGLWRUZLWKRXWPDQDJHPHQWSUHVHQW2XUSURJUDPPHRIZRUNLQ ZDVDVIROORZV

EARLY FEBRUARY

Approval of Preliminary Announcement

5HYLHZHGWKHUHVXOWVIRUWKHIXOO\HDUDQGWKHSUHOLPLQDU\ DQQRXQFHPHQWDQGUHFRPPHQGHGWKHPIRUDGRSWLRQE\ WKH%RDUG
5HYLHZHGWKHHIIHFWLYHQHVVRI²QDQFLDOFRQWUROVDQGRIWKHULVN PDQDJHPHQWSURFHVVDQGLGHQWL²HGDUHDVIRULPSURYHPHQW LQ
5HYLHZHGFRPSOLDQFHZLWK8.&RUSRUDWH*RYHUQDQFHDQG86 &RUSRUDWH*RYHUQDQFH
5HFHLYHGWKH,QWHUQDO\$XGLW5HSRUWDQGDSSURYHGWKH,QWHUQDO \$XGLWSURJUHVVUHSRUWIRU
5HFHLYHGDUHSRUWIURP,QWHUQDO\$XGLWUHJDUGLQJRSHUDWLRQV LQ&KLQD
5HFHLYHGWKH4XDOLW\$VVXUDQFH5HSRUWDQGDSSURYHGWKH4XDOLW\ \$VVXUDQFHZRUNSURJUDPPHIRU
5HFHLYHGWKHIUDXGUHSRUWDQGUHYLHZHGZKLVWOH EORZLQJSURFHGXUHV
5HFHLYHGWKH9LDELOLW\6WDWHPHQWDQGFRQ²UPHGWKDWWKH &RPSDQ\LVDYLDEOHHQWLW\IRUWKHDVVHVVHGIRUWKFRPLQJWKUHH \HDUSHULRG
&RQ²UPHGWKHLQGHSHQGHQFHRI.30*DVH[WHUQDODXGLWRU
\$SSURYHG.30*H[WHUQDODXGLWIHHVDQGWKHSROLF\IRUDSSURYDO RI.30*QRQDXGLWWD[IHHVDQGQRWHGIHHVSDLGWRRWKHUPDMRU DXGLW²UPV

/\$7()(%58\$5<9,\$92,&(&21)(5(1&(

Approval of Financial Statements

5HYLHZHGDQGDSSURYHGWKH\$QQXDO5HSRUWDQG\$FFRXQWV IRUKDYLQJDJUHHGWKDWWKH\ZHUHIDLUEDODQFHGDQG XQGHUVWDQGDEOHDQGUHFRPPHQGHGWKHPIRUDGRSWLRQE\ WKH%RDUG
&RQVLGHUHGWKHHIIHFWLYHQHVVRIWKHH[WHUQDODXGLWRUDQG FRQFOXGHGWKDWWKHLUZRUNKDGEHHQHIIHFWLYH
5HYLHZHGWKHLPSOHPHQWDWLRQSURFHVVIRU0LQLPXP\$FFHSWDEOH 3UDFWLFHVIRUWKH)LQDQFHIXQFWLRQDQGRWKHUFRQWUROLQLWLDWLYHV

APRIL

Reviewed the control themes and observations of the external auditor and concluded that they had met expectations.
Approved the Sustainability Report and its verification process.
Received a corporate governance update for 2017 corporate reporting.

MAY (VIA VOICE CONFERENCE)

Approval of Q1 Trading Statement

Reviewed the Q1 2016 Trading Report and approved the 01 announcement.
Approved the Company's policy and report on Conflict Minerals for submission to the NYSE.

JULY

Approval of H1 results

Reviewed the results for the first half 2016 and approved the H1 announcement
Reviewed and approved the external auditor's Integrated Audit Plan for 2016.
Received an update regarding the progress made on moving UK operations to Croxley Park.
Reviewed accounting for disposal of Gynaecology business.

EARLY NOVEMBER (IN BOSTON, MASSACHUSETTS)

Approval of Q3 Trading Statement

Reviewed the Q3 2016 Trading Report and approved the Q3 announcement.
Reviewed the Progress Reports from the external auditor on Q3 2016 and from Internal Audit on their work.
Received an update on new reporting, regulatory and governance requirements.
Approved the risk management process.
Approved the year-end certification process.
Received a report regarding Cyber Risk.
Reviewed the progress of recent transactions against expectations at the time of the acquisition.

LATE NOVEMBER

Review of Functional Reports

Received and discussed a report on the Finance Transformation project.
Received a report from the Internal Audit function focusing on instances of fraud.
Reviewed and approved the layout and design of the Annual Report 2016.
Received and discussed a report on Group tax strategy and management of risk.
Reviewed the process being undertaken to support the making of the Viability Statement.
Considered and approved critical accounting policies and judgements in advance of the 2016 year end.
Received an update from KPMG on the external audit and preliminary Sarbanes-Oxley findings.

Since the year end, we have also reviewed the Annual Report and Accounts for 2016 and have concluded that taken as a whole, they are fair, balanced and understandable and have advised the full Board accordingly. In coming to this conclusion, we have considered the description of the Group's strategy and key risks, the key elements of the business model, which is set out on pages 8 to 9, risks and the key performance indicators and their link to the strategy.

\$8',7&200,77((5(3257

ACCOUNTABILITY FRQWLQXHG

6,*1,),&\$170\$77(565(/\$7('727+(),1\$1&,\$/67\$7(0(176

:HFRQVLGHUHGWKHIROORZLQJNH\DUHDVRIMXGJHPHQWLQUHODWLRQWRWKH DFFRXQWVDQGDWHDFKKDOI\HDUDQGTXDUWHUO\WUDGLQJUHSRUWZKLFKZH GLVFXVVHGLQDOOFDVHVZLWKPDQDJHPHQWDQGWKHH[WHUQDODXGLWRU

Valuation of inventories

\$IHDWXUHRIWKHRUWKRSDHGLFEXVLQHVVPRGHOZKRVHILQLVKHGJRRGV LQYHQWRU\PDNHVXSRIWKH*URXSWRWDOILQLVKHGJRRGVLQYHQWRU\?LV WKHKLJKOHYHORISURGXFWLQYHQWRU\UHTXLUHGVRPHRIZKLFKLVORFDWHG DWFXVWRPHUSUHPLVHVDQGLVDYDLODEOHIRUFXVWRPHUVªLPPHGLDWHXVH &RPSOHWHVHWVRISURGXFWLQFOXGLQJODUJHDQGVPDOOVL]HVKDYHWR EHPDGHDYDLODEOHLQWKLVZD\7KHVHVL]HVDUHXVHGOHVVIUHTXHQWO\ WKDQVWDQGDUGVL]HVDQGWRZDUGVWKHHQGRIWKHSURGXFWOLIHF\FOHDUH LQHYLWDEO\LQH[FHVVRIUHTXLUHPHQWV\$GMXVWPHQWVWRFDUU\LQJYDOXHDUH WKHUHIRUHUHTXLUHGWREHPDGHWRRUWKRSDHGLFLQYHQWRU\WRDQWLFLSDWH WKLVVLWXDWLRQ

Our action

\$WHDFKTXDUWHUHQGZHUHFHLYHGUHSRUWVIURPDQGGLVFXVVHGZLWK PDQDJHPHQWWKHOHYHORISURYLVLRQLQJDQGPDWHULDODUHDVDWULVN 7KHSURYLVLRQLQJOHYHOZDVDW'HFHPEHUDVDW 'HFHPEHU?:HFKDOOHQJHGWKHEDVLVRIWKHSURYLVLRQVDQG FRQFOXGHGWKDWWKHSURSRVHGOHYHOVZHUHDSSURSULDWHDQGKDYHEHHQ FRQVLVWHQWO\HVWLPDWHG

Liability provisioning

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

Our action

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©SURYLVLRQVªLQ1RWHLQ PLOOLRQLQ?ZHUHDSSURSULDWHLQWKHFLUFXPVWDQFHV

Impairment

,QFDUU\LQJRXWLPSDLUPHQWUHYLHZVRIJRRGZLOOLQWDQJLEOHDVVHWVDQG SURSHUW\SODQWDQGHTXLSPHQWDQXPEHURIVLJQLILFDQWDVVXPSWLRQV KDYHWREHPDGHZKHQSUHSDULQJFDVKIORZSURMHFWLRQV7KHVHLQFOXGH WKHIXWXUHUDWHRIPDUNHWJURZWKGLVFRXQWUDWHVWKHPDUNHWGHPDQGIRU WKHSURGXFWVDFTXLUHGWKHIXWXUHSURILWDELOLW\RIDFTXLUHGEXVLQHVVHVRU SURGXFWVOHYHOVRIUHLPEXUVHPHQWDQGVXFFHVVLQREWDLQLQJUHJXODWRU\ DSSURYDOV,IDFWXDOUHVXOWVVKRXOGGLIIHURUFKDQJHVLQH[SHFWDWLRQV DULVHLPSDLUPHQWFKDUJHVPD\EHUHTXLUHGZKLFKZRXOGDGYHUVHO\ LPSDFWRSHUDWLQJUHVXOWV

Our action

:HUHYLHZHGPDQDJHPHQWªVUHSRUWVRQWKHNH\DVVXPSWLRQVZLWK UHVSHFWWRJRRGZLOODFTXLVLWLRQLQWDQJLEOHDVVHWVDQGLQYHVWPHQWVLQ DVVRFLDWHV¥SDUWLFXODUO\WKHIRUHFDVWIXWXUHFDVKIORZVDQGGLVFRXQW UDWHVXVHGWRPDNHWKHVHFDOFXODWLRQV:HQRWHGWKHLPSDLUPHQW FKDUJHRIPLOOLRQWKDWKDVEHHQUHFRUGHGLQWKHSULQFLSDO FRPSRQHQWRIZKLFKUHODWHGWRWKH2DVLVEUDQG:HFKDOOHQJHGWKHNH\ DVVXPSWLRQVXVHGLQWKHDVVHVVPHQWHVSHFLDOO\LQOLJKWRIWKLVEHLQJD VHFRQGLPSDLUPHQWFKDUJHDQGFRQFOXGHGWKDWWKHH[WHUQDOIDFWVWKDW KDGLPSDFWHGPDQDJHPHQWMXGJHPHQWZHUHDSSURSULDWHO\FRQVLGHUHG :HKDYHDOVRFRQVLGHUHGWKHGLVFORVXUHVXUURXQGLQJWKHVHUHYLHZV DQGFRQFOXGHGWKDWWKHUHYLHZDQGGLVFORVXUHZHUHDSSURSULDWH

Taxation

7KH*URXSRSHUDWHVLQQXPHURXVWD[MXULVGLFWLRQVDURXQGWKHZRUOG DQGDWDQ\JLYHQWLPHWKH*URXSKDV\HDUVRXWVWDQGLQJDQGLVLQYROYHG LQGLVSXWHVDQGWD[DXGLWV,QHVWLPDWLQJWKHSUREDELOLW\DQGDPRXQW RIDQ\WD[FKDUJHPDQDJHPHQWWDNHVLQWRDFFRXQWWKHYLHZVRI LQWHUQDODQGH[WHUQDODGYLVHUVDQGXSGDWHVWKHDPRXQWRISURYLVLRQ ZKHQHYHUQHFHVVDU\

Our action

:HDQQXDOO\UHYLHZRXUSURFHVVHVDQGDSSURYHWKHSULQFLSOHV IRUPDQDJHPHQWRIWD[ULVNV:HUHYLHZTXDUWHUO\UHSRUWVIURP PDQDJHPHQWHYDOXDWLQJH[LVWLQJULVNVDQGWD[SURYLVLRQV%DVHGRQD WKRURXJKUHSRUWIURPPDQDJHPHQWRIWD[OLDELOLWLHVDQGRXUFKDOOHQJHRI WKHEDVLVRIDQ\WD[SURYLVLRQVUHFRUGHGZHFRQFOXGHGWKDWWKHOHYHOV RISURYLVLRQVDQGGLVFORVXUHVZHUHDSSURSULDWH

Business combinations

7KH*URXSKDVLGHQWLILHG©JURZWKWKURXJKDFTXLVLWLRQVªDVRQHRILWV 6WUDWHJLF3ULRULWLHV

Our action

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

EXTERNAL AUDITOR

Independence of external auditor

The independence of our external auditor is critical for the integrity of the audit. Following a competitive tender in 2014, KPMG LLP were appointed the Company's external auditor for the 2015 audit replacing Ernst & Young LLP who had been the Company's auditor for a number of years. We are satisfied that KPMG LLP are fully independent from the Company's management and free from conflicts of interest. Our Auditor Independence Policy, which ensures that this independence is maintained, is available on the Company's website.

We believe that the implementation of this policy helps ensure that auditor objectivity and independence is safeguarded. The policy also governs our approach when we require our external auditor to carry out non-audit services, and all such services are strictly governed by this policy.

The Auditor Independence Policy also governs the policy regarding audit partner rotation with the expectation that the audit partner will rotate at least every five years. The Audit Committee confirms it has complied with the provision of the Competition and Markets Authority Order which came into effect from 1 January 2015.

Effectiveness of external auditors

We conducted a review into the effectiveness of the external audit as part of the 2016 year end process, in line with previous years. We sought the views of key members of the finance management team, considered the feedback from this process and shared it with management.

During the year, we also considered the inspection reports from the Audit Oversight Boards in the UK and US and determined that we were satisfied with the audit quality provided by KPMG.

Overall therefore, we concluded that KPMG had carried out their audit for 2016 effectively.

Appointment of external auditors at Annual General Meeting

Resolutions will be put to the Annual General Meeting to be held on 6 April 2017 proposing the re-appointment of KPMG LLP as the Company's auditor and authorising the Board to determine their remuneration, on the recommendation of the Audit Committee.

Disclosure of Information to the Auditor

In accordance with Section 418 of the Companies Act 2006, the Directors serving at the time of approving the Directors' Report confirm that, to the best of their knowledge and belief, there is no relevant audit information of which the auditor, KPMG, are unaware and the Directors also confirm that they have taken reasonable steps to be aware of any relevant audit information and, accordingly, to establish that the auditor is aware of such information.

Non-Audit Fees Paid to the Auditor

Non-audit fees are subject to approval in line with the Auditor Independence Policy which is reviewed annually and forms part of the terms of reference of the Audit Committee.

The Audit Committee recognise the importance of the independence of the external auditor and ensures that the Auditor's independence should not be breached. The Audit Committee ensures that the Auditor does not receive a fee from the Company or its subsidiaries that would be deemed large enough to impact its independence or be deemed a contingent fee. The total fees for permitted non-audit services shall be no more than 70% of the average of the fees paid in the last three consecutive financial years for the statutory audits of the Company and its subsidiaries. In light of the Financial Reporting Council's revised Ethical Standards, we have revised our Auditor Independence Policy.

Any pre-approved aggregate, individual amounts up to \$25,000 may be authorised by the Senior Vice-President Tax and Senior Vice-President Group Finance respectively and amounts up to \$50,000 by the Chief Financial Officer. Any individual amount over \$50,000 must be preapproved by the Chairman of the Audit Committee. If unforeseen additional permitted services are required, or any which exceed the amounts approved, again pre-approval by the Chairman of the Audit Committee is required.

The following reflects the non-audit fees incurred with KPMG in 2016:

Both the below pieces of work were approved by the Chairman of the Audit Committee

		2016 \$ million
	Tax compliance services Assistance with tax compliance in a number of smaller markets; Singapore, Malaysia, Thailand, India and Finland.	0.10
Pension advice	Advice on the impact of changes to pension benefits for the UK defined benefit scheme.	0.50
Other		0.04

Tax compliance services conducted by KPMG will be discontinued in 2017 with the exception of countries where it is required by law for the auditor to conduct these services.

The ratio of non-audit fees to audit fees for the year ended 31 December 2015 was 0.25. The ratio of non-audit fees to audit fees for the year ended 31 December 2016 is 0.25.

Full details are shown in Note 3.2 of the Notes to the Group accounts.

FINANCIAL REVIEW

RISK

AUDIT COMMITTEE REPORT

ACCOUNTABILITY continued

Audit Fees paid to the Auditor

Fees for professional services provided by KPMG LLP, the Group's independent auditors in each of the last two fiscal years, in each of the following categories were:

	2016 \$ million	2015 \$ million
Audit	4	ব
Audit-related fees
Total	4	ব

INTERNAL AUDIT

Our Internal Audit function reports directly to the Audit Committee. The Internal Audit function carries out work across the Group acting as a third line of defence. The audit coverage is based on risk with the focus for 2016 being assurance over the Group's SAP implementation, finance transformation, US inventory processes and core financial controls across the Group. Non-financial reviews included Group Complaints and Compliance in addition to an increased focus on IT audit and post implementation reviews.

During the year, they completed 40 reviews across the business. The Audit Committee receives a quarterly report of the activities of the Internal Audit function and reviews the results of the Internal Audit reports, looking in detail at any reports with unsatisfactory ratings. We also receive a quarterly report detailing any un-remediated and overdue control recommendations and oversee the effective and timely remediation of any recommendations.

Of particular note in 2016 were the Internal Audit reviews conducted in China and the LATAM region. Each review was discussed at the Audit Committee with presentations from Internal Audit and Executive Regional management. Remediation of agreed actions is monitored by the Audit Committee at each Committee meeting. There has been continued focus on Emerging Markets, with reviews of Brazil, Mexico, Saudi Arabia, Turkey and Russia.

In 2017, we will continue to monitor Internal Audit's scope of work and operational methods to ensure that it continues to play a full role in providing assurance over the Group's identification and management of risk and its associated controls.

RISK MANAGEMENT PROGRAMME

Whilst the Board is responsible for ensuring oversight of strategic risks relating to the Company, determining an appropriate level of risk appetite, and monitoring risks through a range of Board and Board Committee processes, the Audit Committee is responsible for ensuring oversight of the processes by which operational risks, relating to the Company and its operations are managed and for reviewing financial risks and the operating effectiveness of the Group's risk management process.

During the year, we reviewed our risk management processes at our meetings in February, July and November. We approved the risk management programme for 2016 and monitored performance against that plan specifically reviewing the work undertaken by the risk champions across the Group, identifying the risks which could impact their areas of our business. We also reviewed and evaluated the work undertaken by the executive team in identifying the specific risks which could impact the strategic priorities and the key products in their area.

We also undertook deep dives into key risks impacting our business including the economic conditions impacting our business in China, our plans for addressing IT and Cyber Security risks, our processes for handling of product complaints, and the impact of moving many of our corporate head office roles out of London.

Since the year end, we have reviewed a report from the Internal Audit function into the effectiveness of the risk management programme throughout the year. We considered the principal risks, the actions taken by management to review those risks and the Board risk appetite in respect of each risk.

We concluded that the risk management process during 2016 and up to the date of approval of this Annual Report was effective. Work will continue in 2017 and beyond to continue to enhance the process.

See pages 42 to 46 for further information on our risk management process.

VIABILITY STATEMENT

We also reviewed management's work in conducting a robust assessment of those risks which would threaten our business model and the future performance or liquidity of the Company, including its resilience to the threats of viability posed by those risks in severe but plausible scenarios. This assessment included stress and sensitivity analyses of these risks to enable us to evaluate the impact of a severe but plausible combination of risks. We then considered whether additional financing would be required in such eventualities. Based on this analysis, we recommended to the Board that it could approve and make the Viability Statement on page 47.

GOING CONCERN

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the 'Financial review and principal risks' section on pages 39 to 46. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described under 'Commentary on the Group cash flow statement' section set out on page 114.

In addition, the Notes to the Group accounts include the Group's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposure to credit risk and liquidity risk.

The Group has considerable financial resources and its customers and suppliers are diversified across different geographic areas. As a consequence, the Directors believe that the Group is well placed to manage its business risk successfully despite the on-going uncertain economic outlook.

The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis for accounting in preparing the annual financial statements.

Management also believes that the Group has sufficient working capital for its present requirements.

EVALUATION OF INTERNAL CONTROLS

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a–15 (f) and 15d-15(f) under the US Securities Exchange Act of 1934.

There is an established system of internal control throughout the Group and our country business units. The main elements of the internal control framework are:

The management of each country is responsible for the establishment and review of effective financial controls within their business unit
The Group Finance manual sets out financial and accounting policies. The Group's Minimum Acceptable Practices (MAPs) have been enhanced further to cover financial and operational controls. The business is required to self-assess their level of compliance with the MAPs and remediate any gaps. MAPs compliance is validated by both external audit and Internal Audit visits.
During the year there has been an exercise to standardise and simplify our core financial controls. In 2017 there will be a focus on the use of data analytics, automation and robotic tools to strengthen controls further.
The Internal Audit function agrees an annual work plan and scope of work with the Audit Committee.
The Audit Committee reviews reports from Internal Audit on their findings on internal financial controls, including compliance with MAPs and from the Senior Vice President, Group Finance and the heads of the Financial Controls and Compliance, Taxation and Treasury functions.
The Audit Committee reviews regular reports from the Financial Controls and Compliance function with regard to compliance with the Sarbanes-Oxley Act including the scope and results of management's testing and progress regarding any remediation.
The Audit Committee reviews the Group whistle-blower procedures.
The Audit Committee received and reviewed a report on the progress of the Finance Transformation during 2016 and the mitigation of the associated risks.

This system of internal control has been designed to manage rather than eliminate material risks to the achievement of our strategic and business objectives and can provide only reasonable, and not absolute, assurance against material misstatement or loss. Because of inherent limitation, our internal controls over financial reporting may not prevent or detect all misstatements. In addition, our projections of any evaluation of effectiveness in future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Entities where the Company does not hold a controlling interest have their own processes of internal controls similar to that of the Company.

We have reviewed the system of internal financial control and satisfied ourselves that we are meeting the required standards both for the year ended 31 December 2016 and up to the date of approval of this Annual Report. No concerns were raised with us in 2016 regarding possible improprieties in matters of financial reporting.

This process complies with the Financial Reporting Council's 'Guidance on Risk Management, Internal Control and Related Financial and Business Reporting' on the UK corporate governance code and additionally contributes to our compliance with the obligations under the Sarbanes-Oxley Act and other internal assurance activities.

There has been no change during the period covered by this Annual Report that has materially affected, or is reasonably likely to materially affect, the Group's internal control over financial reporting.

The Board is responsible overall for reviewing and approving the adequacy and effectiveness of the risk management framework and the system of internal controls over financial, operational (including quality management and ethical compliance) processes operated by the Group. The Board has delegated responsibility for this review to the Audit Committee. The Audit Committee, through the Internal Audit function, reviews the adequacy and effectiveness of internal control procedures and identifies any weaknesses and ensures these are remediated within agreed timelines. The latest review covered the financial year to 31 December 2016 and included the period up to the approval of this Annual Report.

The main elements of this annual review are as follows

The Chief Executive Officer and the former Chief Financial Officer evaluated the effectiveness of the design and operation of the Group's disclosure controls and procedures as at 31 December 2016. Based upon this evaluation, the Chief Executive Officer concluded on 22 February 2017 that the disclosure controls were effective as at 31 December 2016.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Management assessed the effectiveness of the Group's internal control over financial reporting as at 31 December 2016 in accordance with the requirements in the US under s404 of the Sarbanes-Oxley Act. In making that assessment, they used the criteria set forth by the Committee of Sponsoring Organisations of the Treadway Commission in Internal Control-Integrated Framework. Based on their assessment, management concluded and reported that, as at 31 December 2016, the Group's internal control over financial reporting is effective based on those criteria.
Having received the report from management, the Audit Committee reports to the Board on the effectiveness of controls.
KPMG LLP, an independent registered public accounting firm issued an audit report on the Group's internal control over financial reporting as at 31 December 2016.

CODE OF ETHICS FOR SENIOR FINANCIAL OFFICERS

We have adopted a Code of Ethics for Senior Financial Officers, which applies to the Chief Executive Officer, the Chief Financial Officer, the Senior Vice President Group Finance and the Group's senior financial officers. There have been no waivers to any of the Code's provisions nor have there been any amendments to the Code during 2016 or up until 22 February 2017. A copy of the Code of Ethics for Senior Financial Officers can be found on our website at www.smith-nephew.com

In addition, every individual in the finance function certifies to the Chief Financial Officer that they have complied with the Finance Code of Conduct.

EVALUATION OF EFFECTIVENESS OF THE AUDIT COMMITTEE

The effectiveness of the Audit Committee was evaluated as part of the review into the effectiveness of the Board conducted at the end of 2016.

This review found that the Audit Committee was becoming increasingly effective, but recognising the increased responsibilities of the Audit Committee suggested that the time needed for each meeting could he increased

',5(&7256ª5(081(5\$7,215(3257

REMUNERATION

DEAR SHAREHOLDER,

2016 was a year when we faced challenges including pricing pressures, currency headwinds and disappointing performance in China and the Gulf. In other areas, particularly Sports Medicine and Knee Implants, we maintained a strong momentum and generally made good progress as we continued to execute on our five strategic priorities. The performance on the measures we currently use in our variable plans was as follows:

Revenue at \$4,669 million showed reported growth of 1% XQGHUO\LQJ
7UDGLQJSUR²WDWPLOOLRQVKRZHGUHSRUWHGJURZWKRI
7UDGLQJFDVK³RZZDVPLOOLRQZLWKWKH\HDUWUDGLQJSUR²WWR FDVKUDWLRRI
5HYHQXHVIURP(PHUJLQJ0DUNHWVZHUHPLOOLRQ
Share price improved from 1,208p to 1,221p during the year.

\$VDUHVXOWRIWKHILQDQFLDOSHUIRUPDQFHLQDQGRYHUWKHWKUHH year period ending 31 December 2016, Olivier Bohuon has received DFDVKERQXVRIRIVDODU\DQ(TXLW\,QFHQWLYHDZDUGRI RIVDODU\DQGWKH3HUIRUPDQFH6KDUH\$ZDUGYHVWHGDWRIPD[LPXP Whilst the Remuneration Committee recognises that Olivier Bohuon met or exceeded his business targets during the year, which would have OHGWRDFDVKERQXVRIZHDUHDOVRPLQGIXOWKDWWKHILQDQFLDO targets have not been met. We have therefore exercised our discretion downwards to reduce the total cash bonus by 10%. In aggregate this has UHVXOWHGLQDUHGXFWLRQRI2OLYLHU%RKXRQªVWRWDOUHPXQHUDWLRQRIRYHU PLOOLRQRUUHODWLYHWR)XUWKHUGHWDLOVDUHVHWRXWRQSDJH

2016 Annual General Meeting

<RXZLOODOOEHDZDUHWKDWZHRQO\UHFHLYHGWKHVXSSRUWRIRI shareholders on the Remuneration Report vote at the 2016 Annual General Meeting. This was a great disappointment to the Remuneration Committee and the Board as a whole, as we genuinely believed that H[HUFLVLQJRXUGLVFUHWLRQZDVLQVKDUHKROGHUVªLQWHUHVWDQGZDVWKHULJKW thing to do, better aligning rewards with the performance of the Company DQGWKHVKDUHKROGHUH[SHULHQFHIRUDOOSODQSDUWLFLSDQWV+RZHYHU of our shareholders disagreed and this led us to critically review our UHPXQHUDWLRQDUUDQJHPHQWVGXULQJ:HXQGHUWRRNDQH[WHQVLYH exercise talking to our senior executives to understand their views on our remuneration arrangements and in particular the extent to which they successfully drive performance across the strategic aims we have identified for the future success of the Company.

We also engaged with the holders of over 40% of our shares to talk to them about their views of our remuneration arrangements. We reached out to our top 20 shareholders and to all institutional investors who had contacted us before or around the time of the AGM to talk about our GHFLVLRQVDQGWKHVXEVHTXHQWVKDUHKROGHUYRWH:HDUHH[WUHPHO\ grateful to the shareholders who engaged with us and shared their views. \$VDUHVXOWRIWKHVHGLVFXVVLRQVZHDUHSURSRVLQJD5HPXQHUDWLRQ3ROLF\ which reflects your comments and views.

&RQFOXVLRQVIURPRXUH[HFXWLYHDQGVKDUHKROGHU HQJDJHPHQWSURJUDPPH

Our engagement programme showed overwhelming support from H[HFXWLYHVDQGIURPVKDUHKROGHUVIRURXU5HPXQHUDWLRQ3ROLF\WKH structure of our remuneration packages and the balance between the various elements of pay. We have therefore chosen to make no VXEVWDQWLDOFKDQJHVWRWKH5HPXQHUDWLRQ3ROLF\RXDSSURYHGLQ although following feedback from shareholders in recent years, we have PDGHVRPHPLQRUFKDQJHVWRWKHRSHUDWLRQRIWKH3HUIRUPDQFH6KDUH 3URJUDPPH363

)RU363DZDUGVPDGHIURPRQZDUGVZHZLOODSSO\DWZR\HDU SRVWYHVWLQJKROGLQJSHULRG7KLVZLOOHQVXUHWKDW([HFXWLYH'LUHFWRUV are aligned with the shareholder experience for five years from the GDWHRIHDFKJUDQWDQGRYHUWLPHZLOOEXLOGXSDVL]HDEOHVKDUHKROGLQJ LQWKH&RPSDQ\

Additionally, we have adjusted some of the performance measures used in our short and long term incentive plans and the weighting between these measures. The result of these changes is a greater emphasis on ILQDQFLDOPHDVXUHVLQRXU\$QQXDO,QFHQWLYH3URJUDPPHDQGDEDODQFH of measures more closely linked to our strategic aims. The measures ZHKDYHFKRVHQDUHGHWDLOHGEHORZDQGRQWKHRSSRVLWHSDJH

<RXZLOOQRWHWKDWZHKDYHLQWURGXFHGDQHZ©5HWXUQRQ,QYHVWHG&DSLWDOª 52,&?PHDVXUHLQWRRXU3HUIRUPDQFH6KDUH3ODQ7KLVLVDPHDVXUH which resonated strongly with the shareholders we met and which we believe will help to drive the performance we are aiming for. ROIC was introduced internally as a reporting measure in 2016, given its role in successfully executing our strategic pillars. It incentivises better financial discipline, rewards enhanced operating performance and provides a link to an area that our shareholders have identified as a high priority for improvement. Its introduction as a formal performance metric was the natural next step.

ROIC will be defined as:

1HW2SHUDWLQJ3URILWless Adjusted Taxes

2SHQLQJ1HW2SHUDWLQJ\$VVHWV&ORVLQJ1HW2SHUDWLQJ\$VVHWV

Average ROIC over the three year performance period will be compared to the targets set at the beginning of the performance period. You will find IXUWKHULQIRUPDWLRQRQWKLVPHDVXUHRQSDJH

*UDKDP%DNHU¥&KLHI)LQDQFLDO2I²FHU

:HZHOFRPH*UDKDP%DNHUZKRZLOOMRLQWKH&RPSDQ\DV&KLHI)LQDQFLDO 2IILFHURQ0DUFK'XULQJWKH\HDUZHFRQVLGHUHGDQGDSSURYHG his remuneration package, which we announced on 30 November 2016. 7KHVHDUUDQJHPHQWVDUHLQOLQHZLWKWKH5HPXQHUDWLRQ3ROLF\DSSURYHG by shareholders in 2014. You will find further details in the Remuneration 5HSRUW1RVLJQRQRUEX\RXWDZDUGVKDYHEHHQPDGHLQFRQQHFWLRQ with his appointment.

-XOLH%URZQ¥IRUPHU&KLHI)LQDQFLDO2I²FHU

-XOLH%URZQOHIWWKH&RPSDQ\RQ-DQXDU\DWZKLFKSRLQWDOO RXWVWDQGLQJDZDUGVODSVHG)XUWKHUGHWDLOVDUHVHWRXWRQSDJH

Shareholding Requirements

:HDOVRUHYLHZHGDQGLQFUHDVHGRXUVKDUHKROGLQJUHTXLUHPHQWV 7KH&KLHI([HFXWLYH2IILFHULVQRZUHTXLUHGWREXLOGXSDKROGLQJRI shares in the Company to the value of three times his annual base VDODU\7KHUHTXLUHPHQWIRUWKH&KLHI)LQDQFLDO2IILFHUUHPDLQVDWWZR WLPHVKLVDQQXDOEDVHVDODU\7KHVHVKDUHKROGLQJUHTXLUHPHQWVDUH normally expected to be met within five years of joining the Company.

Looking forward

The Remuneration Committee will continue to be guided by the principles we have followed in the past:

3HUIRUPDQFHPHDVXUHVOLQNHGWRRXUVWUDWHJLFSULRULWLHV
\$OLJQPHQWRIH[HFXWLYHDQGVKDUHKROGHULQWHUHVWVDQG
Simplicity.

We passionately believe that engagement is important both for the Company and for our shareholders. Engagement is more than just voting. I would therefore like to reinforce my gratitude to those of our shareholders who took the time to provide their thoughts on RXU5HPXQHUDWLRQ3ROLF\DQGWKHFKDQJHVZHSURSRVHGGXULQJWKH course of 2016. Your Remuneration Committee believes that the incremental changes proposed ensure continued alignment to our evolving strategic pillars and will incentivise and reward our Executive Directors, and broader senior executive team, for delivering strong performance for our shareholders in the years ahead.

-RVHSK3DSD Chairman of the Remuneration Committee

&RPSOLDQFHVWDWHPHQW

:HKDYHSUHSDUHGWKLV'LUHFWRUVª5HPXQHUDWLRQ5HSRUWWKH5HSRUW?LQDFFRUGDQFH ZLWK7KH(QWHUSULVHDQG5HJXODWRU\5HIRUP\$FWFODXVHV?DQG 7KH/DUJHDQG0HGLXP6L]HG&RPSDQLHVDQG*URXSV\$FFRXQWVDQG5HSRUWV? \$PHQGPHQW?5HJXODWLRQVWKH5HJXODWLRQV?7KH5HSRUWDOVRPHHWVWKHUHOHYDQW UHTXLUHPHQWVRIWKH)LQDQFLDO&RQGXFW\$XWKRULW)&\$?/LVWLQJ5XOHV 7KH²UVWSDUWRIWKH5HSRUWSDJHVWR?LVWKH'LUHFWRUVª5HPXQHUDWLRQ3ROLF\ 5HSRUWWKH3ROLF\5HSRUW?ZKLFKZLOOEHSUHVHQWHGWRVKDUHKROGHUVIRUDSSURYDODWWKH \$QQXDO*HQHUDO0HHWLQJWREHKHOGRQ\$SULO7KH3ROLF\5HSRUWGHVFULEHVRXU 5HPXQHUDWLRQ3ROLF\DVLWUHODWHVWRWKH'LUHFWRUVRIWKH&RPSDQ\$OOSD\PHQWVZH make to any Director of the Company will be in accordance with this Remuneration 3ROLF\:HLQWHQGWKDWWKLV5HPXQHUDWLRQ3ROLF\ZLOOUHPDLQLQSODFHXQFKDQJHGIRU the next three years and will next be put to shareholder vote at the Annual General Meeting to be held in 2020. 7KHVHFRQGSDUWRIWKH5HSRUWSDJHVWR?LVWKHDQQXDOUHSRUWRQUHPXQHUDWLRQ

WKH,PSOHPHQWDWLRQ5HSRUW?7KH,PSOHPHQWDWLRQ5HSRUWZLOOEHSXWWRVKDUHKROGHUV IRUDSSURYDODVDQDGYLVRU\YRWHDWWKH\$QQXDO*HQHUDO0HHWLQJRQ\$SULO7KH ,PSOHPHQWDWLRQ5HSRUWH[SODLQVKRZWKH5HPXQHUDWLRQ3ROLF\ZDVLPSOHPHQWHG GXULQJDQGDOVRKRZLWLVFXUUHQWO\EHLQJLPSOHPHQWHGLQ7KH²QDQFLDO WDEOHVRQSDJHVWRWKH'LUHFWRUVªLQWHUHVWWDEOHRQSDJHDQGWKHWDEOHV RQSDJHVWRKDYHEHHQDXGLWHGE.30*//3

0(\$685(6,12859\$5,\$%/(3\$<3/\$16

),1\$1&,\$/0(\$685(6,1\$118\$/,1&(17,9(3/\$1
5HYHQXH	Revenue is a key driver of profit growth.
7UDGLQJ3UR²W0DUJLQ new	5HSODFHVDEVROXWHWUDGLQJSUR²W7UDGLQJ SUR²WPDUJLQLVDFULWLFDOPHDVXUHERWK for the business and our shareholders and delivering margin improvements is DŸFRUHFRPPLWPHQWXQGHURXUVWUDWHJ\
7UDGLQJ&DVK)ORZ	&DVK³RZIURPRXU(VWDEOLVKHG0DUNHWV is necessary in order to fund growth in Emerging Markets, innovation, organic JURZWKDQGDFTXLVLWLRQV
%86,1(662%-(&7,9(6,1\$118\$/,1&(17,9(3/\$1
%XVLQHVV3URFHVV	We need to release resources from the businesses through improved VWUXFWXUHVHI²FLHQFLHVDQGEXVLQHVV SURFHVVHVLQRUGHUWRUHLQYHVWLQRXU higher growth areas, including Emerging Markets, Innovation, organic growth and DFTXLVLWLRQV
3HRSOH	We need to attract and retain the right people to achieve our strategy through improving our operating model and drive the right behaviours for all of our people globally.
&XVWRPHU	Our mission is to deliver advanced medical technologies that help healthcare professionals, our customers, LPSURYHWKHTXDOLW\RIOLIHRIWKHLU patients.
	3(5)250\$1&(0(\$685(6,12853(5)250\$1&(6+\$5(Ÿ3/\$1
5HODWLYH765 PRGL²HG	If we execute our strategy successfully, this will lead to an increased return for our shareholders, whether you invest in WKHKHDOWKFDUHVHFWRURULQWKH)76(
&XPXODWLYH&DVK)ORZ	&DVK³RZIURPRXU(VWDEOLVKHG0DUNHWV is necessary in order to fund growth in Emerging Markets, innovation, organic JURZWKDQGDFTXLVLWLRQV
6DOHV*URZWK PRGL²HG	6DOHVJURZWKLVDNH\GULYHURISUR²W growth.
5HWXUQRQ,QYHVWHG&DSLWDO new	Return on investment is a high priority for our shareholders which will drive EHWWHU²QDQFLDOGLVFLSOLQHDQGHQKDQFHG operating performance.

'HWDLOHGIXUWKHURQSDJHVWR

',5(&7256ª5(081(5\$7,215(3257

REMUNERATION continued

7+(32/,&<5(3257

)8785(32/,&<7\$%/(¥(;(&87,9(',5(&7256

The following table and accompanying notes explain the different elements of remuneration we pay to our Executive Directors:

%\$6(6\$/\$5<\$1'%(1(),76

BASE SALARY

:HDUHD)76(OLVWHGFRPSDQ\RSHUDWLQJLQRYHUFRXQWULHVDURXQGWKHZRUOG2XUVWUDWHJ\WRJHQHUDWHFDVKIURP(VWDEOLVKHG0DUNHWVLQRUGHU to invest for growth in higher growth geographies and franchises means that we are competing for international talent and our base salaries therefore QHHGWRUHIOHFWZKDWRXU([HFXWLYH'LUHFWRUVZRXOGUHFHLYHLIWKH\ZHUHWRZRUNLQDQRWKHULQWHUQDWLRQDOFRPSDQ\RIDVLPLODUVL]HFRPSOH[LW\DQG geographical scope.

+RZWKHFRPSRQHQWRSHUDWHV	0D[LPXPOHYHOVRISD\PHQW	)UDPHZRUNLQZKLFKSHUIRUPDQFHLVDVVHVVHG
Salaries are normally reviewed annually, with any increase applying from 1 April.	The base salary of the Executive Directors with HIIHFWIURP\$SULOZLOOEHDVIROORZV	3HUIRUPDQFHLQWKHSULRU\HDULVRQHRIWKHIDFWRUV taken into account and poor performance is likely WROHDGWRD]HURVDODU\LQFUHDVH
Salary levels and increases take account of:	– 2OLYLHU%RKXRQ¯ – *UDKDP%DNHU… The factors noted in the previous column will be taken into consideration when making increases to base salary and when appointing a new Director.
– Market movements within a peer group of
VLPLODUO\VL]HG8.OLVWHGFRPSDQLHV – Scope and responsibility of the position
– 6NLOOH[SHULHQFHDQGSHUIRUPDQFH of the individual Director
– General economic conditions in the relevant geographic market, and	In normal circumstances, base salary increases for Executive Directors will relate
– Average increases awarded across the Company, with particular regard to increases in the market in which the Executive is based.	to the geographic market and peer group. In addition, the average increases for employees across the Group will be taken into account. The Remuneration Committee retains the right to approve higher increases when there is a substantial change in the scope of WKH([HFXWLYH'LUHFWRUªVUROH\$IXOOH[SODQDWLRQ will be provided in the Implementation Report should higher increases be approved in exceptional cases.

3\$<0(17,1/,(82)3(16,21

,QRUGHUWRDWWUDFWDQGUHWDLQ([HFXWLYH'LUHFWRUVZLWKWKHFDSDELOLW\RIGULYLQJRXUFRUSRUDWHVWUDWHJ\ZHQHHGWRSURYLGHPDUNHWFRPSHWLWLYHUHWLUHPHQW benefits similar to the benefits they would receive if they were to work for one of our competitors.

At the same time, we seek to avoid exposing the Company to defined benefit pension risks, and where possible will make payments in lieu of providing a pension.

+RZWKHFRPSRQHQWRSHUDWHV	0D[LPXPOHYHOVRISD\PHQW	)UDPHZRUNLQZKLFKSHUIRUPDQFHLVDVVHVVHG
Current Executive Directors receive an allowance in lieu of membership of a &RPSDQ\UXQSHQVLRQVFKHPH	Up to 30% of base salary.	The level of payment in lieu of a pension paid to Executive Directors is not dependent on performance.
Base salary is the only component of remuneration which is pensionable.

,QRUGHUWRDWWUDFWDQGUHWDLQ([HFXWLYH'LUHFWRUVZLWKWKHFDSDELOLW\RIGULYLQJRXUFRUSRUDWHVWUDWHJ\ZHQHHGWRSURYLGHDUDQJHRIPDUNHWFRPSHWLWLYH benefits similar to the benefits they would receive if they were to work for one of our competitors.

,WLVLPSRUWDQWWKDWRXU([HFXWLYH'LUHFWRUVDUHIUHHWRIRFXVRQWKH&RPSDQ\ªVEXVLQHVVZLWKRXWEHLQJGLYHUWHGE\FRQFHUQVDERXWPHGLFDOSURYLVLRQ ULVNEHQHILWFRYHURULIUHTXLUHGUHORFDWLRQLVVXHV

A wide range of benefits may be provided depending on the benefits provided for comparable roles in the location in which the Executive Director is based. These benefits will include, as a minimum, healthcare cover, life DVVXUDQFHORQJWHUPGLVDELOLW\DQQXDOPHGLFDO examinations, company car or car allowance. The Committee retains the discretion to provide additional benefits where necessary or relevant LQWKHFRQWH[WRIWKH([HFXWLYHªVORFDWLRQ

Where applicable, relocation costs may be SURYLGHGLQOLQHZLWK&RPSDQ\ªVUHORFDWLRQ policy for employees, which may include removal costs, assistance with accommodation, living expenses for self and family and financial consultancy advice. In some cases such payments may be grossed up.

The policy is framed by the nature of the benefits that the Remuneration Committee is willing to provide to Executive Directors. The maximum amount payable will depend on the cost of providing such benefits to an employee in the location at which the Executive Director is based. Shareholders should note that the cost of providing comparable benefits in different jurisdictions may vary widely.

As an indication, the cost of such benefits provided in 2016 was as follows:

2OLYLHU%RKXRQ¯
Julie Brown £22,244.

The maximum amount payable in benefits to an Executive Director, in normal circumstances, will not be significantly more than amounts SDLGLQRUHTXLYDOHQWLQORFDOFXUUHQF\? The Remuneration Committee retains the right to pay more than this should the cost of providing the same underlying benefits increase or in the event of a relocation. A full explanation will be provided in the Implementation Report should the cost of benefits provided be significantly higher.

+RZWKHFRPSRQHQWRSHUDWHV 0D[LPXPOHYHOVRISD\PHQW )UDPHZRUNLQZKLFKSHUIRUPDQFHLVDVVHVVHG

The level and cost of benefits provided to Executive Directors is not dependent on performance but on the package of benefits provided to comparable roles within the relevant location.

',5(&7256ª5(081(5\$7,215(3257

REMUNERATION continued

7+(32/,&<5(3257

\$//(03/2<((\$55\$1*(0(176

\$//(03/2<((6+\$5(3/\$16

7RHQDEOH([HFXWLYH'LUHFWRUVWRSDUWLFLSDWHLQDOOHPSOR\HHVKDUHSODQVRQWKHVDPHEDVLVDVRWKHUHPSOR\HHV

+RZWKHFRPSRQHQWRSHUDWHV	0D[LPXPOHYHOVRISD\PHQW	)UDPHZRUNLQZKLFKSHUIRUPDQFHLVDVVHVVHG
6KDUHVDYH3ODQVDUHRSHUDWHGLQWKH8.DQG 31 other countries internationally. In the US, an (PSOR\HH6WRFN3XUFKDVH3ODQLVRSHUDWHG These plans enable employees to save on a regular basis and then buy shares in the Company. Executive Directors are able to participate in such plans on a similar basis to other employees, depending on where they	Executive Directors may currently invest up WR…SHUPRQWKLQWKH8.6KDUH6DYH 3ODQ7KH5HPXQHUDWLRQ&RPPLWWHHPD\ exercise its discretion to increase this amount up to the maximum permitted by the HM Revenue & Customs. Similar limits will apply in different locations.	7KHSRWHQWLDOJDLQVIURPDOOHPSOR\HHSODQV are not based on performance but are linked to growth in the share price.

ANNUAL INCENTIVES

are located.

\$118\$/,1&(17,9(3/\$1¥&\$6+,1&(17,9(

7RPRWLYDWHDQGUHZDUGWKHDFKLHYHPHQWRIVSHFLILFDQQXDOILQDQFLDODQGEXVLQHVVREMHFWLYHVUHODWHGWRWKH&RPSDQ\ªVVWUDWHJ\DQGVXVWDLQHGWKURXJK a clawback mechanism explained more fully in the notes.

7KHREMHFWLYHVZKLFKGHWHUPLQHWKHSD\PHQWRIWKHDQQXDOFDVKLQFHQWLYHDQGWKHOHYHORIWKHDQQXDOHTXLW\DZDUGDUHOLQNHGFORVHO\WRWKH Group strategy.

7KHILQDQFLDOPHDVXUHVRI5HYHQXH7UDGLQJ3URILW0DUJLQDQG7UDGLQJ&DVK)ORZXQGHUOLQHRXUVWUDWHJ\IRUJURZWK

The business objectives are also linked to the Group strategy. These change from year to year to reflect the evolving strategy, but will typically be linked WRWKH6WUDWHJLF3ULRULWLHVVHWRXWLQWKLV\$QQXDO5HSRUW7KH,PSOHPHQWDWLRQ5HSRUWHDFK\HDUZLOOH[SODLQKRZHDFKREMHFWLYHLVOLQNHGWRDVSHFLILF strategic priority.

+RZWKHFRPSRQHQWRSHUDWHV	0D[LPXPOHYHOVRISD\PHQW	)UDPHZRUNLQZKLFKSHUIRUPDQFHLVDVVHVVHG
7KH\$QQXDO,QFHQWLYH3ODQFRPSULVHVDFDVK DQGDQHTXLW\FRPSRQHQWERWKEDVHGRQ the achievement of financial and business objectives set at the start of the year.	The total maximum payable under the Annual ,QFHQWLYH3ODQLVRIŸEDVHVDODU\ &DVK,QFHQWLYHDQG(TXLW\,QFHQWLYH	The cash and share awards are subject to malus and clawback as detailed in the notes following this table.
	In respect of the Cash Incentive:	RIWKHFDVKFRPSRQHQWLVEDVHGRQILQDQFLDO performance measures, which currently include 5HYHQXH?7UDGLQJ3URILW0DUJLQ?DQG
The cash component is paid in full after the end of the performance year.	VDODU\DZDUGHGIRUPD[LPXP performance.
At the end of the year, the Remuneration Committee determines the extent to which performance against these has been achieved and sets the award level.	100% salary awarded for target performance.	7UDGLQJ&DVK)ORZ RIWKHFDVKFRPSRQHQWLVEDVHGRQ RWKHUEXVLQHVVJRDOVOLQNHGWRWKH&RPSDQ\ªV strategy, which could include financial and
	VDODU\DZDUGHGIRUWKUHVKROG performance.
	3HUIRUPDQFHDVVHVVHGDJDLQVWLQGLYLGXDO objectives and Group financial targets.	QRQILQDQFLDOPHDVXUHV
		The Remuneration Committee retains the discretion to adjust the relative weightings of the financial and business components, and to adopt any performance measure that is relevant to the Company.

\$118\$/,1&(17,9(3/\$1¥(48,7<,1&(17,9(

7RGULYHVKDUHRZQHUVKLSDQGHQFRXUDJHVXVWDLQHGKLJKVWDQGDUGVWKURXJKWKHDSSOLFDWLRQRID©PDOXVªSURYLVLRQRYHUWKUHH\HDUVH[SODLQHGPRUH fully in the notes.

+RZWKHFRPSRQHQWRSHUDWHV	0D[LPXPOHYHOVRISD\PHQW	)UDPHZRUNLQZKLFKSHUIRUPDQFHLVDVVHVVHG
7KHHTXLW\DZDUGFRPSRQHQWFRPSULVHV	,QUHVSHFWRIWKH(TXLW\,QFHQWLYH	The Remuneration Committee will use its MXGJHPHQWRIWKHLQGLYLGXDOªVSHUIRUPDQFH based both on what has been achieved during the year and how it has been achieved in
conditional share awards (made at the time of WKHFDVKDZDUG?ZLWKYHVWLQJSKDVHGRYHUWKH following three years.	3HUIRUPDQFHLVDVVHVVHGDJDLQVWLQGLYLGXDO SHUIRUPDQFHZKLFKLQFOXGHVŸDQHOHPHQWRI Group financial targets.
7KHHTXLW\FRPSRQHQWYHVWV®®® on successive award anniversaries, only if performance remains satisfactory over each	RIVDODU\DZDUGHGIRUPD[LPXP performance.	GHWHUPLQLQJWKHOHYHORIHTXLW\DZDUGWKDWPD\ EHDZDUGHGZLWKLQWKHUDQJHRIWR of salary.
RIWKHVHWKUHH\HDUVRWKHUZLVHWKHDZDUG will lapse.	RIVDODU\DZDUGHGIRUWDUJHWSHUIRUPDQFH	7KHHTXLW\FRPSRQHQWZLOOYHVWLQWKUHHHTXDO WUDQFKHVRYHUDWKUHH\HDUSHULRGSURYLGHGWKDW
	0% of salary awarded for performance
3DUWLFLSDQWVZLOOUHFHLYHDQDGGLWLRQDOQXPEHU RIVKDUHVHTXLYDOHQWWRŸWKHDPRXQWRIGLYLGHQG payable per vested share during the relevant performance period.	DVVHVVHGWRŸEHŸEHORZWDUJHW	satisfactory performance is sustained.

',5(&7256ª5(081(5\$7,215(3257

REMUNERATION continued

7+(32/,&<5(3257

/217(50,1&(17,9(6\$:\$5'6\$&7,9(/<%(,10\$'(

3(5)250\$1&(6+\$5(352*5\$00(

7RPRWLYDWHDQGUHZDUGORQJHUWHUPSHUIRUPDQFHOLQNHGWRWKHORQJWHUPVWUDWHJ\DQGVKDUHSULFHRIWKH&RPSDQ\

7KHSHUIRUPDQFHPHDVXUHVZKLFKGHWHUPLQHWKHOHYHORIYHVWLQJRIWKH3HUIRUPDQFH6KDUH\$ZDUGVDUHOLQNHGWRRXUFRUSRUDWHVWUDWHJ\

+RZWKHFRPSRQHQWRSHUDWHV	0D[LPXPOHYHOVRISD\PHQW	)UDPHZRUNLQZKLFKSHUIRUPDQFHLVDVVHVVHG
7KH3HUIRUPDQFH6KDUH3URJUDPPHFRPSULVHV conditional share awards which vest after three years, subject to the achievement of stretching performance targets linked to the &RPSDQ\ªVVWUDWHJ\ Awards may be subject to clawback in the event of material financial misstatement or misconduct. 3DUWLFLSDQWVZLOOUHFHLYHDQDGGLWLRQDOQXPEHU RIVKDUHVHTXLYDOHQWWRWKHDPRXQWRIGLYLGHQG payable per vested share during the relevant performance period. On vesting, a number of shares are sold to cover the tax liability. The remaining shares are UHTXLUHGWREHKHOGE\WKH([HFXWLYH'LUHFWRUIRU DIXUWKHUWZR\HDUKROGLQJSHULRG	Annual awards: 190% of salary for maximum performance. RIVDODU\IRUWDUJHWSHUIRUPDQFH RIVDODU\IRUWKUHVKROGSHUIRUPDQFH	Currently: – RIWKHDZDUGYHVWVRQDFKLHYHPHQWRID WKUHH\HDUFXPXODWLYHIUHHFDVK³RZWDUJHW – RIWKHDZDUGYHVWVVXEMHFWWRWKUHH\HDU 7RWDO6KDUHKROGHU5HWXUQ765?DWPHGLDQ performance relative to Global Healthcare FRPSDQLHVDQGWR)76(FRPSDQLHV – RIWKHDZDUGYHVWVVXEMHFWWRWKH achievement of return on invested capital targets. – RIWKHDZDUGYHVWVVXEMHFWWRWRWDO sales growth. – These measures, the targets and performance against them are described more fully in the Implementation Report. – 7KH3HUIRUPDQFH6KDUH\$ZDUGZLOOYHVWRQ the third anniversary of the date of grant, depending on the extent to which the performance conditions are met over the WKUHH\HDUSHULRGFRPPHQFLQJLQWKH\HDU the award was made. – The Remuneration Committee retains the discretion to change the measures and their respective weightings to ensure continuing DOLJQPHQWZLWKWKH&RPSDQ\ªVVWUDWHJ\ – The cash and share awards are subject to malus and clawback as detailed in the notes following this table. \$ZDUGVPDGHSULRUWRZHUHVXEMHFWWR TSR against a sector peer group, cash flow DQGŸUHYHQXHLQ(PHUJLQJ0DUNHWVWDUJHWV

,//8675\$7,2162)7+(\$33/,&\$7,212)7+(5(081(5\$7,21 32/,&<

The following charts show the potential split between the different HOHPHQWVRIWKH([HFXWLYH'LUHFWRUVªUHPXQHUDWLRQXQGHUWKUHHGLIIHUHQW performance scenarios.

&KLHI([HFXWLYH2I²FHU

&KLHI)LQDQFLDO2I²FHU

Salary 3D\PHQWLQOLHXRISHQVLRQ

Benefits \$QQXDO,QFHQWLYH&DVK? \$QQXDO,QFHQWLYH(TXLW\? 3HUIRUPDQFH6KDUH3URJUDPPH

7RWDO5HPXQHUDWLRQE\3HUIRUPDQFH6FHQDULR for 2017 Financial Year

3HUFHQWDJHVSOLW

&KLHI([HFXWLYH2I²FHU &KLHI)LQDQFLDO2I²FHU

MINIMUM % MAXIMUM % TARGET %

)L[HGSD\ \$QQXDO,QFHQWLYH&DVK? \$QQXDO,QFHQWLYH(TXLW\? /RQJWHUP,QFHQWLYHV

'DWDIRUWKH&KLHI([HFXWLYH2I²FHUDVVXPHVDQH[FKDQJHUDWHRI¯

MALUS AND CLAWBACK

The Remuneration Committee may determine that an unvested award or part of an award may not vest (regardless of whether or not the SHUIRUPDQFHFRQGLWLRQVKDYHEHHQPHW?RUPD\GHWHUPLQHWKDWDQ\FDVK ERQXVYHVWHGVKDUHVRUWKHLUHTXLYDOHQWYDOXHLQFDVKEHUHWXUQHGWRWKH Company in the event that any of the following matters is discovered:

\$PDWHULDOPLVVWDWHPHQWRIWKH&RPSDQ\ªV²QDQFLDOUHVXOWVRU
A material error in determining the extent to which any performance FRQGLWLRQKDVEHHQVDWLV²HGRU
\$VLJQL²FDQWDGYHUVHFKDQJHLQWKH²QDQFLDOSHUIRUPDQFHRIWKH &RPSDQ\RUDVLJQL²FDQWORVVDWDJHQHUDOOHYHORUDWWKHFRXQWU\ EXVLQHVVXQLWRUIXQFWLRQLQZKLFKDSDUWLFLSDQWZRUNHGRU
,QDSSURSULDWHFRQGXFWIRUH[DPSOHUHSXWDWLRQDOLVVXHV?FDSDELOLW\ or performance by a participant, or within a team business area RUSUR²WFHQWUH

7KHVHSURYLVLRQVDSSO\WRVKDUHDZDUGVXQGHUWKH*OREDO6KDUH3ODQ DQGFDVKDPRXQWVXQGHUWKH\$QQXDO&DVK,QFHQWLYH3ODQ

32/,&<215(&58,70(17\$55\$1*(0(176

Our policy on the recruitment of Executive Directors is to pay a fair remuneration package for the role being undertaken and the experience of the Executive Director appointed. In terms of base salary, we will seek to pay a salary comparable, in the opinion of the Committee, to that which ZRXOGEHSDLGIRUDQHTXLYDOHQWSRVLWLRQHOVHZKHUH7KH5HPXQHUDWLRQ Committee will determine a base salary in line with the policy and having regard to the parameters set out on in the future policy table. Incoming Executive Directors will be entitled to pension, benefit and incentive arrangements which are the same as provided to existing Executive Directors. On that basis, incentive awards would not exceed RIEDVHVDODU\

:HUHFRJQLVHWKDWLQWKHHYHQWWKDWZHUHTXLUHDQHZ([HFXWLYH'LUHFWRUWR relocate to take up a position with the Company, we will also pay relocation and related costs as described in the future policy table, which is in line with the relocation arrangements we operate across the Group.

We also recognise that in many cases, an external appointee may forfeit VL]HDEOHFDVKERQXVHVDQGVKDUHDZDUGVLIWKH\FKRRVHWROHDYHWKHLU former employer and join us. The Remuneration Committee therefore believes that we need the ability to compensate new hires for incentive awards they give up on joining us. The Committee will use its judgement in GHWHUPLQLQJDQ\VXFKFRPSHQVDWLRQZKLFKZLOOEHGHFLGHGRQDFDVHE\ case basis. We will only provide compensation which is no more beneficial than that given up by the new appointee and we will seek evidence from the previous employer to confirm the full details of bonus or share awards being forfeited. As far as possible, we will seek to replicate forfeited share awards using Smith & Nephew incentive plans or through reliance on Rule LQWKH/LVWLQJ5XOHVZKLOVWDWWKHVDPHWLPHDLPLQJIRUVLPSOLFLW\

If we appoint an existing employee as an Executive Director of the &RPSDQ\SUHH[LVWLQJREOLJDWLRQVZLWKUHVSHFWWRUHPXQHUDWLRQVXFK as pension, benefits and legacy share awards, will be honoured. Should these differ materially from current arrangements, these will be disclosed in the next Implementation Report.

We will supply details via an announcement to the London Stock Exchange RIDQLQFRPLQJ([HFXWLYH'LUHFWRUªVUHPXQHUDWLRQDUUDQJHPHQWVDWWKHWLPH of their appointment.

),1\$1&,\$/ REVIEW 23(5\$7,21\$/ RISK

',5(&7256ª5(081(5\$7,215(3257

REMUNERATION continued

7+(32/,&<5(3257

SERVICE CONTRACTS

We employ Executive Directors on rolling service contracts with notice periods of up to 12 months from the Company and six months from WKH([HFXWLYH'LUHFWRU2QWHUPLQDWLRQRIWKHFRQWUDFWZHPD\UHTXLUH the Executive Director not to work their notice period and pay them an DPRXQWHTXLYDOHQWWRWKHEDVHVDODU\DQGSD\PHQWLQOLHXRISHQVLRQDQG EHQHILWVWKH\ZRXOGKDYHUHFHLYHGLIWKH\KDGEHHQUHTXLUHGWRZRUNWKHLU notice period.

8QGHUWKHWHUPVRIWKH([HFXWLYH'LUHFWRUªVVHUYLFHFRQWUDFW([HFXWLYH Directors are restricted for a period of 12 months after leaving the employment of the Company from working for a competitor, soliciting orders from customers and offering employment to employees of Smith & Nephew. The Company retains the right to waive these provisions in certain circumstances. In the event that these provisions are waived or the former Executive Director commences employment earlier than at the end of the notice period, no further payments shall be made in respect of WKHSRUWLRQRIQRWLFHSHULRGQRWZRUNHG'LUHFWRUVªVHUYLFHFRQWUDFWVDUH DYDLODEOHIRULQVSHFWLRQDWWKH&RPSDQ\ªVUHJLVWHUHGRIILFH\$GDP6WUHHW London WC2N 6LA.

32/,&<213\$<0(17)25/2662)2)),&(

Our policy regarding termination payments to departing Executive 'LUHFWRUVLVWROLPLWVHYHUDQFHSD\PHQWVWRSUHHVWDEOLVKHGFRQWUDFWXDO arrangements. In the event that the employment of an Executive Director is terminated, any compensation payable will be determined in accordance with the terms of the service contract between the Company and the Executive Director, as well as the rules of any incentive plans.

8QGHUQRUPDOFLUFXPVWDQFHVH[FOXGLQJWHUPLQDWLRQIRUJURVVPLVFRQGXFW? all leavers are entitled to receive termination payments in lieu of notice HTXDOWREDVHVDODU\SD\PHQWLQOLHXRISHQVLRQDQGEHQHILWV,QVRPH circumstances additional benefits may become payable to cover reimbursement of untaken holiday leave, repatriation and outplacement fees, legal and financial advice.

In addition, we may also in exceptional circumstances exercise our discretion to pay the Executive Director a proportion of the annual cash LQFHQWLYHWKH\ZRXOGKDYHUHFHLYHGKDGWKH\EHHQUHTXLUHGWRZRUNWKHLU notice period. Any entitlement or discretionary payment may be reduced in OLQHZLWKWKH([HFXWLYH'LUHFWRUªVGXW\WRPLWLJDWHORVVHVVXEMHFWWRDSSO\LQJ RXUQRQFRPSHWHFODXVH

We will supply details via an announcement to the London Stock Exchange RIDGHSDUWLQJ([HFXWLYH'LUHFWRUªVWHUPLQDWLRQDUUDQJHPHQWVDWWKHWLPH of departure.

In the case of a change of control which results in the termination of an Executive Director or a material alteration to their responsibilities or duties, within 12 months of the event, the Executive Director would be entitled WRUHFHLYHPRQWKVªEDVHVDODU\SOXVSD\PHQWLQOLHXRISHQVLRQDQG benefits. In addition, the Remuneration Committee has discretion to pay an Executive Director in these circumstances an annual cash incentive. )RU'LUHFWRUVDSSRLQWHGSULRUWR1RYHPEHUDQDXWRPDWLFDQQXDO cash incentive is payable at target.

,QWKHHYHQWWKDWDQ([HFXWLYH'LUHFWRUOHDYHVIRUUHDVRQVRILOOKHDOWK death, redundancy or retirement in agreement with the Company, WKHQWKHYHVWLQJRIDQ\RXWVWDQGLQJDQQXDOFDVKLQFHQWLYHDQGHTXLW\ LQFHQWLYHDZDUGVZLOOJHQHUDOO\GHSHQGRQWKH5HPXQHUDWLRQ&RPPLWWHHªV DVVHVVPHQWRISHUIRUPDQFHWRGDWH3HUIRUPDQFHVKDUHDZDUGVZLOOEH SURUDWHGIRUWKHWLPHZRUNHGGXULQJWKHUHOHYDQWSHUIRUPDQFHSHULRG DQGZLOOUHPDLQVXEMHFWWRSHUIRUPDQFHRYHUWKHIXOOSHUIRUPDQFHSHULRG

)RUDOORWKHUOHDYHUVWKHDQQXDOFDVKLQFHQWLYHZLOOJHQHUDOO\EHIRUIHLWHG DQGRXWVWDQGLQJHTXLW\LQFHQWLYHDZDUGVDQGSHUIRUPDQFHVKDUHDZDUGV will lapse.

2QHRIIDZDUGVJUDQWHGRQDSSRLQWPHQWZLOOQRUPDOO\ODSVHRQ OHDYLQJH[FHSWLQFDVHVRIGHDWKUHWLUHPHQWUHGXQGDQF\RULOOKHDOWK The Remuneration Committee has discretion to permit such awards to vest in other circumstances and will be subject to satisfactorily meeting performance conditions if applicable.

The Remuneration Committee retains discretion to alter these provisions RQDFDVHE\FDVHEDVLVIROORZLQJDUHYLHZRIFLUFXPVWDQFHVDQGWRHQVXUH fairness for both shareholders and Executive Directors.

We will supply details via an announcement to the London Stock Exchange RIDQRXWJRLQJ([HFXWLYH'LUHFWRUªVUHPXQHUDWLRQDUUDQJHPHQWVDURXQG the time of leaving.

&+\$1*(67232/,&<

7KH5HPXQHUDWLRQ3ROLF\PDNHVWKHIROORZLQJFKDQJHVWRWKH Remuneration policy:

Introduction of a two year holding period for vested 3HUIRUPDQFHVKDUHV
)OH[LELOLW\WRFKDQJHPHDVXUHV
,QFUHDVHGHPSKDVLVRQ²QDQFLDOREMHFWLYHVLQWKH\$QQXDO,QFHQWLYH 3ODQLQFUHDVHVIURPWR
,QFUHDVHGVKDUHKROGLQJUHTXLUHPHQWWRRIVDODU\IRUWKH &KLHI([HFXWLYH2I²FHU

)XUWKHUGHWDLOVFDQEHIRXQGLQWKHOHWWHUIURPWKH&KDLUPDQRIWKH 5HPXQHUDWLRQ&RPPLWWHHRQSDJHVWR

32/,&<216+\$5(+2/',1*5(48,5(0(176

The Remuneration Committee believes that one of the best ways our Executive Directors can have a greater alignment with shareholders is for them to hold a significant number of shares in the Company. The Chief Executive Officer is therefore expected to build up a holding of Smith & 1HSKHZVKDUHVZRUWKWKUHHWLPHVWKHLUEDVHVDODU\DQGWKH&KLHI)LQDQFLDO Officer is expected to build up a holding of two times their basic salary. ,QRUGHUWRUHLQIRUFHWKLVH[SHFWDWLRQZHUHTXLUHWKHPWRUHWDLQRIWKH VKDUHVDIWHUWD[?YHVWLQJXQGHUWKHHTXLW\LQFHQWLYHSURJUDPPHVXQWLOWKLV holding has been met, recognising that differing international tax regimes affect the pace at which an Executive Director may fulfil the shareholding UHTXLUHPHQW:KHQFDOFXODWLQJZKHWKHURUQRWWKLVUHTXLUHPHQWKDVEHHQ met, we will include ordinary shares or ADRs held by the Executive Director DQGWKHLULPPHGLDWHIDPLO\2UGLQDULO\ZHZRXOGH[SHFWWKLVUHTXLUHG shareholding to have been built up within a period of five years from the date of appointment.

)XUWKHUPRUHIURPDZDUGVPDGHLQZHUHTXLUHRXU([HFXWLYH'LUHFWRUV WRUHWDLQDOOWKHVKDUHVDIWHUWD[?YHVWLQJXQGHUWKH3HUIRUPDQFH6KDUH 3URJUDPPHIRUDSHULRGRIWZR\HDUVDIWHUYHVWLQJ

67\$7(0(172)&216,'(5\$7,212)(03/2<0(17&21',7,216 (/6(:+(5(,17+(&203\$1<\$1'',))(5(1&(6727+( (;(&87,9(',5(&72532/,&<

\$OOHPSOR\HHVDFURVVWKH*URXSKDYHSHUIRUPDQFHEDVHGSD\OLQNHG to objectives derived from the strategic priorities, which underpin the SHUIRUPDQFHPHWULFVLQWKH([HFXWLYH'LUHFWRU,QFHQWLYH3ODQV

Executive Director base salaries will generally increase at a rate in line with the average salary increases awarded across the Company. Given the diverse geographic markets within which the Company operates, the Committee will generally be informed by the average salary increase in both the market local to the Executive and the UK, recognising the &RPSDQ\ªVSODFHRIOLVWLQJDQGZLOODOVRFRQVLGHUPDUNHWGDWDSHULRGLFDOO\

A range of different pension arrangements operate across the Group GHSHQGLQJRQORFDWLRQDQGRUOHQJWKRIVHUYLFH([HFXWLYH'LUHFWRUVDQG Executive Officers either participate in the legacy pension arrangements relevant to their local market or receive a cash payment of 30% of salary in lieu of a pension. Senior executives who do not participate in a local Company pension plan receive a cash payment of 20% of salary in lieu RISHQVLRQ'LIIHULQJDPRXQWVDSSO\IRUORZHUOHYHOVZLWKLQWKH&RPSDQ\

The Company has established a benefits framework under which the nature of benefits varies by geography. Executive Directors participate in benefit arrangements similar to those applied for employees within the applicable location.

All employees are set objectives at the beginning of each year, which link through to the objectives set for the Executive Directors. Annual cash incentives payable to employees across the Company depend on the satisfactory completion of these objectives as well as performance against relevant Group and country business unit financial targets relating to revenue, trading profit and trading cash, similar to the financial targets VHWIRUWKH([HFXWLYH'LUHFWRUV

([HFXWLYH2IILFHUVDQGVHQLRUH[HFXWLYHVDVDW?SDUWLFLSDWH LQWKHDQQXDO(TXLW\,QFHQWLYH3URJUDPPHDQGWKH3HUIRUPDQFH 6KDUH3URJUDPPH7KHPD[LPXPDPRXQWVSD\DEOHDUHORZHUEXW the performance conditions are the same as those that apply to the Executive Directors.

No specific consultation with employees has been undertaken relating to Director remuneration. However, regular employee surveys are conducted across the Group, which cover a wide range of issues relating to local HPSOR\PHQWFRQGLWLRQVDQGDQXQGHUVWDQGLQJRI*URXSZLGHVWUDWHJLF PDWWHUV\$VDWDURXQGHPSOR\HHVLQFRXQWULHVSDUWLFLSDWH LQRQHRUPRUHRIRXUJOREDOVKDUHSODQV

',5(&7256ª5(081(5\$7,215(3257

REMUNERATION continued

7+(32/,&<5(3257

)8785(32/,&<7\$%/(¥&+\$,50\$1\$1'121(;(&87,9(',5(&7256

7KHIROORZLQJWDEOHDQGDFFRPSDQ\LQJQRWHVH[SODLQWKHGLIIHUHQWHOHPHQWVRIUHPXQHUDWLRQZHSD\WRRXU&KDLUPDQDQG1RQ([HFXWLYH'LUHFWRUV No element of their remuneration is subject to performance. All payments made to the Chairman are determined by the Remuneration Committee, ZKLOVWSD\PHQWVPDGHWRWKH1RQ([HFXWLYH'LUHFWRUVDUHGHWHUPLQHGE\WKH'LUHFWRUVZKRDUHQRWWKHPVHOYHV1RQ([HFXWLYH'LUHFWRUVFXUUHQWO\WKH &KDLUPDQWKH&KLHI([HFXWLYH2IILFHUDQGWKH&KLHI)LQDQFLDO2IILFHU

\$118\$/)((6

%\$6,&\$118\$/)((

7RDWWUDFWDQGUHWDLQ'LUHFWRUVE\VHWWLQJIHHVDWUDWHVFRPSDUDEOHWRZKDWZRXOGEHSDLGLQDQHTXLYDOHQWSRVLWLRQHOVHZKHUH

\$SURSRUWLRQRIWKHIHHVDUHSDLGLQVKDUHVLQWKHWKLUGTXDUWHURIHDFK\HDULQRUGHUWRDOLJQ1RQ([HFXWLYH'LUHFWRUVªIHHVZLWKWKHLQWHUHVWV of shareholders.

+RZWKHFRPSRQHQWRSHUDWHV	0D[LPXPOHYHOVRISD\PHQW
)HHVZLOOEHUHYLHZHGSHULRGLFDOO\,QIXWXUH DQ\LQFUHDVHZLOOEHSDLGLQVKDUHVXQWLO RIŸWKHWRWDOIHHLVSDLGLQVKDUHV	Annual fees are currently as follows: – …LQFDVKSOXV…LQVKDUHVRU – LQFDVKSOXVLQVKDUHV
)HHVDUHVHWLQOLQHZLWKPDUNHWSUDFWLFH IRUIHHVSDLGE\VLPLODUO\VL]HG8. listed companies.	Chairman fee: – £309,000 plus £103,000 in shares.
Annual fees are set and paid in UK Sterling or US Dollars depending on the location of the 1RQ([HFXWLYH'LUHFWRU,IDSSURSULDWHIHHV may be set and paid in alternative currencies.	:KLOVWLWLVQRWH[SHFWHGWRLQFUHDVHWKHIHHVSDLGWRWKH1RQ([HFXWLYH'LUHFWRUVDQGWKH&KDLUPDQE\ PRUHWKDQWKHLQFUHDVHVSDLGWRHPSOR\HHVJHQHUDOO\LQŸH[FHSWLRQDOFLUFXPVWDQFHVKLJKHUIHHVPLJKW become payable.
	7KHWRWDOPD[LPXPDJJUHJDWHIHHVSD\DEOHWRWKH1RQ([HFXWLYH'LUHFWRUVZLOOQRWH[FHHG…PLOOLRQ DVVHWRXWLQWKH&RPSDQ\ªV\$UWLFOHVRI\$VVRFLDWLRQ

)(()256(1,25,1'(3(1'(17',5(&725\$1'&200,77((&+\$,50(1

7RFRPSHQVDWH1RQ([HFXWLYH'LUHFWRUVIRUWKHDGGLWLRQDOWLPHVSHQWDV&RPPLWWHH&KDLUPHQRUDVWKH6HQLRU,QGHSHQGHQW'LUHFWRU

+RZWKHFRPSRQHQWRSHUDWHV	0D[LPXPOHYHOVRISD\PHQW
A fixed fee is paid, which is reviewed periodically.	– …LQFDVKRU – LQFDVK
	Whilst it is not expected that the fees paid to the Senior Independent Director or Committee Chairmen ZLOOH[FHHGWKHLQFUHDVHVSDLGWRHPSOR\HHVJHQHUDOO\LQŸH[FHSWLRQDOFLUFXPVWDQFHVKLJKHUIHHV might become payable.

,17(5&217,1(17\$/75\$9(/)((

7RFRPSHQVDWH1RQ([HFXWLYH'LUHFWRUVIRUWKHWLPHVSHQWWUDYHOOLQJWRDWWHQGPHHWLQJVLQDQRWKHUFRQWLQHQW

+RZWKHFRPSRQHQWRSHUDWHV	0D[LPXPOHYHOVRISD\PHQW
A fixed fee is paid, which is reviewed periodically.	– …LQFDVKRU – LQFDVK
	Whilst it is not expected to increase these fees by more than the increases paid to employees generally, in exceptional circumstances, higher fees might become payable.

127(672)8785(32/,&<7\$%/(¥121(;(&87,9(',5(&7256

&KDQJHVWR5HPXQHUDWLRQ3ROLF

7KHUHKDYHEHHQQRFKDQJHVWRRXU5HPXQHUDWLRQ3ROLF\DVLWDSSOLHV WR1RQ([HFXWLYH'LUHFWRUVVLQFHWKH3ROLF\ZDVLQLWLDOO\DSSURYHGE\ shareholders in April 2014.

\$GGLWLRQDOGXWLHVXQGHUWDNHQE\1RQ([HFXWLYH'LUHFWRUV

,QWKHHYHQWWKDWWKH&KDLUPDQRUD1RQ([HFXWLYH'LUHFWRULVUHTXLUHGWR undertake significant additional executive duties in order to support the Executive Directors during a period of absence due to illness or a gap prior to the appointment of a permanent Executive Director, the Remuneration Committee is authorised to determine an appropriate level of fees which shall be payable. These fees will not exceed the amounts which would normally be paid to a permanent Executive Director undertaking such GXWLHVDQGVKDOOQRWLQFOXGHSDUWLFLSDWLRQLQVKRUWRUORQJWHUPLQFHQWLYH arrangements or benefit plans.

3ROLF\RQUHFUXLWPHQWDUUDQJHPHQWV

\$Q\QHZ1RQ([HFXWLYH'LUHFWRUVKDOOEHSDLGLQDFFRUGDQFHZLWKWKH FXUUHQWIHHOHYHOVRQDSSRLQWPHQWLQOLQHZLWKWKH3ROLF\VHWRXWDERYH With respect to the appointment of a new Chairman, fee levels will take LQWRDFFRXQWPDUNHWUDWHVWKHLQGLYLGXDOªVSURILOHDQGH[SHULHQFHWKH WLPHUHTXLUHGWRXQGHUWDNHWKHUROHDQGJHQHUDOEXVLQHVVFRQGLWLRQV In addition, the Remuneration Committee retains the right to authorise the payment of relocation assistance or an accommodation allowance in the event of the appointment of a Chairman not based within the UK.

/HWWHUVRIDSSRLQWPHQW

7KH&KDLUPDQDQG1RQ([HFXWLYH'LUHFWRUVKDYHOHWWHUVRIDSSRLQWPHQW which set out the terms under which they provide their services to the &RPSDQ\DQGDUHDYDLODEOHIRULQVSHFWLRQDWWKH&RPSDQ\ªVUHJLVWHUHG RIILFH\$GDP6WUHHW/RQGRQ:&1/\$7KHDSSRLQWPHQWRI1RQ Executive Directors is not subject to a notice period, nor is there any compensation payable on loss of office, for example, should they not EHUHHOHFWHGDWDQ\$QQXDO*HQHUDO0HHWLQJ7KHDSSRLQWPHQWRIWKH Chairman is subject to a notice period of six months.

7KH&KDLUPDQDQG1RQ([HFXWLYH'LUHFWRUVDUHUHTXLUHGWRDFTXLUHD VKDUHKROGLQJLQWKH&RPSDQ\HTXLYDOHQWLQYDOXHWRRQHWLPHVWKHLUEDVLF fee within two years of their appointment to the Board.

67\$7(0(172)&216,'(5\$7,212)6+\$5(+2/'(59,(:6

The broad outline of our remuneration arrangements have remained largely unchanged since 2012. As our strategy has evolved, we KDYHDOWHUHGVRPHRIWKHPHDVXUHVZHXVHLQRXUVKRUWDQGORQJ term incentive plans, but the overall structure of our remuneration arrangements has remained the same. Shareholders formally approved WKH5HPXQHUDWLRQ3ROLF\LQUHVSHFWRIRXU([HFXWLYH'LUHFWRUVDWWKH\$QQXDO *HQHUDO0HHWLQJLQ-RVHSK3DSD&KDLUPDQRIWKH5HPXQHUDWLRQ &RPPLWWHHKDVPHWZLWKVKDUHKROGHUVEHIRUHWKHSROLF\ZDVDSSURYHG DQGHYHU\HDUVLQFHLQRUGHUWRDVFHUWDLQVKDUHKROGHUYLHZVRQRXU remuneration arrangements.

\$KHDGRIWKH\$QQXDO*HQHUDO0HHWLQJLQ0U3DSDKHOGPHHWLQJVDQG FDOOVZLWKVKDUHKROGHUVKROGLQJDSSUR[LPDWHO\RIWKH&RPSDQ\ªV 6KDUH&DSLWDO\$OWKRXJKWKHKROGHUVRIRIRXUVKDUHVYRWHGDJDLQVWWKH Remuneration Report in 2016, our engagement ahead of the 2016 Annual General Meeting had shown us that shareholders were broadly supportive RIRXU5HPXQHUDWLRQ3ROLF\DQGWKRVHZKRRSSRVHGWKH5HPXQHUDWLRQ Report were primarily voting against the use of discretion rather than any DVSHFWRIWKH5HPXQHUDWLRQ3ROLF\

'XULQJIROORZLQJWKH\$QQXDO*HQHUDO0HHWLQJ0U3DSDFRQWLQXHG to engage extensively with shareholders. In Autumn 2016, he met with or held telephone calls with 28 shareholders holding around 41% of the &RPSDQ\ªVVKDUHV7KHVKDUHKROGHUVKHPHWUDQJHGIURPVRPHRIRXU top 20 shareholders down to smaller active and engaged shareholders holding fewer than one million shares. He discussed our proposals to continue with the same overall remuneration arrangements, whilst altering WKHSHUIRUPDQFHPHDVXUHVXVHGLQWKHVKRUWDQGORQJWHUPLQFHQWLYH plans. We found the discussions with shareholders at this time useful in helping to understand the measures and targets which were important to our shareholders, and those which shareholders did not support. As a result of these discussions, some updated performance measures KDYHEHHQLQFRUSRUDWHGLQWRRXULQFHQWLYHSODQVIRUDQGDWZR\HDU holding period will now apply on the vesting of performance shares for our Executive Directors.

IMPLEMENTATION REPORT

REMUNERATION continued

Remuneration Committee

CURRENT MEMBERS IN 2016

	Member since	Meetings Attended
Joseph Papa (Chairman)	April 2011	6/6
Vinita Bali	April 2015	5/6
Virginia Bottomley	April 2014	6/6
Robin Freestone	September 2015	6/6
Brian Larcombe1	September 2010	5/6
Roberto Quarta	April 2014	6/6

1 Brian Larcombe will be retiring from the Board at the Annual General Meeting to be held on 6 April 2017.

2017 FOCUS

To monitor the effectiveness of the new performance measures, particularly ROIC, in driving performance.
To complete search for Remuneration Committee Chairman elect.
To continue to evaluate the competitiveness of pay.
To monitor external developments relating to remuneration, particularly the green paper on Corporate Governance.

The Remuneration Committee presents the annual report on remuneration (the Implementation Report), which, together with the annual statement from the Chairman of the Remuneration Committee, will be put to shareholders for an advisory vote at the Annual General Meeting to be held on 6 April 2017.

ROLE OF THE REMUNERATION COMMITTEE

Our work falls into the following three areas:

Determination of Remuneration Policy and Packages

Determination of Remuneration Policy for Executive Directors and senior executives.
Approval of individual remuneration packages for Executive 'LUHFWRUVDQG([HFXWLYH2I²FHUVDWOHDVWDQQXDOO\DQGDQ\PDMRU changes to individual packages throughout the year.
Consideration of remuneration policies and practices across the Group.
Approval of appropriate performance measures for shortterm and long-term incentive plans for Executive Directors and senior executives.
Determination of pay-outs under short-term and long-term incentive plans for Executive Directors and senior executives.

Oversight of all Company Share Plans

– Determination of the use of long-term incentive plans and overseeing the use of shares in executive and all-employee plans.

Reporting and Engagement with shareholders on Remuneration Matters

Approval of the Directors' Remuneration Report ensuring compliance with related governance provisions.
Continuation of constructive engagement on remuneration matters with shareholders.

The terms of reference of the Remuneration Committee describe our role and responsibilities more fully and can be found on our website: www.smith-nephew.com

ACTIVITIES OF THE REMUNERATION COMMITTEE IN 2016 AND SINCE THE YEAR END

In 2016, we held six meetings and determined three matters by written resolution. Each meeting was attended by all members of the Committee (except Vinita Bali and Brian Larcombe who each missed one meeting this year). The Chief Executive Officer, the Chief Human Resources Officer and the Senior Vice President, Global Reward, key members of the finance function and the Company Secretary also attended all or part of VRPHRIWKHPHHWLQJVH[FHSWZKHQWKHLURZQUHPXQHUDWLRQZDVEHLQJ discussed. We also met with the independent Remuneration Consultants, :LOOLV7RZHUV:DWVRQZLWKRXWPDQDJHPHQWSUHVHQW2XUSURJUDPPHRI work in 2016 was as follows:

EARLY FEBRUARY

Approval of salaries, awards and payouts in 2016

1RWHGWKH²QDQFLDOUHVXOWVIRUDJDLQVWWKHWDUJHWVXQGHU WKHVKRUWWHUPDQGORQJWHUPLQFHQWLYHSODQV
Agreed the targets for the short-term and long-term incentive plans for 2016.
7KH\$XGLW&RPPLWWHHMRLQHGWKH5HPXQHUDWLRQ&RPPLWWHHIRU both the above agenda items to answer any questions regarding audited numbers and provide assurance.
Approved the quantum of cash payments to Executive Directors DQG([HFXWLYH2I²FHUVXQGHUWKH\$QQXDO,QFHQWLYH3ODQ and awards under the Equity Incentive Programme and the Performance Share Programme.
Approved the vesting of share awards granted in 2013 and reviewed the performance of long-term awards granted in 2013 and 2014. Exercised our discretion to authorise the vesting at threshold of the element of the performance share awards VXEMHFWWR765SHUIRUPDQFH
Reviewed benchmark data increases to salaries across the Group and approved salary increases for Executive Directors DQG([HFXWLYH2I²FHUVZLWKHIIHFWIURP\$SULO
Approved the text of the Remuneration Report.

LATE FEBRUARY

Final approval of the Remuneration Report (via voice conference)

\$SSURYHGWKH²QDOWDUJHWVIRUWKHVKRUWWHUPDQGORQJWHUP incentive plans for 2016.
\$SSURYHGWKH²QDOWH[WRIWKH5HPXQHUDWLRQ5HSRUW

JULY

Mid-year Review of Remuneration Arrangements

Reviewed the shareholder response to the Remuneration Report at the Annual General Meeting and noted shareholders' comments that would be addressed in this report.
Reviewed the performance of long-term awards granted in 2014, 2015 and 2016.
Discussed and planned programme of engagement with institutional investors on remuneration.
Considered the Executive Director remuneration packages in comparison to our peers.
Reviewed adherence to shareholding guidelines by Executive 'LUHFWRUV([HFXWLYH2I²FHUVDQGVHQLRUH[HFXWLYHV
Monitored dilution limits and the number of shares available for use in respect of executive and all-employee share plans.
Discussed preliminary review of senior executive remuneration framework and measures.

EARLY NOVEMBER

Received a report from the Chairman of the Remuneration Committee on recent engagement with shareholders.
Discussed comments from members of the Audit Committee in GHWHUPLQLQJWKHGH²QLWLRQDQGUDQJHVIRUSURSRVHGPHWULFVIRU short and long-term incentive plans.
Approved the Remuneration Policy to be put to shareholders at the Annual General Meeting to be held in April 2017, including the revised metrics for the short and long-term incentive plans and the introduction of a post-vesting two year holding period IRUWKH3HUIRUPDQFH6KDUH\$ZDUGV
5HYLHZHG²UVWGUDIWRIWKH5HPXQHUDWLRQ5HSRUWIRU

LATE NOVEMBER

Review of Remuneration Strategy

Reviewed and considered the principles for determining payouts under the long-term plans due to vest in 2017.
\$SSURYHGWKH²QDO5HPXQHUDWLRQ6WUDWHJ\IRU
Reviewed market data for the Executive Directors and Executive 2I²FHUVSUHSDUHGLQDFFRUGDQFHZLWKWKHDJUHHGPHWKRGRORJ\

An additional meeting was held in April to consider shareholder views immediately ahead of the Annual General Meeting and additional matters were approved by written resolution.

Since the year end, we have also reviewed the financial results for 2016 against the targets under the short-term and long-term incentive DUUDQJHPHQWVMRLQWO\ZLWKWKH\$XGLW&RPPLWWHHDQGKDYHDJUHHGWKH targets for the short-term and long-term incentive plans for 2017. We have also approved increases to the salaries of Executive Directors and Executive Officers and determined cash payments under the Annual Incentive Plan, awards under the Equity Incentive Programme and the Performance Share Programme, and the vesting of awards under the Performance Share Programme granted in 2014. Finally, we approved WKHZRUGLQJRIWKLV'LUHFWRUVª5HPXQHUDWLRQ5HSRUW

During the year, the Remuneration Committee received information and advice from Willis Towers Watson, an independent executive remuneration consultancy firm appointed by the Remuneration Committee in 2011 following a full tender process. They provided advice on market trends and remuneration issues in general, attended Remuneration Committee meetings, assisted in the review of the Directors' Remuneration Report, provided market benchmark data on compensation design and levels, undertook calculations relating to the PSP performance conditions and supported a review of the Remuneration Policy. The fees paid to Willis Towers Watson for Remuneration Committee advice during 2016, charged on a time and expense basis was £214,939 in total. Willis Towers Watson also provided other human resources and compensation advice to the Company for the level below the Board. Willis Towers Watson comply with the Code of Conduct in relation to Executive Remuneration Consulting in the United Kingdom and the Remuneration Committee is satisfied that WKHLUDGYLFHLVREMHFWLYHDQGLQGHSHQGHQW

IMPLEMENTATION REPORT

REMUNERATION continued

SINGLE TOTAL FIGURE ON REMUNERATION

The amounts for 2016 have been converted into US\$ for ease of comparability using the exchange rates of £ to US\$1.349 and € to US\$1.106 (2015: £ to US\$1.5281 and € to US\$1.1089).

			Fixed pay	Annual variable pay	Hybrid	Long-term variable pay
		Payment		Annual	Annual
		in lieu of	Taxable	Incentive	Incentive	Performance
Director	Base salary	pension	EHQH²WV	Plan – cash	Plan – equity	Share Plan	Total
Olivier Bohuon Appointed 1 April 2011
2016	\$1,295,017	\$388,505	\$166,465	\$592,902	\$652,258	\$227,174	\$3,322,321
2015	\$1,260,594	\$378,178	\$228,698	\$1,419,192	\$825,396	\$1,230,319	\$5,342,377
Julie Brown Appointed 4 February 2013 (resigned with effect from 11 January 2017)
2016	\$730,257	\$219,078	\$30,007	–	–	–	\$979,342
2015	\$803,116	\$240,936	\$29,862	\$843,482	\$444,954	\$678,497	\$3,040,847

Base salary: the actual salary receivable for the year.

Payment in lieu of pension: the value of the salary supplement paid by the Company in lieu of a pension.

Benefits: the gross value of all taxable benefits (or benefits that would be taxable in the UK) received in the year.

Annual Incentive Plan – cash: the value of the cash incentive payable for performance in respect of the relevant financial year.

Annual Incentive Plan – equity:WKHYDOXHRIWKHHTXLW\HOHPHQWDZDUGHGLQUHVSHFWRISHUIRUPDQFHLQWKHUHOHYDQWILQDQFLDO\HDUEXWVXEMHFWWRDQ ongoing performance test as described on pages 91 to 92 of this report.

Performance Share Plan:WKHYDOXHRIVKDUHVYHVWLQJWKDWZHUHVXEMHFWWRSHUIRUPDQFHRYHUWKHWKUHH\HDUSHULRGHQGLQJRQ'HFHPEHULQWKH relevant financial year, based on an estimated share price of 1,167.51p per share, which was the average price of a share over the last quarter of 2016. The value of the 2013 share awards that vested in 2016 have now been restated with the share price on the date of actual vesting being 1,130p per share on 9 March 2016. The value of the 2014 Share Awards that will vest in March 2017 are calculated in the table by using the Q4 average share price of 1,167.51p per share.

Total: the sum of the above elements.

All data is presented in our reporting currency of US\$. Amounts for Olivier Bohuon and Julie Brown have been converted from EURO and GBP respectively using average exchange rates. Given currency volatility in 2016, this may give the impression of changes that are misleading. Data is presented in local currency in the subsequent sections in the interests of full transparency.

5HVLJQDWLRQRI-XOLH%URZQDV&KLHI)LQDQFLDO2I²FHU

Julie Brown resigned as Chief Financial Officer with effect from 11 January 2017 in order to take up a position at another company. She will therefore receive no cash or equity awards under the Annual Incentive Plan in respect of her service during 2016. Her awards under the Equity Incentive Programme and the Performance Share Programme all lapsed with effect from 11 January 2017.

Graham Baker will be appointed Chief Financial Officer on 1 March 2017 and will receive a base salary of £510,000. He will be entitled to participate in the incentive plans as detailed below.

BASE SALARY

With effect from 1 April 2016, Executive Directors were paid the following base salaries, reflecting an increase of 3%:

	2015	2016
Olivier Bohuon	€1,145,135	€1,179,490
Julie Brown	£529,420	£545,303

In February 2017, we reviewed the base salaries of the Executive Directors, having considered general economic conditions and average salary increases across the rest of the Group, which have averaged at 3.5%. The Remuneration Committee has agreed that there will be no increase to the base salary of the Executive Directors.

PAYMENT IN LIEU OF PENSION

In 2016, both Olivier Bohuon and Julie Brown received a salary supplement of 30% of their basic salary to apply towards their retirement savings, in lieu of membership of one of the Company's pension schemes. The same arrangement will apply in 2017 for Olivier Bohuon and for Graham Baker, following his appointment on 1 March 2017.

BENEFITS

In 2016, both Olivier Bohuon and Julie Brown received death in service cover of seven times basic salary, of which four times salary is payable as a lump sum with the balance used to provide for any spouse and dependent persons. They also received health cover for themselves and their families, a car allowance and financial consultancy advice. Olivier Bohuon also received assistance with travel costs between London and Paris. The same arrangements will apply in 2017 for Olivier Bohuon and for Graham Baker. The following table summarises the value of benefits on an element-byelement basis in respect of 2015 and 2016.

	Olivier Bohuon			Julie Brown
	2015	2016	2015	2016
Health cover	£15,040	£15,672	£1,144	£1,440
Car and fuel allowance Financial	€21,344	€18,292	£14,640	£14,640
consultancy advice	£95,052	£66,572	£3,758	£6,164
Travel costs	£20,961	£23,814	–	–
Subscriptions	£3,120	£2,344	–	–

ANNUAL INCENTIVE PLAN 2016

During 2016, 70% of the Annual Incentive Plan for Executive Directors was EDVHGRQWKHDFKLHYHPHQWRIVSHFLILFILQDQFLDOREMHFWLYHVDQGRIWKH DZDUGGHSHQGHGRQWKHDFKLHYHPHQWRIVSHFLILFEXVLQHVVREMHFWLYHV

Financial Objectives

The financial measures on which performance was assessed in 2016 were revenue, trading profit and trading cash. For each of these measures, the Committee determined threshold, target and maximum performance in February 2016. In February 2017, the Committee reviewed performance DJDLQVWHDFKRIWKHVHREMHFWLYHVDQGGHWHUPLQHGWKHSHUFHQWDJHRIWKH DZDUGZKLFKZRXOGYHVWLQUHVSHFWRIHDFKRIWKHREMHFWLYHVDOODVGHWDLOHG in the table below.

	Threshold	Target	Maximum	Actual1
Revenue	\$4,641m	\$4,785m	\$4,929m	\$4,647m
7UDGLQJSUR²W	\$1,052m	\$1,108m	\$1,163m	\$1,023m
Trading cash	\$833m	\$926m	\$1,019m	\$779m

1 At constant exchange rates. See page 175.

This resulted in a bonus achievement of 16% of salary in respect of the ILQDQFLDOREMHFWLYHV

	Weight	Achieved % of target	Award % of salary
Revenue1	30%	97.1%	16%
7UDGLQJSUR²W1	30%	92.3%	0%
Trading cash1	10%	84.1%	0%
	Ÿ Ÿ	Total	16%

1 At constant exchange rates. See page 175.

Accordingly, the following amounts have been earned by Olivier Bohuon under the cash element of the annual incentive plan in respect of his ILQDQFLDOREMHFWLYHV

Olivier Bohuon	€188,718

Business Objectives

:KHQVHWWLQJEXVLQHVVREMHFWLYHVIRUWKHXSFRPLQJ\HDUWKH%RDUGORRNV not only at the expected financial performance for the year, but also at the actions it expects the Executive Director to carry out in the year to build a solid foundation for financial performance over the longer term. ,QUHYLHZLQJSHUIRUPDQFHDJDLQVWWKHVHREMHFWLYHVDWWKHHQGRIWKH\HDU the Board is mindful that there is not a necessary correlation between ILQDQFLDOSHUIRUPDQFHDQGWKHDFKLHYHPHQWRIEXVLQHVVREMHFWLYHVDQG WKDWEXVLQHVVREMHFWLYHVPD\ZHOOEHDFKLHYHGLQD\HDUZKHQILQDQFLDO performance for that year has not been outstanding.

The table on the following page sets out how Olivier Bohuon has SHUIRUPHGDJDLQVWWKHEXVLQHVVREMHFWLYHVRI%XVLQHVV3URFHVV 3HRSOHDQG&XVWRPHU

IMPLEMENTATION REPORT

REMUNERATION continued

BUSINESS PROCESS

Improved inventory turn by 7.75% over the previous year, against a target of 8%.
Improved service and supply levels to 95% against a target RI
Continued in line with target to improve and simplify Quality Management System resulting in reduction in backlog of FRPSODLQWVIHZHULQWHUQDODXGLWDQGWKLUGSDUW\²QGLQJVDQG LQFUHDVHGUDWHRIFORVXUHRI²QGLQJV

PEOPLE

Continued roll-out of Great Place to Work programme, achieved accreditation in Canada, China, Denmark and South Africa against target of three countries.
Achieved target of strengthening commercial platform by implementing new global commercial organisation under a &KLHI&RPPHUFLDO2I²FHUFHQWUDOLVHGSULFLQJDQGVDOHVIRUFH excellence to drive commercial excellence.
Achieved target of extending single country managing director model to the US, completing 'spans and layers' restructure of Group to improve decision making and GHOLYHUHI²FLHQF\
Achieved target of appointing President of Research and Development to lead a newly formed single global R&D organisation, with team structure implemented.
Achieved target of updating succession and identifying candidates.

CUSTOMER

Achieved target of implementing new sustainability strategy including robust metrics.
Achieved 8 out of 15 sustainability targets including: an 11% reduction in water usage; and maintain top quartile safety performance in our sector.
Set tone from the top and championed ethics and compliance programme, achieving 99% of worldwide compliance training completed in line with target.

OTHER ACHIEVEMENTS

– ,QDGGLWLRQ2OLYLHUKDGRWKHUDFKLHYHPHQWVZKLFKZHUH QRWHQYLVDJHGZKHQVHWWLQJREMHFWLYHVDWWKHEHJLQQLQJRI the year, notably: above plan ArthroCare revenue synergies; and the disposal of the Gynaecology business resulting in DPLOOLRQVKDUHEX\EDFNIRUVKDUHKROGHUV

Olivier Bohuon level of award – business objectives €406,924 representing 34.5% of salary (30% target award).

The Remuneration Committee has however considered whether in the context of the Company's financial performance during 2016, it would be appropriate to make a cash payment at this level, given the lack of alignment with shareholder interests. The Remuneration Committee has therefore determined to exercise its discretion and modify the total payment downwards by 10%. This reduces the total payment to be made under the Cash Incentive Plan to 45.45% of salary (€536,078).

Equity Incentive Award

The individual performance of all employees in the Group is assessed on two bases. The first looks at what has been achieved, namely the extent to which the employee has performed against the financial and business REMHFWLYHVVHWDWWKHEHJLQQLQJRIWKH\HDU7KHVHFRQGORRNVDWKRZWKLV performance has been achieved, reflecting the right culture and values. Against each, the employee is rated as having performed below, in line RUDERYHH[SHFWDWLRQV

The Remuneration Committee has considered the performance of Olivier Bohuon in exactly the same way as other employees in the Group when determining the level of Equity Award to be made to him. In assessing his SHUIRUPDQFHDJDLQVWWKHVDPHILQDQFLDODQGEXVLQHVVREMHFWLYHVXVHGWR determine the level of his cash award, the Remuneration Committee has determined that on the first criterion (assessing what he has achieved) 2OLYLHU%RKXRQKDVPRVWO\PHWKLVREMHFWLYHVWKURXJKRXWWKH\HDU2QWKH second criterion (assessing how he has achieved), the Remuneration Committee has determined that he has performed in line with expectations. A rating of 'in line with expectations' on both bases results LQDQ(TXLW\DZDUGRIRIVDODU\

In summary, as a result of the financial performance described on page 91 and the performance described in the table on this page, the Remuneration Committee determined that the following awards be made under the Annual Incentive Plan in respect of performance in 2016:

	Cash Component		Equity Component
Executive Director	% of salary	Amount	% of salary	Amount
Olivier Bohuon	45.45%	€536,078	50%	€589,745
Julie Brown	0%	£0	0%	£0

7KHVH²JXUHVDUHFRQYHUWHGLQWRGROODUVDQGLQFOXGHGXQGHU\$QQXDO,QFHQWLYH3ODQFDVK? DQGHTXLW\?LQWKHVLQJOH²JXUHWDEOHRQSDJH

As a result of the 2016 performance assessment for Olivier Bohuon, the first tranche of the Equity Incentive Award made in 2016, the second tranche of the Equity Incentive Award made in 2015 and the third tranche RIWKH(TXLW\,QFHQWLYH\$ZDUGPDGHLQZLOOYHVW

ANNUAL INCENTIVE PLAN 2017

Cash Element

During the year, the Remuneration Committee reviewed the operation of the Annual Incentive Plan and for 2017 onwards have made changes to the performance measures and weightings which will apply to the cash element of the Annual Incentive Plan. These changes place a greater emphasis on financial goals reflecting the importance we place on achievement of financial measures. The financial measures now comprise 75% of the total award (2016: 70%) and are split between revenue (35%), trading profit margin (25%), and trading cash flow (15%). We have selected these measures because revenue and trading profit margin constitute the key drivers of profit growth, and trading cash flow is a key measure of how efficiently we turn our assets into cash. We have introduced trading profit margin replacing the previous trading profit measure as margin is a critical measure both for the business and our investors and delivering margin improvements is a core commitment under our strategy.

7KHUHPDLQLQJRIWKHWRWDODZDUGDUHLQGLYLGXDOEXVLQHVVREMHFWLYHV similar to previous years, tied to our strategic priorities. For 2017, these EXVLQHVVREMHFWLYHVIDOOLQWRWKHFDWHJRULHVRI%XVLQHVVSURFHVV3HRSOH and Customer.

The weighting of the performance measures for 2017 can be summarised as follows:

Financial objectives	75%
Revenue	35%
7UDGLQJSUR²WPDUJLQ	25%
7UDGLQJFDVK³RZ	15%
Business objectives	25%
Business process	8.33%
People	8.33%
Customer	8.33%

The Board has determined that the disclosure of performance targets at this time is commercially sensitive. These targets are determined within the context of a five-year plan and the disclosure of these targets could give information to our competitors about details of our strategy which would enable them to compete more effectively with us to the detriment of our performance. These targets, together with threshold and maximum will however be disclosed in next year's Annual Report, when the Committee will discuss performance against the targets. For the financial performance measures, 'Target' is set at target performance as approved by the Board in the Budget for 2017. 'Threshold' and 'Maximum' are set at +/-3% from the target for revenue, at +/-0.45 percentage points for the trading profit margin measure and at +/-10% for the trading cash flow measure.

Equity Award Element

The Equity Award element will operate in 2017 in exactly the same way as in 2016 and previous years. The Remuneration Committee will assess what has been achieved by the Executive Directors against the same financial DQGEXVLQHVVREMHFWLYHVXVHGWRGHWHUPLQHWKHOHYHORIWKHLUFDVKDZDUGV The Remuneration Committee will assess how the Executive Directors KDYHDFKLHYHGWKHLUREMHFWLYHVE\FRQVLGHULQJWKHUROHSOD\HGE\WKH Executive Directors in establishing an appropriate culture and set of values throughout the organisation. The level of Equity Incentive Award to be made will be determined according to the following matrix:

		Assessment of how Executive Directors have achieved
		Below expectations	In line with expectations	Above expectations
	Below expectations	No Award	No Award	No Award
Assessment of what has been	In line with expectations	No Award	Award of 50% of Salary	Award of 55% of Salary
achieved	Above expectations	No Award	Award of 55% of Salary	Award of 65% of Salary

DETAILS OF AWARDS MADE UNDER THE EQUITY INCENTIVE PROGRAMME DURING 2016

Details of conditional awards over shares, granted as part of the Annual Equity Incentive Programme to Executive Directors under the rules of the Global Share Plan 2010 for their 2015 performance (awarded in 2016) are shown below. The performance conditions and performance periods applying to these awards are detailed above.

	Number of shares
Date granted	under award	Date vesting
Olivier Bohuon
7 March 2016	50,159	1/3 on 7 March 2017
		1/3 on 7 March 2018
		1/3 on 7 March 2019
Julie Brown	Ÿ	Ÿ
7 March 2016	25,342	This award has lapsed
		in its entirety on
		Ÿ-DQXDU\

The precise awards granted in 2017 to Olivier Bohuon in respect of service in 2016 will be announced when the awards are made and will be disclosed in the 2017 Annual Report. No awards will be made to -XOLH%URZQRUWR*UDKDP%DNHU

Graham Baker will participate in the Annual Incentive Plan (Cash and Equity) from 1 March 2017, the date of his appointment.

3(5)250\$1&(6+\$5(3525\$00(¥5\$176

Performance share awards in 2016 were made to Executive Directors under the Global Share Plan 2010 to a maximum value of 190% of salary (95% for target performance). Performance will be measured over the three ILQDQFLDO\HDUVEHJLQQLQJLQDQGZLOOYHVWVXEMHFWWRSHUIRUPDQFH DQGFRQWLQXHGHPSOR\PHQWLQRIWKHDZDUGZLOOYHVWVXEMHFW to cumulative free cash flow performance, 25% to revenue in Emerging Markets and 25% to relative TSR.

Cumulative free cash flow is defined as net cash inflow from operating activities, less capital expenditure, less the cash flow input of certain DGMXVWHGLWHPV)UHHFDVKIORZLVWKHPRVWDSSURSULDWHPHDVXUHRI cash flow performance because it relates to cash generated to finance additional investments in business opportunities, debt repayments and distribution to shareholders. This measure includes significant elements RIRSHUDWLRQDOILQDQFLDOSHUIRUPDQFHDQGKHOSVWRDOLJQ([HFXWLYH'LUHFWRU awards with shareholder value creation.

7KHRIWKHDZDUGWKDWZLOOEHVXEMHFWWRFXPXODWLYHIUHHFDVKIORZ performance will vest as follows:

&XPXODWLYHIUHHFDVK³RZ	Award vesting as % of salary
Below \$1.585bn	Nil
\$1.585bn	23.75%
\$1.822bn	47.5%
\$2.059bn or more	95%

Awards will vest on a straight-line basis between these points.

IMPLEMENTATION REPORT

REMUNERATION continued

Revenue in Emerging Markets is defined as cumulative revenue over a three-year period beginning 1 January 2016 from our Emerging Markets. 7KHRIWKHDZDUGWKDWZLOOEHVXEMHFWWRUHYHQXHLQ(PHUJLQJ0DUNHW performance will vest as follows:

Revenue in Emerging Markets	Award vesting as % of salary
Below Threshold	Nil
Threshold	11.875%
Target	23.75%
Maximum or above	47.5%

It is not possible to disclose precise targets for revenue growth in Emerging Markets as this will give commercially sensitive information to our competitors concerning our growth plans in Emerging Markets, which they could use against us to launch new products and enter new markets. This would be detrimental to our business in Emerging Markets, which are key to our success overall. This target however will be disclosed in the 2018 Annual Report, when the Committee will discuss performance against the target.

25% of the award will vest based on the Company's Total Shareholder Return (TSR) performance relative to a bespoke peer group of companies in the medical devices sector over a three-year period commencing 1 January 2016 as follows:

Relative TSR ranking	Award vesting as % of salary
Below median	Nil
Median	11.875%
Upper quartile	47.5%

Awards will vest on a straight-line basis between these points. If the Company's TSR performance is below median, none of this part of the award will vest.

The bespoke peer group for the 2016 awards comprises the following companies: Baxter International, Becton, Dickinson and Company, Boston Scientific Corporation, C. R. Bard, Coloplast A/S, CONMED Corporation, Edwards Lifesciences Corporation, Essilor International SA, Getinge AB, *16WRUH1RUG\$60HGWURQLF6WU\NHU6KLUHSOF6RQRYD+ROGLQJ\$* 6W-XGH0HGLFDO:LOOLDP'HPDQWDQG=LPPHU%LRPHW

The Group's TSR performance and its performance relative to the comparator group is independently monitored and reported to the Remuneration Committee by Willis Towers Watson.

PERFORMANCE SHARE PROGRAMME 2017

A performance share award will be made in 2017 to Olivier Bohuon and Graham Baker under the Global Share Plan 2010 to a maximum value of 190% of salary (95% for target performance).

During 2016, the Remuneration Committee reviewed the operation of the Performance Share Programme and have made changes to the performance measures and weightings which will apply to awards going forward.

Performance will be measured over the three financial years commencing -DQXDU\DQGZLOOYHVWVXEMHFWWRSHUIRUPDQFHDQGFRQWLQXHG HPSOR\PHQWLQ6XEMHFWWRVKDUHKROGHUDSSURYDORIWKHQHZ Remuneration Policy at the Annual General Meeting to be held on 6 April 2017, on vesting, sufficient shares will be sold to cover taxation obligations and the Executive Directors will be required to hold the net shares for a further period of two years.

We have selected four equally weighted performance measures – relative TSR, return on invested capital, sales growth and cumulative free cash flow. We have selected these measures because of their link to our strategic priorities and the alignment with the shareholder experience. The four measures are defined as follows:

Relative TSR provides accountability and alignment to shareholders. 25% of the award will vest based on the Company's TSR performance relative to constituents of two separate indices over a three-year period commencing 1 January 2017 as follows:

TSR relative to the peer groups	Award vesting as % of salary
Below median	Nil
Median	11.875%
Upper quartile	47.5%

Awards will vest on a straight-line basis between these points. If the Company's TSR performance is below median, none of this part of the award will vest.

The two equally weighted peer groups against which the Company's TSR performance will be measured will be defined at the start of each performance period based on constituents of the following:

\$VHFWRUEDVHGSHHUJURXSEDVHGRQWKRVHFRPSDQLHVFODVVL²HG as the S&P 1200 Global Healthcare subset comprising medical GHYLFHVHTXLSPHQWDQGVXSSOLHVFRPSDQLHVRI²FLDOLQGXVWU\ FODVVL²FDWLRQVRI©+HDOWK&DUH(TXLSPHQWDQG6XSSOLHV/LIH Sciences Tools & Services and Health Care Technology'. This is a broader sector-based peer group than in previous years, so that we maintain a focus on outperforming our broad sector without being impacted by the volatility of a smaller group.
)76(FRQVWLWXHQWVH[FOXGLQJ²QDQFLDOVHUYLFHVDQGFRPPRGLWLHV companies. This is in response to shareholders who assess our performance not based on sector, but instead based on the index we operate in.

The Group's TSR performance and its performance relative to the comparator group is independently monitored and reported to the Remuneration Committee by Willis Towers Watson.

Return on invested capital (ROIC) adds focus on enhancing operating performance and reducing the under-performing asset base. The introduction of ROIC as a performance measure will incentivise better financial discipline, reward enhanced operating performance and provide a link to an area that our shareholders have identified as a high priority IRULPSURYHPHQWRIWKHDZDUGZLOOEHVXEMHFWWR52,&DQGZLOOYHVW as follows:

ROIC will be defined as:

Net Operating Profit1 OHVV\$GMXVWHG7D[HV²

(Opening Net Operating Assets + Closing Net Operating Assets3 )/2

ROIC will be measured each year of the three year performance period and a simple average of the three years will be compared to the targets below (precise numbers will be included in the Remuneration Report prospectively). The Remuneration Committee will have the discretion WRDGMXVW52,&WDUJHWVLQWKHFDVHRIVLJQLILFDQWHYHQWVVXFKDVPDWHULDO PHUJHUVDFTXLVLWLRQVDQGGLVSRVDOVDQGWKDWVXFKDGMXVWPHQWZLOOEH consistent with the deal model and approved by the Board at the time of the transaction.

2SHUDWLQJSUR²WLVDVGLVFORVHGLQWKH*URXSLQFRPHVWDWHPHQWLQWKH\$QQXDO5HSRUW

\$GMXVWHG7D[HVUHSUHVHQWVRXU7D[DWLRQFKDUJHSHUWKH*URXSLQFRPHVWDWHPHQW DGMXVWHGIRUWKHLPSDFWRIWD[RQLWHPVQRWLQFOXGHGLQ2SHUDWLQJSUR²WQRWDEO\LQWHUHVW LQFRPHDQGH[SHQVHRWKHU²QDQFHFRVWVDQGVKDUHRIUHVXOWVRIDVVRFLDWH

3 Net Operating Assets comprises net assets from the Group balance sheet (Total assets less Total liabilities) excluding the following items: Investments, Investments LQDVVRFLDWHV5HWLUHPHQWEHQH²WDVVHWVDQGOLDELOLWLHV/RQJWHUPERUURZLQJV%DQN overdrafts and loans, and Cash at bank.

Return on Invested Capital	Award vesting as % of salary
Below Threshold 11.1%	Nil
Threshold 11.1% (-1.9% of target)	11.875%
Target 13% (as derived from the Strategic Plan)	23.75%
Maximum or above 14.9% (+1.9% of target)	47.5%

Awards will vest on a straight-line basis between these points.

Sales growth focuses on growth in both Established Markets and Emerging Markets. This is a broadening of the previous sales growth measure to focus beyond our emerging markets. 25% of the award will be VXEMHFWWRVDOHVJURZWKDQGZLOOYHVWDVIROORZV

Sales growth over three year period commencing 1 January 2017	Award vesting as % of salary
Below Threshold	Nil
Threshold (-3% of target)	11.875%
Target	23.75%
Maximum or above (+3% of target)	47.5%

It is not possible to disclose precise targets for sales growth as this will give commercially sensitive information to our competitors concerning our growth plans and is potentially price sensitive information. This target however will be disclosed in the 2019 Annual Report, when the Committee will discuss performance against the target.

Cumulative cash flow is important as it is derived from increased revenues and healthy trading profits. Having a healthy cash flow will enable XVWRFRQWLQXHWRJURZDQGLQYHVWRIWKHDZDUGZLOOEHVXEMHFWWR cumulative free cash flow performance and will vest as follows:

&XPXODWLYHIUHHFDVK³RZ	Award vesting as % of salary
Below \$1,482m	Nil
\$1,482m (-13% of target)	11.875%
\$1,703m	23.75%
\$1,924m or more (+13% of target)	47.5%

VESTING OF AWARDS MADE IN 2014

Since the end of the year, the Remuneration Committee has reviewed the vesting of conditional awards made to Executive Directors under the Global Share Plan 2010 in 2014. Vesting of the conditional awards made LQZDVVXEMHFWWRSHUIRUPDQFHFRQGLWLRQVEDVHGRQ765UHYHQXHLQ Emerging Markets and cumulative free cash flow measured over a threeyear period commencing 1 January 2014.

25% of the award was based on the Company's TSR relative to a bespoke group of 15 medical devices companies. Against this peer group, the Company's TSR performance ranked below median meaning that this part of the award therefore vested at 0%.

50% of the award was based on cumulative free cash flow performance. 2YHUWKHWKUHH\HDUSHULRGWKHDGMXVWHGFXPXODWLYHIUHHFDVKIORZZDV ELOOLRQEHORZWKHWKUHVKROGUHTXLUHGIRUYHVWLQJ7KHVHDGMXVWPHQWV include items such as Board approved M&A, including the acquisitions of Healthpoint and ArthroCare and Board approved Business Plans such as the Group Optimisation programme, the Regranex inventory and metal-onmetal settlements. This part of the award therefore vested at 0%.

25% of the award was based on revenues in Emerging Markets. The threshold set in 2014 was \$2,133 million with a target of \$2,510 million. 2YHUWKHWKUHH\HDUSHULRGWKHDGMXVWHGUHYHQXHVLQ(PHUJLQJ0DUNHWV ZHUHPLOOLRQ7KHVHDGMXVWPHQWVLQFOXGH%RDUGDSSURYHG0 \$ This part of the award therefore vested at 64% of target (32% of maximum).

Overall therefore, the conditional awards made in 2014 will vest at 8% of maximum (16% of target) on 7 March 2017 as follows:

Director	Date of grant	Number of shares under award at maximum	Number vesting
Olivier Bohuon	7 March 2014	180,304	14,424
Julie Brown	7 March 2014	100,688	This award has lapsed in its entirety on 11 January 2017

IMPLEMENTATION REPORT

REMUNERATION continued

SUMMARY OF SCHEME INTERESTS AWARDED DURING THE FINANCIAL YEAR

		Julie Brown1
Basis on which award is made	Number of shares	Face value	Number of shares	Face value
\$QQXDO(TXLW\,QFHQWLYH\$ZDUGVHHŸSDJH	50,159	€744,358	25,342	£291,181
Performance Share Award at maximum (see page 93)	146,620	€2,175,756	87,544	£1,005,898
EDVHVDODU\DWŸPD[LPXP	Ÿ	Ÿ		Ÿ

1 Awards lapsed in full on 11 January 2017 when Julie Brown left the Company.

Please see Policy Table on pages 81 to 82 for details of how the above plans operate. The number of shares is calculated using the closing share price on the day before the grant, which for the awards granted on 7 March 2016 was 1,149p.

DETAILS OF OUTSTANDING AWARDS MADE UNDER THE PERFORMANCE SHARE PROGRAMME

'HWDLOVRIFRQGLWLRQDODZDUGVRYHUVKDUHVJUDQWHGWR([HFXWLYH'LUHFWRUVVXEMHFWWRSHUIRUPDQFHFRQGLWLRQVDUHVKRZQEHORZ7KHVHDZDUGVZHUHJUDQWHG under the Global Share Plan 2010. The performance conditions and performance periods applying to these awards are detailed on page 93.

	Date granted	Number of ordinary shares under award at maximum	Date of vesting
Olivier Bohuon	7 March 20141	180,304	7 March 2017
	9 March 2015	133,156	9 March 2018
	7 March 2016	146,620	7 March 2019
Julie Brown	7 March 20142	100,688	7 March 2017
	9 March 20152	85,366	9 March 2018
	7 March 20162	87,544	7 March 2019

1 On 7 February 2017, 92% of the award granted at maximum to Olivier Bohuon lapsed following completion of the performance period.

2 On 11 January 2017, these awards lapsed in their entirety on Julie Brown ceasing to be an employee of the Company.

DETAILS OF OPTION GRANTS UNDER THE ALL-EMPLOYEE SHARESAVE PLAN

Details of options held by Executive Directors under the Smith & Nephew ShareSave Plan (2012) are shown below.

Director	Date granted	Number of shares under option	Date of vesting	Exercise period	Option price
Julie Brown	17 September 2013	2,400 Ordinary Shares	1 November 2018	1 November 2018 – 30 April 2019	£6.25

These options lapsed in their entirety in January 2017, when Julie Brown left the Company.

SINGLE TOTAL FIGURE ON REMUNERATION

Chairman and Non-Executive Directors

				Non-Executive Director/
		Basic annual fee1		Committee fee		Intercontinental travel fee		Total
Ÿ'LUHFWRU	2015	2016	2015	2016	2015	2016	2015	2016
Roberto Quarta	£400,000	£409,750	N/A	N/A	£3,500	£3,500	£403,500	£413,250
Vinita Bali	£63,000	£63,000	N/A	N/A	£17,500	£21,000	£80,500	£84,000
	\$6,000	\$9,780	Ÿ		Ÿ		\$6,000	\$9,780
Ian Barlow	£66,150	£68,135	£15,000	£18,750	£3,500	£3,500	£84,650	£90,385
Virginia Bottomley	£66,150	£68,135	N/A	N/A	£3,500	£3,500	£69,650	£71,635
Erik Engstrom	£66,150	£68,135	N/A	N/A	£3,500	£3,500	£69,650	£71,635
Robin Freestone	£21,000	£68,135	N/A	N/A	£3,500	£3,500	£24,500	£71,635
Michael Friedman	\$126,000	\$129,780	\$27,000	\$33,000	\$42,000	\$35,000	\$195,000	\$197,780
Brian Larcombe	£66,150	£68,135	£15,000	£18,750	£3,500	£3,500	£84,650	£90,385
Joseph Papa	\$126,000	\$129,780	\$27,000	\$33,000	\$35,000	\$35,000	\$188,000	\$197,780

1 The basic annual fee includes shares purchased for the Chairman and Non-Executive Directors in lieu of part of the annual fee, details of which can be found RQWKHWDEOHRQSDJH

Chairman and Non-Executive Director Fees

In February 2016, the Remuneration Committee reviewed the fees paid to the Chairman and the Board reviewed the fees paid to the Non-Executive Directors and determined that with effect from 1 April 2016, the fees paid would be as follows:

Annual fee paid to the Chairman	£412,000 of which £103,000 paid in shares (increase of 3%)
Annual fee paid to Non-Executive Directors	£68,135 of which £5,135 paid in shares (increase of 3%) Or \$129,780 of which \$9,780 paid in shares (increase of 3%)
Intercontinental travel fee (per meeting)	£3,500 or \$7,000 (unchanged)
Fee for Senior Independent Director and Committee Chairman	RUUH³HFWLQJLQFUHDVHGUHVSRQVLELOLWLHV

In February 2017, the Remuneration Committee reviewed the fees paid to the Chairman and the Board reviewed the fees paid to the Non-Executive Directors and determined that with effect from 1 April 2017, the fees paid would remain unchanged.

&KLHI([HFXWLYH2I²FHUªVUHPXQHUDWLRQFRPSDUHGWRHPSOR\HHVJHQHUDOO

The percentage change in the remuneration of the Chief Executive Officer between 2015 and 2016 compared to that of employees generally is as follows:

	Base salary % change 2016	%HQH²WV % change 2016	Annual cash bonus % change 2016
&KLHI([HFXWLYH2I²FHU	2.7%	-27%	-58%
Average for all employees	3.5%	N/A	N/A

The average cost of wages and salaries for employees generally decreased by 3.1% in 2016 (see Note 3.1 to the Group accounts). Figures for annual cash bonuses are included in the numbers.

Payments made to past Directors

No payments were made to former Directors in the year.

3D\PHQWVIRUORVVRIRI²FH

No payments were made in respect of a Director's loss of office in 2016.

Service contracts

Executive Directors are employed on rolling service contracts with notice periods of up to 12 months from the Company and six months from the Executive Director. Further information can be found on page 84 of the Policy Report.

Outside directorships

Olivier Bohuon is a Non-Executive Director of Virbac SA and received €21,000 in respect of this appointment. He is also a Non-Executive Director of Shire Plc and received €160,397 in respect of this appointment. Julie Brown is a Non-Executive Director of Roche Holding Ltd and received a fee of CHF310,000.

'LUHFWRUVªLQWHUHVWVLQRUGLQDU\VKDUHV

Beneficial interests of the Executive Directors in the ordinary shares of the Company are as follows:

			Olivier Bohuon	Julie Brown
	1 January 2016	31 December 2016	17 February 20171	1 January 2016	31 December 2016	17 February 20171
Ordinary shares	338,183	424,288	424,2883	42,945	90,040	N/A
Share options	0	0	0	2,400	2,400	N/A
Performance share awards2	554,388	460,080	294,200	318,920	273,598	N/A
Equity Incentive awards	107,142	96,417	96,417	42,377	50,649	N/A
Other awards	0	0	0	25,000	0	N/A

1 The latest practicable date for this Annual Report.

7KHVHVKDUHDZDUGVDUHVXEMHFWWRIXUWKHUSHUIRUPDQFHFRQGLWLRQVEHIRUHWKH\PD\YHVWDVGHWDLOHGRQSDJHVWR

3 The ordinary shares held by Olivier Bohuon on 17 February 2017 represent 527.82% of his base annual salary.

The beneficial interest of each Executive Director is less than 1% of the ordinary share capital of the Company. In addition, Olivier Bohuon holds 50,000 deferred shares. Following the redenomination of ordinary shares into US Dollars on 23 January 2006, the Company issued 50,000 deferred shares. These shares are normally held by the Chief Executive Officer and are not listed on any stock exchange and have extremely limited rights attached to them.

IMPLEMENTATION REPORT

REMUNERATION continued

Beneficial interests of the Chairman and Non-Executive Directors in the ordinary shares of the Company are as follows:

Director	1 January 2016 (or date of appointment) if later	31 December 2016 (or date of retirement if earlier)	17 February 20171	Shareholding as % of annual fee2
Roberto Quarta3	19,765	24,156	24,156	70.53
Vinita Bali4	6,186	6,522	6,522	111.69
Ian Barlow	18,556	18,786	18,786	331.69
Virginia Bottomley	18,219	18,473	18,473	273.19
Erik Engstrom	15,140	15,350	15,350	271.02
Robin Freestone	15,000	15,310	15,310	270.32
Michael Friedman4	9,014	9,476	9,476	118.49
Brian Larcombe	40,508	40,718	40,718	718.92
Joseph Papa4	13,197	13,547	13,547	169.40

1 The latest practicable date for this Annual Report.

2 Calculated using the closing share price of 1,203p per ordinary share and \$30.44 per ADS on 17 February 2017, and an exchange rate of £1/\$1.2195.

3 All Non-Executive Directors held the required shareholding during the year except the Chairman.

4 Vinita Bali, Michael Friedman and Joseph Papa hold some of their shares in the form of ADS.

The beneficial interest of each Non-Executive Director is less than 1% of the ordinary share capital of the Company.

Relative importance of spend on pay

The following table sets out the total amounts spent in 2016 and 2015 on remuneration, the attributable profit for each year and the dividends declared and paid in each year.

	For the year to 31 December 2016	For the year to 31 December 2015	% change
\$WWULEXWDEOHSUR²WIRUWKH\HDU	\$784m	\$410m	91.2%
Dividends paid during the year	\$279m	\$272m	2.6%
Share buyback1	\$368m	\$77m	378%
Total Group spend on remuneration	\$1,227m	\$1,193m	-2.8%

1 Shares are bought in the market in respect of shares issued as part of the executive and employee share plans. Following the disposal of the Gynaecology business in August 2016, the Company commenced a \$300m share buy-back programme. See Note 19.2 for further information.

Total Shareholder Return

A graph of the Company's TSR performance compared to that of the FTSE 100 index is shown below in accordance with Schedule 8 to the Regulations.

Eight-year Total Shareholder Return

(measured in UK Sterling, based on monthly spot values)

Smith & Nephew FTSE 100

<-- PDF CHUNK SEPARATOR -->

However, as we compare the Company's performance to a tailored sector peer group of medical devices companies (see page 94), when considering TSR performance in the context of the Global Share Plan 2010, we feel that the following graph showing the TSR performance of this peer group is also of interest.

Eight-year Total Shareholder Return

(measured in US Dollars, based on monthly spot values)

Smith & Nephew Medical Devices – Median

Table of historic data

The following table details information about the pay of the Chief Executive Officer in the previous nine years:

	Long-term incentive vesting rates against maximum opportunity
Year	&KLHI([HFXWLYH2I²FHU	6LQJOH²JXUHRIWRWDO remuneration \$	Annual Cash Incentive payout against maximum %5	Performance shares %	Options %
2016	Olivier Bohuon	\$3,322,321	30	8	N/A
2015	Olivier Bohuon	\$5,342,3774	75	33.5	N/A
2014	Olivier Bohuon	\$6,785,121	43	57	N/A
2013	Olivier Bohuon	\$4,692,858	84	0	N/A
2012	Olivier Bohuon	\$4,956,771	84	N/A	N/A
2011	Olivier Bohuon1,2	\$7,442,191	68	N/A	N/A
2011	David Illingworth3	\$3,595,787	37	27	27
2010	David Illingworth	\$4,060,707	57	70	61
2009	David Illingworth	\$4,406,485	59	46	59

\$SSRLQWHG&KLHI([HFXWLYH2I²FHURQ\$SULO

2 Includes recruitment award of €1,400,000 cash and a share award over 200,000 ordinary shares with a value of €1,410,000 on grant.

5HVLJQHGDV&KLHI([HFXWLYH2I²FHURQ\$SULO

3ULRU\HDUVDUHUHVWDWHGWRUH³HFWDPRXQWVQRWNQRZQDWWKHGDWHRIVLJQLQJWKHSUHYLRXV\$QQXDO5HSRUW 5 Calculated as 45.45% (actual payout) disclosed on page 92 divided by the maximum potential payout of 150%.

Implementation of Remuneration Policy in 2017

Shareholders will be asked to approve the new Remuneration Policy at the Annual General Meeting on 6 April 2017. This policy is detailed on pages 78 to 87. The new Remuneration Policy is broadly the same as the policy approved by shareholders in 2014; the only changes being the measures used for the short and long term incentive programmes and the introduction a holding period for shares vesting under the Performance Share Programme. The main differences therefore to the way that the Remuneration Policy will be implemented in 2017 are as follows:

– 7KH²QDQFLDOPHDVXUHVEHXVHGIRUWKH\$QQXDO,QFHQWLYH3ODQZLOOEH5HYHQXH?7UDGLQJSUR²WPDUJLQ?DQG7UDGLQJFDVK³RZ

– 7KHEXVLQHVVREMHFWLYHPHDVXUHVEHXVHGIRUWKH\$QQXDO,QFHQWLYH3ODQZLOOEH%XVLQHVVSURFHVV?3HRSOH?DQG&XVWRPHU

– 7KHSHUIRUPDQFHPHDVXUHVWREHXVHGIRUWKH3HUIRUPDQFH6KDUH3ODQZLOOEH&XPXODWLYHFDVK³RZ?5HODWLYH765?6DOHVJURZWK (25%) and Return on Invested Capital (25%).

There are no changes to salary, pensions or opportunities under the Incentive Plan for 2017. Equally, there are no changes in the provided benefits, although the disclosed value will vary based on the underlying cost of providing them.

IMPLEMENTATION REPORT

REMUNERATION continued

Statement of voting at Annual General Meeting held in 2016

At the Annual General Meeting held on 14 April 2016, votes cast by proxy and at the meeting and votes withheld in respect of the votes on the Directors' Remuneration Report were as follows:

Resolution	Votes for	% for	Votes against	% against	Total votes validly cast	Votes withheld
Approval of the Directors' Remuneration Report	272,923,229	46.99	307,890,596	53.01	580,913,825	52,488,566

During 2016, Joseph Papa, Chairman of our Remuneration Committee has undertaken an extensive programme of engagement with investors, which is detailed in the Policy Report on page 87.

Other remuneration matters

Graham Baker will be appointed Chief Financial Officer on 1 March 2017. He will receive a base salary of £510,000 and will participate in the Annual Incentive Plan for 2017 as detailed above. He will also receive a Performance Share Award as detailed above and a payment in lieu of pension equivalent to 30% of his base salary, as well as standard benefits, including a car allowance, healthcare cover and if applicable financial consultancy advice. +LVQRWLFHSHULRGZLOOEHPRQWKVIURPKLPDQGPRQWKVIURPWKH&RPSDQ\1RDGGLWLRQDOSD\PHQWZLOOEHPDGHRQKLVMRLQLQJWKH&RPSDQ\

Senior management remuneration

The Group's administrative, supervisory and management body (senior management) is comprised for US reporting purposes, of Executive Directors and Executive Officers. Details of the current Executive Directors and Executive Officers are given on pages 52 to 53.

Compensation paid to senior management in respect of 2016, 2015 and 2014 was as follows:

2014	2015	2016
\$12,725,000	\$13,971,000	\$12,874,000
\$2,664,000	0	0
\$16,000	0	0
\$507,000	\$698,000	\$1,112,000

As at 17 February 2017, the senior management owned 301,797 shares and 57,303 ADSs, constituting less than 0.1% of the share capital of the Company. Details of share awards granted during the year and held as at 17 February 2017 by members of senior management are as follows:

	Share awards granted during the year	Total share awards held as at 17 February 2017
Equity Incentive awards	164,526	248,381
Performance Share awards	152,008	284,505
Conditional share awards under the Global Share Plan 2010	49,526	59,469
Options under Employee ShareSave plans	1,009	0
Options under the Global Share Plan 2010	0	52,577

Dilution headroom

The Remuneration Committee ensures that at all times the number of new shares which may be issued under any share-based plans, including allemployee plans, does not exceed 10% of the Company's issued share capital over any rolling ten-year period (of which up to 5% may be issued to satisfy awards under the Company's discretionary plans). The Company monitors headroom closely when granting awards over shares taking into account the number of options or shares that might be expected to lapse or be forfeited before vesting or exercise. In the event that insufficient new shares are available, there are processes in place to purchase shares in the market to satisfy vesting awards and to net-settle option exercises.

Over the previous 10 years (2007 to 2016), the number of new shares issued under our share plans has been as follows:

All-employee share plans	7,552,785 (0.86% of issued share capital as at 17 February 2017)
Discretionary share plans	35,681,391 (4.07% of issued share capital as at 17 February 2017)

By order of the Board, on 22 February 2017

Joseph Papa Chairman of the Remuneration Committee

GROUP FINANCIAL STATEMENTS

102 Director's responsibilities for the accounts
103 Independent auditor's UK report
108 Critical accounting policies

GROUP FINANCIAL STATEMENTS

109 Group income statement
111 Group balance sheet
*URXSFDVK³RZVWDWHPHQW
115 Group statement of changes in equity

NOTES TO THE GROUP ACCOUNTS

116 Note 1. Basis of preparation
117 Note 2. Business segment information
1RWH2SHUDWLQJSUR²W
1RWH,QWHUHVWDQGRWKHU²QDQFHFRVWV
123 Note 5. Taxation
126 Note 6. Earnings per ordinary share
127 Note 7. Property, plant and equipment
1RWH*RRGZLOO
130 Note 9. Intangible assets
132 Note 10. Investments
132 Note 11. Investments in associates
133 Note 12. Inventories
134 Note 13. Trade and other receivables
135 Note 14. Trade and other payables
1RWH&DVKDQGERUURZLQJV
138 Note 16. Financial instruments and risk management
143 Note 17. Provisions and contingencies
1RWH5HWLUHPHQWEHQH²WREOLJDWLRQV
151 Note 19. Equity
1RWH&DVK³RZVWDWHPHQW
154 Note 21. Acquisitions and disposals
156 Note 22. Operating leases

OTHER NOTES TO THE ACCOUNTS

157 Note 23.1. Share-based payments
160 Note 23.2. Related party transactions
161 Note 23.3. Group Companies

165 COMPANY FINANCIAL STATEMENTS AND ASSOCIATED NOTES

OTHER FINANCIAL INFORMATION

6HOHFWHG²QDQFLDOGDWD
1RQ*\$\$3²QDQFLDOLQIRUPDWLRQ

182 INFORMATION FOR SHAREHOLDERS

GROUP FINANCIAL STATEMENTS

STATEMENT OF DIRECTOR'S RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS

The Directors are responsible for preparing this Annual Report and Form 20-F Information and the Group and Parent Company Financial 6WDWHPHQWVLQDFFRUGDQFHZLWKDSSOLFDEOHODZDQGUHJXODWLRQV

&RPSDQ\ODZUHTXLUHVWKH'LUHFWRUVWRSUHSDUH*URXSDQG3DUHQW &RPSDQ)LQDQFLDO6WDWHPHQWVIRUHDFK²QDQFLDO\HDUWKH*URXS)LQDQFLDO 6WDWHPHQWVDUHUHTXLUHGWREHSUHSDUHGLQDFFRUGDQFHZLWK,)56VDV DGRSWHGE\WKH(8DQGDSSOLFDEOHODZDQGWKH'LUHFWRUVKDYHHOHFWHGWR SUHSDUHWKH3DUHQW&RPSDQ)LQDQFLDO6WDWHPHQWVLQDFFRUGDQFHZLWK8. Accounting Standards, including FRS 101 Reduced Disclosure Framework.

8QGHUFRPSDQ\ODZ'LUHFWRUVPXVWQRWDSSURYH)LQDQFLDO6WDWHPHQWV XQOHVVWKH\DUHVDWLV²HGWKDWWKH\JLYHDWUXHDQGIDLUYLHZRIWKHVWDWHRI DIIDLUVRIDJURXSDQG3DUHQW&RPSDQ\DQGRIWKHLUSUR²WRUORVVIRUWKDW period. In preparing each of the Group and Parent Company Financial Statements, the Directors are required to:

ç VHOHFWVXLWDEOHDFFRXQWLQJSROLFLHVDQGWKHQDSSO\WKHPFRQVLVWHQWO\
ç PDNHMXGJHPHQWVDQGHVWLPDWHVWKDWDUHUHDVRQDEOHDQGSUXGHQW
ç IRUWKH*URXS)LQDQFLDO6WDWHPHQWVVWDWHZKHWKHUWKH\KDYHEHHQ SUHSDUHGLQDFFRUGDQFHZLWK,)56VDVDGRSWHGE\WKH(8
ç IRUWKH3DUHQW&RPSDQ)LQDQFLDO6WDWHPHQWVVWDWHZKHWKHUDSSOLFDEOH 8.\$FFRXQWLQJ6WDQGDUGVKDYHEHHQIROORZHGVXEMHFWWRDQ\PDWHULDO departures disclosed and explained in the Parent Company Financial 6WDWHPHQWVDQG
ç prepare the Financial Statements on the going concern basis unless it is LQDSSURSULDWHWRSUHVXPHWKDWWKH*URXSDQGWKH3DUHQW&RPSDQ\ZLOO continue in business.

The Directors are responsible for keeping adequate accounting records WKDWDUHVXI²FLHQWWRVKRZDQGH[SODLQWKH3DUHQW&RPSDQ\ªVWUDQVDFWLRQV DQGGLVFORVHZLWKUHDVRQDEOHDFFXUDF\DWDQ\WLPHWKH²QDQFLDOSRVLWLRQ of the Parent Company and enable them to ensure that its Financial 6WDWHPHQWVFRPSO\ZLWKWKH&RPSDQLHV\$FW7KH\KDYHJHQHUDO responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

8QGHUDSSOLFDEOHODZDQGUHJXODWLRQVWKH'LUHFWRUVDUHDOVRUHVSRQVLEOH for preparing a compliant Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement.

The Directors are responsible for the maintenance and integrity of the FRUSRUDWHDQG²QDQFLDOLQIRUPDWLRQLQFOXGHGRQWKH&RPSDQ\ªVZHEVLWH Legislation in the UK governing the preparation and dissemination of ²QDQFLDOVWDWHPHQWVPD\GLIIHUIURPOHJLVODWLRQLQRWKHUMXULVGLFWLRQV

RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT 2)7+(\$118\$/5(3257

:HFRQ²UPWKDWWRWKHEHVWRIRXUNQRZOHGJH

ç WKH)LQDQFLDO6WDWHPHQWVSUHSDUHGLQDFFRUGDQFHZLWKWKHDSSOLFDEOHVHW RIDFFRXQWLQJVWDQGDUGVJLYHDWUXHDQGIDLUYLHZRIWKHDVVHWVOLDELOLWLHV ²QDQFLDOSRVLWLRQDQGSUR²WRUORVVRIWKH*URXSDQG
ç WKH6WUDWHJLF5HSRUWDQG'LUHFWRUVª5HSRUWLQFOXGHVDIDLUUHYLHZRI WKHGHYHORSPHQWDQGSHUIRUPDQFHRIWKHEXVLQHVVDQGWKH²QDQFLDO SRVLWLRQRIWKH*URXSWRJHWKHUZLWKDGHVFULSWLRQRIWKHSULQFLSDOULVNV and uncertainties that they face.

We consider the Annual Report and Financial Statements, taken as a ZKROHDUHIDLUEDODQFHGDQGXQGHUVWDQGDEOHDQGSURYLGHWKHLQIRUPDWLRQ necessary for shareholders to assess the Group's position and performance, business model and strategy.

7KHVWUDWHJLFUHSRUWZKLFKKDVEHHQSUHSDUHGLQDFFRUGDQFH ZLWKWKHUHTXLUHPHQWVRIWKH&RPSDQLHV\$FWFRPSULVHV WKHIROORZLQJVHFWLRQV

ç 2YHUYLHZSDJHVWR
ç 2XU%XVLQHVVDQG0DUNHWSODFHSDJHVWR
ç 2SHUDWLRQDO5HYLHZSDJHVWR
ç )LQDQFLDO5HYLHZSDJHVWR
ç 5LVNSDJHVWR

And has been approved and signed on behalf of the Board.

By order of the Board, 22 February 2017

Susan Swabey Company Secretary

INDEPENDENT AUDITOR'S UK REPORT

AUDITOR'S REPORTS ON THE FINANCIAL STATEMENTS AND ON INTERNAL CONTROL OVER FINANCIAL REPORTING ISARBANES-OXLEY ACT SECTION 404

The report set out below is provided in compliance with International Standards KPMG LLP has also issued reports in accordance with standards of the Public Company Accounting Oversight Board in the Annual Report on Form 20-F to be fled with the US Securities and Exchange Commission. Those reports are unqualified and include opinions on the Group Financial Statements and on the effectiveness of internal control over financial reporting as at 31 December 2016 (Sarbanes-Oxley Act Section 404).

The Directors' statement on internal control over financial reporting is set out on page 75.

INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF SMITH & NEPHEW PLC ONLY

OPINIONS AND CONCLUSIONS ARISING FROM OUR AUDIT

1 Our opinion on the financial statements is unmodified

We have audited the financial statements of Smith & Nephew plc for the year ended 31 December 2016 set out on pages 108 to 168.

In our opinion:

the financial statements give a true and fiel Group's and of the Parent Company's affairs as at 31 December 2016 and of the Group's profit for the year then ended;
the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union;
the Parent Company financial statements have been properly prepared in accordance with UK Accounting Standards, including FRS 101 Reduced Disclosure Framework; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 financial statements, Article 4 of the IAS Regulation.

As explained in the accounting policies set out in the Group, in addition to complying with its legal obligation to apply IFRS as adopted by the EU, has assued by the IASB. In our opinion, the Consolidated Financial Statements comply with IFRS as issued by the IASB.

2 Our assessment of risks of material misstatement

We summarise below the risks of material misstatement (unchanged from 2015) that had the greatest effect on our audit significance), our ley audit procedures to and our findings from those procedures in order that the Company's members as a body may better understand the process by which we arrived at our audit opinion.

Our indings are based on procedures undertaken in the purpose of our statutory audit opinion on the financial statements as a whole and consequently are incidental to that opinions on separate elements of the financial statements.

VALUATION OF ACQUIRED INTANGIBLE ASSETS
(INCLUDED IN INTANGIBLE ASSETS OF 2016: \$1,411 MILLION; 2015: \$1,502 MILLION)

THE RISK

OUR RESPONSE

The Group has significant intangible assets, of which the most significant relate to acquisitions in respect of ArthroCare (acquired in 2014) and Healthpoint (acquired in 2012). There is a risk that due to changes in the competitive landscape, regulatory or other external factors the acquired assets underperform in comparison to their original investment case and that the carrying value may be impaired.

The carrying values of intangibles assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If such indicators exist, the recoverable amount of the asset is estimated on the basis of discounted future cash flow forecasts which are inherently judgemental.

An impairment charge of \$32 million (2015: impairment charge of \$40m) has been recognised in relation to Oasis, a brand acquired from the Healthpoint acquisition which has continued to underperform against the original investment case. The remaining carrying value of Oasis following the impairment charge and current year amortisation is \$9 million.

Our procedures included challenging the directors' process by which they identified intangible assets with indicators of impairment that required detailed impairment reviews. For those assets selected for detailed impairment reviews, we tested the principles and integrity of the Group's discounted cash flow models and corroborated key assumptions made on revenue and profitability projections through interviews with commercial personnel, checking the consistency with strategic plans for the assets and by reference to external market data if available.

Risk vs 2015: ◀

We tested the sensitivity of the value in use calculated to the key assumptions.

We also assessed the adequacy of related disclosures in the Group's financial statements, including whether the Group's disclosures about the sensitivity of the outcome of the impairment assessment to changes in key assumptions reflected the key risks inherent in the valuation of acquired intangibles.

Our results

As a result of our work, we determined that the quantum of impairment recognised in 2016 and the related disclosures were appropriate. (2015: appropriate).

5LVNYV

GROUP FINANCIAL STATEMENTS

INDEPENDENT AUDITOR'S UK REPORT continued

/,\$%,/,7<3529,6,21,1*,1&/8'(':,7+,13529,6,2162) 0,//,210,//,21

THE RISK	OUR RESPONSE
The development, manufacture and sale of medical devices entails risk of product liability claims and patent infringement issues due to the technological nature of the products and the competitive nature of the industry. Determining the impact and likely outcome of any litigation matters is inherently subjective and the DPRXQWVLQYROYHGDUHŸSRWHQWLDOO\PDWHULDO	We tested the Group's controls surrounding litigation and contingent liabilities, LQVSHFWHGDVDPSOHRIOHJDOLQYRLFHVDQGFRUUHVSRQGHGGLUHFWO\ZLWKH[WHUQDOOHJDO DGYLVHUVWRXQGHUVWDQGWKHIDFWSDWWHUQVDQGHQVXUHWKDWDOOVLJQL²FDQWFDVHVKDG EHHQDGHTXDWHO\FRQVLGHUHGE\WKH'LUHFWRUVLQŸPDNLQJWKHLUMXGJHPHQWRQDQ\ provisioning that may be required.
\$VGLVFORVHGLQ1RWHWKH*URXSFRQWLQXHVWRKROGDSURYLVLRQRIPLOOLRQLQ respect of potential liabilities arising from the ongoing exposure for Metal-on-Metal hip products.	We tested the key estimates of provisions, including the Directors assessment of potential royalties payable for past sales for intellectual property disputes and expected settlement of product liability cases. We challenged the assumptions PDGHEDVHGRQWKHIDFWSDWWHUQRIVLPLODUKLVWRULFFDVHVZKLFKPD\EHLQGLFDWLYH RIŸWKHOLNHO\VHWWOHPHQW
	For the liability recognised in respect of the expected payouts for Metal-on-Metal FODLPVZHLQYROYHGRXUDFWXDULDOVSHFLDOLVWVWRFKDOOHQJHWKHFULWLFDODVVXPSWLRQV used in statistical projections in determining the estimate. The key assumptions LQFOXGHGH[SHFWHGQXPEHURIFODLPDQWVSURMHFWHGYDOXHRIHDFKVHWWOHPHQWDQG the likely time period expected for settlement.
	:HDOVRFRQVLGHUHGWKHDGHTXDF\RIWKH*URXSªVGLVFORVXUHVLQUHVSHFWRIŸOLWLJDWLRQ reserves and contingent liabilities.
	2XUUHVXOWV )URPWKHHYLGHQFHREWDLQHGZHFRQVLGHUHGWKHOHYHORISURYLVLRQLQJDQGUHODWHG GLVFORVXUHVWREHDFFHSWDEOHDFFHSWDEOH

5()(5723\$(\$8',7&200,77((5(3257?3\$(6\$1'72 \$&&2817,1*32/,&<\$1'),1\$1&,\$/',6&/2685(6

7\$;3529,6,21,1*,1&/8'(',1&855(177\$;3\$<\$%/(2) 0,//,210,//,21

THE RISK	OUR RESPONSE
Accruals for tax contingencies require the Directors to make judgements and estimates in relation to tax issues and exposures. Given that the Group operates in a number of tax jurisdictions, there are complexities of transfer pricing and other LQWHUQDWLRQDOWD[OHJLVODWLRQDQGWKHWLPHWDNHQIRUWD[PDWWHUVWREHDJUHHGZLWKWKH tax authorities can be extensive.	,QWKLVDUHDRXUSURFHGXUHVLQFOXGHGWKHVXSSRUWRIRXURZQLQWHUQDWLRQDODQGORFDO WD[VSHFLDOLVWVLQDVVHVVLQJWKH*URXSªVWD[SRVLWLRQVLWVFRUUHVSRQGHQFHZLWK the relevant tax authorities, and analysing and challenging the key assumptions XVHGWRGHWHUPLQHWD[SURYLVLRQVEDVHGRQRXUNQRZOHGJHDQGH[SHULHQFHVRI the application of the international and local legislation by the relevant authorities and courts.
	:HDOVRFRQVLGHUHGWKHDGHTXDF\RIWKH*URXSªVGLVFORVXUHVLQUHVSHFWRIŸWD[ DQGŸXQFHUWDLQWD[SRVLWLRQV
	2XUUHVXOWV )URPWKHHYLGHQFHREWDLQHGZHFRQVLGHUHGWKHOHYHORISURYLVLRQLQJDQGŸUHODWHG GLVFORVXUHVWREHDFFHSWDEOHDFFHSWDEOH

5()(5723\$*(\$8',7&200,77((5(3257?3\$*(6\$1'72 \$&&2817,1*32/,&<\$1'),1\$1&,\$/',6&/2685(6

	,19(1725<9\$/8\$7,21¥0,//,210,//,21	5LVNŸYV
THE RISK	OUR RESPONSE

,QYHQWRU\FRPSULVHV²QLVKHGJRRGVDQGUDZPDWHULDOV 7KH*URXSKDVKLJKOHYHOVRI²QLVKHGJRRGVVRPHRIZKLFKDUHORFDWHGDW customer premises to be available for immediate use. Complete sets of products KDYHWREHPDGHDYDLODEOHLQWKLVZD\LQFOXGLQJRXWVL]HVZKLFKDUHXVHGOHVV IUHTXHQWO\7RZDUGVWKHHQGRIDSURGXFWªVOLIHF\FOH²QLVKHGJRRGVLQYHQWRU\OHYHOV may exceed requirements.

+LJKYROXPHVRIUDZPDWHULDOVZKLFKDUHKLJKO\VSHFL²FWRLQGLYLGXDOSURGXFW franchises are maintained on hand to support the production cycle. Where actual usage differs from expectation due to their usage in the future production of ²QLVKHGJRRGVDQ\H[FHVVPDWHULDOVPD\EHFRPHREVROHWH

Historical sales of these products are often indicative of future usage, adjusted IRUFKDQJHVLQWKHPDUNHWGHPDQGWHFKQRORJLFDODGYDQFHPHQWVRURWKHUIDFWRUV

In estimating the net realisable value for inventory, management has to apply MXGJHPHQWRQKRZPXFKRIWKHLQYHQWRU\RQKDQGZLOOXOWLPDWHO\EHXVHGRUVROG LQDUULYLQJDWLWVHVWLPDWHRIH[FHVVDQGREVROHWHLQYHQWRU\

7KHNH\LQSXWVXVHGLQHVWLPDWLQJWKH([FHVVDQG2EVROHVFHQFH( 2?SURYLVLRQ LQFOXGHDVVXPSWLRQVDURXQGH[SHFWHGXVDJHRILQYHQWRU\ZKLFKDUHEDVHG RQKLVWRULFDOVDOHVDQGRWKHULQWHUQDORUH[WHUQDOIDFWRUVZKLFKPD\LPSDFWWKH demand for the product.

:HWHVWHGWKHGHVLJQDQGHIIHFWLYHQHVVRIFRQWUROVVXUURXQGLQJWKHUHYLHZRI WKH( 2SURYLVLRQ

2QDVDPSOHEDVLVZHFRUURERUDWHGKLVWRULFVDOHVEDFNWRXQGHUO\LQJVRXUFH data. We tested the accuracy and integrity of the underlying calculations of the provisions. We also corroborated on a sample basis the expected usage of LQYHQWRU\ZLWKWKH'LUHFWRUªVSODQVIRUODXQFKLQJQHZSURGXFWOLQHVRUGLVFRQWLQXLQJ product lines.

We considered the historical accuracy of the provision against actual inventory ZULWHRIIVWRFRQVLGHUWKHDFFXUDF\RIWKHKLVWRULFDVVXPSWLRQVPDGHE\ the Directors.

We also considered the adequacy of the Group's disclosures in respect of inventory valuation.

2XUUHVXOWV

)URPWKHHYLGHQFHREWDLQHGZHFRQVLGHUHGWKHOHYHORISURYLVLRQLQJIRULQYHQWRU\ DQGUHODWHGGLVFORVXUHVWREHDFFHSWDEOHDFFHSWDEOH

5LVNYV

5()(5723\$*(\$8',7&200,77((5(3257?3\$*(6\$1' \$&&2817,1*32/,&<\$1'),1\$1&,\$/',6&/2685(6

\$'9\$1&(':281'&\$5(%,2\$&7,9(6\$1''(9,&(65(9(18(¥0,//,21 0,//,21

One of the key areas of focus of our audit is to consider that both the timing and Our procedures included testing the Group's controls surrounding the timing the amount of revenue being recognised is appropriate. The amount of revenue of revenue recognition and key controls in the order-to-cash transaction cycle, EHLQJUHFRJQLVHGUHTXLUHVWKH'LUHFWRUVWRDSSURSULDWHO\UH³HFWHVWLPDWHVIRU LQFOXGLQJUHFRQFLOLDWLRQVEHWZHHQVDOHVV\VWHPVDQGWKHJHQHUDOOHGJHU

FRQWUDFWXDOUHEDWHVFKDUJHEDFNVDQGUHWXUQVZKLFKDUHGHGXFWHGLQDUULYLQJ :HDVVHVVHGZKHWKHUDSSURSULDWHUHYHQXHUHFRJQLWLRQSROLFLHVDUHDSSOLHG DWŸUHYHQXHIURPZKROHVDOHFXVWRPHUVDQGGLVWULEXWRUV WKURXJKFRPSDULVRQZLWKDFFRXQWLQJVWDQGDUGVLQSDUWLFXODUDURXQGWKHWLPLQJ RIŸUHYHQXHUHFRJQLWLRQ2WKHUSURFHGXUHVLQFOXGHGDQDO\VLVRISURGXFWVDOHV \HDURQ\HDUFRPSDULQJPRYHPHQWVZLWKH[SHFWDWLRQVDQGLQVSHFWLRQRI FRQWUDFWVZLWKFXVWRPHUVWRGHWHUPLQHLIDOONH\FRQWUDFWXDOWHUPVKDYHEHHQ DSSURSULDWHO\UH³HFWHGLQWKHFDOFXODWLRQVRIGHGXFWLRQVIURPUHYHQXH
2XUZRUNLQUHVSHFWRIWKHFRQWUDFWXDOUHEDWHVFKDUJHEDFNVDQGUHWXUQVLQFOXGHG WHVWLQJNH\FRQWUROVLQFOXGLQJWKH*URXSªVUHYLHZDQGDSSURYDORIFKDUJHEDFNV returns and rebates.
E\ŸZKLFKWKH'LUHFWRUVZHUHDEOHWRIRUHFDVWWKHVHDFFUXDOV	We also assessed the accuracy of the contractual rebates, charge backs and UHWXUQVFDOFXODWLRQVFRUURERUDWHGLQSXWVZLWKVRXUFHGRFXPHQWVDQGFRQVLGHUHG the historical accuracy of the accruals held in prior years to assess the accuracy
We also assessed the adequacy of the Group's disclosures of its revenue recognition policy and other related disclosures.
2XUUHVXOWV 7KHUHVXOWVRIRXUWHVWLQJZHUHVDWLVIDFWRU\DQGZHFRQVLGHUHGWKDWWKHDPRXQWRI UHYHQXHUHFRJQLVHGDQGUHODWHGGLVFORVXUHVDUHDSSURSULDWHDSSURSULDWH

GROUP FINANCIAL STATEMENTS

INDEPENDENT AUDITOR'S UK REPORT continued

2XUDSSOLFDWLRQRIPDWHULDOLW\DQGDQRYHUYLHZRIWKHVFRSHRI RXUDXGLW

0DWHULDOLW

7KHPDWHULDOLW\IRUWKH*URXS²QDQFLDOVWDWHPHQWVDVDZKROHZDVVHWDW PLOOLRQPLOOLRQ?GHWHUPLQHGZLWKUHIHUHQFHWRDEHQFKPDUN RI?RI*URXSSUR²WEHIRUHWD[QRUPDOLVHGWRH[FOXGH SUR²WRQGLVSRVDORIPLOOLRQDFTXLVLWLRQUHODWHGFRVWVRIPLOOLRQ LPSDLUPHQWFKDUJHVRIPLOOLRQUHVWUXFWXULQJDQGUDWLRQDOLVDWLRQ H[SHQVHVRIPLOOLRQDQGDQHWFUHGLWIRUOHJDODQGRWKHUFKDUJHVRI PLOOLRQDVGLVFORVHGLQ1RWH

:HEHOLHYHWKDWSUHWD[SUR²WH[FOXGLQJWKHVHLWHPVSURYLGHVXVZLWKD consistent year-on-year basis for determining materiality and is the most UHOHYDQWSHUIRUPDQFHPHDVXUHWRWKHXVHUVRIWKH²QDQFLDOVWDWHPHQWV

MATERIALITY FOR THE GROUP FINANCIAL STATEMENTS

We report to the Audit Committee any corrected or uncorrected PLVVWDWHPHQWVH[FHHGLQJPLOOLRQLQDGGLWLRQWRRWKHULGHQWL²HG PLVVWDWHPHQWVWKDWZDUUDQWHGUHSRUWLQJRQTXDOLWDWLYHJURXQGV

6FRSHDQGFRYHUDJH

2IWKH*URXSªV?UHSRUWLQJFRPSRQHQWVZHVXEMHFWHG ?WRIXOOVFRSHDXGLWVIRU*URXSUHSRUWLQJSXUSRVHVDQG ?WRDXGLWVRIVSHFL²FDFFRXQWEDODQFHVLQFOXGLQJUHYHQXHLQYHQWRU\ DQGWD[DWLRQ7KHODWWHUZHUHQRWLQGLYLGXDOO\²QDQFLDOO\VLJQL²FDQWHQRXJK WRUHTXLUHDQDXGLWIRU*URXSUHSRUWLQJSXUSRVHVEXWZHUHLQFOXGHGLQWKH VFRSHRIRXU*URXSUHSRUWLQJZRUNLQRUGHUWRSURYLGHIXUWKHUFRYHUDJH RYHUWKHLGHQWL²HGULVNVDQGWKH*URXSªVUHVXOWV

7KHUHPDLQLQJ?RIWRWDO*URXSUHYHQXH? RI*URXSSUR²WEHIRUHWD[DQG?RIWRWDO*URXSDVVHWVLV UHSUHVHQWHGE\UHSRUWLQJFRPSRQHQWVQRQHRIZKLFKLQGLYLGXDOO\ UHSUHVHQWHGPRUHWKDQRIDQ\RIWRWDO*URXSUHYHQXH*URXSSUR²W EHIRUHWD[RUWRWDO*URXSDVVHWV)RUWKHVHUHPDLQLQJFRPSRQHQWVZH performed analysis at an aggregated Group level to re-examine our DVVHVVPHQWWKDWWKHUHZHUHQRVLJQL²FDQWULVNVRIPDWHULDOPLVVWDWHPHQW ZLWKLQWKHVH

7KH*URXSDXGLWWHDPLQVWUXFWHGFRPSRQHQWDXGLWRUVDVWRWKHVLJQL²FDQW areas to be covered, including the relevant risks detailed above and the information to be reported back. The Group audit team approved the FRPSRQHQWPDWHULDOLWLHVZKLFKUDQJHGIURPPLOOLRQWRPLOOLRQ PLOOLRQWRPLOOLRQ?KDYLQJUHJDUGWRWKHPL[RIVL]HDQGULVNSUR²OHRI WKH*URXSDFURVVWKHFRPSRQHQWV7KHZRUNRQRIWKHFRPSRQHQWV RIWKHFRPSRQHQWV?ZDVSHUIRUPHGE\FRPSRQHQWDXGLWRUV and the rest by the Group audit team. The group team performed SURFHGXUHVRQWKHLWHPVH[FOXGHGIURPQRUPDOLVHGJURXSSUR²WEHIRUHWD[

7KH*URXSDXGLWWHDPYLVLWHGFRPSRQHQWVLQ86\$8.%UD]LO*HUPDQ\ DQG6ZLW]HUODQG86\$&KLQD8.%UD]LO\$XVWUDOLD,WDO\*HUPDQ\ DQG6ZLW]HUODQG?9RLFHFRQIHUHQFHPHHWLQJVZHUHDOVRKHOGZLWKWKHVH FRPSRQHQWDXGLWRUVDQGWKHPDMRULW\RIWKHRWKHUVWKDWZHUHQRWSK\VLFDOO\ YLVLWHG\$WWKHVHYLVLWVDQGPHHWLQJVWKH²QGLQJVUHSRUWHGWRWKH*URXS DXGLWWHDPZHUHGLVFXVVHGLQPRUHGHWDLODQGDQ\IXUWKHUZRUNUHTXLUHG E\WKH*URXSDXGLWWHDPZDVWKHQSHUIRUPHGE\WKHFRPSRQHQWDXGLWRU

SMITH & NEPHEW ANNUAL REPORT 2016 WWW SMITH-NEPHEW COM

4 Our opinion on other matters prescribed by the Companies Act 2006 is unmodified

In our opinion:

the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
the information given in the Strategic Report and the Directors' Report for the financial year is consistent with the financial statements.

Based solely on the work required to be undertaken in the course of the audit of the financial statements and from reading the Strategic report and the Directors' report:

we have not identified material misstatements in those reports; and
in our opinion, those reports have been prepared in accordance with the Companies Act 2006.

5 We have nothing to report on the disclosures of principal risks

Based on the knowledge we acquired during our audit, we have nothing material to add or draw attention to in relation to:

the directors' statement of viability on page 47, concerning the principal risks, their management, and, based on that, the directors' assessment and expectations of the group's continuing in operation over the 3 years to December 2019; or
the disclosures in Note 1 of the financial statements concerning the use of the going concern basis of accounting.

6 We have nothing to report in respect of the matters on which we are required to report by exception

Under ISAs (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified other information in the annual report that contains a material inconsistency with either that knowledge or the financial statements, a material misstatement of fact, or that is otherwise misleading.

In particular, we are required to report to you if:

we have identified material inconsistencies between the knowledge we acquired during our audit and the directors' statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the group's position and performance, business model and strategy; or
the Audit Committee report does not appropriately address matters communicated by us to the audit committee.

Under the Companies Act 2006 we are required to report to you if, in our opinion:

adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or
the Parent Company financial statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns; or
certain disclosures of directors' remuneration specified by law are not made: or
we have not received all the information and explanations we require for our audit.

Under the Listing Rules we are required to review:

the directors' statements, set out on pages 47 and 74, in relation to going concern and longer-term viability; and
the part of the Corporate Governance Statement on page 54 in the Corporate Governance report relating to the Company's compliance with the eleven provisions of the 2014 UK Corporate Governance Code specified for our review.

We have nothing to report in respect of the above responsibilities.

Scope and responsibilities

As explained more fully in the Directors' Responsibilities Statement set out on page 102, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. A description of the scope of an audit of financial statements is provided on the Financial Reporting Council's website at www.trc.org.uk/ auditscopeukprivate. This report is made solely to the Company's members as a body and is subject to important explanations and disclaimers regarding our responsibilities, published on our website at www.kpmg.com/uk/auditscopeukco2014b, which are incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we have undertaken and the basis of our opinions.

Stephen Oxley (Senior Statutory Auditor)

for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL 22 February 2017

GROUP FINANCIAL STATEMENTS

CRITICAL ACCOUNTING POLICIES

7KH*URXSSUHSDUHVLWVFRQVROLGDWHG²QDQFLDOVWDWHPHQWVLQDFFRUGDQFH ZLWK,)56DVLVVXHGE\WKH,\$6%DQG,)56DVDGRSWHGE\WKH(8 WKHDSSOLFDWLRQRIZKLFKRIWHQUHTXLUHVMXGJHPHQWVWREHPDGHE\ PDQDJHPHQWZKHQIRUPXODWLQJWKH*URXSªV²QDQFLDOSRVLWLRQDQG results. Under IFRS, the Directors are required to adopt those accounting policies most appropriate to the Group's circumstances for the purpose of SUHVHQWLQJIDLUO\WKH*URXSªV²QDQFLDOSRVLWLRQ²QDQFLDOSHUIRUPDQFHDQG FDVK³RZV

In determining and applying accounting policies, judgement is often UHTXLUHGLQUHVSHFWRILWHPVZKHUHWKHFKRLFHRIVSHFL²FSROLF\DFFRXQWLQJ HVWLPDWHRUDVVXPSWLRQWREHIROORZHGFRXOGPDWHULDOO\DIIHFWWKHUHSRUWHG UHVXOWVRUQHWDVVHWSRVLWLRQRIWKH*URXSLWPD\ODWHUEHGHWHUPLQHGWKDWD GLIIHUHQWFKRLFHZRXOGKDYHEHHQPRUHDSSURSULDWH

7KH*URXSªVVLJQL²FDQWDFFRXQWLQJSROLFLHVDUHVHWRXWLQ1RWHVWRRI WKH1RWHVWRWKH*URXSDFFRXQWV2IWKRVHWKHSROLFLHVZKLFKUHTXLUHWKH PRVWXVHRIPDQDJHPHQWªVMXGJHPHQWDUHDVIROORZV

VALUATION OF INVENTORIES

A feature of the Orthopaedic Reconstruction and Trauma & Extremities IUDQFKLVHVZKRVH²QLVKHGJRRGVLQYHQWRU\PDNHXSDSSUR[LPDWHO\ RIWKH*URXSªVWRWDO²QLVKHGJRRGVLQYHQWRU\?LVWKHKLJKOHYHORISURGXFW LQYHQWRU\UHTXLUHGVRPHRIZKLFKLVORFDWHGDWFXVWRPHUSUHPLVHVDQG is available for customers' immediate use. Complete sets of products, LQFOXGLQJODUJHDQGVPDOOVL]HVKDYHWREHPDGHDYDLODEOHLQWKLVZD\ 7KHVHVL]HVDUHXVHGOHVVIUHTXHQWO\WKDQVWDQGDUGVL]HVDQGWRZDUGV the end of the product life cycle are inevitably in excess of requirements. Adjustments to carrying value are therefore required to be made to orthopaedic inventory to anticipate this situation. These adjustments DUHFDOFXODWHGLQDFFRUGDQFHZLWKDIRUPXODEDVHGRQOHYHOVRILQYHQWRU\ FRPSDUHGZLWKKLVWRULFDOXVDJH7KLVIRUPXODLVDSSOLHGRQDQLQGLYLGXDO SURGXFWOLQHEDVLVDQGLV²UVWDSSOLHGZKHQDSURGXFWJURXSKDVEHHQ RQWKHPDUNHWIRUWZR\HDUV7KLVPHWKRGRIFDOFXODWLRQLVFRQVLGHUHG appropriate based on experience, but it does involve management judgement on customer demand, effectiveness of inventory deployment, OHQJWKRISURGXFWOLYHVSKDVHRXWRIROGSURGXFWVDQGHI²FLHQF\RI manufacturing planning systems.

IMPAIRMENT

,QFDUU\LQJRXWLPSDLUPHQWUHYLHZVRIJRRGZLOOLQWDQJLEOHDVVHWVDQG SURSHUW\SODQWDQGHTXLSPHQWDQXPEHURIVLJQL²FDQWDVVXPSWLRQV KDYHWREHPDGHZKHQSUHSDULQJFDVK³RZSURMHFWLRQV7KHVHLQFOXGH WKHIXWXUHUDWHRIPDUNHWJURZWKGLVFRXQWUDWHVWKHPDUNHWGHPDQGIRU WKHSURGXFWVDFTXLUHGWKHIXWXUHSUR²WDELOLW\RIDFTXLUHGEXVLQHVVHVRU products, levels of reimbursement and success in obtaining regulatory approvals. If actual results should differ or changes in expectations arise, LPSDLUPHQWFKDUJHVPD\EHUHTXLUHGZKLFKZRXOGDGYHUVHO\LPSDFW operating results.

LIABILITY PROVISIONING

7KHUHFRJQLWLRQRISURYLVLRQVIRUOHJDOGLVSXWHVLVVXEMHFWWRDVLJQL²FDQW GHJUHHRIHVWLPDWLRQ3URYLVLRQLVPDGHIRUORVVFRQWLQJHQFLHVZKHQ LWLVFRQVLGHUHGSUREDEOHWKDWDQDGYHUVHRXWFRPHZLOORFFXUDQGWKH amount of the loss can be reasonably estimated. In making its estimates, management takes into account the advice of internal and external legal FRXQVHO3URYLVLRQVDUHUHYLHZHGUHJXODUO\DQGDPRXQWVXSGDWHGZKHUH QHFHVVDU\WRUH³HFWGHYHORSPHQWVLQWKHGLVSXWHV7KHXOWLPDWHOLDELOLW\ may differ from the amount provided depending on the outcome of court proceedings and settlement negotiations or if investigations bring to light QHZIDFWV

7\$;\$7,21

7KH*URXSRSHUDWHVLQQXPHURXVWD[MXULVGLFWLRQVDURXQGWKHZRUOG Although it is Group policy to submit its tax returns to the relevant tax authorities as promptly as possible, at any given time the Group has \HDUVRXWVWDQGLQJDQGLVLQYROYHGLQGLVSXWHVDQGWD[DXGLWV6LJQL²FDQW issues may take several years to resolve. In estimating the probability DQGDPRXQWRIDQ\WD[FKDUJHPDQDJHPHQWWDNHVLQWRDFFRXQWWKHYLHZV of internal and external advisers and updates the amount of provision ZKHQHYHUQHFHVVDU\7KHXOWLPDWHWD[OLDELOLW\PD\GLIIHUIURPWKHDPRXQW SURYLGHGGHSHQGLQJRQLQWHUSUHWDWLRQVRIWD[ODZVHWWOHPHQWQHJRWLDWLRQV or changes in legislation.

BUSINESS COMBINATIONS

7KH*URXSKDVLGHQWL²HG©JURZWKWKURXJKDFTXLVLWLRQVªDVRQHRILWV 6WUDWHJLF3ULRULWLHV'XULQJZHDFTXLUHG%OXH%HOW7HFKQRORJLHVWKH determination of the balance sheet fair value acquired is dependent upon the understanding of the circumstances at acquisition and estimates of the future results of the acquired business and management judgement is a factor in making these determinations.

GROUP INCOME STATEMENT

		Year ended 31 December 2016	Year ended 31 December 2015	Year ended 31 December 2014
	Notes	PLOOLRQ	PLOOLRQ	PLOOLRQ
5HYHQXH	2	4,669	4,634	4,617
Cost of goods sold
*URVVSUR²W		3,397	3,491	3,455
Selling, general and administrative expenses	3
Research and development expenses	3
2SHUDWLQJSUR²W	2 & 3	801	628	749
Interest income	4	6	11	13
Interest expense	4
2WKHU²QDQFHFRVWV	4
Share of results of associates	11
3UR²WRQGLVSRVDORIEXVLQHVV	21	326	–	–
3UR²WEHIRUHWD[DWLRQ		1,062	559	714
Taxation	5
\$WWULEXWDEOHSUR²WIRUWKH\HDU1		784	410	501
(DUQLQJVSHURUGLQDU\VKDUH1	6
Basic		88.1¢	45.9¢	56.1¢
Diluted		87.8¢	45.6¢	55.7¢

GROUP STATEMENT OF COMPREHENSIVE INCOME

	Notes	Year ended 31 December 2016 PLOOLRQ	Year ended 31 December 2015 PLOOLRQ	Year ended 31 December 2014 PLOOLRQ
\$WWULEXWDEOHSUR²WIRUWKH\HDU1		784	410	501
Other comprehensive income:
,WHPVWKDWZLOOQRWEHUHFODVVL²HGWRLQFRPHVWDWHPHQW
5HPHDVXUHPHQWRIQHWUHWLUHPHQWEHQH²WREOLJDWLRQV	18
Taxation on other comprehensive income	5	10	10	19
7RWDOLWHPVWKDWZLOOQRWEHUHFODVVL²HGWRLQFRPHVWDWHPHQW			2
,WHPVWKDWPD\EHUHFODVVL²HGVXEVHTXHQWO\WRLQFRPHVWDWHPHQW
&DVK³RZKHGJHV¥LQWHUHVWUDWHGHULYDWLYHV
– losses arising in the year		–	–
&DVK³RZKHGJHV¥IRUZDUGIRUHLJQH[FKDQJHFRQWUDFWV
¥JDLQVORVVHV?DULVLQJLQWKH\HDU			34	31
¥ORVVHVJDLQV?WUDQVIHUUHGWRLQYHQWRULHVIRUWKH\HDU		20
Fair value remeasurement of available for sale asset		10	–	–
Exchange differences on translation of foreign operations
7RWDOLWHPVWKDWPD\EHUHFODVVL²HGVXEVHTXHQWO\WRLQFRPHVWDWHPHQW
2WKHUFRPSUHKHQVLYHH[SHQVHIRUWKH\HDUQHWRIWD[DWLRQ
7RWDOFRPSUHKHQVLYHLQFRPHIRUWKH\HDU1		594	220	242

\$WWULEXWDEOHWRHTXLW\KROGHUVRIWKH&RPSDQ\DQGZKROO\GHULYHGIURPFRQWLQXLQJRSHUDWLRQV

THE NOTES ON PAGES 116 TO 164 ARE AN INTEGRAL PART OF THESE ACCOUNTS. GROUP FINANCIAL STATEMENTS

COMMENTARY ON THE GROUP INCOME STATEMENT AND GROUP STATEMENT OF COMPREHENSIVE INCOME

REVENUE

*URXSUHYHQXHLQFUHDVHGE\PRQDUHSRUWHGEDVLVIURPP LQWRPLQ

The underlying increase is 2%, after adjusting for 1% attributable to the unfavourable impact of currency movements.

COST OF GOODS SOLD

&RVWRIJRRGVVROGLQFUHDVHGE\PRQDUHSRUWHGEDVLVIURP PLQWRPLQ7KHPRYHPHQWLVSULPDULO\GXHWR underlying trading.

6(//,1**(1(5\$/\$1'\$'0,1,675\$7,9((;3(16(6

6HOOLQJJHQHUDODQGDGPLQLVWUDWLYHH[SHQVHVGHFUHDVHGE\P RQDUHSRUWHGEDVLV?IURPPLQWRPLQ

,QDGPLQLVWUDWLYHH[SHQVHVLQFOXGHGDPRUWLVDWLRQRIVRIWZDUHDQG RWKHULQWDQJLEOHDVVHWVRIPP?PRIUHVWUXFWXULQJDQG UDWLRQDOLVDWLRQH[SHQVHVP?DQDPRXQWRIPUHODWLQJWR DPRUWLVDWLRQDQGLPSDLUPHQWRIDFTXLUHGLQWDQJLEOHVP?P RIDFTXLVLWLRQUHODWHGFRVWVP?DQGPQHWFUHGLWSULPDULO\ UHODWHGWRDPFXUWDLOPHQWFUHGLWRQ8.SRVWUHWLUHPHQWEHQH²WV PFKDUJHIRUOHJDODQGRWKHUFKDUJHV

Excluding the above items, selling, general and administrative expenses ZHUHPLQDGHFUHDVHRIPIURPPLQ

5(6(\$5&+\$1''(9(/230(17(;3(16(6

Research and development expenditure as a percentage of revenue UHPDLQHGEURDGO\FRQVLVWHQWDWLQ?([SHQGLWXUHZDV PLQFRPSDUHGWRPLQ7KH*URXSFRQWLQXHVWRLQYHVW in innovative technologies and products to differentiate it from competitors.

OPERATING PROFIT

2SHUDWLQJSUR²WLQFUHDVHGE\PIURPPLQWRPLQ

7KLVPRYHPHQWLQZDVSULPDULO\GULYHQE\WKHDEVHQFHRIFRVWV recognised in 2015 relating to anticipated and settled metal-on-metal hip claims.

,17(5(67,1&20((;3(16(

1HWLQWHUHVWH[SHQVHLQFUHDVHGE\PIURPDQHWPH[SHQVHLQ WRDQHWPH[SHQVHLQ7KLVPRYHPHQWLVSULPDULO\GXHWR an increase in the effective interest rate and the increase in net debt due WRWKHDFTXLVLWLRQRI%OXH%HOW7HFKQRORJLHV

OTHER FINANCE COSTS

2WKHU²QDQFHFRVWVLQLQFUHDVHGE\PDQGSULQFLSDOO\UHODWHVWR FRVWVDVVRFLDWHGZLWKWKH*URXSªVUHWLUHPHQWEHQH²WVFKHPHV

PROFIT ON DISPOSAL OF BUSINESS

\$SUR²WRQGLVSRVDORIPZDVUHFRJQLVHGLQIROORZLQJWKHVDOH RIWKH*\QDHFRORJ\EXVLQHVV

7\$;\$7,21

7KHWD[DWLRQFKDUJHLQFUHDVHGE\PWRPIURPP in 2015 principally due to the tax charge on the disposal of the Gynaecology business.

2XUUHSRUWHGWD[UDWHRI?LQFOXGHVWKHRQHRIIEHQH²W RID86WD[VHWWOHPHQWZKLFKLVSDUWO\RIIVHWE\WKHWD[UDWHRQWKHGLVSRVDO of the predominantly US Gynaecology business.

GROUP BALANCE SHEET

		At 31 December	At 31 December
		2016	2015
Assets	Notes	PLOOLRQ	PLOOLRQ
1RQFXUUHQWDVVHWV
Property, plant and equipment	7	982	932
*RRGZLOO	8	2,188	2,012
Intangible assets	9	1,411	1,502
Investments	10	25	13
Investments in associates	11	112	115
5HWLUHPHQWEHQH²WDVVHW	18	–	13
Deferred tax assets	5	97	105
		4,815	4,692
&XUUHQWDVVHWV
Inventories	12	1,244	1,217
Trade and other receivables	13	1,185	1,138
Cash at bank	15	100	120
		2,529	2,475
7RWDODVVHWV		7,344	7,167

(TXLW\DQGOLDELOLWLHV
(TXLW\DWWULEXWDEOHWRRZQHUVRIWKH&RPSDQ\
Share capital	19	180	183
Share premium		600	590
Capital redemption reserve		15	12
Treasury shares	19
Other reserves
Retained earnings		3,970	3,731
7RWDOHTXLW\		3,958	3,966
1RQFXUUHQWOLDELOLWLHV
/RQJWHUPERUURZLQJV	15	1,564	1,434
5HWLUHPHQWEHQH²WREOLJDWLRQV	18	164	184
Other payables	14	82	29
Provisions	17	134	133
Deferred tax liabilities	5	94	77
		2,038	1,857
&XUUHQWOLDELOLWLHV
Bank overdrafts and loans	15	86	46
Trade and other payables	14	884	842
Provisions	17	147	193
Current tax payable		231	263
7RWDOOLDELOLWLHV		1,348 3,386	1,344 3,201
7RWDOHTXLW\DQGOLDELOLWLHV		7,344	7,167

7KHDFFRXQWVZHUHDSSURYHGE\WKH%RDUGDQGDXWKRULVHGIRULVVXHRQ)HEUXDU\DQGDUHVLJQHGRQLWVEHKDOIE\

5REHUWR4XDUWD	2OLYLHU%RKXRQ
&KDLUPDQ	&KLHI([HFXWLYH2I²FHU

THE NOTES ON PAGES 116 TO 164 ARE AN INTEGRAL PART OF THESE ACCOUNTS. REVIEW

GROUP FINANCIAL STATEMENTS

COMMENTARY ON THE GROUP BALANCE SHEET

NON-CURRENT ASSETS

Non-current assets increased by \$123m to \$4,815m in 2016 from \$4,692m in 2015. This is principally attributable to the following:

Property, plant and equipment increased by \$50m from \$932m in 2015 to \$982m in 2016. There were \$320m of additions together with \$2m acquired with the Blue Belt acquisition which was partially offset by \$21m of assets disposed. Depreciation of \$224m was charged during 2016 and there were unfavourable currency movements of \$27m.
Goodwill increased by \$176m from \$2,012m in 2015 to \$2,188m in 2016. This movement relates to additions of \$211m from the acquisition of Blue Belt and BST-CarGel. This was partially offset by unfavourable currency movements of \$35m.
Intangible assets decreased by \$91m from \$1,502m in 2015 to \$1,411m in 2016. There were additions of \$72m in 2016 relating to intellectual property, distribution rights and software acquired together with \$85m acquired with the Blue Belt and BST-CarGel acquisitions. Amortisation and impairment during 2016 was \$239m and there were unfavourable currency movements of \$9m.
Investments increased to \$25m from \$13m in 2015. The increase was attributable to additions of \$2m and fair value remeasurement of \$10m.
Deferred tax assets decreased by \$8m in the year from \$105m in 2015 to \$97m in 2016. The net deferred tax asset position is \$3m (2015: asset of \$28m). The decrease of \$25m is due to tax accrual to tax return adjustments and current year utilisation of net deferred tax assets offset by the impact of acquisitions of \$15m.

CURRENT ASSETS

Current assets increased by \$54m to \$2,529m from \$2,475m in 2015. The movement relates to the following:

Inventories rose by \$27m to \$1,244m in 2016 from \$1,217m in 2015. This movement is driven by inventory increases in distribution hubs and general increase across the Emerging Markets. This was offset by untavourable currency movements of \$26m.
The level of trade and other receivables increased by \$47m to \$1,185m in 2016 from \$1,138m in 2015. The movement primarily relates to increased trade receivables of \$39m and \$10m decrease in the bad debt provision as well as unfavourable currency movements.
Cash at bank has decreased by \$20m from \$120m in 2015 to \$100m in 2016. Refer to the Group cash flow statement and related commentary on pages 113 and 114 for further detail.

NON-CURRENT LIABILITIES

Non-current liabilities increased by \$181m from \$1,857m in 2015 to \$2,038m in 2016. This movement principally relates to:

Long-term borrowing increased from \$1,434m in 2015 to \$1,564m in 2016 principally due to acquisitions made in 2016.
The retirement benefit obligation decreased from \$184m in 2015 to \$164m in 2016 due to past service cost adjustments arising from plan amendments in the UK, favourable asset movements partially offset by decreases in discount rates.
Deferred tax liabilities increased by \$17m from \$77m in 2015 to \$94m in 2016. Refer to commentary within non-current assets for explanation of the net deferred tax position movement.
Other payables increased by \$53m from \$29m in 2015 to \$82m in 2016 due to deferred consideration on acquisitions made in 2016.

CURRENT LIABILITIES

Current liabilities increased by \$4m from \$1,344m in 2015 to \$1,348m in 2016. This movement is attributable to:

Bank overdrafts and loans increased by \$40m from \$46m in 2015 to \$86m in 2016.
Trade and other payables increased by \$42m from \$842m in 2015 to \$884m in 2016 primarily due to deferred consideration for acquisitions made in 2016.
Provisions decreased by \$46m from \$193m in 2015 to \$147m in 2016 primarily due to utilisation of the legal provision for known and anticipated metal-on-metal hip claims.
Current tax payables decreased by \$32m from \$263m in 2015 to \$231m, mainly attributable to differences in the timing of cash tax payments year-on-year.

TOTAL EQUITY

Total equity decreased by \$8m from \$3,966m in 2015 to \$3,958m in 2016. The principal movements were:

	Total equity \$ million
1 January 2016	3.966
Attributable profit	784
Currency translation losses	(134)
Hedging reserves	5
Fair value remeasurement of available for sale assets	10
Actuarial losses on retirement benefit obligations	(81)
Dividends paid during the year	(279)
Purchase of own shares	(368)
Taxation on other comprehensive income and
equity items	12
Net share-based transactions	43
31 December 2016	3.958

GROUP CASH FLOW STATEMENT

		Year ended 31 December	Year ended 31 December	Year ended 31 December
		2016	2015	2014
&DVK³RZVIURPRSHUDWLQJDFWLYLWLHV	Notes	PLOOLRQ	PLOOLRQ	PLOOLRQ
3UR²WEHIRUHWD[DWLRQ		1,062	559	714
Net interest expense	4	46	38	22
Depreciation, amortisation and impairment		463	493	427
/RVVRQGLVSRVDORISURSHUW\SODQWDQGHTXLSPHQWDQGVRIWZDUH		15	15	11
Distribution from trade investments		–	3	1
6KDUHEDVHGSD\PHQWVH[SHQVHHTXLW\VHWWOHG	23	27	29	32
Share of results of associates	11	3	16	2
3UR²WRQGLVSRVDORIPDQXIDFWXULQJIDFLOLW\	21	–	–
3UR²WRQGLVSRVDORIEXVLQHVV	21		–	–
1HWPRYHPHQWLQSRVWUHWLUHPHQWEHQH²WREOLJDWLRQV
Increase in inventories
Increase in trade and other receivables
'HFUHDVH?LQFUHDVHLQWUDGHDQGRWKHUSD\DEOHVDQGSURYLVLRQV			216	86
Cash generated from operations1		1,035	1,203	961
Interest received		3	8	3
Interest paid
Income taxes paid
1HWFDVKLQ³RZIURPRSHUDWLQJDFWLYLWLHV		849	1,030	683
&DVK³RZVIURPLQYHVWLQJDFWLYLWLHV
Acquisitions, net of cash acquired	21
Capital expenditure	2
Investment in associate	11	–
Purchase of investments	10
Proceeds from associate loan redemption		–	–	188
Proceeds on disposal of manufacturing facility	21	–	–	20
Proceeds on disposal of business	21	343	–	–
Tax on disposal of business			–	–
1HWFDVKXVHGLQLQYHVWLQJDFWLYLWLHV
&DVK³RZVIURP²QDQFLQJDFWLYLWLHV
Proceeds from issue of ordinary share capital		10	16	40
3XUFKDVHRIRZQVKDUHV
3URFHHGVIURPERUURZLQJVGXHZLWKLQRQH\HDU	20	34	42	30
6HWWOHPHQWRIERUURZLQJVGXHZLWKLQRQH\HDU	20
3URFHHGVIURPERUURZLQJVGXHDIWHURQH\HDU	20	890	831	3,390
6HWWOHPHQWRIERUURZLQJVGXHDIWHURQH\HDU	20
3URFHHGVIURPRZQVKDUHV		6	5	4
6HWWOHPHQWRIFXUUHQF\VZDSV	20
Equity dividends paid	19
1HWFDVKXVHGLQ?IURP²QDQFLQJDFWLYLWLHV				1,008
1HWGHFUHDVH?LQFUHDVHLQFDVKDQGFDVKHTXLYDOHQWV			43
Cash and cash equivalents at beginning of year	20	102	65	126
Exchange adjustments	20
&DVKDQGFDVKHTXLYDOHQWVDWHQGRI\HDU2		38	102	65

,QFOXGHVPPP?RIRXWJRLQJVRQUHVWUXFWXULQJDQGUDWLRQDOLVDWLRQH[SHQVHVPPP?RIDFTXLVLWLRQUHODWHGFRVWV DQGPPP?RIOHJDODQGRWKHUFRVWV

&DVKDQGFDVKHTXLYDOHQWVLVQHWRIEDQNRYHUGUDIWVRIPPP

THE NOTES ON PAGES 116 TO 164 ARE AN INTEGRAL PART OF THESE ACCOUNTS. GROUP FINANCIAL STATEMENTS

COMMENTARY ON THE GROUP CASH FLOW STATEMENT

The main elements of the Group's cash flow and movements in net debt can be summarised as follows:

NET CASH INFLOW FROM OPERATING ACTIVITIES

Cash generated from operations in 2016 of \$1,035m (2015: \$1,203m, 2014: \$961m) is after paying out \$24m (2015: \$36m, 2014: \$112m) of acquisition-related costs, \$62m (2015: \$52m, 2014: \$60m) of restructuring and rationalisation expenses and \$36m (2015: \$3m, 2014: \$23m) relating to legal and other costs.

Inventory turn improved slightly supported by the benefits from the Global inventory transformation program. For trade receivables there was a slight deterioration in days of sales outstanding. Movements in trade and other payables and provisions were impacted in 2015 by the recognition of a \$185m provision relating to the estimated costs to resolve all known and anticipated metal-on-metal hip claims.

CAPITAL EXPENDITURE

The Group's ongoing capital expenditure and working capital requirements were financed through cash flow generated by business operations and, where necessary, through short-term committed and uncommitted bank facilities. In 2016, capital expenditure on tangible and intangible assets represented approximately 8% of continuing Group revenue (2015: 8%, 2014: 8%).

In 2016, capital expenditure amounted to \$392m (2015: \$358m, 2014: \$375m). The principal areas of investment were the placement of orthopaedic instruments with customers, patents and licences, plant and equipment and information technology.

At 31 December 2016, \$64m (2015: \$24m, 2014: \$34m) of capital expenditure had been contracted but not provided for which will be funded from future cash inflows.

ACQUISITIONS AND DISPOSALS

During the year ended 31 December 2016, the Group acquired Blue Belt Technologies Inc. and BST-CarGel for consideration, net of cash acquired, of \$214m. The Gynaecology business was disposed of for proceeds of \$350m less expenses of \$7m and taxes of \$118m.

During the year ended 31 December 2015, the Group acquired businesses in Colombia and Russia for consideration, net of cash acquired, of \$44m. In November 2015, the Group invested \$25m in its associate, Bioventus.

SHARE BUY-BACKS

During the year ended 31 December 2016, the Group purchased a total of 24.0m (2015: 4.4m) ordinary shares at a cost of \$368m (2015: \$77m), which in 2016 included a \$300m share buy-back announced following the disposal of the Gynaecology business.

DIVIDENDS

The 2015 final dividend of 19.0 US cents per ordinary share totalling \$170m was paid on 11 May 2016. The 2016 interim dividend of 12.3 US cents per ordinary share totalling \$109m was paid on 25 October 2016.

LIQUIDITY AND CAPITAL RESOURCES

The Group's policy is to ensure that it has sufficient funding and facilities in place to meet foreseeable borrowing requirements.

At 31 December 2016, the Group held \$38m (2015: \$102m, 2014: \$65m) in cash net of bank overdrafts. The Group had committed facilities available of \$2,425m at 31 December 2016 of which \$1,560m was drawn. Smith & Nephew intends to repay the amounts due within one year by using available cash and drawing down on the longer-term facilities. In addition, Smith & Nephew has finance lease commitments of \$7m (2015: \$10m).

The principal variations in the Group's borrowing requirements result from the timing of dividend payments, acquisitions and disposals of businesses, timing of capital expenditure and working capital fluctuations. Smith & Nephew believes that its capital expenditure needs and its working capital funding for 2017, as well as its other known or expected commitments or liabilities, can be met from its existing resources and facilities. The Group's net debt increased from \$1,361m at the beginning of 2016 to \$1,550m at the end of 2016, representing an overall increase of \$189m.

The Group's planned future contributions are considered adequate to cover the current underfunded position in the Group's defined benefit plans.

GROUP STATEMENT OF CHANGES IN EQUITY

	Share capital PLOOLRQ	Share premium PLOOLRQ	Capital redemption reserve PLOOLRQ	Treasury shares2 PLOOLRQ	Other reserves3 PLOOLRQ	Retained earnings PLOOLRQ	Total equity PLOOLRQ
At 31 December 2013	184	535	10		120	3,520	4,047
\$WWULEXWDEOHSUR²WIRUWKH\HDU1	–	–	–	–	–	501	501
Other comprehensive expense	–	–	–	–
Equity dividends declared and paid	–	–	–	–	–
Share-based payments recognised	–	–	–	–	–	32	32
3XUFKDVHRIRZQVKDUHV	–	–	–		–	–
&RVWRIVKDUHVWUDQVIHUUHGWREHQH²FLDULHV	–	–	–	25	–		4
Cancellation of treasury shares		–	1	57	–		–
Issue of ordinary share capital4	1	39	–	–	–	–	40
At 31 December 2014	184	574	11			3,650	4,040
\$WWULEXWDEOHSUR²WIRUWKH\HDU1	–	–	–	–	–	410	410
2WKHUFRPSUHKHQVLYHH[SHQVH?LQFRPH	–	–	–	–		2
Equity dividends declared and paid	–	–	–	–	–
Share-based payments recognised	–	–	–	–	–	29	29
Taxation on share-based payments	–	–	–	–	–	5	5
3XUFKDVHRIRZQVKDUHV	–	–	–		–	–
&RVWRIVKDUHVWUDQVIHUUHGWREHQH²FLDULHV	–	–	–	38	–		5
Cancellation of treasury shares		–	1	60	–		–
Issue of ordinary share capital4	–	16	–	–	–	–	16
At 31 December 2015	183	590	12			3,731	3,966
\$WWULEXWDEOHSUR²WIRUWKH\HDU1	–	–	–	–	–	784	784
Other comprehensive expense	–	–	–	–
Equity dividends declared and paid	–	–	–	–	–
Share-based payments recognised	–	–	–	–	–	27	27
Taxation on share-based payments	–	–	–	–	–	2	2
3XUFKDVHRIRZQVKDUHV	–	–	–		–	–
&RVWRIVKDUHVWUDQVIHUUHGWREHQH²FLDULHV	–	–	–	40	–		6
Cancellation of treasury shares		–	3	190	–		–
Issue of ordinary share capital4	–	10	–	–	–	–	10
\$W'HFHPEHU	180	600	15			3,970	3,958

\$WWULEXWDEOHWRHTXLW\KROGHUVRIWKH&RPSDQ\DQGZKROO\GHULYHGIURPFRQWLQXLQJRSHUDWLRQV

2 Refer to Note 19.2 for further information.

2WKHUUHVHUYHVFRPSULVHVJDLQVDQGORVVHVRQFDVK³RZKHGJHVIRUHLJQH[FKDQJHGLIIHUHQFHVRQWUDQVODWLRQRIIRUHLJQRSHUDWLRQVDQGQHWFKDQJHVRQIDLUYDOXHRIWUDGLQJ LQYHVWPHQWV7KHFXPXODWLYHWUDQVODWLRQORVVZLWKLQRWKHUUHVHUYHVDW'HFHPEHUZDVPPORVVPORVV

4 Issue of ordinary share capital as a result of options being exercised.

THE NOTES ON PAGES 116 TO 164 ARE AN INTEGRAL PART OF THESE ACCOUNTS.

FINANCIAL REVIEW

NOTES TO THE GROUP ACCOUNTS

1 BASIS OF PREPARATION

Smith & Nephew plc (the Company) is a public limited company incorporated in England and Wales. In these accounts, the 'Group' means WKH&RPSDQ\DQGDOOLWVVXEVLGLDULHV7KHSULQFLSDODFWLYLWLHVRIWKH Group are to develop, manufacture, market and sell medical devices and services.

As required by the European Union's IAS Regulation and the Companies Act 2006, the Group has prepared its accounts in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) effective as at 31 December 2016. The Group has also prepared its accounts in accordance with IFRS as issued by the International Accounting Standards Board (IASB) effective as at 31 December 2016. IFRS as adopted by the EU differs in certain respects from IFRS as issued by the IASB. However, the differences have no impact for the periods presented.

The preparation of accounts in conformity with IFRS requires management to use estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the accounts and the reported amounts of revenues and expenses during the year. The accounting policies requiring management WRXVHVLJQL²FDQWHVWLPDWHVDQGDVVXPSWLRQVDUHLQYHQWRULHVLPSDLUPHQW taxation, liability provisions and business combinations. These are discussed under Critical accounting policies on page 108. Although these estimates are based on management's best knowledge of current events and actions, actual results ultimately may differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively.

The Directors continue to adopt the going concern basis for accounting LQSUHSDULQJWKHDQQXDO²QDQFLDOVWDWHPHQWV7KH'LUHFWRUVKDYHD reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future.

As described in Note 15, the Group meets its funding requirements through a mixture of shareholders' funds, bank borrowings and private placement notes. At 31 December 2016, the Group had committed borrowing facilities of \$2.4bn and total liquidity of \$0.9bn, including net cash and cash equivalents of \$38m and undrawn committed borrowing facilities of \$0.9bn. The earliest expiry date of the Group's committed borrowing facilities is in respect of a \$300m bilateral term loan facility GXHWRH[SLUHLQ\$SULO

The Group's forecasts and projections, taking into account reasonably possible changes in trading performance, show that the Group has VXI²FLHQW²QDQFLDOUHVRXUFHV7KH'LUHFWRUVKDYHUHDVRQDEOHH[SHFWDWLRQ that the Company and the Group are well placed to manage their business risks and to continue in operational existence for a period of at least three \HDUVIURPWKHGDWHRIWKHDSSURYDORIWKH²QDQFLDOVWDWHPHQWV\$FFRUGLQJO\ the Directors continue to adopt the going concern basis (in accordance ZLWKWKHJXLGDQFH©*RLQJ&RQFHUQDQG/LTXLGLW\5LVN*XLGDQFHIRU Directors of UK Companies 2009' issued by the FRC) in preparing the FRQVROLGDWHG²QDQFLDOVWDWHPHQWV

There have been no new accounting pronouncements impacting the Group in 2016.

A number of new standards, amendments to standards and interpretations are effective for the Group's annual periods beginning on or after 1 January 2017, and have not been applied in preparing these consolidated DFFRXQWV7KHQHZOHDVLQJVWDQGDUG,)56Leases will become effective IURP-DQXDU\DQGLVH[SHFWHGWRKDYHDVLJQL²FDQWHIIHFWRQWKH consolidated accounts of Group. The impact of these new standards is still being determined.

1.1 Consolidation

The Group accounts include the accounts of Smith & Nephew plc and its subsidiaries for the periods during which they were members of the Group.

Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are consolidated in the Group accounts from the date that the Group obtains control, and continue to be consolidated until the date that such control ceases. Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated on consolidation. All subsidiaries have year ends which are co-terminus with the Groups, with the exception of jurisdictions whereby a different year end is required by local legislation.

When the Group loses control over a subsidiary, it derecognises the assets DQGOLDELOLWLHVRIWKHVXEVLGLDU\DQGDQ\UHODWHGFRPSRQHQWVRIHTXLW\$Q\ UHVXOWLQJJDLQRUORVVLVUHFRJQLVHGLQSUR²WRUORVV\$Q\UHWDLQHGLQWHUHVWLQ the former subsidiary is measured at fair value.

1.2 Foreign currencies

Functional and presentation currency

The Group accounts are presented in US Dollars, which is the Company's functional currency.

Foreign currency transactions

Transactions in foreign currencies are translated to the respective functional currencies of Group companies at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated to the functional currency as at the exchange rate at the reporting date. Non-monetary items are not retranslated.

Foreign operations

Balance sheet items of foreign operations, including goodwill and fair value adjustments arising on acquisition are translated into US Dollars on consolidation at the exchange rates at the reporting date. Income VWDWHPHQWLWHPVDQGWKHFDVK³RZVRIIRUHLJQRSHUDWLRQVDUHWUDQVODWHGDW average rates as an approximation to actual transaction rates, with actual transaction rates used for large one off transactions.

Foreign currency differences are recognised in Other comprehensive LQFRPHDQGDFFXPXODWHGLQ©2WKHUUHVHUYHVªZLWKLQHTXLW\7KHVHLQFOXGH exchange differences on the translation at closing rates of exchange of non-US Dollar opening net assets; the differences arising between WKHWUDQVODWLRQRISUR²WVLQWR86'ROODUVDWDFWXDORUDYHUDJHDVDQ approximation) and closing exchange rates; to the extent that the hedging relationship is effective, the difference on translation of foreign currency ERUURZLQJVRUVZDSVWKDWDUHXVHGWR²QDQFHRUKHGJHWKH*URXSªVQHW investments in foreign operations; and the movement in the fair value of forward foreign exchange contracts used to hedge forecast foreign H[FKDQJHFDVK³RZV

Foreign operations continued

The exchange rates used for the translation of currencies into US Dollars WKDWKDYHWKHPRVWVLJQL²FDQWLPSDFWRQWKH*URXSUHVXOWVZHUH

	2016	2015	2014
Average rates
Sterling	1.35	1.53	1.65
Euro	1.11	1.11	1.33
Swiss Franc	1.02	1.04	1.09
Renminbi	0.15	0.16	0.16
Year end rates
Sterling	1.23	1.48	1.56
Euro	1.05	1.09	1.21
Swiss Franc	0.98	1.00	1.01
Renminbi	0.14	0.15	0.16

2 BUSINESS SEGMENT INFORMATION

Development, manufacturing, supply chain and central functions are managed globally for the Group as a whole. Sales are managed through three geographical selling regions, with each having a president who is responsible for the commercial view of that region. The Executive &RPPLWWHH([&R?FRPSULVHVWKH&KLHI&RPPHUFLDO2I²FHUJHRJUDSKLFDO presidents and certain heads of function and is chaired by the CEO. The ExCo is the body through which the CEO uses the authority delegated to him by the Board of Directors to manage the operations and performance RIWKH*URXS\$OOVLJQL²FDQWRSHUDWLQJGHFLVLRQVUHJDUGLQJWKHDOORFDWLRQRI the Group's resources and assessment of the Group's performance are made by the ExCo, and whilst the members have individual responsibility for the implementation of decisions within their respective areas, it is at the ExCo level that these decisions are made. Accordingly, the ExCo is FRQVLGHUHGWREHWKH*URXSªVFKLHIRSHUDWLQJGHFLVLRQPDNHUDVGH²QHGE\ IFRS 8, Operating Segments.

In making decisions about the allocation of the Group's resources, the ([&RUHYLHZ²QDQFLDOLQIRUPDWLRQRQDQLQWHJUDWHGEDVLVIRUWKH*URXSDV a whole and determines the best allocation of resources to group-wide projects. This information is prepared substantially on the same basis DVWKH*URXSªV,)56²QDQFLDOVWDWHPHQWVDVLGHIURPWKHDGMXVWPHQWV described in Note 2.2.

,QDVVHVVLQJSHUIRUPDQFHWKH([&RDOVRFRQVLGHU²QDQFLDOLQIRUPDWLRQ presented on a geographical selling region and product franchise basis for revenue. Financial information for corporate and functional costs is presented on a group-wide basis. When applying the requirements of IFRS 8, the Group considers that the allocation of resources by the ExCo being determined at Group level on a project by project basis determines that the Group has one operating segment.

The types of products and services offered by the Group's global business VHJPHQWDUHDVIROORZV

ç Sports Medicine Joint Repair, which offers surgeons a broad array of instruments, technologies and implants necessary to perform minimally invasive surgery of the joints;
ç Arthroscopic Enabling Technologies, which offers healthcare providers DYDULHW\RIWHFKQRORJLHVVXFKDV³XLGPDQDJHPHQWHTXLSPHQWIRU VXUJLFDODFFHVVKLJKGH²QLWLRQFDPHUDVGLJLWDOLPDJHFDSWXUHVFRSHV light sources and monitors to assist with visualisation inside the joints, radio frequency wands, electromechanical and mechanical blades, and hand instruments for removing damaged tissue;
ç Trauma & Extremities, consisting of internal and external devices used in the stabilisation of severe fractures and deformity correction procedures;
ç Other Surgical Businesses, which includes robotics-assisted surgery, various products and technologies to assist in surgical treatment of the ear, nose and throat, and gynaecological instrumentation, until the Gynaecology business disposal in August 2016.
ç Knee Implants, which offers an innovative range of products for specialised knee replacement procedures;
ç Hip Implants, which offers a range of specialist products for reconstruction of the hip joint;
ç Advanced Wound Care, which includes products for the treatment of acute and chronic wounds, including leg, diabetic and pressure ulcers, burns and post-operative wounds;
ç Advanced Wound Bioactives, which includes biologics and other bioactive technologies that provide unique approaches to debridement and dermal repair/regeneration; and
ç Advanced Wound Devices, which consists of traditional and single-use Negative Pressure Wound Therapy and hydrosurgery systems.

The segment information is prepared in conformity with the accounting policies of the Group and the accounting standard IFRS 8 Operating Segments.

7KHVHJPHQWSUR²WPHDVXUHUHSRUWHGWRWKH&KLHI([HFXWLYH2I²FHUDQGKLV Commercial and Operations Committee team for the purposes of resource DOORFDWLRQDQGDVVHVVPHQWLVWUDGLQJSUR²WEHIRUHLQWHUHVWDQGUHODWHG income tax expense and excludes the effects of non-recurring income and H[SHQGLWXUHIURPRQHRIILWHPVDVGLVFXVVHGLQ1RWH*URXS²QDQFLQJ (including interest receivable and payable) is managed on a net basis outside of the business segment. In 2015, the Group changed its operating segments following its transition to a new commercial organisational structure. Consequently the 2014 comparatives presented were restated LQWRFRQIRUPWRWKHRQHJOREDOVHJPHQWYLHZ

The results and other information as required of the single segment are shown in Note 2.

2 BUSINESS SEGMENT INFORMATION continued

2.1 Revenue by business segment and geography

ACCOUNTING POLICY

Revenue comprises sales of products and services to third parties at amounts invoiced net of trade discounts and rebates, excluding taxes on UHYHQXH5HYHQXHIURPWKHVDOHRISURGXFWVLVUHFRJQLVHGXSRQWUDQVIHUWRWKHFXVWRPHURIWKHVLJQL²FDQWULVNVDQGUHZDUGVRIRZQHUVKLS7KLVLV JHQHUDOO\ZKHQJRRGVDUHGHOLYHUHGWRFXVWRPHUV7KHUHLVQRVLJQL²FDQWUHYHQXHDVVRFLDWHGZLWKWKHSURYLVLRQRIGLVFUHWHVHUYLFHV6DOHVRILQYHQWRU\ ORFDWHGDWFXVWRPHUSUHPLVHVDQGDYDLODEOHIRUFXVWRPHUVªLPPHGLDWHXVHDUHUHFRJQLVHGZKHQQRWL²FDWLRQLVUHFHLYHGWKDWWKHSURGXFWKDVEHHQ implanted or used. Appropriate provisions for returns, trade discounts and rebates are deducted from revenue. Rebates comprise retrospective volume discounts granted to certain customers on attainment of certain levels of purchases from the Group. These are accrued over the course of the DUUDQJHPHQWEDVHGRQHVWLPDWHVRIWKHOHYHORIEXVLQHVVH[SHFWHGDQGDGMXVWHGDWWKHHQGRIWKHDUUDQJHPHQWWRUH³HFWDFWXDOYROXPHV

6HJPHQWUHYHQXHUHFRQFLOHVWRVWDWXWRU\UHYHQXHVDQGRWKHULQFRPHIURPFRQWLQXLQJRSHUDWLRQVDVIROORZV

	2016 \$ million	2015 \$ million	2014 \$ million
Reportable segment revenue
Revenue from external customers	4,669	4,634	4,617

7KHWDEOHEHORZVKRZVUHYHQXHE\SURGXFWW\SHIURPFRQWLQXLQJRSHUDWLRQV,QFOXGHGZLWKLQWKHDQGDQDO\VHVDUHUHFODVVL²FDWLRQVRI \$58m and \$54m respectively of product sales formerly included in the Sports Medicine Joint Repair franchise which have now been included in the Arthroscopic Enabling Technologies franchise in order to present analysis in line with 2016 management reporting on a consistent basis.

	2016 \$ million	2015 \$ million	2014 \$ million
Revenue by product from continuing operations
Sports Medicine Joint Repair	587	548	522
Arthroscopic Enabling Technologies	631	631	596
Trauma & Extremities	475	497	506
Other Surgical Businesses	214	205	147
Knee Implants	932	883	873
Hip Implants	597	604	654
Advanced Wound Care	719	755	805
Advanced Wound Bioactives	342	344	322
Advanced Wound Devices	172	167	192
Consolidated revenue from continuing operations	4,669	4,634	4,617

,QSUHVHQWLQJLQIRUPDWLRQRQWKHEDVLVRIJHRJUDSKLFDOVHJPHQWVVHJPHQWUHYHQXHLVEDVHGRQORFDWLRQRI6PLWK 1HSKHZEXVLQHVVHV

	2016 \$ million	2015 \$ million	2014 \$ million
Geographical segment revenue
United Kingdom	266	301	299
United States of America	2,299	2,217	2,012
Other1	2,104	2,116	2,306
Consolidated revenue from continuing operations	4,669	4,634	4,617

1 No other country represents more than 5% of consolidated sales revenue from continuing operations.

Major customers

No single customer generates revenue greater than 10% of the consolidated revenue.

7UDGLQJDQGRSHUDWLQJSUR²WE\EXVLQHVVVHJPHQW

7UDGLQJSUR²WLVDWUHQGPHDVXUHZKLFKSUHVHQWVWKHORQJWHUPSUR²WDELOLW\RIWKH*URXSH[FOXGLQJWKHLPSDFWRIVSHFL²FWUDQVDFWLRQVWKDWPDQDJHPHQW FRQVLGHUVDIIHFWVWKH*URXSªVVKRUWWHUPSUR²WDELOLW\7KH*URXSSUHVHQWVWKLVPHDVXUHWRDVVLVWLQYHVWRUVLQWKHLUXQGHUVWDQGLQJRIWUHQGV7KH*URXS KDVLGHQWL²HGWKHIROORZLQJLWHPVZKHUHPDWHULDODVWKRVHWREHH[FOXGHGIURPRSHUDWLQJSUR²WZKHQDUULYLQJDWWUDGLQJSUR²WDFTXLVLWLRQDQGGLVSRVDO UHODWHGLWHPVLQFOXGLQJDPRUWLVDWLRQDQGLPSDLUPHQWRIDFTXLVLWLRQLQWDQJLEOHVVLJQL²FDQWUHVWUXFWXULQJSURJUDPPHVJDLQVDQGORVVHVDULVLQJIURPOHJDO GLVSXWHVDQGRWKHUVLJQL²FDQWLWHPV)XUWKHUGHWDLOLVSURYLGHGLQ1RWHVDQG7UDGLQJSUR²WUHFRQFLOHVWRRSHUDWLQJSUR²WDVIROORZV

2016	2015	2014
		\$ million 1,055
		(118)
		(61)
		(129)
		2
801	628	749
(46)	(38)	(22)
(16)	(15)	(11)
(3)	(16)	(2)
326	–	–
(278)	(149)	(213)
784	410	501
	\$ million 1,020 (9) (62) (178) 30	\$ million 1,099 (12) (65) (204) (190)

2.3 Assets and liabilities by business segment and geography

	2016 \$ million	2015 \$ million	2014 \$ million
Reconciliation of assets of the business segment to the consolidated group
Assets of the business segment	7,147	6,929	7,129
8QDOORFDWHGFRUSRUDWHDVVHWV
– Deferred tax assets	97	105	77
¥5HWLUHPHQWEHQH²WDVVHWV	–	13	7
– Cash at bank	100	120	93
Total assets of the consolidated group	7,344	7,167	7,306
6HJPHQWDVVHWVDUHEDVHGRQWKHORFDWLRQRIWKHDVVHWV
	2016	2015	2014

	\$ million	\$ million	\$ million
United Kingdom	335	366	379
United States of America	3,145	2,982	3,104
Other	1,238	1,226	1,299
Non-current assets by geographical location1	4,718	4,574	4,782

1RQFXUUHQWDVVHWVH[FOXGHVUHWLUHPHQWEHQH²WDVVHWVDQGGHIHUUHGWD[DVVHWV

2 BUSINESS SEGMENT INFORMATION continued

	2016 \$ million	2015 \$ million	2014 \$ million
Reconciliation of liabilities of the business segment to the consolidated group
Liabilities of the business segment	1,247	1,197	1,012
8QDOORFDWHGFRUSRUDWHOLDELOLWLHV
– Long-term borrowings	1,564	1,434	1,666
¥5HWLUHPHQWEHQH²WREOLJDWLRQV	164	184	233
– Deferred tax liabilities	94	77	98
– Bank overdrafts and loans due within one year	86	46	39
– Current tax payable	231	263	218
Total liabilities of the consolidated group	3,386	3,201	3,266
Depreciation, amortisation and impairment of the business segment
Depreciation of property, plant and equipment	224	226	222
Amortisation of acquired intangibles	130	153	129
Amortisation of other intangible assets	61	66	62
Total depreciation and amortisation	415	445	413
Impairment losses on property, plant and equipment1	–	–	14
Impairment losses on acquired intangibles1	48	51	–
Impairment reversal on trade investments1	–	(3)	–
Total non-cash items	463	493	427

,PSDLUPHQWVUHFRJQLVHGLQRSHUDWLQJSUR²WZLWKLQWKHDGPLQLVWUDWLYHH[SHQVHVOLQH

6HJPHQWDFTXLVLWLRQRISURSHUW\SODQWDQGHTXLSPHQWDQGLQWDQJLEOHVUHFRQFLOHVWRWKDWRIWKHFRQVROLGDWHGJURXSDQGFRPSULVHVWKHIROORZLQJ

	2016 \$ million	2015 \$ million	2014 \$ million
Additions to property, plant and equipment	320	303	298
Additions to intangibles	72	55	77
Capital expenditure (excluding business combinations)	392	358	375
Trade investments	2	2	4
Acquisitions – Goodwill	211	34	844
Acquisitions – Intangible assets	85	19	833
Acquisitions – Property, plant and equipment	2	6	62
Capital and acquisition expenditure	692	419	2,118

3 OPERATING PROFIT

ACCOUNTING POLICIES

Research and development

Research expenditure is expensed as incurred. Internal development expenditure is only capitalised if the recognition criteria in IAS 38 Intangible Assets KDYHEHHQVDWLV²HG7KH*URXSFRQVLGHUVWKDWWKHUHJXODWRU\WHFKQLFDODQGPDUNHWXQFHUWDLQWLHVLQKHUHQWLQWKHGHYHORSPHQWRIQHZSURGXFWV mean that in most cases development costs should not be capitalised as intangible assets until products receive approval from the appropriate regulatory body.

Payments to third parties for research and development projects are accounted for based on the substance of the arrangement. If the arrangement represents outsourced research and development activities the payments are generally expensed except in limited circumstances where the respective development expenditure would be capitalised under the principles established in IAS 38. By contrast, the payments are capitalised LIWKHDUUDQJHPHQWUHSUHVHQWVFRQVLGHUDWLRQIRUWKHDFTXLVLWLRQRILQWHOOHFWXDOSURSHUW\GHYHORSHGDWWKHULVNRIWKHWKLUGSDUW\

Capitalised development expenditures are amortised on a straight-line basis over their useful economic lives from product launch.

Advertising costs

Advertising costs are expensed as incurred.

	2016	2015	2014
	\$ million	\$ million	\$ million
Revenue	4,669	4,634	4,617
Cost of goods sold1,2	(1,272)	(1,143)	(1,162)
*URVVSUR²W	3,397	3,491	3,455
Research and development expenses	(230)	(222)	(235)
6HOOLQJJHQHUDODQGDGPLQLVWUDWLYHH[SHQVHV
Marketing, selling and distribution expenses	(1,712)	(1,735)	(1,670)
Administrative expenses3,4,5,6	(654)	(906)	(801)
	(2,366)	(2,641)	(2,471)
2SHUDWLQJSUR²W	801	628	749

LQFOXGHVQLORIUHVWUXFWXULQJDQGUDWLRQDOLVDWLRQH[SHQVHVQLOP

LQFOXGHVQLORIDFTXLVLWLRQUHODWHGFRVWVQLOP

LQFOXGHVPRIDPRUWLVDWLRQRIVRIWZDUHDQGRWKHULQWDQJLEOHDVVHWVPP

LQFOXGHVPRIUHVWUXFWXULQJDQGUDWLRQDOLVDWLRQH[SHQVHVDQGPRIDPRUWLVDWLRQDQGLPSDLUPHQWRIDFTXLVLWLRQLQWDQJLEOHVPRIUHVWUXFWXULQJDQG UDWLRQDOLVDWLRQH[SHQVHVDQGPRIDPRUWLVDWLRQRIDFTXLVLWLRQLQWDQJLEOHVPRIUHVWUXFWXULQJDQGUDWLRQDOLVDWLRQH[SHQVHVDQGPRIDPRUWLVDWLRQRI

acquisition intangibles). LQFOXGHVPFUHGLWUHODWLQJWROHJDODQGRWKHUH[FHSWLRQDOVPFKDUJHPFUHGLW

LQFOXGHVPRIDFTXLVLWLRQUHODWHGFRVWVPP

1RWHWKDWLWHPVGHWDLOHGLQDQGDUHH[FOXGHGIURPWKHFDOFXODWLRQRIWUDGLQJSUR²WWKHVHJPHQWSUR²WPHDVXUH

2SHUDWLQJSUR²WLVVWDWHGDIWHUFKDUJLQJFUHGLWLQJ?WKHIROORZLQJLWHPV

	2016 \$ million	2015 \$ million	2014 \$ million
Other operating income	(25)	(41)	(9)
Amortisation of intangibles	191	219	191
Impairment of intangible assets	48	51	–
Depreciation of property, plant and equipment	224	226	222
Loss on disposal of property, plant and equipment and intangible assets	15	15	11
Operating lease payments for land and buildings	39	37	38
Operating lease payments for other assets	19	20	18
Advertising costs	88	91	96

,QRWKHURSHUDWLQJLQFRPHSULPDULO\UHODWHVWRLQVXUDQFHUHFRYHU\UHODWLQJWRPHWDORQPHWDOFODLPVQHWJDLQUHODWLQJWRSDWHQWOLWLJDWLRQ

3 OPERATING PROFIT continued

3.1 Staff costs and employee numbers

6WDIIFRVWVGXULQJWKH\HDUDPRXQWHGWR

		2016	2015	2014
	Notes	\$ million	\$ million	\$ million
Wages and salaries		1,227	1,193	1,237
Social security costs		129	135	127
Pension costs (including retirement healthcare)1	18	23	58	17
Share-based payments	23	27	30	32
		1,406	1,416	1,413

,QSHQVLRQFRVWVLQFOXGHWKHSDVWVHUYLFHFRVWFUHGLWRIPDULVLQJSULPDULO\IURPWKHFORVXUHRIWKH8.GH²QHGEHQH²WVFKHPHWRIXWXUHDFFUXDO

'XULQJWKH\HDUHQGHG'HFHPEHUWKHDYHUDJHQXPEHURIHPSOR\HHVZDV

3.2 Audit Fees – information about the nature and cost of services provided by auditor

	2016 \$ million	2015 \$ million	2014 \$ million
\$XGLWVHUYLFHV
Group accounts	2	2	2
Local statutory audit pursuant to legislation	2	2	1
2WKHUVHUYLFHV
Non-audit services	1	1	–
7D[DWLRQVHUYLFHV
Compliance services	–	–	1
Advisory services	–	–	1
Total auditor's remuneration	5	5	5
\$ULVLQJ
In the UK	2	2	3
Outside the UK	3	3	2
	5	5	5

Audit fees for the current year and 2015 are those relating to KPMG LLP, the Group's auditor. In 2014, fees relate to Ernst & Young LLP, the Group's former auditor.

3.3 Acquisition-related costs

\$FTXLVLWLRQUHODWHGFRVWVRIPPP?ZHUHLQFXUUHGZLWKLQRSHUDWLQJSUR²WLQ7KHVHFRVWVUHODWHWRWKHFRVWVDVVRFLDWHGZLWK the purchase and integration of Blue Belt Technologies and other acquisitions.

3.4 Restructuring and rationalisation expenses

5HVWUXFWXULQJDQGUDWLRQDOLVDWLRQFRVWVRIPPP?ZHUHLQFXUUHGLQ7KHVHFRVWVSULPDULO\UHODWHGWRWKHRQJRLQJ implementation of the Group Optimisation Plan that was announced in May 2014 and has now completed.

3.5 Legal and other

7KHOHJDODQGRWKHUFUHGLWZLWKLQRSHUDWLQJSUR²WRIPPFKDUJHPFUHGLW?UHFRJQLVHGSULPDULO\UHODWHGWRDPFXUWDLOPHQWJDLQ DULVLQJRQ8.SRVWUHWLUHPHQWEHQH²WV\$OVRLQFOXGHGLVDQHWPJDLQLQUHVSHFWRILQVXUDQFHUHFRYHULHVRIPDQGOHJDOH[SHQVHVRIPUHODWLQJ to the ongoing metal-on-metal hip claims. This was partially offset by legal expenses relating to patent litigation.

4 INTEREST AND OTHER FINANCE COSTS

4.1 Interest income/(expense)

	2016 \$ million	2015 \$ million	2014 \$ million
Interest income	6	11	13
,QWHUHVWH[SHQVH
Bank borrowings	(9)	(9)	(19)
Private placement notes	(37)	(37)	(14)
Other	(6)	(3)	(2)
	(52)	(49)	(35)
Net interest expense	(46)	(38)	(22)

2WKHU²QDQFHFRVWV

		2016	2015	2014
	Notes	\$ million	\$ million	\$ million
5HWLUHPHQWEHQH²WQHWLQWHUHVWH[SHQVH	18	(7)	(11)	(10)
Unwinding of discount		(9)	(3)	–
Other		–	(1)	(1)
2WKHU²QDQFHFRVWV		(16)	(15)	(11)

Foreign exchange gains or losses arose primarily on the translation of intercompany and third party borrowings and amounted to a net \$22m gain in QHWPJDLQQHWPJDLQ?7KHVHDPRXQWVZHUHPDWFKHGE\WKHIDLUYDOXHJDLQVRUORVVHVRQFXUUHQF\VZDSVKHOGWRPDQDJHWKLV currency risk.

5 TAXATION

ACCOUNTING POLICY

The charge for current taxation is based on the results for the year as adjusted for items which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

The Group operates in multiple tax jurisdictions around the world and records provisions for taxation liabilities and tax audits when it is considered probable that a tax charge will arise and the amount can be reliably estimated. Although Group policy is to submit its tax returns to the relevant WD[DXWKRULWLHVDVSURPSWO\DVSRVVLEOHDWDQ\WLPHWKH*URXSKDV\HDUVRXWVWDQGLQJDQGLVLQYROYHGLQGLVSXWHVDQGWD[DXGLWV6LJQL²FDQWLVVXHV may take many years to resolve. In estimating the probability and amount of any tax charge, management takes into account the views of internal and external advisers and updates the amount of the provision whenever necessary. The ultimate tax liability may differ from the amount provided depending on interpretations of tax law, settlement negotiations or changes in legislation.

'HIHUUHGWD[LVUHFRJQLVHGLQUHVSHFWRIWHPSRUDU\GLIIHUHQFHVEHWZHHQWKHFDUU\LQJDPRXQWVRIDVVHWVDQGOLDELOLWLHVIRU²QDQFLDOUHSRUWLQJSXUSRVHV and the amounts used for taxation purposes.

'HIHUUHGWD[LVQRWUHFRJQLVHGIRUWHPSRUDU\GLIIHUHQFHVUHODWHGWRLQYHVWPHQWVLQVXEVLGLDULHVDQGDVVRFLDWHVZKHUHWKH*URXSLVDEOHWRFRQWUROWKH timing of the reversal of the temporary difference and it is probable that this will not reverse in the foreseeable future; on the initial recognition of nondeductible goodwill; and on the initial recognition of an asset or liability in a transaction that is not a business combination and that, at the time of the WUDQVDFWLRQGRHVQRWDIIHFWWKHDFFRXQWLQJRUWD[DEOHSUR²W

'HIHUUHGWD[DVVHWVDUHUHFRJQLVHGWRWKHH[WHQWWKDWLWLVSUREDEOHWKDWIXWXUHWD[DEOHSUR²WVZLOOEHDYDLODEOHDJDLQVWZKLFKWKH\FDQEHXVHG'HIHUUHG tax assets are reviewed at each reporting date.

Deferred tax is measured on an undiscounted basis, and at the tax rates that have been enacted or substantively enacted by the reporting date that are expected to apply in the periods in which the asset or liability is settled. It is recognised in the income statement except when it relates to items credited or charged directly to other comprehensive income or equity, in which case the deferred tax is also recognised within other comprehensive income or equity respectively.

Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority, when the Group intends to settle its current tax assets and liabilities on a net basis and that authority permits the Group to make a single net payment.

5 TAXATION continued

5.1 Taxation charge attributable to the Group

	2016 \$ million	2015 \$ million	2014 \$ million
&XUUHQWWD[DWLRQ
8.FRUSRUDWLRQWD[DW	23	31	39
Overseas tax	261	219	235
Current income tax charge	284	250	274
Adjustments in respect of prior periods	(53)	(56)	(6)
Total current taxation	231	194	268
'HIHUUHGWD[DWLRQ
Origination and reversal of temporary differences	24	(73)	(52)
Changes in tax rates	–	(3)	–
Adjustments to estimated amounts arising in prior periods	23	31	(3)
Total deferred taxation	47	(45)	(55)
Total taxation as per the income statement	278	149	213
Taxation in other comprehensive income	(10)	(10)	(19)
Taxation in equity	(2)	(5)	–
Taxation attributable to the Group	266	134	194

7KHQHWSULRUSHULRGDGMXVWPHQWEHQH²WRIPFXUUHQWWD[FUHGLWRIPRIIVHWE\DGHIHUUHGWD[FKDUJHRIP?PDLQO\UHODWHVWRDSURYLVLRQ release following agreement reached with the IRS on a US tax matter, other provision releases on the expiry of statute of limitations and tax accrual to tax UHWXUQDGMXVWPHQWVRIIVHWE\DQLQFUHDVHLQFHUWDLQRWKHUWD[SURYLVLRQV7KHQHWSULRUSHULRGDGMXVWPHQWEHQH²WRIPFXUUHQWWD[FUHGLWRIP offset by a deferred tax charge of \$31m) mainly relates to provision releases after settlement with tax authorities or the expiry of statute of limitations and tax accrual to tax return adjustments.

7RWDOWD[DWLRQDVSHUWKHLQFRPHVWDWHPHQWLQFUHDVHGE\PPUHGXFWLRQDQGPUHGXFWLRQ?DVDFRQVHTXHQFHRIDFTXLVLWLRQDQG disposals, restructuring and rationalisation costs, amortisation and impairment of acquisition intangibles and legal and other (see Note 6).

Factors affecting future tax charges

The Group operates in numerous tax jurisdictions around the world and is subject to factors that may affect future tax charges including potential US tax reform, implementation of the OECD's BEPS actions, tax rate changes, tax legislation changes and resolution of tax audits and disputes. At any given time the Group has unagreed years outstanding in various countries and is involved in tax audits and disputes, some of which may take several years to resolve. The ultimate tax liability may differ from the amount provided depending on interpretations of tax law, settlement negotiations or changes in legislation. The Group believes that it has made adequate provision in respect of additional tax liabilities that may arise from these unagreed years, tax audits and disputes, the majority of which relate to transfer pricing matters as would be expected for a Group operating internationally. However, the actual liability for any particular issue may be higher or lower than the amount provided resulting in a negative or positive effect on the tax charge in any given year.

In December 2016, the Group appealed to the First-Tier Tribunal in the UK against a decision by HM Revenue and Customs (HMRC) relating to the tax deductibility of certain historical foreign exchange losses. The decision of the Tribunal was released on 8 February 2017 and it upheld the Group's appeal. +05&KDVGD\VIURP)HEUXDU\WRGHFLGHZKHWKHUWRDSSHDOWKLVGHFLVLRQ1RWD[EHQH²WKDVEHHQUHFRJQLVHGWRGDWHLQUHVSHFWRIWKHVH foreign exchange losses. In the event that HMRC decide not to appeal or if they do and the Group is ultimately successful in the Courts following an appeal, then the Group's tax charge would be reduced, in the year of success, as a result.

In 2016, the UK Government enacted legislation to reduce the main rate of UK statutory corporation tax to 19.0% from 1 April 2017 and 17.0% from 1 April 2020.

7KH8.VWDQGDUGUDWHRIFRUSRUDWLRQWD[IRULV?2YHUVHDVWD[DWLRQLVFDOFXODWHGDWWKHUDWHVSUHYDLOLQJLQWKHUHVSHFWLYH MXULVGLFWLRQV7KHWDEOHEHORZUHFRQFLOHVWKHH[SHFWHGWD[FKDUJHDWWKH8.VWDWXWRU\UDWHZLWKWKHDFWXDOWD[FKDUJH

	2016 \$ million	2015 \$ million	2014 \$ million
3UR²WEHIRUHWD[DWLRQ	1,062	559	714
([SHFWHGWD[DWLRQDW8.VWDWXWRU\UDWHRI	212	113	154
Differences in overseas taxation rates1	52	61	63
Disposal of the Gynaecology business (mainly at the US tax rate)	56	–	–
%HQH²WRI860DQXIDFWXULQJGHGXFWLRQ	(7)	(7)	(10)
R&D credits	(3)	(6)	(5)
Tax losses not recognised	1	11	11
Utilisation of previously unrecognised tax losses	(9)	–	–
Expenses not deductible for tax purposes2	6	2	9
Adjustments in respect of prior years3	(30)	(25)	(9)
Total taxation as per the income statement	278	149	213

0DLQO\UHODWHVWRSUR²WVWD[HGLQWKH86DWDUDWHKLJKHUWKDQWKH8.VWDWXWRU\UDWH

,QFOXGHVWKHLPSDFWRILQWUDJURXSORDQVSURYLGHGWR²QDQFH86DFTXLVLWLRQVDQGEXVLQHVVRSHUDWLRQV

3 The 2016 and 2015 credits of \$30m and \$25m respectively are explained above.

5.2 Deferred taxation

0RYHPHQWVLQWKHPDLQFRPSRQHQWVRIGHIHUUHGWD[DVVHWVDQGOLDELOLWLHVZHUHDVIROORZV

	Accelerated tax		Retirement EHQH²W		Inventory, provisions and other
	depreciation \$ million	Intangibles \$ million	obligation \$ million	Macrotexture \$ million	differences \$ million	Total \$ million
At 1 January 2015	(70)	(226)	70	52	153	(21)
Exchange adjustment	(1)	7	(1)	–	(7)	(2)
5HFODVVL²FDWLRQV	(1)	(53)	(19)	–	73	–
Movement in income statement – current year	4	41	(19)	–	47	73
Movement in income statement – prior years	6	9	(1)	–	(45)	(31)
Movement in other comprehensive income	–	–	9	–	1	10
Movement in equity	–	–	–	–	(1)	(1)
Changes in tax rate	–	2	–	–	1	3
Acquisitions	–	(3)	–	–	–	(3)
At 31 December 2015	(62)	(223)	39	52	222	28
Exchange adjustment	–	2	–	–	(3)	(1)
Movement in income statement – current year	–	34	(16)	–	(42)	(24)
Movement in income statement – prior years	(11)	6	(2)	–	(16)	(23)
Movement in other comprehensive income	–	–	7	–	(1)	6
Movement in equity	–	–	–	–	2	2
Changes in tax rate	–	1	–	–	(1)	–
Acquisitions	–	(29)	–	–	44	15
At 31 December 2016	(73)	(209)	28	52	205	3

⁵HSUHVHQWHGE\

	2016 \$ million	2015 \$ million
Deferred tax assets	97	105
Deferred tax liabilities	(94)	(77)
Net position at 31 December	3	28

7KH*URXSKDVXQXVHGJURVVWUDGLQJWD[ORVVHVRIPP?DQGJURVVXQXVHGFDSLWDOORVVHVRIPP?DYDLODEOHIRURIIVHW DJDLQVWIXWXUHSUR²WV\$GHIHUUHGWD[DVVHWKDVEHHQUHFRJQLVHGLQUHVSHFWRIPP?RIWKHWUDGLQJWD[ORVVHV1RGHIHUUHGWD[DVVHWKDV been recognised on the remaining unused tax losses as they are not expected to be realised in the foreseeable future.

The aggregate amount of temporary differences in respect of investments in subsidiaries and associates for which deferred tax liabilities have not been UHFRJQLVHGLVDSSUR[LPDWHO\PP

6 EARNINGS PER ORDINARY SHARE

ACCOUNTING POLICIES

Earnings per share

%DVLFHDUQLQJVSHUVKDUHLVFDOFXODWHGE\GLYLGLQJWKHSUR²WDWWULEXWDEOHWRHTXLW\KROGHUVE\WKHZHLJKWHGDYHUDJHQXPEHURIRUGLQDU\VKDUHVLQLVVXH during the year, excluding shares held by the Company in the Employees' Share Trust or as treasury shares.

Diluted earnings per share

Diluted earnings per share is calculated by adjusting the basic earnings per share for the effect of conversion to ordinary shares associated with dilutive potential ordinary shares, which comprise share options and awards granted to employees.

Adjusted earnings per share

\$GMXVWHGHDUQLQJVSHUVKDUHLVDWUHQGPHDVXUHZKLFKSUHVHQWVWKHORQJWHUPSUR²WDELOLW\RIWKH*URXSH[FOXGLQJWKHLPSDFWRIVSHFL²FWUDQVDFWLRQV WKDWPDQDJHPHQWFRQVLGHUVDIIHFWVWKH*URXSªVVKRUWWHUPSUR²WDELOLW\7KH*URXSSUHVHQWVWKLVPHDVXUHWRDVVLVWLQYHVWRUVLQWKHLUXQGHUVWDQGLQJRI WUHQGV\$GMXVWHGDWWULEXWDEOHSUR²WLVWKHQXPHUDWRUXVHGIRUWKLVPHDVXUH7KH*URXSKDVLGHQWL²HGWKHIROORZLQJLWHPVDVWKRVHWREHH[FOXGHGZKHQ DUULYLQJDWDGMXVWHGDWWULEXWDEOHSUR²WDFTXLVLWLRQVDQGGLVSRVDOVUHODWHGLWHPVLQFOXGLQJDPRUWLVDWLRQDQGLPSDLUPHQWRIDFTXLVLWLRQLQWDQJLEOHDVVHWV VLJQL²FDQWUHVWUXFWXULQJSURJUDPPHVVLJQL²FDQWJDLQVDQGORVVHVDULVLQJIURPOHJDOGLVSXWHVDQGRWKHUVLJQL²FDQWDQGWD[DWLRQWKHUHRQ

7KHFDOFXODWLRQVRIWKHEDVLFGLOXWHGDQGDGMXVWHGHDUQLQJVSHURUGLQDU\VKDUHDUHEDVHGRQWKHIROORZLQJDWWULEXWDEOHSUR²WDQGQXPEHUVRIVKDUHV

	2016 \$ million	2015 \$ million	2014 \$ million
Earnings
\$WWULEXWDEOHSUR²WIRUWKH\HDU	784	410	501
\$GMXVWHGDWWULEXWDEOHSUR²WVHHEHORZ	735	761	743

\$WWULEXWDEOHSUR²WLVUHFRQFLOHGWRDGMXVWHGDWWULEXWDEOHSUR²WDVIROORZV

	Notes	2016 \$ million	2015 \$ million	2014 \$ million
\$WWULEXWDEOHSUR²WIRUWKH\HDU		784	410	501
Acquisition-related costs		9	25	125
Restructuring and rationalisation expenses	3	62	65	61
Amortisation and impairment of acquisition intangibles	9	178	204	129
Legal and other1		(20)	187	(2)
3UR²WRQGLVSRVDORIEXVLQHVV	21	(326)	–	–
Taxation on excluded items	5	48	(130)	(71)
\$GMXVWHGDWWULEXWDEOHSUR²W		735	761	743

/HJDODQGRWKHUFUHGLWLQFOXGHVPZLWKLQRSHUDWLQJSUR²WVUHIHUWR1RWH?DPFKDUJHZLWKLQRWKHU²QDQFHFRVWVIRUXQZLQGLQJRIWKHGLVFRXQWRQWKHSURYLVLRQIRUNQRZQ anticipated and settled metal-on-metal hip claims, and a \$5m charge within share of results of associates for expenses incurred by Bioventus for an aborted initial public offering of shares.

The numerators used for basic and diluted earnings per ordinary share are the same. The denominators used for all categories of earnings for basic and GLOXWHGHDUQLQJVSHURUGLQDU\VKDUHDUHDVIROORZV

	2016	2015	2014
Number of shares (millions)
Basic weighted number of shares	890	894	893
Dilutive impact of share options outstanding	3	5	6
Diluted weighted average number of shares	893	899	899
Earnings per ordinary share
Basic	88.1¢	45.9¢	56.1¢
Diluted	87.8¢	45.6¢	55.7¢
Adjusted2	82.6¢	85.1¢	83.2¢

2 Adjusted earnings per share is calculated using the basic weighted number of shares.

7 PROPERTY, PLANT AND EQUIPMENT

ACCOUNTING POLICIES

Property, plant and equipment

Items of property, plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses.

Depreciation is calculated to write off the cost of items of property, plant and equipment less their estimated residual values using the straight-line PHWKRGRYHUWKHLUHVWLPDWHGXVHIXOOLYHVDQGLVJHQHUDOO\UHFRJQLVHGLQSUR²WRUORVV/HDVHGDVVHWVDUHGHSUHFLDWHGRYHUWKHVKRUWHURIWKHOHDVHWHUP and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Freehold land is not depreciated. The estimated useful lives of items of property, plant and equipment is 3–20 years and for buildings is 20–50 years.

Assets in course of construction are not depreciated until they are available for use.

Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.

Finance costs relating to the purchase or construction of property, plant and equipment and intangible assets that take longer than one year to FRPSOHWHDUHFDSLWDOLVHGEDVHGRQWKH*URXSZHLJKWHGDYHUDJHERUURZLQJFRVWV\$OORWKHU²QDQFHFRVWVDUHH[SHQVHGDVLQFXUUHG

Impairment of assets

The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may be impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment loss. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cashgenerating unit to which it belongs.

An asset's recoverable amount is the higher of an asset's or cash-generating unit's fair value less costs to sell and its value-in-use. In assessing YDOXHLQXVHLWVHVWLPDWHGIXWXUHFDVK³RZLVGLVFRXQWHGWRLWVSUHVHQWYDOXHXVLQJDSUHWD[GLVFRXQWUDWHWKDWUH³HFWVWKHFXUUHQWPDUNHWDVVHVVPHQW RIWKHWLPHYDOXHRIPRQH\DQGWKHULVNVVSHFL²FWRWKHDVVHW

7 PROPERTY, PLANT AND EQUIPMENT continued

	Notes		Land and buildings	Plant and equipment		Assets in
		Freehold \$ million	Leasehold \$ million	Instruments \$ million	Other \$ million	course of construction \$ million	Total \$ million
Cost
At 1 January 2015		149	54	1,060	963	134	2,360
Exchange adjustment		(3)	(1)	(63)	(26)	(1)	(94)
Acquisitions	21	–	–	6	–	–	6
Additions		4	1	152	78	68	303
Disposals		(1)	(1)	(113)	(47)	–	(162)
Transfers		5	5	–	35	(45)	–
At 31 December 2015		154	58	1,042	1,003	156	2,413
Exchange adjustment		(6)	–	(22)	(46)	(5)	(79)
Acquisitions	21	–	–	2	–	–	2
Additions		1	1	166	72	80	320
Disposals	21	–	–	(76)	(39)	(3)	(118)
Transfers		16	60	4	33	(113)	–
At 31 December 2016		165	119	1,116	1,023	115	2,538
Depreciation and impairment
At 1 January 2015		45	32	744	637	11	1,469
Exchange adjustment		(1)	–	(43)	(19)	–	(63)
Charge for the year		5	4	137	80	–	226
Disposals		(1)	(1)	(106)	(43)	–	(151)
At 31 December 2015		48	35	732	655	11	1,481
Exchange adjustment		(3)	–	(15)	(34)	–	(52)
Charge for the year		5	7	131	81	–	224
Disposals		–	–	(67)	(30)	–	(97)
At 31 December 2016		50	42	781	672	11	1,556
Net book amounts
At 31 December 2016		115	77	335	351	104	982
At 31 December 2015		106	23	310	348	145	932

/DQGDQGEXLOGLQJVLQFOXGHVODQGZLWKDFRVWRIPP?WKDWLVQRWVXEMHFWWRGHSUHFLDWLRQ\$VVHWVKHOGXQGHU²QDQFHOHDVHVZLWKDQHWERRN YDOXHRIPP?DUHLQFOXGHGZLWKLQODQGDQGEXLOGLQJV

*URXSFDSLWDOH[SHQGLWXUHUHODWLQJWRSURSHUW\SODQWDQGHTXLSPHQWFRQWUDFWHGEXWQRWSURYLGHGIRUDPRXQWHGWRPP

The amount of borrowing costs capitalised in 2016 and 2015 was minimal.

8 GOODWILL

ACCOUNTING POLICY

*RRGZLOOLVQRWDPRUWLVHGEXWLVUHYLHZHGIRULPSDLUPHQWDQQXDOO\*RRGZLOOLVDOORFDWHGWRWKHFDVKJHQHUDWLQJXQLW&*8?WKDWLVH[SHFWHGWREHQH²W IURPWKHDFTXLVLWLRQ7KHUHFRYHUDEOHDPRXQWRI&*8VWRZKLFKJRRGZLOOKDVEHHQDOORFDWHGLVWHVWHGIRULPSDLUPHQWDQQXDOO\7KH&*8VLGHQWL²HG by management are at the aggregated product franchise levels of Reconstruction, Other Surgical Devices and Advanced Wound Management, in the ZD\WKHFRUHDVVHWVDUHXVHGWRJHQHUDWHFDVK³RZV

If the recoverable amount of the CGU is less than its carrying amount then an impairment loss is determined to have occurred. Any impairment losses WKDWDULVHDUHUHFRJQLVHGLPPHGLDWHO\LQWKHLQFRPHVWDWHPHQWDQGDUHDOORFDWHG²UVWWRUHGXFHWKHFDUU\LQJDPRXQWRIJRRGZLOODQGWKHQWRWKH carrying amounts of the other assets of the CGU.

,QFDUU\LQJRXWLPSDLUPHQWUHYLHZVRIJRRGZLOODQXPEHURIVLJQL²FDQWDVVXPSWLRQVKDYHWREHPDGHZKHQSUHSDULQJFDVK³RZSURMHFWLRQV7KHVH LQFOXGHWKHIXWXUHUDWHRIPDUNHWJURZWKGLVFRXQWUDWHVWKHPDUNHWGHPDQGIRUWKHSURGXFWVDFTXLUHGWKHIXWXUHSUR²WDELOLW\RIDFTXLUHGEXVLQHVVHV or products, levels of reimbursement and success in obtaining regulatory approvals. If actual results should differ, or changes in expectations arise, impairment charges may be required which would adversely impact operating results.

	Notes	2016 \$ million	2015 \$ million
Cost
At 1 January		2,012	2,027
Exchange adjustment		(35)	(49)
Acquisitions	21	211	34
At 31 December		2,188	2,012
Impairment
At 1 January and 31 December		–	–
Net book amounts		2,188	2,012

0DQDJHPHQWKDVLGHQWL²HGIRXU&*8VLQDSSO\LQJWKHSURYLVLRQVRI,\$6,PSDLUPHQWRI\$VVHWV5HFRQVWUXFWLRQ2WKHU6XUJLFDO'HYLFHV\$GYDQFHG Wound Care & Devices and Bioactives.

For the purpose of goodwill impairment testing, the Advanced Wound Care & Devices and Bioactives CGUs have been aggregated (Advanced Wound 0DQDJHPHQW?DVWKLVLVWKHOHYHODWZKLFKJRRGZLOOLVPRQLWRUHGDQGOHYHODWZKLFKWKHHFRQRPLFEHQH²WVUHODWLQJWRWKHJRRGZLOOZLWKLQWKHVH&*8V is realised.

*RRGZLOOLVDOORFDWHGWRWKH*URXSªV&*8VDVIROORZV

	2016
	\$ million
Reconstruction	551
Other Surgical Devices	1,351
Advanced Wound Management	286
	2,188

Impairment reviews were performed in September 2016 and September 2015 by comparing the recoverable amount of each CGU with its carrying DPRXQWLQFOXGLQJJRRGZLOO7KHVHZHUHXSGDWHGGXULQJ'HFHPEHUWDNLQJLQWRDFFRXQWDQ\VLJQL²FDQWHYHQWVWKDWRFFXUUHGEHWZHHQ6HSWHPEHU and December.

)RUHDFK&*8WKHUHFRYHUDEOHDPRXQWVDUHEDVHGRQYDOXHLQXVHZKLFKLVFDOFXODWHGIURPSUHWD[FDVK³RZSURMHFWLRQVIRU²YH\HDUVXVLQJGDWD from the Group's budget and strategic planning process, the results of which are reviewed and approved by the Board. These projections exclude DQ\HVWLPDWHGIXWXUHFDVKLQ³RZVRURXW³RZVH[SHFWHGWRDULVHIURPIXWXUHUHVWUXFWXULQJV7KH²YH\HDUSHULRGLVLQOLQHZLWKWKH*URXSªVVWUDWHJLF planning process.

In determining the growth rates used in the calculations of the value-in-use, management considered annual revenue growth. Projections are based on anticipated volume and value growth in the markets served by the Group and assumptions as to market share movements. Each year the projections for the previous year are compared to actual results and variances are factored into the assumptions used in the current year. The discount rates used in the YDOXHLQXVHFDOFXODWLRQVUH³HFWPDQDJHPHQWªVDVVHVVPHQWRIULVNVVSHFL²FWRWKHDVVHWVRIHDFK&*8

8.1 Reconstruction CGU

7KHVDOHVJURZWKDQGWUDGLQJSUR²WPDUJLQXVHGLQWKHYDOXHLQXVHFDOFXODWLRQIRUWKH5HFRQVWUXFWLRQ&*8ZKLFKLQFOXGHVWKH7UDXPDDQG([WUHPLWLHV EXVLQHVVUH³HFWVPDQDJHPHQWªVGLVWLQFWLYHRUWKRSDHGLFUHFRQVWUXFWLRQVWUDWHJ\ZKLFKFRPELQHVFXWWLQJHGJHLQQRYDWLRQGLVUXSWLYHEXVLQHVVPRGHOV and a strong Emerging Markets platform to drive outperformance.

5HYHQXHJURZWKUDWHVIRUWKH²YH\HDUSHULRGUDQJHGIURPWRIRUWKHYDULRXVFRPSRQHQWVRIWKH5HFRQVWUXFWLRQ&*87KHZHLJKWHGDYHUDJH JURZWKUDWHXVHGWRH[WUDSRODWHWKHFDVK³RZVEH\RQGWKH²YH\HDUSHULRGLQFDOFXODWLQJWKHWHUPLQDOYDOXHLV7KHSUHWD[GLVFRXQWUDWHXVHGLQWKH Reconstruction CGU value-in-use calculation is 10.5%.

8 GOODWILL continued

8.2 Other Surgical Devices CGU

7KHYDOXHLQXVHFDOFXODWLRQIRUWKH2WKHU6XUJLFDO'HYLFHV&*8UH³HFWVJURZWKUDWHVDQGWUDGLQJSUR²WPDUJLQVFRQVLVWHQWZLWKPDQDJHPHQWªVVWUDWHJ\WR rebalance Smith & Nephew towards higher growth areas such as, for example, Sports Medicine.

5HYHQXHJURZWKUDWHVIRUWKH²YH\HDUSHULRGUDQJHGIURPWRIRUWKHYDULRXVFRPSRQHQWVRIWKH2WKHU6XUJLFDO'HYLFHV&*87KHZHLJKWHG DYHUDJHJURZWKUDWHXVHGWRH[WUDSRODWHWKHFDVK³RZVEH\RQGWKH²YH\HDUSHULRGLQFDOFXODWLQJWKHWHUPLQDOYDOXHLV7KHSUHWD[GLVFRXQWUDWH used in the Other Surgical Devices CGU value-in-use calculation is 10.5%.

8.3 Advanced Wound Management CGU

The aggregated Advanced Wound Management CGU comprises the Advanced Wound Care & Devices and Bioactives CGUs.

In performing the value-in-use calculation for this combined CGU, management considered the Group's focus across the wound product franchises, focusing on widening access to the customer, the higher added value sectors of healing chronic wounds and tissue repair using bioactives, and by FRQWLQXLQJWRLPSURYHHI²FLHQF\

5HYHQXHJURZWKUDWHVIRUWKH²YH\HDUSHULRGUDQJHGIURPWRIRUWKHYDULRXVFRPSRQHQWVRIWKH\$GYDQFHG:RXQG0DQDJHPHQW&*87KH ZHLJKWHGDYHUDJHJURZWKUDWHXVHGWRH[WUDSRODWHWKHFDVK³RZVEH\RQGWKH²YH\HDUSHULRGLQFDOFXODWLQJWKHWHUPLQDOYDOXHLV7KHSUHWD[ discount rate used in the Advanced Wound Management CGU value-in-use calculation is 10.5%.

8.4 Sensitivity to changes in assumptions used in value-in-use calculations

7KHFDOFXODWLRQVRIYDOXHLQXVHIRUWKHLGHQWL²HG&*8VDUHPRVWVHQVLWLYHWRFKDQJHVLQGLVFRXQWDQGJURZWKUDWHV0DQDJHPHQWªVFRQVLGHUDWLRQRI WKHVHVHQVLWLYLWLHVLVVHWRXWEHORZ

ç Growth of market and market share management has considered the impact of a variance in market growth and market share. The value-in-use calculations shows that if the assumed long-term growth rates were reduced to nil, the recoverable amount of each CGU would still be greater than its carrying value.
ç Discount rate management has considered the impact of an increase in the discount rate applied to the value-in-use calculations. This sensitivity analysis shows that for the recoverable amount of each CGU to be less than its carrying value, the discount rate would have to be increased to 13.2% for the Reconstruction CGU, 17.2% for the Other Surgical Devices CGU and 21.6% for the Advanced Wound Products CGU.

9 INTANGIBLE ASSETS

ACCOUNTING POLICIES

Intangible assets

Intangible assets acquired separately from a business combination (including purchased patents, know-how, trademarks, licences and distribution rights) are initially measured at cost. The cost of intangible assets acquired in a material business combination (referred to as acquisition intangibles) is the fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. All intangible assets are amortised on a straight-line basis over their estimated useful economic lives. The estimated useful economic life of an intangible asset ranges between three and 20 years depending on its nature. Internally-generated intangible assets are expensed in the income statement as incurred. Purchased computer software and certain costs of information technology projects are capitalised as intangible assets. Software that is integral to computer hardware is capitalised as plant and equipment.

Contingent consideration

Contingent consideration receivable associated with the sale of product rights and other assets outside of a business combination is recognised at the time of sale to the extent that the future event upon which the contingent consideration is conditional is within the Group's control, or to the extent that is it considered to be virtually certain that the contingent consideration will become due. If the contingent consideration is outside of the Group's FRQWURORULWFDQQRWEHFRQVLGHUHGYLUWXDOO\FHUWDLQWKDWLWZLOOEHFRPHGXHDQDVVHWDQGFRUUHVSRQGLQJHQWU\LQSUR²WDQGORVVLVUHFRJQLVHGRQO\RQFH it becomes virtually certain that the contingent consideration will become due.

Contingent consideration payable associated with the purchase of product rights and other assets outside of a business combination is recognised at the time of sale to the extent that the future event upon which the contingent consideration is conditional is under the control of the seller and it is considered probable that the contingent consideration will become due. Contingent consideration associated within a contingent condition that is within the Group's control is recognised at the point when the contingent condition is met.

Impairment of intangible assets

The carrying values of intangible assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may be impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment loss. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the CGU to which it belongs. An asset's recoverable amount is the higher of an asset's or CGU's fair value less costs to sell and its value-in-use. In assessing value-in-use, its HVWLPDWHGIXWXUHFDVK³RZLVGLVFRXQWHGWRLWVSUHVHQWYDOXHXVLQJDSUHWD[GLVFRXQWUDWHWKDWUH³HFWVWKHFXUUHQWPDUNHWDVVHVVPHQWVRIWKHWLPH YDOXHRIPRQH\DQGWKHULVNVVSHFL²FWRWKHDVVHW

,QFDUU\LQJRXWLPSDLUPHQWUHYLHZVRILQWDQJLEOHDVVHWVDQXPEHURIVLJQL²FDQWDVVXPSWLRQVKDYHWREHPDGHZKHQSUHSDULQJFDVK³RZSURMHFWLRQV 7KHVHLQFOXGHWKHIXWXUHUDWHRIPDUNHWJURZWKGLVFRXQWUDWHVWKHPDUNHWGHPDQGIRUWKHSURGXFWVDFTXLUHGWKHIXWXUHSUR²WDELOLW\RIDFTXLUHG EXVLQHVVHVRUSURGXFWVOHYHOVRIUHLPEXUVHPHQWDQGVXFFHVVLQREWDLQLQJUHJXODWRU\DSSURYDOV,IDFWXDOUHVXOWVVKRXOGGLIIHURUFKDQJHVLQ expectations should arise, impairment charges may be required which would adversely impact operating results.

	Technology \$ million	Product related \$ million	Customer and distribution related \$ million	Software \$ million	Total \$ million
Cost
At 1 January 2015	244	1,884	113	267	2,508
Exchange adjustment	(9)	(31)	(13)	(8)	(61)
Acquisitions1	–	–	19	–	19
Additions	–	17	–	38	55
Disposals	–	(6)	–	(8)	(14)
At 31 December 2015	235	1,864	119	289	2,507
Exchange adjustment	(2)	(20)	2	(8)	(28)
Acquisitions1	68	17	–	–	85
Additions	–	24	–	48	72
Disposals	–	(36)	–	–	(36)
At 31 December 2016	301	1,849	121	329	2,600
Amortisation and impairment
At 1 January 2015	10	564	57	130	761
Exchange adjustment	–	(11)	(3)	(2)	(16)
Charge for the year – amortisation	11	159	15	34	219
Charge for the year – impairment	–	51	–	–	51
Disposals	–	(4)	–	(6)	(10)
At 31 December 2015	21	759	69	156	1,005
Exchange adjustment	–	(16)	1	(4)	(19)
Charge for the year – amortisation	48	98	10	35	191
Charge for the year – impairment	–	48	–	–	48
Disposals	–	(36)	–	–	(36)
At 31 December 2016	69	853	80	187	1,189
Net book amounts
At 31 December 2016	232	996	41	142	1,411
At 31 December 2015	214	1,105	50	133	1,502

1 In 2016 this relates to technology and product related intangibles acquired with the purchase of Blue Belt Technologies Inc. and BST-CarGel. In 2015 this balance relates to customer relationships acquired with the purchase of distributors in Colombia and Russia.

\$PRUWLVDWLRQDQGLPSDLUPHQWRIDFTXLUHGLQWDQJLEOHVLVVHWRXWEHORZ

	2016 \$ million	2015 \$ million
Technology	48	11
Product-related	126	188
Customer and distribution related	4	5
Total	178	204

*URXSFDSLWDOH[SHQGLWXUHUHODWLQJWRVRIWZDUHFRQWUDFWHGEXWQRWSURYLGHGIRUDPRXQWHGWRPP

Two product-related intangible assets were determined to have a value in use below their carrying value, resulting in an impairment charge being UHFRJQLVHG7KHLPSDLUPHQWFKDUJHSULPDULO\UHODWHVWRPIURP2DVLVFDOFXODWHGXVLQJDGLVFRXQWUDWHRI?DSURGXFWULJKWDFTXLUHG with the Healthpoint acquisition in 2012. During the year, continued reimbursement pressure has resulted in revenues not increasing at the previously H[SHFWHGUDWH7KHUHPDLQLQJFDUU\LQJYDOXHRIPLVVXSSRUWHGE\WKHSUHVHQWYDOXHRIDQWLFLSDWHGIXWXUHFDVK³RZV7KHVHFRQGSURGXFWUHODWHG intangible asset has no residual carrying value.

10 INVESTMENTS

ACCOUNTING POLICY

Investments, other than those related to associates, are initially recorded at fair value plus any directly attributable transaction costs on the trade date. 7KH*URXSKDVLQYHVWPHQWVLQDQHQWLW\WKDWKROGVPDLQO\XQTXRWHGHTXLW\VHFXULWLHVZKLFKE\WKHLUQDWXUHKDYHQR²[HGPDWXULW\GDWHRUFRXSRQUDWH These investments are classed as 'available-for-sale' carried at fair value. The fair value of these investments are based on the underlying fair value RIWKHHTXLW\VHFXULWLHVPDUNHWDEOHVHFXULWLHVDUHYDOXHGE\UHIHUHQFHWRFORVLQJSULFHVLQWKHPDUNHWDQGQRQPDUNHWDEOHVHFXULWLHVDUHHVWLPDWHG FRQVLGHULQJIDFWRUVLQFOXGLQJWKHSXUFKDVHSULFHSULFHVRIUHFHQWVLJQL²FDQWSULYDWHSODFHPHQWVRIVHFXULWLHVRIWKHVDPHLVVXHUDQGHVWLPDWHVRI liquidation value. Changes in fair value are recognised in other comprehensive income except where management considers that there is objective HYLGHQFHRIDQLPSDLUPHQWRIWKHXQGHUO\LQJHTXLW\VHFXULWLHV2EMHFWLYHHYLGHQFHZRXOGLQFOXGHDVLJQL²FDQWRUSURORQJHGGHFOLQHLQWKHIDLUYDOXH of the investment below its cost less any impairment loss previously recognised. Impairment losses are recognised by reclassifying the losses DFFXPXODWHGLQRWKHUUHVHUYHVWRSUR²WRUORVV

	2016	2015
	\$ million	\$ million
At 1 January	13	5
Additions	2	2
Fair value remeasurement	10	3
Transfer from investments in associates	–	6
Distributions	–	(3)
At 31 December	25	13

11 INVESTMENTS IN ASSOCIATES

ACCOUNTING POLICY

,QYHVWPHQWVLQDVVRFLDWHVEHLQJWKRVHHQWLWLHVRYHUZKLFKWKH*URXSKDVDVLJQL²FDQWLQ³XHQFHDQGZKLFKLVQHLWKHUDVXEVLGLDU\QRUDMRLQWYHQWXUH DUHDFFRXQWHGIRUXVLQJWKHHTXLW\PHWKRGZLWKWKH*URXSUHFRUGLQJLWVVKDUHRIWKHDVVRFLDWHVªSUR²WDQGORVVDQGRWKHUFRPSUHKHQVLYHLQFRPH7KH *URXSªVVKDUHRIDVVRFLDWHVªSUR²WRUORVVLVLQFOXGHGLQRQHVHSDUDWHLQFRPHVWDWHPHQWOLQHDQGLVFDOFXODWHGDIWHUGHGXFWLRQRIWKHLUUHVSHFWLYHWD[HV

At 31 December 2016 and 31 December 2015, the Group holds 49% of Bioventus LLC (Bioventus). Bioventus is a limited liability company operating as a partnership. The Company's headquarters is located in Durham, North Carolina, US. Bioventus focuses its medical product development around its core competencies of orthobiologic therapies and orthopaedic diagnostics from which it develops and markets clinically proven orthopaedic therapies and diagnostic tools, including osteoarthritis pain treatments, bone growth stimulators and ultrasound devices. Bioventus sells bone healing stimulation devices and is a provider of osteoarthritis injection therapies. The Group's ability to recover the value of its investment is dependent upon the ongoing FOLQLFDODQGFRPPHUFLDOVXFFHVVRIWKHVHSURGXFWV7KHORVVDIWHUWD[DWLRQUHFRJQLVHGLQWKHLQFRPHVWDWHPHQWUHODWLQJWR%LRYHQWXVZDVPORVV after taxation \$18m).

The carrying amount of this investment was reviewed for impairment as at the balance sheet date. For the purposes of impairment testing the recoverable DPRXQWRIWKLVLQYHVWPHQWZDVEDVHGRQLWVIDLUYDOXHOHVVFRVWWRVHOOHVWLPDWHGXVLQJGLVFRXQWHGFDVK³RZV

7KHDPRXQWVUHFRJQLVHGLQWKHEDODQFHVKHHWDQGLQFRPHVWDWHPHQWIRUDVVRFLDWHVDUHDVIROORZV

	2016 \$ million	2015 \$ million
Balance sheet	112	115
Income statement loss	(3)	(16)

6XPPDULVHG²QDQFLDOLQIRUPDWLRQIRUVLJQL²FDQWDVVRFLDWHV

6HWRXWEHORZLVWKHVXPPDULVHG²QDQFLDOLQIRUPDWLRQIRU%LRYHQWXVDGMXVWHGIRUGLIIHUHQFHVZLWK*URXSDFFRXQWLQJSROLFLHV

	2016 \$ million	2015 \$ million
Summarised balance sheet
Non-current assets	364	389
Current assets	105	93
Non-current liabilities	(258)	(235)
Current liabilities	(53)	(80)
Net assets	158	167
Group's share of net assets at 49%	77	82
Group adjustments1	32	30
Group's carrying amount of investment at 49%	109	112

	2016 \$ million	2015 \$ million
Summarised statement of comprehensive income
Revenue	282	256
Attributable loss for the year	(21)	(41)
Group adjustments1	15	5
Total comprehensive loss	(6)	(36)
Group share of loss for the year at 49%	(3)	(18)

1 Group adjustments include an adjustment to align the useful life of intangible assets with Group policy.

\$W'HFHPEHUWKH*URXSKHOGDQHTXLW\LQYHVWPHQWLQRQHRWKHUDVVRFLDWHRQH?ZLWKDFDUU\LQJYDOXHRIPP

12 INVENTORIES

ACCOUNTING POLICY

)LQLVKHGJRRGVDQGZRUNLQSURJUHVVDUHYDOXHGDWIDFWRU\FRVWLQFOXGLQJDSSURSULDWHRYHUKHDGVRQD²UVWLQ²UVWRXWEDVLV5DZPDWHULDOVDQG ERXJKWLQ²QLVKHGJRRGVDUHYDOXHGDWSXUFKDVHSULFH\$OOLQYHQWRULHVDUHUHGXFHGWRQHWUHDOLVDEOHYDOXHZKHUHORZHUWKDQFRVW,QYHQWRU\DFTXLUHG DVSDUWRIDEXVLQHVVDFTXLVLWLRQLVYDOXHGDWVHOOLQJSULFHOHVVFRVWVWRVHOODQGDSUR²WDOORZDQFHIRUVHOOLQJHIIRUWV

Orthopaedic instruments are generally not sold but provided to customers and distributors for use in surgery. They are recorded as inventory until they are deployed at which point they are transferred to plant and equipment and depreciated over their useful economic lives of between three and seven years.

A feature of the orthopaedic business is the high level of product inventory required, some of which is located at customer premises and is available for customers' immediate use (referred to as consignment inventory). Complete sets of product, including large and small sizes, have to be made available in this way. These outer sizes are used less frequently than standard sizes and towards the end of the product life cycle are inevitably in excess of requirements. Adjustments to carrying value are therefore required to be made to orthopaedic inventory to anticipate this situation. These adjustments are calculated in accordance with a formula based on levels of inventory compared with historical or forecast usage. This formula is DSSOLHGRQDQLQGLYLGXDOSURGXFWOLQHEDVLVDQGLV²UVWDSSOLHGZKHQDSURGXFWJURXSKDVEHHQRQWKHPDUNHWIRUWZR\HDUV7KLVPHWKRGRIFDOFXODWLRQ is considered appropriate based on experience but it involves management judgements on effectiveness of inventory deployment, length of product OLYHVSKDVHRXWRIROGSURGXFWVDQGHI²FLHQF\RIPDQXIDFWXULQJSODQQLQJV\VWHPV

	2016 \$ million	2015 \$ million	2014 \$ million
Raw materials and consumables	213	205	214
Work-in-progress	55	84	82
Finished goods and goods for resale	976	928	885
	1,244	1,217	1,181

5HVHUYHVIRUH[FHVVDQGREVROHWHLQYHQWRULHVZHUHPPP?7KHGHFUHDVHLQUHVHUYHVRIPLQWKH\HDUFRPSULVHGP credited to the reserve on the write-off of inventory and foreign exchange movements of \$7m.

7KHFRVWRILQYHQWRULHVUHFRJQLVHGDVDQH[SHQVHDQGLQFOXGHGLQFRVWRIJRRGVVROGDPRXQWHGWRPPP?,QDGGLWLRQ PZDVUHFRJQLVHGDVDQH[SHQVHZLWKLQFRVWRIJRRGVVROGUHVXOWLQJIURPLQYHQWRU\ZULWHRIIVPP

Notwithstanding inventory acquired within acquisitions, no inventory is carried at fair value less costs to sell in any year.

13 TRADE AND OTHER RECEIVABLES

ACCOUNTING POLICY

Trade and other receivables are carried at amortised cost, less any allowances for uncollectible amounts. They are included in current assets, except IRUPDWXULWLHVJUHDWHUWKDQPRQWKVDIWHUWKHEDODQFHVKHHWGDWH7KHVHDUHFODVVL²HGDVQRQFXUUHQWDVVHWV

The Group manages credit risk through credit limits which require authorisation commensurate with the size of the limit and which are regularly UHYLHZHG&UHGLWOLPLWGHFLVLRQVDUHPDGHEDVHGRQDYDLODEOH²QDQFLDOLQIRUPDWLRQDQGWKHEXVLQHVVFDVH6LJQL²FDQWUHFHLYDEOHVDUHUHJXODUO\ UHYLHZHGDQGPRQLWRUHGDW*URXSOHYHO7KH*URXSKDVQRVLJQL²FDQWFRQFHQWUDWLRQRIFUHGLWULVNZLWKH[SRVXUHVSUHDGRYHUDODUJHQXPEHURI customers and geographies. Furthermore, the Group's principal customers are backed by government and public or private medical insurance funding, which historically represent a lower risk of default. The maximum exposure to credit risk at the reporting date is the fair value of each class RIUHFHLYDEOH7KH*URXSGRHVQRWKROGDQ\FROODWHUDODVVHFXULW\

	2016	2015	2014
	\$ million	\$ million	\$ million
Trade receivables	1,042	1,003	1,015
/HVVSURYLVLRQIRUEDGDQGGRXEWIXOGHEWV	(54)	(64)	(47)
Trade receivables – net	988	939	968
Derivatives – forward foreign exchange, currency swaps and interest rate contracts	48	33	49
Other receivables	76	83	51
Prepayments and accrued income	73	83	98
	1,185	1,138	1,166

7UDGHUHFHLYDEOHVDUHFODVVL²HGDVORDQVDQGUHFHLYDEOHV0DQDJHPHQWFRQVLGHUVWKDWWKHFDUU\LQJDPRXQWRIWUDGHDQGRWKHUUHFHLYDEOHVDSSUR[LPDWHV to the fair value.

7KHSURYLVLRQIRUEDGDQGGRXEWIXOGHEWVLVEDVHGRQVSHFL²FDVVHVVPHQWVRIULVNDQGUHIHUHQFHWRSDVWGHIDXOWH[SHULHQFH7KHEDGGHEWH[SHQVHIRU WKH\HDUZDVPPH[SHQVHPFUHGLW?\$PRXQWVGXHIURPLQVXUHUVLQUHVSHFWRIWKHPDFURWH[WXUHGFODLPRIPP P?DUHLQFOXGHGZLWKLQRWKHUUHFHLYDEOHVDQGKDYHEHHQSURYLGHGLQIXOO

7KHDPRXQWRIWUDGHUHFHLYDEOHVWKDWZHUHSDVWGXHZDVDVIROORZV

	2016 \$ million	2015 \$ million	2014 \$ million
Past due not more than three months	142	154	181
Past due more than three months and not more than six months	51	45	49
Past due more than six months and not more than one year	70	57	51
Past due more than one year	54	53	42
	317	309	323
Neither past due nor impaired	725	694	692
Provision for bad and doubtful debts	(54)	(64)	(47)
Trade receivables – net	988	939	968

0RYHPHQWVLQWKHSURYLVLRQIRUEDGDQGGRXEWIXOGHEWVZHUHDVIROORZV

	2016 \$ million	2015 \$ million	2014 \$ million
At 1 January	64	47	57
Exchange adjustment	(3)	(3)	(4)
Net receivables provided/(provision released) during the year	7	25	(4)
Utilisation of provision	(14)	(5)	(2)
At 31 December	54	64	47

7UDGHUHFHLYDEOHVLQFOXGHDPRXQWVGHQRPLQDWHGLQWKHIROORZLQJPDMRUFXUUHQFLHV

	2016 \$ million	2015 \$ million	2014 \$ million
US Dollar	416	362	353
Sterling	57	58	92
Euro	193	192	225
Other	322	327	298
Trade receivables – net	988	939	968

14 TRADE AND OTHER PAYABLES

	2016 \$ million	2015 \$ million
Trade and other payables due within one year
Trade and other payables	807	808
Derivatives – forward foreign exchange, currency and interest swaps	39	26
Acquisition consideration	38	8
	884	842
Other payables due after one year
Acquisition consideration	82	19
Other payables	–	10
	82	29

The acquisition consideration includes \$56m contingent upon future events.

The acquisition consideration due after more than one year is expected to be payable as follows: \$29m in 2018, \$8m in 2019, \$20m in 2020, \$11m in DQGPGXHLQRYHU²YH\HDUVPLQPLQDQGPLQ

15 CASH AND BORROWINGS

15.1 Net debt

Net debt comprises borrowings and credit balances on currency swaps less cash at bank.

	2016	2015
	\$ million	\$ million
Bank overdrafts and loans due within one year	86	46
/RQJWHUPEDQNERUURZLQJVDQG²QDQFHOHDVHV	440	308
Private placement notes	1,124	1,126
Borrowings	1,650	1,480
Cash at bank
Credit balance on derivatives – currency swaps	1	2
Debit balance on derivatives – interest rate swaps
Net debt	1,550	1,361

Borrowings are repayable as follows:

	Within one year or on demand \$ million	Between one and two years \$ million	Between two and three years \$ million	Between three and four years \$ million	Between four and ²YH\HDUV \$ million	After ²YH\HDUV \$ million	Total \$ million
At 31 December 2016:
Bank loans	22	–	300	–	135	–	457
Bank overdrafts	62	–	–	–	–	–	62
Finance lease liabilities	2	2	3	–	–	–	7
Private placement notes	–	–	125	–	264	735	1,124
	86	2	428	–	399	735	1,650
At 31 December 2015:
Bank loans	26	–	300	–	–	–	326
Bank overdrafts	18	–	–	–	–	–	18
Finance lease liabilities	2	2	3	3	–	–	10
Private placement notes	–	–	–	125	–	1,001	1,126
	46	2	303	128	–	1,001	1,480

FINANCIAL REVIEW

NOTES TO THE GROUP ACCOUNTS

15 CASH AND BORROWINGS continued

15.2 Assets pledged as security

Assets are pledged as security under normal market conditions. Secured borrowings and pledged assets are as follows:

	2016	2015
	\$ million	\$ million
Finance lease liabilities – due within one year	2	2
Finance lease liabilities – due after one year	5	8
Total amount of secured borrowings	7	10
Total net book value of assets pledged as security:
Property, plant and equipment	5	6
	5	6

15.3 Liquidity risk exposures

7KH%RDUGKDVHVWDEOLVKHGDVHWRISROLFLHVWRPDQDJHIXQGLQJDQGFXUUHQF\ULVNV7KH*URXSXVHVGHULYDWLYH²QDQFLDOLQVWUXPHQWVRQO\WRPDQDJHWKH ²QDQFLDOULVNVDVVRFLDWHGZLWKXQGHUO\LQJEXVLQHVVDFWLYLWLHVDQGWKHLU²QDQFLQJ

Liquidity risk is the risk that the Group is not able to settle or meet its obligations on time or at a reasonable price. The Group's policy is to ensure that WKHUHLVVXI²FLHQWIXQGLQJDQGIDFLOLWLHVLQSODFHWRPHHWIRUHVHHDEOHERUURZLQJUHTXLUHPHQWV7KH*URXSPDQDJHVDQGPRQLWRUVOLTXLGLW\ULVNWKURXJK regular reporting of current cash and borrowing balances and periodic preparation and review of short and medium-term cash forecasts, having regard to the maturities of investments and borrowing facilities.

7KH*URXSKDVDYDLODEOHFRPPLWWHGIDFLOLWLHVRIEQEQ?7KHLQWHUHVWSD\DEOHRQERUURZLQJVXQGHUFRPPLWWHGIDFLOLWLHVLVHLWKHUDW²[HGRU ³RDWLQJUDWHV)ORDWLQJUDWHVDUHW\SLFDOO\EDVHGRQWKH/,%25RURWKHUUHIHUHQFHUDWH?UHOHYDQWWRWKHWHUPDQGFXUUHQF\FRQFHUQHG

7KH&RPSDQ\LVVXEMHFWWRUHVWULFWLYHFRYHQDQWVXQGHULWVSULQFLSDOIDFLOLW\DJUHHPHQWV7KHVH²QDQFLDOFRYHQDQWVDUHWHVWHGDWWKHHQGRIHDFK half year for the 12 months ending on the last day of the testing period. As of 31 December 2016, the Company was in compliance with these covenants. The facilities are also subject to customary events of default, none of which are currently anticipated to occur.

The Group's committed facilities are:

Facility	Date due
\$300 million bilateral, term loan facility	April 2019
\$80 million 2.47% Senior Notes	November 2019
\$45 million Floating Rate Senior Notes	November 2019
\$75 million 3.23% Senior Notes	January 2021
\$1.0 billion syndicated, revolving credit facility	March 2021
\$190 million 2.97% Senior Notes	November 2021
\$75 million 3.46% Senior Notes	January 2022
\$50 million 3.15% Senior Notes	November 2022
\$105 million 3.26% Senior Notes	November 2023
\$100 million 3.89% Senior Notes	January 2024
\$305 million 3.36% Senior Notes	November 2024
\$25 million Floating Rate Senior Notes	November 2024
\$75 million 3.99% Senior Notes	January 2026

<HDUHQG²QDQFLDOOLDELOLWLHVE\FRQWUDFWXDOPDWXULW

7KHWDEOHEHORZDQDO\VHVWKH*URXSªV\HDUHQG²QDQFLDOOLDELOLWLHVE\FRQWUDFWXDOPDWXULW\GDWHLQFOXGLQJFRQWUDFWXDOLQWHUHVWSD\PHQWVDQGH[FOXGLQJWKH impact of netting arrangements:

	Within one year or on demand \$ million	Between one and two years \$ million	Between two and ²YH\HDUV \$ million	After ²YH\HDUV \$ million	Total \$ million
At 31 December 2016
1RQGHULYDWLYH²QDQFLDOOLDELOLWLHV
Bank overdrafts and loans	86	–	435	–	521
Trade and other payables	807	–	–	–	807
Finance lease liabilities	3	3	3	–	9
Private placement notes	36	36	491	800	1,363
Acquisition consideration	38	30	46	16	130
'HULYDWLYH²QDQFLDOOLDELOLWLHV
&XUUHQF\VZDSVIRUZDUGIRUHLJQH[FKDQJHFRQWUDFWV¥RXW³RZ	2,284	–	–	–	2,284
&XUUHQF\VZDSVIRUZDUGIRUHLJQH[FKDQJHFRQWUDFWV¥LQ³RZ		–	–	–
	969	69	975	816	2,829
At 31 December 2015
1RQGHULYDWLYH²QDQFLDOOLDELOLWLHV
Bank overdrafts and loans	45	–	300	–	345
Trade and other payables	808	10	–	–	818
Finance lease liabilities	3	3	6	–	12
Private placement notes	36	36	230	1,098	1,400
Acquisition consideration	8	7	12	–	27
'HULYDWLYH²QDQFLDOOLDELOLWLHV
&XUUHQF\VZDSVIRUZDUGIRUHLJQH[FKDQJHFRQWUDFWV¥RXW³RZ	2,279	–	–	–	2,279
&XUUHQF\VZDSVIRUZDUGIRUHLJQH[FKDQJHFRQWUDFWV¥LQ³RZ		–	–	–
	902	56	548	1,098	2,604

7KHDPRXQWVLQWKHWDEOHVDERYHDUHXQGLVFRXQWHGFDVK³RZVZKLFKGLIIHUIURPWKHDPRXQWVLQFOXGHGLQWKHEDODQFHVKHHWZKHUHWKHXQGHUO\LQJFDVK ³RZVKDYHEHHQGLVFRXQWHG

15.5 Finance leases

ACCOUNTING POLICY

/HDVHVDUHFODVVL²HGDV²QDQFHOHDVHVZKHQWKHWHUPVRIWKHOHDVHWUDQVIHUVXEVWDQWLDOO\DOOWKHULVNVDQGUHZDUGVRIRZQHUVKLSWRWKH*URXS\$OORWKHU OHDVHVDUHFODVVL²HGDVRSHUDWLQJOHDVHV

The leased assets are measured initially at an amount equal to the lower of their fair value and the present value of the minimum lease payments. \$VVHWVKHOGXQGHU²QDQFHOHDVHVDUHFDSLWDOLVHGDVSURSHUW\SODQWRUHTXLSPHQWDQGGHSUHFLDWHGDFFRUGLQJO\0LQLPXPOHDVHSD\PHQWVDUH DSSRUWLRQHGEHWZHHQWKH²QDQFHH[SHQVHDQGWKHUHGXFWLRQLQWKHRXWVWDQGLQJOLDELOLW\7KH²QDQFHH[SHQVHLVDOORFDWHGWRHDFKSHULRGGXULQJ WKHOHDVHWHUPVRDVWRSURGXFHDFRQVWDQWSHULRGLFUDWHRILQWHUHVWRQWKHUHPDLQLQJEDODQFHRIWKHOLDELOLW\

15 CASH AND BORROWINGS continued

)XWXUHPLQLPXPOHDVHSD\PHQWVXQGHU²QDQFHOHDVHVWRJHWKHUZLWKWKHSUHVHQWYDOXHRIWKHPLQLPXPOHDVHSD\PHQWVDUHDVIROORZV

	2016 \$ million	2015 \$ million
Within one year	3	3
After one and within two years	3	3
After two and within three years	3	3
After three and within four years	–	3
\$IWHUIRXUDQGZLWKLQ²YH\HDUV	–	–
\$IWHU²YH\HDUV	–	–
Total minimum lease payments	9	12
Discounted by imputed interest
Present value of minimum lease payments	7	10

3UHVHQWYDOXHRIPLQLPXPOHDVHSD\PHQWVFDQEHVSOLWRXWDVPP?GXHZLWKLQRQH\HDUPP?GXHEHWZHHQRQHWR²YH\HDUVDQG QLOQLO?GXHDIWHU²YH\HDUV

Liquidity and capital resources

7KH*URXSªVSROLF\LVWRHQVXUHWKDWLWKDVVXI²FLHQWIXQGLQJDQGIDFLOLWLHVWRPHHWIRUHVHHDEOHERUURZLQJUHTXLUHPHQWV

\$W'HFHPEHUWKH*URXSKHOGPPP?LQFDVKQHWRIEDQNRYHUGUDIWV7KH*URXSKDGFRPPLWWHGIDFLOLWLHVDYDLODEOHRI \$2,425m at 31 December 2016 of which \$1,560m was drawn. Smith & Nephew intends to repay the amounts due within one year using available cash DQGGUDZLQJGRZQRQWKHORQJHUWHUPIDFLOLWLHV,QDGGLWLRQWKH*URXSKDV²QDQFHOHDVHFRPPLWPHQWVRIP

The principal variations in the Group's borrowing requirements result from the timing of dividend payments, acquisitions and disposals of businesses, WLPLQJRIFDSLWDOH[SHQGLWXUHDQGZRUNLQJFDSLWDO³XFWXDWLRQV6PLWK 1HSKHZEHOLHYHVWKDWLWVFDSLWDOH[SHQGLWXUHQHHGVDQGLWVZRUNLQJFDSLWDOIXQGLQJ for 2016, as well as its other known or expected commitments or liabilities, can be met from its existing resources and facilities. The Group's net debt increased from \$1,361m at the beginning of 2016 to \$1,550m at the end of 2016, representing an overall increase of \$189m, due primarily to the acquisition of Blue Belt Technologies.

7KH*URXSªVSODQQHGIXWXUHFRQWULEXWLRQVDUHFRQVLGHUHGDGHTXDWHWRFRYHUWKHFXUUHQWXQGHUIXQGHGSRVLWLRQLQWKH*URXSªVGH²QHGEHQH²WSODQV

16 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

ACCOUNTING POLICY

'HULYDWLYH²QDQFLDOLQVWUXPHQWV

'HULYDWLYH²QDQFLDOLQVWUXPHQWVDUHLQLWLDOO\UHFRJQLVHGDWIDLUYDOXHRQWKHGDWHDGHULYDWLYHFRQWUDFWLVHQWHUHGLQWRDQGDUHVXEVHTXHQWO\UHPHDVXUHG at their fair value at subsequent balance sheet dates.

&KDQJHVLQWKHIDLUYDOXHRIGHULYDWLYH²QDQFLDOLQVWUXPHQWVWKDWDUHGHVLJQDWHGDQGHIIHFWLYHDVFDVK³RZKHGJHVRIIRUHFDVWWKLUGSDUW\DQG intercompany transactions are recognised in other comprehensive income until the associated asset or liability is recognised. Amounts taken to RWKHUFRPSUHKHQVLYHLQFRPHDUHWUDQVIHUUHGWRWKHLQFRPHVWDWHPHQWLQWKHSHULRGLQZKLFKWKHKHGJHGWUDQVDFWLRQDIIHFWVSUR²WDQGORVV:KHUH WKHKHGJHGLWHPLVWKHFRVWRIDQRQ²QDQFLDODVVHWWKHDPRXQWVWDNHQWRRWKHUFRPSUHKHQVLYHLQFRPHDUHWUDQVIHUUHGWRWKHLQLWLDOFDUU\LQJYDOXHRI the asset.

Currency swaps to match foreign currency net assets with foreign currency liabilities are fair valued at year end. Changes in the fair values of currency swaps that are designated and effective as net investment hedges are matched in other comprehensive income against changes in value of the related net assets.

,QWHUHVWUDWHGHULYDWLYHVWUDQVDFWHGWR²[LQWHUHVWUDWHVRQ³RDWLQJUDWHERUURZLQJVDUHDFFRXQWHGIRUDVFDVK³RZKHGJHVDQGFKDQJHVLQWKHIDLU values resulting from changes in market interest rates are recognised in other comprehensive income. Amounts taken to other comprehensive income DUHWUDQVIHUUHGWRWKHLQFRPHVWDWHPHQWZKHQWKHKHGJHGWUDQVDFWLRQDIIHFWVSUR²WDQGORVV

,QWHUHVWUDWHGHULYDWLYHVWUDQVDFWHGWRFRQYHUW²[HGUDWHERUURZLQJVLQWR³RDWLQJUDWHERUURZLQJVDUHDFFRXQWHGIRUDVIDLUYDOXHKHGJHVDQGFKDQJHVLQ the fair values resulting from changes in market interest rates are recognised in the income statement.

\$Q\LQHIIHFWLYHQHVVRQKHGJLQJLQVWUXPHQWVDQGFKDQJHVLQWKHIDLUYDOXHRIGHULYDWLYH²QDQFLDOLQVWUXPHQWVWKDWGRQRWTXDOLI\IRUKHGJHDFFRXQWLQJ DUHUHFRJQLVHGLQWKHLQFRPHVWDWHPHQWZLWKLQRWKHU²QDQFHFRVWVDVWKH\DULVH

+HGJHDFFRXQWLQJLVGLVFRQWLQXHGZKHQWKHKHGJLQJLQVWUXPHQWH[SLUHVRULVVROGWHUPLQDWHGRUH[HUFLVHGRUQRORQJHUTXDOL²HVIRUKHGJH accounting. At that point in time, any cumulative gain or loss on the hedging instrument recognised in other comprehensive income is retained there until the forecast transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in other comprehensive income is transferred.

16.1 Foreign exchange exposures

The Group operates in over 100 countries and as a consequence has transactional and translational foreign exchange exposure. It is Group policy for operating units not to hold material unhedged monetary assets or liabilities other than in their functional currencies.

)RUHLJQH[FKDQJHYDULDWLRQVDIIHFWWUDGLQJUHVXOWVLQWZRZD\V)LUVWO\RQWUDQVODWLRQRIRYHUVHDVVDOHVDQGSUR²WVLQWR86'ROODUVDQGVHFRQGO\ transactional exposures arising where some, or all of the costs of sale are incurred in a different currency from the sale. The principal transactional exposures arise as the proportion of costs in US Dollars, Sterling and Swiss Francs exceed the proportion of sales in each of these currencies and correspondingly the proportion of sales in Euros exceeds the proportion of costs in Euros.

The impact of currency movements on the cost of purchases is partly mitigated by the use of forward foreign exchange contracts. The Group uses IRUZDUGIRUHLJQH[FKDQJHFRQWUDFWVGHVLJQDWHGDVFDVK³RZKHGJHVWRKHGJHIRUHFDVWWKLUGSDUW\DQGLQWHUFRPSDQ\WUDGLQJFDVK³RZVXSWRRQH year. When a commitment is entered into, forward foreign exchange contracts are normally used to increase the hedge to 100% of the exposure. Cash ³RZVUHODWLQJWRFDVK³RZKHGJHVDUHH[SHFWHGWRRFFXUZLWKLQPRQWKVRILQFHSWLRQDQGSUR²WVDQGORVVHVRQKHGJHVDUHH[SHFWHGWRHQWHULQWRWKH GHWHUPLQDWLRQRISUR²WZLWKLQFRVWRIJRRGVVROG?ZLWKLQDIXUWKHUPRQWKSHULRG7KHSULQFLSDOFXUUHQFLHVKHGJHGE\IRUZDUGIRUHLJQH[FKDQJHFRQWUDFWV DUH86'ROODUV(XURVDQG6WHUOLQJ\$W'HFHPEHUWKH*URXSKDGFRQWUDFWHGWRH[FKDQJHZLWKLQRQH\HDUWKHHTXLYDOHQWRIEQEQ? Based on the Group's net borrowings as at 31 December 2016, if the US Dollar were to weaken against all currencies by 10%, the Group's net borrowings ZRXOGGHFUHDVHE\PGHFUHDVHE\P?DVWKH*URXSKHOGDKLJKHUDPRXQWRIIRUHLJQGHQRPLQDWHGFDVKWKDQIRUHLJQGHQRPLQDWHGERUURZLQJV

If the US Dollar were to weaken by 10% against all other currencies, then the fair value of the forward foreign exchange contracts as at 31 December ZRXOGKDYHEHHQPORZHUPORZHU?6LPLODUO\LIWKH(XURZHUHWRZHDNHQE\DJDLQVWDOORWKHUFXUUHQFLHVWKHQWKHIDLUYDOXHRIWKH IRUZDUGIRUHLJQH[FKDQJHFRQWUDFWVDVDW'HFHPEHUZRXOGKDYHEHHQPKLJKHUPKLJKHU?0RYHPHQWVLQWKHIDLUYDOXHRIIRUZDUG foreign exchange contracts would be recognised in other comprehensive income and accumulated in the hedging reserve.

A 10% strengthening of the US Dollar or Euro against all other currencies at 31 December 2016 would have had the equal but opposite effect to the amounts shown above, on the basis that all other variables remain constant.

The Group's policy is to hedge all actual foreign exchange exposures and the Group's forward foreign exchange contracts are designated as cash ³RZKHGJHV7KHQHWLPSDFWRIWUDQVDFWLRQUHODWHGIRUHLJQH[FKDQJHRQWKHLQFRPHVWDWHPHQWIURPDPRYHPHQWLQH[FKDQJHUDWHVRQWKHYDOXHRI IRUZDUGIRUHLJQH[FKDQJHFRQWUDFWVLVQRWVLJQL²FDQW,QDGGLWLRQWKHPRYHPHQWVLQWKHIDLUYDOXHRIRWKHU²QDQFLDOLQVWUXPHQWVXVHGIRUKHGJLQJVXFK as currency swaps for which hedge accounting is not applied, offset movements in the values of assets and liabilities and are recognised through the income statement.

16.2 Interest rate exposures

7KH*URXSLVH[SRVHGWRLQWHUHVWUDWHULVNRQFDVKERUURZLQJVDQGFHUWDLQFXUUHQF\DQGLQWHUHVWUDWHVZDSVZKLFKDUHDW³RDWLQJUDWHV:KHQUHTXLUHGWKH Group uses interest rate derivatives to meet its objective of protecting borrowing costs within parameters set by the Board. These interest rate derivatives DUHDFFRXQWHGIRUDVFDVK³RZKHGJHVDQGDVVXFKFKDQJHVLQIDLUYDOXHUHVXOWLQJIURPFKDQJHVLQPDUNHWLQWHUHVWUDWHVDUHUHFRJQLVHGLQRWKHU comprehensive income and accumulated in the hedging reserve, with the fair value of the interest rate derivatives recorded in the balance sheet.

\$GGLWLRQDOO\WKH*URXSXVHVLQWHUHVWUDWHVZDSVWRUHGXFHWKHRYHUDOOOHYHORI²[HGUDWHGHEWZLWKLQSDUDPHWHUVVHWE\WKH%RDUG:KHQXVHGLQWKLVZD\ interest rate derivatives are accounted for as fair value hedges. The fair value movement of the derivative is offset in the income statement against the fair YDOXHPRYHPHQWLQWKHXQGHUO\LQJ²[HGUDWHGHEW

Based on the Group's gross borrowings as at 31 December 2016, if interest rates were to increase by 100 basis points in all currencies then the annual net LQWHUHVWFKDUJHZRXOGLQFUHDVHE\PP?\$GHFUHDVHLQLQWHUHVWUDWHVE\EDVLVSRLQWVLQDOOFXUUHQFLHVZRXOGKDYHDQHTXDOEXWRSSRVLWH effect to the amounts shown above.

16.3 Credit risk exposures

7KH*URXSOLPLWVH[SRVXUHWRFUHGLWULVNRQFRXQWHUSDUWLHVXVHGIRU²QDQFLDOLQVWUXPHQWVWKURXJKDV\VWHPRILQWHUQDOFUHGLWOLPLWV7KH²QDQFLDOH[SRVXUH of a counterparty is determined as the total of cash and deposits, plus the risk on derivative instruments, assessed as the fair value of the instrument plus a risk element based on the nominal value and the historic volatility of the market value of the instrument. The Group does not anticipate nonperformance of counterparties and believes it is not subject to material concentration of credit risk as the Group operates within a policy of counterparty limits designed to reduce exposure to any single counterparty.

7KHPD[LPXPFUHGLWULVNH[SRVXUHRQGHULYDWLYHVDW'HFHPEHUZDVPP?EHLQJWKHWRWDOGHELWIDLUYDOXHVRQIRUZDUGIRUHLJQ H[FKDQJHFRQWUDFWVDQGFXUUHQF\VZDSV7KHPD[LPXPFUHGLWULVNH[SRVXUHRQFDVKDWEDQNDW'HFHPEHUZDVPP? 7KH*URXSªVH[SRVXUHWRFUHGLWULVNLVQRWPDWHULDODVWKHDPRXQWVDUHKHOGLQDZLGHQXPEHURIEDQNVLQDQXPEHURIGLIIHUHQWFRXQWULHV

Credit risk on trade receivables is detailed in Note 13.

16 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT continued

&XUUHQF\DQGLQWHUHVWUDWHSUR²OHRILQWHUHVWEHDULQJOLDELOLWLHVDQGDVVHWV

Short-term debtors and creditors are excluded from the following disclosures.

&XUUHQF\DQGLQWHUHVWUDWHSUR²OHRILQWHUHVWEHDULQJOLDELOLWLHV

							Fixed rate liabilities
	Gross borrowings \$ million	Currency swaps \$ million	Interest rate swaps \$million	Total liabilities \$ million	Floating rate liabilities \$ million	Fixed rate liabilities \$ million	Weighted average interest rate %	Weighted average time for which UDWHLV²[HG Years
At 31 December 2016
US Dollar							3.5	6.8
Other			–			–	–	–
Total interest bearing liabilities
At 31 December 2015
US Dollar			–				3.5	7.8
Other			–			–	–	–
Total interest bearing liabilities			–

\$W'HFHPEHUPP?RI²[HGUDWHOLDELOLWLHVUHODWHGWR²QDQFHOHDVHV,QWKH*URXSDOVRKDGOLDELOLWLHVGXHIRUGHIHUUHGDFTXLVLWLRQ FRQVLGHUDWLRQGHQRPLQDWHGLQ86'ROODUV(XURV7XUNLVK/LUDDQG5XVVLDQ5XEOHV?WRWDOOLQJPPP?RQZKLFKQRLQWHUHVWZDV SD\DEOHVHH1RWH?7KHUHZHUHQRRWKHUVLJQL²FDQWLQWHUHVWEHDULQJ²QDQFLDOOLDELOLWLHV

)ORDWLQJUDWHVRQOLDELOLWLHVDUHW\SLFDOO\EDVHGRQWKHRQHWKUHHRUVL[PRQWK/,%25RURWKHUUHIHUHQFHUDWH?UHOHYDQWWRWKHFXUUHQF\FRQFHUQHG 7KHZHLJKWHGDYHUDJHLQWHUHVWUDWHRQ³RDWLQJUDWHERUURZLQJVDVDW'HFHPEHUZDV

&XUUHQF\DQGLQWHUHVWUDWHSUR²OHRILQWHUHVWEHDULQJDVVHWV

	Interest rate swaps \$ million	Cash at bank \$ million	Currency swaps \$ million	Total assets \$ million	Floating rate assets \$ million	Fixed rate assets \$ million
At 31 December 2016
US Dollars	–	29	83	112	112	–
Other	–	71	366	437	437	–
Total interest bearing assets	–	100	449	549	549	–
At 31 December 2015
US Dollars	1	72	55	128	127	1
Other	–	48	313	361	361	–
Total interest bearing assets	1	120	368	489	488	1

Floating rates on assets are typically based on the short-term deposit rates relevant to the currency concerned.

)DLUYDOXHRI²QDQFLDODVVHWVDQGOLDELOLWLHV

ACCOUNTING POLICY

Measurement of fair values

\$QXPEHURIWKH*URXSªVDFFRXQWLQJSROLFLHVDQGGLVFORVXUHVUHTXLUHWKHPHDVXUHPHQWRIIDLUYDOXHVIRUERWK²QDQFLDODVVHWVDQGOLDELOLWLHVDQGQRQ ²QDQFLDODVVHWVDFTXLUHGLQDEXVLQHVVFRPELQDWLRQVHH1RWH

When measuring the fair value of an asset or liability, the Group uses market observable data as far as possible. Fair values are categorised into GLIIHUHQWOHYHOVLQWKHIDLUYDOXHKLHUDUFK\EDVHGRQWKHLQSXWVXVHGLQWKHYDOXDWLRQWHFKQLTXHVDVIROORZV/HYHOTXRWHGSULFHVXQDGMXVWHG?LQ active markets for identical assets or liabilities; Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, HLWKHUGLUHFWO\LHDVSULFHV?RULQGLUHFWO\LHGHULYHGIURPSULFHV?DQG/HYHOLQSXWVIRUWKHDVVHWRUOLDELOLW\WKDWDUHQRWEDVHGRQREVHUYDEOHGDWD XQREVHUYDEOHLQSXWV

The Group recognises transfers between the levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.

7KHIROORZLQJWDEOHVKRZVWKHFDUU\LQJDPRXQWVDQGIDLUYDOXHVRI²QDQFLDODVVHWVDQG²QDQFLDOOLDELOLWLHVLQFOXGLQJWKHLUOHYHOVLQWKHIDLUYDOXHKLHUDUFK\ ,WGRHVQRWLQFOXGHIDLUYDOXHLQIRUPDWLRQIRU²QDQFLDODVVHWVDQG²QDQFLDOOLDELOLWLHVQRWPHDVXUHGDWIDLUYDOXHLIWKHFDUU\LQJDPRXQWLVDUHDVRQDEOH approximation of fair value.

						Carrying amount			Fair value
	Designated at fair value	Fair value – hedging instruments	Loans and receivables	Available for sale	Other ²QDQFLDO liabilities	Total	Level 2	Level 3	Total
At 31 December 2016	\$ million	\$ million	\$ million	\$ million	\$ million	\$ million	\$ million	\$ million	\$ million
Financial assets measured DWŸIDLUŸYDOXH
Forward foreign exchange contracts	–	45	–	–	–	45	45	–	45
Investments	–	–	–	25	–	25	–	25	25
Currency swaps	3	–	–	–	–	3	3	–	3
Interest rate swaps	–	–	–	–	–	–	–	–	–
	3	45	–	25	–	73
Financial liabilities measured DWŸIDLUŸYDOXH
Acquisition consideration		–	–	–	–		–
Forward foreign exchange contracts	–		–	–	–			–
Currency swaps		–	–	–	–			–
Interest rate swaps	–		–	–	–			–
Private placement debt	–	–		–	–			–
				–	–
Financial assets not measured DWŸIDLUYDOXH
Trade and other receivables	–	–	1,064	–	–	1,064
Cash at bank	–	–	100	–	–	100
	–	–	1,164	–	–	1,164
Financial liabilities not measured DWŸIDLUYDOXH
Acquisition consideration		–	–	–	–
Bank overdrafts	–	–	–	–
Bank loans	–	–	–	–
Private placement debt	–	–	–	–				–
Finance lease liabilities	–	–	–	–
Trade and other payables	–	–	–	–
		–	–	–

7KHIDLUYDOXHRIWKHSULYDWHSODFHPHQWQRWHVLVGHWHUPLQHGXVLQJDGLVFRXQWHGFDVK³RZPRGHOEDVHGRQSUHYDLOLQJPDUNHWUDWHV

16 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT continued

						Carrying amount			Fair value
At 31 December 2015	Designated at fair value \$ million	Fair value – hedging instruments \$ million	Loans and receivables \$ million	Available for sale \$ million	Other ²QDQFLDO liabilities \$ million	Total \$ million	Level 2 \$ million	Level 3 \$ million	Total \$ million
Financial assets measured at fair value
Forward foreign exchange contracts	–	31	–	–	–	31	31	–	31
Investments	–	–	–	13	–	13	–	13	13
Currency swaps	1	–	–	–	–	1	1	–	1
Interest rate swaps	–	1	–	–	–	1	1	–	1
	1	32	–	13	–	46
Financial liabilities measured at fair value
Acquisition consideration		–	–	–	–		–
Forward foreign exchange contracts	–		–	–	–			–
Currency swaps		–	–	–	–			–
Private placement debt	–	–		–	–			–
				–	–
Financial assets not measured at fair value
Trade and other receivables	–	–	1,022	–	–	1,022
Cash at bank	–	–	120	–	–	120
	–	–	1,142	–	–	1,142
Financial liabilities not measured at fair value
Bank overdrafts	–	–	–	–
Bank loans	–	–	–	–
Private placement debt	–	–	–	–				–
Finance lease liabilities	–	–	–	–
Trade and other payables	–	–	–	–
	–	–	–	–

7KHUHKDVEHHQQRFKDQJHLQWKHFODVVL²FDWLRQRI²QDQFLDODVVHWVDQGOLDELOLWLHVWKHPHWKRGDQGDVVXPSWLRQVXVHGLQGHWHUPLQLQJIDLUYDOXHDQG WKHFDWHJRULVDWLRQRI²QDQFLDODVVHWVDQGOLDELOLWLHVZLWKLQWKHIDLUYDOXHKLHUDUFK\IURPWKRVHGLVFORVHGLQWKH\$QQXDO5HSRUWIRUWKH\HDUHQGHG 31 December 2015.

7KH*URXSHQWHUVLQWRGHULYDWLYH²QDQFLDOLQVWUXPHQWVZLWK²QDQFLDOLQVWLWXWLRQVZLWKLQYHVWPHQWJUDGHFUHGLWUDWLQJV7KHIDLUYDOXHRIIRUZDUGIRUHLJQ H[FKDQJHFRQWUDFWVLVFDOFXODWHGE\UHIHUHQFHWRTXRWHGPDUNHWIRUZDUGH[FKDQJHUDWHVIRUFRQWUDFWVZLWKVLPLODUPDWXULW\SUR²OHV7KHIDLUYDOXHRI currency swaps is determined by reference to quoted market spot rates. As a result, foreign forward exchange contracts and currency swaps are FODVVL²HGDV/HYHOZLWKLQWKHIDLUYDOXHKLHUDUFK\

The changes in counterparty credit risk had no material effect on the hedge effectiveness for derivatives designated in hedge relationships and other ²QDQFLDOLQVWUXPHQWVUHFRJQLVHGDWIDLUYDOXH

7KHIDLUYDOXHRIFRQWLQJHQWFRQVLGHUDWLRQLVHVWLPDWHGXVLQJDGLVFRXQWHGFDVK³RZPRGHO7KHYDOXDWLRQPRGHOFRQVLGHUVWKHSUHVHQWYDOXHRIH[SHFWHG payment, discounted using a risk-adjusted discount rate. The expected payment is determined by considering the possible scenarios, which relate to the achievement of established milestones and targets, the amount to be paid under each scenario and the probability of each scenario. As a result, FRQWLQJHQWFRQVLGHUDWLRQLVFODVVL²HGDV/HYHOZLWKLQWKHIDLUYDOXHKLHUDUFK\

The fair value of investments is based upon third party pricing models for share issues. As a result, investments are considered Level 3 in the fair value hierarchy.

There were no transfers between Levels 1, 2 and 3 during 2016 and 2015.

For cash and cash equivalents, short-term loans and receivables, overdrafts and other short-term liabilities which have a maturity of less than three months, the book values approximate the fair values because of their short-term nature.

Long-term borrowings are measured in the balance sheet at amortised cost. As the Group's long-term borrowings are not quoted publicly and as market SULFHVDUHQRWDYDLODEOHWKHLUIDLUYDOXHVDUHHVWLPDWHGE\GLVFRXQWLQJIXWXUHFRQWUDFWXDOFDVK³RZVWRQHWSUHVHQWYDOXHVDWWKHFXUUHQWPDUNHWLQWHUHVW UDWHVDYDLODEOHWRWKH*URXSIRUVLPLODU²QDQFLDOLQVWUXPHQWVDVDWWKH\HDUHQG

17 PROVISIONS AND CONTINGENCIES

ACCOUNTING POLICY

In the normal course of business the Group is involved in various legal disputes. Provisions are made for loss contingencies when it is deemed probable that an adverse outcome will occur and the amount of the losses can be reasonably estimated. Where the Group is the plaintiff in pursuing claims against third parties, legal and associated expenses are charged to the income statement as incurred.

7KHUHFRJQLWLRQRISURYLVLRQVIRUOHJDOGLVSXWHVLVVXEMHFWWRDVLJQL²FDQWGHJUHHRIHVWLPDWLRQ,QPDNLQJLWVHVWLPDWHVPDQDJHPHQWWDNHVLQWRDFFRXQW WKHDGYLFHRILQWHUQDODQGH[WHUQDOOHJDOFRXQVHO3URYLVLRQVDUHUHYLHZHGUHJXODUO\DQGDPRXQWVXSGDWHGZKHUHQHFHVVDU\WRUH³HFWGHYHORSPHQWVLQ the disputes. The ultimate liability may differ from the amount provided depending on the outcome of court proceedings or settlement negotiations or as new facts emerge.

\$SURYLVLRQIRURQHURXVFRQWUDFWVLVUHFRJQLVHGZKHQWKHH[SHFWHGEHQH²WVWREHGHULYHGE\WKH*URXSIURPDFRQWUDFWDUHORZHUWKDQWKH unavoidable cost of meeting its obligations under the contract. For the purpose of calculating any onerous lease provision, the Group takes the GLVFRXQWHGIXWXUHOHDVHSD\PHQWVLIDQ\?QHWRIH[SHFWHGUHQWDOLQFRPH%HIRUHDSURYLVLRQLVHVWDEOLVKHGWKH*URXSUHFRJQLVHVDQ\LPSDLUPHQWORVV on the assets associated with that contract.

A provision for rationalisation is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating losses are not provided for.

17.1 Provisions

	Rationalisation		Legal and other
	provisions	Metal-on-metal	provisions	Total
	\$ million	\$ million	\$ million	\$ million
At 1 January 2015	12	–	118	130
Charge to income statement	23	185	18	226
Utilised		–
Transfers	–	–	15	15
Exchange adjustment		–
At 31 December 2015	23	185	118	326
Net charge to income statement	12	–		11
Acquisitions	–	–	10	10
Unwinding of discount	–	5	–	5
Utilised
Exchange adjustment		–	1	–
At 31 December 2016	20	163	98	281
Provisions – due within one year	20	43	84	147
Provisions – due after one year	–	120	14	134
At 31 December 2016	20	163	98	281
Provisions – due within one year	23	63	107	193
Provisions – due after one year	–	122	11	133
At 31 December 2015	23	185	118	326

7KHSULQFLSDOHOHPHQWVZLWKLQUDWLRQDOLVDWLRQSURYLVLRQVUHODWHWRWKH*URXS2SWLPLVDWLRQSURJUDPPHPDLQO\VHYHUDQFH?DQQRXQFHGLQ0D\DQG SHRSOHFRVWVDVVRFLDWHGZLWKWKHVWUXFWXUDODQGHI²FLHQF\SURJUDPPHDQQRXQFHGLQ\$XJXVW

)ROORZLQJWKHVHWWOHPHQWRIWKHPDMRULW\RI86PHWDORQPHWDOKLSFODLPVGLVFXVVHGEHORZ?WKH*URXSKDVHVWLPDWHGDSURYLVLRQRIP P?UHODWLQJWRWKHSUHVHQWYDOXHDW'HFHPEHURIWKHHVWLPDWHGFRVWVWRUHVROYHDOORWKHUNQRZQDQGDQWLFLSDWHGPHWDORQPHWDOKLS claims. The estimated value of the provision has been determined using an actuarial model. Given the inherent uncertainty in assumptions relating to IDFWRUVVXFKDVWKHQXPEHURIFODLPVDQGRXWFRPHWKHDFWXDOFRVWVPD\GLIIHUVLJQL²FDQWO\IURPWKLVHVWLPDWH7KHSURYLVLRQGRHVQRWLQFOXGHDQ\SRVVLEOH insurance recoveries on these claims or legal fees associated with defending claims. The Group carries considerable product liability insurance, and will continue to defend claims vigorously.

The legal and other provisions mainly relate to various other product liability and intellectual property litigation matters.

\$OOSURYLVLRQVDUHH[SHFWHGWREHVXEVWDQWLDOO\XWLOLVHGZLWKLQ²YH\HDUVRI'HFHPEHUDQGQRQHDUHWUHDWHGDV²QDQFLDOLQVWUXPHQWV

17 PROVISIONS AND CONTINGENCIES continued

17.2 Contingencies

The Company and its subsidiaries are party to various legal proceedings, some of which include claims for substantial damages. The outcome of these proceedings cannot readily be foreseen, but except as described herein management believes none of them is likely to result in a material adverse HIIHFWRQWKH²QDQFLDOSRVLWLRQRIWKH*URXS7KH*URXSSURYLGHVIRURXWFRPHVWKDWDUHGHHPHGWREHSUREDEOHDQGFDQEHUHOLDEO\HVWLPDWHG7KHUHLV QRDVVXUDQFHWKDWORVVHVZLOOQRWH[FHHGSURYLVLRQVRUZLOOQRWKDYHDVLJQL²FDQWLPSDFWRQWKH*URXSªVUHVXOWVRIRSHUDWLRQVLQWKHSHULRGLQZKLFKWKH\ are realised.

In August 2003, the Group withdrew voluntarily from all markets the macrotextured versions of its OXINIUM femoral knee components. A charge of \$154m was recorded in 2004 for anticipated expenses in connection with macrotexture claims. Most of that amount has since been applied to settlements of such claims, and all claims have now been resolved. The aggregate cost at 31 December 2016 related to this matter is approximately \$205m. The Group has sought recovery from its primary and excess insurers for costs of resolving the claims. The primary insurance carrier has paid \$60m in full settlement of its policy liability. However, the excess carriers have denied coverage, citing defences relating to the wording of the insurance policies and other matters. In December 2004, the Group brought suit against them in the US district court for the Western District of Tennessee, for which a trial has not yet begun. An additional \$22m was received during 2007 from a successful settlement with a third party.

17.3 Legal proceedings

Product liability claims

The Group faces claims from time to time for alleged defects in its products and has on occasion recalled or withdrawn products from the market. Such claims are endemic to the medical device industry. The Group maintains product liability insurance subject to limits and deductibles that management believes are reasonable. All policies contain exclusions and limitations, however, and there can be no assurance that insurance will be available or adequate to cover all claims.

In recent years, there has been heightened concern about possible adverse effects of hip implant products with metal-on-metal bearing surfaces, and the Group has incurred, and will continue to incur expenses to defend claims in this area. As of February 2017, and giving effect to the US settlements described below, approximately 770 such claims were pending with the Group around the world, of which approximately 320 had given rise to pending OHJDOSURFHHGLQJV0RVWFODLPVUHODWHWRWKH*URXSªV%LUPLQJKDP+LS5HVXUIDFLQJ%+5?SURGXFWDQGLWVWZRPRGXODUPHWDORQPHWDOFRPSRQHQWVWKH %LUPLQJKDP+LS0RGXODU+HDG%+0+?DQGWKHRSWLRQDOPHWDOOLQHUFRPSRQHQWRIWKH5\$FHWDEXODU6\VWHP50/?7KH%+0+DQG50/DUHQRORQJHU on the market: the R3ML was withdrawn in 2012 and the BHMH was phased out in 2014. In 2015, the Group ceased offering smaller sizes of the BHR and restricted instructions for BHR use in female patients. These actions were taken to ensure that the BHR is only used in those patient groups where it continues to demonstrate strong performance.

In 2015 and 2016, the Group's US subsidiary settled the majority of its US metal-on-metal hip lawsuits in two group settlements, without admitting liability. Insurance receipts covered most of the amounts paid, with the net cash cost being \$25m. These cases had been consolidated in a state court in Memphis, Tennessee and principally related to the Group's modular metal-on-metal hip components, which are no longer on the market. In February 2017, certain plaintiffs asked the US Judicial Panel on Multidistrict Litigation to transfer 31 cases pending in federal courts to the US District Court for the District of Maryland. In England and Wales, metal-on-metal hip implant claims against various companies have been consolidated for trials under group litigation orders in the High Court in London. The BHR and other claims pending against the Group have been stayed and will not be reactivated until the outcome of those trials is known.

The Group has requested indemnity from its product liability insurers for most of these metal-on-metal hip implant claims. Each insurer makes its own decision as to coverage issues, and the liability of some insurers depends on exhaustion of lower levels of coverage. The Group is working with all of the insurers to address any defences to coverage they have raised.

/LWLJDWLRQRXWFRPHVDUHGLI²FXOWWRSUHGLFWDQGGHIHQFHFRVWVFDQEHVLJQL²FDQW7KH*URXSWDNHVFDUHWRPRQLWRUWKHFOLQLFDOHYLGHQFHUHODWLQJWRLWVPHWDO hip implant products and ensure that its product offerings are designed to serve patients' interests.

Intellectual property disputes

The Group is engaged, as both plaintiff and defendant, in litigation with various competitors and others over claims of patent infringement and other intellectual property matters. These disputes are being heard in courts in the US and other jurisdictions and also before agencies that examine patents. 2XWFRPHVDUHUDUHO\FHUWDLQDQGFRVWVDUHRIWHQVLJQL²FDQW

The Group prosecuted and defended a series of patent infringement suits against Arthrex in US federal courts in Oregon and Texas starting in 2004, principally relating to suture anchors for use in shoulder surgery. Arthrex paid \$99m in June 2015 in connection with the Oregon litigation, and most of WKDWDZDUGQHWRIYDULRXVH[SHQVHV?ZDVUHFRJQLVHGLQWKH*URXSªVRSHUDWLQJSUR²WDWWKDWWLPH7KH*URXSDVVHUWHGWKHVDPHSDWHQWDJDLQVWDGGLWLRQDO Arthrex products in a follow-up suit that was scheduled for trial in February 2017 in the Oregon court. Arthrex asserted its own suture anchor patents against Smith & Nephew in 2014 and 2015 in the US District Court for the Eastern District of Texas. In December 2016, the jury in that case decided that two of the Group's US subsidiaries infringed two asserted Arthrex patents and awarded Arthrex \$17.4m. In February 2017, the parties reached a settlement resulting in the dismissal of all patent litigation in Oregon and Texas. Smith & Nephew agreed to pay Arthrex \$8m, and each party agreed to additional SD\PHQWVFRQWLQJHQWRQWKHRXWFRPHRISDWHQWYDOLGLW\SURFHHGLQJVFXUUHQWO\SHQGLQJDWWKH863DWHQW 7UDGHPDUN2I²FHUHODWLQJWRWKHDVVHUWHGSDWHQWV The Group has fully provided for any possible additional payment relating to its historical sales.

,Q)HEUXDU\&RQIRU0,6,QF²OHGVXLWDJDLQVWWKH*URXSªV86VXEVLGLDU\LQWKH(DVWHUQ'LYLVLRQRIWKH86'LVWULFW&RXUWIRUWKH'LVWULFWRI0DVVDFKXVHWWV DOOHJLQJWKDWDQXPEHURILWVSDWHQWVJHQHUDOO\GLUHFWHGWRSDWLHQWVSHFL²FLQVWUXPHQWDWLRQDVVRFLDWHGZLWKNQHHDUWKURSODVW\?DUHLQIULQJHGE\6PLWK Nephew's Visionaire cutting guides and associated knee implants. The suit requests damages and an injunction. Smith & Nephew seeks to invalidate the DVVHUWHGSDWHQWVDWWKH863DWHQW 7UDGHPDUN2I²FHDQGKDVDOVR²OHGFRXQWHUFODLPVIRULQIULQJHPHQWE\&RQIRU0,6RIWKH*URXSªV86SDWHQWV

17.4 Tax Matters

At any given time the Group has unagreed years outstanding in various countries and is involved in tax audits and disputes, some of which may take several years to resolve. The Group believes that it has made adequate provision in respect of related additional tax liabilities that may arise. See Note 5 for further details.

18 RETIREMENT BENEFIT OBLIGATIONS

ACCOUNTING POLICY

7KH*URXSVSRQVRUVGH²QHGEHQH²WSODQVLQDQXPEHURIFRXQWULHV\$GH²QHGEHQH²WSHQVLRQSODQGH²QHVDQDPRXQWRISHQVLRQEHQH²WWKDWDQ employee will receive on retirement or a minimum guaranteed return on contributions, which is dependent on various factors such as age, years RIVHUYLFHDQG²QDOVDODU\7KH*URXSªVREOLJDWLRQLVFDOFXODWHGVHSDUDWHO\IRUHDFKSODQE\GLVFRXQWLQJWKHHVWLPDWHGIXWXUHEHQH²WWKDWHPSOR\HHV KDYHHDUQHGLQUHWXUQIRUWKHLUVHUYLFHLQWKHFXUUHQWDQGSULRUSHULRGV7KHIDLUYDOXHRIDQ\SODQDVVHWVLVGHGXFWHGWRDUULYHDWWKHQHWOLDELOLW\

7KHFDOFXODWLRQRIWKHGH²QHGEHQH²WREOLJDWLRQLVSHUIRUPHGDQQXDOO\E\H[WHUQDODFWXDULHVXVLQJWKHSURMHFWHGXQLWFUHGLWPHWKRG 5HPHDVXUHPHQWVDULVLQJIURPGH²QHGEHQH²WSODQVFRPSULVHDFWXDULDOJDLQVDQGORVVHVDQGWKHUHWXUQRQWKHSODQDVVHWVQHWRIWKHFRVWV RIPDQDJLQJWKHSODQDVVHWV7KH*URXSUHFRJQLVHVWKHVHLPPHGLDWHO\LQRWKHUFRPSUHKHQVLYHLQFRPH2&,?DQGDOORWKHUH[SHQVHVVXFKDVVHUYLFH cost, net interest cost, administration costs and taxes, are recognised in the income statement.

\$QXPEHURINH\DVVXPSWLRQVDUHPDGHZKHQFDOFXODWLQJWKHIDLUYDOXHRIWKH*URXSªVGH²QHGEHQH²WSHQVLRQSODQV7KHVHDVVXPSWLRQVLPSDFWWKH EDODQFHVKHHWDVVHWDQGOLDELOLWLHVRSHUDWLQJSUR²W²QDQFHLQFRPHFRVWVDQGRWKHUFRPSUHKHQVLYHLQFRPH7KHPRVWFULWLFDODVVXPSWLRQVDUHWKH GLVFRXQWUDWHWKHUDWHRILQ³DWLRQDQGPRUWDOLW\DVVXPSWLRQVWREHDSSOLHGWRIXWXUHSHQVLRQSODQOLDELOLWLHV7KHGLVFRXQWUDWHLVEDVHGRQWKH\LHOGDW WKHUHSRUWLQJGDWHRQERQGVWKDWKDYHDFUHGLWUDWLQJRI\$\$GHQRPLQDWHGLQWKHFXUUHQF\LQZKLFKWKHEHQH²WVDUHH[SHFWHGWREHSDLGDQGKDYHD PDWXULW\SUR²OHDSSUR[LPDWHO\WKHVDPHDVWKH*URXSªVREOLJDWLRQV,QGHWHUPLQLQJWKHVHDVVXPSWLRQVPDQDJHPHQWWDNHLQWRDFFRXQWWKHDGYLFHRI professional external actuaries and benchmarks its assumptions against external data.

7KH*URXSGHWHUPLQHVWKHQHWLQWHUHVWH[SHQVHLQFRPH?RQWKHQHWGH²QHGEHQH²WOLDELOLW\DVVHW?IRUWKHSHULRGE\DSSO\LQJWKHGLVFRXQWUDWHXVHG WRPHDVXUHWKHGH²QHGEHQH²WREOLJDWLRQDWWKHEHJLQQLQJRIWKHDQQXDOSHULRGWRWKHQHWGH²QHGEHQH²WOLDELOLW\DVVHW

7KH*URXSDOVRRSHUDWHVDQXPEHURIGH²QHGFRQWULEXWLRQSODQV\$GH²QHGFRQWULEXWLRQSODQLVDSHQVLRQSODQXQGHUZKLFKWKH*URXSDQG HPSOR\HHVSD\²[HGFRQWULEXWLRQVWRDWKLUGSDUW\²QDQFLDOSURYLGHU7KH*URXSKDVQRIXUWKHUSD\PHQWREOLJDWLRQVRQFHWKHFRQWULEXWLRQVKDYH EHHQSDLG&RQWULEXWLRQVDUHUHFRJQLVHGDVDQHPSOR\HHEHQH²WH[SHQVHZKHQWKH\DUHGXH

5HWLUHPHQWEHQH²WQHWDVVHWV?REOLJDWLRQV

7KH*URXSªVUHWLUHPHQWEHQH²WREOLJDWLRQVFRPSULVH

	2016	2015
	\$ million	\$ million
Funded plans:
UK Plan	4
US Plan	27	56
Other plans	52	48
	83	97
Unfunded plans:
Other plans	55	44
Retirement healthcare	26	30
	164	171
Amount recognised on the balance sheet – liability	164	184
Amount recognised on the balance sheet – asset	–

7KH*URXSVSRQVRUVGH²QHGEHQH²WSHQVLRQSODQVIRULWVHPSOR\HHVLQFRXQWULHVDQGWKHVHDUHHVWDEOLVKHGXQGHUWKHODZVRIWKHUHOHYDQWFRXQWU\ Funded plans are funded by the payment of contributions and the assets are held by separate trust funds or insurance companies. In countries where WKHUHLVQR&RPSDQ\VSRQVRUHGSHQVLRQSODQVWDWHEHQH²WVDUHFRQVLGHUHGE\PDQDJHPHQWWREHDGHTXDWH(PSOR\HHVªUHWLUHPHQWEHQH²WVDUHWKH VXEMHFWRIUHJXODUPDQDJHPHQWUHYLHZ7KH*URXSªVGH²QHGEHQH²WSODQVSURYLGHHPSOR\HHVZLWKDQHQWLWOHPHQWWRUHWLUHPHQWEHQH²WVYDU\LQJEHWZHHQ DQGRI²QDOVDODU\RQDWWDLQPHQWRIUHWLUHPHQWDJH7KHOHYHORIHQWLWOHPHQWLVGHSHQGHQWRQWKH\HDUVRIVHUYLFHRIWKHHPSOR\HH

7KH*URXSªVWZRPDMRUGH²QHGEHQH²WSHQVLRQSODQVDUHLQWKH8.DQG86%RWKWKHVHSODQVZHUHFORVHGWRQHZHPSOR\HHVLQDQGGH²QHG contribution plans are offered to new joiners. The US and UK Plans were closed to future accrual in March 2014 and December 2016 respectively.

The UK Plan operates under trust law and responsibility for its governance lies with a Board of Trustees. This Board is composed of representatives of the Group, plan participants and an independent trustee, who act on behalf of members in accordance with the terms of the Trust Deed and Rules and UHOHYDQWOHJLVODWLRQ7KH8.3ODQªVDVVHWVDUHKHOGE\WKHWUXVW\$QQXDOLQFUHDVHVRQEHQH²WVLQSD\PHQWDUHGHSHQGHQWRQLQ³DWLRQ7KHUHLVQROHJLVODWLYH minimum funding requirement in the UK, however the Group has agreed with the Board of Trustees to pay a schedule of supplementary payments VHH1RWH?7KH7UXVW'HHGRIWKH8.3ODQVWDWHVWKDWDQ\VXUSOXVLVXOWLPDWHO\DFFHVVLEOHE\WKH*URXSDVDUHIXQG

18 RETIREMENT BENEFIT OBLIGATIONS continued

The US Plan is governed by a US Pension Committee which is comprised of both plan participants and representatives of the Group. In the US, the 3HQVLRQ3URWHFWLRQ\$FW?HVWDEOLVKHGERWKDPLQLPXPUHTXLUHGFRQWULEXWLRQDQGDPD[LPXPGHGXFWLEOHFRQWULEXWLRQ)DLOXUHWRFRQWULEXWHDWOHDVWWKH PLQLPXPUHTXLUHGDPRXQWZLOOVXEMHFWWKH&RPSDQ\WRVLJQL²FDQWSHQDOWLHVDQGFRQWULEXWLRQVLQH[FHVVRIWKHPD[LPXPGHGXFWLEOHKDYHQHJDWLYHWD[ FRQVHTXHQFHV7KHPLQLPXPIXQGLQJUHTXLUHPHQWLVLQWHQGHGWRIXOO\IXQGWKHSUHVHQWYDOXHRIDFFUXHGEHQH²WVRYHUVHYHQ\HDUV

5HFRQFLOLDWLRQRIEHQH²WREOLJDWLRQVDQGSHQVLRQDVVHWV

7KHPRYHPHQWLQWKH*URXSªVSHQVLRQEHQH²WREOLJDWLRQDQGSHQVLRQDVVHWVLVDVIROORZV

			2016			2015
	Obligation \$ million	Asset \$ million	Total \$ million	Obligation \$ million	Asset \$ million	Total \$ million
Amounts recognised on the balance sheet at beginning of the period		1,350			1,411
Income statement expense:
Current service cost		–			–
Past service credit	51	–	51	22	–	22
Settlements	7		–	30
,QWHUHVWH[SHQVH?LQFRPH		48			50
Administration costs and taxes		–			–
Costs recognised in Income statement		41	25		18
Re-measurements:
Actuarial gain due to liability experience	7	–	7	17	–	17
\$FWXDULDOORVV?JDLQGXHWR²QDQFLDO assumptions change		–		20	–	20
Actuarial gain due to demographic assumptions	33	–	33	–	–	–
5HWXUQRQSODQDVVHWVJUHDWHUWKDQOHVVWKDQ?GLVFRXQWUDWH	–	180	180	–
Re-measurements recognised in OCI		180		37
Cash:
Employer contributions	–	60	60	–	66	66
Employee contributions		4	–		5	–
%HQH²WVSDLGGLUHFWO\E\WKH*URXSWD[HVDQGDGPLQLVWUDWLRQ costs paid from scheme assets	3	–	3	3	–	3
%HQH²WVSDLG	61			52
Net cash	60	–	60	50	16	66
Exchange rates	161		3	56		6
Amount recognised on the balance sheet		1,413			1,350
Amount recognised on the balance sheet – liability		1,413			507
Amount recognised on the balance sheet – asset	–	–	–		843	13

Represented by:

	2016				2015
	Obligation \$ million	Asset \$ million	Total \$ million	Obligation \$ million	Asset \$ million	Total \$ million
UK Plan		840			811	7
US Plan		434			404
Other Plans		139			135
Total		1,413			1,350

\$OOEHQH²WVDUHYHVWHGDWWKHHQGRIHDFKUHSRUWLQJSHULRG7KHZHLJKWHGDYHUDJHGXUDWLRQRIWKHGH²QHGEHQH²WREOLJDWLRQDWWKHHQGRIWKHUHSRUWLQJ period is 22 years and 12 years for the UK and US Plans respectively.

18.3 Plan assets

The market value of the US, UK and Other Plans assets are as follows:

	2016	2015	2014
UK Plan:	\$ million	\$ million	\$ million
Assets with a quoted market price:
Cash and cash equivalents	6	5	6
Equity securities	213	234	237
Other Bonds	38	43	–
Liability driven investments	239	171	227
'LYHUVL²HGJURZWKIXQGV	130	144	155
	626	597	625
Other assets:
Insurance contract	214	214	238
Market value of assets	840	811	863
US Plan:
Assets with a quoted market price:
Cash and cash equivalents	–	–	–
Equity securities	178	166	167
*RYHUQPHQWERQGV¥²[HGLQWHUHVW	128	119	121
Corporate bonds	128	119	120
Market value of assets	434	404	408
Other Plans:
Assets with a quoted market price:
Cash and cash equivalents	4	9	6
Equity securities	35	35	33
*RYHUQPHQWERQGV¥²[HGLQWHUHVW	3	5	7
– index linked	3	9	13
Corporate and other bonds	11	13	12
Insurance contracts	34	28	31
Property	12	8	6
Other quoted securities	2	1	3
	104	108	111
Other assets:
Insurance contracts	35	27	29
Market value of assets	139	135	140
Total market value of assets	1,413	1,350	1,411

1RSODQVLQYHVWGLUHFWO\LQSURSHUW\RFFXSLHGE\WKH*URXSRULQ²QDQFLDOVHFXULWLHVLVVXHGE\WKH*URXS

7KH86DQG8.3ODQDVVHWVDUHLQYHVWHGLQDGLYHUVL²HGUDQJHRILQGXVWULHVDFURVVDEURDGUDQJHRIJHRJUDSKLHV7KHVHDVVHWVLQFOXGHOLDELOLW\PDWFKLQJ DVVHWVDQGDQQXLW\SROLFLHVSXUFKDVHGE\WKHWUXVWHHVRIHDFKSODQZKLFKDLPWRPDWFKWKHEHQH²WVWREHSDLGWRFHUWDLQPHPEHUVIURPWKHSODQDQG WKHUHIRUHUHPRYHWKHLQYHVWPHQWLQ³DWLRQDQGGHPRJUDSKLFULVNVLQUHODWLRQWRWKRVHOLDELOLWLHV

,Q'HFHPEHUWKHORZULVNDVVHWSRUWIROLRKHOGE\WKH8.3ODQZDVWUDQVIHUUHGLQWROLDELOLW\GULYHQLQYHVWPHQWV/',?7KH8.3ODQDOVRKDVDQ LQVXUDQFHFRQWUDFWZLWK5RWKHVD\/LIHFRYHULQJDVXEVHWRIWKH8.3ODQSHQVLRQHUOLDELOLWLHV7KHWHUPVRIWKLVSROLF\GH²QHWKDWWKHFRQWUDFWYDOXHH[DFWO\ PDWFKHVWKHDPRXQWDQGWLPLQJRIWKHSHQVLRQHUREOLJDWLRQVFRYHUHGE\WKHFRQWUDFW,QDFFRUGDQFHZLWK,\$65(PSOR\HH%HQH²WV, the fair value of the insurance contract is deemed to be the present value of the related obligations which is discounted at the AA corporate bond rate.

18 RETIREMENT BENEFIT OBLIGATIONS continued

18.4 Expenses recognised in the income statement

7KHWRWDOH[SHQVHUHODWLQJWRUHWLUHPHQWEHQH²WVUHFRJQLVHGIRUWKH\HDULVPPP?2IWKLVFRVWUHFRJQLVHGIRUWKH\HDUP PP?UHODWHVWRGH²QHGFRQWULEXWLRQVDQGPQHWFUHGLWPQHWH[SHQVHPQHWFUHGLW?UHODWHVWRGH²QHG EHQH²WSODQV

7KHFRVWFKDUJHGLQUHVSHFWRIWKH*URXSªVGH²QHGFRQWULEXWLRQSODQVUHSUHVHQWVFRQWULEXWLRQVSD\DEOHWRWKHVHSODQVE\WKH*URXSDWUDWHVVSHFL²HGLQ WKHUXOHVRIWKHSODQV7KHVHZHUHFKDUJHGWRRSHUDWLQJSUR²WLQVHOOLQJJHQHUDODQGDGPLQLVWUDWLYHH[SHQVHV7KHUHZHUHQLORXWVWDQGLQJSD\PHQWVDV DW'HFHPEHUGXHWREHSDLGRYHUWRWKHSODQVQLOQLO

The \$25m net credit for the year includes a \$44m curtailment gain arising from the closure of the UK Plan to future accrual and \$5m past service credit relating to redundancies.

In 2015, the \$9m net expense for the year includes a \$16m past service cost credit arising from amendments to the US Retirement Healthcare plan and DPJDLQDULVLQJIURPEHQH²WRSWLRQVRIIHUHGWRPHPEHUVRIWKH8.3ODQ

'H²QHGEHQH²WSODQFRVWVFRPSULVHVHUYLFHFRVWZKLFKLVFKDUJHGWRRSHUDWLQJSUR²WLQVHOOLQJJHQHUDODQGDGPLQLVWUDWLYHH[SHQVHVDQGQHWLQWHUHVWFRVW DQGDGPLQLVWUDWLRQFRVWVDQGWD[HVZKLFKDUHUHSRUWHGDVRWKHU²QDQFHFRVWV

7KHGH²QHGEHQH²WSHQVLRQFRVWVFKDUJHGIRUWKH8.DQG863ODQVDUH

	2016		2015		2014
	UK Plan \$ million	US Plan \$ million	UK Plan \$ million	US Plan \$ million	UK Plan \$ million	US Plan \$ million
Service cost	7	–	9	–	10	2
Past service credit		–		–	–
6HWWOHPHQWORVVJDLQ	1	–	2	–	–
Net interest cost, administration and taxes	–	3	3	4	3	3
		3	7	4	13

18.5 Principal actuarial assumptions

7KHIROORZLQJDUHWKHSULQFLSDO²QDQFLDODFWXDULDODVVXPSWLRQVXVHGDWWKHUHSRUWLQJGDWHWRGHWHUPLQHWKH8.DQG86GH²QHGEHQH²WREOLJDWLRQV and expense.

	2016	2015	2014
	% per annum	% per annum	% per annum
UK Plan:
Discount rate	2.6	3.8	3.7
Future salary increases	3.8	3.6	3.5
Future pension increases	3.3	3.1	3.0
,Q³DWLRQ53,	3.3	3.1	3.0
,Q³DWLRQ&3,	2.3	2.1	2.0
US Plan:
Discount rate	4.0	4.3	4.0
Future salary increases	n/a	n/a	n/a
,Q³DWLRQ	n/a	n/a	n/a

Actuarial assumptions regarding future mortality are based on mortality tables. The UK uses the S1NA with projections in line with the CMI 2011 table DQGWKH86XVHVWKH53WDEOHZLWK03VFDOH7KHFXUUHQWORQJHYLWLHVXQGHUO\LQJWKHYDOXHVRIWKHREOLJDWLRQVLQWKHGH²QHGEHQH²WSODQVDUH as follows:

	2016	2015	2014
	years	years	years
Life expectancy at age 60
UK Plan:
Males	29.7	29.6	29.4
Females	31.1	31.3	31.2
US Plan:
Males	25.1	25.8	26.0
Females	27.4	28.2	28.5
Life expectancy at age 60 in 20 years' time
UK Plan:
Males	32.5	32.6	32.4
Females	33.0	33.4	33.3
US Plan:
Males	25.4	27.6	27.8
Females	27.9	29.9	30.2

18.6 Sensitivity analysis

7KHFDOFXODWLRQRIWKHGH²QHGEHQH²WREOLJDWLRQLVVHQVLWLYHWRWKHDVVXPSWLRQVXVHG7KHIROORZLQJWDEOHVXPPDULVHVWKHLQFUHDVHGHFUHDVHRQWKH 8.DQG86GH²QHGEHQH²WREOLJDWLRQDQGSHQVLRQFRVWVDVDUHVXOWRIUHDVRQDEO\SRVVLEOHFKDQJHVLQVRPHRIWKHDVVXPSWLRQVZKLOHKROGLQJDOORWKHU DVVXPSWLRQVFRQVLVWHQW7KHVHQVLWLYLW\WRWKHLQ³DWLRQDVVXPSWLRQFKDQJHLQFOXGHVFRUUHVSRQGLQJFKDQJHVWRWKHIXWXUHVDODU\LQFUHDVHVDQGIXWXUH SHQVLRQLQFUHDVHDVVXPSWLRQV7KHDQDO\VLVGRHVQRWWDNHLQWRDFFRXQWWKHIXOOGLVWULEXWLRQRIFDVK³RZVH[SHFWHGXQGHUWKHSODQ

&KDQJHVWRWKHLQ³DWLRQDVVXPSWLRQZLOOQRWKDYHDQ\HIIHFWRQWKH863HQVLRQ3ODQDVLWZDVFORVHGWRIXWXUHDFFUXDOLQ

	Increase in pension obligation		Increase in pension cost
\$ million	+50bps/+1yr	-50bps/-1yr	+50bps/+1 yr	-50bps/-1yr
UK Plan:
Discount rate	-84.4	97.5	-2	+2
,Q³DWLRQ	88.1	-79.4	+2	-2
Mortality	33.3	-32.8	+1	-1
US Plan:
Discount rate	-24.9	26.7	-1	+1
,Q³DWLRQ	n/a	n/a	n/a	n/a
Mortality	10.9	-10.9	–	–

18 RETIREMENT BENEFIT OBLIGATIONS continued

18.7 Risk

The pension plans expose the Group to the following risks:

Interest rate risk	9RODWLOLW\LQ²QDQFLDOPDUNHWVFDQFKDQJHWKHFDOFXODWLRQVRIWKHREOLJDWLRQVLJQL²FDQWO\DVWKHFDOFXODWLRQRIWKH obligation is linked to yields on AA-rated corporate bonds. A decrease in the bond yield will increase the measure of SODQOLDELOLWLHVDOWKRXJKWKLVZLOOEHSDUWLDOO\RIIVHWE\LQFUHDVHVLQWKHYDOXHRIŸPDWFKLQJSODQDVVHWVVXFKDVERQGVDQG insurance contracts.
	In the UK, the liability matching portfolio held in conventional and index-linked gilts was transferred into liability driven investments in order to reduce interest rate risk.
,Q³DWLRQULVN	7KH8.3ODQLVOLQNHGWRLQ³DWLRQ\$KLJKUDWHRILQ³DWLRQZLOOOHDGWRDKLJKHUOLDELOLW\7KLVULVNLVPDQDJHGE\KROGLQJ LQ³DWLRQOLQNHGERQGVDQGDQLQ³DWLRQOLQNHGLQVXUDQFHFRQWUDFWLQUHVSHFWRIVRPHRIWKHREOLJDWLRQ,QWKH8.WKHOLDELOLW\ matching portfolio held in conventional and index-linked gilts was transferred into liability driven investments in order to UHGXFHLQ³DWLRQULVN
	The UK and US Plans have been closed to future accrual which eliminates the exposure to this risk.
Investment risk	,IWKHUHWXUQRQSODQDVVHWVLVEHORZWKHGLVFRXQWUDWHDOOHOVHEHLQJHTXDOWKHUHZLOOEHDQLQFUHDVHLQWKHSODQGH²FLW
	In the UK, this risk is partially managed by a portfolio of liability matching assets and a bulk annuity, together with a dynamic de-risking policy to switch growth assets into liability matching assets over time.
	The US Plan has a dynamic de-risking policy to shift plan assets into longer-term stable asset classes. The policy established 10 pre-determined funded status levels and when each trigger point is reached, the plan assets are re-balanced accordingly.
Longevity risk	7KHSUHVHQWYDOXHRIWKHSODQVGH²QHGEHQH²WOLDELOLW\LVFDOFXODWHGE\UHIHUHQFHWRWKHEHVWHVWLPDWHRIWKHPRUWDOLW\RIWKH plan participants both during and after their employment. An increase in the life expectancy of plan participants above that DVVXPHGZLOOLQFUHDVHWKHEHQH²WREOLJDWLRQ
	7KH8.3ODQLQRUGHUWRPLQLPLVHORQJHYLW\ULVNKDVHQWHUHGLQWRDQLQVXUDQFHFRQWUDFWZKLFKFRYHUVDŸSRUWLRQRI pensioner obligations.
Salary risk	7KHFDOFXODWLRQRIWKHGH²QHGEHQH²WREOLJDWLRQXVHVWKHIXWXUHHVWLPDWHGVDODULHVRISODQSDUWLFLSDQWV,QFUHDVHVLQWKH VDODU\RISODQSDUWLFLSDQWVDERYHWKDWDVVXPHGZLOOLQFUHDVHWKHEHQH²WREOLJDWLRQ
	The exposure to salary risk in the UK and US has been eliminated with the closure of these Plans to future accrual.

18.8 Funding

A full valuation is performed by actuaries for the Trustees of each plan to determine the level of funding required. Employer contributions rates, based on these full valuations, are agreed between the Trustees of each plan and the Group. The assumptions used in the funding actuarial valuations may differ from those assumptions above.

UK Plan

The most recent full actuarial valuation of the UK Plan was undertaken as at 30 September 2015. Contributions to the UK Plan in 2016 were PPP?7KLVLQFOXGHGVXSSOHPHQWDU\SD\PHQWVRIPPP

The Group has currently agreed to pay supplementary payments until 2021 and the agreed supplementary contribution for 2017 is \$23m.

US Plan

A full actuarial valuation for the US Plan was last undertaken as at 20 September 2013 before the closure of the Plan to future accrual. Contributions to the 863ODQZHUHPPP?ZKLFKLQFOXGHGVXSSOHPHQWDU\SD\PHQWVRIP

7KHSODQQHGVXSSOHPHQWDU\FRQWULEXWLRQIRULVP

19 EQUITY

ACCOUNTING POLICY

Incremental costs directly attributable to the issue of ordinary shares, net of any tax effects, are recognised as a deduction from equity.

When shares recognised as equity are repurchased, the amount of the consideration paid, which includes directly attributable costs, net of any tax HIIHFWVLVUHFRJQLVHGDVDGHGXFWLRQIURPHTXLW\5HSXUFKDVHGVKDUHVDUHFODVVL²HGDVWUHDVXU\VKDUHVDQGDUHSUHVHQWHGLQWKHWUHDVXU\VKDUH UHVHUYH:KHQWUHDVXU\VKDUHVDUHVROGRUUHLVVXHGVXEVHTXHQWO\WKHDPRXQWUHFHLYHGLVUHFRJQLVHGDVDQLQFUHDVHLQHTXLW\DQGWKHUHVXOWLQJ VXUSOXVRUGH²FLWRQWKHWUDQVDFWLRQLVSUHVHQWHGZLWKLQVKDUHSUHPLXP

19.1 Share capital

		2UGLQDU\VKDUHV"		'HIHUUHGVKDUHV…
	Thousand	\$ million	Thousand	\$ million	Total \$ million
Authorised
At 31 December 2014	1,223,591	245	50	–	245
At 31 December 2015	1,223,591	245	50	–	245
At 31 December 2016	1,223,591	245	50	–	245
Allotted, issued and fully paid
At 1 January 2014	918,167	184	50	–	184
Share options	4,180	1	–	–	1
Shares cancelled			–	–
At 31 December 2014	917,942	184	50	–	184
Share options	1,855	–	–	–	–
Shares cancelled			–	–
At 31 December 2015	915,447	183	50	–	183
Share options	1,283	–	–	–	–
Shares cancelled			–	–
At 31 December 2016	903,723	180	50	–	180

The deferred shares were issued in 2006 in order to comply with English Company law. They are not listed on any stock exchange and have extremely limited rights and effectively have no value. These rights are summarised as follows:

ç 7KHKROGHUVKDOOQRWEHHQWLWOHGWRSDUWLFLSDWHLQWKHSUR²WVRIWKH&RPSDQ\
ç The holder shall not have any right to participate in any distribution of the Company's assets on a winding up or other distribution except that after the return of the nominal amount paid up on each share in the capital of the Company of any class other than the deferred shares and the distribution of a IXUWKHULQUHVSHFWRIHDFKVXFKVKDUHWKHUHVKDOOEHGLVWULEXWHGWRDKROGHURIDGHIHUUHGVKDUHIRUHDFKGHIHUUHGVKDUHKHOG?DQDPRXQWHTXDO to the nominal value of the deferred share;
ç The holder shall not be entitled to receive notice, attend, speak or vote at any general meeting of the Company; and
ç The Company may create, allot and issue further shares or reduce or repay the whole or any part of its share capital or other capital reserves without obtaining the consent of the holders of the deferred shares.

7KH*URXSªVREMHFWLYHVZKHQPDQDJLQJFDSLWDODUHWRHQVXUHWKH*URXSKDVDGHTXDWHIXQGVWRFRQWLQXHDVDJRLQJFRQFHUQDQGVXI²FLHQW³H[LELOLW\ZLWKLQ the capital structure to fund the ongoing growth of the business and to take advantage of business development opportunities including acquisitions.

The Group determines the amount of capital taking into account changes in business risks and future cash requirements. The Group reviews its capital structure on an ongoing basis and uses share buy-backs, dividends and the issue of new shares to adjust the retained capital.

The Group considers the capital that it manages to be as follows:

	2016 \$ million	2015 \$ million	2014 \$ million
Share capital	180	183	184
Share premium	600	590	574
Capital redemption reserve	15	12	11
Treasury shares
Retained earnings and other reserves	3,595	3,475	3,586
	3,958	3,966	4,040

19 EQUITY continued

19.2 Treasury shares

Treasury shares represents the holding of the Company's own shares in respect of the Smith & Nephew Employees' Share Trust and shares bought back as part of the share buy-back programme. On 8 August 2016 the Group commenced a new \$300m share buy-back programme following the sale of its *\QDHFRORJ\EXVLQHVV7KHVKDUHEX\EDFNSURJUDPPHZDVFRPSOHWHGLQ'HFHPEHU'XULQJDWRWDORIP?RUGLQDU\VKDUHVZHUH SXUFKDVHGDWDFRVWRIPDQGP?RUGLQDU\VKDUHVZHUHFDQFHOOHG'XULQJDWRWDORIPRUGLQDU\VKDUHV?KDGEHHQSXUFKDVHG DWDFRVWRIPDQGP?KDGEHHQFDQFHOOHG

7KH6PLWK 1HSKHZ(PSOR\HHVª6KDUH7UXVW7UXVW?ZDVHVWDEOLVKHGWRKROGVKDUHVUHODWLQJWRWKHORQJWHUPLQFHQWLYHSODQVUHIHUUHGWRLQWKH 'Directors' Remuneration Report'. The Trust is administered by an independent professional trust company resident in Jersey and is funded by a loan from the Company. The cost of the Trust is charged to the income statement as it accrues. A dividend waiver is in place in respect of those shares held under the long-term incentive plans. The Trust only accepts dividends in respect of nil-cost options and deferred bonus plan shares. The waiver represents less than 1% of the total dividends paid.

The movements in Treasury shares and the Employees' Share Trust are as follows:

	Treasury \$ million	Employees' Share Trust \$ million	Total \$ million
At 1 January 2015	314	1	315
Shares purchased	77	–	77
Shares transferred from treasury		58	–
6KDUHVWUDQVIHUUHGWR*URXSEHQH²FLDULHV
Shares cancelled		–
At 31 December 2015	264	30	294
Shares purchased	368	–	368
Shares transferred from treasury		18	–
6KDUHVWUDQVIHUUHGWR*URXSEHQH²FLDULHV
Shares cancelled		–
At 31 December 2016	411	21	432

	Number of shares million	Number of shares million	Number of shares million
At 1 January 2015	24.0	0.1	24.1
Shares purchased	4.4	–	4.4
Shares transferred from treasury		4.4	–
6KDUHVWUDQVIHUUHGWR*URXSEHQH²FLDULHV
Shares cancelled		–
At 31 December 2015	18.9	2.3	21.2
Shares purchased	24.0	–	24.0
Shares transferred from treasury		1.2	–
6KDUHVWUDQVIHUUHGWR*URXSEHQH²FLDULHV
Shares cancelled		–
At 31 December 2016	27.8	1.5	29.3

19.3 Dividends

	2016 \$ million	2015 \$ million	2014 \$ million
The following dividends were declared and paid in the year:
2UGLQDU\²QDORI"IRU""?SDLG0D\	170	166	152
2UGLQDU\LQWHULPRI"IRU""?SDLG2FWREHU	109	106	98
	279	272	250

\$²QDOGLYLGHQGIRURI per ordinary share was proposed by the Board on 8 February 2017 and will be paid, subject to shareholder approval, on 10 May 2017 to shareholders on the Register of Members on 31 March 2017. The estimated amount of this dividend is \$162m.

20 CASH FLOW STATEMENT

ACCOUNTING POLICY

,QWKH*URXSFDVK³RZVWDWHPHQWFDVKDQGFDVKHTXLYDOHQWVLQFOXGHVFDVKDWEDQNRWKHUVKRUWWHUPOLTXLGLQYHVWPHQWVZLWKRULJLQDOPDWXULWLHV RIWKUHHPRQWKVRUOHVVDQGEDQNRYHUGUDIWV,QWKH*URXSEDODQFHVKHHWEDQNRYHUGUDIWVDUHVKRZQZLWKLQEDQNRYHUGUDIWVDQGORDQVXQGHU FXUUHQWOLDELOLWLHV

Analysis of net debt

							%RUURZLQJV
	Cash PLOOLRQ	2YHUGUDIWV PLOOLRQ	'XHZLWKLQ one year PLOOLRQ	Due after one year PLOOLRQ	Net FXUUHQF\VZDSV PLOOLRQ	Net LQWHUHVWVZDSV PLOOLRQ	7RWDO PLOOLRQ
At 1 January 2014	137	(11)	(33)	(347)	1	–	(253)
1HWFDVK³RZLPSDFW	(35)	(19)	22		11	–
([FKDQJHDGMXVWPHQW	(9)	2	–	3	(13)	–	(17)
\$W'HFHPEHU	93	(28)	(11)		(1)	–
1HWFDVK³RZLPSDFW	34	9	(17)	231	15	1	273
([FKDQJHDGMXVWPHQW	(7)	1	–	1		–	(21)
\$W'HFHPEHU	120	(18)	(28)		(2)	1
1HWFDVK³RZLPSDFW	(18)	(45)	4	(129)	25	(2)
([FKDQJHDGMXVWPHQW	(2)	1	–	(1)	(22)	–	(24)
At 31 December 2016	100		(24)		1	(1)

5HFRQFLOLDWLRQRIQHWFDVK³RZWRPRYHPHQWLQQHWGHEW

	PLOOLRQ	2015 PLOOLRQ	2014 PLOOLRQ
1HWFDVK³RZIURPFDVKQHWRIRYHUGUDIWV		43	(54)
6HWWOHPHQWRIFXUUHQF\VZDSV	25	15	11
1HWFDVK³RZIURPERUURZLQJV	(127)	215
&KDQJHLQQHWGHEWIURPQHWFDVK³RZ		273
([FKDQJHDGMXVWPHQW	(24)	(21)	(17)
&KDQJHLQQHWGHEWLQWKH\HDU	(189)	252
2SHQLQJQHWGHEW			(253)
Closing net debt

&DVKDQGFDVKHTXLYDOHQWV

)RUWKHSXUSRVHVRIWKH*URXSFDVK³RZVWDWHPHQWFDVKDQGFDVKHTXLYDOHQWVDW'HFHPEHUFRPSULVHFDVKDWEDQNQHWRIEDQNRYHUGUDIWV

	PLOOLRQ	2015 PLOOLRQ	2014 PLOOLRQ
&DVKDWEDQN	100	120	93
%DQNRYHUGUDIWV		(18)	(28)
&DVKDQGFDVKHTXLYDOHQWV	38	102

7KH*URXSRSHUDWHVLQRYHUFRXQWULHVDURXQGWKHZRUOGVRPHRIZKLFKLPSRVHUHVWULFWLRQVRYHUFDVKPRYHPHQW7KHVHUHVWULFWLRQVKDYHRQO\D PLQLPDOLPSDFWRIWKHPDQDJHPHQWRIWKH*URXSªVFDVK

21 ACQUISITIONS AND DISPOSALS

ACCOUNTING POLICY

7KH*URXSDFFRXQWVIRUEXVLQHVVFRPELQDWLRQVXVLQJWKHDFTXLVLWLRQPHWKRGZKHQFRQWUROLVWUDQVIHUUHGWRWKH*URXS7KHFRQVLGHUDWLRQWUDQVIHUUHG LQWKHDFTXLVLWLRQLVPHDVXUHGDWIDLUYDOXHDVDUHWKHLGHQWL²DEOHQHWDVVHWVDFTXLUHG\$Q\JRRGZLOOWKDWDULVHVLVWHVWHGDQQXDOO\IRULPSDLUPHQW\$Q\ JDLQRQDEDUJDLQSXUFKDVHLVUHFRJQLVHGLQSUR²WRUORVVLPPHGLDWHO\7UDQVDFWLRQFRVWVDUHH[SHQVHGDVLQFXUUHGH[FHSWLIUHODWHGWRWKHLVVXHRI GHEWRUHTXLW\VHFXULWLHV

\$Q\FRQWLQJHQWFRQVLGHUDWLRQSD\DEOHLVPHDVXUHGDWIDLUYDOXHDWWKHDFTXLVLWLRQGDWH,IWKHFRQWLQJHQWFRQVLGHUDWLRQLVFODVVL²HGDVHTXLW\WKHQLWLV QRWUHPHDVXUHGDQGVHWWOHPHQWLVDFFRXQWHGIRUZLWKLQHTXLW\2WKHUZLVHVXEVHTXHQWFKDQJHVLQWKHIDLUYDOXHRIWKHFRQWLQJHQWFRQVLGHUDWLRQDUH UHFRJQLVHGLQSUR²WRUORVV

21.1 Acquisitions

Year ended 31 December 2016

'XULQJWKH\HDUHQGHG'HFHPEHUWKH*URXSDFTXLUHGWZRPHGLFDOWHFKQRORJ\EXVLQHVVHVGHHPHGWREHEXVLQHVVFRPELQDWLRQVZLWKLQWKH scope of IFRS 3 Business Combinations

2Q-DQXDU\WKH*URXSFRPSOHWHGWKHDFTXLVLWLRQRIRIWKHVKDUHFDSLWDORI%OXH%HOW+ROGLQJV,QFDEXVLQHVVVSHFLDOLVLQJLQURERWLF WHFKQRORJLHV7KHDFTXLVLWLRQVHFXUHVDOHDGLQJSRVLWLRQLQWKHIDVWJURZLQJDUHDRI2UWKRSDHGLFURERWLFVDVVLVWHGVXUJHU\7KHIDLUYDOXHRIFRQVLGHUDWLRQ LVPDQGLQFOXGHVPGHIHUUHGFRQVLGHUDWLRQ7KHIDLUYDOXHVRIDVVHWVDFTXLUHGZHUH

	PLOOLRQ
\$JJUHJDWHLGHQWL²DEOHDVVHWVDFTXLUHGDQGOLDELOLWLHVDVVXPHG
,QWDQJLEOHDVVHWV	70
3URSHUW\SODQW HTXLSPHQWDQGLQYHQWRU\	13
7UDGHDQGRWKHUSD\DEOH	(11)
3URYLVLRQV	(10)
'HIHUUHGWD[DVVHWV
Net assets	78
*RRGZLOO	184
Consideration (net of \$3m cash acquired)

7KHJRRGZLOOLVDWWULEXWDEOHWRWKHUHYHQXHV\QHUJLHVRISURYLGLQJDIXOOURERWLFVXUJHU\RIIHULQJDQGIXWXUHDSSOLFDWLRQVRIWKHWHFKQRORJLFDOH[SHUWLVH7KH JRRGZLOOLVQRWH[SHFWHGWREHGHGXFWLEOHIRUWD[SXUSRVHV

2Q-DQXDU\WKH*URXSFRPSOHWHGWKHDFTXLVLWLRQRI%67&DU*HOD²UVWOLQHFDUWLODJHUHSDLUSURGXFWIURP3LUDPDO+HDOWKFDUH&DQDGD?/LPLWHG7KH IDLUYDOXHRIWKHFRQVLGHUDWLRQLVPDQGLQFOXGHGPRIGHIHUUHGDQGFRQWLQJHQWFRQVLGHUDWLRQ7KHIDLUYDOXHVRIQHWDVVHWVDFTXLUHGDUHSURGXFW LQWDQJLEOHDVVHWVRIPLQYHQWRU\RIPDQGDGHIHUUHGWD[OLDELOLW\RIP7KHJRRGZLOOZKLFKLVH[SHFWHGWREHGHGXFWLEOHIRUWD[SXUSRVHVDULVLQJRQ WKHDFTXLVLWLRQLVPLVDWWULEXWDEOHWRWKHIXWXUHSHQHWUDWLRQLQWRQHZPDUNHWVH[SHFWHGIURPWKHWUDQVDFWLRQ

'XULQJWKH\HDUHQGHG'HFHPEHUWKHFRQWULEXWLRQWRUHYHQXHDQGDWWULEXWDEOHSUR²WIURPWKHVHDFTXLVLWLRQVLVLPPDWHULDO,IWKHDFTXLVLWLRQVKDG RFFXUUHGDWWKHEHJLQQLQJRIWKH\HDUWKHLUFRQWULEXWLRQWRUHYHQXHDQGDWWULEXWDEOHSUR²WZRXOGKDYHDOVREHHQLPPDWHULDO

Year ended 31 December 2015

'XULQJWKH\HDUHQGHG'HFHPEHUWKH*URXSDFTXLUHGLWVGLVWULEXWRULQ&RORPELDDQGLWVGLVWULEXWRUDQGDPDQXIDFWXUHULQ5XVVLD7KH DFTXLVLWLRQVDUHGHHPHGWREHEXVLQHVVFRPELQDWLRQVZLWKLQWKHVFRSHRI,)56Business Combinations

7KHDJJUHJDWHGWRWDOIDLUYDOXHRIWKHFRQVLGHUDWLRQZDVPDQGLQFOXGHGPRIFRQWLQJHQWFRQVLGHUDWLRQDQGPWKURXJKWKHVHWWOHPHQWRI ZRUNLQJFDSLWDOFRPPLWPHQWV7KHDFTXLVLWLRQDFFRXQWLQJZDVFRPSOHWHGGXULQJZLWKQRPHDVXUHPHQWDGMXVWPHQWVEHLQJPDGH

7KHIROORZLQJWDEOHVXPPDULVHVWKHDJJUHJDWHFRQVLGHUDWLRQWUDQVIHUUHGDQGWKHDJJUHJDWHIDLUYDOXHDPRXQWVRIDVVHWVDFTXLUHGDQGOLDELOLWLHVDVVXPHG DWWKHDFTXLVLWLRQGDWH

	PLOOLRQ
\$JJUHJDWHLGHQWL²DEOHDVVHWVDFTXLUHGDQGOLDELOLWLHVDVVXPHG
,QWDQJLEOHDVVHWV	19
Other assets1	29
/LDELOLWLHV	(14)
Net assets	34
*RRGZLOO	34
Cost of acquisition

,QFOXGLQJQHWFDVKRIP

The aggregated estimate of goodwill arising on the actributable to the additional economic benefits expected from the transactions, including the assembled workforces, which have been transferred as part of the acquisitions. The expected to be deductible for tax purposes.

The contribution to revenue and attributable profit from the year ended 31 December 2015 was immaterial. If the acquisitions had occurred at the beginning of the year, their contributions to revenue and attributable profit for the year ended 31 December 2015 would also have been immaterial

Year ended 31 December 2014

Acquisition of ArthroCare

On 29 May 2014, the Group acquired 100% of the shares of ArthroCare Corporation, an innovative medical device company with a highly complementary sports medicine portfolio. The purchase price was \$48.25 per share, paid in cash with the fair consideration equalling \$7.715m. The acquisition was financed through existing and cash balances, including an existing \$1bn revolving credit facility and a new two-jear \$1.4bn term loan facility, established in February 2014.

The acquisition is deemed to be a business combination within the scope of IFRS 3 Business Combination accounting was completed during 2015. The fair values shown below include ments recognised during the period. The goodwill arising on the aquisition is \$829m. It relates to the value of the additional economic be ransaction, including synergies and the assembled workforce. The goodwill recognised is not expected to be deductible for tax purposes.

The following table summarises the consideration transferred, anounts of assets acquired and liabilities assumed at the acquisition date.

	\$ million
Identifiable assets acquired and liabilities assumed
Property, plant and equipment	60
Inventories	66
Trade receivables and prepayments	54
Identifiable intangible assets	817
Investments in associates	ব
Trade and other payables	(74)
Provisions	(19)
Current tax payable	(18)
Deferred tax liabilities	(173)
Net assets	717
Goodwill	829
Consideration (net of \$169m of cash acquired)	1,546

For the year ended 31 December 2014, ArthreCare's contribution to Group reversion approximately seven months of sales. This gave rise to a pre-lax profi of \$28m after anortisation intangibles. Had ArthroCare been acquired on 1 January 2014, the Groups revenues for 2014 would have been \$147m higher and pre-tax profit would have been \$5m higher.

Acquisition of Brazilian distributor

On 17 March 2014, the Group acquired certain asses and libitities related to the distribution business for its sports medicine, orthopaedic reconstruction, and trauma products in Brazil. The acquisition was deemed to be a business combination within the scope of IFRS 3 Business Combinations. The acquisition date fair value of the consideration was \$31m and \$26m and \$5m in relation to the settlement of working capital commitments. The deferred consideration was subsequently settled during the second quarter of 2014.

The acquisition accounting was completed during 2015. As at the fair value of the net assets acquired, which includes measurement period adjustments recognised during the period, was \$16m. This includes of \$12m, identifiable intargible asses of \$16m, inventory of \$4m, property, plant and equipment of \$2m, trade payables of \$5m, current tax payable of \$4m and deferred tax liabilities of \$8m. As a result, the goodwill arising on the adtributable to the additional economic benefits expected from the acquisition, including the assembled workforce, which has part of the acquisition. The goodwill is not expected to be decucitible for tax purposes.

The contribution to revenue and attributable profit for the year ended 31 December 2014 was immaterial. If the acquisition had occurred at the beginning of the year its contribution to revenue and attributable profit for the year ended 31 December 2014 would also have been immaterial

21 ACQUISITIONS AND DISPOSALS FRQWLQXHG

21.2 Disposal of business

'XULQJWKH\HDUHQGHG'HFHPEHUWKH*URXSGLVSRVHGRILWV*\QDHFRORJ\EXVLQHVVIRUFDVKFRQVLGHUDWLRQRIP7KHQHWDVVHWVGLVSRVHG LQFOXGHGPSODQWDQGHTXLSPHQWDQGPLQYHQWRU\'LVSRVDOUHODWHGFRVWVRIPDQGOLDELOLWLHVRIPUHVXOWHGLQDSUHWD[JDLQRQGLVSRVDORI P

)RUWKH\HDUHQGHG'HFHPEHUWKH*URXSGLGQRWGLVSRVHRIDQ\EXVLQHVVHV

'XULQJWKH*URXSGLVSRVHGRIDPDQXIDFWXULQJIDFLOLW\LQWKH8.IRUFDVKFRQVLGHUDWLRQRIPUHVXOWLQJLQDSUHWD[JDLQRQGLVSRVDORIP7KH UHYHQXHDQGSUR²WFRQWULEXWLRQRIWKHGLVSRVHGEXVLQHVVZDVLPPDWHULDO

22 OPERATING LEASES

ACCOUNTING POLICY

/HDVHVDUHFODVVL²HGDV²QDQFHOHDVHVZKHQWKHWHUPVRIWKHOHDVHWUDQVIHUVXEVWDQWLDOO\DOOWKHULVNVDQGUHZDUGVRIRZQHUVKLSWRWKH*URXS\$OORWKHU OHDVHVDUHFODVVL²HGDVRSHUDWLQJOHDVHV

3D\PHQWVXQGHURSHUDWLQJOHDVHVDUHH[SHQVHGLQWKHLQFRPHVWDWHPHQWRQDVWUDLJKWOLQHEDVLVRYHUWKHWHUPRIWKHOHDVH/HDVHLQFHQWLYHVUHFHLYHG DUHUHFRJQLVHGDVDQLQWHJUDOSDUWRIWKHWRWDOOHDVHH[SHQVHRYHUWKHWHUPRIWKHOHDVH

)XWXUHPLQLPXPOHDVHSD\PHQWVXQGHUQRQFDQFHOODEOHRSHUDWLQJOHDVHVIDOOGXHDVIROORZV

	PLOOLRQ	2015 PLOOLRQ
/DQGDQGEXLOGLQJV
:LWKLQRQH\HDU	33	29
\$IWHURQHDQGZLWKLQWZR\HDUV	27	20
\$IWHUWZRDQGZLWKLQWKUHH\HDUV	23	14
\$IWHUWKUHHDQGZLWKLQIRXU\HDUV		11
\$IWHUIRXUDQGZLWKLQ²YH\HDUV	13	8
\$IWHU²YH\HDUV	41	9
	153	91
2WKHUDVVHWV
:LWKLQRQH\HDU	15
\$IWHURQHDQGZLWKLQWZR\HDUV	11	9
\$IWHUWZRDQGZLWKLQWKUHH\HDUV		5
\$IWHUWKUHHDQGZLWKLQIRXU\HDUV	2	2
	34	32

23 OTHER NOTES TO THE ACCOUNTS

23.1 Share-based payments

ACCOUNTING POLICY

7KH*URXSRSHUDWHVDQXPEHURIHTXLW\VHWWOHGH[HFXWLYHDQGHPSOR\HHVKDUHSODQV)RUDOOJUDQWVRIVKDUHRSWLRQVDQGDZDUGVWKHIDLUYDOXHDWWKH JUDQWGDWHLVFDOFXODWHGXVLQJDSSURSULDWHRSWLRQSULFLQJPRGHOV7KHJUDQWGDWHIDLUYDOXHLVUHFRJQLVHGRYHUWKHYHVWLQJSHULRGDVDQH[SHQVHZLWKD FRUUHVSRQGLQJLQFUHDVHLQUHWDLQHGHDUQLQJV

Employee plans

7KH6PLWK 1HSKHZ6KDUHVDYH3ODQ?DGRSWHGE\VKDUHKROGHUVRQ\$SULO?WKH6DYH\$V<RX(DUQ6\$<(?SODQ?WKH6PLWK 1HSKHZ ,QWHUQDWLRQDO6KDUHVDYH3ODQ?6PLWK 1HSKHZ)UDQFH6KDUHVDYH3ODQ?6PLWK 1HSKHZ6KDUHVDYH3ODQ?WKH6DYH\$V<RX(DUQ 6\$<(?SODQ?DGRSWHGE\VKDUHKROGHUVRQ\$SULO?6PLWK 1HSKHZ,QWHUQDWLRQDO6KDUHVDYH3ODQ?DGRSWHGE\VKDUHKROGHUVRQ\$SULO ?DQG6PLWK 1HSKHZ)UDQFH6KDUHVDYH3ODQ?DGRSWHGE\VKDUHKROGHUVRQ\$SULO?DUHWRJHWKHUWHUPHGWKH©(PSOR\HH3ODQVª

7KH6\$<(DQG6\$<(SODQVDUHDYDLODEOHWRDOOHPSOR\HHVLQWKH8.HPSOR\HGE\SDUWLFLSDWLQJ*URXSFRPSDQLHVVXEMHFWWRWKUHHPRQWKVª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

(PSOR\HHVLQWKH86DUHDEOHWRSDUWLFLSDWHLQWKH(PSOR\HH6WRFN3XUFKDVH3ODQZKLFKJLYHVWKHPWKHRSSRUWXQLW\WRDFTXLUHVKDUHVLQWKHIRUPRI \$'6VDWDGLVFRXQWRIRUPRUHLIWKHVKDUHVDSSUHFLDWHLQYDOXHGXULQJWKHSODQªVTXDUWHUO\SXUFKDVHSHULRG?WRWKHPDUNHWSULFHWKURXJKDUHJXODU VDYLQJVSODQ

([HFXWLYHSODQV

7KH6PLWK 1HSKHZ8.\$SSURYHG6KDUH2SWLRQ3ODQWKH6PLWK 1HSKHZ8.8QDSSURYHG6KDUH2SWLRQ3ODQWKH6PLWK 1HSKHZ 866KDUH3ODQDGRSWHGE\VKDUHKROGHUVRQ\$SULO?WKH6PLWK 1HSKHZ([HFXWLYH6KDUH2SWLRQ3ODQDGRSWHGE\VKDUHKROGHUVRQ0D\ ?DQGWKH6PLWK 1HSKHZ*OREDO6KDUH3ODQDGRSWHGE\VKDUHKROGHUVRQ0D\?DUHWRJHWKHUWHUPHGWKH©([HFXWLYH3ODQVª

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

7KHPD[LPXPWHUPRIRSWLRQVJUDQWHGXQGHUDOOSODQVLV\HDUVIURPWKHGDWHRIJUDQW\$OOVKDUHRSWLRQSODQVDUHVHWWOHGLQVKDUHV

)URPRQZDUGV6HQLRU([HFXWLYHVZHUHJUDQWHGVKDUHDZDUGVLQVWHDGRIVKDUHRSWLRQVDQGIURPH[HFXWLYHVZHUHJUDQWHGFRQGLWLRQDOVKDUH DZDUGVLQVWHDGRIVKDUHRSWLRQV7KHDZDUGVYHVWDIWHURQH\HDUDIWHUWZR\HDUVDQGWKHUHPDLQLQJEDODQFHDIWHUWKHWKLUG\HDUVXEMHFWWR FRQWLQXHGHPSOR\PHQW7KHUHDUHQRSHUIRUPDQFHFRQGLWLRQVIRUH[HFXWLYHV9HVWLQJIRU6HQLRU([HFXWLYHVLVVXEMHFWWRSHUVRQDOSHUIRUPDQFHOHYHOV 7KHPDUNHWYDOXHXVHGWRFDOFXODWHWKHQXPEHURIDZDUGVLVWKHFORVLQJSULFHRIDQRUGLQDU\VKDUHRQWKHODVWWUDGLQJGD\SULRUWRWKHJUDQWGDWH

23 OTHER NOTES TO THE ACCOUNTS FRQWLQXHG

\$W'HFHPEHU?RSWLRQVZHUHRXWVWDQGLQJXQGHUVKDUHRSWLRQSODQVDVIROORZV

	1XPEHURI shares WKRXVDQG	5DQJHRIRSWLRQ H[HUFLVHSULFHV pence
Employee Plans:
2XWVWDQGLQJDW-DQXDU\		¥
*UDQWHG	799
)RUIHLWHG	(289)	¥
([HUFLVHG	(743)	¥
([SLUHG	(18)	¥
2XWVWDQGLQJDW'HFHPEHU		¥
*UDQWHG
)RUIHLWHG	(275)	¥
([HUFLVHG	(744)	¥
([SLUHG	(45)	¥
2XWVWDQGLQJDW'HFHPEHU		¥
*UDQWHG
)RUIHLWHG	(295)	¥
([HUFLVHG		¥
([SLUHG	(73)	¥
Outstanding at 31 December 2016		¥
Options exercisable at 31 December 2016	120	¥
2SWLRQVH[HUFLVDEOHDW'HFHPEHU	82	¥
2SWLRQVH[HUFLVDEOHDW'HFHPEHU	94	¥
([HFXWLYH3ODQV
2XWVWDQGLQJDW-DQXDU\		¥
)RUIHLWHG	(115)	¥
([HUFLVHG		¥
([SLUHG	(413)	¥
2XWVWDQGLQJDW'HFHPEHU		¥
)RUIHLWHG	(8)	¥
([HUFLVHG		¥
([SLUHG	(182)	¥
2XWVWDQGLQJDW'HFHPEHU		¥
([HUFLVHG		¥
([SLUHG	(79)	¥
Outstanding at 31 December 2016		¥
Options exercisable at 31 December 2016		¥
2SWLRQVH[HUFLVDEOHDW'HFHPEHU		¥
2SWLRQVH[HUFLVDEOHDW'HFHPEHU		¥

7KHZHLJKWHGDYHUDJHUHPDLQLQJFRQWUDFWXDOOLIHRIRSWLRQVRXWVWDQGLQJDW'HFHPEHUZDV\HDUV\HDUV\HDUV?IRU([HFXWLYH 3ODQVDQG\HDUV\HDUV\HDUV?IRU(PSOR\HH3ODQV

	2016	2015	2014
	pence	pence	pence
Weighted average share price	1.181.8	1.144.4	994 4

Options granted during the year were as follows:

	Options granted thousand	Weighted average tair value per option at grant date pence	Weighted average share price at grant date pence	Weighted average exercise price pence	Weighted average option life years
Employee Plans	1.168	301.2	1,217.0	1,026.0	3.8

The weighted average fair value of options granted under Employee Plans during 2015 was 293.9p (2014: 255.8p) and those under ing 2015 was nil (2014: nil).

Options granted under Employee Plans are valued using the Black-Scholes option model as management consider these plans are exercised within a short period of time after the vesting date.

For all plans the inputs to the option pricing models are reast. The following assumptions were used in calculating the fair value of options granted:

	Employee Plans
	2016	2015	2014
Dividend yield %	20	2.0	20
Expected volatility %¹	25.0	25.0	20.0
Risk free interest rate %2	1.3	1.3	1.3
Expected life in years	3.8	3.8	39

Volatility is assessed on a historic basis primarily based on past share price movements over the expected life of the options.

2 The risk free interest rate reflects the yields available on zero coupon government bonds over the option term and currency.

Share-based payments - long-term incentive plans

In 2004, a share-based incentive plan was introduced for Executive Officers and the next level of Senior Executives. The plan included a Performance Share Plan (PSP) and a Bonus Co-Investment Plan (CIP),

Vesting of the PSP awards is dependent upon performance relative to the FTSE 100 and an index international companies in the medical devices industry.

Under the OP, participants could elect to use up to a maximum of one-half of their annual bonus to purchase shares are held for three years and the Group's EPSA growth targets are achieved, participants receive an award of matching shares for each share purchased.

From 2009, the CP was replaced by the Deferred Bonus Plan. This plan was designed to build up and maintain a significant shareholding in the Company. Under the plan, up to ones earned at target level or above by an eligible employee was compulsonily defered into shares which vested, subject to continued employment, in equal annual tranches over three year. No further performance conditions applied to the deferred shares.

From 2010, Performance Share awards were granted under the Gobal Share Plan 2010 for all Executive Directors. Awards granted under both plans are combined to provide the figures below.

From 2012, Deferred Bonus Plan and GSP 2010 options for Executive Officers and the next level of Senior Executives were replaced by Equity Incentive Awards (EIA). EIA are designed to build up and maintain a significant shareholding in the Company. EA will vest, in equal annual tranches over three year), subject to continued employment and personal performance. No further performance conditions apply to the EIA.

The fair values of awards granted under lons are calculated using a binomial model. Performance Share awards under both the PSP and Global Share Plan 2010 contain vesting conditions based on TSR versus a comparator group which represent market-based performance conditions for valuation purposes and an assessment of vesting probability is therefored into the assumptions. The assumptions include the volatilites for the comparator groups. A correlation of 35% (2015: 35%, 2014: 40%) has also been assumed for the medical devices sector as they are impacted by similar factors. The Global Share Plan 2010 is a combination of Free Cash Flow growth, Revenue in Emerging & International Markets and the Group's TSR performance over the three-year period.

The other assumptions used are consistent with the Executive scheme assumptions disclosed earlier in this Note.

23 OTHER NOTES TO THE ACCOUNTS FRQWLQXHG

\$W'HFHPEHUWKHPD[LPXPQXPEHURIVKDUHVWKDWFRXOGEHDZDUGHGXQGHUWKH*URXSªVORQJWHUPLQFHQWLYHSODQVZDV

					1XPEHURIVKDUHVLQWKRXVDQGV
	Other \$ZDUGV	EIA	PSP	'HIHUUHG %RQXV3ODQ	7RWDO
2XWVWDQGLQJDW-DQXDU\				44
\$ZDUGHG	751			–
9HVWHG	(583)	(751)	–	(44)
)RUIHLWHG		(24)		–
2XWVWDQGLQJDW'HFHPEHU				–
\$ZDUGHG		592		–
9HVWHG				–
)RUIHLWHG	(93)	(84)	(138)	–	(315)
2XWVWDQGLQJDW'HFHPEHU				–
\$ZDUGHG	790			–
9HVWHG	(800)			–
)RUIHLWHG	(88)	(38)	(773)	–	(899)
Outstanding at 31 December 2016		998		–

2WKHUDZDUGVPDLQO\FRPSULVHVRIFRQGLWLRQDOVKDUHDZDUGVJUDQWHGXQGHUWKH*OREDO6KDUH3ODQ

7KHZHLJKWHGDYHUDJHUHPDLQLQJFRQWUDFWXDOOLIHRIDZDUGVRXWVWDQGLQJDW'HFHPEHUZDV\HDUV\HDUV\HDUV?IRUWKH363 \HDUV\HDUV\HDUV?IRUWKH(,\$DQG\HDUV\HDUV\HDUV?IRUWKHRWKHUDZDUGV

Share-based payments – charge to income statement

7KHH[SHQVHFKDUJHGWRWKHLQFRPHVWDWHPHQWIRUVKDUHEDVHGSD\PHQWVLVDVIROORZV

	PLOOLRQ	2015 PLOOLRQ	2014 PLOOLRQ
*UDQWHGLQFXUUHQW\HDU	9	11	9
*UDQWHGLQSULRU\HDUV	18	19	23
Total share-based payments expense for the year1	27	30	32

7KHWRWDOVKDUHEDVHGSD\PHQWVH[SHQVHLQFRPSULVHGPWDNHQWKURXJKUHVHUYHVDVZHOODVPFDVKVHWWOHPHQWVGXULQJWKH\HDU

8QGHUWKH([HFXWLYH3ODQV363(,\$DQG&,3WKHQXPEHURIRUGLQDU\VKDUHVRYHUZKLFKRSWLRQVDQGVKDUHDZDUGVPD\EHJUDQWHGLVOLPLWHGVRWKDWWKH QXPEHURIRUGLQDU\VKDUHVLVVXHGRUWKDWPD\EHLVVXHGGXULQJWKH\HDUVSUHFHGLQJWKHGDWHRIJUDQWVKDOOQRWH[FHHGRIWKHRUGLQDU\VKDUHFDSLWDO DWWKHGDWHRIJUDQW7KHWRWDOQXPEHURIRUGLQDU\VKDUHVZKLFKPD\EHLVVXDEOHLQDQ\HDUSHULRGXQGHUDOOVKDUHSODQVRSHUDWHGE\WKH&RPSDQ\ PD\QRWH[FHHGRIWKHRUGLQDU\VKDUHFDSLWDODWWKHGDWHRIJUDQW

23.2 Related party transactions

Trading transactions

,QWKHFRXUVHRIQRUPDORSHUDWLRQVWKH*URXSWUDGHGZLWKLWVDVVRFLDWHVGHWDLOHGLQ1RWH7KHDJJUHJDWHGWUDQVDFWLRQVZKLFKKDYHQRWEHHQGLVFORVHG HOVHZKHUHLQWKH²QDQFLDOVWDWHPHQWVDUHQLOQLOP

Key management personnel

7KHUHPXQHUDWLRQRIH[HFXWLYHRI²FHUVLQFOXGLQJ1RQ([HFXWLYH'LUHFWRUV?GXULQJWKH\HDULVVXPPDULVHGEHORZ

	PLOOLRQ	2015 PLOOLRQ	2014 PLOOLRQ
6KRUWWHUPHPSOR\HHEHQH²WV	15		14
6KDUHEDVHGSD\PHQWVH[SHQVH	7	8	8
3HQVLRQDQGSRVWHPSOR\PHQWEHQH²WHQWLWOHPHQWV	1	1	1
2WKHUEHQH²WV	–	–	3
	23	25

'LUHFWRUVªUHPXQHUDWLRQGLVFORVXUHVDUHLQFOXGHGRQSDJHVDQG

23.3 Group Companies

,QDFFRUGDQFHZLWK6HFWLRQRIWKH&RPSDQLHV\$FWDIXOOOLVWRIVXEVLGLDULHVDVVRFLDWHVMRLQWDUUDQJHPHQWVMRLQWYHQWXUHVDQGSDUWQHUVKLSV DUHOLVWHGEHORZLQFOXGLQJWKHLUFRXQWU\RILQFRUSRUDWLRQ\$OOFRPSDQLHVDUHRZQHGXQOHVVRWKHUZLVHLQGLFDWHG8QOHVVRWKHUZLVHVWDWHGWKHVKDUH FDSLWDOGLVFORVHGFRPSULVHVRUGLQDU\VKDUHVZKLFKDUHLQGLUHFWO\KHOGE\6PLWK 1HSKHZSOF

	Country of RSHUDWLRQDQG	5HJLVWHUHG
&RPSDQ\QDPH1	LQFRUSRUDWLRQ	2I²FH
UK1
%OXH%HOW7HFKQRORJLHV8./LPLWHG	(QJODQG :DOHV	/RQGRQ
0LFKHOVRQ'LDJQRVWLF/LPLWHG5	(QJODQG :DOHV	Kent
1HRWKHUL[/LPLWHG5	(QJODQG :DOHV	/RQGRQ
3OXV2UWKRSHGLFV8.?/LPLWHG4	(QJODQG :DOHV	/RQGRQ
6PLWK 1HSKHZ2YHUVHDV?/LPLWHG	(QJODQG :DOHV	/RQGRQ
6PLWK 1HSKHZ\$57&/LPLWHG	(QJODQG :DOHV	/RQGRQ
6PLWK 1HSKHZ%HWD/LPLWHG4	(QJODQG :DOHV	/RQGRQ
6PLWK 1HSKHZ&KLQD+ROGLQJV8. /LPLWHG3	(QJODQG :DOHV	/RQGRQ
6PLWK 1HSKHZ&ROODJHQDVH/LPLWHG4	(QJODQG :DOHV	+XOO
6PLWK 1HSKHZ(PSOR\HHV7UXVWHHV /LPLWHG4	(QJODQG :DOHV	/RQGRQ
6PLWK 1HSKHZ(61/LPLWHG4	(QJODQG :DOHV	/RQGRQ
6PLWK 1HSKHZ([WUXGHG)LOPV/LPLWHG4	(QJODQG :DOHV	+XOO
6PLWK 1HSKHZ)LQDQFH4	(QJODQG :DOHV	/RQGRQ
6PLWK 1HSKHZ)LQDQFH2UDWHF4	(QJODQG :DOHV	/RQGRQ
6PLWK 1HSKHZ+HDOWKFDUH/LPLWHG4	(QJODQG :DOHV	+XOO
6PLWK 1HSKHZ,QYHVWPHQW+ROGLQJV /LPLWHG3	(QJODQG :DOHV	/RQGRQ
6PLWK 1HSKHZ0HGLFDO)DEULFV/LPLWHG4	(QJODQG :DOHV	/RQGRQ
6PLWK 1HSKHZ0HGLFDO/LPLWHG4	(QJODQG :DOHV	+XOO
6PLWK 1HSKHZ1RPLQHH&RPSDQ\ /LPLWHG4	(QJODQG :DOHV	/RQGRQ
6PLWK 1HSKHZ1RPLQHH6HUYLFHV /LPLWHG4	(QJODQG :DOHV	/RQGRQ
6PLWK 1HSKHZ2UWKRSDHGLFV/LPLWHG4	(QJODQG :DOHV	/RQGRQ
6PLWK 1HSKHZ3HQVLRQV1RPLQHHV /LPLWHG4	(QJODQG :DOHV	/RQGRQ
6PLWK 1HSKHZ3KDUPDFHXWLFDOV/LPLWHG4	(QJODQG :DOHV	+XOO
6PLWK 1HSKHZ5DLVHJUDGH/LPLWHG	(QJODQG :DOHV	/RQGRQ
6PLWK 1HSKHZ5DUHOHWWHU/LPLWHG4	(QJODQG :DOHV	/RQGRQ
6PLWK 1HSKHZ7UDGLQJ*URXS/LPLWHG3	(QJODQG :DOHV	/RQGRQ
6PLWK 1HSKHZ8.([HFXWLYH3HQVLRQ 6FKHPH7UXVWHH/LPLWHG4	(QJODQG :DOHV	/RQGRQ
6PLWK 1HSKHZ8./LPLWHG	(QJODQG :DOHV	/RQGRQ
6PLWK 1HSKHZ8.3HQVLRQ)XQG 7UXVWHHŸ/LPLWHG4	(QJODQG :DOHV	/RQGRQ
6PLWK 1HSKHZ86'/LPLWHG3	(QJODQG :DOHV	/RQGRQ
6PLWK 1HSKHZ86'2QH/LPLWHG3	(QJODQG :DOHV	/RQGRQ
7-6PLWKDQG1HSKHZ/LPLWHG3	(QJODQG :DOHV	+XOO
7KH\$OELRQ6RDS&RPSDQ\/LPLWHG4	(QJODQG :DOHV	/RQGRQ
73/LPLWHG3	6FRWODQG	(GLQEXUJK

Rest of Europe1
-----------------	--	--	--	--

6PLWK 1HSKHZ*PE+	\$XVWULD	9LHQQD
\$UWKUR&DUH%HOJLXP635/4	%HOJLXP	=DYHQWHP
6PLWK 1HSKHZ6\$19	%HOJLXP	=DYHQWHP
6PLWK 1HSKHZ\$6	'HQPDUN	+RHUVKROP
6PLWK 1HSKHZ)UDQFH6\$63	France	Le Mans
6PLWK 1HSKHZ6\$6	France	Le Mans
\$6XUJLFDO	France	Le Mans
6PLWK 1HSKHZ2\	)LQODQG	+HOVLQNL

&RPSDQ\QDPH1	Country of RSHUDWLRQDQG LQFRUSRUDWLRQ	5HJLVWHUHG 2I²FH
6PLWK 1HSKHZ%XVLQHVV6HUYLFHV PE+Ÿ &R.3	*HUPDQ\	+DPEXUJ
6PLWK 1HSKHZ%XVLQHVV6HUYLFHV 9HUZDOWXQJV*PE+3	*HUPDQ\	+DPEXUJ
6PLWK 1HSKHZ'HXWVFKODQG+ROGLQJ *PE+3	*HUPDQ\	+DPEXUJ
6PLWK 1HSKHZ*PE+	*HUPDQ\	+DPEXUJ
6PLWK 1HSKHZ2UWKRSDHGLFV*PE+	*HUPDQ\	7XWWOLQJHQ
3OXV2UWKRSHGLFV+HOODV6\$	Greece	Athens
6PLWK 1HSKHZ+HOODV6\$	Greece	Athens
6PLWK 1HSKHZ/LPLWHG	,UHODQG	'XEOLQ
6PLWK 1HSKHZ)LQDQFH,UHODQG/LPLWHG	,UHODQG	'XEOLQ
6PLWK 1HSKHZ6UO3	,WDO\	0LODQ
\$UWKUR&DUH/X[HPERXUJ6DUO3 4	/X[HPERXUJ	/X[HPERXUJ
6PLWK 1HSKHZ)LQDQFH6DUO3	/X[HPERXUJ	/X[HPERXUJ
6PLWK 1HSKHZ,QWHUQDWLRQDO6\$3	/X[HPERXUJ	/X[HPERXUJ
6PLWK 1HSKHZ(XURSH?%93	1HWKHUODQGV	\$PVWHUGDP
6PLWK 1HSKHZ%93	1HWKHUODQGV	\$PVWHUGDP
6PLWK 1HSKHZ0DQDJHPHQW%93	1HWKHUODQGV	\$PVWHUGDP
6PLWK 1HSKHZ1HGHUODQG&9	1HWKHUODQGV	\$PVWHUGDP
6PLWK 1HSKHZ2SWLFV%94	1HWKHUODQGV	\$PVWHUGDP
6PLWK 1HSKHZ\$6	1RUZD\	2VOR
6PLWK 1HSKHZVS]RR	3RODQG	:DUVDZ
6PLWK 1HSKHZ/GD	3RUWXJDO	/LVERQ
'2UWKRSDHGLFV//&	5XVVLDQ)HGHUDWLRQ	0RVFRZ
LLC DC	5XVVLDQ)HGHUDWLRQ	3XVFKLQR
//&6PLWK 1HSKHZ	5XVVLDQ)HGHUDWLRQ	0RVFRZ
6PLWK 1HSKHZ6\$8	6SDLQ	%DUFHORQD
6PLWK 1HSKHZ\$WNLHERODJ3	6ZHGHQ	0ROQGDO
/XPLQD\$GKHVLYHV\$%5	6ZHGHQ	*RWKHQEHUJ
3OXV2UWKRSHGLFV+ROGLQJ\$*3	6ZLW]HUODQG	Baar
6PLWK 1HSKHZ0DQXIDFWXULQJ\$*	6ZLW]HUODQG	Aarau
6PLWK 1HSKHZ2UWKRSDHGLFV\$*3	6ZLW]HUODQG	Baar
6PLWK 1HSKHZ6FKZHL]\$*	6ZLW]HUODQG	Baar
6PLWK 1HSKHZ\$*	6ZLW]HUODQG	Baar

US1

\$UWKURFDUH&RUSRUDWLRQ3	8QLWHG6WDWHV	San Jose
%LRYHQWXV//&5	8QLWHG6WDWHV	:LOPLQJWRQ
%OXH%HOW+ROGLQJV,QF3	8QLWHG6WDWHV	0LQQHDSROLV
%OXH%HOW7HFKQRORJLHV,QF3	8QLWHG6WDWHV	3LWWVEXUJK
%OXH6N\0HGLFDO*URXS,QF	8QLWHG6WDWHV	:LOPLQJWRQ
'HOSKL9HQWXUHV9/35	8QLWHG6WDWHV	0HQOR3DUN
+HDOLFRLO,QF	8QLWHG6WDWHV	:LOPLQJWRQ
+LSFR,QF	8QLWHG6WDWHV	:LOPLQJWRQ
.DO\SWR0HGLFDO,QF	8QLWHG6WDWHV	:LOPLQJWRQ
/LIH0RGHOHU,QF	8QLWHG6WDWHV	7XVWLQ
0HPSKLV%LRPHG9HQWXUHV,/35	8QLWHG6WDWHV	'HODZDUH
2UDWHF,QWHUYHQWLRQV,QF	8QLWHG6WDWHV	&RQFRUG
2UWKRSDHGLF%LRV\VWHPV/WG,QF	8QLWHG6WDWHV	3KRHQL[
2VWHR%LRORJLFV,QF	8QLWHG6WDWHV	'DOODV
3OXV2UWKRSHGLFV//&	8QLWHG6WDWHV	\$QGRYHU

23 OTHER NOTES TO THE ACCOUNTS FRQWLQXHG

&RPSDQ\QDPH1	Country of RSHUDWLRQDQG LQFRUSRUDWLRQ	5HJLVWHUHG 2I²FH
6LQRSV\V6XUJLFDO,QF5	8QLWHG6WDWHV	%RXOGHU
6PLWK 1HSKHZ\$+3,QF4	8QLWHG6WDWHV	:LOPLQJWRQ
6PLWK 1HSKHZ&RQVROLGDWHG,QF	8QLWHG6WDWHV	\$PVWHUGDP
6PLWK 1HSKHZ286,QF3	8QLWHG6WDWHV	:LOPLQJWRQ
6PLWK 1HSKHZ,QF3	8QLWHG6WDWHV	:LOPLQJWRQ
6XUJLFDO)URQWLHUV6HULHV,//&5	8QLWHG6WDWHV	'RYHU

&RPSDQ\QDPH1	Country of RSHUDWLRQDQG LQFRUSRUDWLRQ	5HJLVWHUHG 2I²FH
,&(0%(0HGLFDOSW\?/WG5	6RXWK\$IULFD	3LQHWRZQ
6PLWK 1HSKHZ3W\?/LPLWHG3	6RXWK\$IULFD	:HVWYLOOH
6PLWK 1HSKHZ3KDUPDFHXWLFDOV 3URSULHWDU\?/LPLWHG	6RXWK\$IULFD	:HVWYLOOH
6PLWK 1HSKHZ/LPLWHG	7KDLODQG	+XDL.KZDQJ 'LVWULFW %DQJNRN
6UL6LDP0HGLFDO/LPLWHG	7KDLODQG	/XPSLQL 3KDWXPZDQ %DQJNRN
6PLWKYH1HSKHZ0HGLNDO&LKD]ODU7LFDUHW /LPLWHG6LUNHWL	7XUNH\	6DUL\HU ,VWDQEXO
6PLWK 1HSKHZ)=(	8QLWHG\$UDE(PLUDWHV	-HEHO\$OL 'XEDL

Africa, Asia, Australasia and Other America1

6PLWK 1HSKHZ\$UJHQWLQD65/4	\$UJHQWLQD	%XHQRV\$LUHV
\$UWKUR&DUH\$XVWUDODVLD?3W\/WG4	\$XVWUDOLD	1RUWK5\GH
6PLWK 1HSKHZ3W\/LPLWHG	\$XVWUDOLD	1RUWK5\GH
6PLWK 1HSKHZ6XUJLFDO+ROGLQJV 3W\Ÿ/LPLWHG	\$XVWUDOLD	1RUWK5\GH
6PLWK 1HSKHZ6XUJLFDO3W\/LPLWHG	\$XVWUDOLD	1RUWK5\GH
6PLWK 1HSKHZ&RPHUFLRGH3URGXWRV 0HGLFRV/7'\$	%UD]LO	6mR3DXOR
6PLWK 1HSKHZGR%UDVLO3DUWLFLSDFRHV 6\$3	%UD]LO	6mR3DXOR
6PLWK 1HSKHZ\$OEHUWD?,QF	&DQDGD	&DOJDU\
6PLWK 1HSKHZ,QF3	&DQDGD	Toronto
7HQHW0HGLFDO(QJLQHHULQJ,QF	&DQDGD	&DOJDU\
6PLWK 1HSKHZ)LQDQFH+ROGLQJV/LPLWHG	&D\PDQ,VODQGV	6RXWK&KXUFKŸ 6WUHHW *HRUJHŸ7RZQ
6PLWK 1HSKHZ0HGLFDO 6KDQJKDL?Ÿ/LPLWHG3	&KLQD	6KDQJKDL )UHHŸ7UDGH 7HVWŸ=RQH
6PLWK 1HSKHZ0HGLFDO6X]KRX?Ÿ/LPLWHG	&KLQD	6X]KRX&LW\
6PLWK 1HSKHZ2UWKRSDHGLFV%HLMLQJ &R/WG	&KLQD	%HLMLQJ (FRQRPLF DQG7HFKQLFDO 'HYHORSPHQW Area
6 1+ROGLQJV6\$63	&RORPELD	%RJRWD
6PLWK 1HSKHZ&RORPELD6\$6	&RORPELD	%RJRWD
\$UWKUR&DUH&RVWD5LFD6UO	&RVWD5LFD	&RVWD5LFD
6PLWK 1HSKHZ&XUDoDR19	&XUDoDR	:LOOHPVWDG
6PLWK 1HSKHZ%HLMLQJ+ROGLQJV/LPLWHG3	+RQJ.RQJ	'HOWD+RXVH +RQJ.RQJ
6PLWK 1HSKHZ/LPLWHG3	+RQJ.RQJ	'HOWD+RXVH +RQJ.RQJ
6PLWK 1HSKHZ6X]KRX+ROGLQJV/LPLWHG3	+RQJ.RQJ	'HOWD+RXVH +RQJ.RQJ
\$GOHU0HGLHTXLS3ULYDWH/LPLWHG	,QGLD	Pune
6PLWK 1HSKHZ+HDOWKFDUH3ULYDWHŸ/LPLWHG	,QGLD	0XPEDL
2UWKR6SDFH/WG5	,VUDHO	Caesarea
6PLWK 1HSKHZ(QGRVFRS\	Japan	7RN\R
6PLWK 1HSKHZ	Japan	7RN\R
6PLWK 1HSKHZ2UWKRSDHGLFV3	Japan	7RN\R
6PLWK 1HSKHZ:RXQG0DQDJHPHQW	Japan	7RN\R
6PLWK 1HSKHZ&KXVLN+RHVLD	.RUHD5HSXEOLFRI	6HRXO
6PLWK 1HSKHZ+HDOWKFDUH6GQŸ%HUKDG	0DOD\VLD	.XDOD/XPSXU
6PLWK 1HSKHZ6\$GH&9	0H[LFR	0H[LFR&LW\
6PLWK 1HSKHZ/LPLWHG	1HZ=HDODQG	\$XFNODQG
6PLWK 1HSKHZ,QF	3XHUWR5LFR	San Juan
6PLWK 1HSKHZ3WH/LPLWHG3	6LQJDSRUH	6LQJDSRUH

7KHDFWLYLW\RIDOOFRPSDQLHVOLVWHGDERYHLVWKHSURYLVLRQRIPHGLFDOGHYLFHVXQOHVV LQGLFDWHGRWKHUZLVH

'LUHFWO\RZQHGE\6PLWK 1HSKHZSOF

+ROGLQJFRPSDQ\

'RUPDQWFRPSDQ\

1RWRZQHGE\6PLWK 1HSKHZ*URXS

Registered Office addresses
UK
London	15 Adam Street, London, WC2N 6LA
Kent	Ground Floor, Eclipse House, Eclipse Park, Sittingbourne Road, Maidstone, Kent, ME14 3EN
Hull	101 Hessle Road, Hull, HU3 2BN
Edinburgh	4th Floor, 115 George Street, Edinburgh, EH2 4JN

Rest of Europe
Vienna	Concorde Business Park, 1/C/3 2320, Schwechat, Austria
Zaventem	Hector Heenneaulaan 366, 1930 Zaventem, Belgium
Hoersholm	Slotsmarken 14, Hoersholm, DK-2970, Denmark
Le Mans	25 Boulevard Marie et Alexandre, Oyon, 72100, Le Mans, France
Helsinki	Ayritie 12 C, 01510, Vantaa, Finland
Hamburg	Friesenweg 4, Haus 21, 22763, Hamburg, Germany
Tuttlingen	Alemannenstrasse 14, 78532, Tuttlingen, Germany
Athens	Protopappa Street 43, GR 16346, Ilioupoli, Athens, Greece
Dublin 1	3rd Floor, Kilmore House, Park Lane, Spencer Dock, Dublin 1, Ireland
Dublin 2	Molyneux House, Bride Street, Dublin 2, Ireland
Milan	Via de Capitani 2A, 20864, Agrate Brianza (MI), Italy
Luxembourg	163, Rue de Kiem, L-8030 Strassen, Luxembourg
Amsterdam	Kruisweg 637, 2132 NB Hoofddorp, The Netherlands
Oslo	Nye Vakas vei 64, 1395, Hvalsted, Norway
Warsaw	Ul Osmanska 12, 02-823, Warsaw, Poland
Lisbon	Estrada Nacional no 10 ao Km. 131, Parque Tejo - Bloco C, 2625-445 Forte de Casa, Vila Franca de Xira, Portugal
Moscow	9a, Bld, 10, 2nd Sinichkina Street, Moscow 111020, Russian Federation
Puschino	8/1 Stroiteley Street, 142290, City of Puschino, Moscow Region, Russian Federation
Barcelona	Edificio Conata I, c/ Fructuos Gelabert 2 y 4, San Joan Despi - 08970, Barcelona, Spain
Molndal	PO Box 143, S-431 22 Molndal, Sweden
Baar	Oberneuhofstr 10d, Baar, 6340
Aarau	Schachenallee 29, 5000, Aarau, Switzerland
Gothenburg	Varbergsgatan 2A / 412 65 Göteborg / Sweden
ાં તિ

ﮐ
San Jose	595 North Pastoria Avenue, Sunnyvale, California, 94086, USA
Minneapolis	2905 Northwest Blvd, Suite 40, Plymouth MN 55441, United States
Pittsburgh	2828 Liberty Ave, Suite 100, Pittsburgh PA 15222, United States

Registered Office addresses
Boulder	5480 Valmont Road, Suite 215, Boulder, Colorado, 90301
Wilmington	CT Corporation, 1209 Orange Street, Wilmington DE 19801, United States
Concord	C T Corporation, 9 Capitol Street, Concord, New Hampshire, 03301, USA
Phoenix	CT Corporation System, 3225 North Central Avenue, Phoenix AZ 85012, United States
Dallas	CT Corporation System, 350 North St. Paul Street, Dallas TX 75201, United States
Andover	150 Minuteman Road, Andover, MA, 01810, United States
Menlo Park	3000 Sand Hill Road, Building 1, Suite 135, Melo Park, California, 94025
Memphis	6075 Poplar Avenue, Suite 335, Memphis, Tennessee, 38119
Tustin	3002 Dow Avenue, Building 100, Unit 138, Tustin, California, 92780
Dover	160 Greentree Drive, Suite 101, Dover, Delaware, 19904

Africa, Asia, Australasia and Other America

Buenos Aires	Maipu 1300, 13th Floor, City of Buenos Aires, Argentina
North Ryde	85 Waterloo Road, North Ryde NSW 2113, Australia
São Paulo	Avenida do Cafe, 277, Centro Empresarial do Aco, Centro Empresarial do Aco, Torre B, 4 andar, conjuto, CEP 04311-000, São Paulo 403, Jabaquara, Brazil
Calgary	3500-855-2 Street SW, Calgary AB AB T2P 4J8, Canada
Toronto	199, Bay Street, 4000, Toronto, Ontario M5L 1A9, Canada
Shedden Road, Georgetown	Chartered Trust Services Limited, One Capital Place, Shedden Road, PO Box 1034 GT, Grand Cayman, Cayman Islands
South Church Street, Georgetown	c/o M&C Corporate Services Limited, Ugland House, South Church Street, P.O. Box 309, George Town, Grand Cayman, Cayman Islands
Chao Yang District, Beijing	Room 17-021, Internal B17 floor, B3-24th floor, No 3 Xin Yuan South Rd, Chao Yang District, Beijing, China
Shunyi District, Beijing	22 Linhe Avenue, Linhe Economic Development Zone, Shunyi District, Beijing, 101300, China
East City, Beijing	No. B-D, Floor 2, A Building, Beijing East Gate Plaza, No. 9, Dong Zhong Street, East City, Beijing, China
Guangzhou	Room 2502 No 33, 6th Jian She Rd, Yue Xiu District, Guangzhou, China
Shanghai	Room 1208-1209, No 168 Middle Xi Zang Rd, Shanghai, China
Shanghai Free Trade Test Zone	Part B, 4th Floor, Tong Yong Building, No 188 Ao Na Rd, Shanghai Free Trade Test Zone, Shanghai, China
Dong Cheng District, Beijing	Unit B1, 2/F, Tower A, East Gate Plaza No.9, Dongshong Street, Dong Cheng District, Beijing, China
Chengdu	No 5. 15th Floor, Unit 1, Building, 1 Li Bao Building, No 62 North Ke Hua Rd, Wu Hou District, Chengdu, China

23 OTHER NOTES TO THE ACCOUNTS continued

Registered Office addresses
Middle Xi Zang Rd, Shanghai	Room 1201-1207, No168 Middle Xi Zang Rd, Shanghai, China 12, Wuxiang Road, West Area of Comprehensive Bonded Zone, Suzhou Industrial Park, Suzhou City, SIP, Jiangsu Province, China
Suzhou City
Beijing Economic and Technical Development Area	No. 98 Kechuang Dongliujie, Beijing Economic and Technical Development Area, Beijing, China
Bogota	Calle 100 No. 7 - 33 to 1 P3, Bogota D.C., 0, Colombia
Costa Rica	Heredia-Heredia Aurora, Free Zone Global Park, Building 200, Costa Rica
Willemstad	Pietermaai 15, PO Box 4905, Curaçao
Delta House, Hong Kong	Unit 813 - 816, 8/F, Delta House, 3 On Yiu Street, Shatin, New Territories, Hong Kong
Pune	Sushrut House, Survey no.288, Phase II next to MIDC, Hinjewadi, at Mann, Taluka Mulshi, Pune, 411057, India
Mumbai	5A, Bakhtawar, 5th Floor, behind The Oberoi, Nariman Point, Mumbai, Maharashtra, 400021, India
Mumbai-59	501-B - 509-B Dynasty Business Park, Andheri Kurla Road, Andheri East, Mumbai-59, Maharashtra, India
Caesarea	7 Halamarish, Caesarea, 3088900, Israel
Tokyo	2-4-1, Shiba -Koen, Minato-Ku, Tokyo 105-0011, Japan
Seoul	13th Floor, ASEM Tower, Gangnam-gu 13th Floor, ASEM Tower, 159-1 Samsung-dong, Seoul, Korea
Kuala Lumpur	Suite 11.01 B & 11.02 Level 11, Menara AmFIRST, No 1 Jalan 19/3 46300 Petaling Jaya, Selangor, Malaysia

Registered Office addresses
Mexico City	Av. Insurgentes Sur, numero 1602, Piso No.7, Oficina 702, Colonia Credito, Constructor, Delegacion Benito Juarez, C.P. 03940, Mexico
Auckland	621 Rosebank Road, Avondale, Auckland 6, New Zealand
San Juan	Edificio Cesar Castillo, Calle Angel Buonomo #361, Hato Rey, 00917, Puerto Rico
Singapore	50 Raffles Place, #32-01 Singapore Land Tower, 048623, Singapore
Pinetown	30 Gillitts Road, Pinetown, 3600, South Africa
Westville	30 The Boulevard, Westway Office Park, Westville, 3629, South Africa
Huai Khwang District, Bangkok	16th Floor Building A, 9th Tower Grand Rama 9, 33/4 Rama 9 Road, Huai Khwang District, Bangkok, 10310, Thailand
Lumpini Phatumwan, Bangkok	16th Floor, GPF Witthayu Tower A, 93/1 Wireless Road, Lumpini, Phatumwan, Bangkok, 10330, Thailand
Ankara	Mebusevleri Mah. Ergin Sk. No:24, 2 Çankaya, Ankara, Turkey
Sariyer, İstanbul	Bahcekoy Mah., Orkide Sok., No:8/E Bahcekoy, Sariyer Istanbil, Turkey
Bagcilar, Istanbul	Mahmutbey Mah. 16 Yol Sok., No: 127/1 DPL+ASM Bagcilar, Istanbul, Turkey
Jebel Ali, Dubai	PO Box 16993 LB02016, Jebel Ali, Dubai, United Arab Emirates
Dubai Health Centre, Dubai	401-404 & 406-407, Floor 4. B-47 Dubai Health Centre, Dubai, United Arab Emirates

COMPANY FINANCIAL STATEMENTS

COMPANY BALANCE SHEET

	At 31 December	At 31 December
Notes	2016 \$ million	2015 \$ million
Fixed assets:
Investments 3	5,322	5,322
Current assets:
Debtors 4	824	2,234
Cash and bank 6	14	47
	838	2,281
Creditors: amounts falling due within one year:
Borrowings 6	(41)	(3)
Other creditors 5	(814)	(1,881)
	(855)	(1,884)
Net current (liabilities)/assets	(17)	397
Total assets less current liabilities	5,305	5,719
Creditors: amounts falling due after one year:
Borrowings 6	(1,559)	(1,425)
Total assets less total liabilities	3,746	4,294
Equity shareholders' funds:
Called up equity share capital	180	183
Share premium account	600	590
Capital redemption reserve	15	12
Capital reserve	2,266	2,266
Treasury shares	(432)	(294)
Exchange reserve	(52)	(52)
3UR²WDQGORVVDFFRXQW	1,169	1,589
Shareholders' funds	3,746	4,294

The accounts were approved by the Board and authorised for issue on 22 February 2017 and signed on its behalf by:

&KDLUPDQ &KLHI([HFXWLYH2I²FHU

Roberto Quarta Olivier Bohuon

THE PARENT COMPANY FINANCIAL STATEMENTS OF SMITH & NEPHEW PLC ON PAGES 165 TO 168 DO NOT FORM PART OF THE SMITH & NEPHEW'S ANNUAL REPORT ON FORM 20-F AS FILED WITH THE SEC.

COMPANY FINANCIAL STATEMENTS

STATEMENT OF CHANGES IN EQUITY

								2016	2015
	Share capital \$ million	Share premium \$ million	Capital redemption reserve \$ million	Capital reserves \$ million	Treasury shares \$ million	Exchange reserves \$ million	3UR²WDQG loss account \$ million	Total shareholders' funds \$ million	Total shareholders' funds \$ million
At 1 January	183	590	12	2,266	(294)	(52)	1,589	4,294	4,484
\$WWULEXWDEOHSUR²WIRUWKH\HDU	–	–	–	–	–	–	58	58	107
1HWJDLQRQFDVK³RZKHGJHV	–	–	–	–	–	–	1	1	1
Exchange adjustments	–	–	–	–	–	–	(3)	(3)	1
Equity dividends paid in the year	–	–	–	–	–	–	(279)	(279)	(272)
Share-based payments recognised	–	–	–	–	–	–	27	27	29
Cost of shares transferred to EHQH²FLDULHV	–	–	–	–	40	–	(34)	6	5
New shares issued on exercise of share options	–	10	–	–	–	–	–	10	16
Cancellation of treasury shares	(3)	–	3	–	190	–	(190)	–	–
Treasury shares purchased	–	–	–	–	(368)	–	–	(368)	(77)
At 31 December	180	600	15	2,266	(432)	(52)	1,169	3,746	4,294

Further information on the share capital of the Company can be found in Note 19.1 of the Notes to the Group accounts.

The total distributable reserves of the Company are \$685m (2015: \$1,243m). In accordance with the exemption permitted by Section 408 of the &RPSDQLHV\$FWWKH&RPSDQ\KDVQRWSUHVHQWHGLWVRZQSUR²WDQGORVVDFFRXQW7KHDWWULEXWDEOHSUR²WIRUWKH\HDUGHDOWZLWKLQWKHDFFRXQWV RIWKH&RPSDQ\LVPP

)HHVSDLGWR.30*//3IRUDXGLWDQGQRQDXGLWVHUYLFHVWRWKH&RPSDQ\LWVHOIDUHQRWGLVFORVHGLQWKHLQGLYLGXDODFFRXQWVEHFDXVH*URXS²QDQFLDO statements are prepared which are required to disclose such fees on a consolidated basis. The fees for the consolidated Group are disclosed in 1RWHRIWKH1RWHVWRWKH*URXSDFFRXQWV

167 SMITH & NEPHEW ANNUAL REPORT 2016 WWW.SMITH-NEPHEW.COM

NOTES TO THE COMPANY ACCOUNTS

1 BASIS OF PREPARATION

Smith & Nephew plc (the Company) is a public limited company incorporated in England and Wales.

The separate accounts of the Company are presented as required by the Companies Act 2006. On 1 January 2015, the Company transitioned from previously extant UK Generally Accepted Accounting Practices to Financial Reporting Standard 101 Reduced Disclosure Framework ('Reduced Disclosure )UDPHZRUNª?7KHVH²QDQFLDOVWDWHPHQWVDQGDFFRPSDQ\LQJQRWHVKDYHEHHQSUHSDUHGLQDFFRUGDQFHZLWKWKH5HGXFHG'LVFORVXUH)UDPHZRUNIRUDOO SHULRGVSUHVHQWHG7KHUHZHUHQRWUDQVLWLRQDODGMXVWPHQWVUHTXLUHGRQDGRSWLRQRIWKHQHZVWDQGDUG7KH²QDQFLDOLQIRUPDWLRQIRUWKH&RPSDQ\KDV EHHQSUHSDUHGRQWKHVDPHEDVLVDVWKHFRQVROLGDWHG²QDQFLDOVWDWHPHQWVDSSO\LQJLGHQWLFDODFFRXQWLQJSROLFLHVDVRXWOLQHGWKURXJKRXWWKH1RWHVWRWKH *URXSDFFRXQWV7KHGLUHFWRUVKDYHGHWHUPLQHGWKDWWKHSUHSDUDWLRQRIWKH&RPSDQ\²QDQFLDOVWDWHPHQWVRQDJRLQJFRQFHUQEDVLVLVDSSURSULDWHDVWKH Company receives dividend cash receipts from its subsidiary undertakings which enable it to meet its liabilities as they fall due.

In applying these policies, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the accounts and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of current events and actions, actual results ultimately may differ from those estimates.

,QWKHVH²QDQFLDOVWDWHPHQWVWKH&RPSDQ\KDVDSSOLHGWKHH[HPSWLRQVDYDLODEOHXQGHU)56LQUHVSHFWRIWKHIROORZLQJGLVFORVXUHV

ç A Cash Flow Statement and related notes;
ç &RPSDUDWLYHSHULRGUHFRQFLOLDWLRQVIRUVKDUHFDSLWDODQGWDQJLEOH²[HGDVVHWV
ç Disclosures in respect of transactions with wholly-owned subsidiaries;
ç Disclosures in respect of capital management;
ç The effects of new but not yet effective IFRSs; and
ç Disclosures in respect of the compensation of key management personnel.

\$VWKHFRQVROLGDWHG²QDQFLDOVWDWHPHQWVLQFOXGHWKHHTXLYDOHQWGLVFORVXUHVWKH&RPSDQ\KDVDOVRWDNHQWKHH[HPSWLRQVXQGHU)56DYDLODEOHLQ respect of the following disclosures:

ç FRS 2 Share Based Payments in respect of group settled share based payments; and
ç Certain disclosures required by IFRS 13 Fair Value Measurement and the disclosures required by IFRS 7 Financial Instrument Disclosures.

7KH&RPSDQ\SURSRVHVWRFRQWLQXHWRDGRSWWKHUHGXFHGGLVFORVXUHIUDPHZRUNRI)56LQLWVQH[W²QDQFLDOVWDWHPHQWV

2 RESULTS FOR THE YEAR

\$VSHUPLWWHGE\6HFWLRQ?RIWKH&RPSDQLHV\$FWWKH&RPSDQ\KDVQRWSUHVHQWHGLWVRZQSUR²WDQGORVVDFFRXQW3UR²WIRUWKH\HDUZDVP (2015: \$107m).

3 INVESTMENTS

ACCOUNTING POLICY

Investments in subsidiaries are stated at cost less provision for impairment.

	2016	2015
	\$ million	\$ million
At 1 January and 31 December	5,322	5,322

Investments represent holdings in subsidiary undertakings.

In accordance with Section 409 of the Companies Act 2006, a listing of all entities invested in by the consolidated Group is provided in Note 23.3 of the Notes to the Group Accounts. Entities directly owned by Smith & Nephew plc are highlighted in that section.

4 DEBTORS

	2016 \$ million	2015 \$ million
Amounts falling due within one year:
Amounts owed by subsidiary undertakings	735	2,169
Prepayments and accrued income	3	5
Current asset derivatives – forward foreign exchange contracts	45	30
Current asset derivatives – forward foreign exchange contracts – subsidiary undertakings	36	21
Current asset derivatives – currency swaps	1	–
Current taxation	4	9
	824	2,234

NOTES TO THE COMPANY ACCOUNTS

5 OTHER CREDITORS

	2016 \$ million	2015 \$ million
Amounts falling due within one year:
Amounts owed to subsidiary undertakings	715	1,813
Other creditors	17	15
Current liability derivatives – forward foreign exchange contracts	36	21
Current liability derivatives – forward foreign exchange contracts – subsidiary undertakings	45	30
Current liability derivatives – currency swaps	–	2
Current liability derivatives – interest rate swaps	1	–
	814	1,881

6 CASH AND BORROWINGS

ACCOUNTING POLICY

Financial instruments

Currency swaps are used to match foreign currency net assets with foreign currency liabilities. They are initially recorded at fair value and then for reporting purposes remeasured to fair value at exchange rates and interest rates at subsequent balance sheet dates.

&KDQJHVLQWKHIDLUYDOXHRIGHULYDWLYH²QDQFLDOLQVWUXPHQWVDUHUHFRJQLVHGLQWKHSUR²WDQGORVVDFFRXQWDVWKH\DULVH

	2016	2015
	\$ million	\$ million
Bank loans and overdrafts due within one year or on demand	41	3
Bank loans due after one year	1,559	1,425
Borrowings	1,600	1,428
Cash and bank	(14)	(47)
Credit balance on derivatives – forward exchange contracts and currency swaps	1	2
Interest rate swaps	(1)	–
Net debt	1,586	1,383

All currency swaps are stated at fair value. Gross US Dollar equivalents of \$449m (2015: \$368m) receivable and \$448m (2015: \$370m) payable have been netted. Currency swaps comprise foreign exchange swaps and were used in 2016 and 2015 to hedge intra-group loans.

7 SHARE-BASED PAYMENTS

The Company operates a number of equity-settled executive and employee share plans. For all grants of share options and awards, the fair value as at the date of grant is calculated using an appropriate option pricing model and the corresponding expense is recognised over the vesting period. Subsidiary companies are recharged for the fair value of share options that relate to their employees.

The disclosure relating to the Company is detailed in Note 23.1 of the Notes to the Group accounts.

8 CONTINGENCIES

	2016 \$ million	2015 \$ million
Guarantees in respect of subsidiary undertakings	–	–

The Company gives guarantees to banks to support liabilities and cross guarantees to support overdrafts.

7KH&RPSDQ\RSHUDWHGGH²QHGEHQH²WSHQVLRQSODQVLQEXWDWWKHHQGRILWVSHQVLRQSODQREOLJDWLRQVZHUHWUDQVIHUUHGWR6PLWK 1HSKHZ UK Limited. The Company has provided guarantees to the trustees of the pension plans to support future amounts due from participating employers (see Note 18 of the Notes to the Group accounts).

169 SMITH & NEPHEW ANNUAL REPORT 2016 WWW.SMITH-NEPHEW.COM

GROUP INFORMATION

BUSINESS OVERVIEW AND GROUP HISTORY

Smith & Nephew's operations are organised into geographical selling regions and product franchises within the medical technology industry.

The Group has a history dating back 160 years to the family enterprise of Thomas James Smith who opened a small pharmacy in Hull, UK in 1856. Following his death in 1896, his nephew Horatio Nelson Smith took over the management of the business.

By the late 1990s, Smith & Nephew had expanded into being a diverse healthcare conglomerate with operations across the globe, producing YDULRXVPHGLFDOGHYLFHVSHUVRQDOFDUHSURGXFWVDQGWUDGLWLRQDODQGDGYDQFHGZRXQGFDUHWUHDWPHQWV,Q6PLWK 1HSKHZDQQRXQFHGD major restructuring to focus management attention and investment on three global business units – Advanced Wound Management, Endoscopy and Orthopaedics – which offered high growth and margin opportunities. In 2011, the Endoscopy and Orthopaedics businesses were brought together to create an Advanced Surgical Devices division. In 2015, the Advanced Wound Management and Advanced Surgical Devices divisions were brought together to form a global business across nine product franchises, managed as three geographical selling regions with global functions for operations, R&D and corporate support functions.

Smith & Nephew was incorporated and listed on the London Stock Exchange in 1937 and in 1999 the Group was also listed on the New York Stock Exchange. In 2001, Smith & Nephew became a constituent member of the FTSE 100 index in the UK. This means that Smith & Nephew is included LQWKHWRSFRPSDQLHVWUDGHGRQWKH/RQGRQ6WRFN([FKDQJHPHDVXUHGLQWHUPVRIPDUNHWFDSLWDOLVDWLRQ

Today, Smith & Nephew is a public limited company incorporated and headquartered in the UK and carries out business around the world.

PROPERTY, PLANT AND EQUIPMENT

The table below summarises the main properties which the Group uses and their approximate areas.

	Approximate area (square feet 000's)
*URXSKHDGRI²FHLQ/RQGRQ8.	22
2I²FHDQGVXUJLFDOWUDLQLQJIDFLOLW\LQ&UR[OH\3DUN:DWIRUG8.	60
Regional headquarters in Andover, Massachusetts, US	144
0DQXIDFWXULQJUHVHDUFKDQGRI²FHIDFLOLW\LQ+XOO8.	473
0DQXIDFWXULQJDQGRI²FHIDFLOLWLHVLQ0HPSKLV7HQQHVVHH86	968
Distribution facility in Memphis, Tennessee, US	248
Manufacturing facility in Aarau, Switzerland	121
Manufacturing facility in Beijing, China	192
Manufacturing facility in Tuttlingen, Germany	50
Distribution facility and regional headquarters in Baar, Switzerland	71
0DQXIDFWXULQJIDFLOLW\LQ0DQV²HOG0DVVDFKXVHWWV86	98
Manufacturing facility in Oklahoma City, Oklahoma, US	155
0DQXIDFWXULQJUHVHDUFKDQGRI²FHIDFLOLW\LQ\$XVWLQ7H[DV86	157
Manufacturing facilities in La Aurora and Alajuela, Costa Rica	292
Research facility in Irvine, California, US	23
Manufacturing facility in Devrukh, India	74
Manufacturing facility in Suzhou, China	288
Bioactives headquarters and laboratory space in Fort Worth, Texas, US	165
Manufacturing facility in Curaçao, Dutch Caribbean	16

The Group Global Operations strategy includes ongoing assessment of the optimal facility footprint. The Advanced Surgical Devices manufacturing facilities in Memphis, Tennessee are largely freehold, a portion of Tuttlingen and the Advanced Wound Management facilities in Hull are freehold while other principal locations are leasehold. The Group has freehold and leasehold interests in real estate in other countries throughout the world, but no other LVLQGLYLGXDOO\VLJQL²FDQWWRWKH*URXS:KHUHUHTXLUHGWKHDSSURSULDWHJRYHUQPHQWDODXWKRULWLHVKDYHDSSURYHGWKHIDFLOLWLHV

OFF-BALANCE SHEET ARRANGEMENTS

0DQDJHPHQWEHOLHYHVWKDWWKH*URXSGRHVQRWKDYHDQ\RIIEDODQFHVKHHWDUUDQJHPHQWVDVGH²QHGE\WKH6(&LQLWHP(RI)RUP)WKDWKDYHRU DUHUHDVRQDEO\OLNHO\WRKDYHDFXUUHQWRUIXWXUHHIIHFWRQWKH*URXSªV²QDQFLDOFRQGLWLRQFKDQJHVLQ²QDQFLDOFRQGLWLRQUHYHQXHVRUH[SHQVHVUHVXOWV RIRSHUDWLRQVOLTXLGLW\FDSLWDOH[SHQGLWXUHVRUFDSLWDOUHVRXUFHVWKDWLVPDWHULDOWRLQYHVWRUV

RELATED PARTY TRANSACTIONS

Except for transactions with associates (see Note 23.2 of Notes to the Group accounts), no other related party had material transactions or loans with 6PLWK 1HSKHZRYHUWKHODVWWKUHH²QDQFLDO\HDUV

RISK FACTORS

There are known and unknown risks and uncertainties relating to Smith & Nephew's business. The factors listed on pages 170 to 172 could cause WKH*URXSªVEXVLQHVV²QDQFLDOSRVLWLRQDQGUHVXOWVRIRSHUDWLRQVWRGLIIHUPDWHULDOO\DQGDGYHUVHO\IURPH[SHFWHGDQGKLVWRULFDOOHYHOV,QDGGLWLRQRWKHU IDFWRUVQRWOLVWHGKHUHWKDW6PLWK 1HSKHZFDQQRWSUHVHQWO\LGHQWLI\RUGRHVQRWEHOLHYHWREHHTXDOO\VLJQL²FDQWFRXOGDOVRPDWHULDOO\DGYHUVHO\DIIHFW 6PLWK 1HSKHZªVEXVLQHVV²QDQFLDOSRVLWLRQRUUHVXOWVRIRSHUDWLRQV

FINANCIAL REVIEW

GROUP INFORMATION

Highly competitive markets

The Group competes across a diverse range of geographic and product markets. Each market in which the Group operates contains a number of different competitors, including specialised and international corporations. 6LJQL²FDQWSURGXFWLQQRYDWLRQVWHFKQLFDODGYDQFHVRUWKHLQWHQVL²FDWLRQ of price competition by competitors could adversely affect the Group's operating results.

6RPHRIWKHVHFRPSHWLWRUVPD\KDYHJUHDWHU²QDQFLDOPDUNHWLQJDQG other resources than Smith & Nephew. These competitors may be DEOHWRLQLWLDWHWHFKQRORJLFDODGYDQFHVLQWKH²HOGGHOLYHUSURGXFWVRQ more attractive terms, more aggressively market their products or invest larger amounts of capital and research and development (R&D) into their businesses.

There is a possibility of further consolidation of competitors, which could adversely affect the Group's ability to compete with larger companies due WRLQVXI²FLHQW²QDQFLDOUHVRXUFHV,IDQ\RIWKH*URXSªVEXVLQHVVHVZHUH to lose market share or achieve lower than expected revenue growth, WKHUHFRXOGEHDGLVSURSRUWLRQDWHDGYHUVHLPSDFWRQWKH*URXSªVVKDUH price and its strategic options.

Competition exists among healthcare providers to gain patients on the basis of quality, service and price. There has been some consolidation in the Group's customer base and this trend is expected to continue. Some customers have joined group purchasing organisations or introduced other cost containment measures that could lead to downward pressure on prices or limit the number of suppliers in certain business areas, ZKLFKFRXOGDGYHUVHO\DIIHFW6PLWK 1HSKHZªVUHVXOWVRIRSHUDWLRQVDQG hinder its growth potential.

Continual development and introduction of new products

The medical devices industry has a rapid rate of new product introduction. In order to remain competitive, the Group must continue to develop innovative products that satisfy customer needs and preferences or provide cost or other advantages. Developing new products is a costly, lengthy and uncertain process. The Group may fail to innovate due to low R&D investment, a R&D skills gap or poor product development. A potential product may not be brought to market or not succeed in the market for any number of reasons, including failure to work optimally, failure to receive regulatory approval, failure to be cost-competitive, infringement of patents or other intellectual property rights and changes in consumer demand. The Group's products and technologies are also subject to marketing attack by competitors. Furthermore, new products that are developed and marketed by the Group's competitors may affect price levels in the various markets in which the Group operates. If the Group's new products do not remain competitive with those of competitors, the Group's revenue could decline.

The Group maintains reserves for excess and obsolete inventory resulting from the potential inability to sell its products at prices in excess of current carrying costs. Marketplace changes resulting from the introduction of new products or surgical procedures may cause some of the Group's products to become obsolete. The Group makes estimates regarding the future recoverability of the costs of these products and records a provision for excess and obsolete inventories based on historical experience, expiration of sterilisation dates and expected future trends. If actual product life cycles, product demand or acceptance of new product introductions are less favourable than projected by management, additional inventory writedowns may be required.

Dependence on government and other funding

In most markets throughout the world, expenditure on medical devices is ultimately controlled to a large extent by governments. Funds may be made available or withdrawn from healthcare budgets depending on government policy. The Group is therefore largely dependent on future governments providing increased funds commensurate with the increased demand arising from demographic trends.

Pricing of the Group's products is largely governed in most markets by governmental reimbursement authorities. Initiatives sponsored by government agencies, legislative bodies and the private sector to limit the growth of healthcare costs, including price regulation, excise taxes and competitive pricing, are ongoing in markets where the Group has operations. This control may be exercised by determining prices for an individual product or for an entire procedure. The Group is exposed to government policies favouring locally sourced products. The Group is also exposed to changes in reimbursement policy, tax policy and pricing which PD\KDYHDQDGYHUVHLPSDFWRQUHYHQXHDQGRSHUDWLQJSUR²W3URYLVLRQV LQ86KHDOWKFDUHOHJLVODWLRQZKLFKSUHYLRXVO\LPSRVHGVLJQL²FDQWWD[HVRQ medical device manufacturers have been suspended for two years but may be reinstated. There may be an increased risk of adverse changes to government funding policies arising from deterioration in macro-economic conditions from time to time in the Group's markets.

The Group must adhere to the rules laid down by government agencies that fund or regulate healthcare, including extensive and complex rules in WKH86)DLOXUHWRGRVRFRXOGUHVXOWLQ²QHVRUORVVRIIXWXUHIXQGLQJ

World economic conditions

Demand for the Group's products is driven by demographic trends, including the ageing population and the incidence of osteoporosis and obesity. Supply of, use of and payment for the Group's products are also LQ³XHQFHGE\ZRUOGHFRQRPLFFRQGLWLRQVZKLFKFRXOGSODFHLQFUHDVHG pressure on demand and pricing, adversely impacting the Group's ability to deliver revenue and margin growth. The conditions could favour larger, better capitalised groups, with higher market shares and margins. As a consequence, the Group's prosperity is linked to general economic conditions and there is a risk of deterioration of the Group's performance DQG²QDQFHVGXULQJDGYHUVHPDFURHFRQRPLFFRQGLWLRQV

During 2016, economic conditions worldwide continued to create several challenges for the Group, including deferrals of joint replacement SURFHGXUHVKHLJKWHQHGSULFLQJSUHVVXUHVLJQL²FDQWGHFOLQHVLQFDSLWDO equipment expenditures at hospitals (notably in China) and increased uncertainty over the collectability of government debt, particularly those in the Emerging Markets and the oil-dependent Gulf States. These factors tempered the overall growth of the Group's global markets and could have an increased impact on growth in the future.

Political uncertainties

The Group operates on a worldwide basis and has distribution channels, purchasing agents and buying entities in over 100 countries. Political upheaval in some of those countries or in surrounding regions may impact the Group's results of operations. Political changes in a country FRXOGSUHYHQWWKH*URXSIURPUHFHLYLQJUHPLWWDQFHVRISUR²WIURPD member of the Group located in that country or from selling its products or investments in that country. Furthermore, changes in government policy regarding preference for local suppliers, import quotas, taxation or other PDWWHUVFRXOGDGYHUVHO\DIIHFWWKH*URXSªVUHYHQXHDQGRSHUDWLQJSUR²W :DUHFRQRPLFVDQFWLRQVWHUURULVWDFWLYLWLHVRURWKHUFRQ³LFWFRXOGDOVR adversely impact the Group. These risks may be greater in Emerging 0DUNHWVZKLFKDFFRXQWIRUDQLQFUHDVLQJSRUWLRQRIWKH*URXSªVEXVLQHVV During 2016, the outcome of the UK referendum regarding the EU and the pending change in administration in the United States have added to political uncertainty.

&XUUHQF\³XFWXDWLRQV

Smith & Nephew's results of operations are affected by transactional exchange rate movements in that they are subject to exposures arising from revenue in a currency different from the related costs and expenses. The Group's manufacturing cost base is situated principally in the US, the 8.&KLQDDQG6ZLW]HUODQGIURPZKLFK²QLVKHGSURGXFWVDUHH[SRUWHGWR the Group's selling operations worldwide. Thus, the Group is exposed to ³XFWXDWLRQVLQH[FKDQJHUDWHVEHWZHHQWKH86'ROODU6WHUOLQJDQG6ZLVV Franc and the currency of the Group's selling operations, particularly the (XUR\$XVWUDOLDQ'ROODUDQG-DSDQHVH<HQ,IWKH86'ROODU6WHUOLQJRU Swiss Franc should strengthen against the Euro, Australian Dollar and the Japanese Yen, the Group's trading margin could be adversely affected.

The Group manages the impact of exchange rate movements on revenue and cost of goods sold by a policy of transacting forward foreign currency FRPPLWPHQWVZKHQ²UPSXUFKDVHRUGHUVDUHSODFHG,QDGGLWLRQWKH Group's policy is for forecast transactions to be covered between 50% and 90% for up to one year. However, the Group is exposed to medium WRORQJWHUPDGYHUVHPRYHPHQWVLQWKHVWUHQJWKRIFXUUHQFLHVFRPSDUHG WRWKH86'ROODU

The Group uses the US Dollar as its reporting currency and the US Dollar is the functional currency of Smith & Nephew plc. The Group's revenues, SUR²WVDQGHDUQLQJVDUHDOVRDIIHFWHGE\H[FKDQJHUDWHPRYHPHQWVRQ WKHWUDQVODWLRQRIUHVXOWVRIRSHUDWLRQVLQIRUHLJQVXEVLGLDULHVIRU²QDQFLDO reporting purposes. See 'Liquidity and capital resources' on page 114.

Manufacturing and supply

The Group's manufacturing production is concentrated at main facilities in 0HPSKLV0DQV²HOGDQG2NODKRPD&LW\LQWKH86+XOODQG:DUZLFNLQWKH UK, Aarau in Switzerland, Tuttlingen in Germany, Devrukh in India, Suzhou and Beijing in China, La Aurora and Alajuela in Costa Rica, Puschino in Russia and Curaçao, in Dutch Caribbean. If major physical disruption took place at any of these sites, it could adversely affect the results of operations. Physical loss and consequential loss insurance is carried to cover such risks but is subject to limits and deductibles and may not be VXI²FLHQWWRFRYHUFDWDVWURSKLFORVV0DQDJHPHQWRIRUWKRSDHGLFLQYHQWRU\ is complex, particularly forecasting and production planning. There is a risk that failures in operational execution could lead to excess inventory or individual product shortages.

The Group is reliant on certain key suppliers of raw materials, components, ²QLVKHGSURGXFWVDQGSDFNDJLQJPDWHULDOVRULQVRPHFDVHVRQDVLQJOH supplier. These suppliers must provide the materials and perform the DFWLYLWLHVWRWKH*URXSªVVWDQGDUGRITXDOLW\UHTXLUHPHQWV

A supplier's failure to meet expected quality standards could create liability for the Group and adversely affect sales of the Group's related products.

The Group may be forced to pay higher prices to obtain raw materials, which it may not be able to pass on to its customers in the form of LQFUHDVHGSULFHVIRULWV²QLVKHGSURGXFWV,QDGGLWLRQVRPHRIWKHUDZ materials used may become unavailable, and there can be no assurance that the Group will be able to obtain suitable and cost effective substitutes. Any interruption of supply caused by these or other factors could QHJDWLYHO\LPSDFW6PLWK 1HSKHZªVUHYHQXHDQGRSHUDWLQJSUR²W

The Group will, from time to time, outsource the manufacture of FRPSRQHQWVDQG²QLVKHGSURGXFWVWRWKLUGSDUWLHVDQGZLOOSHULRGLFDOO\ relocate the manufacture of product and/or processes between existing facilities. While these are planned activities, with these transfers there is DULVNRIGLVUXSWLRQWRVXSSO\

Attracting and retaining key personnel

The Group's continued development depends on its ability to hire and retain highly-skilled personnel with particular expertise. This is critical, particularly in general management, research, new product development and in the sales forces. If Smith & Nephew is unable to retain key personnel in general management, research and new

product development or if its largest sales forces suffer disruption or XSKHDYDOLWVUHYHQXHDQGRSHUDWLQJSUR²WZRXOGEHDGYHUVHO\DIIHFWHG Additionally, if the Group is unable to recruit, hire, develop and retain a talented, competitive workforce, it may not be able to meet its strategic business objectives.

Proprietary rights and patents

Due to the technological nature of medical devices and the Group's emphasis on serving its customers with innovative products, the Group has been subject to patent infringement claims and is subject to the potential for additional claims.

Claims asserted by third parties regarding infringement of their intellectual property rights, if successful, could require the Group to expend time and VLJQL²FDQWUHVRXUFHVWRSD\GDPDJHVGHYHORSQRQLQIULQJLQJSURGXFWV or obtain licences to the products which are the subject of such litigation, WKHUHE\DIIHFWLQJWKH*URXSªVJURZWKDQGSUR²WDELOLW\6PLWK 1HSKHZ attempts to protect its intellectual property and regularly opposes third party patents and trademarks where appropriate in those areas that PLJKWFRQ³LFWZLWKWKH*URXSªVEXVLQHVVLQWHUHVWV,I6PLWK 1HSKHZ fails to protect and enforce its intellectual property rights successfully, its competitive position could suffer, which could harm its results of operations.

Product liability claims and loss of reputation

The development, manufacture and sale of medical devices entail risk of product liability claims or recalls. Design and manufacturing defects with respect to products sold by the Group or by companies it has acquired could damage, or impair the repair of, body functions. The Group may become subject to liability, which could be substantial, because of actual or alleged defects in its products. In addition, product defects could lead to the need to recall from the market existing products, which may be costly and harmful to the Group's reputation.

There can be no assurance that customers, particularly in the US, the Group's largest geographical market, will not bring product liability or related claims that would have a material adverse effect on the Group's ²QDQFLDOSRVLWLRQRUUHVXOWVRIRSHUDWLRQVLQWKHIXWXUHRUWKDWWKH*URXS will be able to resolve such claims within insurance limits. During 2015, developments in the Group's metal-on-metal hip implant claims led to a \$203m charge being recognised relating to known and future claims.

Regulatory standards and compliance in the healthcare industry

Business practices in the healthcare industry are subject to regulation and review by various government authorities. In general, the trend in many countries in which the Group does business is towards higher expectations and increased enforcement activity by governmental authorities. While the Group is committed to doing business with integrity and welcomes the trend to higher standards in the healthcare industry, the Group and other companies in the industry have been subject to investigations and other enforcement activity that have incurred and may FRQWLQXHWRLQFXUVLJQL²FDQWH[SHQVH8QGHUFHUWDLQFLUFXPVWDQFHVLIWKH *URXSZHUHIRXQGWRKDYHYLRODWHGWKHODZLWVDELOLW\WRVHOOLWVSURGXFWVWR certain customers could be restricted.

International regulation

The Group operates across the world and is subject to extensive legislation, including anti-bribery and corruption and data protection, in each country in which we operate. Our international operations are governed in part by the UK Bribery Act and the US Foreign Corrupt Practices Act (FCPA) which prohibit us or our agents from making, or RIIHULQJLPSURSHUSD\PHQWVWRJRYHUQPHQWRI²FLDOVDQGRWKHUSHUVRQV for the purpose of obtaining or maintaining business or product approvals. Enforcement of such legislation has increased in recent years ZLWKVLJQL²FDQW²QHVDQGSHQDOWLHVEHLQJLPSRVHGRQFRPSDQLHVDQG individuals. Our international operations, particularly in the Emerging

GROUP INFORMATION

Markets, expose the Group to the risk that our employees or agents will engage in prohibited activities.

Regulatory approval

The international medical device industry is highly regulated. Regulatory requirements are a major factor in determining whether substances and materials can be developed into marketable products and the amount of time and expense that should be allotted to such development.

National regulatory authorities administer and enforce a complex series of laws and regulations that govern the design, development, approval, manufacture, labelling, marketing and sale of healthcare products. They DOVRUHYLHZGDWDVXSSRUWLQJWKHVDIHW\DQGHI²FDF\RIVXFKSURGXFWV2I particular importance is the requirement in many countries that products be authorised or registered prior to manufacture, marketing or sale and that such authorisation or registration be subsequently maintained. The major regulatory agencies for Smith & Nephew's products include the Food and Drug Administration (FDA) in the US, the Medicines and Healthcare products Regulatory Agency in the UK, the Ministry of Health, Labour and Welfare in Japan, the China Food and Drug Administration and the Australian Therapeutic Goods Administration. At any time, the Group is awaiting a number of regulatory approvals which, if not received, could adversely affect results of operations.

The trend is towards more stringent regulation and higher standards of technical appraisal. Such controls have become increasingly demanding to comply with and management believes that this trend will continue.

Regulatory requirements may also entail inspections for compliance with appropriate standards, including those relating to Quality Management Systems or Good Manufacturing Practices regulations. All manufacturing DQGRWKHUVLJQL²FDQWIDFLOLWLHVZLWKLQWKH*URXSDUHVXEMHFWWRUHJXODU internal and external audit for compliance with national and Group medical device regulation and policies.

Payment for medical devices may be governed by reimbursement tariff agencies in a number of countries. Reimbursement rates may be set in response to perceived economic value of the devices, based on clinical and other data relating to cost, patient outcomes and comparative effectiveness. They may also be affected by overall government budgetary considerations. The Group believes that its emphasis on innovative products and services should contribute to success in this environment.

Failure to comply with these regulatory requirements could have a number of adverse consequences, including withdrawal of approval to sell a SURGXFWLQDFRXQWU\WHPSRUDU\FORVXUHRIDPDQXIDFWXULQJIDFLOLW\²QHV and potential damage to Company reputation.

Failure to make successful acquisitions

A key element of the Group's strategy for continued growth is to make acquisitions or alliances to complement its existing business. Failure to identify appropriate acquisition targets or failure to conduct adequate due diligence or to integrate them successfully would have an adverse impact RQWKH*URXSªVFRPSHWLWLYHSRVLWLRQDQGSUR²WDELOLW\7KLVFRXOGUHVXOW from the diversion of management resources towards the acquisition or integration process, challenges of integrating organisations of different geographic, cultural and ethical backgrounds, as well as the prospect of taking on unexpected or unknown liabilities. In addition, the availability of JOREDOFDSLWDOPD\PDNH²QDQFLQJOHVVDWWDLQDEOHRUPRUHH[SHQVLYHDQG could result in the Group failing in its strategic aim of growth by acquisition or alliance.

Relationships with healthcare professionals

The Group seeks to maintain effective and ethical working relationships with physicians and medical personnel who assist in the research and development of new products or improvements to our existing product range or in product training and medical education. If we are unable to maintain these relationships our ability to meet the demands of our FXVWRPHUVFRXOGEHGLPLQLVKHGDQGRXUUHYHQXHDQGSUR²WFRXOGEH materially adversely affected.

Reliance on sophisticated information technology

The Group uses a wide variety of information systems, programmes and technology to manage our business. Our systems are vulnerable to a cyber-attack, malicious intrusion, loss of data privacy or any other VLJQL²FDQWGLVUXSWLRQ2XUV\VWHPVKDYHEHHQDQGZLOOFRQWLQXHWREHWKH target of such threats. We have systems in place to minimise the risk and disruption of these intrusions and to monitor our systems on an ongoing basis for current or potential threats. There can be no assurance that these measures will prove effective in protecting Smith & Nephew from future interruptions and as a result the performance of the Group could be materially adversely affected.

Other risk factors

Smith & Nephew is subject to a number of other risks, which are common to most global medical technology groups and are reviewed as part of the Group's risk management process.

FACTORS AFFECTING SMITH & NEPHEW'S RESULTS OF OPERATIONS

*RYHUQPHQWHFRQRPLF²VFDOPRQHWDU\DQGSROLWLFDOSROLFLHVDUHDOOIDFWRUV that materially affect the Group's operation or investments of shareholders. 2WKHUIDFWRUVLQFOXGHVDOHVWUHQGVFXUUHQF\³XFWXDWLRQVDQGLQQRYDWLRQ Each of these factors is discussed further in the 'Our Marketplace' on pages 16 to 17, 'Financial review' on pages 39 to 41 and 'Taxation information for shareholders' on pages 187 to 188.

OTHER FINANCIAL INFORMATION

SELECTED FINANCIAL DATA

	2016 \$ million	2015 \$ million	2014 \$ million	2013 \$ million	2012 \$ million
Income statement
Revenue	4,669	4,634	4,617	4,351	4,137
Cost of goods sold	(1,272)	(1,143)	(1,162)	(1,100)	(1,070)
*URVVSUR²W	3,397	3,491	3,455	3,251	3,067
Selling, general and administrative expenses	(2,366)	(2,641)	(2,471)	(2,210)	(2,050)
Research and development expenses	(230)	(222)	(235)	(231)	(171)
2SHUDWLQJSUR²W1	801	628	749	810	846
Net interest (payable)/receivable	(46)	(38)	(22)	4	2
2WKHU²QDQFHFRVWV?LQFRPH	(16)	(15)	(11)	(11)	(11)
Share of results of associates	(3)	(16)	(2)	(1)	4
3UR²WRQGLVSRVDORIEXVLQHVVDQGQHWDVVHWVKHOGIRUVDOH	326	–	–	–	251
3UR²WEHIRUHWD[DWLRQ	1,062	559	714	802	1,092
Taxation	(278)	(149)	(213)	(246)	(371)
\$WWULEXWDEOHSUR²WIRUWKH\HDU	784	410	501	556	721
Earnings per ordinary share
Basic	88.1¢	45.9¢	56.1¢	61.7¢	80.4¢
Diluted	87.8¢	45.6¢	55.7¢	61.4¢	80.0¢
\$GMXVWHGDWWULEXWDEOHSUR²W
\$WWULEXWDEOHSUR²WIRUWKH\HDU	784	410	501	556	721
Acquisition related costs	9	25	125	31	11
Restructuring and rationalisation expenses	62	65	61	58	65
Legal and other	(20)	187	(2)	–	–
Amortisation and impairment of acquisition intangibles	178	204	129	88	43
3UR²WRQGLVSRVDORIEXVLQHVVDQGQHWDVVHWVKHOGIRUVDOH	(326)	–	–	–	(251)
Taxation on excluded items	48	(130)	(71)	(40)	82
\$GMXVWHGDWWULEXWDEOHSUR²W	735	761	743	693	671
Adjusted earnings per ordinary share (EPSA)2	82.6¢	85.1¢	83.2¢	76.9¢	74.8¢

5HFRQFLOLDWLRQRIRSHUDWLQJWRWUDGLQJSUR²WLVSUHVHQWHGEHORZ

\$GMXVWHGHDUQLQJVSHURUGLQDU\VKDUHLVFDOFXODWHGE\GLYLGLQJDGMXVWHGDWWULEXWDEOHSUR²WE\WKHEDVLFZHLJKWHGQXPEHURIVKDUHV

2016 \$ million	2015 \$ million	2014	2013	2012
		\$ million	\$ million	\$ million
801	628	749	810	846
9	12	118	31	11
62	65	61	58	65
178	204	129	88	43
(30)	190	(2)	–	–
1,020	1,099	1,055	987	965

OTHER FINANCIAL INFORMATION

SELECTED FINANCIAL DATA continued

	2016 \$ million	2015 \$ million	2014 \$ million	2013 \$ million	2012 \$ million
Group balance sheet
Non-current assets	4,815	4,692	4,866	3,563	3,498
Current assets	2,529	2,475	2,440	2,256	2,144
Total assets	7,344	7,167	7,306	5,819	5,642
Share capital	180	183	184	184	193
Share premium	600	590	574	535	488
Capital redemption reserve	15	12	11	10	–
Treasury shares	(432)	(294)	(315)	(322)	(735)
Retained earnings and other reserves	3,595	3,475	3,586	3,640	3,938
Total equity	3,958	3,966	4,040	4,047	3,884
Non-current liabilities	2,038	1,857	2,104	699	828
Current liabilities	1,348	1,344	1,162	1,073	930
Total liabilities	3,386	3,201	3,266	1,772	1,758
Total equity and liabilities	7,344	7,167	7,306	5,819	5,642

*URXSFDVK³RZVWDWHPHQW
Cash generated from operations	1,035	1,203	961	1,138	1,184
Net interest paid	(45)	(36)	(33)	(6)	(4)
Income taxes paid	(141)	(137)	(245)	(265)	(278)
1HWFDVKLQ³RZIURPRSHUDWLQJDFWLYLWLHV	849	1,030	683	867	902
Capital expenditure (including trade investments and net of disposals of property, plant and equipment)	(394)	(360)	(379)	(340)	(265)
Acquisitions and disposals	(214)	(44)	(1,552)	(67)	(782)
Proceeds on disposal of business (net of tax)	225	–	–	–	103
Investment in associate	–	(25)	(2)	–	(10)
Proceeds from associate loan redemption	–	–	188	–	–
Proceeds from own shares	6	5	4	3	6
Equity dividends paid	(279)	(272)	(250)	(239)	(186)
Issue of ordinary capital and treasury shares purchased	(358)	(61)	(35)	(183)	77
1HWFDVK³RZIURP²QDQFLQJDQGLQYHVWLQJDFWLYLWLHV	(165)	273	(1,343)	41	(155)
Exchange adjustments	(24)	(21)	(17)	(6)	5
Opening net debt	(1,361)	(1,613)	(253)	(288)	(138)
Closing net debt	(1,550)	(1,361)	(1,613)	(253)	(288)
6HOHFWHG²QDQFLDOUDWLRV
Gearing (closing net debt as a percentage of total equity)	39%	34%	40%	6%	7%
Dividends per ordinary share1	30.8¢	30.8¢	29.60¢	27.40¢	26.10¢
Research and development costs to revenue	4.9%	4.8%	5.1%	5.3%	4.1%
Capital expenditure (including intangibles but excluding goodwill) to revenue	8.4%	7.7%	8.1%	7.8%	6.4%

7KH%RDUGKDVSURSRVHGD²QDOGLYLGHQGRI86FHQWVSHUVKDUHZKLFKWRJHWKHUZLWKWKH²UVWLQWHULPGLYLGHQGRI86FHQWVPDNHVDWRWDOIRURI86FHQWV

NON-GAAP FINANCIAL INFORMATION – ADJUSTED MEASURES

7KHVH)LQDQFLDO6WDWHPHQWVLQFOXGH²QDQFLDOPHDVXUHVWKDWDUHQRWSUHSDUHGLQDFFRUGDQFHZLWK,QWHUQDWLRQDO)LQDQFLDO5HSRUWLQJ6WDQGDUGV,)56?7KHVH PHDVXUHVZKLFKLQFOXGHWUDGLQJSUR²WWUDGLQJSUR²WPDUJLQWUDGLQJFDVK³RZ(36\$DQGXQGHUO\LQJJURZWKH[FOXGHWKHHIIHFWRIFHUWDLQFDVKDQGQRQ FDVKLWHPVWKDW*URXSPDQDJHPHQWEHOLHYHVDUHQRWUHODWHGWRWKHXQGHUO\LQJSHUIRUPDQFHRIWKH*URXS7KHVHQRQ,)56²QDQFLDOPHDVXUHVDUHDOVR used by management to make operating decisions because they facilitate internal comparisons of performance to historical results on both a business segment and a consolidated Group basis.

1RQ,)56²QDQFLDOPHDVXUHVDUHSUHVHQWHGLQWKHVH)LQDQFLDO6WDWHPHQWVDVWKH*URXSªVPDQDJHPHQWEHOLHYHWKDWWKH\SURYLGHLQYHVWRUVZLWKD means of evaluating performance of the business segment and the consolidated Group on a consistent basis, similar to the way in which the Group's management evaluates performance, that is not otherwise apparent on an IFRS basis, given that certain non-recurring, infrequent or non-cash items that management does not otherwise believe are indicative of the underlying performance of the consolidated Group may not be excluded when preparing ²QDQFLDOPHDVXUHVXQGHU,)567KHVHQRQ,)56PHDVXUHVVKRXOGQRWEHFRQVLGHUHGLQLVRODWLRQIURPDVVXEVWLWXWHVIRURUVXSHULRUWR²QDQFLDOPHDVXUHV prepared in accordance with IFRS.

Underlying revenue growth

'Underlying growth in revenue' is used to compare the revenue in a given year to the previous year on a like-for-like basis. This is achieved by adjusting for the impact of sales of products acquired in material business combinations or disposed of and for movements in exchange rates. Underlying growth in revenue is not presented in the accounts prepared in accordance with IFRS and is therefore a measure not in accordance with Generally Accepted Accounting Principles (a 'non-GAAP' measure).

Underlying growth in revenue is considered by the Group to be an important measure of performance in terms of local functional currency since LWH[FOXGHVWKRVHLWHPVFRQVLGHUHGWREHRXWVLGHWKHLQ³XHQFHRIORFDOPDQDJHPHQW7KH*URXSªVPDQDJHPHQWXVHVWKLVQRQ*\$\$3PHDVXUH LQLWVLQWHUQDO²QDQFLDOUHSRUWLQJEXGJHWLQJDQGSODQQLQJWRDVVHVVSHUIRUPDQFHRQERWKDEXVLQHVVDQGDFRQVROLGDWHG*URXSEDVLV5HYHQXHJURZWK DWFRQVWDQWFXUUHQF\LVLPSRUWDQWLQPHDVXULQJEXVLQHVVSHUIRUPDQFHFRPSDUHGWRFRPSHWLWRUVDQGFRPSDUHGWRWKHJURZWKRIWKHPDUNHWLWVHOI

The Group considers that revenue from sales of products acquired in material business combinations results in a step-up in growth in revenue in the year of acquisition that cannot be wholly attributed to local management's efforts with respect to the business in the year of acquisition. Depending on the timing of the acquisition, there will usually be a further step change in the following year. A measure of growth excluding the effects of business combinations also allows senior management to evaluate the performance and relative impact of growth from the existing business and growth from acquisitions. The process of making business acquisitions is directed, approved and funded from the Group corporate centre in line with strategic objectives.

7KHPDWHULDOOLPLWDWLRQRIWKHXQGHUO\LQJJURZWKLQUHYHQXHPHDVXUHLVWKDWLWH[FOXGHVFHUWDLQIDFWRUVGHVFULEHGDERYHZKLFKXOWLPDWHO\KDYHDVLJQL²FDQW impact on total revenues. The Group compensates for this limitation by taking into account relative movements in exchange rates in its investment, strategic planning and resource allocation. In addition, as the evaluation and assessment of business acquisitions is not within the control of local management, performance of acquisitions is monitored centrally until the business is integrated.

The Group's management considers that the non-GAAP measure of underlying growth in revenue and the GAAP measure of growth in revenue are complementary measures, neither of which management uses exclusively.

©8QGHUO\LQJJURZWKLQUHYHQXHªUHFRQFLOHVWRJURZWKLQUHYHQXHUHSRUWHGWKHPRVWGLUHFWO\FRPSDUDEOH²QDQFLDOPHDVXUHFDOFXODWHGLQDFFRUGDQFHZLWK IFRS by making two adjustments, the 'constant currency exchange effect' and the 'acquisitions and disposals effect', described below.

The 'constant currency exchange effect' is a measure of the increase/decrease in revenue resulting from currency movements on non-US Dollar sales and is measured as the difference between: 1) the increase/decrease in the current year revenue translated into US Dollars at the current year average exchange rate and the prior revenue translated at the prior year rate; and 2) the increase/decrease being measured by translating current and prior year revenues into US Dollars using the prior year closing rate.

The 'acquisitions and disposals effect' is the measure of the impact on revenue from newly acquired material business combinations and recent material business disposals. This is calculated by comparing the current year, constant currency actual revenue (which include acquisitions and exclude disposals from the relevant date of completion) with prior year, constant currency actual revenue, adjusted to include the results of acquisitions and exclude disposals for the commensurate period in the prior year. These sales are separately tracked in the Group's internal reporting systems and are UHDGLO\LGHQWL²DEOH

OTHER FINANCIAL INFORMATION

5HSRUWHGUHYHQXHJURZWKWKHPRVWGLUHFWO\FRPSDUDEOH²QDQFLDOPHDVXUHFDOFXODWHGLQDFFRUGDQFHZLWK,)56UHFRQFLOHVWRXQGHUO\LQJJURZWKLQUHYHQXH as follows:

				Reconciling items
2016	Reported growth	Underlying growth	Acquisitions/disposals	Currency impact
Consolidated revenue by franchise	%	%	%	%
Sports Medicine, Trauma & Other	1	3	(1)	(1)
Sports Medicine Joint Repair	7	8	–	(1)
Arthroscopic Enabling Technologies	–	2	–	(2)
Trauma & Extremities	(4)	(4)	1	(1)
Other Surgical Businesses	5	15	(9)	(1)
Reconstruction	3	2	2	(1)
Knee Implants	6	4	3	(1)
Hip Implants	(1)	(1)	–	–
Advanced Wound Management	(3)	(1)	–	(2)
Advanced Wound Care	(5)	(3)	–	(2)
Advanced Wound Bioactives	(1)	–	–	(1)
Advanced Wound Devices	3	5	–	(2)
Total	1	2	–	(1)

				Reconciling items
2015 Consolidated revenue	Reported growth %	Underlying growth %	Acquisitions/disposals %	Currency impact %
Total	–	4	4	(8)

7UDGLQJSUR²WWUDGLQJSUR²WPDUJLQDQGWUDGLQJFDVK³RZ

7UDGLQJSUR²WWUDGLQJSUR²WPDUJLQDQGWUDGLQJFDVK³RZDUHWUHQGPHDVXUHVZKLFKSUHVHQWWKHORQJWHUPSUR²WDELOLW\RIWKH*URXSH[FOXGLQJWKHLPSDFW RIVSHFL²FWUDQVDFWLRQVWKDWPDQDJHPHQWFRQVLGHUVDIIHFWWKH*URXSªVVKRUWWHUPSUR²WDELOLW\DQGFDVK³RZV7KH*URXSKDVLGHQWL²HGWKHIROORZLQJ LWHPVZKHUHPDWHULDODVWKRVHWREHH[FOXGHGIURPRSHUDWLQJSUR²WDQGFDVKJHQHUDWHGIURPRSHUDWLRQVZKHQDUULYLQJDWWUDGLQJSUR²WDQGWUDGLQJ FDVK³RZUHVSHFWLYHO\DFTXLVLWLRQDQGGLVSRVDOUHODWHGLWHPVDULVLQJLQFRQQHFWLRQZLWKEXVLQHVVFRPELQDWLRQVLQFOXGLQJDPRUWLVDWLRQRIDFTXLVLWLRQ LQWDQJLEOHDVVHWVLPSDLUPHQWVDQGLQWHJUDWLRQFRVWVUHVWUXFWXULQJHYHQWVJDLQVDQGORVVHVUHVXOWLQJIURPOHJDOGLVSXWHVDQGVLJQL²FDQWXQLQVXUHG ORVVHV,QDGGLWLRQWRWKHVHLWHPVJDLQVRUORVVHVWKDWPDWHULDOO\LPSDFWWKH*URXSªVSUR²WDELOLW\RUFDVK³RZVRQDVKRUWWHUPRURQHRIIEDVLVDUH H[FOXGHGIURPRSHUDWLQJSUR²WDQGFDVKJHQHUDWHGIURPRSHUDWLRQVZKHQDUULYLQJDWWUDGLQJSUR²WDQGWUDGLQJFDVK³RZUHVSHFWLYHO\

Adjusted earnings per ordinary share (EPSA)

(36\$LVDWUHQGPHDVXUHZKLFKSUHVHQWVWKHORQJWHUPSUR²WDELOLW\RIWKH*URXSH[FOXGLQJWKHSRVWWD[LPSDFWRIVSHFL²FWUDQVDFWLRQVWKDWPDQDJHPHQW FRQVLGHUVDIIHFWVWKH*URXSªVVKRUWWHUPSUR²WDELOLW\7KH*URXSSUHVHQWVWKLVPHDVXUHWRDVVLVWLQYHVWRUVLQWKHLUXQGHUVWDQGLQJRIWUHQGV\$GMXVWHG DWWULEXWDEOHSUR²WLVWKHQXPHUDWRUXVHGIRUWKLVPHDVXUHDQGLVGHWHUPLQHGE\DGMXVWLQJDWWULEXWDEOHSUR²WIRUWKHLWHPVWKDWDUHH[FOXGHGIURPRSHUDWLQJ SUR²WZKHQDUULYLQJDWWUDGLQJSUR²WDQGLWHPVWKDWDUHUHFRJQLVHGEHORZRSHUDWLQJSUR²WWKDWDIIHFWWKH*URXSªVVKRUWWHUPSUR²WDELOLW\7KHPRVWGLUHFWO\ FRPSDUDEOH²QDQFLDOPHDVXUHFDOFXODWHGLQDFFRUGDQFHZLWK,)56LVHDUQLQJVSHURUGLQDU\VKDUH(36

	Revenue \$ million	Operating SUR²W1 \$ million	Taxation2 \$ million	Attributable SUR²W3 \$ million	Cash generated from operating activities4 \$ million	Earnings per share5 ¢
2016 Reported	4,669	801	(278)	784	1,035	88.1
\$FTXLVLWLRQUHODWHGFRVWVDQGSUR²WRQGLVSRVDO	–	9	120	(197)	24	(22.2)
Restructuring and rationalisation costs	–	62	(14)	48	62	5.4
Amortisation and impairment of acquisition intangibles	–	178	(59)	119	–	13.4
Legal and other	–	(30)	1	(19)	36	(2.1)
Capital expenditure	–	–	–	–	(392)	–
2016 Adjusted	4,669	1,020	(230)	735	765	82.6

\$FTXLVLWLRQUHODWHGFRVWVDQGFDVK³RZVFor the year to 31 December 2016, these costs relate to the costs associated with the integration of Blue Belt 7HFKQRORJLHVDQGRWKHUDFTXLVLWLRQV7D[DWLRQDQGDWWULEXWDEOHSUR²WLQFOXGHWKHHIIHFWRIWKHGLVSRVDORIWKH*\QDHFRORJ\EXVLQHVV

Restructuring and rationalisation costs: For the year to 31 December 2016 these costs primarily relate to the ongoing implementation of the Group Optimisation plan that was announced in May 2014.

Amortisation and impairment of acquisition intangibles: For the year ended 31 December 2016 these charges relate to the amortisation of intangible assets acquired in material business combinations and a total impairment of \$48m including \$32m relating to Oasis, a product acquired with the Healthpoint acquisition in 2013.

Legal and other: )RUWKH\HDUWR'HFHPEHUWKHQHWFUHGLWRIPSULPDULO\UHODWHVWRDPFXUWDLOPHQWFUHGLWRQSRVWUHWLUHPHQWEHQH²WV in the UK pension scheme partially offset by legal expenses incurred for patent litigation with Arthrex. Also included is a net \$1m credit in respect of insurance recoveries of \$24m and legal expenses \$23m, relating to the ongoing metal-on-metal hip claims.

		Cash generated
	Revenue \$ million	Operating SUR²W1 \$ million	Taxation2 \$ million	Attributable SUR²W3 \$ million	from operating activities4 \$ million	Earnings per share5 ¢
2015 Reported	4,634	628	(149)	410	1,203	45.9
Acquisition-related costs	–	12	(9)	16	36	1.8
Restructuring and rationalisation costs	–	65	(18)	47	52	5.3
Amortisation and impairment of acquisition intangibles	–	204	(66)	138	–	15.4
Legal and other	–	190	(37)	150	3	16.7
Capital expenditure	–	–	–	–	(358)	–
2015 Adjusted	4,634	1,099	(279)	761	936	85.1

\$FTXLVLWLRQUHODWHGFRVWVDQGFDVK³RZVFor the year to 31 December 2015, these costs primarily relate to ongoing ArthroCare integration and deferred consideration for an acquisition made by an associate.

Restructuring and rationalisation costs: For the year to 31 December 2015, these costs primarily relate to the ongoing implementation of the Group Optimisation plan that was announced in May 2014.

Amortisation and impairment of acquisition intangibles: For the year ended 31 December 2015, these charges relate to the amortisation of intangible assets acquired in material business combinations and a total impairment of \$51m including \$40m relating to Oasis, a product acquired with the Healthpoint acquisition in 2013.

Legal and other: For the year to 31 December 2015, the net charge primarily relates to \$203m for known, anticipated and settled metal-on-metal hip claims and associated legal expenses of \$21m. This was offset by a net gain of \$33m relating to patent litigation with Arthrex and past service and FXUWDLOPHQWJDLQVRIPDULVLQJRQ86DQG8.SRVWUHWLUHPHQWEHQH²WV

,QDGGLWLRQDWRWDORIPFKDUJHSULPDULO\UHODWHVWR²QDOFRVWVUHODWLQJWR5(1\$6<6GLVWULEXWLRQKROGDQGUHGXQGDQFLHVIURPWKHGHFLVLRQWRFHDVH development of HP802.

5HSUHVHQWVDUHFRQFLOLDWLRQRIRSHUDWLQJSUR²WWRWUDGLQJSUR²W
2 Represents a reconciliation of reported tax to trading tax.
5HSUHVHQWVDUHFRQFLOLDWLRQRIUHSRUWHGDWWULEXWDEOHSUR²WWRDGMXVWHGDWWULEXWDEOHSUR²W
5HSUHVHQWVDUHFRQFLOLDWLRQRIFDVKJHQHUDWHGIURPRSHUDWLRQVWRWUDGLQJFDVK³RZ
5 Represents a reconciliation of basic earnings per ordinary share to adjusted earnings per ordinary share (EPSA).

2015 FINANCIAL HIGHLIGHTS

REVENUE

*URXSUHYHQXHLQFUHDVHGE\P³DWRQDUHSRUWHGEDVLVIURPPLQWRPLQ

The underlying increase is 4%, after adjusting for the 4% impact of acquisitions and the 8% attributable to the unfavourable impact of currency movements.

Established Markets had an underlying growth of 3% and Emerging Markets had an underlying growth of 11%, both of which contributed to the Group increase of 4%.

COST OF GOODS SOLD

Cost of goods sold decreased by \$19m, 2% on a reported basis, from \$1,162m in 2014 to \$1,143m in 2015. The movement is primarily due to the strengthening of the US Dollar which more than offsets the increase in volume from acquisitions and underlying trading.

During 2015, no restructuring and rationalisation expenses (2014: \$12m) and acquisition related costs (2014: \$23m) were charged to cost of goods sold.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses increased by \$170m (7% on a reported basis) from \$2,471m in 2014 to \$2,641m in 2015. The underlying movement is 7% after adjusting for net impact of 7% from acquisitions and unfavourable currency movements of 7%.

In 2015, administrative expenses included amortisation of software and other intangible assets of \$66m (2014: \$62m), \$65m of restructuring and rationalisation expenses (2014: \$49m), an amount of \$204m relating to amortisation and impairment of acquired intangibles (2014: \$129m), \$12m of acquisition related costs (2014: \$95m) and \$203m relating to anticipated and settled metal-on-metal hip claims and additional expenses primarily relating to the RENASYS distribution hold in the US. These expenses were offset by a net gain of \$33m relating to a patent litigation and past service DQGFXUWDLOPHQWJDLQVRIPP?DULVLQJRQ86DQG8.SRVWUHWLUHPHQWEHQH²WV

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenditure as a percentage of revenue remained broadly consistent at 4.8% in 2015 (2014: 5.1%). Actual expenditure was \$222m in 2015 compared to \$235m in 2014. The Group continues to invest in innovative technologies and products to differentiate it from competitors.

OPERATING PROFIT

2SHUDWLQJSUR²WGHFUHDVHGE\PIURPPLQWRPLQ

7KLVPRYHPHQWZDVSULPDULO\GULYHQE\WKHEHQH²WVRIWKH*URXS2SWLPLVDWLRQSURJUDPPHDQGV\QHUJLHVIURPWKH\$UWKUR&DUHDFTXLVLWLRQLQRIIVHW by the costs relating to anticipated and settled metal-on-metal hip claims.

INTEREST INCOME/(EXPENSE)

Net interest expense increased by \$16m from a net \$22m expense in 2014 to a net \$38m expense in 2015. This movement is primarily due to an increase LQLQWHUHVWH[SHQVHGXHWRWKH²QDQFLQJRIWKH\$UWKUR&DUHDFTXLVLWLRQLQ

OTHER FINANCE COSTS

2WKHU²QDQFHFRVWVLQLQFUHDVHGE\PDQGSULQFLSDOO\UHODWHVWRFRVWVDVVRFLDWHGZLWKWKH*URXSªVUHWLUHPHQWEHQH²WVFKHPHV

TAXATION

The taxation charge decreased by \$64m to \$149m from \$213m in 2014.

\$IWHUDGMXVWLQJIRUVSHFL²FWUDQVDFWLRQVWKDWPDQDJHPHQWFRQVLGHUVDIIHFWWKH*URXSªVVKRUWWHUPSUR²WDELOLW\UHVWUXFWXULQJDQGUDWLRQDOLVDWLRQH[SHQVHV DPRUWLVDWLRQRIDFTXLVLWLRQLQWDQJLEOHVDFTXLVLWLRQUHODWHGFRVWVDQGOHJDODQGRWKHULWHPV?WKHWD[UDWHRQWUDGLQJSUR²WZDV

COMMENTARY ON THE GROUP BALANCE SHEET

Non-current assets

Non-current assets decreased by \$174m to \$4,692m in 2015 from \$4,866m in 2014. This is principally attributable to the following:

ç Property, plant and equipment increased by \$41m from \$891m in 2014 to \$932m in 2015. There were \$303m of additions together with \$6m acquired with the Colombia and Russia acquisitions which were offset by \$11m of assets disposed. Depreciation of \$226m was charged during 2015 and there were unfavourable currency movements of \$31m.
ç Goodwill decreased by \$15m from \$2,027m in 2014 to \$2,012 in 2015. This movement relates to additions of \$10m from the acquisition in Colombia and \$24m from the acquisition in Russia. This was offset by unfavourable currency movements of \$49m which decreased the overall goodwill balance.
ç Intangible assets decreased by \$245m from \$1,747m in 2014 to \$1,502m in 2015. There were additions of \$55m in 2015 relating to intellectual property, distribution rights and software acquired together with \$19m acquired with the Colombia and Russia acquisitions. Amortisation and impairment during 2015 was \$270m and there were unfavourable currency movements of \$45m.
ç Investments in associates increased to \$115m from \$112m in 2014. The increase was attributable to a capital contribution to Bioventus of \$25m and RWKHULQYHVWPHQWJDLQVRIPRIIVHWE\DQLQYHVWPHQWORVVLQ%LRYHQWXVRIPDQGDUHFODVVL²FDWLRQRIDQDVVRFLDWHWRLQYHVWPHQWVRIPGXHWRD change in shareholding.
ç Deferred tax assets increased by \$28m in the year from \$77m in 2014 to \$105m in 2015. The net deferred tax position has changed from a liability of \$21m in 2014 to an asset of \$28m in 2015. The net movement of \$49m is mainly due to the creation of the metal-on-metal hip claim provision and DPRUWLVDWLRQRIFHUWDLQDFTXLUHGLQWDQJLEOHVRIIVHWE\DUHGXFWLRQLQUHWLUHPHQWEHQH²WREOLJDWLRQV

Current assets

Current assets increased by \$35m to \$2,475m from \$2,440m in 2014. The movement relates to the following:

ç Inventories rose by \$36m to \$1,217m in 2015 from \$1,181m in 2014. This movement is driven by inventory acquired with the Colombia and Russia acquisitions and a general increase across the Emerging Markets. This was offset by unfavourable currency movements of \$63m.
ç The level of trade and other receivables decreased by \$28m to \$1,138m in 2015 from \$1,166m in 2014. The movement primarily relates to the \$17m increase in the bad debt provision as well as unfavourable currency movements.
ç Cash at bank has increased by \$27m from \$93m in 2014 to \$120m in 2015.

Non-current liabilities

Non-current liabilities decreased by \$247m from \$2,104m in 2014 to \$1,857m in 2015. This movement principally relates to:

ç Long-term borrowing decreased from \$1,666m in 2014 to \$1,434m in 2015 principally due to repayments of bank debt.
ç 7KHUHWLUHPHQWEHQH²WREOLJDWLRQGHFUHDVHGIURPPLQWRPLQGXHWRSDVWFRVWDGMXVWPHQWVDULVLQJIURPSODQDPHQGPHQWVLQWKH UK and US, increases in discount rates and supplementary cash contributions.
ç Deferred tax liabilities decreased by \$21m from \$98m in 2014 to \$77m in 2015. Refer to commentary within non-current assets for explanation of the QHWGHIHUUHGWD[SRVLWLRQPRYHPHQW
ç The impact of the above was partly offset by an increase in non-current provisions, primarily relating to the estimated costs to resolve all future known and anticipated metal-on-metal hip claims.

Current liabilities

Current liabilities increased by \$182m from \$1,162m in 2014 and \$1,344m in 2015. This movement is attributable to:

ç Bank overdrafts and loans increased by \$7m from \$39m in 2014 to \$46m in 2015.
ç Provisions increased by \$126m from \$67m in 2014 to \$193m in 2015 primarily due to an increase in legal provision for known and anticipated metal-on-metal hip claims.
ç Current tax payables increased by \$45m from \$218m in 2014 to \$263m, mainly attributable to differences in the timing of cash tax payments year-on-year.

TOTAL EQUITY

Total equity decreased by \$74m from \$4,040m in 2014 to \$3,966m in 2015. The principal movements were:

	Total equity \$ million
1 January 2015	4,040
\$WWULEXWDEOHSUR²W	410
Currency translation gains	(176)
Hedging reserves	(16)
\$FWXDULDOORVVHVRQUHWLUHPHQWEHQH²WREOLJDWLRQV	(8)
Dividends paid during the year	(272)
Purchase of own shares	(77)
Taxation on other comprehensive income and equity items	15
Net share-based transactions	50
31 December 2015	3,966

CONTRACTUAL OBLIGATIONS

Contractual obligations at 31 December 2016 were as follows:

				Payments due by period
	Less than one year \$ million	One to three years \$ million	Three to ²YH\HDUV \$ million	More than ²YH\HDUV \$ million
Debt obligations	86	300	135	–
Private placement notes	36	197	330	800
Finance lease obligations	3	6	–	–
Operating lease obligations	48	67	31	41
5HWLUHPHQWEHQH²WREOLJDWLRQ	43	–	–	–
Purchase obligations	27	24	10	–
Capital expenditure	64	–	–	–
Other	74	42	34	16
	381	636	540	857

Other contractual obligations represent \$36m of foreign exchange contracts and \$130m of acquisition consideration. Provisions that do not relate to contractual obligations are not included in the above table.

7KHDJUHHGFRQWULEXWLRQVIRULQUHVSHFWRIWKH*URXSªVGH²QHGEHQH²WVSODQVDUHPIRUWKH8.DQGPIRUWKH863ODQ7KHWDEOHDERYHGRHV not include amounts payable in respect of 2016 and beyond as these are subject to future agreement and amounts cannot be reasonably estimated.

There are a number of agreements that take effect, alter or terminate upon a change in control of the Company or the Group following a takeover, such DVEDQNORDQDJUHHPHQWVDQG&RPSDQ\VKDUHSODQV1RQHRIWKHVHDUHGHHPHGWREHVLJQL²FDQWLQWHUPVRIWKHLUSRWHQWLDOLPSDFWRQWKHEXVLQHVVRIWKH Group as a whole. In addition, there are service contracts between the Company and its Executive Directors which provide for the automatic payment of DERQXVIROORZLQJORVVRIRI²FHRUHPSOR\PHQWRFFXUULQJEHFDXVHRIDVXFFHVVIXOWDNHRYHUELG)XUWKHUGHWDLOVDUHVHWRXWRQSDJH84.

The Company does not have contracts or other arrangements which individually are essential to the business.

FINANCIAL CALENDAR

Annual General Meeting	6 April 2017
First quarter trading report	5 May 2017
3D\PHQWRI²QDOGLYLGHQG	10 May 2017
Half year results announced	27 July 20171
Third quarter trading report	1RYHPEHU
3D\PHQWRILQWHULPGLYLGHQG	1RYHPEHU
Full year results announced	)HEUXDU\1
\$QQXDO5HSRUWDYDLODEOH	)HEUXDU\0DUFK
Annual General Meeting	\$SULO

'LYLGHQGGHFODUDWLRQGDWHV

Annual General Meeting

7KH&RPSDQ\ªV\$QQXDO*HQHUDO0HHWLQJ\$*0?ZLOOEHKHOGRQ\$SULODWSPDW1R&DYHQGLVK6TXDUH/RQGRQ:*\$1 5HJLVWHUHGVKDUHKROGHUVKDYHEHHQVHQWHLWKHUD1RWLFHRI\$QQXDO*HQHUDO0HHWLQJRUQRWL²FDWLRQRIDYDLODELOLW\RIWKH1RWLFHRI \$QQXDO*HQHUDO0HHWLQJ

&RUSRUDWHKHDGTXDUWHUVDQGUHJLVWHUHGRI²FH

7KHFRUSRUDWHKHDGTXDUWHUVLVLQWKH8.DQGWKHUHJLVWHUHGRI²FHDGGUHVVLV6PLWK 1HSKHZSOF\$GDP6WUHHW/RQGRQ:1/\$8. 5HJLVWHUHGLQ(QJODQGDQG:DOHV1R7HO?ZHEVLWHZZZVPLWKQHSKHZFRP

25',1\$5<6+\$5(+2/'(56

Registrar

\$OOJHQHUDOHQTXLULHVFRQFHUQLQJVKDUHKROGLQJVGLYLGHQGVFKDQJHVWRVKDUHKROGHUVªSHUVRQDOGHWDLOVDQGWKH\$*0VKRXOGEHDGGUHVVHGWR

&RPSXWHUVKDUH,QYHVWRU6HUYLFHVSOF7KH3DYLOLRQV%ULGJZDWHU5RDG%ULVWRO%6==

7HO 7HO?IURPRXWVLGHWKH8. :HEVLWHZZZLQYHVWRUFHQWUHFRXN

/LQHVDUHRSHQIURPDPWRSP0RQGD\WR)ULGD\H[FOXGLQJSXEOLFKROLGD\VLQ(QJODQGDQG:DOHV

6KDUHKROGHUIDFLOLWLHV

,QYHVWRU&HQWUH

<RXFDQQRZPDQDJH\RXUKROGLQJVRQOLQHE\UHJLVWHULQJRQ&RPSXWHUVKDUHªVVHFXUHVKDUHKROGHUZHEVLWH,QYHVWRU&HQWUH2QFHUHJLVWHUHG ,QYHVWRU&HQWUHPDNHVLWHDV\IRU\RXWRVLJQXSIRUHOHFWURQLFFRPPXQLFDWLRQVXSGDWH\RXUDGGUHVVGHWDLOVDQGDGGDSD\PHQWLQVWUXFWLRQ 9LVLWZZZLQYHVWRUFHQWUHFRXNIRUDIDVWDQGFRQYHQLHQWZD\WRPDQDJH\RXUKROGLQJV

(FRPPXQLFDWLRQV

:HHQFRXUDJH\RXWRHOHFWWRUHFHLYHFRPPXQLFDWLRQVYLDHPDLODVWKLVKDVVLJQL²FDQWHQYLURQPHQWDODQGFRVWEHQH²WV,I\RXZRXOGOLNHWR UHFHLYHHPDLOQRWL²FDWLRQVZKHQ\RXUVKDUHKROGHUFRPPXQLFDWLRQVDUHDYDLODEOHRQOLQHSOHDVHVXEPLW\RXUHPDLODGGUHVVDQG651E\YLVLWLQJ ZZZLQYHVWRUFHQWUHFRXNHFRPPV

3D\PHQWRIGLYLGHQGVGLUHFWWR\RXUEDQNRUEXLOGLQJVRFLHW\DFFRXQW

,I\RXZLVKWRDYRLGWKHULVNRI\RXUGLYLGHQGDZDUGVJHWWLQJORVWRUPLVODLG\RXFDQDUUDQJHWRKDYH\RXUFDVKGLYLGHQGVSDLGGLUHFWO\WRDEDQNRUEXLOGLQJ VRFLHW\DFFRXQW7KLVIDFLOLW\LVDYDLODEOHWR8.UHVLGHQWVKDUHKROGHUVZKRUHFHLYH6WHUOLQJGLYLGHQGV,I\RXGRQRWOLYHLQWKH8.\RXPD\ EHDEOHWRUHJLVWHUIRUWKH*OREDO3D\PHQW6HUYLFH)RUPRUHLQIRUPDWLRQSOHDVHFRQWDFW&RPSXWHUVKDUH

'LYLGHQG5H,QYHVWPHQWSODQ'5,3

7KH&RPSDQ\RIIHUVVKDUHKROGHUVH[FHSWWKRVHLQ1RUWK\$PHULFD?WKHRSSRUWXQLW\WRSDUWLFLSDWHLQD'5,37KLVHQDEOHV\RXWRUHLQYHVW\RXUFDVK GLYLGHQGVLQIXUWKHURUGLQDU\VKDUHVRI6PLWK 1HSKHZSOF7KHVHDUHSXUFKDVHGLQWKHPDUNHWDWFRPSHWLWLYHGHDOLQJFRVWV)RUIXUWKHUGHWDLOVSOXV DQDSSOLFDWLRQIRUPWRUHLQYHVWIXWXUHGLYLGHQGVFRQWDFW&RPSXWHUVKDUH

'XSOLFDWHDFFRXQWV

,I\RXKDYHPRUHWKDQRQHDFFRXQWGXHWRLQFRQVLVWHQF\LQDFFRXQWGHWDLOV\RXPD\DYRLGGXSOLFDWHPDLOLQJVE\ZULWLQJWR&RPSXWHUVKDUHDQGUHTXHVWLQJ DQDPDOJDPDWLRQRI\RXUVKDUHDFFRXQWV

Keep your personal details up to date

3OHDVHUHPHPEHUWRWHOO&RPSXWHUVKDUHLI\RXPRYHKRXVHRUFKDQJHEDQNGHWDLOVRUWKHUHLVDQ\RWKHUFKDQJHLQ\RXUDFFRXQWLQIRUPDWLRQ,I\RXKDYH DOUHDG\UHJLVWHUHGZLWK,QYHVWRU&HQWUH\RXFDQXSGDWH\RXUDGGUHVVRQOLQH\$OWHUQDWLYHO\RXZLOOQHHGWRFRPSOHWHD&KDQJHRI\$GGUHVVIRUPDQGVHQG LWWR&RPSXWHUVKDUH<RXFDQDFFHVVD&KDQJHRI\$GGUHVVIRUPYLDLQYHVWRUFHQWUHE\YLVLWLQJKWWSZZZFRPSXWHUVKDUHFRPXN613IRUPV

<RXFDQDOVRFKDQJH\RXUDGGUHVVRUXSGDWH\RXUEDQNGHWDLOVTXLFNO\DQGHDVLO\RYHUWKHSKRQHXVLQJWKHFRQWDFWQXPEHUDERYH

INFORMATION FOR SHAREHOLDERS

Individual savings account (ISA)

Shareholders who are UK resident may hold Smith & Nephew plc shares in an ISA, which is administered by the Company's registrar. For information about this service please contact Computershare.

SHAREHOLDER COMMUNICATIONS

We make quarterly financial announcements which are mailable through Stock Exchange announcements and on the Group's website (www.smith-nephew.com). Copies of recent Annual Reports, press releases, institutional presentations and audio webcasts are also available on the website.

We send paper copies of the Notice of Annual General Meeting and Annual Report only to those shareholders who have elected to receive shareholder documentation by post. Electronic opies of the Annual General Meeting are available on the Group's website at www.smith-nephew.com. Both ordinary shareholders can request paper copies of the Annual Report, which the Company provides free of charge. The Company will continary shareholders by post the Form of Proxy notifying them of the availability of the Annual Report and Notice of Annual General Meeting on the Group's website. If you elect to receive the Annual General Meeting electronically you are informed by e-mail of the Group's website. ADS holders receive the Form of Proxy by post, but will not receive a paper copy of the Notice of Annual General Meeting.

INVESTOR COMMUNICATIONS

The Company maintains regular dialogue with individual institutional shareholders, together with results presentations. To ensure that all members of the Board develop an understanding of the views of mestors, the Executive Directors review significant issues raised by investors with the Board. Non-Executive Directors are sent copies of analysts' and brokers' briefings. There is an opportunity for individual shareholders to question the Directors at the Annual General Meeting and the Company regularly responds to letters from shareholders on a range of issues.

UK CAPITAL GAINS TAX

For the purposes of UK capital gains tax, the Company's ordinary shares on 31 March 1982 was 35.04p.

SMITH & NEPHFW SHARF PRICE

The Company's ordinary shares are quoted on the London Stock Exchange under the symbol SN. The price is available on the Smith & Nephew website www.smith-nephew.com and at www.londonstockexchange.com where the financial data is updated with a 15-minute delay.

SHAREGIFT

If you hold a small number of shares, which would cost more to sell than they are worth, you may wish to the charity ShareGift Registered Charity no. 1052686) which specialises in accepting such shares as donations for Capital Gains Tax purposes (no gain or loss) and it may also be possible to obtain income tax relief. The relevant stock transfer from Computershare at the address given on page 181.

Further information about ShareGift is available at www.sharegift.org or by contacting ShareGift at:

ShareGift, PO Box 72253, London SW1P 9LQ

Tel: (+44) (0) 20 7930 3737

UNAUTHORISED BROKERS (BOILER ROOM SCAMS)

You are advised to be very wary of any unsolicied advice, offers to buy shares at a discount or offers of free Company reports. These are typically from overseas-based "brokers' who target UK shareholders offering to sell them what often turn out to be worthless or high-risk shares in US or UK investments. These operations are commonly known as 'boiler rooms'.

If you deal with an unauthorised firm, you will not be eigible to receive payment under the Financial Services Compensation Scheme if things go wrong. lf you receive any unsolicited investment advice, obtain the person and organisation and check that they are propery authorised by the FCA by visiting www.fca.org.uk/register/

If you think you have been approached by an unauthorised firm you should contact the FCA consumer helpline on 0800 111 6768 or e-mail [email protected]

More detailed information can be found on the FCA website at www.fca.org.uk/consumers/protect-yourself/unauthorised-firms.

SOCIAL MEDIA

Smith & Nephew has a presence across a range of social media channels, including Twitter, Facebook and Linked below. Information provided by Smith & Nephew through social media channels is not incorporated by reference herein and does not form part of our Annual Report or Form 20-F.

twitter.com/SmithNephewPLC

AMERICAN DEPOSITARY SHARES (ADSS) AND AMERICAN DEPOSITARY RECEIPTS (ADRS)

In the USA, the Company's ordinary shares are traded in the form of ADSs, on the New York Stock Exchange under the symbol SNN. Each American Depositary Share represents two ordinary shares. Deutsche Bank is the Company's ADR programme.

ADS ENQUIRIES

All enquiries regarding ADS holder accounts and payment of dividends should be addressed to:

Deutsche Bank Shareholder Services American Stock Transfer and Trust Company Operations Centre 6201 15th Avenue Brooklyn, New York NY 11219

Tel: +1 866 249 2593 (toll free) E-mail: [email protected] Website: www.adr.db.com

The Deutsche Bank Global Direct Investor Services Program is arabling investment directly in ADS with reduced brokerage commissions and service costs. For further information on Gobal Direct contact Deutsche Bank Shareholder Services (as above) or visit www.adr.db.com

The Company provides Deutsche Bank, as depositary, with copies of Annual Reports containing Consolicated Financial Statements and the opinion expressed thereon by its independent auditor. Such financial statements are prepared under IFRS. Deutsche Bank will send these reports to recorded ADS hodders who have elected to receive paper copies. The Company also provides to Deutsche Bank all notices of shareholders' meetings and other reports and communications that are made generally available to shareholders of the Company. Deutsche Bank makes such notices, reports and communications available for inspection by recorded holders of ADSs and sends voting instruction forms by post to all recorded holders of ADSs.

SMITH & NEPHEW ADS PRICE

The Company's ADS price can be obtained from the official New York Stock Exchange website at www.nyse.com, the Smith & Nephew website www.smith-nephew.com, and is quoted daily in the Wall Street Journal where the live financial data is updated with a 15-minute delay

ADS PAYMENT INFORMATION

The Company hereby discloses ADS payment information for the year ended 31 December with the Securities and Exchange Commission rules 12.D.S and 12.D.A relating to Frilings by foreign private issues. The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing ADSs for the purpose of with drawal or from internediaries acting for them. The depositary collects fees for making distributions to investors, including ayment of dividends by the Company by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary services by deductions from cash distributions or by directly billing investors or by charging the book-entry system acting for them. The depositary nay generally refuse to provide fee-attracting services until its fee for those services are paid.

Persons depositing or withdrawing shares must pay	For
\$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) \$0.05 (or less) per ADS	Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates Any cash distribution to ADS registered holders, including payment of dividend
\$0.05 (or less) per ADS per calendar year Registration or transter tees	Depositary services Transfer and registration of shares on our share register to or from the name of the depositary or its agent when shares are deposited or withdrawn
Taxes and other governmental charges the depositary or the custodian As necessary have to pay on any ADS or share underlying an ADS, for example, stock transter taxes, stamp duty or withholding taxes
Any charges incurred by the depositary or its agents for servicing the deposited securities	As necessary

During 2016, a fee of one US cent per ADS was collected on the 2015 final dividend paid in May and a fee of one US cent per ADS was collected on the 2016 interim dividend paid in October. In the period 1 January 2017, the total program payments made by Deutsche Bank Trust Company Americas were \$515,910.

GOVERNANCE

INFORMATION FOR SHAREHOLDERS

DIVIDEND HISTORY

Smith & Nephew has paid dividends on its ordinary shares in every year since 1937. Following the capital reduction in 2000, the Group adopted a policy of increasing its divide the ratio of EPSA, as set out in the 'Selected financial data', to ordinary dividends declared for the year). This was intended to increase the financis of the Group for acquisitions and other investments. From 2000 to 2004, he dividend increased in line with inflation and, in 2004, dividend cover stood at 4.1 times. Having achieved this level of the Board changed the policy, from that of increasing dividends in line with increasing dividends for 2005 and after by 10%. Following the redenomination of the Company's share capital into US Dollars, the Board re-affirmed its policy of increasing the dividend by 10% a year in US Dollar terms.

On 2 August 2012, the Board announced its intention to pursue a progressive dividend policy, with the aim of increasing the US Dollar value of ordinary dividends over time broadly based on the Group's underlying growth in earnings, while taking into account capital requirements and cash flows.

At the time of the full year results, the Board reviews the appropriate level of total annual dividend that the interim dividend will be set by a formula and will be equivalent to 40% of the previous year. Dividends will continue to be declared in US Dollars with an equivalent amount in Sterling payable to those registered address is in the UK, or who have validly elected to receive Sterling dividends.

An interim dividend in respect of each fiscal year in August and paid in November. A final dividend will be recommonded by the Board of Directors and paid subject to approval by shareholders at the Company's Annual General Meeting,

Future dividends of Smith & Nephew will be dependent upon : the future financial condition of the Group; the Board's dividend policy; and the additional factors that might affect the Group set out in 'Special note regarding forward-looking statements' and 'Risk Factor'.

DIVIDENDS PER SHARE

The table below sets out the dividends per ordinary share in the last five years.

					Years ended 31 December
	2016	2015	2014	2013	2012
Pence per share:
Interim	10.080	8.533	7.578	7.211	6.811
Final	14.883	13.496	13.711	11.233	11.778
Total	24.963	22.029	21.289	18 444	18.589
US cents per share:
Interim	12.300	13.111	12.222	11.556	11.000
Final	18.500	19.000	20.667	18.889	18.000
Total	30.800	32.111	32.889	30.445	29.000

1 Translated at the Bank of England rate on 17 February 2017.

Dividends above include the associated UK tax credit of 10%, but exclude the deduction of withholding the interim dividend for 2015. From 6 April 2016, please note that dividends below £5,000 per tax year will be tax free and dividends above £5,000 per tax year will be subject to personal income tax at the rate of 7.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. A self-assessment form will therefore be required. This will apply to both cash and DRP dividends paid on shares held within pensions and ISAs will be unaffected, remaining tax free.

Since the second interim dividend for 2005, all dividends have been declared in US cents per ordinary share.

The 2016 final dividend will be payable on 10 May 2017, subject to shareholder approval.

In respect of the proposed final dividend for the year ended 31 December 2016 of 18.5 US cents per ordinary share, the record date will be 31 March 2017 and the payment date will be 10 May 2017. The Sterling share will be set following the record date. Shareholders may elect to receive their dividend in either Stering or US Dollars and the 21 April 2017. The ordinary shares will trade ex-dividend on both the London and New York Stock Exchanges from 30 March 2017.

The proposed final dividend of 18.5 US cents per ordinary share, which the interim dividend of 12.3 US cents, makes a total for 2016 of 30.8 US cents.

SHARE PRICES

The table below sets out, for the periods indicated, the highest middle market quotations for the Company's ordinary shares (as derived from the Daily Official List of the UK Listing Authority and the highest and lowest sales prices of its ADSs (as reported on the New York Stock Exchange composite tape).

		Ordinary shares		ADSs
	High ದ	Low A	High വട്ടു	Low ાટફ
Year ended 31 December:
2012	6.93	5.80	56.13	45.13
2013	8.68	6.80	71.85	52.90
20141	11.93	8.57	97.27	29.39
2015	12.12	10.60	37.78	32.48
2016	13.10	10.51	35.06	27.11
Quarters in the year ended 31 December:
2015:
1st Quarter	12.00	11.13	36.85	33.44
2nd Quarter	11.95	10.72	35.80	33.68
3rd Quarter	12.03	10.68	37.78	33.24
4th Quarter	12.12	10.60	35.88	32.48
2016:
1st Quarter	11.79	10.51	34.80	30.55
2nd Quarter	12.67	11.12	34.97	31.43
3rd Quarter	13.10	12.11	35.06	32.37
4th Quarter	12.81	10.67	32.97	27.11
2017:
1st Quarter (to 17 February 2017)	12.37	10.51	30.78	29.90
Last six months:
August 2016	13.00	12.24	33.81	32.73
September 2016	12.67	12.11	33.70	32.37
October 2016	12.81	11.83	32.97	29.25
November 2016	11.56	10.67	28.75	27.11
December 2016	12.21	11.06	30.08	28.07
January 2017	12.37	11.70	30.74	29.90
February 2017 (to 17 February 2017)	12.07	10.51	30.78	30.19

1 On 14 October 2014, the ratio of ordinary shares per ADS changed from five ordinary shares per ADS to two ordinary shares per ADS.

SHARE CAPITAL

The principal trading market for the ordinary shares is the ordinary shares were listed on the New York Stock Exchange on 16 November 1999, trading in the form of ADSs evidenced by ADRs. Each ADS represents two ordinary shares from 14 October which time one ADS represented five ordinary shares. The ADS facility is sponsored by Deutsche Bank acting as depositary.

All the ordinary shares, including those held by Difeers, rank pari passu with each other. On 23 January 2006, the ordinary shares of 12%p were redenominated as ordinary shares of US 20 cents following approval by shareholders at the Extraordinary General Meeting in December 2005). The new US Dolar ordinary shares carry the same rights as the shares. The share price continues to be quoted in Sterling. In 2006, the Company issued £50,000 of shares in Stering in order to comply with English law. These, which are not listed on any stock exchange. They have extremely himted rights and therefore frectively have no value. The Chief Executive Officer, although the Board reserves the right to transfer them to another member of the Board should it so wish.

Shareholdings

As at 17 February 207, to the knowledge of the Group, there were 15,167 registered holders of whom 92 had registered addresses in the USA and held a total of 207,127 ordinary shares (0.02% of the total issued). Because certain ordinary shares of nomines, the number of shareholders with registered addresses in the number of beneficial owners of ordinary shares resident in the USA.

As at 17 February 2017, 31,428,045 ADSs equivalent to 62,856,090 ordinary shares or approximately 7.2% of the total ordinary shares in issue, were outstanding and were held by 88 registered ADS holders.

5(9,(:

,1)250\$7,21)256+\$5(+2/'(56

6+\$5(&\$3,7\$/continued

Major shareholders

\$VIDUDVLVNQRZQWR6PLWK 1HSKHZWKH*URXSLVQRWGLUHFWO\RULQGLUHFWO\RZQHGRUFRQWUROOHGE\DQRWKHUFRUSRUDWLRQRUE\DQ\JRYHUQPHQWDQGWKH *URXSKDVQRWHQWHUHGLQWRDUUDQJHPHQWVWKHRSHUDWLRQRIZKLFKPD\DWDVXEVHTXHQWGDWHUHVXOWLQDFKDQJHLQFRQWURORIWKH*URXS

\$VDW)HEUXDU\QRSHUVRQVDUHNQRZQWR6PLWK 1HSKHZWRKDYHDQ\LQWHUHVWDVGH²QHGLQWKH'LVFORVXUHDQG7UDQVSDUHQF\5XOHVRIWKH)&\$? LQRUPRUHRIWKHRUGLQDU\VKDUHVRWKHUWKDQDVVKRZQEHORZ7KHIROORZLQJWDEOHVVKRZFKDQJHVRYHUWKHODVWWKUHH\HDUVLQWKHSHUFHQWDJHDQG QXPEHUVRIWKHLVVXHGVKDUHFDSLWDORZQHGE\VKDUHKROGHUVKROGLQJRUPRUHRIRUGLQDU\VKDUHVDVQRWL²HGWRWKH&RPSDQ\XQGHUWKH'LVFORVXUHDQG 7UDQVSDUHQF\5XOHV


	)HEUXDU\	2016	2015

%ODFN5RFN,QF
,QYHVFR

				\$VDW'HFHPEHU
	)HEUXDU\ '000	2016 '000	2015 '000	'000
%ODFN5RFN,QF
,QYHVFR

7KH&RPSDQ\LVQRWDZDUHRIDQ\SHUVRQZKRKDVDVLJQL²FDQWGLUHFWRULQGLUHFWKROGLQJRIVHFXULWLHVLQWKH&RPSDQ\DQGLVQRWDZDUHRIDQ\SHUVRQV KROGLQJVHFXULWLHVZKLFKPD\FRQWUROWKH&RPSDQ\7KHUHDUHQRVHFXULWLHVLQLVVXHZKLFKKDYHVSHFLDOULJKWVDVWRWKHFRQWURORIWKH&RPSDQ\

3XUFKDVHRIRUGLQDU\VKDUHVRQEHKDOIRIWKH&RPSDQ

\$WWKH\$*0WKH&RPSDQ\ZLOOEHVHHNLQJDUHQHZDORILWVFXUUHQWSHUPLVVLRQIURPVKDUHKROGHUVWRSXUFKDVHXSWRRILWVRZQVKDUHV,QRUGHUWRDYRLG VKDUHKROGHUGLOXWLRQVKDUHVDOORWWHGWRHPSOR\HHVWKURXJKHPSOR\HHVKDUHVFKHPHVDUHERXJKWEDFNRQDTXDUWHUO\EDVLVDQGVXEVHTXHQWO\FDQFHOOHG E\WKH&RPSDQ\

,QDGGLWLRQWKH&RPSDQ\HQJDJHGLQDVKDUHEX\EDFNDVDUHVXOWRIWKHGLYHVWLWXUHRILWV*\QDHFRORJ\EXVLQHVVWR0HGWURQLFSOFLQ\$XJXVW 7KLVEX\EDFNSURJUDPPHUDQIURP\$XJXVWWR'HFHPEHU

)URP-DQXDU\WR)HEUXDU\LQWKHPRQWKVOLVWHGEHORZWKH&RPSDQ\KDVSXUFKDVHGRUGLQDU\VKDUHVDWDFRVWRI86P

	Total shares purchased ©V	\$YHUDJHSULFH paid per share pence	\$SSUR[LPDWH86YDOXH of shares purchased under the plan
)HEUXDU\
0D\¥-XQH
\$XJXVW
\$XJXVW¥'HFHPEHU
'HFHPEHU
)HEUXDU\

7KHVKDUHVZHUHSXUFKDVHGLQWKHRSHQPDUNHWE-30RUJDQ&D]HQRYH/LPLWHGDQG0HUULOO/\QFK,QWHUQDWLRQDORQEHKDOIRIWKH&RPSDQ\

Exchange controls and other limitations affecting security holders

There are no UK governmental laws, decrees or regulations that restrict the export or import of capital or that affect the payment of dividends, interest or other payments to non-resident holders of Smith & Nephew's securities, except for certain restrictions imposed from time to time by Her Majesty's Treasury of the United Kingdom pursuant to legislation, such as the United Nations Act 1946 and the Emergency Laws Act 1964, against the government or residents of certain countries.

There are no limitations, either under the laws of the UK or under the Articles of Association of Smith & Nephew, restricting the right of non- UK residents to hold or to exercise voting rights in respect of ordinary shares, except that where any overseas shareholder has not provided to the Company a UK address for the service of notices, the Company is under no obligation to send any notice or other document to an overseas address. It is, however, the current practice of the Company to send every notice or other document to all shareholders regardless of the country recorded in the register of members, with the exception of details of the Company's dividend reinvestment plan, which are not sent to shareholders with recorded addresses in the USA and Canada.

TAXATION INFORMATION FOR SHAREHOLDERS

The comments below are of a general and summary nature and are based on the Group's understanding of certain aspects of current UK and US federal income tax law and practice relevant to the ADSs and ordinary shares not in ADS form. The comments address the material US and UK tax consequences generally applicable to a person who is the beneficial owner of ADSs or ordinary shares and who, for US federal income tax purposes, is a citizen or resident of the USA, a corporation (or other entity taxable as a corporation) created or organised in or under the laws of the USA (or any State therein or the District of Columbia), or an estate or trust the income of which is included in gross income for US federal income tax purposes regardless of its source (each a US Holder). The comments set out below do not purport to address all tax consequences of the ownership of ADSs or ordinary shares that may be material to a particular holder and in particular do not deal with the position of shareholders who directly or indirectly own 10% or more of the Company's issued ordinary shares. This discussion does not apply to (i) persons whose holding of ADSs or ordinary shares is effectively connected with or pertains to either a permanent establishment in the UK through which a US Holder carries on a business in the UK or a fixed base from which a US Holder performs independent personal services in the UK, or (ii) persons whose registered address is inside the UK. This discussion does not apply to certain investors subject to special rules, such as certain financial institutions, tax-exempt entities, insurance companies, broker-dealers and traders in securities that elect to use the mark-to-market method of tax accounting, partnerships or other entities treated as partnerships for US federal income tax purposes, US Holders holding ADSs or ordinary shares as part of a hedging, conversion or other integrated transaction or US Holders whose

functional currency for US federal income tax purposes is other than the US Dollar. In addition, the comments below do not address the potential application of the provisions of the United States Internal Revenue Code, known as the Medicare contribution tax, any alternative minimum tax consequences or any US state, local or non-US (other than UK) taxes. The summary deals only with US Holders who hold ADSs or ordinary shares as capital assets. The summary is based on current UK and US law and practice which is subject to change, possibly with retroactive effect. US Holders are recommended to consult their own tax advisers as to the particular tax consequences to them of the ownership of ADSs or ordinary shares. The Company believes, and this discussion assumes, that the Company was not a passive foreign investment company for its taxable year ended 31 December 2016.

This discussion is based in part on representations by the depositary and assumes that each obligation under the deposit agreement and any related agreement will be performed in accordance with its terms. For purposes of US federal income tax law, US Holders of ADSs will generally be treated as owners of the ordinary shares represented by the ADSs. However, the US Treasury has expressed concerns that parties to whom depositary shares are released before shares are delivered to the depositary (pre-released) may be taking actions that are inconsistent with the claiming of foreign tax credits by owners of depositary shares. Such actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate US Holders. Accordingly, the availability of the reduced tax rate for dividends received by certain non-corporate US Holders of ADSs could be affected by actions that may be taken by parties to whom ADSs are pre-released.

Taxation of dividends in the UK and the USA

The UK does not currently impose a withholding tax on dividends paid by a UK corporation, such as the Company.

Distributions paid by the Company will be treated for US federal income tax purposes as foreign source ordinary dividend income to a US Holder to the extent paid out of the Company's current or accumulated earnings and profits as determined for US federal income tax purposes. Because the Company does not maintain calculations of its earnings and profits under US federal income tax principles, it is expected that distributions generally will be reported to US Holders as dividends. Such dividends will not be eligible for the dividends-received deduction generally allowed to corporate US Holders.

Dividends paid to certain non-corporate US Holders of ordinary shares or ADSs may be subject to US federal income tax at lower rates than those applicable to other types of ordinary income if certain conditions are met. Non-corporate US Holders should consult their own tax advisers to determine whether they are subject to any special rules that limit their ability to be taxed at these favourable rates.

INFORMATION FOR SHAREHOLDERS

SHARE PRICES continued

Taxation of capital gains

US Holders, who are not resident or ordinarily resident for tax purposes in the UK, will not generally be liable for UK capital gains tax on any capital gain realised upon the sale or other disposition of ADSs or ordinary shares unless the ADSs or ordinary shares are held in connection with a trade carried on in the UK through a permanent establishment (or in the case of individuals, through a branch or agency). Furthermore, UK resident individuals who acquire ADSs or ordinary shares before becoming temporarily non-UK residents may remain subject to UK taxation of capital gains on gains realised while non-resident.

For US federal income tax purposes, gains or losses realised upon a taxable sale or other disposition of ADSs or ordinary shares by US Holders generally will be US source capital gains or losses and will be long-term capital gains or losses if the ADSs or ordinary shares were held for more than one year. The amount of a US Holder's gain or loss will be equal to the difference between the amount realised on the sale or other disposition and such holder's tax basis in the ADSs, or ordinary shares, each determined in US Dollars.

Inheritance and estate taxes

The HM Revenue & Customs imposes inheritance tax on capital transfers which occur on death, and in the seven years preceding death. The HM Revenue & Customs considers that the US/UK Double Taxation Convention on Estate and Gift Tax applies to inheritance tax. Consequently, a US citizen who is domiciled in the USA and is not a UK national or domiciled in the UK will not be subject to UK inheritance tax in respect of ADSs and ordinary shares. A UK national who is domiciled in the USA will be subject to both UK inheritance tax and US federal estate tax but will be entitled to a credit for US federal estate tax charged in respect of ADSs and ordinary shares in computing the liability to UK inheritance tax. Conversely, a US citizen who is domiciled or deemed domiciled in the UK will be entitled to a credit for UK inheritance tax charged in respect of ADSs and ordinary shares in computing the liability for US federal estate tax. Special rules apply where ADSs and ordinary shares are business property of a permanent establishment of an enterprise situated in the UK.

US information reporting and backup withholding

Payments of dividends on, or proceeds from the sale of, ADSs or ordinary shares that are made within the USA or through certain US-related financial intermediaries generally will be subject to US information reporting, and may be subject to backup withholding, unless a US Holder is an exempt recipient or, in the case of backup withholding, provides a correct US taxpayer identification number and certain other conditions are met. US backup withholding may apply if there has been a notification from the US Internal Revenue Service of a failure to report all interest or dividends.

Any backup withholding deducted may be credited against the US Holder's US federal income tax liability, and, where the backup withholding exceeds the actual liability, the US Holder may obtain a refund by timely filing the appropriate refund claim with the US Internal Revenue Service.

Certain US Holders who are individuals or closely-held entities held by individuals may be required to report information relating to securities issued by a non-US person (or foreign accounts through which the securities are held), subject to certain exceptions (including an exception for securities held in accounts maintained by US financial institutions). US Holders should consult their tax advisers regarding their reporting obligations with respect to the ordinary shares or ADSs.

UK stamp duty and stamp duty reserve tax

RISK

UK stamp duty is charged on documents and in particular instruments for the transfer of registered ownership of ordinary shares. Transfers of ordinary shares in certificated form will generally be subject to UK stamp duty at the rate of ½% of the consideration given for the transfer with the duty rounded up to the nearest £5.

UK stamp duty reserve tax (SDRT) arises when there is an agreement to transfer shares in UK companies 'for consideration in money or money's worth', and so an agreement to transfer ordinary shares for money or other consideration may give rise to a charge to SDRT at the rate of ½% (rounded up to the nearest penny). The charge of SDRT will be cancelled, and any SDRT already paid will be refunded, if within six years of the agreement an instrument of transfer is produced to HM Revenue & Customs and the appropriate stamp duty paid.

Transfers of ordinary shares into CREST (an electronic transfer system) are exempt from stamp duty so long as the transferee is a member of CREST who will hold the ordinary shares as a nominee for the transferor and the transfer is in a form that will ensure that the securities become held in uncertificated form within CREST. Paperless transfers of ordinary shares within CREST for consideration in money or money's worth are liable to SDRT rather than stamp duty. SDRT on relevant transactions will be collected by CREST at 1/2%, and this will apply whether or not the transfer is effected in the UK and whether or not the parties to it are resident or situated in the UK.

A charge of stamp duty or SDRT at the rate of 1½% of the consideration (or, in some circumstances, the value of the shares concerned) will arise on a transfer or issue of ordinary shares to the depositary or to certain persons providing a clearance service (or their nominees or agents) for the conversion into ADRs and will generally be payable by the depositary or person providing clearance service. In accordance with the terms of the Deposit Agreement, any tax or duty payable by the depositary on deposits of ordinary shares will be charged by the depositary to the party to whom ADRs are delivered against such deposits.

No liability for stamp duty or SDRT will arise on any transfer of, or agreement to transfer, an ADS or beneficial ownership of an ADS, provided that the ADS and any instrument of transfer or written agreement to transfer remains at all times outside the UK, and provided further that any instrument of transfer or written agreement to transfer is not executed in the UK and the transfer does not relate to any matter or thing done or to be done in the UK (the location of the custodian as a holder of ordinary shares not being relevant in this context). In any other case, any transfer of, or agreement to transfer, an ADS or beneficial ownership of an ADS could, depending on all the circumstances of the transfer, give rise to a charge to stamp duty or SDRT.

ARTICLES OF ASSOCIATION

The following summarises certain material rights of holders of the Company's ordinary shares under the material provisions of the Company's Articles of Association and English law. This summary is qualified in its entirety by reference to the Companies Act and the Company's Articles of Association. In the following description, a 'shareholder' is the person registered in the Company's register of members as the holder of an ordinary share.

The Company is incorporated under the name Smith & Nephew plc and is registered in England and Wales with registered number 324357.

The Company's ordinary shares may be held in certificated or uncertificated form. No holder of the Company's shares will be required to make additional contributions of capital in respect of the Company's shares in the future. In accordance with English law, the Company's ordinary shares rank equally.

Directors

Under the Company's Articles of Association, a Director may not vote in respect of any contract, arrangement, transaction or proposal in which he, or any person connected with him, has any material interest other than by virtue of his interests in securities of, or otherwise in or through, the Company. This is subject to certain exceptions relating to proposals (a) indemnifying him in respect of obligations incurred on behalf of the Company, (b) indemnifying a third party in respect of obligations of the Company for which the Director has assumed responsibility under an indemnity or guarantee, (c) relating to an offer of securities in which he will be interested as an underwriter, (d) concerning another body corporate in which the Director is beneficially interested in less than 1% of the issued shares of any class of shares of such a body corporate, (e) relating to an employee benefit in which the Director will share equally with other employees and (f) relating to any insurance that the Company is empowered to purchase for the benefit of Directors of the Company in respect of actions undertaken as Directors (and/or officers) of the Company.

A Director shall not vote or be counted in any quorum present at a meeting in relation to a resolution on which he is not entitled to vote.

The Directors are empowered to exercise all the powers of the Company to borrow money, subject to the limitation that the aggregate amount of all monies borrowed after deducting cash and current asset investments by the Company and its subsidiaries shall not exceed the sum of \$6,500,000,000.

Any Director who has been appointed by the Directors since the previous Annual General Meeting of shareholders, either to fill a casual vacancy or as an additional Director holds office only until the conclusion of the next Annual General Meeting and then shall be eligible for re-election by the shareholders. The other Directors retire and are eligible for re-appointment at the third Annual General Meeting after the meeting at which they were last re-appointed. If not re-appointed, a Director retiring at a meeting shall retain office until the meeting appoints someone in his place, or if it does not do so, until the conclusion of the meeting. The Directors are subject to removal with or without cause by the Board or the shareholders. Directors are not required to hold any shares of the Company by way of qualification.

Under the Company's Articles of Association and English law, a Director may be indemnified out of the assets of the Company against liabilities he may sustain or incur in the execution of his duties.

Rights attaching to ordinary shares

Under English law, dividends are payable on the Company's ordinary shares only out of profits available for distribution, as determined in accordance with accounting principles generally accepted in the UK and by the Companies Act 2006. Holders of the Company's ordinary shares are entitled to receive final dividends as may be declared by the Directors and approved by the shareholders in general meeting, rateable according to the amounts paid up on such shares, provided that the dividend cannot exceed the amount recommended by the Directors.

The Company's Board of Directors may declare such interim dividends as appear to them to be justified by the Company's financial position. If authorised by an ordinary resolution of the shareholders, the Board may also direct payment of a dividend in whole or in part by the distribution of specific assets (and in particular of paid up shares or debentures of the Company).

Any dividend unclaimed after 12 years from the date the dividend was declared, or became due for payment, will be forfeited and will revert to the Company.

There were no material modifications to the rights of shareholders under the Articles during 2016.

Voting rights of ordinary shares

Voting at any general meeting of shareholders is by a show of hands unless a poll, which is a written vote, is duly demanded and held. On a show of hands, every shareholder who is present in person at a general meeting has one vote regardless of the number of shares held. On a poll, every shareholder who is present in person or by proxy has one vote for each ordinary share held by that shareholder. A poll may be demanded by any of the following:

the chairman of the meeting;
at least five shareholders present or by proxy entitled to vote on the resolution;
any shareholder or shareholders representing in the aggregate not less than one-tenth of the total voting rights of all shareholders entitled to vote on the resolution; or
any shareholder or shareholders holding shares conferring a right to vote on the resolution on which there have been paid-up sums in aggregate equal to not less than one-tenth of the total sum paid up on all the shares conferring that right.

A form of proxy will be treated as giving the proxy the authority to demand a poll, or to join others in demanding one, as above.

The necessary quorum for a general meeting is two shareholders present in person or by proxy carrying the right to vote upon the business to be transacted

INFORMATION FOR SHAREHOLDERS

ARTICLES OF ASSOCIATION continued

Matters are transacted at general meetings of the Company by the processing and passing of resolutions of which there are two kinds; ordinary or special resolutions:

Ordinary resolutions include resolutions for the re-election of Directors, the approval of financial statements, the declaration of dividends (other than interim dividends), the appointment and re-appointment of auditors or the grant of authority to allot shares. An ordinary resolution requires the affirmative vote of a majority of the votes of those persons voting at the meetings at which there is a quorum.
Special resolutions include resolutions amending the Company's Articles of Association, dis-applying statutory pre-emption rights or changing the Company's name; modifying the rights of any class of the Company's shares at a meeting of the holders of such class or relating to certain matters concerning the Company's winding up. A special resolution requires the affirmative vote of not less than three-quarters of the votes of the persons voting at the meeting at which there is a quorum.

Annual General Meetings must be convened upon advance written notice of 21 days. Other general meetings must be convened upon advance written notice of at least 14 clear days. The days of delivery or receipt of notice are not included. The notice must specify the nature of the business to be transacted. Meetings are convened by the Board of Directors. Members with 5% of the ordinary share capital of the Company may requisition the Board to convene a meeting.

Variation of rights

If, at any time, the Company's share capital is divided into different classes of shares, the rights attached to any class may be varied, subject to the provisions of the Companies Act, with the consent in writing of holders of three-quarters in nominal value of the issued shares of that class or upon the adoption of a special resolution passed at a separate meeting of the holders of the shares of that class. At every such separate meeting, all the provisions of the articles of association relating to proceedings at a general meeting apply, except that the quorum is to be the number of persons (which must be two or more) who hold or represent by proxy not less than one-third in nominal value of the issued shares of the class and at any such meeting a poll may be demanded in writing by any person or their proxy who hold shares of that class. Where a person is present by proxy or proxies, he is treated as holding only the shares in respect of which the proxies are authorised to exercise voting rights.

Rights in a winding up

Except as the Company's shareholders have agreed or may otherwise agree, upon the Company's winding up, the balance of assets available for distribution:

after the payment of all creditors including certain preferential creditors, whether statutorily preferred creditors or normal creditors; and
subject to any special rights attaching to any other class of shares;
is to be distributed among the holders of ordinary shares according to the amounts paid-up on the shares held by them. This distribution is generally to be made in US Dollars. A liquidator may, however, upon the adoption of any extraordinary resolution of the shareholders and any other sanction required by law, divide among the shareholders the whole or any part of the Company's assets in kind.

Limitations on voting and shareholding

There are no limitations imposed by English law or the Company's Articles of Association on the right of non-residents or foreign persons to hold or vote the Company's ordinary shares or ADSs, other than the limitations that would generally apply to all of the Company's shareholders.

Transfers of shares

The Board may refuse to register the transfer of shares held in certificated form which:

are not fully paid (provided that it shall not exercise this discretion in such a way as to prevent stock market dealings in the shares of that class from taking place on an open and proper basis);
are not duly stamped or duly certified or otherwise shown to the satisfaction of the Board to be exempt from stamp duty, lodged at the Transfer Office or at such other place as the Board may appoint and (save in the case of a transfer by a person to whom no certificate was issued in respect of the shares in question) accompanied by the certificate for the shares to which it relates, and such other evidence as the Board may reasonably require to show the right of the transferor to make the transfer and, if the instrument of transfer is executed by some other person on his behalf, the authority of that person so to do;
are in respect of more than one class of shares; or
are in favour of more than four transferees.

Deferred shares

Following the re-denomination of share capital on 23 January 2006, the ordinary shares' nominal value became 20 US cents each. There were no changes to the rights or obligations of the ordinary shares. In order to comply with the Companies Act 2006, a new class of Sterling shares was created, deferred shares, of which £50,000 were issued and allotted in 2006 as fully paid to the Chief Executive Officer though the Board reserves the right to transfer them to another member of the Board should it so wish. These deferred shares have no voting or dividend rights and on winding up only are entitled to repayment at nominal value only if all ordinary shareholders have received the nominal value of their shares plus an additional \$1,000 each.

Amendments

The Company does not have any special rules about amendments to its Articles of Association beyond those imposed by law.

CROSS REFERENCE TO FORM 20-F

This table provides a cross reference from the information included in this Annual Report to the requirements of Form 20-F.

Part I		Page
ltem 1	Identity of Directors, Senior Management and Advisers	n/a
Item 2	Offer Statistics and Expected Timetable	n/a
ltem 3	Key Information
	A - Selected Financial Data	173-174
	B - Capitalization and Indebtedness	n/a
	C - Reason for the Offer and Use of Proceeds	n/a
	D - Risk Factors	169-172
Item 4	Information on the Company
	A - History and Development of the Company	167
	B - Business Overview	2-46, 117-120, 169-172, 178-179
	C - Organizational Structure	7, 132-133, 161-162
	D - Property, Plant and equipment	127-128, 169
Item 4A	Unresolved Staff Comments	None
Item 5	Operating and Financial Review and Prospects
	A - Operating results	6-7, 39-41, 110, 112, 178-179
	B - Liquidity and Capital Resources	114, 135–138, 153
	C - Research and Development, patents and licences, etc.	3, 5, 13, 121
	D - Trend information	16-17, 108, 169-172
	E - Off Balance Sheet Arrangements	169
	F - Tabular Disclosure of Contractual Obligations	180
	G – Safe Harbor	196
ltem 6	Directors, Senior Management and Employees
	A - Directors and Senior Management	48—56
	B - Compensation	76-100
	C - Board Practices	48-75
	D - Employees	33-35, 122
	E – Share Ownership	96-97, 157-160
Item 7	Major shareholders and Related Party Transactions
	A - Major shareholders	186
	- Host Country shareholders	185
	B - Related Party Transactions	160, 169
	C - Interests of experts and counsel	n/a
ltem 8	Financial information
	A - Consolidated Statements and Other Financial Information	102-164
	- Legal Proceedings	144
	– Dividends	184
	B - Significant Changes	None
ltem 9	The Offer and Listing
	A - Offer and Listing Details	185-186
	B - Plan of Distribution	n/a
	C - Markets	185
	D - Selling shareholders	n/a
	E - Dilution	n/a
	F – Expenses of the Issue	n/a

INFORMATION FOR SHAREHOLDERS

CROSS REFERENCE TO FORM 20-F continued

Part I		Page
ltem 10	Additional Information
	A - Share capital	n/a
	B - Memorandum and Articles of Association	189-190
	C - Material Contracts	154-156
	D - Exchange Controls	187
	E - Taxation	187-188
	F - Dividends and Paying Agents	n/a
	G – Statement by Experts	n/a
	H - Documents on Display	196
	I - Subsidiary Information	161-164
ltem 11	Quantitative and Qualitative Disclosure about Market Risk	138-142, 169-172
ltem 12	Description of Securities Other than Equity Securities
	A - Debt securities	n/a
	B - Warrants and rights	n/a
	C - Other securities	n/a
	D - American Depositary shares	183
Part II
ltem 13	Defaults, Dividend Arrearages and Delinquencies	None
ltem 14	Material Modifications to the Rights of Security Holders and Use of Proceeds	None
ltem 15	Controls and Procedures	69-75
Item 16	(Reserved)	n/a
Item 16A	Audit Committee Financial Expert	69
Item 16B	Code of Ethics	75
ltem 16C	Principal Accountant Fees and Services	73-74, 122
Item 16D	Exemptions from the Listing Standards for Audit Committees	n/a
Item 16E	Purchases of Equity Securities by the Issuer and Affiliated Purchasers	152, 186
Item 16F	Change in Registrant's Certifying Accountant	73
Item 16G	Corporate Governance	54
ltem 16H	Mine Safety Disclosure	n/a
Part III
ltem 17	Financial Statements	n/a
ltem 18	Financial Statements	102-164
ltem 19	Exhibits

GLOSSARY OF TERMS

Unless the context indicates otherwise, the following terms have the meanings shown below:

Term	Meaning
ACL	The anterior cruciate ligament (ACL) is one of the four major ligaments in the human knee.
ADR	In the US, the Company's ordinary shares are traded in the form of ADSs evidenced by American Depositary Receipts (ADRs).
ADS	In the US, the Company's ordinary shares are traded in the form of American Depositary Shares (ADSs).
Advanced Surgical Devices	A product group comprising products for orthopaedic replacement and reconstruction, endoscopy devices and trauma devices. Products for orthopaedic replacement include systems for knees, hips, and shoulders. Endoscopy devices comprise of support products for orthopaedic surgery such as computer assisted surgery and minimally invasive surgery techniques using specialised viewing and access devices, surgical instruments and powered equipment. Orthopaedics trauma devices are used in the treatment of bone fractures including rods, pins, screws, plates and external frames.
Advanced Wound Management	A product group comprising products associated with the treatment of skin wounds, ranging from products that provide moist wound healing using breathable films and polymers to providing active wound healing by biochemical or cellular action.
AGM	Annual General Meeting of the Company.
Arthroscopy	Endoscopy of the joints is termed 'arthroscopy', with the principal applications being the knee and shoulder.
ASD	Advanced Surgical Devices.
AWM	Advanced Wound Management.
Basis Point	One hundredth of one percentage point.
Chronic wounds	Chronic wounds are those with long or unknown healing times including leg ulcers, pressure sores and diabetic foot ulcers.
Company	Smith & Nephew plc or, where appropriate, the Company's Board of Directors, unless the context otherwise requires.
Companies Act	Companies Act 2006, as amended, of England and Wales.
EBITA	Earnings before interest, tax and amortisation.
EBITDA	Earnings before interest, tax, depreciation and amortisation.
Emerging Markets	Emerging Markets include Greater China, India, Brazil and Russia.
EPSA	EPSA is a trend measure, which presents the long-term profitability of the Group excluding the post-fax impact of specific transactions that management considers aftects the Group's short-term profitability. The Group presents this measure to assist investors in their understanding of trends. Adjusted attributable profit is the numerator used for this measure and is determined by adjusting attributable profit for the items that are excluded trom operating profit when arriving at trading profit and items that are recognised below operating profit that aftect the Group's short-term profitability.
Endoscopy	Through a small incision, surgeons are able to see inside the body using a monitor and identify and repair defects.
ERP	Enterprise Resource Planning: a software system which integrates internal and external management intormation, facilitating the tlow of intormation across an organisation.
Established Markets	Established Markets include United States of America, Europe, Australia, New Zealand, Canada and Japan.
Euro or €	References to the common currency used in the majority of the countries of the European Union.
External fixation	The use of wires or pins transfixed through bone to hold a frame to the position of a fracture.
FDA	US Food and Drug Administration.
Financial statements	Refers to the consolidated Group Accounts of Smith & Nephew plc.
FISE 100	Index of the largest 100 listed companies on the London Stock Exchange by market capitalisation.
GMP	Good manufacturing practice or 'GMP' is the guidance that outlines the aspects of production and testing that can impact the quality of a product.
Group or Smith & Nephew	Used for convenience to refer to the Company and its consolidated subsidiaries, unless the context otherwise requires.

INFORMATION FOR SHAREHOLDERS

GLOSSARY OF TERMS continued

Term	Meaning
Health economics	A branch of economics concerned with issues related to efficiency, effectiveness, value and behaviour in the production and consumption of health and healthcare.
IFRIC	International Financial Reporting Interpretations as adopted by the EU and as issued by the International Accounting Standards Board.
IFRS	International Financial Reporting Standards as adopted by the EU and as issued by the International Accounting Standards Board.
International Markets	International Markets include Middle East, North Atrica, Southern Africa, Latin America, ASEAN, South Korea and Eastern Europe.
LSE	London Stock Exchange.
Metal-on-metal hip resurfacing	A less invasive surgical approach to treating arthritis in certain patients whereby only the surfaces of the hip joint are replaced leaving the hip head substantially preserved.
Negative Pressure Wound Therapy	A technology used to treat chronic wounds such as diabetic ulcers, pressure sores and post-operative wounds through the application of sub-atmospheric pressure to an open wound.
NYSE	New York Stock Exchange.
Orthobiologics products	Any product that is primarily intended to act as a scatfold and/or actively stimulates bone growth.
Orthopaedic products	Orthopaedic reconstruction products include joint replacement systems for knees, hips and shoulders and support products such as computer-assisted surgery and minimally invasive surgery techniques. Orthopaedic trauma devices are used in the treatment of bone fractures including rods, pins, screws, plates and external frames. Clinical therapies products include joint fluid therapy for pain reduction of the knee and an ultrasound treatment to accelerate the healing of bone fractures.
oxinium	OXINIUM material is an advanced load bearing technology. It is created through a proprietary manufacturing process that enables zirconium to absorb oxygen and transform to a ceramic on the surface, resulting in a material that incorporates the features of ceramic and metal. Management believes that OXINIUM material used in the production of components of knee and hip implants exhibits unique performance characteristics due to its hardhess, low-friction and resistance to roughening and abrasion.
Parent Company	Smith & Nephew plc.
Pound Sterling, Sterling, £, pence or p	References to UK currency. 1p is equivalent to one hundredth of £1.
Repair	A product group within ASD comprising specialised devices, fixation systems and bio-absorbable materials to repair joints and associated tissue.
Resection	Products that cut or ablate tissue within ASD comprising mechanical blades, radio frequency wands, electromechanical and hand instruments for resecting tissue.
SEC	US Securities and Exchange Commission.
Trading results	Trading profit, trading profit margin and trading cash flow are trend measures, which present the long- term profitability of the Group excluding the impact of specific transactions that management considers aftect the Group's short-term profitability and cash tlows. The Group has identified the following items, where material, as those to be excluded from operating profit and cash generated from operations when arriving at trading profit and trading cash flow, respectively: acquisition and disposal related items arising in connection with business combinations, including amortisation intangible assets, impairments and integration costs; restructuring events; gains and losses resulting from legal disputes and significant uninsured losses. In addition to these items, gains or losses that materially impact the Group's profitability or cash tlows on a short-term or one-off basis are excluded from operating profit and cash generated from operations when arriving at trading cash tlow, respectively,
UK	United Kingdom of Great Britain and Northern Ireland.
UK GAAP	Accounting principles generally accepted in the United Kingdom.
Underlying growth	Growth after adjusting for the effects of currency translation of the comparative impact of acquisitions and exclusion of disposals.
પાર	United States of America.
US Dollars, \$ or cents or ¢	References to US currency. 1 cent is equivalent to one hundredth of US\$1.
US GAAP	Accounting principles generally accepted in the United States of America.
Visualisation	Products within ASD comprising digital cameras, light sources, monitors, scopes, image capture, central control and multimedia broadcasting systems for use in endoscopic surgery with visualisation.
Wound bed	An area of healthy dermal and epidermal tissue of a wound.

,1'(;

2015 Financial highlights
Accounting Policies
Accounts Presentation
Acquisitions
Acquisition related costs
\$PHULFDQ'HSRVLWDU\6KDUHV
Articles of Association
Audit fees
%RDUG
%XVLQHVVRYHUYLHZ
%XVLQHVVVHJPHQWLQIRUPDWLRQ
&DVKDQGERUURZLQJV	¥
Chairman's statement	2
&KLHI([HFXWLYHªVVWDWHPHQW
&RPSDQ\EDODQFHVKHHW	165
Company notes to the accounts
Contingencies
&RQWUDFWXDOREOLJDWLRQV
&RUSRUDWH*RYHUQDQFH6WDWHPHQW
Critical accounting policies
&URVV5HIHUHQFHWR)RUP)
&XUUHQF\³XFWXDWLRQV	171
Currency translation	116
'HIHUUHGWD[DWLRQ	125
Directors' Remuneration Report
'LUHFWRUVªUHVSRQVLELOLWLHVIRUWKHDFFRXQWV	102
'LUHFWRUVªUHVSRQVLELOLW\VWDWHPHQW	102
'LYLGHQGV
Earnings per share
(PSOR\HHV3HRSOH
(PSOR\HHVª6KDUH7UXVW	152
Ethics and compliance
([HFXWLYH2I²FHUV
Factors affecting results of operations	172
Financial instruments
)LQDQFLDOSRVLWLRQOLTXLGLW\DQGFDSLWDOUHVRXUFHV
Glossary of terms
Goodwill
*URXSEDODQFHVKHHW	111
*URXSFDVK³RZVWDWHPHQW	113
Group companies
Group history
Group income statement
Group notes to the accounts

*URXSRYHUYLHZ
Group statement of changes in equity	115
*URXSVWDWHPHQWRIFRPSUHKHQVLYHLQFRPH
Independent auditor's reports
Information for shareholders
,QWDQJLEOHDVVHWV
Intellectual property
,QWHUHVWDQGRWKHU²QDQFHFRVWV	123
,QYHQWRULHV	133
,QYHVWPHQWV	132
,QYHVWPHQWLQDVVRFLDWHV
Key Performance Indicators
Leases
Legal and other	122
Legal proceedings
Manufacturing	30
0DUNHWSODFH
New accounting standards	116
2IIEDODQFHVKHHWDUUDQJHPHQWV
2SHUDWLQJSUR²W
2WKHU²QDQFHFRVWV	123
2XWORRNDQGWUHQGLQIRUPDWLRQ

Parent Company accounts
3D\DEOHV	135
3HRSOH(PSOR\HHV
3URYLVLRQV
3URSHUW\SODQWDQGHTXLSPHQW
5HFHLYDEOHV
Regulation
Related party transactions
5HVHDUFKDQGGHYHORSPHQW	27
5HVWUXFWXULQJDQGUDWLRQDOLVDWLRQH[SHQVHV	122
5HWLUHPHQWEHQH²WREOLJDWLRQ	¥
5LVNIDFWRUV	¥
5LVNPDQDJHPHQW
6DOHVDQGPDUNHWLQJ	32
6HOHFWHG²QDQFLDOGDWD
6KDUHEDVHGSD\PHQWV
6KDUHFDSLWDO
6KDUHKROGHUUHWXUQ	¥
6WUDWHJ\
6XVWDLQDELOLW\
7D[DWLRQ
7D[DWLRQLQIRUPDWLRQIRUVKDUHKROGHUV
Training and education	31
Treasury shares

INFORMATION FOR SHAREHOLDERS

ABOUT SMITH & NEPHEW

The Smith & Nephew Group (the Group) is a global medical devices business operating in the markets for advanced surgical devices comprising orthopaedic reconstruction, trauma and sports medicine and advanced wound management, with revenue of approximately \$4.7bn in 2016. Smith & Nephew plc (the Company) is the Parent Company of the Group. It is an English public limited company with its shares listed on the premium list of the UK Listing Authority and traded on the London Stock Exchange. Shares are also traded on the New York Stock Exchange in the form of American Depositary Shares (ADSs).

This is the Annual Report of Smith & Nephew plc for the year ended 31 December 2016. It comprises, in a single document, the Annual Report and Accounts of the Company in accordance with UK requirements and the Annual Report on Form 20-F in accordance with the regulations of the United States Securities and Exchange Commission (SEC).

Smith & Nephew operates on a worldwide basis and has distribution channels in over 100 countries. The Group is structured as three geographical selling regions responsible for the commercial view of that region. Research & Development, Manufacturing, Supply Chain and Central functions are managed globally for the Group as a whole.

Smith & Nephew's corporate website, www.smith-nephew.com, gives additional information on the Group, including an electronic version of this Annual Report. Information made available on this website, or other websites mentioned in this Annual Report, are not and should not be regarded as being part of, or incorporated into, this Annual Report.

For the convenience of the reader, a Glossary of technical and financial terms used in this document is included on pages 193 and 194. The product names referred to in this document are identified by use of capital letters and the ^ symbol (on first occurrence) and are trademarks owned by or licensed to members of the Group.

PRESENTATION

The Group's fiscal year end is 31 December. References to a particular year in this Annual Report are to the fiscal year, unless otherwise indicated. Except as the context otherwise requires, 'Ordinary Share' or 'share' refer to the ordinary shares of Smith & Nephew plc of 20 US cents each.

The Group Accounts of Smith & Nephew in this Annual Report are presented in US Dollars. Solely for the convenience of the reader, certain parts of this Annual Report contain translations of amounts in US Dollars into Sterling at specified rates. These translations should not be construed as representations that the US Dollar amounts actually represent such Sterling amounts or could be converted into Sterling at the rate indicated.

Unless stated otherwise, the translation of US Dollars and cents to Sterling and pence in this Annual Report has been made at the Bank of England exchange rate on the date indicated. On 17 February 2017, the Bank of England rate was US\$1.243 per £1.

The results of the Group, as reported in US Dollars, are affected by movements in exchange rates between US Dollars and other currencies. The Group applied the average exchange rates prevailing during the year to translate the results of companies with functional currency other than US Dollars. The currencies which most influenced these translations in the years covered by this report were Sterling, Swiss Franc and the Euro.

The Accounts of the Group in this Annual Report are presented in millions (m) unless otherwise indicated.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The Group's reports filed with, or furnished to, the US Securities and Exchange Commission (SEC), including this document and written information released, or oral statements made, to the public in the future by or on behalf of the Group, contain 'forward-looking statements' within the meaning of the US Private Securities Litigation Reform Act of 1995, that may or may not prove accurate. For example, statements regarding expected revenue growth and trading profit margins discussed under 'Outlook', 'Global Outlook' and 'Strategic performance', market trends and our product pipeline are forward-looking statements. Phrases such as 'aim', 'plan', 'intend', 'anticipate', 'well-placed', 'believe', 'estimate', 'expect', 'target', 'consider' and similar expressions are generally intended to identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results, to differ materially from what is expressed or implied by the statements.

For Smith & Nephew, these factors include: economic and financial conditions in the markets we serve, especially those affecting health care providers, payers and customers; price levels for established and innovative medical devices; developments in medical technology; regulatory approvals, reimbursement decisions or other government actions; product defects or recalls; litigation relating to patent or other claims; legal compliance risks and related investigative, remedial or enforcement actions; strategic actions, including acquisitions and dispositions and our success in performing due diligence, valuing and integrating acquired businesses; disruption that may result from transactions or other changes we make in our business plans or organisation to adapt to market developments and numerous other matters that affect us or our markets, including those of a political, economic, business, competitive or reputational nature; relationships with healthcare professionals; reliance on information technology. Specific risks faced by the Group are described under 'Risk factors' on pages 169 to 172 of this Annual Report. Any forward-looking statement is based on information available to Smith & Nephew as of the date of the statement. All written or oral forward-looking statements attributable to Smith & Nephew are qualified by this caution. Smith & Nephew does not undertake any obligation to update or revise any forward-looking statement to reflect any change in circumstances or in Smith & Nephew's expectations.

PRODUCT DATA

Product data and product share estimates throughout this report are derived from a variety of sources including publicly available competitors' information, internal management information and independent market research reports.

DOCUMENTS ON DISPLAY

It is possible to read and copy documents referred to in this Annual Report at the Registered Office of the Company. Documents referred to in this Annual Report that have been filed with the Securities and Exchange Commission in the US may be read and copied at the SEC's public reference room located at 450 Fifth Street, NW, Washington DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges. The SEC also maintains a website at www.sec.gov that contains reports and other information regarding registrants that file electronically with the SEC. This Annual Report and some of the other information submitted by the Group to the SEC may be accessed through the SEC website.

The inks used are renewable, biodegradable and emit fewer Volatile Organic Compounds (VOCs) than mineral-RLOLQNV7KH\DUHEDVHGRQKLJKOHYHOVRIUHQHZDEOHUDZ materials such as vegetable oils and naturally occurring resin. The inks do not contain any toxic heavy metals DQGWKHUHIRUHGRQRWSRVHDSUREOHPLISODFHGLQODQG²OO

Smith & Nephew plc 15 Adam Street London WC2N 6LA United Kingdom T +44 (0) 20 7401 7646 [email protected] www.smith-nephew.com

AI assistant

Smith & Nephew PLC — Annual Report 2016

4588_10-k_2016-12-31_b8d994de-ce8f-4476-8008-cbd5615ad9ba.pdf

Innovate for value

CONTENTS

Find more online

Innovate for value

Succeeding in challenging times In 2016 Smith & Nephew faced and overcame challenges.

DEAR SHAREHOLDER,

FINANCIAL PERFORMANCE

GOVERNANCE AND CULTURE

\$4,669m +1% +2%

30.8¢ 0% Dividend per share

\$801m +28%

2SHUDWLQJSUR²W

\$1,020m -7%

7UDGLQJSUR²W1

88.1¢ +92%

Earnings per share EPS

82.6¢ -3%

Adjusted Earnings per share EPSA1

5%

R&D expenditure

Innovative products and deep customer relationships

DEAR SHAREHOLDER,

COMMERCIAL PROGRESS

DELIVERING INNOVATION

FOCUSED ON EXECUTION

THANK YOU

One global business selling nine product franchises…

to over 100 countries

How we create value

Resources A key differentiator is our drive to push innovation throughout the business

RESEARCH & DEVELOPMENT

ETHICS & COMPLIANCE

MANUFACTURING & QUALITY

TRAINING & EDUCATION

SALES & MARKETING

OUR PEOPLE

OUR VALUE PROPOSITION

OUR PRODUCTS

OUR VALUES AND HOW WE ACT

PERFORMANCE

OUR CUSTOMERS

INNOVATION

FINANCIAL PERFORMANCE

Maximising our performance

OUR STRATEGIC PRIORITIES

BUILD A STRONG POSITION IN ESTABLISHED MARKETS

FOCUS ON EMERGING MARKET

INNOVATE FOR VALUE

SIMPLIFY AND IMPROVE OUR OPERATING MODEL

SUPPLEMENT ORGANIC GROWTH WITH ACQUISITIONS

Build a strong position in Established Markets

IMPROVING PATIENT OUTCOMES

Focus on Emerging Markets

Innovate for value

,1129\$7,1*,1 7+(23(5\$7,1*5220

Simplify and improve our operating model

NEW MANUFACTURING FACILITY OPENS

Supplement organic growth with acquisitions

STRENGTHENING SPORTS MEDICINE

Our marketplace is driven by longer-term trends

CUSTOMERS

REGULATORY STANDARDS AND COMPLIANCE IN THE HEALTHCARE INDUSTRY

600 million

2020

22%

SEASONALITY

E D A C B \$5bn +3% Market size Trauma & Extremities

KNEE IMPLANTS

SMITH & NEPHEW HAS NINE GLOBAL PRODUCT FRANCHISES

HIP IMPLANTS

Preserving active lifestyles

HIP IMPLANTS continued TRAUMA & EXTREMITIES

Making good technology spectacular

SPORTS MEDICINE JOINT REPAIR

Unparalleled performance capabilities1

ARTHROSCOPIC ENABLING TECHNOLOGY

OTHER SURGICAL BUSINESSES

Smith & Nephew PLC Annual Report 2016

7UDGLQJSUR²W¹

,1129\$7,1,1 7+(23(5\$7,15220

/2%\$/&203/,\$1&(3525\$00(

%8,/',1&8/785(%</,9,12859\$/8(6

52836867\$,1\$%,/,7<675\$7(<