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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 20-F





(Mark One)

| ̈ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------------

or



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2014

or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

or



| ̈ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -------------------------------------------------------------------------------------------

Commission file number 1-14978





Smith & Nephew plc

(Exact name of Registrant as specified in its charter)





England and
Wales

(Jurisdiction of incorporation or organization)

15 Adam Street, London WC2N 6LA

(Address of principal executive offices)





Securities
registered or to be registered pursuant to Section 12(b) of the Act:



|                                                       |  |                                                 
|------------------------------------------------------ |  | ------------------------------------------------
|Title of each class                                    |  | Name on each exchange on which registered       
|American Depositary Shares
Ordinary Shares of 20¢ each |  | New York Stock Exchange
New York Stock Exchange*



|* | Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

Securities registered or to be registered pursuant to Section 12(g) of the Act: None.

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None.





Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered
by the annual report: 951,021,116 Ordinary Shares of 20¢ each

Indicate by check mark if the registrant is a well seasoned issuer, as
defined in Rule 405 of the Securities Act    Yes  x    No   ̈

If this Report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934    Yes   ̈    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days:    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer:

Large Accelerated
Filer  x                 Accelerated
Filer   ̈                 Non-accelerated filer   ̈

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.



|             |  |                                                                                                          |  |         
|------------ |  | -------------------------------------------------------------------------------------------------------- |  | --------
| ̈  U.S. GAAP |  | x  International Financial Reporting Standards as issued by the International Accounting Standards Board |  |  ̈  Other

If Other has been checked to the previous question indicate by check mark which financial
statement item the registrant has elected to follow:    Item 17   ̈    Item 18   ̈

If this is an annual report, indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x









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LOGO





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|     |                                           |                                                                           |                                               | 
|---- | ----------------------------------------- | ------------------------------------------------------------------------- | --------------------------------------------- | 
|LOGO |                                           | Whats in
this report                                                    
|     | Strategic Report                         
|     | 4                                         |                                                                           | Financial highlights                         
|     | 5                                         |                                                                           | Chairmans statement                         
|     | 6                                         |                                                                           | Chief Executive Officers review             
|     | 8                                         |                                                                           | Smith & Nephew today                         
|     | 14                                        |                                                                           | Strategic performance                        
|     | 16                                        |                                                                           | Chief Financial Officers overview           
|     | 18                                        |                                                                           | Our marketplace                              
|     | 21                                        |                                                                           | Our business                                 
|     | 26                                        |                                                                           | Advanced Surgical Devices                    
|     | 30                                        |                                                                           | Advanced Wound Management                    
|     | 34                                        |                                                                           | Financial review and principal risks         
|     | 40                                        |                                                                           | Sustainability                               
|     | Supporting Healthcare professionals      
|     | 42                                        |                                                                           | Case studies                                 
|     | Corporate Governance                     
|     | 54                                        |                                                                           | Our Board of Directors*                      
|     | 58                                        |                                                                           | Our Executive Officers*                      
|     | 62                                        |                                                                           | Corporate Governance Statement*              
|     | 75                                        |                                                                           | Audit Committee Report*                      
|     | 81                                        |                                                                           | Directors Remuneration report               
|     | Financial statementsand other information
|     | 103                                       |                                                                           | Directors responsibilities for the accounts*
|     | 105                                       |                                                                           | Independent auditors US reports             
|     | 106                                       |                                                                           | Independent auditors UK report              
|     | 110                                       |                                                                           | Group accounts                               
|     | 117                                       |                                                                           | Notes to the Group accounts                  
|     | 166                                       |                                                                           | Company accounts                             
|     | 167                                       |                                                                           | Notes to the Company accounts                
|     | 170                                       |                                                                           | Group information*                           
|     | 174                                       |                                                                           | Other financial information*                 
|     | 184                                       |                                                                           | Information for shareholders*                
|     | 200                                       |                                                                           | Smith & Nephew heritage                      
|     |                                          
|     |                                           | *   These sections and pages 111, 113 and 115 form the Directors Report.









2Smith & Nephew Annual report 2014



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Our mission







Delivering advanced medical technologies that help healthcare professionals, our customers, improve the quality of life for their patients   LOGO  and this will drive our performance$4.6bn



$1,055m



$749mRevenue1up 2%



Trading profit1,2up 3%



Operating profit1down 8%83.2¢



56.1¢



29.6¢Adjusted earnings per share2up 8%



Earnings per sharedown 9%



Dividends per shareup 8%
  1
The underlying percentage increases/decreases are after adjusting for the effect of currency translation and the inclusion of the comparative impact of acquisitions and exclusion of disposals. 2
Explanations of these non-GAAP financial measures are provided on pages 176 to 179.


LOGO




Smith & Nephew Annual report
20143









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STRATEGIC REPORT Financial highlights   Continuing to improve our performance   LOGO

LOGO

LOGO

LOGOLOGO

LOGO

LOGOLOGO

LOGO

LOGO

LOGO1  The underlying percentage increases/decreases are after adjusting for the effects of
currency translation and the inclusion of the comparative impact of acquisitions and exclusion of disposals.
2  These are non-GAAP measures and exclude restructuring/rationalisation costs, acquisition and disposal-related
costs, amortisation of acquisition intangibles and other transactions which affect short-term profitability. An explanation of these measures is provided on pages 176 to 179.   4Smith & Nephew Annual report 2014




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Chairmans statement





Dear Shareholder,

Board changes

First impressionsI joined Smith & Nephew in December 2013, and succeeded Sir John Buchanan as Chairman in April 2014. In my first letter to you I am
pleased to report that Smith & Nephew made good progress last year, delivering strong earnings growth and enhanced value for shareholders. We did this whilst making major investments to reshape the Group for future success such as the
acquisition of ArthroCare Corporation for $1.5 billion net.  Revenue was $4,617 million, up
2% on an underlying basis or 6% on a reported basis. Trading profit was $1,055 million, up 3% on an underlying basis or 7% on a reported basis. The trading profit margin of 22.9% was 20bps up on the previous year. The Board is pleased to propose a
Final Dividend for the year just gone of 18.6¢ per share, giving a total dividend for 2014 of 29.6¢, up 8% year-on-year.

Sir John Buchanan retired as Chairman in April at the 2014 Annual General Meeting, after nine years of outstanding service. On behalf of the
Board and the whole of Smith & Nephew I thank him for his leadership.  Richard
(Dick) de Shutter also retired at the Annual General Meeting. In his role as Senior Independent Director, Dick provided wise counsel through a period of significant growth and change. Ajay Piramal retired in March, having provided
valuable insight into the emerging markets as we built our presence there. Pamela Kirby retired from the Board in July. She also made a major contribution  particularly as Chairman of the Ethics & Compliance Committee. I thank Dick,
Ajay and Pamela for their service.  It is a credit to the growing strength and reputation
of the Company that we have attracted top global talent to succeed these individuals. Vinita Bali joined the Board in December following an impressive career at blue-chip global corporations such as The Coca-Cola Company in multiple geographies
including India, Africa, South America, the US and UK. Her strong appreciation of customer service and marketing will bring deep insight to Smith & Nephew as we continue to develop innovative ways to serve our markets. Erik Engstrom, the
CEO of Reed Elsevier, joined the Board in January 2015. His understanding of how technology can be used to transform a business will be invaluable.

My first impression of Smith & Nephew was of a Company with strong leadership, a clear strategy and sound financial platform. The open
communication between the Board and the executive team is a real strength of the business. I was particularly impressed with the execution of the ArthroCare acquisition, especially the thoroughness of our due diligence and how well the team is
managing the integration.  I have also been able to spend time visiting our sites and
meeting employees, including attending a Sports Medicine procedure to witness how our highly-skilled reps assist surgeons in improving outcomes. I have consistently found a business with a strong culture, particularly in areas of ethics and
compliance, and people who are proud of their work supporting healthcare professionals. 
Looking ahead I see many exciting opportunities  in the Established Markets where we are challenging the status quo through new commercial models, in the
Emerging & International Markets where we have a leadership platform  and from recent acquisitions. In 2015, I believe we will begin to see more clearly the benefits of the transformational work that has been undertaken at
Smith & Nephew, and I look forward to sharing more news of these achievements next year. 
Yours sincerely,  LOGO  Roberto Quarta
Chairman LOGO

Smith & Nephew made
good progress last year, delivering strong earnings growth and enhanced
value to shareholders.


LOGO




Smith & Nephew Annual report
20145









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STRATEGIC REPORT

Chief Executive Officers review





A good financial performance while strengthening the business







|                                                                                                                                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | 
|------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|The journey to reshape
Smith & Nephew continues and I am excited by our prospects for accelerating
growth in 2015 and beyond. |  | Dear Shareholder
 Smith & Nephew proudly supports healthcare professionals in their daily efforts to
improve the lives of their patients. We do this by taking a pioneering approach to the design of our products and services, by striving to ensure wider access to our advanced technologies, and by enabling better outcomes for patients and healthcare
systems. In doing so, we drive growth and create value for our stakeholders.  In 2014, we
made great progress. We drove a much improved performance in US Hip and Knee Implants and maintained our momentum in Sports Medicine Joint Repair and Trauma & Extremities. Advanced Wound Bioactives, acquired at the end of 2012, again
produced double-digit growth. Our continued investment in Emerging & International Markets drove revenues up 17%. 
Performance in Europe was weaker and Advanced Wound Management was held back by a distribution hold on RENASYSà in the US, and I am confident that we have taken actions that will deliver a better 2015 across these areas. Additionally, the Phase 3
trial results for HP802 were a disappointment, but we remain committed to developing pioneering Advanced Wound Bioactives treatments. 
The Group generated a good increase in revenues and trading profit, and an 8% uplift in EPSA. I am pleased by the changing mix of the business, as we successfully
rebalance by strengthening our higher growth platforms. These now represent more than half of our revenue, up from just 35% three years ago. 
Pioneering design 
Smith & Nephew has a long history of pioneering design, dating back to our foundations in the 19th century. In 2014, we launched many exciting products,
including a cruciate retaining version of our JOURNEYàII natural-motion knee, a
first-of-its-kind DYONICSà PLAN surgical planning tool for hip arthroscopy, and the
HAT-TRICK Lesser Toe Repair System. We continued to invest more in R&D, over 5% of revenue, and have a strong pipeline for 2015 and beyond.
|LOGO                                                                                                                            | 











6Smith & Nephew Annual report 2014



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For us, innovation is not just about products. It is also about how we do business. We seek new ways to serve our customers. In 2014, we
pioneered a new commercial solution for Orthopaedic Reconstruction that fulfils the unmet needs of customers searching for a different value proposition. Called Synceraà, this offers clinically proven primary hip and knee implants combined with cutting-edge technology to streamline the extensive support
process. Syncera has the potential to generate significant savings for the customer. We are encouraged by the contracts signed and prospective customers. 
Widening access 
In the Emerging & International Markets we have built an entrepreneurial business resourced to maximise the significant opportunities we see. In 2014, it
generated more than $600 million revenue, with China, our largest market, growing revenue at over 30%. 15% of Group revenue came from these markets in 2014, up from 8% in 2010.
 In 2014, we established a new commercial structure to market and expand our mid-tier value
product ranges. This will provide wider access to our advanced technologies, helping us support an ever greater number of customers in delivering affordable healthcare. 
Enabling better outcomes 
We provide high quality products and medical education to help drive better clinical outcomes. During 2014, we saw strong and rising demand for unique products
such as our hard-wearing VERILASTà Hips and Knees, VISIONAIREà patient-matched instrumentation and the
PICOà portable disposable Negative Pressure Wound Therapy system. These, and many other
advanced Smith & Nephew products, also enable healthcare professionals to treat more patients faster, improving the economic outcome for the healthcare system payers. 
Strengthening our platform 
In recent years, we have successfully supplemented our organic growth through acquisitions. Healthpoint Biotherapeutics gave us a leading position in Advanced
Wound Bioactives, the fastest growing segment of Advanced Wound Management. We have also completed a number of acquisitions in the Emerging & International Markets, strengthening our platform by adding products, manufacturing, distribution
and sales teams.

ArthroCare, completed in May 2014, has strengthened our Sports Medicine business. Its technology and products significantly enhance our
portfolio, and we will use our global presence to drive substantial new growth. The integration is progressing well. 
Enhanced efficiency 
By simplifying and improving our operating model we are increasing our agility and efficiency. In 2011, we announced a programme to generate annual savings of $150
million. By 31 December 2014, we had achieved annualised savings of $146 million, enabling investment in the Emerging & International Markets, R&D and other growth opportunities.
 In 2014, we announced a further programme to realise at least another $120 million of annual
savings. This work is progressing well. For instance, we are rationalising our global property portfolio and found major savings through better procurement processes. These savings will more directly benefit the bottom line.
 Great Place to Work
 Achieving recognition as a Great Place to Work is important to me. It means having a workplace
where employees are proud and excited to come each day because they are doing work that makes a difference for customers and patients. During 2014, I was proud to congratulate our colleagues in Spain for being the first country to achieve this
distinction from the Great Place to Work Institute  and it will not be the last. Also, our sustainability performance was recognised again as we retained our rankings in both the FTSE4Good and Dow Jones Sustainability indices. Acting
sustainably and responsibly to deliver long-term benefits to society is important. It is our employees who earn these awards, and I thank them for their efforts. 
I am pleased with our momentum in 2014 as we delivered a good financial performance while strengthening the business, and you will find more details on our
successful actions on pages 42 to 53. Whilst the journey to reshape Smith & Nephew continues, we enter 2015 stronger and more efficient and I am excited by our prospects for accelerating growth in 2015 and beyond.
 Sincerely, 
LOGO  Olivier Bohuon
Chief Executive Officer

Our results 
22.9%
 Trading margin1up 20bps  83.2¢ 
EPSA1up 8%
  
  
1   Explanations of these non-GAAP financial measures are provided on pages 176 to 179.


LOGO




Smith & Nephew Annual report
20147









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STRATEGIC REPORT

Smith & Nephew today





Our marketplace is growing

Demand for healthcare continues to increase worldwide. This is driven by increased longevity, more

prevalence
of obesity and associated disease states, greater expectation of an active lifestyle, improved

awareness of treatment options
and the increasing affluence of the emerging markets.





|                          |  |  |  |                           |  |  |  |  |  |  |  | 
|------------------------- |  |  |  | ------------------------- |  |  |  |  |  |  |  | 
|Advanced Surgical Devices |  |  |  | Advanced Wound Management |  |  |  |  |  |  |  | 
|Total segment value       |  |  |  | Total segment value       |  |  |  |  |  |  |  | 
|$24bn                     |  |  |  | $7bn                      |  |  |  |  |  |  |  | 
|+5%                       |  |  |  | +4%                       |  |  |  |  |  |  |  | 



Our products are used by surgeons and
nurses to help

repair and heal the human body throughout a persons life

Global population





LOGO

Source: United Nations  World Population Prospects, The 2012 Revision.









8Smith & Nephew Annual report 2014



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Served by our global businesses Our global franchises design, develop and deliver our advanced medical technologies to customers in more than 100 countries globally.   LOGO
 LOGO
   Advanced Surgical Devices global1. Orthopaedic ReconstructionSpecialist hip and knee implant systems.Revenue1$1,527m


+2%2013  $1,518m2. Trauma & ExtremitiesInternal and external devices used in the stabilisation of severe fractures and deformity correction
procedures.Revenue1$506m


+4%2013  $486m3. Sports Medicine Joint RepairInstruments, technologies and implants necessary to perform minimally invasive surgery of joints.Revenue1$576m


+8%2013  $496m4. Arthroscopic Enabling TechnologiesCutting, visualisation and fluid management technologies necessary for Sports Medicine Joint Repair.Revenue1$542m


+1%2013  $441m5. Other ASDENT and gynaecology instrumentation.Revenue1$147m


+10%2013  $74m
 Advanced Wound Management global1. Advanced Wound CareProducts for the treatment of acute and chronic wounds, including leg, diabetic and pressure ulcers, burns and
post-operative wounds.Revenue1$805m

4%2013   $843m2. Advanced Wound DevicesTraditional and single-use Negative Pressure Wound Therapy (NPWT) and hydrosurgery systems.Revenue1$192m

9%2013   $213m3. Advanced Wound BioactivesBioactive technologies that provide unique approaches to debridement and dermal repair and regeneration.Revenue1$322m

+15%2013   $280m      1
The underlying percentage increases/decreases are after adjusting for the effect of currency translation and the inclusion of the comparative impact of acquisitions and exclusion of disposals.


LOGO




Smith & Nephew Annual report
20149









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STRATEGIC REPORT

Smith & Nephew todaycontinued







Our business model

delivers value



LOGO



|                                                                                |  |                                  |  |  |  |      |  |  |  |      |  |  |  |      |  | 
|------------------------------------------------------------------------------- |  | -------------------------------- |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- |  | 
|                                                                                |  |                                  |  | 
|                                                                                |  | Our Capital Allocation Framework |  |  |  |      |  | 
|                                                                                |  | LOGO                             |  |  |  | LOGO |  |  |  | LOGO |  |  |  | LOGO |  | 
|Maintain a strong balance sheet to ensure solid investment grade credit
metrics



| |  |                   |  |                   |  |           |  |                                |  |                      |  | 
| |  | ----------------- |  | ----------------- |  | --------- |  | ------------------------------ |  | -------------------- |  | 
| |  |                   |  |                  
| |  | Resource utilised |  |                  
| |  | $7.3bn            |  | $235m             |  | 13,468    |  | 15                             |  | $245m                |  | 
| |  | Total Assets      |  | Investment in R&D |  | Employees |  | Manufacturing
plants worldwide |  | Corporation tax paid |  | 







12Smith & Nephew Annual report 2014



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With a strategy to drive our performance  Our strategic
priorities Established MarketsBuild upon existing strong positions, win market share through greater
product and commercial innovation and drive efficiencies to liberate resources.Emerging & International MarketsDeliver thought leadership in the Emerging & International Markets
by building strong, direct customer relationships, widening access to our premium products and developing portfolios designed for the mid-tier
population.Innovate
for valueAccelerate our rate of innovation by investing more
in research & development to support projects that will move clinical and cost boundaries and deliver maximum value.Simplify
and improve our operating modelPursue 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 acquisitionsBuild our platform by acquiring complementary technologies, manufacturing
and distribution in the emerging markets and complementary products or businesses in our higher growth segments.uRead more about our strategy in action on pages 42  53


LOGO




Smith & Nephew Annual report
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STRATEGIC REPORT

Strategic performance





How we performed



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | 
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| |  | Established Markets 
Performance 
Established Markets for Smith & Nephew are Australia, Canada, Europe, Japan, New Zealand and the US.
 Our combined businesses in the Established Markets delivered flat growth
for the year. Headwinds in Europe impacted our performance and offset the positive growth we achieved across the US, Japan, Australia & New Zealand. 
In Advanced Wound Management, our performance was slightly below estimated global segment growth, despite a 15% growth in Advanced Wound
Bioactives. While Trauma & Extremities, Hip Implants and Knee Implants growth were also slightly below the market, these franchises performed better than last year and demonstrated an improving trend in the second half of the year as a
result of our investments in marketing, medical education and new products. In the higher growth Sports Medicine Joint Repair segment we delivered growth at around market rate and saw the first benefits of the ArthroCare acquisition.
 Global Outlook
 While there are some signs of improvement in economic conditions,
overall the Established Markets continue to experience a challenging environment. We have responded by realigning our business models and made focused investments to enhance our performance and efficiency in these markets. |  |  |  | Emerging &
International Markets 
Performance 
Emerging & International Markets represent those outside of the Established Markets including the fast growing BRIC group of Brazil,
China, India and Russia.  Our Emerging & International
Markets grew at 17%, building further on the double-digit growth of 2013. These geographies now represent 15% of the Groups overall revenue, up from 11% in 2011. 
During 2014: 
   Our success in China continued with growth of over 30%, for a second year in a row, as our
investment in training and infrastructure continue to show results. 
   Our Latin American markets, which include Brazil and Mexico, are set for improvement going
forward as we spent the year integrating acquisitions and making organisational and strategic changes. 
   The execution of our mid-tier market strategy continues with the establishment of an independent
commercial structure and increased investment in building a suitable product portfolio. 
Global Outlook 
The healthcare environment in our regions continues to rapidly expand and with the right investments combined with strategic execution will
provide sustained growth opportunities for the Group. |  |  |  | Innovate for value 
Performance 
For Smith & Nephew Innovate for value means having a pioneering approach to creating both products and new commercial
models to bring products and services to our customers.  Consistent
with 2013, R&D investment represented over 5% of revenue, bringing a wide range of products to market across all our franchises. More detail on individual products is set out on pages 21 to 22 and on pages 27 and 31.
 In addition we have made investments in two venture funds as part of our
search for future disruptive technologies.  We have also been
investing in an innovative commercial solution for Orthopaedic Reconstruction that fulfils the unmet needs of customers searching for a different value proposition. Called Syncera, it offers customers clinically proven primary hip and knee implants
combined with cutting-edge technology that streamlines the supply chain and logistics and enables technical support in the operating room. This new model has the potential to generate significant savings for the customer.
 A pioneering approach to products and services provides competitive
advantages. Smarter, easier to use, cost-efficient products and services can offset pricing pressures, disrupt markets and challenge the status quo, which will be required to meet the new and expanding demands for healthcare customers
globally. |  | 
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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  | 
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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
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Simplify and improve
our operating model 
Performance 
Trading profit grew by 3% and trading profit margin increased by 20bps while investing in our commercial operations and
meeting market and pricing pressures.  Key initiatives
included: 
   Continuing to deliver our $150 million per annum efficiency savings
programme, of which we have achieved annualised savings of $146 million as at 31 December 2014. 
   Commencing a further $120 million annualised Group Optimisation plan
through a one-off investment of $150 million, which is progressing well. 
   Moving to a single Managing Director model in markets outside of the US,
combining the commercial organisations to leverage scale and better serve customers. 
By simplifying and improving our operating model we have been able to liberate resources to invest in growth
opportunities, meet the persistent price pressure and improve our financial returns. A simpler and more efficient organisation allows us to make faster and better decisions.



Supplement organic
growth with acquisitions 
Performance 
In 2014, we completed five acquisitions and investments, including our largest deal to date, the $1.7 billion
acquisition of ArthroCare Corporation. This brings the total over the last 4 years to 15 transactions for a combined consideration of $2.8 billion, including the $782 million acquisition of Healthpoint Therapeutics in late 2012.
 ArthroCare was a compelling opportunity to add
unique technology and highly complementary products to further strengthen our sports medicine business. We will be able to generate significant additional revenue from the more comprehensive portfolio. We will use our global presence to drive
substantial new growth. The transaction accelerates our strategy to rebalance Smith & Nephew towards higher growth opportunities. 
We regularly review acquisitions to ensure they are meeting our expectations, and use IRRs and ROCE to confirm
performance is on track to deliver the required return. During 2014 we continued to integrate our recent emerging markets acquisitions, whilst Healthpoint performed strongly in its second full year in Smith & Nephew.
 Acquisitions and partnerships are important
elements which supplement organic investment and provide increased opportunity for high growth and value creation.LOGO



LOGO



1 The underlying percentage increases/decreases are after adjusting for the effect of currency
translation and the inclusion of the comparative impact of acquisitions and exclusion of disposals.
2 Explanations of these non-GAAP financial measures are provided on pages 176 to 179.


LOGO




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STRATEGIC REPORT

Chief Financial Officers overview





We made significant

progress in 2014...



|                                                                                                                                                                                                                                                                                                                                                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Our results 
$4,617m
Revenue1up 2%  
$1,055m
Trading profit1,2up 3%  
  
 
1   The underlying percentage increases/decreases are after adjusting for the effect of currency
translation and the inclusion of the comparative impact of acquisitions and exclusion of disposals.
2   Explanations of these non-GAAP financial measures are provided on pages 176 to 179. |  | Dear Shareholder, 
Smith & Nephew made significant progress in 2014 and continued to deliver good revenue and earnings growth. Our growth trajectory is being enhanced by the
integration of our acquisitions, greater Group efficiency, and tax improvement  combining with strong cash generation and disciplined capital allocation to accelerate value creation for shareholders.
 Strong earnings growth
 In the full year 2014, we generated revenue of $4,617 million (2013: $4,351 million), an
increase of 2% on an underlying basis and 6% on a reported basis. Acquisitions added 5% to the reported growth rate, while currency was a -1% headwind. 
Trading profit was $1,055 million (2013: $987 million), up 3% underlying and 7% on a reported basis. The trading profit margin was 22.9% (2013: 22.7%), a 20bps
increase despite the headwind from the US RENASYS distribution hold announced in June. 
Operating profit for 2014 was $749 million (2013: $810 million), reflecting acquisition costs largely relating to ArthroCare, as well as restructuring and
rationalisation costs, amortisation of acquisition intangibles and legal and other items incurred. The net interest charge and other financing costs for 2014 were $33 million (2013: $7 million). Profit before tax was therefore $714 million (2013:
$802 million).  The tax charge of $213 million reflects an effective tax rate of 27.7% for
the full year (2013: 29.2%) on Trading results.  EPSA was 83.2¢ (166.4¢ per ADS)
(2013: 76.9¢). Reported basic earnings per share was 56.1¢ (112.2¢ per ADS) (2013: 61.7¢). 
Trading cash flow was $781 million (2013: $877 million), reflecting a trading profit to cash conversion ratio of 74% (2013: 89%).
 Net debt at the year-end was $1,613 million reflecting our acquisitions of ArthroCare and in
the emerging markets. This represents a reported net debt/EBITDA ratio of 1.2x. |  | Reinvestment & Group optimisation 
During 2014, we launched a programme to target further efficiencies. We have identified four main areas of activity:
 1  Globalising functions such as Finance,
HR, IT and Legal to ensure that we are operating most effectively to support business growth. 
2  Driving procurement savings to get the most value from the money we spend.
 3  Rationalising our footprint to simplify
the way we work.  4  Further simplifying
our operating model, including establishing a single operating structure under a single managing director in all markets outside the US so that we can make decisions more quickly and effectively.
 All areas of the programme are progressing well. Overall, we are on target to deliver benefits
of over $120 million over a four-year period, with the majority of this expected to benefit margin over time. 
Acquisitions 
We acquired ArthroCare Corporation in 2014 for a net $1.5 billion. This has strengthened our Sports Medicine business. Its technology and products will
significantly enhance our portfolio, and we will use our global presence to drive substantial new growth. The integration is progressing well. 
The financial rationale for this transaction was strong, and we expect to realise cost and revenue synergies of around $85 million of additional annual trading
profit in 2017.  Our other recent acquisitions continue to perform well. The Advanced Wound
Bioactives business acquired at the end of 2012 delivered strong 15% growth in 2014. Our emerging markets acquisitions in Brazil, Turkey and India are now bedded in and delivering increasing benefits. And Bioventus, our orthobiologic therapies
development vehicle, completed a successful external refinancing and repaid a $160 million loan-note, plus $28 million of accrued interest, to us in October.









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...and continued to deliver good revenue and earnings growth.    Segment reporting 
As we simplify our operating model and move to one commercial organisation in all countries barring the US, we are updating our segmental reporting to reflect
this, providing disclosure consistent with the financial information used by senior management to run the business. This means that from 1 January 2015 we will continue to disclose revenue performance by franchise, but other financial data,
such as trading margin and assets, will no longer be split between two divisions  Advanced Surgical Devices (ASD) and Advanced Wound Management (AWM), since they are now part of one operating unit.
 Outlook
 We have made material progress in reshaping Smith & Nephew for higher growth since
2011. Whilst the journey to transform Smith & Nephew continues, increasingly we expect to benefit from the actions and investments we have made. 
We expect the Group to deliver higher underlying revenue growth in 2015 than in 2014. We also expect to deliver a further improvement in trading profit margin.
 Additionally, we expect the effective corporate tax rate on trading results to reduce to
slightly above 27% in 2015, absent any changes to tax legislation. This is incremental to the 220bps reduction achieved in the last two years. 
We believe the Group is at the start of a new and exciting phase in its 158-year history. 
Sincerely,  LOGO  Julie Brown
Chief Financial Officer



We expect the
Group to deliver higher underlying
revenue growth in 2015 than in 2014.We also
expect to deliver a further
improvement in trading profit margin.LOGO


LOGO




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STRATEGIC REPORT

Our marketplace





Changing demands





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|Market trends 
The combination of ageing populations and increasing prevalence of obesity and associated chronic illness is expanding the gap between the demand for healthcare
and ability of governments to supply it. The changing balance in ageing populations also means that there is a potential decrease in funds available for healthcare raised through taxes on the working population. Consequentially, governments and
healthcare providers are looking for various ways to constrain their healthcare expenditure. 
Cost and Outcomes 
Healthcare providers, in an effort to reduce spending, are increasingly focusing on the cost of the whole treatment, rather than the individual components. This is
leading governments and hospitals to seek greater transparency of product pricing.  As a
result, health economic data is being used to obtain reimbursement or justify product pricing. Health economic data currently forms an integral part in shaping the recommendations from the National Institute for Health and Care Excellence (NICE) in
the UK and in the US, the Affordable Care Act has committed budget spend to carry out comparative effectiveness research on treatments. 
As well as the focus on suppliers of healthcare products, some providers are also implementing incentives for better health outcomes to reduce the costs associated
with repeated patient treatments or reduced hospital stay.  Governments are beginning to
impose penalties on healthcare facilities for acute patient re-admissions or for infections acquired within the health system which present an additional economic burden on health care systems. |  |  |  | In the US, healthcare-acquired infections cost almost $10 billion annually, with surgical site infections being the largest contribution to
overall cost.  Product innovation has been the primary response by some suppliers in
meeting patient and healthcare provider demands to improve outcomes, simplify procedures and reduce cost. 
New commercial models, together with product innovation, are being adopted by health systems as a solution to improving resource allocation. There is a recent
trend by health systems to shift towards payment for performance schemes in an effort to promote high quality care and increase the effectiveness of treatments. Additionally, suppliers of healthcare products and devices are providing
lower cost or reduced service offerings to those segments of the market more sensitive to price. 
The healthcare industry is also seeing protectionism/localisation playing a part in the product selection process as some jurisdictions are implementing laws to
show bias towards locally manufactured products. This already exists in Brazil for major tender offers and China is considering incentives to encourage hospitals to use locally made medical devices.
 The increased demand for healthcare products and the limitation of available resources is
widening the funding gap. Providing technologies that deliver value by improving clinical outcomes while reducing the consumption of overall healthcare resources is vital for the success and sustainability of medical device businesses. |  |  |  | Self-Care and Prevention 
Self-care and prevention is regarded as an important element of healthcare in that it will help protect society from potential health threats by minimising the
risk factors that cause them. Governments have been investing in programmes and providing tools to encourage and support healthier behaviour to reduce the strain on healthcare systems from lifestyle diseases. Additionally, pressure is
gradually being applied on the food industry to reduce saturated fats, sugar and salt in products and increase nutritional labelling in an effort to tackle rising rates of obesity and diabetes.
 Regulatory standards
and compliance in the
healthcare industry 
The international medical device industry is highly regulated. Regulatory requirements are important in determining whether substances and materials can be
developed into safe and effective products and done so in an environmentally sustainable way. 
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 also review data supporting the safety and efficacy of such products. Of particular importance is the requirement in many countries that products be authorised or registered prior to the
placement on market 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.









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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. Legislation covering corruption and bribery such as the UK Bribery Act and the US Foreign Corrupt Practices Act business
also apply to all our global operations.  We are committed to assuring a high level of
regulatory compliance and to doing business with integrity and welcome the trend to 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 and will continue to require significant financial and resource investment. See Legal proceedings on page 146.

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 as a result of government policy. We are therefore largely dependent on future governments providing increased funds commensurate with the increased demand arising from demographic trends.
 Pricing of our products is largely influenced in most developed 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 we operate. This control may be exercised by determining prices for an individual product

or for an entire procedure. We are exposed to changes in reimbursement policy, tax policy and pricing which may have an adverse impact on revenue
and operating profit. There may be an increased risk of adverse changes to government funding policies arising from the deterioration in macro-economic conditions in some of our markets.
 Competitors
 Competition exists among healthcare providers to gain patients on the basis of quality,
service and price. Providers are under pressure to reduce the total cost of healthcare delivery. In order to achieve this there has been some consolidation in our customer base, as well as amongst our competitors, and these trends are expected to
continue in the long term. We compete against both local and multinational corporations, including some with greater financial, marketing and other resources.  LOGO Manufacturing facility in Suzhou, China.  LOGO


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|Smith & Nephew estimates that the global orthopaedic reconstruction segment is worth approximately $14 billion and increased by approximately
3% in 2014. Competitors in the orthopaedic reconstruction segment include Biomet, DePuy Synthes (a division of Johnson & Johnson), Stryker and Zimmer. 
Smith & Nephew estimates that the global orthopaedic trauma segment is worth approximately $5 billion and grew by approximately 6% in 2014. Competitors in the
orthopaedic trauma segment include Biomet, DePuy Synthes, Stryker and Zimmer.  Smith &
Nephew estimates that the global sports medicine segment (representing access, resection and repair products) is worth approximately $5 billion and grew by approximately 8% in 2014. Competitors in the |  | sports medicine segment include Arthrex, Conmed, DePuy Mitek (a division of Johnson & Johnson) and Stryker.
 Smith & Nephew estimates that the global wound management segment is worth approximately
$7 billion and grew by 4% in 2014. Global competitors vary across our product areas and geographies and include Acelity, Coloplast, ConvaTec, 3M and Molnlycke. 
Customers 
In certain parts of the world, including the UK, much of Continental Europe, Canada and Japan, the healthcare providers are largely 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. 
Seasonality 
Orthopaedic and sports medicine procedures tend to be higher in the winter months when accidents and sports related injuries are highest. Conversely, 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 the Advanced Wound Management business.





LOGO







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STRATEGIC REPORT

Our business





LOGO  Delivering advanced medical technologies 
Smith & Nephews business model, set out on page 12, supports our mission to deliver advanced medical technologies to help healthcare professionals,
our customers, improve the quality of life for their patients.  Through it we create value.
This value creation process is actioned through five streams of activity. 
  Research & Development
   Ethics &
Compliance 
  Manufacturing 
  Medical Education 
  Sales & Marketing
 Our business model is underpinned by our Capital Allocation Framework. This enables us to
invest for the future, both in organic growth and through acquisitions, whilst also generating value for shareholders today through a progressive dividend policy and commitment to return any excess capital.

Research and Development 
We have a deep knowledge of the needs of surgeons, physicians and nurses, we understand the economic pressures healthcare payers work under, and we recognise that
patients are demanding better treatment options to restore quality of life.  These factors
inform our Research and Development (R&D) strategy, which is at the heart of our business model. 
In 2014, we launched many exciting products, including a cruciate retaining version of our JOURNEY II natural-motion knee, a first-of-its-kind DYONICS PLAN
surgical planning tool for hip arthroscopy, and the HAT-TRICK Lesser Toe Repair System. We have a strong new product pipeline for 2015, with many innovations scheduled. 
These new products, and many more currently in development, are a result of our focus on R&D. We invested $235 million in this area in 2014, in-line with our
commitment, stated in 2011, to increase our investment level to around 5% of revenue.  We
are highly disciplined in project selection. Our R&D experts in the UK, US, Europe, China and India have extensive customer and sector knowledge, which is augmented by ongoing interaction with our marketing teams.

Strict criteria are applied to ensure new products fulfil an unmet clinical need, have a strong commercial case, and are technologically
feasible. Our R&D teams also work closely with manufacturing and supply chain management to ensure we can produce new products to clinical, cost and time specification. Our products undergo clinical and health economic assessment both during
their development and post launch.  Open innovation
 As part of our R&D strategy, Smith & Nephew supports and works with numerous
small companies looking for help with developing and commercialising new technologies. We scout globally for new technologies and services to meet the needs of our customers. 
We are a primary sponsor of the Massachusetts Medical Device Development Center (M2D2) New Venture Competition, supporting entrepreneurial product
development by early-stage medical device companies. We also work with MassChallenge, a global start-up competition and accelerator programme, to support emerging companies that fit with our strategic areas of interest.


LOGO




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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                                                                                                                                                                                                                                                                                                                                    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|We continued in 2014 as the commercial partner in SWAN-iCare, an EU-funded initiative to bring multidisciplinary European research teams together
to deliver a next generation integrated autonomous solution for monitoring and adapting personalised therapy of foot and leg ulcers. 
Smith & Nephew also welcomes new product concepts from surgeons. Through our InVentures programme we collaborate to bring ideas to reality. InVentures
evaluates surgeon concepts for technical and market viability and our development team works hand-in-hand with surgeons to deliver new products that advance healing. Commercialised products benefit from the global selling power of Smith &
Nephew.  In addition, Smith & Nephew invests in early stage technologies relevant
to our business. Recent examples include UK-based Michelson Diagnostics that is developing a point-of-care tissue-imaging system that for the first time allows users to see below the surface of the skin; and an incubator fund investing in
orthopaedic technologies close to commercial launch.  We continue to scout for further
opportunities where we can access new disruptive technologies in our areas of specialism. These investments are typically in technologies that are not yet ready for acquisition but that we believe hold great promise. As well as funding, we may bring
R&D, management and manufacturing expertise, and gain privileged access to or rights to the technology. We aim to accelerate the journey to market and may ultimately acquire the business.
 Intellectual property
 We protect the results of our research and development through patents and other forms of
intellectual property. The Groups patent portfolio currently includes in excess of 5,000 patents and patent applications. Patent protection for our products is sought routinely in our principal markets.
 We also have a policy of protecting our products by registering trademarks under the local
laws of markets in which such products are sold. We vigorously protect our trademarks against infringement. 
In addition to protecting our market position by filing and enforcing patents and trademarks, we may oppose third party patents and trademark filings where
appropriate in those areas that might conflict with our business interests.  In the
ordinary course of business, we enter into a number of licensing arrangements with respect to our products. None of these arrangements individually is considered material to our current operations and financial results. |  | Ethics and compliance 
Code of conduct and business principles
 Smith & Nephew earns trust with patients, customers, healthcare professionals,
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 distributors and independent agents that sell our products. Our Code of Conduct and Business
Principles (Code) 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 Smith & Nephew operates. We are committed to upholding our promise in our Code that we will not retaliate against anyone who makes a report in good faith.
 New employees receive training on our Code, and we assign annual compliance training to
employees. In 2014, we updated our Code training. The new module is more interactive, role-based and allows individuals to apply the Code in different scenarios. Individuals can earn trust points and achievement badges if
they make the right choices in the scenarios. Individuals who show an understanding of the Code by selecting the right behaviour in a scenario can move through the module more quickly than individuals who choose the incorrect behaviour and are then
subject to remediation.  Global compliance programme
 Smith & Nephew has implemented what we believe is a world-class Global Compliance
Programme that helps our businesses comply with laws and regulations. Our comprehensive compliance programme includes global policies and procedures; on-boarding and annual training for employees and managers; monitoring and auditing processes; and
reporting channels.  Through a global intranet website, we provide resources and tools to
guide employees to make decisions that comply with the law and our Code and earn trust. We conduct advance review and approval for significant interactions with healthcare professionals or government officials. We regularly assess existing and
emerging risks in the countries in which we operate. |  | Managing Directors complete an annual certification to the CEO to confirm implementation of required programmes. Managers and employees make an
annual compliance certification, and executive management, managers and employees have a compliance performance objective customised to their level in the organisation. 
In 2014, we developed and piloted a face-to-face course for new managers, which supplements the on-line manager certification training. In 2015, all new managers
will be required to complete both the on-line and the face-to-face course.  New
distributors and other higher risk third parties are subject to screening and are contractually obligated to comply with applicable laws and our Code. Their management is required to take compliance training and certify that they will ensure their
employees and agents comply with the law and our Code. They also receive a CD-ROM with tools to assist them with their own compliance programmes. We have expanded our oversight of independent agents and distributors with on-site assessments to check
compliance controls and monitoring visits to review a sample of transactions from their books and records. 
In 2014, Smith & Nephew filed its first report in compliance with the US Physician Payments Sunshine Act, which comprised over 22,000 transactions with
nearly $18 million in payments and expenses to reportable individuals and entities.  In
early 2015, Smith & Nephew submitted the final report to the US Department of Justice (DoJ) and the US Securities and Exchange Commission (SEC) required under the Companys Foreign Corrupt Practices Act
settlement agreement. We also filed our first report under the deferred prosecution agreement we inherited with the ArthroCare acquisition (see Note 17.3 of the Notes to the Group accounts).









22Smith & Nephew Annual report 2014



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LOGO

LOGO  High quality manufacturing An employee at our manufacturing plant in
Tuttlingen, Germany, working on a polished cementless hip stem.  Manufacturing 
We operate manufacturing facilities in a number of countries across the globe, and a number of central distribution facilities in key geographical areas in which
we operate. Products are shipped to individual country locations which hold small amounts of inventory locally for immediate supply to meet customer requirements. We have a defined manufacturing and facility footprint plan in-line with our
commercial strategy which we review on a regular basis.  We continue to implement
improved processes such as Lean Manufacturing throughout our factories, the global supply chain and the supporting operations to improve and sustain the levels of safety, quality, delivery, productivity and efficiency. We have numerous
Core Competences including: materials technology; precision machining, high volume and automated manufacturing for both our Advanced Surgical Devices and Advanced Wound Management products.
 We procure raw materials, components, finished products and packaging materials from key
suppliers. These purchases include metal forgings and stampings for orthopaedic products, optical and electronic subcomponents 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 ensure value for money based on the total spend across the Group.

We outsource certain parts of our manufacturing processes where necessary to obtain specialised expertise or gain 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. 
Our largest manufacturing operation for Advanced Surgical Devices is based in Memphis (Tennessee, US), with additional production and assembly plants based in
Mansfield (Massachusetts, US), Oklahoma City (Oklahoma, US), Austin (Texas, US), Aarau (Switzerland), Tuttlingen (Germany), Beijing (China), Calgary (Canada), Warwick (UK), Heredia (Costa Rica) and Sangameshwar (India).
 The Memphis facilities produce key products and instrumentation in our Knee Implants, Hip
Implant and Trauma franchises. These include the JOURNEY II and LEGIONà knees, the
ANTHOLOGYà Primary Hip System and key Trauma products such as the PERI-LOCà Ankle Fusion Plating System and TRIGENà Intramedullary Nails. In addition to this, Memphis is the home to the design and manufacturing process of the VISIONAIRE patient matched
instrumentation sets.  The Mansfield facility focuses on sports medicine related products
for minimally invasive surgery including the FAST FIXà 360 Meniscal Repair System,
FOOTPRINTà PK Suture Anchor, DYONICS Platinum Shaver Blades, ENDOBUTTONà CL Ultra and the HEALICOILà PK suture anchor.

The Aarau, Tuttlingen, Beijing and Warwick facilities produce a large number of products including key trauma products, the PLUSà knee and hip range and the BIRMINGHAMà Hip Resurfacing System. The facility in Oklahoma City deals mainly with the assembly of surgical digital equipment, such as HD560à Camera. 
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.  The Advanced Wound Management manufacturing is
primarily managed from our factory and offices in Hull (UK). Wound Management products are also made at our facilities in Suzhou (China), Curaçao (Dutch Caribbean), Alberta (Canada) and Oklahoma City (Oklahoma, US).
 The products made at the Hull site cover the therapies of Exudate management (Foam products
 principally ALLEVYNà), Burns treatment (ACTICOATà) and Wound Closure (OPSITEà film products). Several products produced in Hull, such as JELONETà and BACTIGRASà, transitioned to Suzhou in 2014, as part of our global footprint optimisation programme.


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STRATEGIC REPORT

Our businesscontinued

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|LOGO  OPSITE Post-Op
Visible A waterproof, bacteria-proof dressing with
see-through absorbant pad. Unique design allows
continual monitoring of the incision site without the
need to disrupt the healing process.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  | LOGO                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|A key base material used in the production of a large number of dressings is the intermediate bulk rolls of film which are manufactured in the
Gilberdyke (UK) facility. The facility in Alberta (Canada) provides specific expertise in the addition of silver coatings onto the ACTICOAT burns range prior to shipping to Hull for the final conversion process into finished dressings. The facility
in Gilberdyke (UK) was sold in 2014, and will continue to supply sub components to other facilities until 2016. The processes at the Alberta facility are being transferred to the Hull site during 2015.
 The Suzhou facility opened in 2009 initially to manufacture some Foam products within Exudate
management. It has since expanded to take on production of some Film Wound Closure products. 
The majority of the NPWT components are bought in from third parties and assembled in the Advanced Surgical Devices Oklahoma City facility, with the exception of
the dressings used for the PICO product which are manufactured in Hull.  Manufacturing for
Advanced Wound Bioactives takes place in Curaçao, and at various third party facilities in the US. The products are distributed from a third party logistics facility in San Antonio (Texas, US). Advanced Wound Bioactives has facilities for the
development and possible production of cell based therapies in Fort Worth (Texas, US). |  | Advanced Wound Management distribution hubs are located in Neunkirchen (Germany) and Derby (UK) for international distribution, Bedford (UK) for
UK domestic distribution and Lawrenceville (Georgia, US) for US distribution.  Medical education  Smith & Nephew is dedicated to helping
healthcare professionals improve the quality of care for patients. We are proud to support the professional development of surgeons and nurses by providing them with medical education and training on our Advanced Surgical Devices and Advanced Wound
Management products.  Every year thousands of customers attend our state-of-the-art
training centres in the US, UK and China and Smith & Nephew courses at multiple hospitals and facilities around the world. 
In 2014, we provided training to more than 25,000 surgeons. Working under expert guidance, attendees refine techniques and learn new skills, whilst experiencing
the safe and effective use of our products. We also support healthcare professionals through our on-line resources such as the Global Wound Academy, The Wound Institute and, for surgeons, our Education and Evidence website. |  | Sales and marketing 
Our customers are the providers of medical and surgical treatments and services in over 100 countries worldwide.
 The largest single customer worldwide is a purchasing group based in the UK that represented
less than 5% of our worldwide revenue in 2014.  In our Established Markets, our Advanced
Surgical Devices are principally shipped and invoiced directly to healthcare providers, hospitals and other healthcare facilities. Certain Advanced Wound Management products are shipped and invoiced to wholesale distributors and others are consigned
to distributors that lease the devices to healthcare providers, hospitals and other healthcare facilities and end-users. 
Our US sales forces 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 other Established Markets country-specific commercial organisations manage employee sales forces directly. 
In our Emerging & International Markets we operate through direct selling and marketing operations, and through distributors. In these markets, our
Advanced Surgical Devices franchises frequently share sales resources. The Advanced Wound Management sales force may be separate where it calls on different customers.







24Smith & Nephew Annual report 2014



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Our people 
Smith & Nephew is committed to attracting, engaging, developing and retaining employees. In 2014, we had more than 14,000 employees dedicated to our core
values of Innovation, Trust and Performance. These values represent the foundation of our culture, and underpin our commitment to be an employer of choice as well as a responsible corporate citizen.
 Investing in our people and communities helps ensure the long-term sustainability of our
business. Smith & Nephew strives to create a more engaged and productive workforce and focuses on measures to drive employee engagement. These include an understanding of the Groups mission and direction, sense of employee
involvement, focus and adaptability to customers and market place. We continue to listen to our employees, via regular surveys and focus groups, and we value their opinions. In 2014, we conducted a Global Employee survey to measure progress against
our actions and were named Great Place to Work in Spain.  Attracting the best talent and
developing and engaging our employees are critical to achieving and sustaining our business objectives and overall performance. Employee advancement is merit-based, based on performance as well as demonstration of core competencies which include our
core 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 high-potential employees and ensure they
have robust career development plans. Talented employees are provided with opportunities to develop their skills and career through new assignments and on the job experiences. Current programmes include our Chief Executive Officer (CEO) Forum 
where small groups of high potential and emerging talent are given the opportunity to learn more about the business from the Companys most senior leaders and to benefit from peer mentorship  and the annual Managing Directors
Meeting where country and regional commercial leaders begin the year in alignment with the Groups strategy and goals. In addition, the Board reviews succession plans for key executive roles and succession plans are in place for critical
positions across our business.  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 and certify their adherence to this Code.



Smith & Nephew strives to create a highly engaged and productive workforce. We foster this goal with targeted initiatives to
ensure understanding of the Companys mission and direction, encourage employee involvement, and ensure focus and adaptability to our customers and market place. We seek employee feedback via regular surveys and focus groups, and we act on this
feedback in the spirit of continuous improvement.  Diversity at Smith &
Nephew  Smith & Nephew believes 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.  Smith & Nephew has a Human Resource Global
Standard for diversity and inclusion in the workplace and is committed to creating an inclusive environment that embraces and promotes diversity. 
The Board and Executive officers continue to recognise the importance of diversity and over the last two years have expanded their own diversity profile: three of
our ten Board members are female.  On 31 December 2014, Smith & Nephew had
the following breakdown of employees:



We aim to provide an open, challenging, productive and participative environment based on constructive relationships.
 We maintain open and transparent communication with employees through regular and timely
information and consultation. We clearly communicate our business goals and performance standards, and provide the training, information and authority needed to achieve them. We provide fair recognition and reward based on performance. Our annual
CEO Award, open to all employees worldwide, recognises employees who deliver exceptional results in line with our core values, encouraging innovation and a spirit of continuous improvement at all levels. We are committed to working with employees to
develop each individuals talents, skills and abilities. We provide encouragement to learn and continuously improve. 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 are committed to building diversity in a working environment where there is mutual trust and respect and where everyone feels responsible for the performance
and reputation of our Company. We are committed to providing healthy and safe working conditions for all employees. We achieve this by ensuring that health and safety and the working environment are managed as an integral part of the business, and
we recognise employee involvement as a key part of that process.  We do not use any form of
forced, compulsory or child labour. We support the Universal Declaration of Human Rights of the United 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.Number of Employees1Board of DirectorsMale

7Female

3Total

10Senior Managers and above2Male

562Female

168Total

730Total
employeesMale

8,485Female

5,757Total

14,2421   Number of employees as at 31 December 2014 including
part time employees and employees on leave of absence. 2   Senior Managers and above includes all
employees classed as Directors, senior Directors, Vice Presidents and Executive officers and includes all statutory Directors of our subsidiary companies.


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LOGO





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Overview 
In Advanced Surgical Devices (ASD) we develop, manufacture and sell products in the areas of Orthopaedic Reconstruction,
Trauma & Extremities, Sports Medicine Joint Repair, Arthroscopic Enabling Technologies, and others such as Gynaecology and Ear, Nose and Throat.

Orthopaedic Reconstruction 
Smith & Nephew offers a range of specialist products for orthopaedic reconstruction in its Knee Implants and Hip Implants franchises.
 Implant bearing surfaces such as the proprietary OXINIUMà Oxidized Zirconium continue to be a point of differentiation for Smith & Nephew.
OXINIUM Technology combines the enhanced wear resistance of a ceramic bearing with the superior toughness of a metallic bearing. When combined with highly cross-linked polyethylene (XLPE) it results in our proprietary VERILAST
Technology. In Hip Implants, the combination of a ceramicised metal head and a highly cross-linked polyethylene lined cup have been shown in various national joint replacement registries to have displayed best in class survivorship rates when
compared to implants made from any other materials. In Knee Implants, the LEGION Primary Knee with VERILAST Technology is the only knee implant that has been laboratory-tested to 30-years of simulated wear. While lab testing is not the same as
clinical performance, the tests showed significant reduction in wear compared to conventional technologies. 
Knee Implants 
Smith & Nephew offers a range of products for specialised knee procedures. In 2014, Smith & Nephew launched the JOURNEY II Cruciate Retaining
(CR) knee implant extending the JOURNEY II Active Knee System to procedures that preserve the posterior cruciate ligament (PCL) which account for approximately half of all knee replacement procedures.
 The LEGION/GENESISà II Total Knee System is a comprehensive system designed to allow surgeons to address a wide range of knee procedures from primary to
revision.

These systems also feature VERILAST Technology, our advanced bearing surface and also utilise VISIONAIRE Patient-Matched Instrumentation.
 With VISIONAIRE Instrumentation, a patients MRI and X-rays are used to create customised
cutting blocks that allow the surgeon to achieve optimal mechanical axis alignment of the new implant. In addition, VISIONAIRE also helps save time by reducing the number of procedural steps and instruments used in the operating room.
 In 2014, Smith & Nephew entered into a commercial agreement with Blue Belt
Technologies (BBT), makers of the Navio® Orthopaedic Surgical System, the next generation of orthopaedic robotic surgical navigation. Under this agreement, surgeons using the Navio
system will be able to implant Smith & Nephews JOURNEY UNI partial knee.  We
also announced an agreement with OrthoSensor, the leader in intelligent orthopaedics, that will enable surgeons to benefit from OrthoSensors VERASENSETM Sensor Assisted Surgery Technology
for soft tissue balancing when implanting our JOURNEY II and LEGION Total Knee Systems. VERASENSE utilises advanced sensor technologies to enable evidence-based surgical decisions regarding component position, limb alignment and soft tissue balance
to optimise outcomes in total knee replacement.  Hip Implants
 For Hip Implants, core systems include the ANTHOLOGY Hip System, SYNERGYà Hip System, the SMFà Short Modular Femoral Hip System, the R3à Acetabular System, the POLARCUPà Dual Mobility Hip System and the
SL-PLUSà Hip Family System.
 In 2014, we introduced the POLARSTEMà HA Cementless Stem System in the US for state-of-the-art minimally invasive surgical techniques that preserve bone and soft tissue, with
good functionality and reproducible results.LOGO


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STRATEGIC REPORT

Segment performance:Advanced Surgical Devicescontinued





|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                                                                                                                                                                                                                                                                                                                                                                                 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|For US patients, our successful VERILAST knee consumer campaign was expanded to include hips in 2014. Thanks to the combination of a
well-established brand, a compelling call-to-action and our position as the first company to advertise differentiating technology to this audience, we were able to mirror the successes of our earlier knee campaigns by driving potential patients to
our consumer-facing RediscoverYourGo website and its surgeon locator.  Trauma &
Extremities  Our Trauma & Extremities franchises offer both internal and external
fixation and tissue repair devices, as well as other products used in the stabilisation of severe fractures and deformity correction procedures. 
For extremities and limb restoration, the franchise offers the TAYLOR SPATIAL FRAMEà 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, hand and wrist, and trauma surgeons. For Trauma, the principal internal fixation products are the TRIGENà family of IM nails (TRIGEN META-NAIL System, TRIGEN Humeral Nail System, TRIGEN SURESHOTà, and TRIGEN INTERTANà) and the PERI-LOCà Plating
System.  2014 saw the introduction of the
D-RADà SMART PACK System for treating distal radius fractures. The new system 
which includes complete, sterile, single-use instrument kits with implants, and a tray of sterile packaged fasteners and templates  allows hospital operating room staff to reduce the typical time and expense involved with reprocessing
traditional plate and screw systems.  In wrist repair, we introduced a new solution for
triangular fibrocartilage (TFCC), a complex repair that leverages our
FAST-FIXà 360 technology and provides an all arthroscopic repair which eliminates
knot stack.  Smith & Nephew also announced its entry into the forefoot market in
2014, with the launch of the HAT-TRICK Lesser Toe Repair System. Comprised of three separate repair options, the HAT-TRICK System includes products for metatarsophalangeal (MTP) ligament repair and reconstruction, a metatarsal osteotomy
guide, and a revisable, all-PEEK implant for Proximal Inter-Phalanges (PIP) fusion, also known as hammer-toe correction. |  | In hip repair, we introduced INTERTANà Gold instrumentation that is designed to streamline the surgical steps and improve clinical outcomes by offering a more efficiently
designed set. In addition, the INTERTAN 10S was launched to meet the unique needs of smaller-stature patients by offering a more appropriate size for this population. 
We launched the EVOSà MINI Plating System for use in complex fractures of the long bones of the arms and legs. Designed specifically for traumatologists, this long-bone-specific system includes the variety of mini,
flat plates and screw sizes necessary to address both fracture reduction and short-term fixation while the final, load-bearing repair is being completed. 
Sports Medicine Joint Repair 
The 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 knee, hip and shoulder repair. 
Our global position within the Sports Medicine Joint Repair market was strengthened significantly in 2014, with the May acquisition of
ArthroCare Corporation. The transaction adds technology and highly complementary products to our existing portfolio, including new shoulder anchor innovation. 
In 2014, Smith & Nephew launched its SUTUREFIXà Ultra soft suture anchor for hip and shoulder labral repair to surgeons in the US. The new anchors small, soft construct, and
superior pull-out strength, allow surgeons to more precisely place fixation points around the joint to more accurately re-approximate the patients native anatomy. 
2014 also saw the launch of the N8TIVEà ACL (anterior cruciate ligament) System which helps surgeons create highly anatomic ACL Reconstructions. N8TIVE allows surgeons to restore the size, shape, and location of the native femoral and
tibial ACL insertion points.  Arthroscopic Enabling
Technologies (AET) 
Our Arthroscopic Enabling technologies franchise now includes the latest generation COBLATIONà radio frequency (RF) technology acquired from ArthroCare, as well as electromechanical and mechanical blades and hand
instruments for the removal of damaged tissue. Additionally, the franchise offers fluid management equipment for surgical access and high definition cameras, digital image capture, scopes, light sources and monitors to assist with visualisation
inside the joint. |  | Key AET products include DYONICS shaver blades, ACUFEXà handheld instruments, and a wide range of RF probes. The ArthroCare acquisition brought us the latest generation of RF technology 
the internationally patented COBLATION technology  which offers ablation, resection, and coagulation of soft tissue and hemostasis of blood vessels. The DYONICS Platinum Series Shaver Blades are single-use blades that provide superior
resection due to their sharpness and virtually eliminate clogging through their improved debris evacuation capabilities. The DYONICS PLAN Hip Impingement Planning System was launched in 2014. This interactive, 3D software system uses data from
low-dose1 CT scans to help surgeons visualise, assess and plan each patients unique Femoroacetabular Impingement (FAI) surgery before they enter the operating room.
 Other ASD 
The Other ASD franchise includes smaller businesses such as Gynaecology and our newly acquired Ear, Nose and Throat (ENT) business.
 The main Gynaecology product is the TRUCLEARà System, a first-of-its-kind hysteroscopic tissue removal system, providing safe and efficient removal of endometrial polyps and submucosal
fibroids. The business also sells a hysteroscopic fluid management system, which provides uterine distension and clear visualisation during hysteroscopic procedures. 
Our ENT business develops, manufactures, and markets products for the ENT market space. We offer a wide variety of products in this area including our COBLATION
technology and our RAPIDRHINOà carboxymethylcellulose (CMC) technology
which is featured in dissolvable nasal and sinus dressings, removable nasal and sinus dressings, and epistaxis treatment products.



|1 | Low-dose scan protocol reduces radiation by approximately 50% compared to standard CT protocol.
|- | -----------------------------------------------------------------------------------------------

| | CT Protocol Report, HIPS. Document number 15001984, 2013. Data on file at Smith & Nephew.
| | -----------------------------------------------------------------------------------------





28Smith & Nephew Annual report 2014



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LOGOLOGO VERILAST Technology for Hip
Replacement The
proprietary technology combines innovation with long-term performance. Regulatory approvals 
In 2014, regulatory clearances/approvals were obtained for several key products and instrumentations.
 In the US, 510(k) clearances were given to the D-RADà SMART PACK, VLPà MINI-MOD Plates and Screws, EVOS Mini-Fragment Plating System, JOURNEY II BCS Constrained Articular Inserts, BIOSURE HEALICOILà PK screw, Cannulated Captured Screw, N8TIVE ACL Anatomic Reconstruction System and
NasaStentà CMC Nasal Dressing. Additional 510(k) clearances were also granted for our
VISIONAIRE software revisions as well as the Q-Fixà Suture Anchor, the Multi-Fixà S Knotless Fixations System and the Topazà EZ Microdebrider COBLATION Wand. 
In Canada, approvals were granted for our LEGION Narrow OXINIUM and CoCr Femoral Components, HEALICOIL REGENESORBà Suture Anchor, the SUTUREFIXà ULTRA Suture Anchor, TFCC FAST-FIX Kit,
TRUEPASSà Suture Passer, DYONICS PLAN, ULTRATAPEà, N8TIVE ACL Reconstruction System, BIOSURE HEALICOIL PK screw, KVacà and Ambient KVac COBLATION Wands, Q-Fix Suture Anchor System and MediENTà Turbinate Implant.

In Australia, LEGION Narrow OXINIUM, HEALICOIL REGENESORB, LEGION Hinge Knee System, KVac COBLATION Wand, N8TIVE ACL
Reconstruction System, SpeedLockà Hip Knotless Fixation System, Multi-Fix S Knotless
Fixation Device, Q-Fix Suture Anchor System, Venteraà Sinus Dilation System and Serpentà Articulating ENT Instrument were approved.
 In Latin America, the
Quantumà 2 COBLATION System and the
Magnumà 2 Knotless Fixation Device were approved in Argentina; the Speedfixà Suture System and the Titanà Suture Anchor were approved in Brazil; and the RAPIDRHINO System was approved in Mexico.
 In Europe, the following products obtained regulatory clearance: HEALICOIL
REGENSORB Suture Anchor, VLP MINI-MOD Plates and Screws, the EVOS Mini-Fragments Plates and Screws, the LEGION Hinge Knee System and the JOURNEY II CR Knee System. 
In Japan, the ANTHOLOGY HA Coated Hip stem, SMFà Hip Stem, Osteoraptorà OS Suture Anchor, HEALICOIL REGENESORB Suture Anchor, SUTUREFIX ULTRA Suture Anchor, TFCCà FAST-FIX Kit, OSTEORAPTORà HA
curved, TRUEPASS Suture Passer, DYONICS PLAN, and ULTRATAPE were all approved. 
Other approvals include the Speedlock Hip Knotless Fixation System in Singapore and the ENT Irrigation Pumpà in Korea.


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LOGO



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##### Table of Contents





Overview 
In Advanced Wound Management (AWM) we offer products from initial wound bed preparation through to full wound closure. These
products are targeted at chronic wounds associated with the elderly population, such as pressure sores and venous leg ulcers. There are also products for the treatment of acute wounds such as burns and invasive surgery that impact the wider
population.

The main products within the AWM business are for management of wound exudate, treatment and prevention of wound infections,
negative pressure wound therapy (NPWT) and bioactive therapies. The portfolio is grouped into disposable wound care products (Advanced Wound Care), electrical equipment for wound therapy (Advanced Wound Devices) and bioactives (Advanced
Wound Bioactives).  Advanced Wound
Care  Exudate management
 Exudate management products focus on effectively and efficiently managing
wound fluid and creating an optimal healing environment to promote improved healing outcomes. Our key brands in this space are ALLEVYN foam dressings and DURAFIBERà gelling fibre dressings. 
In 2014, we continued to invest in the development and commercialisation of our flagship ALLEVYN brand, with significant sales and marketing
efforts in key countries. The ALLEVYN brand is evolving towards ALLEVYN Life, our latest innovation in foam dressings, which was designed to provide a better patient experience, and greater wear time. This leads to improved patient outcomes and
economic savings for payers, which has now been demonstrated in several studies.

We have also experienced a significant increase in the utilisation of ALLEVYN Life as a prophylactic measure to help prevent pressure
ulcers, driven by the dressings unique multi-layer design which gives it superior pressure redistribution properties. 
Throughout 2014, we have continued to invest in customer insights and the generation of meaningful clinical and health economic evidence to ensure that our ALLEVYN
portfolio is in a sustainable, category leading position and delivers to our customers expectations. 
Infection management 
AWM has two significant technologies in its infection management portfolio, silver (ACTICOAT, DURAFIBER Ag and ALLEVYN Ag) and iodine (IODOSORBà). The iodine-based IODOSORB product has continued to gain interest due to the unique
properties of the cadexomer iodine molecule and their impact on biofilms, which have become a well-recognised barrier to healing in wound care. IODOSORB benefits from one of the most comprehensive evidence bases in wound care.
 We are also experiencing strong interest in ACTICOAT, particularly in post-surgical wounds to
prevent the complications associated with surgical site infection and in delayed healing chronic wounds. 
Other 
AWM offers a wide range of other wound care products, resulting in Smith & Nephew having one of the most comprehensive ranges of wound care solutions in the
industry. These products include our film and post-operative dressings, skincare products and gels. 
IV3000à:
 AWMs specialist breathable premium IV dressing, utilising REALTICà film
technology and unique patterned adhesive, continues to perform well, particularly driven by emerging markets. In 2014, the IV3000 range benefited from several product upgrades reinforcing its differentiation as a premium offering. Success in the
emerging markets has created an opportunity for a mid-tier offering, which will be introduced in 2015.  
LOGO  ALLEVYN Life
An innovative multi-layered dressing designed for people living their everyday lives.LOGO


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STRATEGIC REPORT

Segment performance:Advanced Wound Managementcontinued







|     |                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|LOGO |                                                                                                                                                                                         | OPSITE Post-Op Visible: This is our innovative dressing that combines the qualities of a premium dressing with the ability to see and monitor the
incision. This unique product continues to deliver strong growth in both our Established Markets and Emerging & International Markets, supported by investment in clinical evidence.
 Advanced Wound Devices
 Advanced Wound Devices consists of two categories of products: NPWT and VERSAJETà. 
NPWT 
Our NPWT solutions include traditional NPWT products (RENASYS products) and the single-use portfolio (PICO and
KALYPTOà products).
 We are also progressing with launch plans for our next-generation traditional NPWT
product.  During 2014, we were required to initiate a distribution hold in the US on
RENASYS products as the FDA indicated new regulatory clearances were required in respect of certain design enhancements. We are working to obtain these and RENASYS remains available outside of the US.
 The PICO system, our single-use, canister-free solution, is revolutionising NPWT. As familiar
and easy to use as an advanced wound dressing, PICO provides an active intervention to help promote optimal healing for early discharge and enhanced outcomes in complex cases. PICO simplifies the delivery of negative pressure, which benefits
patients and caregivers alike. |  | VERSAJET 
The VERSAJET II Hydrosurgery system is a mechanical debridement device used by surgeons to excise and evacuate non-viable tissue, bacteria and contaminants from
wounds, burns and soft tissue injuries.  Advanced Wound
Bioactives  Smith & Nephew is the global market share leader in the bioactives
segment, which is the fastest growing category of wound therapeutics. Our diversified biotherapeutic portfolio offers differentiated, cost-effective solutions for tissue repair and healing, addressing the full spectrum of hard-to-heal wounds.
 Currently, our leading bioactive brand is Collagenase SANTYLà Ointment, the only FDA-approved biologic enzymatic debriding agent for chronic dermal
ulcers and severe burns. In 2014, Smith & Nephew launched a new 90g package size to bring convenience and economy to providers and patients treating large dermal ulcers and burns with SANTYL. In addition, consistent with Smith &
Nephews scientific leadership strategy, new clinical data highlighting the benefits of using SANTYL adjunctively with sharp debridement was released early in the year and was closely followed by initiation of a larger, follow-on study of
similar design to corroborate the initial findings.  REGRANEXà Gel is the first and only FDA approved recombinant platelet-derived growth factor
indicated for use as an adjunct to good ulcer care in the treatment of lower extremity diabetic neuropathic ulcers. Physicians increased their prescribing of REGRANEX throughout the year, in part due to REGRANEX 360, a novel programme launched by
Smith & Nephew to help patients maximise the benefits of the brand by informing about insurance coverage, shipping the medication directly to the patients home or office and providing expert consultation on how to use the brand
appropriately.
|     | LOGO  Collagenase SANTYL
Ointment The only enzymatic debrider approved by the FDA for use in the US. It selectively removes necrotic tissue without
harming surrounding healthy tissue. |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 







32Smith & Nephew Annual report 2014



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##### Table of Contents

LOGO  OASISà, a family of naturally-derived, extracellular matrix replacement products indicated for the management of both chronic and traumatic wounds completes Smith & Nephews bioactive
portfolio. In October 2014, we announced the top-line results of the Phase 3 study of HP802-247, a living cell spray-on therapy designed to stimulate healing
of venous leg ulcers. HP802-247 did not meet the primary endpoint in this trial and we have taken the decision to stop the Phase 3 programme. We remain committed to investing in developing pioneering Advanced Wound Bioactive treatments.
 Regulatory approvals In 2014, regulatory clearance was obtained for both ALLEVYN Life and DURAFIBER in Japan making the latest absorbent dressing technologies available to this
important market. PICO, our single use NPWT system was approved for the first time in Japan. In addition, a significant enhancement to the PICO product, in
the form of the new Soft Port dressing and tubing set, was approved in the EU and Australia. Other registration activities during the year include expanding
the geographic footprint of established products within the emerging markets and the ongoing expansion of Smith & Nephew Medical (Suzhou) as a new supply site for multiple wound care products.


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201433









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STRATEGIC REPORT

Financial review and principal risks





The Group finished 2014 set to

benefit from the actions and

investments we have made



|LOGO
|----



|1 | The underlying percentage increases/decreases are after adjusting for the effect of currency translation and the inclusion of the comparative impact of acquisitions and execution of disposals.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 | Explanation of these non-GAAP financial measures are provided on pages 176 to 179.
|- | ----------------------------------------------------------------------------------







34Smith & Nephew Annual report 2014



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##### Table of Contents







Revenue by market The underlying increase in each divisions revenues, by market, reconciles to reported growth, the most directly comparable financial measure calculated in
accordance with IFRS, as follows:  2014      $ million



2013$ million





Reportedgrowth inrevenue%



Constantcurrencyexchangeeffect %



Acquisition/Disposaleffect%



Underlyinggrowth inrevenue%Advanced Surgical DevicesUS


1,558



1,391





12







(10
)


2Other Established Markets


1,229



1,204





2



2



(4
)


Established Markets


2,787



2,595





7



1



(7
)


1Emerging & International Markets


511



420





22



3



(8
)


17Advanced Surgical Devices


3,298



3,015





9



1



(7
)


3Advanced Wound ManagementUS


454



471





(4
)










(4
)Other Established Markets


699



722





(3
)


(1
)






(2
)Established Markets


1,153



1,193





(3
)










(3
)Emerging & International Markets


166



143





16



3



(5
)


14Advanced Wound Management


1,319



1,336





(1
)


1



(1
)


(1
)  Advanced Surgical Devices 
Revenue 
ASD revenue increased by $283 million (9% on a reported basis) from $3,015 million in 2013 to $3,298 million in 2014. The underlying increase of 3% is after
adjusting for a 7% impact from the acquisition of ArthroCare Corp in May 2014 and a 1% unfavourable foreign currency translation. 
In the US, revenue increased by $167 million to $1,558 million in 2014 from $1,391 million in 2013 (12% on a reported basis). The underlying increase of 2% is
after adjusting 10% for the impact of the ArthroCare Corp acquisition in May 2014. In Other Established Markets, revenue was $1,229 million in 2014, an increase of $25 million from $1,204 million in 2013 (2% on a reported basis). The underlying
increase was flat after adjusting for 2% from favourable foreign currency translation and the impact of 4% from acquisitions. Our Emerging & International Markets revenue increased by $91 million to $511 million in 2014 from $420 million in
2013 (22% increase on a reported basis). The underlying increase was 17% after adjusting for 3% for unfavourable foreign currency translation and the impact of 8% from acquisitions.
 In the global Knee Implant franchise, revenue increased by $8 million from $865 million in
2013 to $873 million in 2014 (1% on a reported basis), representing a 2% underlying revenue increase after 1% of unfavourable currency translation. Growth has been impacted by exposure to a weakening European market with conditions continuing to
deteriorate in Germany, our largest European market, and our position in the product life cycle versus our peers. Growth improved driven by sales of the JOURNEY II BCS Knee System.
 Global revenue from the Hip Implant franchise increased by $1 million from $653 million
in 2013 to $654 million in 2014 (flat on a reported basis), which represented an underlying revenue increase of 1% after

1% unfavourable foreign currency translation. Sales in our VERILAST Hip and direct anterior approach portfolio contributed to the increase.
 Trauma & Extremities revenue increased by $20 million from $486 million in 2013 to
$506 million in 2014 (4% on a reported basis), representing underlying revenue growth of 4% after adjusting for a 1% impact from the acquisition of a Brazilian distributor and 1% of unfavourable foreign currency translation.
 Sports Medicine Joint Repair revenue increased by $80 million from $496 million in 2013 to
$576 million in 2014 (16% on reported basis), representing underlying revenue growth of 8% after adjusting for a 8% impact from the acquisition of ArthroCare Corp, 1% from the acquisition of a Brazilian distributor and 1% of unfavourable foreign
currency translation.  Global revenue from Arthroscopic Enabling technologies increased by
$101 million from $441 million in 2013 to $542 million in 2014 (23% on a reported basis). This increase represents an underlying revenue increase of 1% after adjusting for the 22% impact from the acquisition of ArthroCare Corp, 1% from the
acquisition of a Brazilian distributor and 1% of unfavourable foreign currency translation. 
The revenue in the Other ASD (including Gynaecology and ENT) franchise increased by $73 million from $74 million in 2013 to $147 million in 2014 following the
acquisition of ArthroCare Corp in 2014. Excluding the impact of this acquisition, underlying revenue in the Other ASD franchise, which includes gynaecology, grew by 10%.


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201435









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STRATEGIC REPORT

Financial review and principal riskscontinued





|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |  |                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                |  |  |  |  |                                                         |  |  |               |  |  |  |                | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | -------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- |  |  |  |  | ------------------------------------------------------- |  |  | ------------- |  |  |  | -------------- | 
|Trading and operating profit 
Operating profit, the most directly comparable financial measure under IFRS, reconciles to trading profit as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |  |                |  | Trading and operating profit 
Operating profit, the most directly comparable financial measure under IFRS, reconciles to trading profit as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |  |                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |  | 2014 $ million |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 2013 $ million |  |  |  |  |                                                         |  |  | 2014$ million |  |  |  | 2013 $ million | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |  |                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 
|Operating profit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |  | 626            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 620            |  |  |  |  | Operating profit                                        |  |  | 123           |  |  |  | 190            | 
|Acquisition-related costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |  | 107            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 7              |  |  |  |  | Acquisition-related costs                               |  |  | 11            |  |  |  | 24             | 
|Restructuring and rationalisation
costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |  | 33             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 44             |  |  |  |  | Restructuring and rationalisation costs                 |  |  | 28            |  |  |  | 14             | 
|Amortisation of acquisition
intangibles and impairments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |  | 78             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 41             |  |  |  |  | Amortisation of acquisition intangibles and impairments |  |  | 51            |  |  |  | 47             | 
|Legal and other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  | (34)           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |               |  |  |  |  | Legal and other                                         |  |  | 32            |  |  |  |               | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |  |                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 
|Trading profit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |  | 810            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 712            |  |  |  |  | Trading profit                                          |  |  | 245           |  |  |  | 275            | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |  |                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 
|Trading profit margin increased from 23.6% to 24.6%. Trading
profit increased by $98 million to $810 million from $712 million in 2013. This increase reflects the benefits from our structural efficiency programme. 
Operating profit increased by $6 million from $620 million in 2013 to $626 million in 2014. This comprises the increase in trading profit of $98 million discussed
above offset by increases in acquisition-related costs of $100 million and amortisation of acquisition intangibles of $37 million and partially offset by a decrease in restructuring and rationalisation costs of $11 million and credit relating to the
US pension settlement and closure.  Advanced Wound
Management  Revenue
 AWM revenue decreased by $17 million (-1% on a reported basis), from $1,336 million in 2013 to
$1,319 million in 2014. The underlying decrease of 1% is after adjusting for an increase of 1% for acquisitions completed in the year and a 1% unfavourable foreign currency translation.
 In the US, revenue decreased by $17 million to $454 million in 2014 from $471 million in 2013
(-4% on a reported basis). The underlying decrease was also 4%. In Other Established Markets, revenue was $699 million in 2014, a decrease of $23 million from $722 million in 2013 (-3% on a reported basis). The underlying revenue decrease was 2%
with 1% of unfavourable foreign currency translation. Our Emerging & International Markets revenue increased by $23 million in 2014 (16% on a reported basis). The underlying increase was 14% after adjusting 2% for
unfavourable foreign currency translation.  Advanced Wound Care revenue decreased by $38
million (-5% on a reported basis) to $805 million in 2014 from $849 million in 2013. The underlying decline of 4% is after adjusting for foreign currency translation. Conditions across many European markets remain challenging but the
introduction of the ALLEVYN Life range continues to make good progress across Europe following product introductions and investment in marketing. 
Advance Wound Devices revenue decreased from $213 million in 2013 to $192 million in 2014, a reported decrease of $21 million and 10%. The underlying decrease
of 9% is after adjusting for unfavourable foreign currency translations of 1%. This decline was due to the hold of RENASYS in the US due to regulatory issues and competitive pressures in traditional canister-based NPWT in Europe.
 Advanced Wound Bioactives revenue increase to $322 million in 2014 from $280 million in 2013
(15% reported growth). The underlying increase was also 15%. |  |  |                |  | Trading profit margin decreased from 20.6% to 18.6%. Trading
profit decreased by $30 million to $245 million from $275 million in 2013. The decrease in the year is primarily attributable to the RENASYS hold. 
Operating profit decreased by $67 million from $190 million in 2013 to $123 million in 2014. This comprises of the decrease in trading profit of $30 million
discussed above, costs relating to the hold on RENASYS and cessation of the HP802 trials amounting $52 million, offset by a decrease in acquisition-related costs of $13 million, due to the integration of the Healthpoint acquisition which completed
in December 2012, an increase in restructuring and rationalisation costs of $14 million and an increase of $4 million in amortisation of acquisition intangibles. 
Principal risks and risk management 
As an integral part of planning and review Group, business area and functional management seek to identify the significant risks involved in the
business, and to review the risk management action plans for those risks. The Group Risk Committee, which is comprised of the Chief Executive Officer and senior executives, meets twice a year to review the risks identified by the businesses and
corporate functions and any risk management actions being taken. As appropriate, the Risk Committee may re-categorise risks or require further information on the risk management action plans. The Risk Committee reports to the Board on an annual
basis detailing all principal risks. In addition, the Board considers risk as part of the development of strategy. Internal audit reviews and the Audit Committee reports on the effectiveness of the operation of the risk management process.
 There are known and unknown risks and uncertainties relating to Smith & Nephews
business. The following pages provide an overview of what the Board considers the most significant risks that could cause the Groups business, financial position and results of operations to differ materially and adversely from expected and
historical levels, and how these risks relate to the Groups strategic priorities. Additional detail is set forth under Risk Factors in the Group information section of this report. In addition, other factors not listed here that
Smith & Nephew cannot presently identify or does not believe to be equally significant, could also materially adversely affect Smith & Nephews business, financial position or results of operations. | 







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LOGO  Product Portfolio Development 
The medical devices industry has a rapid rate of new product introduction. The Group must be adept at monitoring the landscape for technological advances, have an
efficient and valuable product development pipeline and secure protection for its intellectual property. The Group may also seek to acquire businesses as part our business strategy to augment the product portfolio or business scale in a certain
geography.Specific risks we face

Risk management actions

Possible impacts  Competitors may introduce a disruptive technology, or obtain patents or other intellectual property
rights, that affect the Groups competitive position 
  Claims by third parties regarding infringement of their intellectual property rights
   Lack of innovation due to low
R&D investment, R&D skills gap or poor product development execution for Established and Emerging & International markets 
  Failure to receive regulatory approval to successfully commercialise a pipeline product

  Processes focused on identifying new products and potential disruptive technologies (internal and
external)    Improved
productivity, prioritisation and allocation of R&D funds 
  Increasing R&D investment to enhance clinical capability and invest in biomaterials
   Strengthen intellectual property
rights and monitor and defend against infringement 
  Global strategic marketing programmes
   Support an Emerging &
International Market product portfolio

  Loss of market share, profit and long-term growth
 
Link to Strategic Priority 

 Innovate for value

 Established Markets
   Emerging & International Markets 

 Supplement organic growth
through acquisitions   Acquisitions and Business Development 
The Group may seek to acquire businesses or products as part of our strategy to augment the product portfolio or generate business scale in certain geographies.
These acquisitions must deliver the expected returns and not create significant liability exposures or the Group may not meet its financial targets.Specific risks we may face

Risk management actions

Possible impacts  Ineffective acquisition due diligence
   Inflated forecasts or projections
may cause over-valuation of transaction 
  Lack of timely adoption of Group standards policies and financial controls during integration could
create additional liabilities 
  Acquisitions in emerging markets may identify practices that must be ceased to meet Group
standards

  Strong resources and processes to ensure rigorous review and integration of acquisitions or product
related investments    Mergers
& Acquisitions Council consisting of senior executives that reviews acquisitions and business development transactions 
  Board of Directors review of all significant transactions
   Detailed compliance due diligence
and integration reporting processes 
  Robust Internal Audit and Group Finance Controls
   Post acquisition review
programme

  Loss of market share, profit and long-term growth
 
Link to Strategic Priority 

 Emerging & International Markets
 
  Supplement organic growth
 through acquisitions
  
Established Markets


LOGO




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STRATEGIC REPORT

Financial review and principal riskscontinued





| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                                                                                                                                                                               |  | 
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| |  | Government Action, Pricing and Reimbursement Pressure 
In most markets throughout the world, expenditure on medical devices is controlled to a large extent by governments, many of which are facing increasingly intense
budgetary constraints. The Group is therefore largely dependent on governments providing increased funds commensurate with the increased demand arising from demographic trends. 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. Political upheaval in the countries where the Group operates or surrounding regions could adversely affect Group operations or
turnover.  Group operations are affected by transactional exchange rate movements. The
Groups manufacturing cost base is situated in the US, UK, Costa Rica, China and Switzerland and finished products are exported worldwide. |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                                                                                                                                                                               |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Specific risks we face                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | Risk management actions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | Possible impacts                                                                                                                                                              |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |   Reduced
reimbursement levels and increasing pricing pressures 
  Reduced demand for elective surgery
   Lack of compelling health economics
data to support reimbursement requests 
  Government policies favouring lower priced and locally sourced products
   Political upheavals prevent selling
of products, receiving remittances of profit from a member of the Group or future investments in that country 
  The Group is exposed to fluctuations in exchange rates. If the manufacturing country currencies
strengthen against the selling currencies, the trading margin may be affected 
  Economic downturn impacts demand and collections                                                                                                                                                                                                                                                                                                      |  |   Develop
innovative economic product and service solutions for both Established and Emerging & International markets (Syncera) 
  Incorporate health economic component into design and development of new products
   Enhanced expertise supporting
reimbursement strategy and guidance 
  Optimise cost to serve to protect margins and liberate funds for investment
   Streamline Cost of Goods Sold,
Stock Keeping Units and inventory management 
  The Group transacts forward foreign currency commitments when firm purchase orders are placed to reduce
exposure to currency fluctuations |  |   Loss of revenue,
profit and cash flows   
 
Link to Strategic Priority
 
Simplify and improve our operating model 
 Established Markets
 
Emerging & International Markets |  | 



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                                                                                                                                                                              |  | 
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| |  | Business Operations and Business Continuity 
Unexpected events could disrupt the business by affecting either a key facility or system or a large number of employees. The business is also reliant on certain
key suppliers of raw materials, components, finished products and packaging materials. 
The Group manages a large product portfolio and a large product inventory. Sales and operation planning and supply chain management must ensure the products
needed are available at the right place and time.  In a fast changing, complex, global
business, high performing talent in key positions is a business critical requirement. |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Specific risks we face                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | Risk management actions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | Possible impacts                                                                                                                                                             |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |   Catastrophe could
render one of the Groups production facilities out of action 
  A significant event could impact key leadership or a large number of employees
   Issues with a single source
supplier of a key component and failure to secure critical supply 
  A severe IT fault or cyber crime could disable critical systems and cause loss of sensitive data
   Over-production of product
inventory and instrument sets may occur due to inadequate portfolio planning 
  Poor retention of high performing and high potential staff could jeopardise achieving
objectives                                                    |  |   Crisis
response/business continuity plans at major facilities and for key products and key suppliers 
  Audit programme for critical suppliers and second sources or increased inventories for critical
components    Enhanced travel
security and protection programme 
  IT disaster and data recovery plans in place to support overall business continuity plans
   Mobile device and cyber security
protection plan    Improved sales
and operations processes and inventory management with dedicated teams and key performance indicators 
  Robust talent systems and processes with focus on identifying key roles and successors |  |   Loss of revenue,
profit and cash flows  
 
Link to Strategic Priority
 
Simplify and improve our operating model 
 Established Markets
 
Emerging & International Markets |  | 









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Product Safety, Regulation, and Litigation 
National regulatory authorities enforce a complex series 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 also inspect for compliance with appropriate standards, including those relating to Quality Management Systems (QMS) or
Good Manufacturing Practice (GMP) regulations. Design or manufacturing defects in products could result in product recalls and liability claims and impact revenues, profits and reputation.Specific risks we face

Risk management actions

Possible impacts  Defective
products supplied to Smith & Nephew or failure in design or manufacturing process 
  New technology, product or processes changed by Smith & Nephew or supplier result in product
deficiencies    Failure to
implement programmes and supporting resources to ensure product quality and regulatory compliance 
  Failure to manage, process and analyse customer complaints and adverse event data

  Global QARA
organisation to create a single Quality Management System 
  Standardised Group quality management and practice
   Monitoring and auditing programmes
to assure compliance    Group-wide
product complaint and registration systems 
  Group-wide practices to drive design, and production line performance and dependability
   Design for manufacture in product
development    Post launch review
of product safety and complaint data

  Loss of revenue,
profit and reduction in share price 
  Negative impact on brand/ reputation
  
Link to Strategic Priority 
Simplify and improve
our operating model
 Established
Markets   Emerging & International Markets   Compliance with Laws and Ethical Behaviour 
Business practices in the healthcare industry are subject to increasing scrutiny by government authorities. The trend in many countries is towards increased
enforcement activity for bribery and corruption. The Group is also subject to increased scrutiny under US healthcare laws (e.g. False Claims Act) and in the EU for data protection. Acquisitions and expansion into emerging markets may require
additional compliance controls.Specific risks we face

Risk management actions

Possible impacts  Violation of
anti-corruption, healthcare, or data privacy laws could result in fines, loss of reimbursement and harm reputation 
  Cultures in certain geographies and in acquired businesses may not fully support the Group value to Earn
Trust    Rapid growth in Emerging
& International Markets with increasing numbers of distributors 
  Third parties retained by the Group may be involved in improper activities which result in penalties or
loss of reputation.    Failure to
conduct adequate due diligence or to integrate appropriate internal controls into acquired businesses could result in fines and impact return on investment

  Strong Board and
Executive oversight bodies supported by a global Office of Ethics & Compliance 
  Code of Conduct/Global Policies and Procedures (GPPs) providing guidelines for ethical
behaviour and controls for significant compliance risks 
  Training and e-resources to guide employees and third parties with ethical and compliance
responsibilities    Monitoring and
auditing programmes to verify implementation 
  Minimum acceptable financial procedures adopted by all businesses wholly owned by the Group
   Independent reporting channels for
employees and third parties to report concerns with confidentiality 
  Robust investigation procedures to ensure adequate reviews and documentation with significant issues
escalated to and monitored by legal and compliance heads 
  Controls for significant interactions with Health Care Professionals and Government Officials
   Higher risk third parties including
distributors and agents subject to screening, compliance requirements, training and oversight processes 
  Due diligence reviews and integration plans and reporting for acquisitions
   Risk assessments to determine
resources and controls for higher risk markets

  Loss of profit
and reduction in share price 
  Negative impact on brand/ reputation
  
Link to Strategic Priority 
Simplify and improve
our operating model
 Emerging & International
Markets  Established Markets


LOGO




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STRATEGIC REPORT

Sustainability





Protecting the future





|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|We care about our customers and helping improve peoples lives. We also care about the people who work for us, the
environment in which we operate and the societies in which we do business. Addressing unmet social need with more affordable products gathered pace in 2014 with the introduction of our Syncera range and further growth and consolidation of our
mid-tier products. As part of our commitment to build trust we increased our engagement with suppliers to increase assurance around compliance and ethics. 
This is a summary of our sustainability activities and progress in 2014. Our Sustainability Report will be published in April 2015.
 In 2014, there were no employee or contractor fatalities and our Lost Time Injury Frequency
Rate (LTIFR) fell again for the fourth successive year, this time by 20%. Compared to the previous year, total waste increased by 13%, however waste disposed to landfill fell by 19% as we found new ways to recycle.
 Energy consumption has increased by 9% since 2011. However, after adjusting for the transient
effect of transferring some production to China and the impact of newly acquired businesses, there was a net fall in energy consumption of 2%. 
After three consecutive years of increases, water consumption reduced by 7% in 2014 compared to the previous year.
 As part of the Great Place to Work strategy, substantially more of our employees enjoyed the
benefits of wellness programmes.  We donated approximately $9 million in philanthropic
activities, of which $2 million was in product donations and charitable gifts. Volunteering programmes were active in most of the territories where we work and the benefits to society and the level of employee involvement continued to
increase. |  | LOGO  Safety
 LOGO  The continuous improvement in safety performance is
underpinned by committed leadership and a sharp focus on managing risks. Making health and safety a priority for all of our employees and contractors was an imperative in 2014. This was supported by the progressive rollout of our integrated
management system and the wide introduction of behavioural based safety programmes.





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Water  LOGO Reducing water consumption continued to be a challenge in 2014, however there was a reduction of 7% achieved as a result of a
breakthrough in water consumption at our Memphis manufacturing facility where 66% of Smith & Nephews water is consumed. Waste  LOGO The annual increase of 13% in total waste was offset by moving landfill waste to recycling or energy recovery. A transient
increase created by commissioning new capacity in China and the one-off event of disposing of waste arising from the Hull flood increased the total waste by 8%. In 2014, we carried out a thorough waste audit in order to implement more initiatives to
manage and reduce our waste. Energy and CO2  LOGO The energy increase of 15.2 GWh (9%) since 2011 has been dominated by the transient impact of commissioning new
manufacturing capacity in China accounting for 10 GWh whilst continuing production in the UK. The effect of recently acquired businesses accounted for 8.7GWh of the increase.
 The underlying reduction of 3.5 GWh (2%) reflects the implementation of efficiency improvements in our
manufacturing facilities. Transferring manufacturing to China from the UK and acquiring capacity in India has resulted in higher emissions factors and
increased CO2 emissions. Greenhouse gases Methodology, materiality and scope The data reported relates to areas
of largest environmental impact including manufacturing sites, warehouses, research and offices. Smaller locations representing less than 2% of our overall emissions are not included. Acquisitions completed before 2014 are included in the data. All emissions fall within the scope of our consolidated financial statement and we have used the Greenhouse Gas Protocol: A Corporate Accounting and Reporting
Standard (Revised Edition) as guidance for this process. Primary data from energy suppliers has been used wherever possible. The Biotherapeutics and the Sushrut Adler acquisitions are included in the data for 2014 for the first time. Data from the
ArthroCare acquisition is excluded and 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 US and regional factors within the US. We have used the US EPA Emissions & Generation Resource Integrated Database (eGRID) for US regions and the UK Government DEFRA
Conversion Factors for Greenhouse Gas Reporting for elsewhere. The emissions from all years have been recalculated using the most up-to-date factors available in 2014. Fugitive emissions are included from the manufacturing and research locations and
arise from the losses of refrigerant gases.  2014



2013CO2e Emissions (tonnes) from:Direct emissions


11,213



10,152Indirect emissions


74,797



68,795Total


86,010



78,947Intensity ratioCO2e (t) per $m revenue*


19.5



19.4CO2e (t) per full-time employee*


6.9



7.5 Revenue data: 2014  $4.4 billion, 2013  $4.1 billion Full-time employee data: 2014  12,437, 2013  10,520  *
Notes: 2013 data adjusted to exclude Healthpoint (Biotherapeutics) and 2014 data adjusted to exclude ArthroCare. By order of the Board, 25 February 2015  LOGO Susan Swabey Company Secretary


LOGO




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LOGO

At the top of

their game





|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |     
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|Sports Medicine is the treatment of injuries to the soft tissues through keyhole surgery  typically ligaments, tendons and cartilage in the
joints. These injuries can affect anyone, not just athletes. Sports Medicine helps patients recover function as well as minimise disability and recovery time. 
Smith & Nephew is a global leader in Sports Medicine. In 2014, nearly a quarter of our revenue came from this area, and our Joint Repair business
delivered revenue growth of 8%.  It is a $4.6 billion global market, and a strong area of
focus and opportunity for Smith & Nephew. |  | We expect to see long-term global growth driven by delivering both clinical benefits and strong health economics. Repairing injuries today
prevents them becoming more debilitating as patients get older, which reduces future demands on healthcare systems. In the emerging markets we are helping to widen access to these advanced treatments through delivering medical education.
 Sports Medicine is a great place to innovate. We are investing more in R&D to improve
existing treatments, and to develop new instrumentation to enable surgeons to better treat their patients. |  | LOGO
|LOGO                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              







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| |  |                                            |  |  |  |                                                   |  | 
| |  | ------------------------------------------ |  |  |  | ------------------------------------------------- |  | 
| |  | 24%                                        |  |  |  | $5bn                                              |  | 
| |  | Nearly a quarter of Smith & Nephew revenue |  |  |  | Global Sports Medicine market with Smith & Nephew |  | 
| |  | came from Sports Medicine in 2014          |  |  |  | having 24% market share in 2014 (see page 20)     |  | 







LOGO







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201445



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LOGO

Better by

design



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |  |                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |      |     
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---- | ----
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |  |                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|We have a deep knowledge of the needs of surgeons and nurses, we understand the economic pressures healthcare payers work under, and
we recognise that patients are demanding better treatment options to restore quality of life. These factors drive our new product development programmes. In 2014, we launched a number of exciting new products, expanding our portfolios in our
Established Markets and Emerging & International Markets.  We also invested $235
million in R&D in 2014, over 5% of revenue, and have a strong pipeline of innovation to come. Our experts in Europe, US, China and India keep us close to our customers and ensure our programmes target unmet clinical needs, have strong financials
and are technologically feasible. They also work closely with manufacturing to ensure we can produce new products to clinical, cost and time specifications. |  |  |                                                                                                                                                                                                                                                                                                                                                                       | JOURNEY II
 The JOURNEY II Cruciate Retaining (CR) knee replacement extends the JOURNEY II Total Knee
System to procedures that preserve the posterior cruciate ligament (PCL), which accounts for approximately half of all knee replacement procedures. The JOURNEY II CR knee, like the JOURNEY II Bi-cruciate Stabilized (BCS) knee that was launched last
year, sets a new standard in knee implant performance by restoring more normal motion for patients. |      | LOGO
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |  |                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |  | HAT-TRICK
 The HAT-TRICK Lesser Toe Repair System is our entry into the high-growth forefoot market,
where we believe there are significant opportunities for us to enhance the surgeon experience, simplify the procedures and, most importantly, improve patient outcomes.                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | LOGO
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |  |                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |  | EVOS
 EVOS MINI Plating System for use in complex fractures of the long bones of the arms and
legs. Designed specifically for traumatologists, this long-bone-specific system includes the variety of mini, flat plates and screw sizes necessary to address both fracture reduction and short-term fixation while the final, load-bearing repair is
being completed. |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | LOGO
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |  |                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |  |                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |  |                                                                                                                                                                                                                                                                                                                                                                       | PICO
 PICO, Smith & Nephews disposable, canister-free Negative Pressure Wound
Therapy system has been named Most Innovative Product 2014 at The Irish Medical and Surgical Trade Association Awards. The award was judged by a panel of top clinicians, health service executives and medical companies.                                                                                                                                                          |      | LOGO













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LOGO

Realising

potential



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The ability to attract and retain talented employees is essential to achieving our business goals. This is why one of our strategic
imperatives is to be recognised as, a great place to work.  For Smith & Nephew,
being a great place to work means having a workplace where employees are proud and excited to come each day because they are doing work that makes a difference for customers and patients.
 It is a place where employees are valued for their performance and achievements, and a place
that values trust above all else.  To qualify as a Great Place to Work, a company must
complete the Great Place to Work Trust Index survey and its management must participate in a Culture Audit. Both evaluate the companys performance on key dimensions of engagement: Credibility, Respect, Fairness, Pride and Camaraderie. |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | We aim to provide an open, challenging, productive, diverse, healthy, safe and participative environment based on
constructive relationships.                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |  | Diverse
 Smith & Nephew believes 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. Diversity & Inclusion continues to be a key focus for us and we have a Global Steering team sponsored by the CEO with local councils established across the business. 30% of our Board of Directors and 23% of senior
managers are female.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |  | Healthy
 We strongly believe we perform better when our employees are healthy, motivated and
focused. The support we provide our employees when they experience a health concern is a critical factor in how well and how quickly they are able to get back to peak. During 2014, Smith & Nephew signed up to the UKs Time to Change
programme, showing our employees being open about mental health concerns will lead to support, not discrimination, and embarked on a global wellness initiative to support all employees.                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Safe
 We are committed to providing healthy and safe working conditions for all employees. We
achieve this by ensuring that health and safety and the working environment are managed as an integral part of the business, and we recognise employee involvement as a key part of that process. During 2014, we reduced the lost time injury frequency
by 20%, reflecting a sharp focus of leadership on identifying and managing workplace risk.
|14,000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Our employees support healthcare professionals in more
than 100 countries                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|23%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|of our senior managers are female                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                  







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LOGO



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CORPORATE GOVERNANCE

Our Board of Directors





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                                                   |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                  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|LOGO                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |  |  | LOGO                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         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|Roberto Quarta (65)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |  |  | Olivier Bohuon (56)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |  |  | Julie Brown (52)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |  |  | Chief Executive Officer                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |  |  | Chief Financial Officer                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Joined the Board in December 2013 and appointed Chairman following election
by shareholders on 10 April 2014. 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 Vice President of Hitchiner Manufacturing Co. Inc., where he helped the company to expand internationally. He returned to BTR plc in 1989 as Divisional Chief Executive, where he led the
expansion in North America and was appointed to the main board. From here he moved to BBA Aviation plc, as CEO from 1993 to 2001 and then as Chairman, until 2007. He has held several board positions, including Non-executive Director of Powergen plc,
Equant N.V., BAE Systems plc and Foster Wheeler AG. His previous Chairmanships include Italtel Group S.p.A. and Rexel S.A. He is currently Chairman Designate of WPP plc, and will shortly retire as Chairman of IMI plc, the global engineering group as
soon as a suitable replacement is appointed. He is a partner at Clayton, Dubilier & Rice and he is a member of the Investment Committee of Fondo Strategico Italiano Spa. 
Skills and Competencies
Robertos career in private equity brings valuable experience to the Board, 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 conducted the search for new Non-executive Directors resulting in the appointment of Vinita Bali and Erik Engstrom. 
Nationality 
LOGO
  American/Italian |  |  |  | Joined the Board and was appointed Chief Executive
Officer in April 2011. He is a Member of the Nomination & Governance Committee.  
 Career and Experience
Olivier has had a highly successful career in the pharmaceutical industry. He holds a doctorate from the University of Paris and an MBA from HEC, Paris. His career
has been truly global. He started his career in Morocco with Roussel Uclaf 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 spent 10 years with 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 (all countries outside of the US), and then President of their Pharmaceutical Division, which was a $20 billion business, encompassing manufacturing, R&D and
commercial operations. 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 FTSE100 company with a deep heritage and provide
inspiring leadership. He is a Non-executive Director of Virbac group. 
Nationality 
LOGO
  French |  |  |  | Joined the Board as Chief Financial Officer in February 2013. 
  
Career and Experience Julie is a
graduate, Chartered Accountant and Fellow of the Institute of Taxation. She trained with KPMG before working at AstraZeneca PLC, where she served as Vice President Group Finance, and ultimately, as Interim
Chief Financial Officer. Prior to that she was Regional Vice President
Latin America, Marketing Company President AstraZeneca Portugal, and Vice President Corporate Strategy and R&D Chief Financial Officer. In both
Julies country and regional roles, trading margins increased significantly, improving the efficiency and profitability of the business. Her experience encompasses many areas of the healthcare value chain including Commercial, Operations,
R&D and Business Development. She has led multi-billion dollar cost saving and restructuring programmes in Operations, R&D and the Commercial organisations and led major refinancing programmes, including the issuance of $2 billion US bonds.
Julie has so far in her career, fulfilled two Non-executive Directorships with the NHS in the UK and the Board of the British Embassy.
 Skills and Competencies
Julie has deep financial expertise and understanding of the healthcare sector, which has enabled her to lead a major transformation project at Smith & Nephew
designed to simplify and improve the organisation and deliver margin accretion. She is a recognised leader with a proven ability to build teams. Her commercial experience in Latin America is of particular benefit as we continue to grow in emerging
markets. She has held a number of senior commercial roles as well as financial positions, making her a versatile Chief Financial Officer. 
Nationality 
LOGO
  British







54Smith & Nephew Annual report 2014



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##### Table of Contents







LOGO



LOGO



LOGOVinita Bali (59) Independent Non-executive Director



Ian Barlow (63) Independent Non-executive Director



The Rt. Hon Baroness Virginia Bottomley of Nettlestone DL (66)
Independent Non-executive Director
Appointed Independent Non-executive Director in April 2012. She is a Member of the Remuneration Committee and joined the Nomination & Governance Committee on
10 April 2014.Appointed Independent Non-executive Director on 1 December 2014. She will join the Remuneration and Ethics & Compliance Committees on 1 April 2015.



Appointed Independent Non-executive Director in March 2010 and Chairman of the Audit Committee in May 2010. He was appointed a Member of the
Ethics & Compliance Committee on 2 October 2014.Career and Experience
Vinita holds an MBA from the Jamnalal Bajaj Institute of Management Studies, University of Bombay and a bachelors degree in economics from the University of
Delhi. She commenced her career in India with the Tata group, and then joined Cadbury India, subsequently working with Cadbury Schweppes plc in the UK, Nigeria and South Africa. From 1994, she held a number of senior global positions in marketing
and general management at The Coca-Cola Company based in the US and South America, becoming President of the Andean Division in 1999 and Vice President, Corporate Strategy in 2001. In 2003, she joined the consultancy, Zyman Group as Managing
Principal, again based in the US. Until recently, Vinita was Managing Director and Chief Executive Officer of Britannia Industries Ltd, a leading Indian publicly listed food company. Currently, Vinita is a Non-executive Director of Syngenta AG,
Titan Company Ltd and CRISIL (Credit Rating Information Services of India) Ltd. She is also a board member of GAIN (Global Alliance for Improved Nutrition). 
Skills and Competencies Vinita
has an impressive track record of achievement with blue-chip global corporations in multiple geographies including India, Africa, South America, the US and UK, all key markets for Smith & Nephew. Additionally, her strong appreciation of customer
service and marketing brings deep insight to the Company as we continue to develop innovative ways to serve our markets and grow our business. 
Nationality 
LOGO
  Indian



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, and acted as Lead Partner for many large international organisations operating extensively in North America, Europe and Asia. Ians previous appointments include Non-executive
Director and Chairman of the Audit Committee of PA Consulting Group and Non-executive Director of Candy & Candy. He was Chairman of WSP Group plc and of Think London, the inward investment agency. He is currently Lead Non-executive Director
chairing the Board of Her Majestys Revenue & Customs; Non-executive Director of The Brunner Investment Trust PLC; Non-executive Director of Foxtons Group plc; Board Member of the China-Britain Business Council and Chairman of The
Racecourse Association.  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.
It was of particular benefit when leading the selection process for the new external auditor in 2014. His appointment as an additional member of the Ethics & Compliance Committee recognises the close links between the activities and oversight
role of both committees. His work for a number of international companies gives added insight when reviewing our global businesses. 
Nationality 
LOGO
  British



Career and Experience
Virginia gained her MSc in Social Administration from the London School of Economics and Political Science 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 Akzo Nobel 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, Pro Chancellor of the University of Surrey, Governor of
the London School of Economics and Trustee of The Economist Newspaper. 
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 long association with Hull, the home of many of our UK employees also brings
an added perspective.  Nationality
 LOGO
  British


LOGO




Smith & Nephew Annual report
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##### Table of Contents

CORPORATE GOVERNANCE

Our Board of Directorscontinued





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|Erik Engstrom (51)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |  |  | Michael Friedman (71)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  | Brian Larcombe (61)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Independent Non-executive Director                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |  |  | Independent Non-executive Director                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |  |  | Independent Non-executive Director                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Appointed Independent 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 1986, he was awarded a Fulbright scholarship to Harvard Business School, from where he graduated with an MBA in 1988. Erik commenced
his career at McKinsey & Co. and then worked in publishing, latterly as President and Chief Operating Officer of Random House, Inc. and as President
and Chief Executive Officer at Bantam Doubleday Dell, North America.
In 2001, he moved on to be a partner at General Atlantic Partners, a private equity investment firm focusing on information technology, internet and telecommunications businesses. Between 2004 and 2009, he was Chief Executive of Elsevier, the
division specialising in scientific and medical information and then from 2009 Chief Executive of Reed Elsevier. 
Skills and Competencies Erik has
successfully reshaped Reed Elsevier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.  Nationality
 LOGO
  Swedish |  |  |  | Appointed Independent Non-executive Director in April 2013. He was appointed Chairman of the Ethics & Compliance Committee on 1 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. 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 Chief Executive Officer of City of Hope, the prestigious cancer research and treatment institution in California. He 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 Vice President 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 Non-executive Director of Celgene Corporation and Non-executive Director of MannKind Corporation.
 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 and
resulted in a smooth handover during 2014. 
Nationality 
LOGO
  American |  |  |  | Appointed Independent Non-executive Director in March 2002, Member of the Audit Committee, Nomination & Governance Committee and Remuneration
Committee, and appointed Senior Independent Director on 10 April 2014. 
Career and Experience Brian
graduated with a Bachelor of Commerce degree from Birmingham University. He spent most of his career in private equity with 3i Group. After leading the UK investment business for a number of years, he became Finance Director and then Chief Executive
of the Group following its flotation. He has held a number of Non-executive Directorships. He is currently Non-executive Director of gategroup Holding AG and Non-executive Director of Kodak Alaris Holdings Limited.
 Skills and Competencies
Brians experience in private equity is particularly useful to us when evaluating acquisitions and new business opportunities. His long service as a
Non-executive Director has provided continuity throughout a period of change and his corporate memory and wise counsel continues to support our new Chairman. As Senior Independent Director and member of the Nomination & Governance Committee, he
plays an active role in succession planning and the search for new Non-executive Directors. In 2014, he led an insightful review into the effectiveness of the Board. 
Nationality 
LOGO
  British







56Smith & Nephew Annual report 2014



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##### Table of Contents







LOGO



LOGOJoseph Papa (59)



Susan Swabey (53)Independent Non-executive Director



Company SecretaryAppointed 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 Master of Business Administration from Northwestern
Universitys Kellogg School of Management. In 2012, he received an Honorary Doctor of Science degree from the University of Connecticut School of Pharmacy. He began his commercial career at Novartis International AG as an Assistant Product
Manager and eventually rose to Vice President, Marketing, having held senior positions in both Switzerland and the US. He moved on to hold senior positions at Searle Pharmaceuticals and was later President & Chief Operating Officer of
DuPont Pharmaceuticals and then Watson Pharma Inc. Between 2004 and 2006, he was Chairman and Chief Executive Officer of the Pharmaceutical Technologies Services Segment of Cardinal Health, Inc. Joe is currently Chairman and Chief Executive of
Perrigo Company plc, one of the largest over-the-counter pharmaceutical companies in the US. 
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 
LOGO
  American



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, 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 
LOGO
  British


LOGO




Smith & Nephew Annual report
201457









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##### Table of Contents

CORPORATE GOVERNANCE

Our Executive Officers





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|Olivier Bohuon is supported in the day-to-day management of the Group by a strong team of Executive Officers: |  |  |  | LOGO                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |  |  | LOGO                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                              |  |  |  | Julie Brown (52)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |  |  | Rodrigo Bianchi (55)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                              |  |  |  | Chief Financial Officer                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |  |  | President, IRAMEA                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                              |  |  |  | Joined the Board as Chief Financial Officer in February 2013. Julie is a graduate, Chartered Accountant and Fellow of the Institute of
Taxation. She is based in London.  Skills and
Competencies Julies experience in the healthcare sector
includes 25 years with AstraZeneca PLC in progressively senior roles and
four years with KPMG. Most recently, she served as Interim Chief Financial Officer of AstraZeneca. She has international experience and a deep understanding of the healthcare sector gained through her previously held Vice President Finance positions
in all areas of the healthcare value chain including Commercial, Operations, R&D and Business Development. Julie has also led commercial organisations, being Country President and Regional Vice President in AstraZeneca.
 Nationality
 LOGO
  British |  |  |  | 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. 
Skills and Experience
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
 LOGO
  Italian                     
|                                                                                                              |  |  |  | LOGO                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |  |  | LOGO                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                              |  |  |  | Helen Maye (55)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |  |  | Diogo Moreira-Rato (53)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                              |  |  |  | Chief Human Resources Officer                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |  |  | President, Europe and Canada                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                              |  |  |  | Joined Smith & Nephew in July 2011 and leads the Global Human Resources and Internal Communications functions. Since 2013, she has also led
the Sustainability, Health, Safety & Environment functions. She is based in London. 
Skills and Experience Helen has
more than 35 years experience across a variety of international and global roles in medical devices and pharmaceuticals, including manufacturing, supply chain and human resources. Previously, she was Divisional Vice President of Human
Resources at Abbott Laboratories.  Nationality
 LOGO
  Irish                                                                                                                                                                                                                                                                 |  |  |  | Joined Smith & Nephew in May 2014 with responsibility for leading all of our commercial business in Europe and Canada. He is based in Baar,
Switzerland.  Skills and Experience
Diogos experience in the healthcare industry includes 31 years with Johnson & Johnson in progressively senior roles. Most recently, Diogo was President,
DePuy Synthes, EMEA, where he led the merger and integration of DePuy and Synthes in EMEA. Prior roles included International Vice President for the Medical Devices and Diagnostics business, President DePuy Orthopaedics and Managing Director of
Portugal.  Nationality
 LOGO
  Portuguese







58Smith & Nephew Annual report 2014



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##### Table of Contents





LOGO



LOGO



LOGOJack Campo (60)



Michael Frazzette (53)



Gordon Howe (52)Chief Legal Officer



President, Advanced Surgical Devices



President, Global OperationsJoined Smith & Nephew in June 2008 and heads up the Global Legal function. Initially based in London, he has been based in Andover,
Massachusetts since late 2011.  Skills and
Experience  Prior to joining Smith & Nephew, Jack held a number of senior
legal roles within the General Electric Company, including seven years at GE Healthcare (GE Medical Systems) in the US and Asia. He began his career with Davis Polk & Wardwell.
 Nationality
 LOGO
  American



Joined Smith & Nephew in July 2006 as President of the Endoscopy business. Since July 2011, he has headed up the Advanced Surgical Devices
Division and is responsible for the Orthopaedic Reconstruction, Trauma and Endoscopy business units. Since 2014 he is also responsible for all of our commercial business in Latin America. He is based in Andover, Massachusetts.
 Skills and Experience
 Mike has held a number of senior positions within the US medical devices industry. He was
Chief Executive Officer of Micro Group, a privately held manufacturer of medical devices. Prior to that, he spent 15 years at Tyco Healthcare in various leadership roles including President of the Patient Care Division, Health Systems, and Tyco
Healthcare Group Canada.  Nationality
 LOGO
  American



Joined Smith & Nephew in 1998 and, since 2013, is responsible for manufacturing, supply chain and procurement, IT systems and Regulatory and
Quality Affairs. Prior to that, he headed up the Global Planning and Business Development teams. He is based in Memphis, Tennessee. 
Skills and Experience 
Gordon has held a number of senior management positions within the Smith & Nephew Group, firstly in the Orthopaedics division and more recently at Group Level.
Prior to joining the Company, he held senior roles at United Technologies Corporation. 
Nationality 
LOGO
  AmericanLOGO Cyrille Petit (44)



LOGO Glenn Warner (52)Chief Corporate Development
Officer



President, Advanced Wound ManagementJoined Smith & Nephew in 2012 and leads the Corporate Development
function. He is based in London.  Skills and
Experience  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 
LOGO
  French



Joined Smith & Nephew in June 2014 with responsibility for Advanced
Wound Managements global franchise strategy, marketing and produce development, as well as its US commercial business. 
Skills and Experience 
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
 LOGO
  American


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CORPORATE GOVERNANCE

Chairmans letter





Good Governance lies at the heart of a well-run Company



Dear Shareholder, I am delighted to present my first Corporate Governance Statement as your Chairman following my appointment at the Annual General Meeting in April 2014. I feel
very strongly that good corporate governance lies at the heart of a well-run company. Openness and transparency, accountability and responsibility should run through everything that we do, both as a Board and throughout the business as a whole. The
Board and I aim to set the tone at the top which should pervade throughout the rest of the organisation. Later in this statement, as well as all the standard
corporate governance disclosures we are required to make, you will find reports from Ian Barlow, Michael Friedman, myself and Joseph Papa, the Chairmen of our Board Committees on the activities of those committees throughout the year. These reports
will explain to you where we have focused our work in 2014. Firstly, however I should like to explain the key issues that we, as a Board, have been handling: Board succession planning As mentioned in
my letter on page 5, Sir John Buchanan, Richard De Schutter, Ajay Piramal and Pamela Kirby all retired from the Board during 2014. One of my first tasks in assuming the role of Chairman therefore was to refresh the Board to take the Company into our
next stage of development. The report from the Nomination & Governance Committee on page 70 discusses the process we followed to identify the gaps in Board skills and experiences left by the departing directors and to commence the search
for our new Non-executive Directors, Vinita Bali, who joined the Board on 1 December 2014, and Erik Engstrom, who joined us on 1 January 2015. I believe that we have a well-balanced Board with the skills we need for the future and I
welcome our new Board members. This, however, is an ongoing process and we shall keep the Board composition under constant review in the years ahead, making changes where necessary to adapt to the changing needs of the Company.   LOGO


Mergers and acquisitions Following the successful acquisition of our Biotherapeutics business in 2012, we continued to make further acquisitions throughout 2013 of the Adler business in
India, two distributorships in Brazil and one in Turkey. In January 2014, we announced the acquisition of ArthroCare Corporation and this deal completed in May. You will read elsewhere in this Annual Report about the successful integration of
ArthroCare into our Company. We also undertook post acquisition reviews of the transaction and earlier acquisitions to monitor actual performance against expected performance at the time of acquisition and we continued to review and evaluate other
potential acquisitions for the future to support our Strategic Priorities. Succession planning below Board level We believe that succession planning below Board level is crucially important for the long-term future of the Company. In October, the Board therefore reviewed
management succession plans both for the Executive Board members and also for their direct reports. We recognised that whilst there were some gaps, there were also plans in place to address these gaps and develop the next tier of management to
become Board-ready in the medium-term. The Board also takes the opportunity to meet with local management teams when undertaking site visits and senior executives below Board level frequently present to the Board and its Committees. This helps us to
get to know executives who could well become Board members in the future. Understanding the business more deeply Corporate governance does not exist in isolation and cannot be reduced to compliance with checklists and codes. In order for the Board to be able to review
strategy, to determine our approach to risk and to respond to events, we need to have a thorough understanding of the business in which we operate. During the
year, the Board received a number of presentations from the businesses covering corporate development activity, the ArthroCare integration progress and our investment in Bioventus LLP. In October, we visited our Biotherapeutics facility in Fort
Worth, Texas, where we met with management and toured the R&D facility. In September, we held our annual Strategy Review in Singapore and met with members
of our ASEAN management team and discussed their opportunities and challenges.  The
Board is committed to the highest standards of corporate governance and we comply with all of the provisions of the UK Corporate Governance Code 2012 (the Code). The Companys American Depositary Shares are listed on the New York
Stock Exchange (NYSE) and we are therefore subject to the rules of the NYSE as well as to the US securities laws and the rules of the Securities Exchange Commission (SEC) applicable to foreign private issuers. We comply with the requirements of the
NYSE and SEC except that the Nomination & Governance Committee is not comprised wholly of Independent Directors as required by the NYSE, but consists of a majority of Independent Directors in accordance with the Code. We shall explain in
this Corporate Governance Statement and in the reports on the Audit Committee, the Nomination & Governance Committee, the Ethics & Compliance Committee and the Remuneration Committee, how we have applied the provisions and
principles of the Financial Conduct Authoritys (FCA) Listing Rules, Disclosure & Transparency Rules (DTRs) and the Code throughout the year. 
The Directors report comprises pages 54 to 80, 103, 111, 113, 115 and pages 170 to 193 of the Annual Report.






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Working together as a Board 
Given the number of changes at Board level in 2014, we decided that our review into the Boards effectiveness would focus on how we worked together as a Board
and how we worked with the Executive Team. This review was led by Brian Larcombe, our Senior Independent Director. He asked the Directors and key members of the Executive team a series of open-ended questions about their views on the role of the
Board and its Committees and how we worked together. The results of his review have proved to be very interesting and we are now working on ways to work together even more effectively. This is explained in greater detail on page 68.
 Yours sincerely, 
LOGO  Roberto Quarta
Chairman     Overview  The Board is committed to the highest standards of corporate governance. We maintain these standards through a clear definition of our roles, continuing development and
evaluation and accountability through the work of the Board Committees.  LOGO


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CORPORATE GOVERNANCE

Corporate Governance Statement





Leadership 


LOGO

Diversity and experience





LOGO

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.                                                                 |  | 



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Role of Directors continued  The roles of the
Non-executive Directors, Senior Independent Director and the Company Secretary are defined as follows:Non-executive Directors



Providing effective challenge to managementAssisting in development and approval of strategyServing on the Board CommitteesProviding advice to management.Senior Independent Director



Chairing meetings in the absence of the ChairmanActing as a sounding board for the Chairman on Board-related mattersActing as an intermediary for the other Directors where necessaryAvailable to shareholders on matters which cannot otherwise be resolvedLeading the annual evaluation into the Boards effectivenessLeading the search for a new Chairman, if necessary.Company Secretary



Advising the Board on matters of corporate governanceSupporting the Chairman and Non-executive DirectorsPoint of contact for investors on matters of corporate governanceEnsuring good governance practices at Board level and throughout the Group. Changes to the Board  ChairmanRoberto Quartareplaced Sir John Buchanan on 10 April 2014Independent Non-executive DirectorsLeft the Board during 2014Ajay Piramal(resigned 24 March 2014)Richard De Shutter(retired 10 April 2014)Pamela Kirby(retired 31 July 2014)Joined the Board during 2014Vinita Bali(appointed 1 December 2014)Erik Engstrom(appointed 1 January 2015, since year-end)Role changed during 2014Brian Larcombereplaced Richard De Schutter as Senior Independent Director on 10 April 2014Michael Friedmanreplaced Pamela Kirby as Chairman of the Ethics & Compliance Committee on 31 July 2014


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CORPORATE GOVERNANCE

Corporate Governance Statementcontinued

Leadership





Corporate Governance Framework The Board is responsible to shareholders for approving the strategy of the Group, for overseeing 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 day-to-day
running of the business is delegated to Olivier Bohuon, the Chief Executive Officer, and his executive team comprising the Executive Officers who are shown on pages 58 to 59.


The Executive Officers form the Commercial and Operations Committee which advises the Chief Executive Officer in
decisions relating to the commercial and operational aspects of the business. The Chief Executive Officer in turn delegates the day-to-day management of the
Group functions and regional commercial operations divisions to the Executive Officers, who are assisted in their decision making by their own leadership teams and other committees and councils.






LOGO



64Smith & Nephew Annual report 2014



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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
question. 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.  We acknowledge that Brian Larcombe has served as an independent
Non-executive Director for a period of 13 years, which is a period of time that some might regard as likely to impact his independence. We do not believe this to be the case as Brian Larcombe continues to maintain an independent view within Board
discussions. Furthermore, his experience on the Board, wise counsel and corporate memory has been most useful to Roberto Quarta in his first year as Chairman of the Company, particularly in a year when a number of other long-serving directors have
left the Board and new Non-executive Directors have been appointed. 
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 23 February 2015. 
Each of us as a 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 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 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 a maximum of one external company. Olivier Bohuon is a Non-executive Director of
Virbac group and Julie Brown does not hold such a position.

Re-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. Vinita Bali and Erik Engstrom, who were appointed to the Board on 1 December 2014 and 1 January 2015 respectively, will offer themselves for election at 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 judgment 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. 
Liaison with shareholders 
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 2014, the Executive Directors held meetings with institutional investors, including investors representing
approximately 46% of the share capital as at December 2014.  Since joining the Company,
Roberto Quarta, the new Chairman has taken the opportunity to meet with investors to hear from them their views of the Company and also to talk about his first impressions of the Company and management. He held 12 meetings with investors holding
approximately 22% of the share capital. These meetings have been a useful part of his induction process in understanding the Company from the investor perspective. 
Joseph Papa, the Chairman of the Remuneration Committee also offered to meet with key institutional investors towards the end of 2014. Most investors were
overwhelmingly supportive of our remuneration arrangements and we have made no changes to these arrangements over the year. He therefore met with four investors holding around 2% of the share capital. These were useful discussions giving insight
into current investor thinking.  Ian Barlow, the Chairman of the Audit Committee also
offered to meet with institutional investors to discuss audit related matters and in particular, the tender process we had followed to select new auditors. The meetings held with five investors holding around 5.45% of the issued share capital were
interesting and useful and we welcomed some insightful comments on possible improvements to the Audit Committee Report. 
Members of the Board are always happy to engage with investors, if they have matters they wish to raise with the Non-executive team.
 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 and Julie Brown routinely report on any concerns or issues that
shareholders have raised with them in their meetings. Copies of analyst reports on the Company and its peers are also circulated to Directors.


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CORPORATE GOVERNANCE

Corporate Governance Statementcontinued





Effectiveness


LOGO

Board timetable



LOGO



Responsibility of the Board

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



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | 
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| |  | Strategy 
   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                                                                                                                                                                                                                                           |  | Risk

   Overseeing the Groups risk management programme

   Regularly reviewing the risk register

   Overseeing risk management processes (see pages 36 to 39 for further
details).                                                                                                                                                                                                                                               |  | 
| |  |    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 corporate social responsibility,
health and safety, Code of Conduct and Code of Share Dealing and other matters 
   Approving the appointment and removal of key professional
advisers. |  | 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. |  | 
| |  | 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                                                                                                                                           |  | 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                                                                                                              |  | 
| |  |    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.                                                                                                                                                                                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                        







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What we did  MonthJanuary



Considered and approved acquisition of ArthroCare Corporation(acquisition of ArthroCare)Early February
(Approval of Preliminary Announcement)



Reviewed the results for the full year 2013
and the preliminary announcement and approved the final dividend to be recommended to shareholders for approval

Reviewed and approved the annual risk management report

Approved the Budget for 2014 and the five-year Plan for 2014 to 2018

Approved the continuation of the share buy-back programme to repurchase shares issued in connection with share plans on a quarterly basis

Reviewed the results of the review into the effectiveness of the Board in 2013 and agreed action points for 2014Late
February (by telephone) (Approval of Financial Statements)



Reviewed and
approved the Annual Report and Accounts for 2013, having determined that they were fair, balanced and understandable

Reviewed and approved the Notice of Annual General Meeting and related documentationEarly
April



Noted, considered
and approved the new Commercial organisation structure

Received a presentation on SYNCERA, the new value range for our ASD division

Approved the Sustainability Report

Prepared for the Annual General Meeting to be held later that dayLate
April (by telephone) (Approval of Q1 results)



Reviewed the
results for the first quarter 2014 and approved the Q1 announcementJuly (Approval of H1 results)



Reviewed the results for the first half 2014 and approved the H1 announcement, having considered managements judgement in a number of areas and approved
payment of interim dividend

Received and considered a report analysing the progress of recent acquisitions against expectations at the time of acquisition

Received and discussed annual review of defence planning

Received update reports from Group Taxation and Group Treasury

Approved the appointment of Deutsche Bank as ADR Depositary Bank and the change of the ratio of ADR to ordinary shares

Updated and approved the Schedule of Matters Reserved to the BoardEarly
October (Strategy Review) 
Singapore



Approved the
Strategic Plan for 2015 to 2019 over a two-day Strategy Review with the executive team

Approved the renewal of the Directors and Officers Liability insurance

Authorised the executive team to arrange the private placement of debtLate
October (Approval of Q3 Results) 
Fort Worth, Texas



Reviewed the
results for the third quarter 2014 and approved the Q3 announcement

Received and considered the annual report from the executive team on executive Succession Planning

Received an update on the progress of the integration of ArthroCare

Approved the appointment of Vinita Bali as a Non-executive DirectorDecember (Approval of Budget)



Approved the Budget
for 2015

Authorised the executive team to conduct a selection process for new corporate brokers

Received a report on the progress of our investment in Bioventus LLP

Received an update on the HR transformation project

Received an update on the Commercial structure within Europe We also agreed to appoint Erik Engstrom as Non-executive Director by written resolution. Since the year end, we have also approved the Annual Report and Accounts for 2014 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 2014. Each meeting was preceded by a meeting between the Chairman and the Non-executive Directors without Executive Directors and management in attendance. Unless
otherwise stated, meetings are held in London. 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 Business 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.


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CORPORATE GOVERNANCE

Corporate Governance Statementcontinued

Effectiveness





Board and Committee Attendance



| |  |                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                                |  |                          |  |                                |  |                                           |  |                                       |  | 
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ |  | ------------------------------ |  | ----------------------------------------- |  | ------------------------------------- |  | 
| |  |                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                                |  |                          |  |                                |  |                                           |  |                                       |  | 
| |  |                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                               
| |  |                                                                                                                                                                                                                                                                    |  | Board Meetings                                                                                                                                                                                                                                                                                                                                 |  | Audit Committee Meetings |  | RemunerationCommittee Meetings |  | Nomination & GovernanceCommittee Meetings |  | Ethics & ComplianceCommittee Meetings |  | 
| |  | Director                                                                                                                                                                                                                                                           |  | (9 meetings)                                                                                                                                                                                                                                                                                                                                   |  | (8 meetings)             |  | (4 meetings)                   |  | (3 meetings)                              |  | (4 meetings)                          |  | 
| |  |                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                               
| |  | Roberto Quarta                                                                                                                                                                                                                                                     |  | 9 / 9                                                                                                                                                                                                                                                                                                                                          |  |                         |  | 2 / 27                         |  | 3 / 3                                     |  |                                      |  | 
| |  |                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                               
| |  | Olivier Bohuon                                                                                                                                                                                                                                                     |  | 9 / 9                                                                                                                                                                                                                                                                                                                                          |  |                         |  |                               |  | 3 / 3                                     |  |                                      |  | 
| |  |                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                               
| |  | Julie Brown                                                                                                                                                                                                                                                        |  | 9 / 9                                                                                                                                                                                                                                                                                                                                          |  |                         |  |                               |  |                                          |  |                                      |  | 
| |  |                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                               
| |  | Vinita Bali1                                                                                                                                                                                                                                                       |  | 1 / 1                                                                                                                                                                                                                                                                                                                                          |  |                         |  |                               |  |                                          |  |                                      |  | 
| |  |                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                               
| |  | Ian Barlow                                                                                                                                                                                                                                                         |  | 9 / 9                                                                                                                                                                                                                                                                                                                                          |  | 8 / 8                    |  |                               |  |                                          |  | 1 / 19                                |  | 
| |  |                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                               
| |  | Virginia Bottomley                                                                                                                                                                                                                                                 |  | 9 / 9                                                                                                                                                                                                                                                                                                                                          |  |                         |  | 4 / 4                          |  | 2 / 28                                    |  |                                      |  | 
| |  |                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                               
| |  | Sir John Buchanan2                                                                                                                                                                                                                                                 |  | 3 / 4                                                                                                                                                                                                                                                                                                                                          |  |                         |  |                               |  | 1 / 1                                     |  |                                      |  | 
| |  |                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                               
| |  | Michael Friedman3                                                                                                                                                                                                                                                  |  | 8 / 9                                                                                                                                                                                                                                                                                                                                          |  |                         |  |                               |  |                                          |  | 4 / 4                                 |  | 
| |  |                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                               
| |  | Pamela Kirby4                                                                                                                                                                                                                                                      |  | 6 / 6                                                                                                                                                                                                                                                                                                                                          |  |                         |  | 3 / 3                          |  |                                          |  | 3 / 3                                 |  | 
| |  |                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                               
| |  | Brian Larcombe                                                                                                                                                                                                                                                     |  | 9 / 9                                                                                                                                                                                                                                                                                                                                          |  | 8 / 8                    |  | 4 / 4                          |  | 3 / 3                                     |  |                                      |  | 
| |  |                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                               
| |  | Joseph Papa                                                                                                                                                                                                                                                        |  | 9 / 9                                                                                                                                                                                                                                                                                                                                          |  | 8 / 8                    |  | 4 / 4                          |  |                                          |  | 4 / 4                                 |  | 
| |  |                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                               
| |  | Ajay Piramal5                                                                                                                                                                                                                                                      |  | 1 / 3                                                                                                                                                                                                                                                                                                                                          |  |                         |  |                               |  |                                          |  |                                      |  | 
| |  |                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                               
| |  | Richard De Schutter6                                                                                                                                                                                                                                               |  | 4 / 4                                                                                                                                                                                                                                                                                                                                          |  | 3 / 3                    |  | 2 / 2                          |  | 1 / 1                                     |  | 2 / 2                                 |  | 
| |  | 1Vinita Bali was appointed to the Board on 1 December 2014
2Sir John
Buchanan retired from the Board on 10 April 2014
3Michael
Friedman was unable to attend one Board telephone update due to a flight delay 4Pamela Kirby retired from the Board on 31 July 2014 |  | 5Ajay Piramal retired from the Board on 24 March 2014
6Richard
De Schutter retired from the Board on 10 April 2014
7Roberto
Quarta joined the Remuneration Committee on 10 April 2014 8Virginia Bottomley joined the Nomination & Governance Committee on 10 April 2014
9Ian
Barlow joined the Ethics & Compliance Committee on 2 October 2014 |  |                         





In the event that a Director is unable to attend a Board or Board Committee meeting, they ensure that they are familiar with the matters to be discussed and make
their views known to the Chairman of the Board or Board Committee prior to the meeting.



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | 
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Dear
Shareholder,  The Chairman asked me as Senior Independent Director to conduct the
review into the effectiveness of the Board in 2014. I interviewed all the members of the Board, the Company Secretary and the Head of Human Resources towards the end of 2014, basing our discussions around a short questionnaire prepared by the
Company Secretary.  The Board scores highly on all the key assessments of our
responsibilities for approving strategy, monitoring performance, determining risk, diligence of members attendance and quality of discussion. Roberto Quarta, Chairman of the Board is universally respected for his professionalism, chairmanship
skills and for |  | developing an excellent working
relationship with Olivier. He has invested the time to understand the business, getting to know the senior executives and the major shareholders and has made excellent progress in strengthening the Board with appointment of new Non-executive
Directors. The Committees of the Board were also found to be operating effectively.  There
has been some healthy discussion around the role played by the Board, with the Non-executives eager to play a more active role in agenda planning, setting the strategy, organisational change and management succession and the appointment of
advisers.  The Board discussed the results of my findings at our Board meeting in February
2015 and agreed the following actions for 2015: |  | 
| |  | Action identified                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Make more effective use
of the annual Board Planner to ensure that all key strategic issues were timetabled appropriately throughout the year                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Encourage the executive
team to access the diverse competencies of the Non-executive Directors more between Board meetings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Continue the practice of
inviting members of the executive team to present regularly to the Board                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | The review into the
Boards effectiveness in 2015 will be facilitated externally as although we undertake an annual review, the last externally facilitated review was in 2012. The areas for attention identified in the 2013 review have been addressed as
follows:                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Progress made in 2014 against the Areas for Attention identified in the 2013
review                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| |  |                                                                                                                                                                           |  |                                                                                                                                                                                                                                                                                                                                                     |  | 
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| |  | Succession
Planning at Non-executive Director level would be a key priority following the retirement of a number of long serving Non-executive Directors during the year. |  | Nomination & Governance
Committee undertook a comprehensive search for new Non-executive Directors leading to the appointment of Vinita Bali on 1 December 2014 and of Erik Engstrom on 1 January 2015. This process is ongoing. Details of the full search process are
given in the Nomination & Governance Committee Report on page 70.           |  | 
| |  |                                                                                                                                                                          
| |  | Timing and length of the Board and Committee meetings
could be reviewed to consider whether the current pattern of meetings was most effective.                           |  | The timing and frequency of Board meetings has been reviewed by the Chairman
and the Chief Executive Officer, who have concluded that the current pattern of meetings is appropriate for the Company and fits in well with the programme of executive activities throughout the year. The reporting schedule inhibits changing the
Board timetable. |  | 

Yours sincerely,

Brian Larcombe

Senior Independent
Director



68Smith & Nephew Annual report 2014



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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 2014, we particularly focused on the changes to Narrative Reporting and reporting on Remuneration as well as the changes incorporated in the UK Corporate Governance Code 2014 and the
Financial Reporting Councils Audit Quality Thematic Review into fraud risks and laws and regulations. New Directors receive tailored induction programmes when they join the Board. In 2014, Vinita Bali commenced her induction programme with a
series of meetings with key senior executives and a briefing on UK Company Law and Corporate Governance delivered jointly by our corporate lawyers, Freshfields and our Company Secretary, Susan Swabey. Since the year end, Vinita Bali and Erik
Engstrom have continued meeting with key senior executives and a series of visits to our major facilities is planned for them both over the next few months. 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. Development activities The following development sessions covering both the Smith & Nephew business and wider market issues were held during the year:  Month

ActivityFebruary



Individual cyber profiling sessions with each Director

Presentation from external consultants on the current state of the Medical Devices industry across EuropeApril



Presentation on new SYNCERA rangeJuly



Joint presentation from our corporate brokers on equity markets and investor perceptions of Smith & NephewSeptember



Meetings with our ASEAN management team in Singapore with presentations from the local Managing Directors in Singapore, Malaysia and Thailand

Presentation from a leading Indian hip surgeon on the challenges in the Indian market

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 discussionsOctober



Visit to the Biotherapeutics facility in Fort Worth, Texas and meetings with the Biotherapeutics research and development teams

Series of presentations from our Advanced Wound Management US Commercial team on the challenges faced by the business, our strategy and initiatives to meet these challenges
and an update on progress made since the previous year  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 70 to 71 explains the process the Board and the Nomination & Governance Committee followed in 2014 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 October 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.  By order of the Board, on
25 February 2015  LOGO  Roberto Quarta
Chairman


LOGO




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Accountability





Accountability


LOGO



Nomination & Governance Committee Report   LOGO  Dear Shareholder
 I am pleased to present our Report on the role and activities of the Nomination &
Governance Committee in 2014.  Current Members in
2014Roberto Quarta

Committee ChairmanBrian Larcombe

Senior
Independent Non-executive DirectorVirginia Bottomley (from 10 April 2014)

Independent
Non-executive DirectorOlivier Bohuon

Chief Executive
Officer1  Sir John
Buchanan and Richard De Schutter left the Committee on 10 April 2014 on their retirement from the Board.Key activities  Review the composition of the Board and make recommendations to the Board
regarding the appointment of Directors.  Oversee governance aspects of the Board and its Committees.2015 focus  Continue to search for one more Non-executive Director with financial
expertise.


Role of the Nomination & Governance Committee Our work falls into the following two areas: Board Composition  
Reviewing the size and composition of the Board  
Overseeing Board succession plans  
Recommending the appointment of Directors  
Monitoring Board diversity. Corporate Governance  
Overseeing governance aspects of the Board and its Committees  
Overseeing the review into the effectiveness of the Board  
Considering and updating the Schedule of Matters Reserved to the Board and the Terms of Reference of the Board Committees  
Monitoring external corporate governance activities and keeping the Board updated  
Overseeing the Board Development Programme and the induction process for new Directors. The terms of reference of
the Nomination & Governance Committee describe our role and responsibilities more fully and can be found on our website at www.smith-nephew.com Activities of the Nomination & Governance Committee in 2014 and since the year end In 2014, we held four physical meetings.
Each meeting was attended by all members of the Committee. The Company Secretary, the Head of Human Resources and external search agents also attended by invitation. In between each meeting, various discussions were held between members of the
Nominations & Governance Committee and the external search agent. Our programme of work in 2014 was as follows: Early February (Activities related
to the year end)  
Considered and approved the re-appointment of directors who had completed three or six years service and the annual appointment of directors serving in excess of nine years  
Reviewed and updated the Schedule of Matters Reserved to the Board and the Terms of Reference of the Board Committees  
Considered and discussed the results of the annual review into the effectiveness of the Board  
Noted an update on corporate governance matters relating to reporting and disclosure requirements. Early
September (Appointment of Vinita Bali)  
Reviewed the long list of candidates for the position of Non-executive Director and discussed the outcome of meetings already held with candidates who had been shortlisted  
Agreed to recommend to the Board that Vinita Bali be appointed Non-executive Director.






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End October (Appointment of Erik Engstrom) 

   Further reviewed the longlist and
shortlist of Non-executive Director candidates and discussed the outcome of meetings held with candidates 

  Agreed to recommend to the Board that Erik Engstrom be appointed Non-executive Director
 

   Agreed to hold further meetings
with other candidates.  Early December (Appointment of Non-executive Directors)


   Further reviewed the longlist and
shortlist of Non-executive Director candidates and discussed the outcome of meetings held with candidates. 
Since the year end, we have also considered the outcomes of the Board Effectiveness review and discussed the future structure of the Board.
 Non-executive Directors
 During 2014, there were a number of changes to the composition of the Board. Sir John Buchanan
retired as Chairman of the Board at the Annual General Meeting after nine years service to the Company. Richard De Schutter also retired at the Annual General Meeting following 13 years service and Pamela Kirby retired after 12
years service in July. Earlier in the year, Ajay Piramal also retired from the Board in March due to the pressure of other commitments. These departures left a number of positions on the Board to be filled. We therefore undertook a search
programme to identify suitable new Board members, which resulted in the appointment of Vinita Bali as Non-executive Director with effect from 1 December 2014 and of Erik Engstrom with effect from 1 January 2015. The process we followed was
as follows:    I worked with
Olivier Bohuon, Chief Executive Officer, the Company Secretary and the Head of Human Resources to analyse the skills and experiences we felt that we needed on the Board to implement our Strategy over the next five years. We also analysed the skills
and experiences of those Directors who would be remaining on the Board 
  From this review, we identified that we would wish to search for up to three new Non-executive
Directors, each with a combination of one or more of the following skills, experiences or backgrounds: 
  Experience of one or more of the Emerging Markets in which we operate;
   Digital experience  we later
modified this to leading a company through a period of considerable technological change; 
  Experience as a Chief Executive Officer in another listed company;
   At least one new female
Non-executive Director;    The
Board reviewed this analysis and endorsed the skills and experiences against which we would be searching 
  The Nomination & Governance Committee selected Russell Reynolds to undertake the search for new
Non-executive directors, having reviewed three firms suggested by the Head of Human Resources and the Company Secretary 
  Russell Reynolds prepared a long list of candidates satisfying one or more of the above criteria and
Brian Larcombe and I met with them to discuss the longlist and select a shortlist of suitable candidates  
  Members of the Nomination & Governance Committee then met individually with a number of
candidates. Additional Board members were also asked to meet certain candidates where there were particular interests or experiences

  The Nomination & Governance Committee agreed to recommend that the Board
appoint Vinita Bali and Erik Engstrom as Non-executive Directors.  The
Nomination & Governance Committee selected Vinita Bali to be a Non-executive Director because of her experience as a very senior commercial executive in a wide range of Emerging Markets across India, Africa and South America.
 We selected Erik Engstrom because of his experience in his role as Chief Executive Officer
leading his company Reed Elsevier through significant technological change and his ability to add value to our Audit Committee. 
Russell Reynolds also undertook succession planning assessments on behalf of management. The Committee is satisfied that their advice is objective and
independent.  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 characteristic. 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 for an understanding of 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, 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. 30% of our Board is female. We do
not regard this as a fixed percentage as the number of Board members will fluctuate from time to time and we would not necessarily expect to replace any retiring Director with a new Director of the same gender. We will still continue to appoint
Directors on merit, valuing the unique contribution that they will bring to the Board, regardless of gender. 
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.  Yours sincerely,
 LOGO  Roberto Quarta
Chairman of the Nomination & Governance Committee


LOGO




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Ethics & Compliance Committee Report
  LOGO  Dear Shareholder
 I am pleased to present our Report on the role and activities of the Ethics &
Compliance Committee in 2014.  Current Members in
2014Michael A. Friedman (from 31 July 2014)

Committee ChairmanIan Barlow (from 2 October 2014)

Independent Non-executive DirectorJoseph
Papa

Independent Non-executive Director1  Richard De Schutter left the Committee on 10 April 2014 on their retirement from the Board.2  Pamela Kirby left the Committee on 31 July 2014 on her retirement from the Board.3  Vinita Bali will join the Committee on 1 April 2015.Key
activities  Reviews ethics and compliance processes and practices
across the Group.  Oversees quality and regulatory matters.  Monitors significant compliance, quality and regulatory issues or failures as they
arise.2015 focus  Develop a deeper oversight of quality and regulatory
matters.  Continue to focus on compliance issues within the
context of our acquisition programme.  Continue to enhance the compliance processes and
practices of our third party distributors.


Role of the Ethics & Compliance Committee Our work falls into the following two general areas: Ethics & Compliance  
Overseeing ethics and compliance programmes  
Monitoring ethics and compliance policies and training programmes  
Reviewing compliance performance based on monitoring, auditing and investigations data  
Reviewing allegations of significant compliance issues  
Overseeing the Groups internal and external communications relating to ethics and compliance matters  
Reviewing external developments and compliance activities  
Receiving reports from the Groups Ethics & Compliance Committee meetings and from the Chief Compliance Officer and the Chief Legal Officer. Quality Assurance and Regulatory Assurance  
Overseeing the processes by which regulatory and quality risks relating to the Company and its operations are managed  
Receiving and considering regular functional reports and presentations from the SVP Quality Assurance and Regulatory Assurance (QARA). The terms of reference of the Ethics & Compliance Committee describe our role and responsibilities more fully and can be found on our website at
www.smith-nephew.com






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Activities of the Ethics & Compliance Committee in 2014 and since the year end In 2014, we held four physical meetings. Each meeting was attended by all members of the Committee. The Company Secretary, the Chief Legal Officer, the
Chief Compliance Officer and the SVP Quality Assurance and Regulatory Assurance also attended by invitation. Our programme of work in 2014 included the following: February  
Noted that the SEC and DOJ had confirmed the termination of the independent monitorship in January 2014 and that the Company was now subject to self-reporting. Discussed and noted the requirements of self-reporting  
Noted the ethics and compliance due diligence and integration work being undertaken in respect of recent transactions in India, Turkey and Brazil and the Biotherapeutics business  
Noted the preparations being made in capturing data to be filed under the US Sunshine Act and considered the Sunshine legislation in other territories. April  
Reviewed the processes in place to ensure oversight over third party sellers  
Noted the ethics and compliance due diligence and integration work being undertaken in respect of recent transactions in India, Turkey and Brazil and ArthroCare  
Noted that the first aggregate payment report under the US Sunshine Act had been filed in March 2014 and considered the Sunshine legislation in other territories. July  
Noted that the Companys first self-reporting report would be filed with the SEC and DOJ in July 2014. October  
Reviewed the results of 2014 ethics survey  
Noted the data recently published under the US Sunshine Act in respect of both the Company and its competitors  
Received a report from the SVP Quality Assurance and Regulatory Assurance on the activities of the QARA function, reviewing the quality and regulatory challenges faced across the Company and initiatives to address them. At each meeting we noted and considered the activities of 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 2014, considered the compliance implications of recent acquisitions and continued our oversight of the Quality Assurance and Regulatory Assurance
function.
 Employee Compliance Programme New employees are trained on our Code of Conduct, which sets out the basic legal and ethical principles for conducting business. A copy of the Code of Conduct can
be found on our website at www.smith-nephew.com Further support is provided through a comprehensive set of tools and resources located on our global intranet
platform. These tools and resources are regularly updated. The Code of Conduct includes our whistle-blower policy, which enables employees and members of the
public to contact us anonymously through an independent provider (where allowed by local law). Individuals can also report any concern to their direct manager or a manager in Compliance, Legal or Human Resources. All calls and contacts are
investigated and the appropriate action taken, including reports for senior management or the Board, where warranted. As stated in the Code of Conduct, we also enforce our non-retaliation policy with respect to anyone who makes a report in good
faith. The Ethics & Compliance Committee is advised of any potentially significant improprieties from time to time, and the Companys response. In 2014, we continued to work to enhance the employee compliance training programme. New employees receive training on our Code of Conduct (Code), and
we assign annual compliance training to employees. In 2014, we updated our Code training. The new module is more interactive, role-based and allows individuals to apply the Code in different scenarios. We also developed and piloted a face-to-face course for new managers, supplementing the on-line manager certification training. In 2015, all new managers will be
required to complete both the on-line and the face-to-face course.


LOGO




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|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Compliance Programme for Third Parties 
We continually review our compliance programme with third party sellers (such as distributors and sales agents), particularly in higher risk markets. This
programme includes due diligence, contracts with compliance terms and compliance training. To increase oversight, we have augmented monitoring and auditing programmes in 2014. 
We expanded our oversight of third party sellers with site assessments to check compliance controls and monitoring visits to review books and records.
 We have continued to strengthen controls over other third parties engaged by us to provide
services other than selling our products, such as customs, registration and travel agents. In 2014, we focused on potentially higher risk third parties. We have established a policy and process requiring that managers prioritise our oversight of
third parties and take appropriate steps, including performing a risk assessment, conducting due diligence and assigning training, based on third party type and risk profile. 
Compliance implications around acquisitions 
In both 2013 and 2014, there has been increased strategic acquisition activity across the Group. In all cases, we undertake comprehensive due diligence evaluation
prior to acquisition and implement compliance integration plans from the point of executing the acquisition. This is to ensure that new businesses are integrated into the Smith & Nephew compliance culture as soon and consistently as
possible and that all new employees are immediately made aware of how we do things at Smith & Nephew. |  | Oversight of Quality Assurance and Regulatory Assurance Function
 During the course of 2014, it was agreed that primary oversight of the Quality Assurance and
Regulatory Assurance Function (QARA) would move from the Audit Committee to the Ethics & Compliance Committee. Product safety is at the heart of our business and regulatory authorities enforce a complex series of laws and regulations that
govern the design, development, approval, manufacture, labelling, marketing and sale of healthcare products, including review of the safety and efficacy of such products. Jerry Porreca, SVP Quality Assurance and Regulatory Assurance presented to the
Ethics & Compliance Committee in October 2014, explaining the new structure of the QARA function and the current focuses and initiatives being addressed by the function. The QARA function is built on four pillars  quality assurance,
regulatory affairs, customer complaints and quality systems and regulatory compliance. 
Going forward, the Ethics & Compliance Committee will monitor the work of the QARA function on a quarterly basis, approve the QARA annual programme of
work, as outlined in their 3-Year QARA Plan, consider any quality or regulatory issues that arise during the year, and approve any appropriate remedial action. 
Yours sincerely,  LOGO  Michael A. Friedman
Chairman of the Ethics & Compliance Committee









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Audit Committee Report  
LOGO  Dear Shareholder
 I am pleased to present our Report on the role and activities of the Audit Committee in
2014.  Current Members in 2014



Role of the Audit Committee
 Our work falls into the following five areas:
 Financial Reporting
  Reviewing significant financial reporting judgments and accounting policies and compliance with
accounting standards 
  Ensuring the integrity of the financial statements and their compliance with UK and US statutory
requirements 
  Ensuring the Annual Report and Accounts are fair, balanced and understandable and recommending their
adoption by the Board  
  Monitoring announcements relating to the Groups financial performance.
 Internal Controls and Risk Management
   Monitoring the effectiveness of
internal controls and compliance with the UK Corporate Governance Code 2012 and the Sarbanes Oxley Act, specifically sections 302 and 404

  Reviewing the operation of the Groups risk management processes and the control environment over
financial risks.  Fraud and Whistle-blowing
  Receiving reports on the processes in place to prevent fraud and to enable whistle-blowing

  If required, receiving reports of fraud incidents.
 Internal Audit
  Agreeing internal audit plans and reviewing reports of internal audit work

  Monitoring the effectiveness of the internal audit function.
 External Audit
  Overseeing the Boards relationship with the external auditor

  Monitoring and reviewing the independence and performance of the external auditor and evaluating their
effectiveness 
  Making recommendations to the Board for the appointment or re-appointment of the external auditor.
 The terms of reference of the Audit Committee describe our role and responsibilities more
fully and can be found on our website at www.smith-nephew.comIan Barlow

Committee Chairman and designated financial expertErik Engstrom(from 1 January 2015)

Independent Non-executive DirectorBrian Larcombe

Senior Independent Non-executive DirectorJoseph Papa

Independent Non-executive Director1  Richard De Schutter left the Committee on 10 April 2014 on his retirement from the Board.Key
activities  Undertake independent assessment of the financial affairs of the Company.  Oversee system of control and risk management throughout the Group.  Undertake detailed work to support the Boards approval of the financial results.2015 focus  Consideration of how to address the requirement to publish a Viability Statement in
the 2015 Annual Report and more detailed risk management reporting.  Monitor the roll-out of enhanced consistently applied financial controls across the Group.


LOGO




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Activities of the Audit Committee in 2014 and since the year end

In 2014, we held five physical meetings and three meetings by telephone. Each meeting was attended by all members of the Committee. The Chief Executive Officer,
the Chief Financial Officer, the Head of Internal Audit (following her appointment in May 2014), the external auditor and key members of the finance function, the Company Secretary and Deputy Company Secretary also attended by invitation. We also
met regularly with the external auditor without management present. Our programme of work in 2014 was as follows:



| |  |                                                                 |   |          |                                                                                                                                                 |                                                                                                                                                                                                                                                                                      |  | 
| |  | --------------------------------------------------------------- | - | -------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | 
| |  |                                                                 |   |          |                                                                                                                                                 |                                                                                                                                                                                                                                                                                      |  | 
| |  |                                                                 |   |         
| |  | Month                                                           |   | Activity |                                                                                                                                                 |                                                                                                                                                                                                                                                                                     
| |  |                                                                 |   |         
| |  | Early February (Approval of
Preliminary Announcement)           |   |         |                                                                                                                                                 | Reviewed the results for the full year 2013 and the preliminary announcement and recommend them for adoption by the Board                                                                                                                                                            |  | 
| |  |                                                                 |  |          | Reviewed the effectiveness of financial controls and of the risk management process and concluded they were operating effectively               |                                                                                                                                                                                                                                                                                     
| |  |                                                                 |  |          | Received the Internal Audit Report and approved the Internal Audit work programme for 2014                                                      |                                                                                                                                                                                                                                                                                      | 
| |  |                                                                 |  |          | Received the Quality Assurance Report and approved the Quality Assurance work programme for 2014                                                |                                                                                                                                                                                                                                                                                      | 
| |  |                                                                 |  |          | Received the fraud report and reviewed whistle-blowing procedures                                                                               |                                                                                                                                                                                                                                                                                      | 
| |  |                                                                 |  |          | Approved external audit fees and the policy for pre-approval of EY non-audit tax fees and noted consulting fees paid to other major audit firms |                                                                                                                                                                                                                                                                                      | 
| |  | Late February
(by telephone) (Approval of Financial Statements) |   |         |                                                                                                                                                 | Reviewed and approved the Annual Report and Accounts for 2013, having considered whether they were fair balanced and understandable, and
recommended them for adoption by the Board                                                                                                  |  | 
| |  |                                                                 |  |          | Considered the effectiveness of the external auditor and concluded that their work had been effective                                           |                                                                                                                                                                                                                                                                                      | 
| |  |                                                                 |   |         |                                                                                                                                                 | Agreed to put the audit out to tender for the financial year 2015                                                                                                                                                                                                                    |  | 
| |  | Early April
(Presentations from prospective audit firms)        |   |         |                                                                                                                                                 | Confirmed the detailed plan for the audit tender and appointed the Audit Tender Steering Committee                                                                                                                                                                                   |  | 
| |  |                                                                 |  |          | Received a presentation from the three audit firms planning to participate in our audit tender process                                          |                                                                                                                                                                                                                                                                                      | 
| |  |                                                                 |   |          |                                                                                                                                                 |                                                                                                                                                                                                                                                                                      | 
| |  | Late April
(by telephone) (Approval of Q1 results)              |   |         |                                                                                                                                                 | Reviewed the results for the first quarter 2014 and approved the Q1 announcement                                                                                                                                                                                                     |  | 
| |  |                                                                 |   |          |                                                                                                                                                 |                                                                                                                                                                                                                                                                                      | 
| |  |                                                                 |   |          |                                                                                                                                                 |                                                                                                                                                                                                                                                                                      | 
| |  | Early July
(by telephone) (Appointment of
new Auditors)         |   |         |                                                                                                                                                 | Considered and approved the recommendation of the Audit Tender Steering Committee to appoint KPMG LLP as the Company auditors for
the year ending 31 December 2015                                                                                                                   |  | 
| |  |                                                                 |   |         
| |  |                                                                 |   |          |                                                                                                                                                 |                                                                                                                                                                                                                                                                                      | 
| |  |                                                                 |   |          |                                                                                                                                                 |                                                                                                                                                                                                                                                                                      | 
| |  | Late July                                                       |   |         |                                                                                                                                                 | Reviewed the results for the first half 2014 and approved the H1 announcement                                                                                                                                                                                                        |  | 
| |  | (Approval of H1 results)                                        |   |         |                                                                                                                                                 | Reviewed the Progress Report from Internal Audit which included an update on the status of the 2014 Internal Audit plan                                                                                                                                                              |  | 
| |  |                                                                 |   |         |                                                                                                                                                 | Received the fraud report and reviewed whistle-blowing procedures                                                                                                                                                                                                                    |  | 
| |  |                                                                 |  |          | Reviewed and discussed the due diligence process for acquisitions, noting improvements made to this process in the past year                    |                                                                                                                                                                                                                                                                                      | 
| |  |                                                                 |  |          | Reviewed and approved the external Auditors Audit Plan for 2014                                                                                |                                                                                                                                                                                                                                                                                      | 
| |  | October                                                         |   |         |                                                                                                                                                 | Reviewed the results for the third quarter 2014 and approved the Q3 announcement                                                                                                                                                                                                     |  | 
| |  | (Approval of Q3 Results)                                        |   |         |                                                                                                                                                 | Approved the terms of the engagement letter of EY as Auditors for the financial year 2014                                                                                                                                                                                            |  | 
| |  |                                                                 |   |         |                                                                                                                                                 | Reviewed the Progress Report from Internal Audit, the status of the 2014 Internal Audit plan and two internal audit reports.                                                                                                                                                         |  | 
| |  |                                                                 |   |         |                                                                                                                                                 | Approved the Group Risk management programme conducted in 2014                                                                                                                                                                                                                       |  | 
| |  |                                                                 |   |         |                                                                                                                                                 | Considered and discussed the updated UK Corporate Governance Code issued by the Financial Reporting Council                                                                                                                                                                          |  | 
| |  |                                                                 |   |         |                                                                                                                                                 | Considered and discussed the Financial Reporting Councils Audit Quality Thematic Review - Fraud risks and laws and regulations.                                                                                                                                                     |  | 
| |  |                                                                 |   |         |                                                                                                                                                 | Received the fraud report and reviewed whistle-blowing processes                                                                                                                                                                                                                     | 
| |  |                                                                 |   |         |                                                                                                                                                 | Noted the progress of the European IT SAP implementation project                                                                                                                                                                                                                     |  | 
| |  |                                                                 |   |         |                                                                                                                                                 | Reviewed the inspection reports on EY from the Financial Reporting Council (UK) and the Public Company Accounting Oversight Board (US)                                                                                                                                               |  | 
| |  |                                                                 |   |         |                                                                                                                                                 | Reviewed and discussed the roll-out of the Minimum Acceptable Practices for Finance and other control focussed initiatives                                                                                                                                                           |  | 
| |  | December                                                        |   |         |                                                                                                                                                 | Reviewed and updated the terms of reference of the Audit Committee                                                                                                                                                                                                                   |  | 
| |  | (Review of Functional                                           |   |         |                                                                                                                                                 | Considered and approved critical accounting policies and judgments in advance of the 2014 year end                                                                                                                                                                                   |  | 
| |  | Reports)                                                        |   |         |                                                                                                                                                 | Considered and approved the external audit plan for 2015                                                                                                                                                                                                                             |  | 
| |  |                                                                 |   |         |                                                                                                                                                 | Reviewed and approved the layout and design of the Annual Report 2014                                                                                                                                                                                                                |  | 
| |  |                                                                 |   |         |                                                                                                                                                 | Received and discussed a report on the Finance transformation project and reports from the Head of Taxation, the Group Treasurer and the Chief Information Officer on Disaster Recovery and IT
risk. These reports focused on the respective controls and risks within each function |  | 

During the year, we also approved our Policy on the use of Conflict Minerals by written resolution.

Since the year end, we have also reviewed the Annual Report and Accounts for 2014 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 page 12, and the key
performance indicators and their link to the strategy.



76Smith & Nephew Annual report 2014



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Significant matters related to the financial statements We considered the following key areas of judgement in relation to the 2014 accounts and at each reporting quarter end, which we discussed in all cases with
management and the external auditor:  Area of judgement



Our actionValuation of inventoriesA feature of the orthopaedic business model (whose finished goods inventory makes up 81% of the Group total finished goods inventory) is the high level of product inventory required, some of
which is located at customer premises and is available for customers immediate use. Complete sets of product, including large and small sizes have to be made available in this way. These 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.



At each quarter end, we received reports from and discussed with management the level of provisioning and material areas at risk. The provisioning level was 21.5% at 31 December 2014
(26.0% as at 31 December 2013). We concluded that the proposed levels were appropriate.Liability provisioningThe recognition of provisions for legal disputes is subject to a significant degree of estimation. Provision is made for loss contingencies when it is considered probable that an adverse
outcome will occur and the amount of the loss can be reasonably estimated. In making its estimates, management takes into account the advice of internal and external legal counsel. Provisions are reviewed regularly and amounts updated where
necessary to reflect developments in the disputes. The ultimate liability may differ from the amount provided depending on the outcome of court proceedings or settlement negotiations or if new facts come to light. The level of provisioning for
contingent and other liabilities is an issue where management and legal judgements are important.



As members of the Board, we receive regular updates from the Chief Legal Officer. These updates form the basis for the level of provisioning. These judgements have not moved materially during
the year, with some cases having been resolved, and we have determined that the proposed levels at year end of $74 million in 2014 ($86 million in 2013) were appropriate in the circumstances.ImpairmentIn carrying out impairment reviews of goodwill, intangible assets and property, plant and equipment, a number of significant assumptions have to be made when preparing cash flow projections.
These include the future rate of market growth, discount rates, the market demand for the products acquired, the future profitability of acquired businesses 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.



We reviewed managements reports on the key assumptions with respect to goodwill, acquisition intangible assets and investments in associates  particularly the forecast future cash
flows and discount rates used to make these calculations. We have also considered the disclosure surrounding these reviews, and concluded that the review and disclosure were appropriate.TaxationProvisioning for potential current tax liabilities and the level of deferred tax asset recognition in relation to accumulated tax losses are underpinned by a range of judgments about the
future statutory profitability of constituent entities of the Group.



We annually review our processes and approve the principles for management of tax risks. We review quarterly reports from management evaluating existing risks and tax provisions, concluding
that the levels of provisions was appropriate.Business combinationsThe Group has identified growth through acquisitions as one of its Strategic Priorities. During 2014, we acquired ArthroCare Corporation; the determination of the balance sheet
fair value acquired is dependent upon understanding the circumstances at acquisition and estimates of the future results of the acquired business and management judgement is a factor in making these determinations.



For completed acquisitions, we received a report from management setting out the significant assets and liabilities acquired, details of the
provisional fair value adjustments applied, an analysis of the intangible assets acquired, the assumptions behind the valuation of these acquired intangible assets and the proposed useful economic life of each intangible asset class. For material
acquisitions, management engage third party specialists to perform a detailed analysis, summaries of which are included in management reports. We reviewed, discussed and approved these reports. We note that within the External Audit report there is a principal risk associated with the timing of revenue recognition and
measurement of related reserves as required by auditing standards. We have considered this and have concluded that we have appropriate procedures and controls in place not to include this as a significant area of judgement.


LOGO




Smith & Nephew Annual report
201477









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CORPORATE GOVERNANCE

Accountabilitycontinued





External Auditor Independence of External Auditors The independence of our
external auditors is critical for the integrity of the audit. 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 governs our approach when we require our external auditor to carry our non-audit services, and all such services are strictly governed by this policy. During 2014, fees paid
to Ernst & Young LLP, our external auditor, for non-audit work totalled $1.8 million, representing 35% of total audit fees. Full details are shown in Note 3.2 of the Notes to the Group accounts. During 2014, fees paid to KPMG LLP, who will
be appointed as our external auditors at the Annual General Meeting, amounted to $3.9 million. The provision of non-audit services by KPMG will be subject to our Auditor Independence Policy and the level of these services will be monitored closely.
It is not expected that the level of non-audit services provided by KPMG will be as high in 2015. The Auditor Independence Policy also governs the policy
regarding audit partner rotation. In 2014, Les Clifford who had been our audit partner for five years was replaced by Michael Rudberg. Effectiveness of
External Auditors Although EY will cease to be the Companys external auditors at the Annual General Meeting, we felt that it would still be useful
to carry out a review of the effectiveness of the external audit process and the quality of the audit, as the findings could be of use to KPMG, the incoming external auditor. We therefore conducted a review into the effectiveness of the external
audit as part of the 2014 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, EY and KPMG. 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 EY. The Audit Quality Review Team of the Financial Reporting Council in the UK reviewed the 2013 audit EY performed of the Company. We
have discussed the results of this inspection with EY and are satisfied that the points raised by the review have been appropriately addressed in the 2014 audit. Overall therefore, we concluded that EY had carried out their audit for 2014 effectively. Appointment of External Auditors at Annual General Meeting Ernst & Young LLP will be retiring as the Companys external auditor at the Annual General Meeting. The reports of Ernst & Young LLP on the
Companys financial statements for the past two fiscal years did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. In connection with the
audits of the Companys financial statements for each of the two fiscal years ended 2013 and 2014, and in the subsequent interim period to 23 February 2015, there were no disagreements with Ernst & Young LLP on any matters of
accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of Ernst & Young LLP would have caused Ernst & Young LLP to make reference to the
matter in their report. Resolutions will be put to the Annual General Meeting to be held on 9 April 2015 proposing the appointment of KPMG LLP as the
Companys Auditors and authorising the Board to determine their remuneration, on the recommendation of the Audit Committee. Disclosure of Information
to the Auditors 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, Ernst & Young LLP, 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. Audit and Professional Fees paid to the Auditor Fees for professional services provided by Ernst & Young LLP, the Groups independent auditor in each of the last two fiscal years, in each of
the following categories were:  2014

2013$ million

$ millionAudit

3

3Audit-related fees



Tax

2

3Other



Total

5

6 Internal Audit Our Internal Audit function reports directly to the Audit Committee and is headed by Jenny Morgan, Senior Vice President Internal Audit, whom we appointed in May
2014. She has subsequently restructured her team to meet the requirements of the evolving nature of our business, particularly in Emerging Markets and new acquisitions. The internal Audit function carries out work in the following three areas:  
Financial systems and processes;  
Systems that ensure compliance with our Code of Conduct, regulation and laws; and  
Quality management systems in our manufacturing activities. In all three areas, they act as a third line of
defence behind operational managements front line and the Companys internal assurance activities within Group Finance Compliance and Quality Assurance. During the year, they completed 26 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
unremediated and overdue control recommendations and oversee the effective and timely remediation of any recommendations. Specific activities of the Internal
Audit function in 2014 were the review of the design of the post-deal acquisition review process and the calculation of the benefits and costs associated with the Group Optimisation programme. In addition site specific audits were conducted of the
China commercial business and the new acquisitions in Turkey and India to ensure that integration efforts were in line with approved plans. In 2015, 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. During 2014, KPMG carried out an external review into the effectiveness of the Internal Audit function. The review made a number of recommendations regarding the
role and remit of internal audit, the resourcing of the function and the development of integrated working with other functions to provide a more holisitc approach to risk and assurance across the Group. These recommendations were accepted and are
being implemented. Since this review, the Internal Audit function has been strengthened by the appointment of Jenny Morgan, the new Senior Vice President
Internal Audit who has in turn restructured the function as detailed above.






|                                    
|------------------------------------
|78 Smith & Nephew Annual report 2014



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Tender of External Audit
Services  EY and their predecessor firms have been the Companys auditors since
the Company listed in 1937. We have been very satisfied with the effectiveness of the external audit process and the quality of the audit and have undertaken a number of measures to ensure that the external auditor has continued to maintain its
independence. However, in common with a number of other companies, as we explained in our Audit Committee Report last year, we recognised in 2014, that it was the right time to put the external audit out to tender.
 During the early summer of 2014, I led a process to select a new external auditor for the year
ending 31 December 2015. I worked with the Groups procurement function and established a Steering Committee comprising myself, Brian Larcombe, member of the Audit Committee and Senior Independent Director, Julie Brown, the Chief Financial
Officer, Susan Swabey, the Company Secretary and Dan Baker, Senior Vice President Group Finance. Given the size, complexity and geographical scope of the business, we invited Deloitte, KPMG and PwC to take part in the tender for carrying out our
external audit. In addition, in light of the emerging rules from Europe, we reached mutual agreement with EY that they would not take part in the tender process.

identification, audit approach to risks audit scope. These written tenders also included the
proposed audit fee, as we believed that as well as ensuring the quality of the audit, we also needed to have regard to the sensible containment of costs. 
5. Early July  In the week leading up to the presentation, each audit firm was asked to prepare a response to
an audit query, the same query for each firm, to simulate real life working and allow the Steering Committee to assess how well they responded to a request at short notice and how they interacted with the Committee on a technical issue.
 6. Early July  Each firm was asked to make
a presentation to the Steering Committee explaining why we should select them as our external auditors. 
7. Early July  Following the presentations and further discussions, the Audit Committee met and considered the
recommendation of the Steering Committee and agreed to appoint KPMG LLP as our external auditors for the 2015 financial year. A resolution to this effect will be submitted to shareholders for approval at the Annual General Meeting.Prior to the commencement of the tender process, each firm was invited to
make a presentation to the early April Audit Committee meeting on a project on which they had recently been working with the Company. This was to ensure that each firm had sufficient exposure to the Audit Committee prior to the financial tender.
 We were conscious that the audit tender process is time and resource consuming, both for the
firms involved and for the Company, and were therefore determined to have a concise yet thorough process, ensuring equivalent access to management for each firm. We undertook the following process over just six weeks:
 1. Late May  Issued the request for
tender.

Throughout the process, we were mindful of the need to preserve the independence of the external audit. As part of the tender, each firm was
required to disclose all existing relationships with the Company and explain their proposals for ensuring that these relationships would not cause any conflict of interest after 1 January 2015. Given that up until 2008, I was Senior Partner in
London with KPMG, we were aware that there might be some concerns about my independence. In order to address this, our Chairman Roberto Quarta joined the Steering Committee for the final stage of presentations to ensure impartiality was maintained.
We also noted that other senior members of the finance team had recently joined the Company from other tendering firms.2. Late May  Participating firms attended a joint workshop over a period of two days. This
included a group meeting with all firms with a series of presentations from key members of management, explaining their key expectations from the external audit process, as well as a series of individual meetings with management.
 3. Late May  Each firm was granted access
to key senior members of management in a structured programme following the workshop, and then given access to senior managers and finance staff throughout the Group to help them understand the business further.
 4. End June  Each firm submitted their
written tender document covering predetermined areas of focus, including risk

We chose KPMG to be our external auditors as we felt that they had demonstrated that they understood our business and risks well and could work
both constructively and in a challenging manner with our management and provide the Audit Committee with the assurances we would need to fulfil our role. 
The audit of the 2014 Annual Report and Accounts will therefore be the last external audit to be conducted by EY. I should therefore like to record my thanks to EY
and their partners and staff for their many years of excellent service to the shareholders of Smith & Nephew. As Chairman of the Audit Committee for the past five years, I have enjoyed working with them and have valued the insights and
professionalism they have brought to the Audit Committee meetings.  Risk Management and Internal Control On behalf of the Board, we reviewed the system of internal financial control and satisfied ourselves that we are meeting required standards both for the year ended
31 December 2014 and up to the date of approval of this Annual Report. No concerns were raised with us in 2014 about possible improprieties in matters of financial reporting. In coming to this conclusion:  
We received regular reports from the Internal Audit and Group Finance functions on their findings from the reviews undertaken throughout the year, both from an internal audit perspective and also with regard to
compliance with the Sarbanes-Oxley Act.
 
We requested and reviewed a report mapping Group level risks and related control assurance.  
We requested various reports from management relating to specific risks identified through the risk management process. Our Risk Management Framework is underpinned by Business and Functional Risk Registers that
highlight the risks identified and the probability and impact of risk to the Group, as well as mitigation plans. The most significant of these risks are considered by the Group Risk Committee for inclusion on a Group Risk Register. The effectiveness
of the framework is reviewed annually by Internal Audit and by the Audit Committee. In 2014, the Audit Committee concluded that the framework was effective.


LOGO




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CORPORATE GOVERNANCE

Accountabilitycontinued





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 Divisions. The
main elements of the internal control framework are:   The management of each Division is responsible for the establishment and review of effective financial controls within their Division.  The Group Finance manual sets out, amongst other things,
financial and accounting policies and minimum internal financial control standards.  The Internal Audit function agrees an annual work plan and scope of work with the Audit Committee.  The Audit Committee reviewed reports from Internal Audit
on their findings on internal financial controls.  The
Audit Committee reviews the Group whistle-blower procedures.  The Audit Committee reviews regular reports from the Senior Vice President, Group Finance and the heads of the Financial Controls and Compliance, Taxation and
Treasury functions.  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. The system of internal control is not applied to the entities in which the Group does not hold a controlling interest. This process
complies with the Financial Reporting Councils Internal Control: Revised Guidance for Directors on the Combined Code and additionally contributes to our compliance with the obligations under the Sarbanes-Oxley Act 2002 and other
internal assurance activities. Other than the integration of ArthroCare there has been no change in the Groups internal control over financial reporting 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 2014 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 Chief
Financial Officer have evaluated the effectiveness of the design and operation of the Groups disclosure controls and procedures as at 31 December 2014. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer
concluded on 23 February 2015 that the disclosure controls were effective as at 31 December 2014.  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 2014 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 2014, 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.  Ernst & Young LLP. An
independent registered public accounting firm issued an audit report on the Groups internal control over financial reporting as at 31 December 2014. This report appears on page 105.  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 2013 or up until 23 February 2015. 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 2014. The results of this
review are described on pages 66 to 67 of this Annual Report. Yours sincerely,  LOGO Ian Barlow Chairman of the
Audit Committee






80Smith & Nephew Annual report 2014



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CORPORATE GOVERNANCE

Remuneration report





Remuneration  Dear Shareholder, The Board focuses on the long-term future of the Company. We are delivering on our strategy to rebalance Smith & Nephew by strengthening our higher growth
platforms, which now represent more than half the business, up from just 35% in 2011. In 2014, we undertook a number of important actions to accelerate this transformation:  
We drove a much improved performance in US Hip and Knee Implants, and maintained our momentum in Sports Medicine Joint Repair and Trauma & Extremities.  
We strengthened our higher growth platforms, acquiring ArthroCare to give us a broader sports medicine portfolio.  
We created new growth platforms, the mid-tier portfolio for Emerging markets, and Syncera, as well as delivering double-digit growth from our recent acquisition Advanced Wound Bioactives. The role of the Remuneration Committee is to design a remuneration strategy that drives performance aligned to the strategic priorities. Our performance in 2014 reflected the choices we made to continue investing to transform Smith & Nephew and, as a result, the Group enters 2015 stronger,
more efficient, and set for higher growth. However, these choices did impact profit and cash performance in 2014 and consequently performance against the financial measures in the Annual Incentive Plan and the resulting payouts under this plan are
accordingly lower than in previous years. The Remuneration Committee recognises that the Executive Directors made the right decisions for the long-term future of the Company and for the benefit of shareholders, and performed well against their
business objectives. In devising our remuneration arrangements, we aim to have a clear line of sight between the performance of the Company and how our
Directors and senior executives are paid. We do this by setting the fixed elements of pay, notably base salary and benefits, in line with what our Executive Directors would be paid at another company of a comparable size, complexity and geographical
spread. For the variable elements of pay, we select performance measures that are linked to one or more of our Strategic Priorities as detailed on page 13 of the Annual Report. These performance measures are summarised on the following page.
 Our remuneration arrangements have essentially remained unchanged from last year and we will therefore not be asking
shareholders to vote on a new remuneration policy. We have however chosen to replicate the policy you approved last year following the annual report on remuneration for ease of reference. During the year, Richard De Schutter and Pamela Kirby ceased to be members of the Remuneration Committee on their retirement from the Board. We value the
contribution they each made to the work of the Committee during the years they served and thank them both for their work. We welcome the opportunity we have
had during the year to meet with our investors to discuss our remuneration arrangements and we thank the shareholders who met with us for their valuable contributions and insights into the way we think about remuneration. We were delighted to have
received the ICSA Excellence in Governance Award for Best Remuneration Report in FTSE 100 in 2014. Yours sincerely,  LOGO Joseph Papa Chairman of the
Remuneration Committee  LOGO


LOGO




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CORPORATE GOVERNANCE

Remuneration reportcontinued





|                                                   |  |                                                                                                                                                                                                                                                                                                                        
|-------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Measure in our Variable Pay
Plans                  |  | Link to Strategic Priorities                                                                                                                                                                                                                                                                                           
|Financial measures in Annual Incentive Plans      
|Revenue, Trading profit, Cash                      |  | We need to generate cash in our
Established Markets to be able to invest in Emerging & International Markets, innovation, organic growth and acquisitions in order to continue to grow in the future. Cash flow is therefore important and this in turn is derived from increased
revenues and healthy trading profits.
|Business objectives in Annual Incentive Plans     
|Business process                                   |  | We need to release resources from the
businesses through improved structures, efficiencies and business processes in order to re-invest in our higher growth areas, including Emerging & International Markets, innovation, organic growth and acquisitions.                                                           
|People                                             |  | We need to attract and retain the right
people to achieve our strategy through improving our operating model.                                                                                                                                                                                                          
|Customer                                           |  | Our mission is to deliver advanced
medical technologies that help healthcare professionals, our customers, improve the quality of life of their patients.                                                                                                                                                              
|Performance measures in our Performance Share Plan
|Free Cash flow                                     |  | Cash flow from our Established Markets
is necessary in order to fund growth in Emerging & International Markets, innovation, organic growth and acquisitions.                                                                                                                                                          
|Revenue in
Emerging &International markets         |  | Our long-term strategy depends on our
ability to grow in Emerging & International Markets.                                                                                                                                                                                                                             
|TSR                                                |  | If we execute our strategy
successfully, this will lead to an increased return for our shareholders.                                                                                                                                                                                                                   





| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | 
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| |  | Compliance statement
 We have prepared this Directors remuneration report (the Report) in
accordance with The Enterprise and Regulatory Reform Act 2012-2013 (clauses 81-84) and The Large and Medium-Sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (the Regulations). The Report also meets the
relevant requirements of the Financial Conduct Authority (FCA) Listing Rules.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | 
| |  | The first part of the Report (pages 83 to 93) is the annual report on remuneration (the Implementation Report). The
Implementation Report will be put to shareholders for approval as an advisory vote at the Annual General Meeting on 9 April 2015. The Implementation Report explains how the remuneration policy was implemented during 2014 and also how it is
currently being implemented in 2015. Pages 85, and 88 to 90 have been audited by Ernst & Young LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 
| |  | The second part of the Report (pages 94 to 102) is the Directors Remuneration Policy Report (the Policy Report) which was approved by shareholders at the Annual General
Meeting held in 2014. The Policy Report describes our remuneration policy as it relates to the Directors of the Company. All payments we make to any Director of the Company will be in accordance with this remuneration policy. We intend that this
remuneration policy will remain in place unchanged for at least the next two years and will next be put to shareholder vote at the Annual General Meeting to be held in 2017. We will bring the policy report back to shareholders earlier in the event
that we make any material change to the remuneration policy or shareholders do not approve the annual report on remuneration. The level of base salary and benefits paid and performance measures shown in the Policy Report are as at 2014, when the
Policy Report was approved by shareholders. Full details of any changes to these details since then, in accordance with the Policy Report are given in the Implementation Report. |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | 







82Smith & Nephew Annual report 2014



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##### Table of Contents







The Implementation Report  Remuneration Committee 
LOGO

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 Directors and Executive Officers at least
annually and any major changes to individual packages throughout the year  
  Consideration of remuneration policies and practices across the Group
  
  Approval of appropriate performance measures for short-term 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 oversees the use of shares in all executive
and all-employee plans.  Reporting and Engagement with shareholders on
Remuneration Matters 
 
  Approval of Directors remuneration report ensuring compliance with related governance
provisions   
  Continuance of constructive engagement on remuneration issues with shareholders.
 The terms of reference of the Remuneration Committee describe our role and responsibilities
more fully and can be found on our website at www.smith-nephew.comThe 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 as an advisory vote at the Annual General Meeting to be held on 9 April 2015.Current Members in 2014Joseph Papa

Committee ChairmanVirginia Bottomley

Independent Non-executive DirectorBrian Larcombe

Senior Independent Non-executive DirectorRoberto Quarta (from 10 April 2014)

Chairman of the Board1. Richard De Schutter left the Committee on 10 April
2014 on his retirement from the Board.2. Pamela Kirby left the Committee on 31 July 2014 on her
retirement from the Board.3. Vinita Bali will join the Committee on 1 April
2015.Key activities  Setting the remuneration policy and packages for Executive Directors and Executive Officers.  Approval of
all share plans operating throughout the Group.  2015
focus  Determination of payouts under cash incentive and
long-term incentive plans vesting in 2015.  Determine targets to apply to cash incentive and
share plan awards in 2015.  Review the overall structure of our remuneration
policies to ensure they still support our business strategy.


LOGO




Smith & Nephew Annual report
201483









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##### Table of Contents

CORPORATE GOVERNANCE

Remuneration reportcontinued





Activities of the Remuneration Committee in 2014 and since the year end

In 2014, we held four physical meetings and determined four matters by written resolution. Each meeting was attended by all members of the Committee. 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 some of the meetings, except when their own remuneration
was being discussed. We also met with the independent Remuneration Consultants, Towers Watson without management present. Our programme of work in 2014 was as follows:



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |          |                                                                                                                                                                                                         |                                                                                                                                                                           |  | 
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | -------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |          |                                                                                                                                                                                                         |                                                                                                                                                                           |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |         
| |  | Month                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | Activity |                                                                                                                                                                                                         |                                                                                                                                                                          
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |         
| |  | Early February                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |         |                                                                                                                                                                                                         | Noted the financial results for 2013 against the targets under the short-term and long-term incentive plans                                                               |  | 
| |  | (Approval of salaries, awards and
payouts in 2014)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |         |                                                                                                                                                                                                         | Agreed the targets for the short-term and long-term incentive plans for 2014, approving the third performance measure for the Performance Share Plan                      | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |          | Approved the quantum of cash payments to Executive Directors and Executive Officers under the Annual Incentive Plan and awards under the Equity Incentive Programme and the Performance Share
Programme |                                                                                                                                                                           | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |          | Approved the vesting of options and share awards granted in 2011 and reviewed the performance of long-term awards granted in 2012 and 2013                                                              |                                                                                                                                                                           | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |         |                                                                                                                                                                                                         | Reviewed benchmark data increases to salaries across the Group and approved salary increases for Executive Directors and Executive Officers with effect from 1 April 2014 |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |         |                                                                                                                                                                                                         | Approved the text of the Remuneration report                                                                                                                              |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |         |                                                                                                                                                                                                         | Reviewed and approved the business plan for the Remuneration Committee for 2014.                                                                                          |  | 
| |  | Late February                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |         |                                                                                                                                                                                                         | Approved the final targets for the
short-term and long-term incentive plans for 2014                                                                                      |  | 
| |  | (by telephone) (Final approval of
Remuneration report)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |         |                                                                                                                                                                                                         | Approved the final text of the Remuneration report.                                                                                                                       |  | 
| |  | Late
July (Mid-year Review of Remuneration
Arrangements)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |         |                                                                                                                                                                                                         | Reviewed the shareholder response and
support for the Remuneration Policy and Report at the Annual General Meeting                                                        |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |          | Reviewed adherence to shareholding guidelines by Executive Directors, Executive Officers and Senior Executives                                                                                          |                                                                                                                                                                          
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |          | Monitored dilution limits and the number of shares available for use in respect of executive and all-employee share plans                                                                               |                                                                                                                                                                           | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |          | Approved the schedule of share awards made since the previous meeting                                                                                                                                   |                                                                                                                                                                           | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |          | Approved minor changes to the rules of various share plans in line with local legislative changes                                                                                                       |                                                                                                                                                                           | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |          | Reviewed the performance of long-term awards granted in 2012, 2013 and 2014.                                                                                                                            |                                                                                                                                                                           | 
| |  | December
(Review of
Remuneration Strategy)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |         |                                                                                                                                                                                                         | Received a report from the Chairman of
the Remuneration Committee on recent engagement with shareholders                                                                  |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |          | Approved the Remuneration Strategy for 2015                                                                                                                                                             |                                                                                                                                                                           | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |          | Considered the first draft of the Remuneration report for 2014                                                                                                                                          |                                                                                                                                                                           | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |          | Reviewed and considered the principles for determining payouts under the short-term and long-term plans due to vest in 2015                                                                             |                                                                                                                                                                           | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |          | Approved the schedule of share awards made since the previous meeting.                                                                                                                                  |                                                                                                                                                                           | 
| |  | Four written resolutions were approved
during the year relating to the approval of two leaver and two recruitment arrangements for Executive Officers. 
Since the year end, we have also reviewed the financial results for 2014 against the targets under the short-term and long-term incentive arrangements jointly with
the Audit Committee, and have agreed the targets for the short-term and long-term incentive plans for 2015. 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 2012. Finally, we approved the wording of this Directors remuneration
report.  During the year, the Remuneration Committee received information and advice from
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 and in determining the third performance measure for the Performance Share Programme. The fees paid to Towers Watson for Remuneration Committee advice during 2014,
charged on a time and expense basis was £39,745 in total. Towers Watson also provided other human resources and compensation advice to the Company for the level below the Board. 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 their advice is objective and independent. |   |         











84Smith & Nephew Annual report 2014



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##### Table of Contents





Single total figure on remuneration  Executive Directors  Annual





Other items in the natureFixed pay

variable pay

Hybrid

Long-term variable
pay

of remunerationPayment



Annual

Annual





All-in lieu

Taxable

Incentive

Incentive

Performance

Share

Employee

One-OffDirector

Base salary

of pension

benefits

Plan  cash

Plan  equity

Share Plan

Option Plan

Share Plans

Awards

TotalOlivier BohuonAppointed 1 April 20112014

$1,464,515

$439,354

$286,341

$952,318

$811,006

$2,641,455







$6,594,9892013

$1,425,559

$427,668

$112,637

$1,793,584

$933,410

0

0





$4,692,858Julie BrownAppointed 4 February 20132014

$840,487

$252,146

$38,494

$470,373

$465,437









$2,066,9382013

$708,450

$212,536

$22,510

$858,978

$390,800





$5,684

$838,266

$3,037,224 These figures have been calculated as follows: Base salary: the actual salary receivable for the year. Payment in lieu of pension: the value of the salary supplement paid by the Company in lieu of a pension. Benefits: the gross value of all taxable benefits (or benefits that would be taxable in the UK) received in the year. Prior years are restated to reflect
amounts not known at the date of signing the previous annual report. Annual Incentive Plan  cash:the value of the cash incentive payable for
performance in respect of the relevant financial year. Annual Incentive Plan  equity:the value of the equity element awarded in respect of
performance in the relevant financial year, but subject to an ongoing performance test as described on pages 87 and 88 of this report. Performance Share
Plan: the value of shares vesting that were subject to performance over the three-year period ending on 31 December in the relevant financial year, based on an estimated share price of 1,053 pence per share, which was the average price of a
share over the last quarter of 2014. Share Option Plan: the embedded gain of options vesting that were subject to performance over the three-year
period ending on 31 December in the relevant financial year. All-Employee Share Plans: the gain on the date of grant for SAYE awards (these are
only subject to an employment condition and therefore the total value is captured in the year of grant), reflecting the 20% discount at which options are granted in the relevant financial year. One-off awards: the total face value of shares awarded to Julie Brown on appointment in 2013 as described on page 89 of this report (these awards are only
subject to an employment condition and therefore the total value is captured in the year of award). Total: the sum of the above elements. The amounts for 2014 have been converted into US$ for ease of comparability using the exchange rates of £ to US$1.6464 and  to US$1.3263, and for the prior years using exchange rates disclosed in previous years accounts.  Base salary With effect from 1 April in each year, Executive Directors were paid the following base salaries:  2013


2014Olivier Bohuon


1,081,500



1,111,782Julie Brown


£500,000



£514,000 In February 2015, 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%. The Remuneration Committee has therefore agreed that the Executive Directors base salaries will increase by 3% with effect from 1 April 2015 to the following:  Olivier Bohuon


1,145,135Julie Brown


£529,420 Payment in lieu of pension In 2014, 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 2015.
 Benefits In 2014, 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. Oliver Bohuon also received assistance with travel costs between
London and Paris. The same arrangements will apply in 2015. The following table summarises the value of benefits on an element-by-element basis in respect of 2013 and 2014.  Olivier Bohuon

Julie Brown2013

2014

2013

2014Health Cover

£12,088

£20,642

£1,130

£1,144Car and fuel allowance

18,050

18,751

£13,270

£14,640Financial

£4,893

£24,053consultancy advice(ii)

19,816

101,926

£0

£7,597Travel costs

£19,407

£28,537

£0

£0Subscriptions

£3,504 (i)

£3,473

£0

£0  (i)
Previous years are restated to reflect amounts not known at the date of signing of the previous Annual Report. (ii)
The level of financial consultancy advice fees for Olivier Bohuon in 2014 reflects that he is a French national working in a global role of a company headquartered in
the UK.


LOGO




Smith & Nephew Annual report
201485









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##### Table of Contents

CORPORATE GOVERNANCE

Remuneration reportcontinued





Annual Incentive Plan During 2014, the Annual Incentive Plan for Executive Directors was based on the achievement of specific financial and business objectives as follows:  Financial objectives






70%Revenue 30%Trading profit 30%Trading cash 10%Business objectives






30%Re-investment and
Group Optimisation


Olivier Bohuon5%



Julie Brown10%Olivier Bohuon



Julie BrownBusinessPeopleCustomer


25%



20% The Board have considered whether it would be in the best interests of the Company and its shareholders to disclose the precise
targets agreed for each of the performance measures in 2014. The targets for each year are set within the context of the Groups five-year plan, which is updated at least annually. If we were to disclose the precise targets for one year of the
plan, this would give information to our competitors about our long-term plans, which they could use to compete against us, for example by re-timing the launch of new products or extension into new growth areas. This could be detrimental to our
commercial performance both in 2015 and going forward. The Board has concluded that even though the actual results for 2014 are known and published, it would be commercially sensitive to disclose what the precise targets determined at the beginning
of 2014 were. At present, the Board would not be in a position to declare these targets at a later date, but will keep this under review. In early 2015, the
Remuneration Committee conducted an assessment of the Executive Directors against their 2014 financial and business objectives. In doing so the Remuneration Committee focused on the need to balance short-term growth whilst building the platform to
deliver sustainable strong performance and greater shareholder value over the medium-term. In summary, the performance of the Executive Directors against the
targets set for 2014 was as follows:  Belowthreshold



Betweentarget andthreshold



Betweentargetandmaximum



AbovemaximumRevenue (30%)






XTrading profit (30%)


XTrading cash (10%)


XBusiness
objectives (30%)Olivier Bohuon










XBusiness
objectives (30%)Julie Brown










XMultiplier (+/- 10%)


The Remuneration Committee agreed not to applythe multiplier to the annual incentive assessment
inrespect of 2014.Olivier BohuonMultiplier (+/- 10%)Julie Brown Financial Objectives Over the period,
revenue was $4,617 million, trading profit was $1,055 million and trading cash flow $781 million. When set against the financial objectives for 2014, revenue performance was between target


and threshold, while trading profit and trading cash performance was below threshold. The Committee
believes, whilst some of the underperformance on trading profit and cash is attributable to the RENASYS hold in the US, the financial outturn partly reflects the impact of important strategic decisions to invest more in the business during 2014 to
deliver longer-term, sustainable value. Decisions to invest in R&D, Emerging & International Markets, the sales force, particularly in wound, and new, disruptive business models in 2014 all impacted profitability for the year, but
strengthened the platform for future growth. Trading cash flow was impacted as we made significant investment in instrument sets to support growth rebuilt our wound safety stock following flooding in our Hull, UK factory and increased the holdings
of Advanced Wound Bioactives products to meet anticipated demand. Business Objectives Under Oliviers strong leadership, and consistent with the strategic plan he initiated in 2011, the Group made significant progress in 2014. Olivier is delivering on his strategy to rebalance Smith & Nephew by strengthening our higher growth platforms, which currently represent more than half
the business, up from just 35% three years ago. Advanced Wound Bioactives delivered strong double-digit growth, Sports Medicine Joint Repair performed well, Trauma & Extremities made good progress, and the Emerging & International
Markets business increased underlying revenue by 17%. He also oversaw a successful turnaround in US Orthopeadic Reconstruction and addressed issues in Europe and AWM where we faced headwinds. In addition to maintaining an increased level of investment in R&D and supporting new products, he introduced new, disruptive commercial models in orthopaedic
reconstruction and the Emerging & International Markets to position Smith & Nephew to fulfil the unmet needs of customers. Finally, he
continues to deliver on our strategic priority to supplement organic growth through acquisition. He led the acquisition of ArthroCare Corporation for $1.7 billion, Smith & Nephews largest deal to date. This has strengthened our Sports
Medicine business and we will use our global presence to drive substantial new growth. He also oversaw the integration of our recent Emerging & International Markets acquisitions. The Remuneration Committee has therefore determined that Olivier performed between target and maximum in 2014 with regard to his business objectives. Under Julies stewardship we continued our disciplined approach to finance, applying our cash allocation framework, managing trading cash effectively to
support investments and initiating a major Group optimisation programme. Led by Julie, this will realise at least $120 million of annual savings. This is progressing as planned, with early results including rationalising our global property
portfolio and making major savings through better procurement processes. She led a successful private placement and has overseen an improvement in our corporate tax rate with further progress expected. She is leading a finance transformation project, establishing new transactional systems across Europe and new Business Information tools, which is improving
visibility and consistency of financial information in the business. The Remuneration Committee has therefore determined that Julie performed between target
and maximum in 2014 with regard to her business objectives. It is not appropriate to disclose the precise personal targets set as a number of the measurements
continue to apply into 2015 and would be commercially sensitive if known by our competitors. At present, the Board would not be in a position to declare these targets at a later date, but will keep this under review. The Remuneration Committee did
highlight a number of their achievements as follows:






86Smith & Nephew Annual report 2014



---

##### Table of Contents





Commentary on 2014 performance  Reinvestment and Group OptimisationOlivier Bohuon Increased business agility and
efficiency, he has delivered annualised savings of $146 million for reinvestment in higher-growth platforms, including Emerging & International Markets. Ensured higher investment levels maintained in R&D and strong pipeline of new products
including expanding JOURNEY II knee system and new Sports Medicine and Trauma & Extremities systems. Initiated Group optimisation programme to achieve further savings, including optimising locations.

Julie Brown Leading implementation of new Group
optimisation programme to achieve $120 million of annual savings, with programme on plan at year-end. Oversaw tax improvement with 220bps reduction in full-year effective rate achieved since the end of 2012 and further progress
expected.Business objectivesOlivier Bohuon Completed $1.7 billion
acquisition of ArthroCare Corporation, strengthening our Sports Medicine business with technology and products and strategy to drive substantial new growth through our global platform. Implemented leaner corporate structure, including one managing
director across markets outside of the US, to enable better focus on the customer.

Julie Brown Maintained rigorous oversight of
investment performance across recent acquisitions including Advanced Wound Bioactives business acquired at the end of 2012, which delivered 15% growth in 2014 and Emerging & International Markets acquisitions in Brazil, Turkey and India, and the
acquisition of ArthroCare.PeopleOlivier Bohuon Employee engagement surveys
demonstrated significant improvements in Strategic Direction, Empowerment, Cross-business Coordination and Customer Focus across the Group. Achieved first Great Place to Work accreditation.

Julie Brown Delivered structural and cultural
transformation programme across finance function, and improved quality of management information to support decision making across the Group.CustomerOlivier Bohuon
Delivered new business models to meet the unmet needs of the customer including Syncera, a new commercial solution for Orthopaedic Reconstruction, and a mid-tier
organisation for the Emerging & International Markets. These challenge the status quo, widening access to market and giving customers new economic options as they seek to improve the quality of life for their patients. Set the tone from the
top and ensured strong ethics and compliance performance across the Group.

Julie Brown
Represented the Group with investors and financial analysts, gaining strongly positive feedback. Hosted CFO roundtable events in New York City, and presented at
investor and other high-profile conferences. Introduced new financial disciplines with the development of group-wide Minimum Acceptable Practices. Refinanced the Company through US Private Placement, term loans and revolving credit
facility.
 The Remuneration Committee also considered whether to apply the multiplier to the annual incentive assessment of
Olivier Bohuon and Julie Brown and agreed that no multiplier was appropriate in respect of 2014. In summary, as a result of the performance described above,
the Remuneration Committee determined that the following awards be made under the Annual Incentive Plan in respect of performance in 2014:  Executive Director

Cash Component


Equity Component% of salary


Amount


% of salary


AmountOlivier Bohuon


65



718,026



55



611,480Julie Brown


56



£285,698



55



£282,700 As a result of the 2014 performance assessment for both Olivier Bohuon and Julie Brown, the first tranche of the Equity Incentive
Award made in 2014, the second tranche of the Equity Incentive Award made in 2013 and the third tranche of the Equity Incentive Award made in 2012 (to Olivier Bohuon only) will vest. Annual Incentive Plan 2015 The
Remuneration Committee has also reviewed the Annual Incentive Plan arrangements for 2015 and has determined that the following performance measures and weightings will apply to the financial and business objectives in 2015:  Financial objectives


70%Revenue 30%Trading profit 30%Trading cash 10%Business objectives


30%Business processPeopleCustomer The Board has determined that the disclosure of performance targets at this time is commercially sensitive. As explained on page
96, 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. At present, the Board would not be in a position to declare these targets at a later date, but will keep this under review. For
the financial performance measures, Target is set at target performance as approved by the Board in the Budget for 2015. Threshold and Maximum are set at +/3% from the target for revenue and trading profit
measures and at +/10% for the cash flow measure. Details of awards made under the Equity incentive Programme 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 in 2014 are shown below. The performance conditions and performance periods applying to these awards are detailed above.  Date granted

Number of shares
under award

Date vestingOlivier Bohuon1/3 on 7 March 20151/3 on 7 March 20167 March 2014

61,683 ordinary shares

1/3 on 7 March 2017Julie Brown1/3 on 7 March 20151/3 on 7 March 20167 March 2014

26,497 ordinary shares

1/3 on 7 March 2017


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CORPORATE GOVERNANCE

Remuneration reportcontinued





The precise awards granted in 2015 in respect of service in 2014 will be announced when the awards are made and will
be disclosed in the 2015 Annual Report. Performance Share Programme  grants Performance share awards in 2014 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 financial years beginning in 2014 and will vest subject to performance and continued employment in 2017. 50% of the award will vest subject to free cash flow performance, 25% to revenue in
Emerging & International Markets and 25% to TSR. Free cash flow is defined as net cash inflow from operating activities, less capital expenditure.
Free cash flow is the most appropriate measure of 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 of operational financial performance and helps to align Executive Director awards with shareholder value creation. The 50% of the award
that will be subject to free cash flow performance will vest as follows:  Cumulative free cash flow

Award vesting as % of salaryBelow $1.64bn

Nil$1.64bn

23.75%$1.88bn

47.5%$2.12bn or more

95% Awards will vest on a straight-line basis between these points. Revenue in Emerging & International Markets is defined as cumulative revenue over a three-year period opening 1 January 2014 from our
Emerging & International Markets. The 25% of the award that will be subject to revenue in Emerging & International Market performance will vest as follows:  Revenue in Emerging &
International Markets

Award vesting as % of salaryBelow Threshold

NilThreshold

11.875%Target

23.75%Maximum or above

47.5% It is not possible to disclose precise targets for revenue growth in Emerging & International Markets as this will give
commercially sensitive information to our competitors concerning our growth plans in Emerging & International Markets, which they could use against us to launch new products and enter new markets. This would be detrimental to our business
in Emerging & International Markets, which are key to our success overall. Target is set at target cumulative revenues from Emerging & International Markets in the corporate plan approved by the Board for the three
years commencing 1 January 2014. Threshold and Maximum are set at +/ 15% from target. At present, the Board would not be in a position to declare these targets at a later date, but will keep this under review. 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 2014 as follows:  Relative TSR ranking

Award vesting as % of salaryBelow median

NilMedian

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 2014 awards comprises of the following companies: Baxter, Becton Dickinson,
Boston Scientific, CR Bard, Coloplast, Conmed, Covidien, Edwards life Sciences, Medtronic, Nobel Biocare, Nuvasive, Orthofix, Stryker, St Jude Medical, Wright Medical and Zimmer. The Groups TSR performance and its performance relative to the comparator group is independently monitored and reported to the remuneration Committee by
Towers Watson. TSR is calculated in common currency using a three-month averaging period at the start and end of the performance period. The Company has established protocols for dealing with companies that cease to be listed or merger and
acquisition activity within the peer group. Performance Share Programme 2015 Performance share awards will be made in 2015 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 financial years commencing 1 January 2015 and will vest subject to performance and continued employment in 2018. Vesting will be subject to the same three performance measures as applies
to the awards made in 2014 using the same definitions and same comparator group. 50% of the award will vest subject to free cash flow performance, 25% to revenue in Emerging & International Markets and 25% to TSR. The 50% of the award that will be subject to free cash flow performance will vest as follows:  Cumulative free cash flow

Award vesting as % of salaryBelow $1.58bn

Nil$1.58bn

23.75%$1.81bn

47.5%$2.05bn or more

95% The free cash flow performance measure target for 2015 is lower than the same target in 2014, primarily due to exchange rate
movement, as well as the continued impact of the RENASYS hold in the US and restructuring charges associated with the Group Optimisation Plan, both of which were not factored in when setting the prior year target. Vesting of Awards made in 2012 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 2012. Vesting of the conditional awards made in 2012 was subject to performance conditions
based on TSR and cumulative free cash flow measured over a three-year period commencing 1 January 2012. 50% of the award was based on the Companys
TSR performance relative to a bespoke peer group of companies in the medical devices sector. Over the three-year period ending 31 December 2014, the Company was ranked 7th out of 17 companies in the comparator group. This part of the award
therefore vested at 58.5%. 50% of the award was based on free cash-flow performance. Over the same three-year period, the adjusted cumulative cash free
cash-flow was $1.642 billion. These adjustments include items such as Board approved M&A including the acquisition of Healthpoint and ArthroCare but do not include items such as the proceeds of the sale of the Gilberdyke business or the
repayment of the Bioventus loan which are excluded from free cash. This part of the award therefore vested at 55.5%. Overall therefore, the conditional awards
made in 2012 will vest at 57% on 8 March 2015 as follows:  Director

Date of grant

Number of sharesunder award

Number vestingOlivier Bohuon

8 March 2012

267,304

152,363






|                                    
|------------------------------------
|88 Smith & Nephew Annual report 2014



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##### Table of Contents





Summary of scheme interests awarded during the financial year  Olivier Bohuon

Julie BrownBasis on which award is made

Number of shares

Face value

Number of shares

Face valueAnnual Equity Incentive Award (see page 86)61,683

702,975

26,497

£250,000Performance Share Award (see page 88)190% base salary at maximum

180,304

2,054,850

100,688

£950,00095% base salary at target

90,152

1,027,425

50,344

£475,000 Please see Policy Table on pages 96 to 97 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 2014 was 943.5 pence. Details of awards made under the
Performance Share Programme Details of conditional awards over shares granted to Executive Directors subject to performance conditions are shown below. These
awards were granted under the Global Share Plan 2010. The performance conditions and performance periods applying to these awards are detailed on pages 96 to 97.  Date granted

Number of ordinary shares under award

Date of vestingOlivier Bohuon

8 March 2012(i)

267,304

8 March 20157 March 2013

240,928

7 March 20167 March 2014

180,304

7 March 2017Julie Brown

7 March 2013

132,866

7 March 20167 March 2014

100,688

7 March 2017 (i) On 3 February 2015, 43% of the award granted to Olivier Bohuon lapsed following completion of the performance period. 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 price1 November 2018 toJulie Brown

17 September 2013

2,400 ordinary shares

1 November 2018

30 April 2019

£6.25 Details of one-off awards Details of the award granted to Julie Brown on joining the Company to compensate her for shares forfeited on leaving her former company are shown below. This award
was made under Listing Rule 9. There are no performance conditions attaching to these shares other than continued service.  Director

Date granted

Number of shares under award

Date of vestingJulie Brown

7 March 2013

25,000 ordinary shares

4 February 2016 Single total figure on remuneration  Chairman and Non-executive Directors  Director

Basic annual fee(i)

Senior Independent Director/
Committee fee

Intercontinental travel fee

Total2013

2014

2013

2014

2013

2014

2013

2014Roberto Quarta(ii)

£4,846

£334,673

N/A

N/A

£0

£7,000

£4,846

£341,673Vinita Bali(iii)

N/A

£5,250

N/A

N/A

N/A

£3,500

N/A

£8,750Ian Barlow

£66,150

£66,150

£15,000

£15,000

£7,000

£7,000

£88,150

£88,150Virginia Bottomley

£66,150

£66,150

N/A

N/A

£7,000

£7,000

£73,150

£73,150Sir John Buchanan(iv)

£420,000

£112,307

N/A

N/A

N/A

N/A

£420,000

£112,307Michael Friedman

$126,000

$126,000

N/A

$11,250

$28,000

$35,000

$154,000

$172,250Pamela Kirby(v)

£66,150

£36,750

£15,000

£8,750

£7,000

N/A

£88,150

£45,500Brian Larcombe

£66,150

£66,150

N/A

£10,865

£7,000

£7,000

£73,150

£84,015Joseph Papa

$126,000

$126,000

$27,000

$27,000

$28,000

$35,000

$181,000

$188,000Ajay Piramal(vi)

£66,150

£10,500

N/A

N/A

£10,500

N/A

£76,650

£10,500Richard De Schutter(vii)

$126,000

$33,692

$27,000

$7,580

$35,000

$14,000

$188,000

$55,273  (i)
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 on the table on page 101. (ii)
Appointed to the Board on 4 December 2013 and as Chairman of the Company on 10 April 2014.  (iii) Appointed to the Board on 1 December 2014.  (iv) Retired from the Board on 10 April 2014. (v)
Retired from the Board on 31 July 2014  (vi) Retired from the Board on 24 March 2014  (vii) Retired from the Board on 10 April 2014  (vi) Erik Engstrom is not included in the table because
he joined the Board on 1 January 2015.


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CORPORATE GOVERNANCE

Remuneration reportcontinued





Chief Executive Officers remuneration compared to employees generally

The percentage change in the remuneration of the Chief Executive Officer between 2013 and 2014 compared to that of employees generally is as follows:



| |  |                           |  |  |               |  |  |  |               |  |  |  |                   |  |  | 
| |  | ------------------------- |  |  | ------------- |  |  |  | ------------- |  |  |  | ----------------- |  |  | 
| |  |                           |  |  |               |  |  |  |               |  |  |  |                   |  |  | 
| |  |                           |  |  | Base salary   |  |  |  | Benefits      |  |  |  | Annual cash bonus |  |  | 
| |  |                           |  |  | % change 2014 |  |  |  | % change 2014 |  |  |  | % change 2014     |  |  | 
| |  | Chief Executive Officer   |  |  | 3.0           |  |  |  | 154.0         |  |  |  | -46.9             |  |  | 
| |  | Average for all employees |  |  | 3.0           |  |  |  | N/A           |  |  |  |                  |  |  | 



|(i) | The average cost of wages and salaries for employees generally increased by 1.57% in 2014 (see Notes 2.4 and 3.1 of the Notes 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.

Payments for loss of office

No payments were made in respect of a Directors loss of office in 2014.

Outside Directorships

Olivier Bohuon is a
Non-executive Director of Virbac SA and received 21,000 in respect of this appointment in 2014.

Directors interests in ordinary shares

Beneficial interests of
the Executive Directors in the ordinary shares of the Company are as follows:



|                             |  |  |                |  |                |  |                  |  |  |  |                  |       |  |             |                |  |  |  |                  |  |  |  |                  |     
|---------------------------- |  |  | -------------- |  | -------------- |  | ---------------- |  |  |  | ---------------- | ----- |  | ----------- | -------------- |  |  |  | ---------------- |  |  |  | ---------------- | ----
|                             |  |  |                |  | Olivier Bohuon |  |                  |  |  |  |                  |       |  | Julie Brown |                |  |  | 
|                             |  |  |                |  |                |  |                  | 
|                             |  |  | 1 January 2014 |  |                |  | 31 December 2014 |  |  |  | 23 February 2015 | (i)   |  |             | 1 January 2014 |  |  |  | 31 December 2014 |  |  |  | 23 February 2015 | (i) 
|Ordinary shares              |  |  | 111,238        |  |                |  | 210,974          |  |  |  | 210,974          | (iii) |  |             | 0              |  |  |  | 25,000           |  |  |  | 38,211           | (iv)
|Share options                |  |  | 151,698        |  |                |  | 0                |  |  |  | 0                |       |  |             | 2,400          |  |  |  | 2,400            |  |  |  | 2,400            | (v) 
|Performance share awards(ii) |  |  | 735,779        |  |                |  | 688,536          |  |  |  | 573,595          |       |  |             | 132,886        |  |  |  | 233,554          |  |  |  | 233,554          |     
|Equity Incentive awards      |  |  | 143,387        |  |                |  | 147,114          |  |  |  | 147,114          |       |  |             | 0              |  |  |  | 26,497           |  |  |  | 26,497           |     
|Other awards                 |  |  | 66,666         |  |                |  | 0                |  |  |  | 0                |       |  |             | 75,000         |  |  |  | 50,000           |  |  |  | 25,000           |     



|(i) | The latest practicable date for this Annual Report.
|--- | ---------------------------------------------------

|(ii) | These share awards are subject to further performance conditions before they may vest, as detailed on pages 96 to 97.
|---- | ---------------------------------------------------------------------------------------------------------------------

|(iii) | The ordinary shares held by Olivier Bohuon on 23 February 2015 represent 304.9% of his base annual salary.
|----- | ----------------------------------------------------------------------------------------------------------

|(iv) | The ordinary shares held by Julie Brown on 23 February 2015 represent 87.8% of her base annual salary.
|---- | ------------------------------------------------------------------------------------------------------

|(v) | This option was granted under the Smith & Nephew ShareSave Plan (2012).
|--- | -----------------------------------------------------------------------

The beneficial interest of each
Executive Director is less that 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.

Beneficial interests of the Chairman and Non-executive Directors in the ordinary shares of the Company are as follows:



|                      |  |  |                                                 |  |  |  |                                               |  |  |  |                     |  |  |  |                                     | 
|--------------------- |  |  | ----------------------------------------------- |  |  |  | --------------------------------------------- |  |  |  | ------------------- |  |  |  | ----------------------------------- | 
|Director              |  |  | 1 January 2014 (or date ofappointment) if later |  |  |  | 31 December (or date ofretirement if earlier) |  |  |  | 23 February 2015(i) |  |  |  | Shareholding as % ofannual 
fee(ii) | 
|Roberto Quarta        |  |  | 0                                               |  |  |  | 15,136                                        |  |  |  | 15,136              |  |  |  | 44.7%                               | 
|Vinita Bali           |  |  | 0                                               |  |  |  | 0                                             |  |  |  | 0                   |  |  |  | 0%                                  | 
|Ian Barlow            |  |  | 18,232                                          |  |  |  | 18,403                                        |  |  |  | 18,403              |  |  |  | 328.6%                              | 
|Virginia Bottomley    |  |  | 17,820                                          |  |  |  | 18,056                                        |  |  |  | 18,056              |  |  |  | 322.4%                              | 
|Sir John Buchanan     |  |  | 166,337                                         |  |  |  | 166,337                                       |  |  |  |                    |  |  |  |                                    | 
|Erik Engstrom         |  |  | N/A                                             |  |  |  | 15,000                                        |  |  |  | 15,000              |  |  |  | 267.8%                              | 
|Michael Friedman(iii) |  |  | 8,624                                           |  |  |  | 8,822                                         |  |  |  | 8,822               |  |  |  | 127.7%                              | 
|Pamela Kirby          |  |  | 15,232                                          |  |  |  | 15,232                                        |  |  |  |                    |  |  |  |                                    | 
|Brian Larcombe        |  |  | 40,212                                          |  |  |  | 40,368                                        |  |  |  | 40,368              |  |  |  | 720.7%                              | 
|Joseph Papa(iii)      |  |  | 12,799                                          |  |  |  | 12,997                                        |  |  |  | 12,997              |  |  |  | 188.2%                              | 
|Ajay Piramal          |  |  | 240                                             |  |  |  | 240                                           |  |  |  |                    |  |  |  |                                    | 
|Richard De Schutter   |  |  | 220,299                                         |  |  |  | 220,299                                       |  |  |  |                    |  |  |  |                                    | 



|(i) | The latest practicable date for this Annual Report.
|--- | ---------------------------------------------------

|(ii) | Calculated using the closing share price of 1,181p per ordinary share and $36.49 per ADS on 23 February 2015, and an exchange rate of £1/$1.5449.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------

|(iii) | 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 that 1% of the ordinary share capital of the Company.



90Smith & Nephew Annual report 2014



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Relative importance of spend on pay The following table sets out the total amounts spent in 2014 and 2013 on remuneration, the attributable profit for each year and the dividends declared and paid in
each year.  For the year to 31 December 2014

For the year to 31 December 2013

% changeAttributable profit for the year

$501m

$556m

-9.89%Dividends paid during the year

$250m

$239m

4.60%Share buyback(i)

$75m

$226m

-66.81%Total Group spend on remuneration

$1,237m

$998m

23.95%  (i)
Share buy-back programme ceased during 2014 following the acquisition of ArthroCare. Shares are bought in the market in respect of shares issued as part of the executive and employee share plans. See note 19.2 on page 154 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. Six Year Total Shareholder Return (measured in UK sterling, based on monthly spot values)  LOGO However, as we compare the Companys performance to a tailored sector peer group of medical devices companies (see page 88,
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. Six Year Total Shareholder Return (measured in US dollars, based on monthly spot values)  LOGO


LOGO




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CORPORATE GOVERNANCE

Remuneration reportcontinued





Table of historic data

The following table details information about the pay of the Chief Executive Officer in the previous five years:



|                                                              |  |  |                         |           |  |  |                                                |      |  |  |                                              |  |  |  |                      |  |  |  |           | 
|------------------------------------------------------------- |  |  | ----------------------- | --------- |  |  | ---------------------------------------------- | ---- |  |  | -------------------------------------------- |  |  |  | -------------------- |  |  |  | --------- | 
|Long-term incentive
vesting rates against maximum opportunity | 
|Year                                                          |  |  | Chief Executive Officer |           |  |  | Single figure
of            total remuneration |      |  |  | Annual Cash Incentivepayout against maximum% |  |  |  | Performance shares % |  |  |  | Options % | 
|2014                                                          |  |  | Olivier Bohuon          |           |  |  | $6,594,989                                     |      |  |  | 65                                           |  |  |  | 57                   |  |  |  | N/A       | 
|2013                                                          |  |  | Olivier Bohuon          |           |  |  | $4,692,858                                     | (iv) |  |  | 84                                           |  |  |  | N/A                  |  |  |  | N/A       | 
|2012                                                          |  |  | Olivier Bohuon          |           |  |  | $4,956,771                                     |      |  |  | 84                                           |  |  |  | N/A                  |  |  |  | N/A       | 
|2011                                                          |  |  | Olivier Bohuon          | (i),(iii) |  |  | $7,442,191                                     |      |  |  | 68                                           |  |  |  | N/A                  |  |  |  | N/A       | 
|2011                                                          |  |  | David Illingworth       | (ii)      |  |  | $3,595,787                                     |      |  |  | 37                                           |  |  |  | 27                   |  |  |  | 27        | 
|2010                                                          |  |  | David Illingworth       |           |  |  | $4,060,707                                     |      |  |  | 57                                           |  |  |  | 70                   |  |  |  | 61        | 
|2009                                                          |  |  | David Illingworth       |           |  |  | $4,406,485                                     |      |  |  | 59                                           |  |  |  | 46                   |  |  |  | 59        | 



|(i) | Appointed Chief Executive Officer on 1 April 2011
|--- | -------------------------------------------------

|(ii) | Resigned as Chief Executive Officer on 1 April 2011
|---- | ---------------------------------------------------

|(iii) | 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
|----- | --------------------------------------------------------------------------------------------------------------------------------

|(iv) | Prior years are restated to reflect amounts not known at the date of signing the previous annual report.
|---- | --------------------------------------------------------------------------------------------------------

Implementation of remuneration policy in 2015

The Remuneration Committee proposes to make no changes to the way that the remuneration
policy is implemented in 2015 from how it was implemented in 2014, other than increasing base salaries in line with salary increases across the Group, as explained on page 85 and setting new targets for the Annual Incentive Plan and the Performance
Share Programme, as explained on page 88.



Statement of voting at
Annual General Meeting held in 2014

At the Annual General Meeting held on 10 April 2014, votes cast by proxy and at the meeting and votes
with-held in respect of the two votes on the Directors Remuneration Policy and the Directors remuneration report were as follows:



|                                           |  |  |             |  |  |  |        |  |  |  |               |  |  |  |           |  |  |  |                          |  |  |  |                | 
|------------------------------------------ |  |  | ----------- |  |  |  | ------ |  |  |  | ------------- |  |  |  | --------- |  |  |  | ------------------------ |  |  |  | -------------- | 
|Resolution                                 |  |  | Votes for   |  |  |  | % for  |  |  |  | Votes against |  |  |  | % against |  |  |  | Total votes validly cast |  |  |  | Votes withheld | 
|Approval of Directors Remuneration Policy |  |  | 586,941,104 |  |  |  | 93.50% |  |  |  | 40,818,512    |  |  |  | 6.50%     |  |  |  | 627,759,616              |  |  |  | 1,990,842      | 
|Approval of Directors remuneration report |  |  | 615,870,158 |  |  |  | 97.97% |  |  |  | 12,774,146    |  |  |  | 2.03%     |  |  |  | 628,644,304              |  |  |  | 1,106,154      | 

Joseph Papa, Chairman of the Remuneration Committee has met with a number of shareholders in previous years to discuss remuneration
matters and met and held calls with the holders of around 28% of the shares in 2013. In 2014, he offered again to meet with shareholders to discuss remuneration matters. Very few shareholders accepted his invitation to meet, acknowledging that
shareholders were broadly happy with our remuneration arrangements and had no concerns that they wished to discuss. He did however meet with shareholders holding around 2% of the share capital, who also indicated their broad support for our
remuneration arrangements. Joseph Papa is always happy to meet and talk to shareholders who wish to discuss remuneration matters with him.







92Smith & Nephew Annual report 2014



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Other remuneration matters Senior Management remuneration The Groups administrative,
supervisory and management body (the 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 54 to 59. Compensation paid to Senior Management in respect of 2014, 2013 and 2012 was as follows:  2012



2013



2014Total compensation (excluding pension emoluments, but including cash payments under the performance-related incentive plans)


$15,249,000



$14,186,000



$12,725,000Total compensation for loss of office


$0



$0



$2,664,000Aggregate increase in accrued pension scheme benefits


$229,000



$257,000



$16,000Aggregate amounts provided for under supplementary schemes


$537,000



$414,000



$507,000 As at 23 February 2015, the Senior Management owned 376,202 shares and 100,855 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 23 February 2015 by members of Senior Management are as follows:  Share awards granted during the year



Total share awards held as at23 February 2015Equity Incentive awards


209,623



400,695Performance Share awards


582,474



1,397,597Conditional share awards under the Global Share Plan 2010


11,596



87,830Options under Employee ShareSave plans and under the Global Share Plan 2010


2,042



4,442 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 all-employee 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 (2005 to 2014), the number of new shares issued under our share plans has been as follows:   All-employee share plans

7,991,875 (0.89% of issued share capital as at 23 February 2015)Discretionary share plans

37,853,815 (4.23% of issued share capital as at 23 February 2015)  By order of the Board, on 25 February 2015  LOGO Joseph Papa Chairman of the
Remuneration Committee


LOGO




Smith & Nephew Annual report
201493









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##### Table of Contents

CORPORATE GOVERNANCE

Remuneration reportcontinued





The Policy Report

The Remuneration Committee presents the Directors remuneration policy report, which was approved by shareholders at the Annual General Meeting held on
10 April 2014.

Future policy table

Executive Directors

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

All figures in this policy table are as at 2014 when the Policy Report was
approved by shareholders





|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|How the component supports the short-                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|and long-term strategy of the Company                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                      | How the component operates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Base salary and benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Base salary                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|We are a FTSE 50 listed company, operating in over 100
countries around the world. Our strategy to generate cash from Established Markets in order to invest for growth in Emerging Markets means that we are competing for international talent and our base salaries therefore need to reflect what our
Executive Directors would receive if they were to work in another international company of a similar size, complexity and geographical scope.                      |                                                                                                                                      | Salaries are normally reviewed annually, with any increase applying
from 1 April.  Salary levels and increases take account of:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |    market
movements within a peer group of similarly sized UK listed companies;                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |    scope and
responsibility of the position;                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |    skill/experience and performance of the individual Director;                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |    general
economic conditions in the relevant geographic market; and                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |    average
increases awarded across the Company, with particular regard to increases in the market in which the Executive is based.
|Payment in lieu of pension                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|In order to attract and retain Executive Directors with the capability of
driving our corporate strategy, we need to provide market-competitive retirement benefits similar to the benefits they would receive if they were to work for one of our competitors.                                                                                                                                                                                                              |                                                                                                                                      | Current Executive Directors receive an allowance in lieu of membership
of a Company-run pension scheme.  Base salary is the only component of
remuneration that is pensionable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|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.                                                                                                                                                                                                                                                                                                              |                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|In order to attract and retain Executive Directors with the capability of driving our corporate strategy, we need to provide a range of
market-competitive benefits similar to the benefits they would receive if they were to work for one of our competitors. 
It is important that our Executive Directors are free to focus on the Companys business without being diverted by concerns about medical provision,
risk benefit cover or, if required, relocation issues. |                                                                                                                                      | 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 assurance, long-term disability, annual medical examinations, company car or car allowance. The Committee retains the discretion to provide additional benefits
where necessary or relevant in the context of the Executives location.  Where
applicable, relocation costs may be provided in line with Companys relocation 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.
|All-employee arrangements                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|All-employee share plans                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|To enable Executive Directors to
participate in all-employee share plans on the same basis as other employees.                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                      | ShareSave Plans are operated in
the UK and 27 other countries internationally. In the US, an Employee Stock Purchase Plan is operated. 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 are located.                                                                                                                                                                                                                                                                                                                                                                                             







94Smith & Nephew Annual report 2014



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Maximum levels of payment

Framework in which performance is
assessedThe base salary of the Executive Directors with effect from 1 April 2014 will be as follows:
 Olivier Bohuon 1,111,782
 Julie Brown £514,000
 The factors noted in the previous column will be taken into consideration when making
increases to base salary and when appointing a new Director.  In normal
circumstances, base salary increases for Executive Directors will relate 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 the Executive Directors role. A full explanation will be provided in the Implementation Report should higher increases be approved in exceptional
cases.

Performance in the prior year is one of the factors taken into account and poor performance is likely to lead to a zero salary increase.Up to 30% of base salary.

The level of payment in lieu of a pension paid to Executive
Directors is not dependent on performance.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
2013 was as follows:  Olivier Bohuon
80,705  Julie Brown
£14,400  The maximum amount payable in benefits to an Executive Director, in normal
circumstances, will not be significantly more than amounts paid in 2013 (or equivalent in local currency). 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.

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.Executive Directors may currently
invest up to £250 per month in the UK ShareSave Plan. The Remuneration Committee may exercise its discretion to increase this amount up to the maximum permitted by the HM Revenue & Customs.
Similar limits will apply in different locations.

The potential gains from
all-employee plans are not based on performance but are linked to growth in the share price.


LOGO




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CORPORATE GOVERNANCE

Directors remuneration reportcontinued





Future policy table

Executive Directors continued



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|How the component supports the
short- and long-term strategy of the Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  | How the component operates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Annual incentives                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Annual Incentive Plan 
Cash Incentive                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|To motivate and reward the achievement of specific annual financial and business objectives related to the Companys strategy and
sustained through a clawback mechanism explained more fully in the notes.  The objectives
which determine the payment of the annual cash incentive and the level of the annual equity award are linked closely to the Group strategy. 
The financial measures of revenue, trading profit and cash flow underlie our strategy for growth and the need to generate cash to fund future
growth.  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 to the Strategic Priorities set out in this Annual Report. The Implementation Report each year will explain how each objective is linked to a specific strategic
priority.  For example, a Reinvestment objective links to the priority of improving the
efficiency of the business model and investment in higher growth segments and geographies and Processes and People objectives link to developing the right organisation. |  | The Annual Incentive Plan comprises a cash and an equity component, both based on the achievement of financial and business objectives set
at the start of the year.  The cash component is paid in full after the end of the
performance year.  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.                                                                                                     
|Annual Incentive Plan  Equity Incentive                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|To drive share ownership and encourage sustained high standards through the application of a malus provision over three years, explained more fully in the notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | The equity award component comprises conditional share awards (made at the time of the cash award), with vesting phased over the
following three years.  The equity component vests
1⁄3, 1⁄3, 1⁄3 on successive award anniversaries, only if performance remains satisfactory over each of these three years; otherwise the award will lapse.
 Participants will receive an additional number of shares equivalent to the amount of
dividend payable per vested share during the relevant performance period.
|Long-term incentives (awards actively being made)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Performance Share
Programme                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|To motivate and reward longer term performance linked to the long-term strategy and share price of the Company.
 The performance measures which determine the level of vesting of the Performance Share
Awards are linked to our corporate strategy.  Our strategy requires the generation of
cash in order to invest for growth. Cash flow is therefore a key performance measure in our performance share plan. 
Growth in our Emerging & International Markets is a key part of our strategy. Revenue in our Emerging & International Markets is therefore included as
one of our performance share plan measures.  If our strategy succeeds, the total return
to our shareholders will also increase and therefore we include a relative TSR measure in our long-term share plan.                                                                                                                                                                                                                                                                                                                                          |  | The Performance Share Programme comprises conditional share awards which vest after three years, subject to the achievement of stretching
performance targets linked to the Companys strategy.  Awards may be subject to
clawback in the event of material financial misstatement or misconduct.  Participants
will receive an additional number of shares equivalent to the amount of dividend payable per vested share during the relevant performance period.                                            
|One-off share awards                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|In order to implement our Group strategy, we recognise that it is not always possible to promote
from within the Company. In the event that we recruit an Executive Director who is currently employed by another company, we recognise that we might be required to compensate that Executive Director for cash or share awards, they may forfeit on
leaving their former employer. Our policy regarding such awards is detailed in the notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | One-off share awards may be made under the provisions of Listing Rule 9.4.2 to facilitate the appointment of a new Executive Director.
Such awards will be made on a case-by-case basis depending on the circumstances at the time to take account of amounts forfeited elsewhere on accepting appointment.                                                                                                                                                                                                  



96Smith & Nephew Annual report 2014



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Maximum levels of payment



Framework in which
performance is assessedThe total maximum payable under the Annual Incentive Plan is 215%
of base salary (150% Cash Incentive and 65% Equity Incentive).  50% salary awarded
for threshold performance.  100% salary awarded for target performance.
 150% salary awarded for maximum performance.
 Performance assessed against individual objectives and Group financial targets.



The cash and share awards are subject to malus and clawback as
detailed in the notes following this table.  70% of the cash component is based on
financial performance measures, which currently include revenue, trading profit and trading cash. The Remuneration Committee retains the discretion to adopt any financial performance measure that is relevant to the Company.
 30% of the cash component is based on other business goals linked to the Companys
strategy, which could include financial and non-financial measures.  The Remuneration
Committee has the discretion to apply a multiplier, adjusting the outcome up or down by 10% to reward or penalise conduct in respect of leadership, corporate reputation, ethics, organisational behaviours and representing the Company both
internally and externally.  The maximum opportunity shown to the left cannot
be exceeded through the application of the multiplier.0% of salary awarded for performance below target.
 50% of salary awarded for target performance.
 65% of salary awarded for maximum performance.
 Performance assessed against individual performance which includes an element
of Group financial targets.



The Remuneration Committee will use their judgement of the
individuals performance in determining the level of equity award that may be awarded within the range of 50% to 65% of salary. 
The equity component will vest in three equal tranches over a three-year period, provided that the annual performance conditions set at the beginning
of each year continue to be met.Annual awards:



Currently:47.5% of salary for threshold performance.
 95% of salary for target performance.
 190% of salary for maximum performance.





50% of the award vests on achievement of a three-year cumulative free cash-flow target

25% of the award vests subject to three-year Total Shareholder Return
(TSR) at median performance relative to industry peers

25% of the award vests subject to the achievement of revenue targets in
Emerging & International Markets

These measures are described in more detail in the notes and
the targets and performance against them will be disclosed in the Implementation Report if appropriate

The Performance Share Award will vest on the third anniversary of the date
of grant, depending on the extent to which the performance conditions are met over the three-year period commencing in the year the award was made

The Remuneration Committee retains the discretion to change the measures
and their respective weightings to ensure continuing alignment with the Companys strategy

The cash and share awards are subject to malus and clawback as detailed in
the notes following this table.Awards made prior to 2014 were subject to TSR and cash flow
targets.Each award will be determined on a
case-by-case basis. In normal circumstances such awards will be no more beneficial than the value of amounts forfeited by the Executive Director on leaving a previous company to join the Board.



The Remuneration
Committee has the discretion to apply performance conditions to one-off awards if appropriate. However, if it is impossible to replicate the vesting conditions applicable to awards granted by other companies, awards may be made without
performance conditions.


LOGO




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201497









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CORPORATE GOVERNANCE

Remuneration reportcontinued





Notes to Future policy table  Executive Directors Changes to remuneration policy The remuneration policy described in the
future policy table  Executive Directors is the same remuneration policy in respect of Executive Directors that has been in force since the beginning of 2012. It is anticipated that this policy will apply at least until the Annual General
Meeting in 2017. The only change made has been to introduce a third performance measure to our Performance Share Programme. Performance measures 
Annual Incentive Plan The performance measures which apply to the Annual Incentive Plan for Executive Directors comprise 70% financial measures and 30%
business goals linked to the Companys strategy, which could include financial and non-financial measures. The financial measures may differ from year to
year to provide continued alignment with the Company strategy. Measures to be used in 2014 are detailed in the Implementation Report. Each year the measures are chosen in order to relate to our Strategic Priorities and in turn to our key performance
indicators, which are set out in this Annual report. The performance targets are set by taking into account the strategy of the Company and are designed to be realistic yet stretching. The business measures will differ from year to year as the evolving corporate strategy means that we will wish to set Executive Directors different business
objectives in order to meet the current corporate needs. The business objectives are personal to each Executive Director, and are tailored to reflect their role and responsibilities during the year. These are set at the start of the year and reflect
the most important areas of strategic focus for the Company. The Remuneration Committee sets annual measurement criteria (performance targets) that are appropriate to motivate and measure an Executive Directors performance in any one year. The
factors taken into consideration include the three-year strategic plan, prior years delivered performance and budgeted performance. In the past, measures have included R&D investment, succession planning, employee engagement, compliance,
development of product portfolio, M&A activity and shared services implementation.


Performance measures  Performance Share Programme The performance measures which apply to the
Performance Share Programme awards made in 2014 relate to cumulative free cash flow, revenue in Emerging & International Markets and Total Shareholder Return. We have chosen three measures which are relevant for the long-term success of the
Company. The free cash flow measure is important for us in a period of growth, when we need to generate cash to fund both organic and inorganic investment. Revenue in Emerging & International Markets is important for us when we are seeking to generate profitable revenue in new markets and from new
products. The Total Shareholder Return measure, which compares our long-term performance against that of our peers, seeks to align the payout of the
Performance Share Programme with the experience of our shareholders. This helps Executive Directors relate to the shareholder experience and ensure that vesting is aligned to the out-performance of our sector. The Remuneration Committee will keep these performance measures under review and retains the discretion to alter the measures or their respective weightings to
ensure continuing alignment to the corporate strategy. 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 performance conditions
have been met) or may determine that any cash bonus, vested shares, or their equivalent value in cash be returned to the Company in the event that any of the following matters is discovered:  
A material misstatement of the Companys financial results; or  
A material error in determining the extent to which any performance condition has been satisfied; or  
A significant adverse change in the financial performance of the Company, or a significant loss at a general level or at the division or function in which a participant worked; or  
Inappropriate conduct (for example reputational issues), capability or performance by a participant, or within a team business area or profit centre. These provisions apply to share awards under the Global Share Plan 2010 and cash amounts under the Annual Cash Incentive Plan.










98Smith & Nephew Annual report 2014



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Illustrations of the application of the remuneration policy The following charts show the potential split between the different elements of the Executive Directors remuneration under three different performance
scenarios: Figures as at salary levels in 2014, when the Policy report was approved by shareholders Chief Executive Officer  LOGO Chief Financial Officer  LOGO Total Remuneration by Performance Scenario for 2014 Financial Year Chief Executive Officer  Chief Financial Officer  LOGO Data for the Chief Executive Officer assumes an exchange rate of 1 =
£0.8494.
 Policy on recruitment arrangements 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 would be paid for an equivalent position elsewhere. The Remuneration 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, awards would not exceed 405% of base salary. We recognise that in the event that we require a new Executive Director to 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 sizeable cash bonuses and share awards if they choose to leave their 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 discretion in setting any such compensation, which will be decided on
a case-by-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 9.4.2 in the Listing Rules, whilst at the same time aiming for simplicity. If we appoint an existing employee as an Executive Director of the Company, pre-exisiting obligations with respect to remuneration, such 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 of an incoming Executive Directors remuneration arrangements at the time of their
appointment. 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 the Executive Director. On termination of the contract, we may require the Executive Director not to work their
notice period and pay them an amount equivalent to the base salary and payment in lieu of pension and benefits they would have received if they had been required to work their notice period. Under the terms of the Executive Directors service contract, Executive 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 and the former Executive Director commences employment earlier than at the end of the notice period, no further payments shall be made in respect of the portion of notice period not worked. Directors service
contracts are available for inspection at the Companys registered office: 15 Adam Street, London WC2N 6LA.


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CORPORATE GOVERNANCE

Remuneration reportcontinued





Policy on payment for loss of office Our policy regarding termination payments to departing Executive Directors is to limit severance payments to pre-established contractual 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. Under normal circumstances (excluding termination for gross misconduct) all leavers are entitled to receive termination payments in lieu of notice equal to
base salary, payment in lieu of pension, and benefits. In some 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 incentive they would
have received had they been required to work their notice period. Any entitlement or discretionary payment may be reduced in line with the Executive Directors duty to mitigate losses, subject to applying our non-compete clause. We will supply details via an announcement to the London Stock Exchange of a departing Executive Directors termination arrangements at the time 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 to receive 12 months base salary plus payment in lieu of pension and benefits. In addition, the Remuneration Committee has discretion
to pay an Executive Director in these circumstances an annual cash incentive. For Directors appointed prior to 1 November 2012, an automatic annual cash incentive is payable at target. In the event that an Executive Director leaves for reasons of ill-health, death, redundancy or retirement in agreement with the Company, then the vesting of any
outstanding annual cash incentive and equity incentive awards will generally depend on the Remuneration Committees assessment of performance to date. Performance share awards will be pro-rated for the time worked during the relevant
performance period, and will remain subject to performance over the full performance period. For all other leavers, the annual cash incentive will generally
be forfeited and outstanding equity incentive awards and performance share awards will lapse. One-off awards granted on appointment will normally lapse on
leaving except in cases of death, retirement, redundancy, or ill-health. 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 on a case-by-case basis following a review of circumstances and to ensure
fairness for both shareholders and Executive Directors. We will supply details via an announcement to the London Stock Exchange of an out-going Executive
Directors remuneration arrangements around the time of leaving.


Policy on shareholding requirements 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. Executive Directors are therefore expected to build up a holding of Smith & Nephew shares worth two-times their base salary. In order to reinforce this expectation, we require them to
retain 50% of all shares vesting under the Company share plans (after tax) until this holding has been met recognising that differing international tax regimes affect the pace at which an Executive Director may fulfil the shareholding
requirement. When calculating whether or not this requirement has been met, we will include ordinary shares or ADRs held by the Executive Director and their immediate family and the intrinsic value of any vested but unexercised
options. Statement of consideration of employment conditions elsewhere in the Company and differences to the Executive
Director Policy All employees across the Group including the Executive Directors are incentivised in a similar manner. Although the salary levels and
maximum opportunities under bonus and share plans differ, generally speaking the same targets and performance conditions relating to the Companys strategy apply throughout the organisation. 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 Companys place of listing, and will also
consider market data periodically. A range of different pension arrangements operate across the Group depending on location and/or length of service.
Executive Directors and 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 of pension. Differing amounts apply for lower levels within the Company. 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 divisional financial targets relating to revenue, trading profit and trading cash, similar to the
financial targets set for the Executive Directors. Executive Officers and Senior Executives (72 as at 2014) participate in the annual Equity Incentive
Programme and the Performance Share Programme. The maximum amounts payable are lower, but 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 employment conditions and an understanding of Group-wide strategic matters. As at 2014, over 4,500 employees in 32 countries participate in one or more of our global share plans.










100Smith & Nephew Annual report 2014



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Future policy table Chairman and Non-executive Directors The following table and
accompanying notes explain the different elements of remuneration we pay to our Chairman and Non-executive Directors. No element of their remuneration is subject to performance. All payments made to the Chairman are determined by the
Remuneration Committee, whilst payments made to the Non-executive Directors are determined by the Directors who are not themselves Non-executive Directors, currently the Chairman, the Chief Executive Officer and the Chief Financial Officer.  How
the component supports the short- and long-term strategy of the Company

How the component operates

Maximum levels of paymentAnnual feesBasic annual feeTo attract and retain Directors by setting fees at rates comparable to what
would be paid in an equivalent position elsewhere.  A proportion of the fees are paid in
shares in the third quarter of each year in order to align Non-executive Directors fees with the interest of shareholders.

Fees will be reviewed periodically. In future, any increase will be
paid in shares until 25% of the total fee is paid in shares.  Fees are set in
line with market practice for fees paid by similarly sized UK listed companies.  Annual
fees are set and paid in UK sterling or US dollars depending on the location of the Non-executive Director. If appropriate, fees may be set and paid in alternative currencies.

Annual fees are currently as follows:
 £63,000 in cash plus £3,150 in shares; or
 $120,000 in cash plus $6,000 in shares.
 Chairman fee: 
£400,000 plus £20,000 in shares (to April 2014). 
£300,000 plus £100,000 in shares (from April 2014). 
Whilst it is not expected to increase the fees paid to the Non-executive Directors and the Chairman by more than the increases paid to employees
generally, in exceptional circumstances, higher fees might become payable.  The total
maximum aggregate fees payable to the Non-executive Directors will not exceed £1.5m as set out in the Companys articles of association.Fee for Senior Independent Director and Committee ChairmenTo compensate Non-executive Directors for the additional time spent as
Committee Chairmen or as the Senior Independent Director.

A fixed fee is paid, which is reviewed periodically.

£15,000 in cash; or
 $27,000 in cash. 
Whilst it is not expected that the fees paid to the Senior Independent Director or Committee Chairman will exceed the increases paid to employees
generally, in exceptional circumstances, higher fees might become payable.Intercontinental travel feeTo compensate Non-executive
Directors for the time spent travelling to attend meetings in another continent.

A fixed fee is paid, which is
reviewed periodically.

£3,500 in cash; or
 $7,000 in cash. 
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. Figures as at salary levels in 2014, when the Policy report was approved by shareholders


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CORPORATE GOVERNANCE

Remuneration reportcontinued





Notes to Future policy table  Non-executive Directors Changes to remuneration policy The Board has altered the policy
regarding the payment of Non-executive Directors and to the Chairman in one respect in 2013, by introducing the payment of a proportion of the fees in the form of shares. The fees paid to the Non-executive Directors and to the Chairman were
reviewed in July 2013 and it was agreed that the basic fee should be increased by 5% (there having been no increase to these fees since August 2011) and that the increase be paid in the form of shares. The amount of the increase less applicable
taxes was used to purchase shares in the market on 15 August 2013. Going forward any increase in the level of fees paid to a Non-executive Director will be paid in the form of shares until 25% of the Non-executive Directors fee is paid in
the form of shares. We have made this change in order to align the fees paid to Non-executive Directors with the experience of our shareholders. With the appointment of Roberto Quarta as Chairman of the Company with effect from the Annual General
Meeting, we have taken the opportunity to pay 25% of his fees in the form of shares immediately. Policy on recruitment arrangements Any new Non-executive Director shall be paid in accordance with the current fee levels on appointment, in line with the policy set out above. With respect to the
appointment of a new Chairman, fee levels will take into account market rates, the individuals profile and experience, the time required to undertake the role and general business conditions. 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.


Letters of appointment The Chairman and Non-executive Directors have letters of appointment which set out the terms under which they provide their services to the Company and are
available for inspection at the Companys registered office: 15 Adam Street, London WC2N 6LA. The appointment of Non-executive Directors is not subject to a notice period, nor is there any compensation payable on loss of office, for
example, should they not be re-elected at an Annual General Meeting. The appointment of the Chairman is subject to a notice period of six months. The
Chairman and Non-executive Directors are required to acquire a shareholding in the Company equivalent in value to one times their basic fee within two years of their appointment to the Board. Statement of consideration of shareholder views This policy report sets out the remuneration policy in relation to Executive Directors, which has been in place since 2012. As this policy evolved at the end of
2011 and during 2012, we engaged actively with shareholders to explain our remuneration arrangements and to discuss their views on our proposals. At the time, Joseph Papa, the Chairman of the Remuneration Committee and members of the Senior
Executive Team met with the holders of around 30% of our shares, including collectively with a number of smaller engaged investors, as well as shareholder advisory bodies. We discussed the structure of our remuneration package, our policies on
termination, recruitment, shareholding requirements and the operation of Annual Incentive Plan. The Directors remuneration report was approved by 96% of shareholders who voted at the Annual General Meeting in 2013 and we received feedback from
shareholders around the time of this meeting that they understood and approved of our remuneration arrangements. Although the remuneration policy has remained essentially unchanged as in previous years, given the changes in remuneration reporting,
we also conducted an engagement programme with our larger shareholders in 2013. Joseph Papa met with the holders of around 20% of our shares, and with a number of shareholder advisory bodies. He has also been available to discuss any aspect of our
remuneration programme with shareholders throughout the year. The shareholders who have engaged with us have all been supportive of our approach to remuneration, recognising the link between the corporate strategy and executive reward.










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Directors responsibilities for
the accounts







The Directors are responsible for preparing the Group and Company accounts in accordance with applicable UK law and
regulations. As a consequence of the Companys ordinary shares being traded on the New York Stock Exchange (in the form of American Depositary Shares) the Directors are responsible for the preparation and filing of an annual report on Form 20-F
with the US Securities and Exchange Commission. The Directors are required to prepare Group accounts for each financial year, in accordance with the
International Financial Reporting Standards (IFRS) as adopted by the European Union which present fairly the financial position of the Group and the financial performance and cash flows of the Group for that period. In preparing those
Group accounts, the Directors are required to:  
select suitable accounting policies in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently;  
present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;  
provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Groups
financial position and financial performance; and  
state that the Group has complied with IFRS, subject to any material departures disclosed and explained in the accounts. Under UK law the Directors have elected to prepare the Company accounts in accordance with UK Generally Accepted Accounting Practice (UK Accounting Standards and
applicable law), which are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing the Company accounts, the Directors are required to:  
select suitable accounting policies and then apply them consistently;  
make judgements and estimates that are reasonable and prudent;  
state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the accounts; and  
prepare the accounts on a going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors confirm that they have complied with the above requirements in preparing the accounts. The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Group and the
Company and enable them to ensure that the accounts comply with the Companies Act 2006 and, in the case of the Group accounts, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and the Company and
hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and
integrity of the corporate and financial information included on the Groups website. It should be noted that information published on the internet is accessible in many countries with different legal requirements. Legislation in the UK
governing the preparation and dissemination of accounts may differ from legislation in other jurisdictions. Fair, Balanced and
Understandable As required by the UK Corporate Governance Code, the Directors confirm that they consider that the Annual Report, taken as a whole, is
fair, balanced and understandable and provides the information necessary for shareholders to assess the Companys performance, business model and strategy. When arriving at this conclusion the Board was assisted by a number of processes
including:
 
The Annual Report is drafted and comprehensively reviewed by appropriate senior management with overall co-ordination by the Head of Financial Reporting;  
An extensive verification process is undertaken to ensure factual accuracy, with third party review by legal advisers; and  
The final draft is reviewed by the Audit Committee prior to consideration by the Board. Directors responsibility statement pursuant to disclosure and transparency Rule 4 The Directors confirm that, to the best of each persons knowledge:  
the Group accounts in this report, which have been prepared in accordance with IFRS as adopted by the European Union and those parts of the Companies Act 2006 applicable to companies reporting under IFRS, give a true
and fair view of the assets, liabilities, financial position and profit of the Group taken as a whole;  
the Company accounts in this report, which have been prepared in accordance with UK Generally Accepted Accounting Practice and the Companies Act 2006, give a true and fair view of the assets, liabilities, financial
position and profit of the Company; and  
the Financial review and principal risks section and commentary on pages 34 to 39 contained in the accounts includes a fair review of the development and performance of the business and the financial
position of the Company and the Group taken as a whole, together with a description of the principal risks and uncertainties that they face. 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 34 to 39. 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 115. 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. Directors Report The
Directors Report has been prepared in accordance with the requirements of the Companies Act 2006. By order of the Board, 25 February 2015  LOGO Susan Swabey Company
Secretary


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FINANCIAL STATEMENTS

Critical accounting policies





The Group prepares its consolidated financial statements in accordance with IFRS as issued by the IASB and IFRS as
adopted by the EU, the application of which often requires judgements to be made by management when formulating the Groups financial position and results. Under IFRS, the Directors are required to adopt those accounting policies most
appropriate to the Groups circumstances for the purpose of presenting fairly the Groups financial position, financial performance and cash flows. In determining and applying accounting policies, judgement is often required in respect of items where the choice of specific policy, accounting estimate or
assumption to be followed could materially affect the reported results or net asset position of the Group; it may later be determined that a different choice would have been more appropriate. The Groups significant accounting policies are set out in Notes 1 to 23 of the Notes to the Group accounts. Of those, the policies which require the most use
of managements judgement are as follows: Valuation of inventories A feature of the Orthopaedic Reconstruction and Trauma & Extremities franchises (whose finished goods inventory makes up approximately 79% of the Group
total finished goods inventory) is the high level of product inventory required, some of which is located at customer premises and is available for customers immediate use. Complete sets of products, including large and small sizes, have to be
made available in this way. These 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 usage. This formula is applied on an individual product line basis and is first
applied when a product group has been on the market for two years. This method of calculation is considered appropriate based on experience, but it does involve management judgements on customer demand, effectiveness of inventory deployment, length
of product lives, phase-out of old products and efficiency of manufacturing planning systems. Impairment In carrying out impairment reviews of goodwill, intangible assets and property, plant and equipment, a number of significant assumptions have to be made when
preparing cash flow projections. These include the future rate of market growth, discount rates, the market demand for the products acquired, the future profitability of acquired businesses 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.


Liability provisioning The recognition of provisions for legal disputes is subject to a significant degree of estimation. Provision is made for loss contingencies when it is considered
probable that an adverse outcome will occur and the amount of the loss can be reasonably estimated. In making its estimates, management takes into account the advice of internal and external legal counsel. Provisions are reviewed regularly and
amounts updated where necessary to reflect developments in the disputes. The ultimate liability may differ from the amount provided depending on the outcome of court proceedings and settlement negotiations or if investigations bring to light new
facts. Taxation The Group operates
in numerous tax jurisdictions around the world. 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 unagreed years outstanding and is involved in disputes and
tax audits. Significant issues may take several 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 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. Business combinations The group has
identified growth through acquisitions as one of its Strategic Priorities. During 2014, we acquired ArthroCare Corporation; the 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.










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Independent auditors US reports



Report of Independent Registered Public Accounting Firm to the Board of Directors and
shareholders of Smith & Nephew plc We have audited the accompanying group balance sheets of Smith & Nephew plc as of 31 December
2014 and 2013, and the related group income statements, group statements of comprehensive income, group cash flow statements and group statements of changes in shareholders equity for each of the three years in the period ended
31 December 2014. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits. Auditors responsibility We conducted
our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Smith & Nephew plc at 31 December 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended 31 December 2014, in conformity with
International Financial Reporting Standards as issued by the International Accounting Standards Board and International Financial Reporting Standards as adopted by the European Union. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Smith & Nephew plcs
internal control over financial reporting as of 31 December 2014, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organisations of the Treadway Commission (2013 framework) and
our report dated 25 February 2015 expressed an unqualified opinion thereon.  Ernst & Young LLP London, England 25 February 2015
 Report of Independent Registered Public Accounting Firm to the Board of Directors and
shareholders of Smith & Nephew plc We have audited Smith & Nephew plcs internal control over financial reporting as of
31 December 2014, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). Smith & Nephew
plcs management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Evaluation of
Internal Controls. Our responsibility is to express an opinion on the companys internal control over financial reporting based on our audit. We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to 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. In our opinion, Smith & Nephew plc maintained, in all material respects, effective internal control over financial reporting as of 31 December 2014,
based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the group
balance sheets of Smith & Nephew plc as of 31 December 2014 and 2013, and the related group income statements, group statements of comprehensive income, group cash flow statements and group statements of changes in equity for each of
the three years in the period ended 31 December 2014 of Smith & Nephew plc and our report dated 25 February 2015 expressed an unqualified opinion thereon.  Ernst & Young LLP London, England 25 February 2015


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FINANCIAL STATEMENTS

Independent auditors UK report





Independent auditors report to the members of Smith & Nephew plc Opinion on financial statements In our opinion:  
the financial statements give a true and fair view of the state of the group and of the parent companys affairs as at 31 December 2014;  
the group financial statements give a true and fair view of the profit for the year ended 31 December 2014;  
the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and IFRSs as adopted by the International Accounting Standards Board (IASB);  
the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice;  
the group and the parent company financial statements have been prepared in accordance with the requirements of the Companies Act 2006; and  
the group financial statements have been prepared in accordance with Article 4 of the IAS Regulation. What we have audited We have audited the
financial statements of Smith & Nephew plc for the year ended 31 December 2014 which comprise:  Group

CompanyThe Group income statement

The Company balance sheetThe Group statement of
comprehensive income

The related notes 1 to
9.The Group balance sheetThe Group cash flow statementThe Group statement of changes in
equityThe related notes 1 to 23. As explained in Note 1 to the consolidated financial statements, the group in addition to applying IFRS as adopted by the European
Union has also applied IFRS as issued by the International Accounting Standards Board (IASB). The financial reporting framework that has been applied in the preparation of the Company financial statements is the provisions of the Companies Act 2006
and United Kingdom Generally Accepted Accounting Practice.


OverviewMateriality

Overall Group materiality of $45 million which represents 5% of adjusted profit before taxAudit scope

We performed an audit of the
complete financial information of two components and audit procedures on specific balances for a further ten components. 
The 12 reporting components where we performed audit procedures accounted for 81% of the groups total assets, 64% group revenue and 85% of the groups
profit before tax and 86% of the groups adjusted profit before tax.Areas of focus

Recognition and measurement of
provisions for litigation reserves and contingent liabilities  Recognition and measurement
of provisions for taxation  Existence and valuation of inventory
 Timing of revenue recognition and measurement of related reserves
 Judgements determining purchase price allocation on acquisitions Our application of materiality We determined materiality for the group to be $45 million (2013: $45 million), which is calculated as 5% of adjusted profit before tax. We believe that profit
before tax, adjusted for the items, as described below, provides us with a consistent year on year basis for determining materiality and is the most relevant performance measure to the stakeholders of the entity. Adjustments are made to profit
before tax for acquisition related costs of $118m and restructuring and rationalisation expenses of $61m as highlighted in note 2.2 of the financial statements, as well as acquisition-related finance costs of $7m. This provided a basis for
identifying and assessing the risk of material misstatement and determining the nature, timing and extent of further audit procedures. On the basis of our
risk assessments, together with our assessment of the groups overall control environment and other qualitative considerations, our judgement was that overall performance materiality (i.e. our tolerance for misstatement in an individual account
or balance) for the group should be 75% (2013: 75%) of planning materiality, namely $33.75 million (2013: $33.75 million). Our objective in adopting this approach was to reduce to an appropriately low level the probability that the aggregate of
total undetected and uncorrected misstatements for the accounts as a whole did not exceed our planning materiality. Audit work at individual components is
undertaken based on a percentage of our total performance materiality. The performance materiality set for each component is based on the relative size of the component and our view of the risk of misstatement at that component. In the current year
the range of performance materiality allocated to components was $3.32m to $21.58m. We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of $2.25 million (2013: $2.25 million), as well as differences below that threshold that, in our view warranted reporting
on qualitative grounds. We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in the light of
other relevant qualitative considerations.






This page does not form part of
Smith & Nephews Annual Report and Form 20-F as filed with the SEC.



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Scope of our audit An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial
statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the groups circumstances and have been consistently applied and adequately
disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify
material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If
we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Following our assessment of the risk of
material misstatement to the group financial statements, we selected 12 components which represent the principal business units within the groups two reportable segments. Two of these components were subject to a full audit and ten were
subject to a partial scope audit where the extent of audit work was based on our assessment of the risks of material misstatement outlined below and the materiality of the locations business operations relative to the group. The scope of these
components may not have included testing of all significant accounts of the location but will have contributed to the coverage of significant accounts tested for the group. Partial scope component testing of significant risks is primarily focused on
the inventory and revenue recognition risks as tax, litigation
 and purchase price allocation risks are audited centrally. For the remaining components, we performed other procedures to test or assess that there were no significant risks of material
misstatement in these components in relation to the group financial statements. The components subject to full audit or partial scope audit procedures make up 81% of the groups total assets, 64% of the groups revenue, 85% of the
groups profit before tax and 86% of the groups adjusted profit before tax, although for countries where a partial scope audit was performed, not all balances that comprise these coverage percentages have been audited. The group audit team continued to follow a programme of planned visits that has been designed to ensure that the Senior Statutory Auditor or his designate visits
each of the locations where the Group audit scope was focused at least once every two years and the most significant of them at least once a year. For all full scope entities, in addition to the location visit, the group audit team participated in
the component teams planning, including the component teams discussion of fraud and error. The group audit team have also reviewed key working papers and challenged conclusions on significant risk areas, as identified at the scoping
stage, primarily inventory and revenue recognition. The group audit team visited nine locations in total over the course of the current year audit. Our assessment of risks of material misstatement We consider that the following areas present the greatest risk of material
misstatement in the financial statements and consequently have had the greatest impact on our audit strategy, the allocation of resources and the efforts of the engagement team, including the more senior members of the team:
   Principal risk area and rationale

Audit responseRecognition and measurement of provisions for litigation reserves and contingent liabilitiesThe development, manufacture and
sale of medical devices entails risk of product liability claims and patent infringement issues due to the surgical nature of the products and the competitive nature of the industry.
 Determining the impact and likely outcome of any litigation matters requires significant
judgement due to the uncertainty of the litigation process and the level of royalty that may be payable for infringed products and raises the risk that those legal provisions may be incorrect.

The litigation reserve at 31
December 2014, included in legal and other provisions of $118m in note 17.1 to the financial statements, covers a number of open legal matters as described in detail in note 17.3 to the financial statements. We held discussions with in-house legal
counsel to understand the status of litigation cases. We read legal invoices and corresponded directly with external legal advisors to understand the fact patterns of the cases. We reviewed managements calculations of provisions, including
their assessment of potential royalties payable for past sales and challenged and corroborated key assumptions.Recognition and measurement of provisions for taxationThe tax charge of profits is
determined according to complex tax laws and regulations. Where the effect of these tax laws and regulations is unclear, judgements are used in determining the liability for the tax to be paid.
 As a multinational Company, tax audits can be ongoing in a number of jurisdictions at any
point in time and tax returns are subject to possible challenge in most locations in which the Company operates. 
There can be significant judgement involved in determining the provision for tax liabilities.

The details of the tax charge are
included in note 5.1 to the financial statements.  We involved tax specialists in the US
and the UK to assist us in assessing and challenging the assumptions and judgements made by the company in their recognition and measurement of provisions for taxation. We tested tax calculations and challenged the companys transfer pricing
arrangements, tax planning activities and status and findings from ongoing tax audits to assess the reasonableness of the provisions recorded. This included an assessment of the likelihood that known uncertain tax positions would result in a tax
liability to the company. This page does not form part of Smith & Nephews Annual Report and Form 20-F as filed with the SEC.


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FINANCIAL STATEMENTS

Independent auditors UK reportcontinued





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|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Principal risk area and rationale                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | Audit response                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Existence and valuation of inventory                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 
|The Company has high levels of finished goods inventory, as detailed in note 12 to the financial
statements, some of which are located at customer premises to be available for immediate use. 
Complete sets of products, including outsizes, have to be made available in this way, with these sizes used less frequently. Towards the end of a products
life cycle, these inventory levels are more than is required and therefore excess to requirements. 
In estimating the appropriate value for inventory, management has to apply judgement on how much of the inventory on hand will ultimately be used, considering the
length of product lives predicted, product usage and how quickly products will be phased out. |  | We carried out tests of controls over routine inventory processes, including cycle counts and period end
counts.  We independently counted or confirmed inventory levels at key component locations
and also reviewed the results of managements testing results for a sample of counts that we did not attend. 
We challenged managements judgements and assumptions used in determining the inventory excess and obsolescence provision in order to assess that their
calculation represents excess and obsolete inventory. We understood their plans for launching new product lines or discontinuing product lines to assess the adequacy of the provision, as well as reflecting on the adequacy of prior year
provisions.  We tested managements calculation to eliminate intercompany profit held
in inventory as goods are sold between group companies, including the recalculation and vouching of margins on a sample basis.
|Timing
of revenue recognition and measurement of related reserves                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 
|Revenue recognition is one of the key areas of audit focus, particularly in respect of the risk of management override and the risk of cut-off of revenue for sales to distributors with the
need for the risks and rewards of ownership to have passed before revenue is recognised.                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | We carried out tests of controls over revenue recognition, including the timing of revenue recognition,
as well as substantive testing, analytical procedures and assessing whether the revenue recognition policies adopted complied with IFRS as detailed in note 2.1 to the financial statements.
 Procedures included independent confirmation with distributors, reviewing shipping terms for
items despatched to test that the risk and reward of ownership had passed, cut off testing of items despatched close to the year end date and a review of returns and credit notes issued subsequent to the year end.
 We also performed detailed trend analysis by period and by major customer to identify unusual
fluctuations.                                                                                                                                                                                                     
|Judgements determining purchase price allocation on acquisitions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 
|On 27 May 2014, the Group acquired ArthroCare Corporation for $1.7bn.
 The acquisition accounting includes the need to determine the fair value of the acquired
assets and liabilities at the acquisition date. This included complex valuation considerations and required the use of specialists. 
The most significant judgements relate to the valuation of intangible assets acquired, the uplift to the value of inventory and property, plant and equipment and
the value of any provisions recorded.                                                                                                                                                                                                                     |  | We focused on this area given the significant judgements involves in assessing the fair values of assets
and liabilities acquired as this directly impacts the amount of goodwill recognised on acquisition. The fair values are based on valuation techniques built, in part, on assumptions around the future performance of the business. We challenged the
assumptions underpinning the valuations, assessed the fair value of the identified assets and liabilities, audited the accounting differences upon IFRS conversion and evaluated the adequacy of the disclosures.
 We also discussed the specialist valuations with the specialists and read their reports, with
involvement of our own specialists to conclude on the appropriateness of the valuation.                                                                                                                                                                   





This page does not form part of Smith & Nephews Annual Report and Form 20-F as filed with the SEC.



108Smith & Nephew Annual report 2014



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Opinion on other matter prescribed by the Companies Act 2006 In our opinion the
information given in the Strategic Report and the Directors Report for the financial year for which the group financial statements are prepared is consistent with the group financial statements. Respective responsibilities of directors and auditor As explained more fully in the Directors Responsibilities Statement set out on page 103, the directors are responsible for the preparation of the group
financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the group financial statements in accordance with applicable law and International Standards on Auditing (UK
and Ireland). Those standards require us to comply with the Auditing Practices Boards Ethical Standards for Auditors. This report is made solely to the
companys members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the companys members those matters we are required to state to them in an
auditors report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the companys members as a body, for our audit work, for this report, or for
the opinions we have formed. Matters on which we are required to report by exception We have nothing to report in
respect of the following: Under the ISAs (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is:  
materially inconsistent with the information in the audited financial statements; or  
apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or  
is otherwise misleading.
 In particular, we are required to consider whether we have identified any inconsistencies between our knowledge
acquired during the audit and the directors statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the audit committee
which we consider should have been disclosed. Under the Companies Act 2006 we are required to report to you if, in our opinion:  
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 statement, set out on page 103, in relation to going concern.  
the part of the Corporate Governance Statement relating to the companys compliance with the nine provisions of the UK Corporate Governance Code specified for our review. Michael Rudberg (Senior statutory auditor) for and on behalf of
Ernst & Young LLP, Statutory Auditor London 25 February 2015
   This page does not form part
of Smith & Nephews Annual Report and Form 20-F as filed with the SEC.


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FINANCIAL STATEMENTS

Group income statement





|                                               |  |  |       |  |  |  |                                    |   |  |  |                                    |   |  |  |                                    |  
|---------------------------------------------- |  |  | ----- |  |  |  | ---------------------------------- | - |  |  | ---------------------------------- | - |  |  | ---------------------------------- | -
|                                               |  |  | Notes |  |  |  | Year ended31 December2014$ million |   |  |  | Year ended31 December2013$ million |   |  |  | Year ended31 December2012$ million |  
|Revenue                                        |  |  | 2     |  |  |  | 4,617                              |   |  |  | 4,351                              |   |  |  | 4,137                              |  
|Cost of goods sold                             |  |  |       |  |  |  | (1,162                             | ) |  |  | (1,100                             | ) |  |  | (1,070                             | )
|Gross profit                                   |  |  |       |  |  |  | 3,455                              |   |  |  | 3,251                              |   |  |  | 3,067                              |  
|Selling, general and administrative expenses   |  |  | 3     |  |  |  | (2,471                             | ) |  |  | (2,210                             | ) |  |  | (2,050                             | )
|Research and development expenses              |  |  | 3     |  |  |  | (235                               | ) |  |  | (231                               | ) |  |  | (171                               | )
|Operating profit                               |  |  | 2 & 3 |  |  |  | 749                                |   |  |  | 810                                |   |  |  | 846                                |  
|Interest receivable                            |  |  | 4     |  |  |  | 13                                 |   |  |  | 14                                 |   |  |  | 11                                 |  
|Interest payable                               |  |  | 4     |  |  |  | (35                                | ) |  |  | (10                                | ) |  |  | (9                                 | )
|Other finance costs                            |  |  | 4     |  |  |  | (11                                | ) |  |  | (11                                | ) |  |  | (11                                | )
|Share of results of associates                 |  |  | 11    |  |  |  | (2                                 | ) |  |  | (1                                 | ) |  |  | 4                                  |  
|Profit on disposal of net assets held for sale |  |  | 3     |  |  |  |                                   |   |  |  |                                   |   |  |  | 251                                |  
|Profit before taxation                         |  |  |       |  |  |  | 714                                |   |  |  | 802                                |   |  |  | 1,092                              |  
|Taxation                                       |  |  | 5     |  |  |  | (213                               | ) |  |  | (246                               | ) |  |  | (371                               | )
|Attributable profit for the year (i)           |  |  |       |  |  |  | 501                                |   |  |  | 556                                |   |  |  | 721                                |  
|Earnings per ordinary share (i)                |  |  | 6     |  |  |  |                                    |   |  |  |                                    |   |  |  |                                    |  
|Basic                                          |  |  |       |  |  |  | 56.1¢                              |   |  |  | 61.7¢                              |   |  |  | 80.4¢                              |  
|Diluted                                        |  |  |       |  |  |  | 55.7¢                              |   |  |  | 61.4¢                              |   |  |  | 80.0¢                              |  

Group statement of comprehensive income



|                                                                      |  |  |       |  |  |  |                                     |   |  |  |                                    |   |  |  |                                    |  
|--------------------------------------------------------------------- |  |  | ----- |  |  |  | ----------------------------------- | - |  |  | ---------------------------------- | - |  |  | ---------------------------------- | -
|                                                                      |  |  | Notes |  |  |  | Year ended31 December2014$ 
million |   |  |  | Year ended31 December2013$ million |   |  |  | Year ended31 December2012$ million |  
|Attributable profit for the year (i)                                  |  |  |       |  |  |  | 501                                 |   |  |  | 556                                |   |  |  | 721                                |  
|Other comprehensive income:                                           |  |  |       |  |  |  |                                     |   |  |  |                                    |   |  |  |                                    |  
|Items that will not be reclassified to income statement               |  |  |       |  |  |  |                                     |   |  |  |                                    |   |  |  |                                    |  
|Actuarial (losses)/gains on retirement benefit obligations            |  |  | 18    |  |  |  | (94                                 | ) |  |  | 12                                 |   |  |  | (5                                 | )
|Taxation on other comprehensive income                                |  |  | 5     |  |  |  | 19                                  |   |  |  | (16                                | ) |  |  | 20                                 |  
|Total items that will not be reclassified to income statement         |  |  |       |  |  |  | (75                                 | ) |  |  | (4                                 | ) |  |  | 15                                 |  
|                                                                      |  |  |       | 
|Items that may be reclassified subsequently to income statement       |  |  |       |  |  |  |                                     |   |  |  |                                    |   |  |  |                                    |  
|Cash flow hedges  interest rate derivatives                          |  |  |       |  |  |  |                                     |   |  |  |                                    |   |  |  |                                    |  
| losses arising in the year                                          |  |  |       |  |  |  | (5                                  | ) |  |  |                                   |   |  |  |                                   |  
|Cash flow hedges  forward foreign exchange contracts                 |  |  |       |  |  |  |                                     |   |  |  |                                    |   |  |  |                                    |  
| gains/(losses) arising in the year                                  |  |  |       |  |  |  | 31                                  |   |  |  | 8                                  |   |  |  | (1                                 | )
| gains transferred to inventories for the year                       |  |  |       |  |  |  | (14                                 | ) |  |  | (3                                 | ) |  |  | (6                                 | )
|Exchange differences on translation of foreign operations             |  |  |       |  |  |  | (196                                | ) |  |  | (6                                 | ) |  |  | 36                                 |  
|Exchange on borrowings classified as net investment hedges            |  |  |       |  |  |  |                                    |   |  |  |                                   |   |  |  | 1                                  |  
|Total items that may be reclassified subsequently to income statement |  |  |       |  |  |  | (184                                | ) |  |  | (1                                 | ) |  |  | 30                                 |  
|Other comprehensive (expense)/income for the year, net of taxation    |  |  |       |  |  |  | (259                                | ) |  |  | (5                                 | ) |  |  | 45                                 |  
|Total comprehensive income for the year (i)                           |  |  |       |  |  |  | 242                                 |   |  |  | 551                                |   |  |  | 766                                |  



|(i) | Attributable to equity holders of the Company and wholly derived from continuing operations.
|--- | --------------------------------------------------------------------------------------------

The Notes on pages
117 to 165 are an integral part of these accounts.







110Smith & Nephew Annual report 2014



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Commentary on the Group income statement and Group statement of comprehensive income





Revenue Group revenue increased by $266m (6% on a reported basis), from $4,351m in 2013 to $4,617m in 2014. The underlying increase is 2%, after adjusting for the 5% impact of the acquisitions of ArthroCare and a Brazilian distributor and 1% attributable to the
unfavourable impact of currency movements. Despite flat growth in the Established Markets, growth of 17% in the Emerging & International Markets contributed to this underlying increase of 2%. Cost of goods sold Cost of goods sold
increased by $62m (6% on a reported basis) from $1,100m in 2013 to $1,162m in 2014. The underlying movement is 5% after adjusting for the net impact of 4% from the ArthroCare acquisition and 3% attributable to the unfavourable impact of currency
movements. The movement in underlying costs of goods sold of 5% is largely attributable to the increase in underlying trading. During 2014, $12m of
restructuring and rationalisation expenses (2013  $12m) and $23m of acquisition related costs (2013  $5m) were charged to cost of goods sold. Selling, general and administrative expenses Selling, general and administrative expenses increased by $261m (12% on a reported basis) from $2,210m in 2013 to $2,471m in 2014. The underlying movement is 5%
after adjusting for the net impact of 7% from the ArthroCare acquisition. Currency movements had no impact. The underlying increase of 5% is due to the
promotion of new product and costs associated with the RENASYS distribution hold and HP802 termination and the underlying increase in trading. In 2014,
administrative expenses included $62m of amortisation of other intangible assets (2013  $64m), $49m of restructuring and rationalisation expenses (2013  $46m), an amount of $129m relating to amortisation of acquisition intangibles (2013
 $88m) and $95m of acquisition related costs (2013  $26m). Research and development expenses Research and development expenditure as a percentage of revenue remained broadly consistent at 5.1% in 2014 (2013  5.3%). Actual expenditure was $235m in
2014 compared to $231m in 2013. The Group continues to invest in innovative technologies and products to differentiate it from competitors.
 Operating profit Operating profit decreased by $61m to $749m from $810m in 2013. This comprised an increase of $6m in Advanced Surgical Devices and a decrease of $67m in
Advanced Wound Management. The movement in Advanced Surgical Devices is attributable to the continuing pressure on margins and its investment in the Emerging
& International Markets. Advanced Wound Management has been adversely impacted by the costs assocaited with the RENASYS distribution hold and the impairment and costs associated with the termination of the HP802 programme. Net interest receivable/(payable) Net
interest payable increased by $26m, from a net $4m receivable in 2013 to a net payable of $22m in 2014. This movement is primarily due to an increase in interest payable as a result of financing the ArthroCare acquisition. Interest receivable also
decreased following the repayment by Bioventus LLC of their loan note in October 2014. Other finance costs Other finance costs in 2014 remained at $11m and principally relate to costs associated with the Groups retirement benefit schemes. Taxation The taxation charge decreased,
by $33m, to $213m from $246m in 2013. The rate of tax was 29.9%, compared with 30.5% in 2013. After adjusting for specific transactions that management
considers affect the Groups short-term profitability, restructuring and rationalisation expenses, amortisation of acquisition intangibles, acquisition related costs and legal and other items) the tax rate was 27.7% (2013  29.2%).
  The financial commentary on this page forms part of the business review and is unaudited. See pages 180 to 183 for commentary on the 2013 financial year.


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FINANCIAL STATEMENTS

Group balance sheet



|                                              |  |  |       |  |  |  |                            |   |  |  |                            |  
|--------------------------------------------- |  |  | ----- |  |  |  | -------------------------- | - |  |  | -------------------------- | -
|                                              |  |  | Notes |  |  |  | At31 December2014$ million |   |  |  | At31 December2013$ million |  
|Assets                                        |  |  |       |  |  |  |                            |   |  |  |                            |  
|Non-current assets:                           |  |  |       |  |  |  |                            |   |  |  |                            |  
|Property, plant and equipment                 |  |  | 7     |  |  |  | 891                        |   |  |  | 816                        |  
|Goodwill                                      |  |  | 8     |  |  |  | 2,027                      |   |  |  | 1,256                      |  
|Intangible assets                             |  |  | 9     |  |  |  | 1,747                      |   |  |  | 1,054                      |  
|Investments                                   |  |  | 10    |  |  |  | 5                          |   |  |  | 2                          |  
|Investments in associates                     |  |  | 11    |  |  |  | 112                        |   |  |  | 107                        |  
|Loans to associates                           |  |  | 11    |  |  |  |                           |   |  |  | 178                        |  
|Retirement benefit asset                      |  |  | 18    |  |  |  | 7                          |   |  |  | 5                          |  
|Deferred tax assets                           |  |  | 5     |  |  |  | 77                         |   |  |  | 145                        |  
|                                              |  |  |       |  |  |  | 4,866                      |   |  |  | 3,563                      |  
|Current assets:                               |  |  |       |  |  |  |                            |   |  |  |                            |  
|Inventories                                   |  |  | 12    |  |  |  | 1,181                      |   |  |  | 1,006                      |  
|Trade and other receivables                   |  |  | 13    |  |  |  | 1,166                      |   |  |  | 1,113                      |  
|Cash at bank                                  |  |  | 15    |  |  |  | 93                         |   |  |  | 137                        |  
|                                              |  |  |       |  |  |  | 2,440                      |   |  |  | 2,256                      |  
|Total assets                                  |  |  |       |  |  |  | 7,306                      |   |  |  | 5,819                      |  
|                                              |  |  |       |  |  |  |                            |   |  |  |                            |  
|Equity and liabilities                        |  |  |       |  |  |  |                            |   |  |  |                            |  
|Equity attributable to owners of the Company: |  |  |       |  |  |  |                            |   |  |  |                            |  
|Share capital                                 |  |  | 19    |  |  |  | 184                        |   |  |  | 184                        |  
|Share premium                                 |  |  |       |  |  |  | 574                        |   |  |  | 535                        |  
|Capital redemption reserve                    |  |  |       |  |  |  | 11                         |   |  |  | 10                         |  
|Treasury shares                               |  |  | 19    |  |  |  | (315                       | ) |  |  | (322                       | )
|Other reserves                                |  |  |       |  |  |  | (64                        | ) |  |  | 120                        |  
|Retained earnings                             |  |  |       |  |  |  | 3,650                      |   |  |  | 3,520                      |  
|Total equity                                  |  |  |       |  |  |  | 4,040                      |   |  |  | 4,047                      |  
|Non-current liabilities:                      |  |  |       |  |  |  |                            |   |  |  |                            |  
|Long-term borrowings                          |  |  | 15    |  |  |  | 1,666                      |   |  |  | 347                        |  
|Retirement benefit obligations                |  |  | 18    |  |  |  | 233                        |   |  |  | 230                        |  
|Other payables                                |  |  | 14    |  |  |  | 44                         |   |  |  | 7                          |  
|Provisions                                    |  |  | 17    |  |  |  | 63                         |   |  |  | 65                         |  
|Deferred tax liabilities                      |  |  | 5     |  |  |  | 98                         |   |  |  | 50                         |  
|                                              |  |  |       |  |  |  | 2,104                      |   |  |  | 699                        |  
|Current liabilities:                          |  |  |       |  |  |  |                            |   |  |  |                            |  
|Bank overdrafts and loans                     |  |  | 15    |  |  |  | 39                         |   |  |  | 44                         |  
|Trade and other payables                      |  |  | 14    |  |  |  | 838                        |   |  |  | 785                        |  
|Provisions                                    |  |  | 17    |  |  |  | 67                         |   |  |  | 60                         |  
|Current tax payable                           |  |  |       |  |  |  | 218                        |   |  |  | 184                        |  
|                                              |  |  |       |  |  |  | 1,162                      |   |  |  | 1,073                      |  
|Total liabilities                             |  |  |       |  |  |  | 3,266                      |   |  |  | 1,772                      |  
|Total equity and liabilities                  |  |  |       |  |  |  | 7,306                      |   |  |  | 5,819                      |  

The accounts were approved by the Board and authorised for issue on 25 February 2015 and are signed on its behalf by:



|               |  |                         |  |                         |  |  |  | 
|-------------- |  | ----------------------- |  | ----------------------- |  |  |  | 
|Roberto Quarta |  | Olivier Bohuon          |  | Julie Brown             |  |  |  | 
|Chairman       |  | Chief Executive Officer |  | Chief Financial Officer |  |  |  | 

The Notes on pages 117 to 165 are an integral part of these accounts.





112Smith & Nephew Annual report 2014



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Commentary on the Group balance sheet



Non-current assets Non-current assets increased by $1,303m to $4,866m in 2014 from $3,563m in 2013. This is principally attributable to the following:  
Property, plant and equipment increased by $75m from $816m in 2013 to $891m in 2014. Depreciation of $222m was charged during 2014, assets with a net book value of $15m were disposed of and $14m
was impaired relating to HP802. These movements were offset by $298m of additions relating primarily to instruments and other plant & machinery and $62m of additions arising on the acquisitions of ArthroCare. The balance relates to
unfavourable currency movements totalling $34m.  
Goodwill increased by $771m from $1,256m in 2013 to $2,027m in 2014. Of this movement, $829m arose on the acquisition of ArthroCare and $15m on the acquisition in Brazil. The remaining balance
relates to unfavourable currency movements totalling $73m.  
Intangible assets increased by $693m from $1,054m in 2013 to $1,747m in 2014. Intangible assets totalling $817m and $16m arose on the acquisition of ArthroCare and Brazil respectively. Amortisation
of $191m was charged during the year and assets with a net book value of $1m were disposed of. A total of $77m relates to the cost of intellectual property, distribution rights and software acquired. The balance relates to unfavourable currency
movements totalling $25m.  
Investment in associates of $112m in 2014 has increased from $107m in 2013. The loan to the associate was fully repaid in the year.  
Deferred tax assets decreased by $68m in the year from $145m in 2013 to $77m in 2014. Current assets Current assets increased
by $184m to $2,440m from $2,256m in 2013. The movement relates to the following:  
Inventories rose by $175m to $1,181m in 2014 from $1,006m in 2013. This movement is principally attributable to the acquisitions of ArthroCare and distributor in Brazil which increased inventory by
$70m and $36m relating to the purchase of an advanced quantity of an ingredient to ensure continued supply of REGRANEX.  
The level of trade and other receivables increased by $53m to $1,166m in 2014 from $1,113m in 2013. The movement primarily relates to the increase in underlying revenues and $54m from the
ArthroCare acquisition offset by $75m of unfavourable currency movements.  
Cash at bank has fallen by $44m to $93m from $137m in 2013.
 Non-current liabilities Non-current liabilities increased by $1,405m from $699m in 2013 to $2,104m in 2014. This movement relates to the following items:  
Long-term borrowings have increased from $347m in 2013 to $1,666m in 2014 as a result of the $1.1bn private placements and $400m additional long-term facility use to fund the acquisition of
ArthroCare.  
The Retirement benefit obligation increased by $3m to $233m in 2014 from $230m in 2013.  
Deferred tax liabilities increased by $48m in the year from $50m in 2013 to $98m in 2014. Current liabilities Current liabilities
increased by $89m from $1,073m in 2013 to $1,162m in 2014. This movement is attributable to:  
Bank overdrafts and current borrowings have decreased by $5m from $44m in 2013 to $39m in 2014.  
Trade and other payables have increased by $53m to $838m in 2014 from $785m in 2013. This increase includes $75m of trade and other payables arising on the acquisition of ArthroCare and distributor
in Brazil offset by $34m of favourable currency movements.  
Current tax payable is $218m at the end of 2014 compared to $184m in 2013. Total equity Total equity decreased by $7m from $4,047m in 2013 to $4,040m in 2014. The principal movements were:  Total equity$ million1 January 2014


4,047Attributable profit


501Currency translation losses


(196
)Hedging reserves


12Actuarial losses on retirement benefit obligations


(94
)Dividends paid during the year


(250
)Purchase of own shares


(75
)Taxation on Other Comprehensive Income and equity items


19Net share-based transactions


7631 December 2014


4,040
     The financial commentary on this page forms part of the business review and
is unaudited. See pages 180 to 183 for commentary on the 2013 financial year.


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2014113









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FINANCIAL STATEMENTS

Group cash flow statement





|                                                               |  |  |       |  |  |  |                                    |   |  |  |                                    |   |  |  |                                    |  
|-------------------------------------------------------------- |  |  | ----- |  |  |  | ---------------------------------- | - |  |  | ---------------------------------- | - |  |  | ---------------------------------- | -
|                                                               |  |  | Notes |  |  |  | Year ended31 December2014$ million |   |  |  | Year ended31 December2013$ million |   |  |  | Year ended31 December2012$ million |  
|Cash flows from operating activities                           |  |  |       |  |  |  |                                    |   |  |  |                                    |   |  |  |                                    |  
|Profit before taxation                                         |  |  |       |  |  |  | 714                                |   |  |  | 802                                |   |  |  | 1,092                              |  
|Net interest payable/(receivable)                              |  |  | 4     |  |  |  | 22                                 |   |  |  | (4                                 | ) |  |  | (2                                 | )
|Depreciation, amortisation and impairment                      |  |  |       |  |  |  | 427                                |   |  |  | 361                                |   |  |  | 312                                |  
|Loss on disposal of property, plant and equipment and software |  |  |       |  |  |  | 11                                 |   |  |  | 23                                 |   |  |  | 12                                 |  
|Distribution from investment                                   |  |  |       |  |  |  | 1                                  |   |  |  |                                   |   |  |  |                                   |  
|Share-based payments expense                                   |  |  | 23    |  |  |  | 32                                 |   |  |  | 28                                 |   |  |  | 34                                 |  
|Share of results of associates                                 |  |  | 11    |  |  |  | 2                                  |   |  |  | 1                                  |   |  |  | (4                                 | )
|Dividends received from associates                             |  |  | 11    |  |  |  |                                   |   |  |  | 1                                  |   |  |  | 7                                  |  
|Profit on disposal of manufacturing facility                   |  |  | 21    |  |  |  | (9                                 | ) |  |  |                                   |   |  |  |                                   |  
|Profit on disposal of net assets held for sale                 |  |  | 3     |  |  |  |                                   |   |  |  |                                   |   |  |  | (251                               | )
|Net movement in post retirement benefit obligations            |  |  |       |  |  |  | (81                                | ) |  |  | (27                                | ) |  |  | (28                                | )
|(Increase)/Decrease in inventories                             |  |  |       |  |  |  | (168                               | ) |  |  | (99                                | ) |  |  | 12                                 |  
|Increase in trade and other receivables                        |  |  |       |  |  |  | (76                                | ) |  |  | (70                                | ) |  |  | (5                                 | )
|Increase in trade and other payables and provisions            |  |  |       |  |  |  | 86                                 |   |  |  | 122                                |   |  |  | 5                                  |  
|Cash generated from operations (i) (ii)                        |  |  |       |  |  |  | 961                                |   |  |  | 1,138                              |   |  |  | 1,184                              |  
|Interest received                                              |  |  |       |  |  |  | 3                                  |   |  |  | 4                                  |   |  |  | 4                                  |  
|Interest paid                                                  |  |  |       |  |  |  | (36                                | ) |  |  | (10                                | ) |  |  | (8                                 | )
|Income taxes paid                                              |  |  |       |  |  |  | (245                               | ) |  |  | (265                               | ) |  |  | (278                               | )
|Net cash inflow from operating activities                      |  |  |       |  |  |  | 683                                |   |  |  | 867                                |   |  |  | 902                                |  
|Cash flows from investing activities                           |  |  |       |  |  |  |                                    |   |  |  |                                    |   |  |  |                                    |  
|Acquisitions, net of cash acquired                             |  |  | 21    |  |  |  | (1,572                             | ) |  |  | (74                                | ) |  |  | (782                               | )
|Proceeds on disposal of net assets held for sale               |  |  |       |  |  |  |                                   |   |  |  |                                   |   |  |  | 103                                |  
|Capital expenditure                                            |  |  | 2     |  |  |  | (375                               | ) |  |  | (340                               | ) |  |  | (265                               | )
|Investment in associate                                        |  |  | 11    |  |  |  | (2                                 | ) |  |  |                                   |   |  |  | (10                                | )
|Purchase of investments                                        |  |  | 10    |  |  |  | (4                                 | ) |  |  |                                   |   |  |  |                                   |  
|Proceeds from associate loan redemption                        |  |  | 11    |  |  |  | 188                                |   |  |  |                                   |   |  |  |                                   |  
|Proceeds on disposal of manufacturing facility                 |  |  | 21    |  |  |  | 20                                 |   |  |  |                                   |   |  |  |                                   |  
|Cash received on disposal of associate                         |  |  |       |  |  |  |                                   |   |  |  | 7                                  |   |  |  |                                   |  
|Net cash used in investing activities                          |  |  |       |  |  |  | (1,745                             | ) |  |  | (407                               | ) |  |  | (954                               | )
|Cash flows from financing activities                           |  |  |       |  |  |  |                                    |   |  |  |                                    |   |  |  |                                    |  
|Proceeds from issue of ordinary share capital                  |  |  |       |  |  |  | 40                                 |   |  |  | 48                                 |   |  |  | 77                                 |  
|Purchase of own shares                                         |  |  |       |  |  |  | (75                                | ) |  |  | (231                               | ) |  |  |                                   |  
|Proceeds of borrowings due within one year                     |  |  | 20    |  |  |  | 30                                 |   |  |  | 12                                 |   |  |  | 40                                 |  
|Settlement of borrowings due within one year                   |  |  | 20    |  |  |  | (52                                | ) |  |  | (6                                 | ) |  |  | (296                               | )
|Proceeds on borrowings due after one year                      |  |  | 20    |  |  |  | 3,390                              |   |  |  | 695                                |   |  |  | 415                                |  
|Settlement of borrowings due after one year                    |  |  | 20    |  |  |  | (2,068                             | ) |  |  | (779                               | ) |  |  | (1                                 | )
|Proceeds from own shares                                       |  |  |       |  |  |  | 4                                  |   |  |  | 3                                  |   |  |  | 6                                  |  
|Settlement of currency swaps                                   |  |  | 20    |  |  |  | (11                                | ) |  |  | (1                                 | ) |  |  | (1                                 | )
|Equity dividends paid                                          |  |  | 19    |  |  |  | (250                               | ) |  |  | (239                               | ) |  |  | (186                               | )
|Net cash from/(used in) financing activities                   |  |  |       |  |  |  | 1,008                              |   |  |  | (498                               | ) |  |  | 54                                 |  
|Net (decrease)/increase in cash and cash equivalents           |  |  |       |  |  |  | (54                                | ) |  |  | (38                                | ) |  |  | 2                                  |  
|Cash and cash equivalents at beginning of year                 |  |  | 20    |  |  |  | 126                                |   |  |  | 167                                |   |  |  | 161                                |  
|Exchange adjustments                                           |  |  | 20    |  |  |  | (7                                 | ) |  |  | (3                                 | ) |  |  | 4                                  |  
|Cash and cash equivalents at end of year                       |  |  |       |  |  |  | 65                                 |   |  |  | 126                                |   |  |  | 167                                |  



|(i) | Includes $60m (2013  $54m, 2012  $55m) of outgoings on restructuring and rationalisation expenses.
|--- | ----------------------------------------------------------------------------------------------------



|(ii) | Includes $112m (2013  $25m, 2012  $3m) of acquisition-related costs and $23m (2013  $nil, 2012  $22m) of legal and other costs
|---- | ----------------------------------------------------------------------------------------------------------------------------------

The Notes on pages 117 to 165 are an integral part of these accounts.





114Smith & Nephew Annual report 2014



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##### Table of Contents

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 2014 of $961m (2013  $1,138m, 2012  $1,184m) is after paying out $112m (2013  $25m, 2012  $3m) of
acquisition-related costs, $60m (2013  $54m, 2012  $55m) of restructuring and rationalisation expenses and $23m (2013  $nil, 2012  $22m) relating to legal and other exceptional costs. 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 2014, capital expenditure on
tangible and intangible fixed assets represented approximately 8% of continuing Group revenue (2013  8%, 2012  6%). In 2014, capital expenditure
amounted to $375m (2013  $340m, 2012  $265m). 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 2014, $34m (2013  $41m, 2012  $4m) of capital expenditure had been contracted but not provided for which will be funded from cash
inflows. Acquisitions and disposals In the three-year period ended 31 December 2014, $2,428m was spent on acquisitions, funded from net debt and cash inflows. This comprised, $782m for
Healthpoint acquired in December 2012, $74m relating to acquisitions in Turkey, Brazil and India completed in quarter four of 2013, $1,546m for ArthroCare acquired in May 2014 and $26m for the acquisition in Brazil completed in quarter one 2014. During 2012, the Group completed the transfer of its Biologics and Clinical Therapies business (CT) to Bioventus for total consideration of $367m.
As part of this transaction the Group received a 49% interest in Bioventus with a value of $104m and subsequently invested a further $10m. During 2014, the
Group received repayment of the $160m loan note to Bioventus and $28m of accrued interest. Proceeds of $20m have been received on the disposal of the
Groups manufacturing plant in Gilberdyke, UK.
 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 2014, the Group held $65m (2013  $126m, 2012 $167m) in cash net of bank overdrafts. The group had committed facilities available of
$2,525m at 31 December 2014 of which $1,655m 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 $12m. During the year ended 31 December 2014, the Group refinanced its principal banking facilities. The Group has signed a
new five-year committed $1 billion multi-currency revolving credit facility with a maturity date of March 2019. In addition, the Group signed a $1.4 billion committed term loan facility with a maturity date of February 2016. The Group drew down its
$1.4 billion committed term loan facility to fund the acquisition of ArthroCare. $1 billion of this loan was repaid during the year partly from private placement proceeds. During the year ended 31 December 2014, the Group received the entire proceeds of the $325 million private placement debt agreement signed in December 2013.
The funds have a weighted average fixed rate of 3.7% and mature between 2021 and 2026. The Group also received $800 million of proceeds from a second private placement agreement signed in November 2014. The funds have a weighted average fixed rate
of 3.1% and mature between 2019 and 2024. 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 2015, 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 $288m at the beginning of 2013 to $1,613m at the end of 2014, representing an overall increase of $1,325m. The Groups planned future contributions are considered adequate to cover the current underfunded position in the Groups defined benefit plans.
     The financial commentary on this page forms part of the business review and
is unaudited. See pages 180 to 183 for commentary on the 2013 financial year.


LOGO




Smith & Nephew Annual report
2014115









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##### Table of Contents

FINANCIAL STATEMENTS

Group statement of changes in equity





|                                            |  |  |                       |   |  |  |                       |  |  |  |                                   |  |  |  |                              |   |  |  |                              |   |  |  |                           |   |  |  |                      |  
|------------------------------------------- |  |  | --------------------- | - |  |  | --------------------- |  |  |  | --------------------------------- |  |  |  | ---------------------------- | - |  |  | ---------------------------- | - |  |  | ------------------------- | - |  |  | -------------------- | -
|                                            |  |  | Sharecapital$ million |   |  |  | Sharepremium$ million |  |  |  | Capitalredemptionreserve$ million |  |  |  | Treasuryshares (ii)$ million |   |  |  | Otherreserves (iii)$ million |   |  |  | Retainedearnings$ million |   |  |  | Totalequity$ million |  
|At 31 December 2011                         |  |  | 191                   |   |  |  | 413                   |  |  |  |                                  |  |  |  | (766                         | ) |  |  | 91                           |   |  |  | 3,258                     |   |  |  | 3,187                |  
|Total comprehensive income (i)              |  |  |                      |   |  |  |                      |  |  |  |                                  |  |  |  |                             |   |  |  | 30                           |   |  |  | 736                       |   |  |  | 766                  |  
|Equity dividends declared and paid          |  |  |                      |   |  |  |                      |  |  |  |                                  |  |  |  |                             |   |  |  |                             |   |  |  | (186                      | ) |  |  | (186                 | )
|Share-based payments recognised             |  |  |                      |   |  |  |                      |  |  |  |                                  |  |  |  |                             |   |  |  |                             |   |  |  | 34                        |   |  |  | 34                   |  
|Cost of shares transferred to beneficiaries |  |  |                      |   |  |  |                      |  |  |  |                                  |  |  |  | 31                           |   |  |  |                             |   |  |  | (25                       | ) |  |  | 6                    |  
|Issue of ordinary share capital (iv)        |  |  | 2                     |   |  |  | 75                    |  |  |  |                                  |  |  |  |                             |   |  |  |                             |   |  |  |                          |   |  |  | 77                   |  
|At 31 December 2012                         |  |  | 193                   |   |  |  | 488                   |  |  |  |                                  |  |  |  | (735                         | ) |  |  | 121                          |   |  |  | 3,817                     |   |  |  | 3,884                |  
|Total comprehensive income (i)              |  |  |                      |   |  |  |                      |  |  |  |                                  |  |  |  |                             |   |  |  | (1                           | ) |  |  | 552                       |   |  |  | 551                  |  
|Equity dividends declared and paid          |  |  |                      |   |  |  |                      |  |  |  |                                  |  |  |  |                             |   |  |  |                             |   |  |  | (239                      | ) |  |  | (239                 | )
|Share-based payments recognised             |  |  |                      |   |  |  |                      |  |  |  |                                  |  |  |  |                             |   |  |  |                             |   |  |  | 28                        |   |  |  | 28                   |  
|Deferred taxation on share-based payments   |  |  |                      |   |  |  |                      |  |  |  |                                  |  |  |  |                             |   |  |  |                             |   |  |  | 3                         |   |  |  | 3                    |  
|Purchase of own shares                      |  |  |                      |   |  |  |                      |  |  |  |                                  |  |  |  | (231                         | ) |  |  |                             |   |  |  |                          |   |  |  | (231                 | )
|Cost of shares transferred to beneficiaries |  |  |                      |   |  |  |                      |  |  |  |                                  |  |  |  | 21                           |   |  |  |                             |   |  |  | (18                       | ) |  |  | 3                    |  
|Cancellation of treasury shares             |  |  | (10                   | ) |  |  |                      |  |  |  | 10                                |  |  |  | 623                          |   |  |  |                             |   |  |  | (623                      | ) |  |  |                     |  
|Issue of ordinary share capital (iv)        |  |  | 1                     |   |  |  | 47                    |  |  |  |                                  |  |  |  |                             |   |  |  |                             |   |  |  |                          |   |  |  | 48                   |  
|At 31 December 2013                         |  |  | 184                   |   |  |  | 535                   |  |  |  | 10                                |  |  |  | (322                         | ) |  |  | 120                          |   |  |  | 3,520                     |   |  |  | 4,047                |  
|Total comprehensive income (i)              |  |  |                      |   |  |  |                      |  |  |  |                                  |  |  |  |                             |   |  |  | (184                         | ) |  |  | 426                       |   |  |  | 242                  |  
|Equity dividends declared and paid          |  |  |                      |   |  |  |                      |  |  |  |                                  |  |  |  |                             |   |  |  |                             |   |  |  | (250                      | ) |  |  | (250                 | )
|Share-based payments recognised             |  |  |                      |   |  |  |                      |  |  |  |                                  |  |  |  |                             |   |  |  |                             |   |  |  | 32                        |   |  |  | 32                   |  
|Purchase of own shares                      |  |  |                      |   |  |  |                      |  |  |  |                                  |  |  |  | (75                          | ) |  |  |                             |   |  |  |                          |   |  |  | (75                  | )
|Cost of shares transferred to beneficiaries |  |  |                      |   |  |  |                      |  |  |  |                                  |  |  |  | 25                           |   |  |  |                             |   |  |  | (21                       | ) |  |  | 4                    |  
|Cancellation of treasury shares             |  |  | (1                    | ) |  |  |                      |  |  |  | 1                                 |  |  |  | 57                           |   |  |  |                             |   |  |  | (57                       | ) |  |  |                     |  
|Issue of ordinary share capital (iv)        |  |  | 1                     |   |  |  | 39                    |  |  |  |                                  |  |  |  |                             |   |  |  |                             |   |  |  |                          |   |  |  | 40                   |  
|At 31 December 2014                         |  |  | 184                   |   |  |  | 574                   |  |  |  | 11                                |  |  |  | (315                         | ) |  |  | (64                          | ) |  |  | 3,650                     |   |  |  | 4,040                |  



|(i) | Attributable to equity holders of the Company and wholly derived from continuing operations.
|--- | --------------------------------------------------------------------------------------------



|(ii) | Refer to Note 19.2 for further information.
|---- | -------------------------------------------



|(iii) | Other reserves comprises gains and losses on cash flow hedges, foreign exchange differences on translation of foreign operations and the difference arising as a result of translating share capital and share premium at
the rate ruling on the date of redenomination instead of the rate at the balance sheet date. The cumulative translation adjustments within Other Reserves at 31 December 2014 were $(78)m (2013  $118m, 2012  $124m).
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(iv) | Issue of ordinary share capital as a result of options being exercised.
|---- | -----------------------------------------------------------------------

The Notes on pages 117 to 165 are an
integral part of these accounts.











116Smith & Nephew Annual report 2014



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##### Table of Contents

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
the Company and all its subsidiaries. The principal activities of the Group are to develop, manufacture, market and sell medical devices in the sectors of Advanced Surgical Devices and Advanced Wound Management. 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 2014. 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 2014. 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 reporting period. The accounting policies requiring management to use significant estimates and assumptions
are; inventories, impairment, taxation, liability provisions and business combinations. These are discussed under Critical accounting policies on page 104. 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 in preparing the annual financial statements. The Directors have a reasonable expectation
that the Group has adequate resources to continue in operational existence for the foreseeable future. There have been no new accounting pronouncements
impacting the Group in 2014. A number of new standards, amendments to standards and interpretations are effective for the Groups annual periods
beginning on or after 1 January 2015, and have not been applied in preparing these consolidated accounts. With the exception of IFRS 9 Financial Instruments and IFRS 15 Revenue, which the Group does not intend to early adopt and
for which the extent of the impact is still being determined, none of these is expected to have a significant effect on the consolidated accounts of the Group. 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 Groups. When the Group loses control over
a subsidiary, it derecognises the assets and liabilities of the subsidiary and any related components of equity. Any resulting gain or loss is recognised in profit or loss. Any retained interest in the former subsidiary is measured at fair value.
 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 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 statement items and the cash flows of foreign operations are translated at
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 income and accumulated in Other reserves within equity. These include: exchange differences on the translation at closing rates of exchange of non-US Dollar opening net assets; the differences
arising between the translation of profits into US Dollars at actual (or average, as an approximation) and closing exchange rates; to the extent that the hedging relationship is effective, the difference on translation of foreign currency borrowings
or swaps that are used to finance or hedge the Groups net investments in foreign operations; and the movement in the fair value of forward foreign exchange contracts used to hedge forecast foreign exchange cash flows. The exchange rates used for the translation of currencies into US Dollars that have the most significant impact on the Group results were:  2014



2013



2012Average ratesSterling


1.65



1.56



1.58Euro


1.33



1.33



1.28Swiss Franc


1.09



1.08



1.07Year-end ratesSterling


1.56



1.66



1.63Euro


1.21



1.38



1.32Swiss Franc


1.01



1.12



1.09


LOGO




Smith & Nephew Annual report
2014117









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##### Table of Contents

FINANCIAL STATEMENTS

Notes to the Group accountscontinued





2 Business segment information During 2014 for management purposes the Group was organised into two global divisions according to the nature of its products which represented two reportable
business segments  Advanced Surgical Devices and Advanced Wound Management. As part of the Reinvestment & Group Optimisation programme
management have created a single unified operating structure with a single cost base, led by a managing director in each major country (outside the US). The change in structure took effect on 1 January 2015 and as such the Group will report as
a single segment from this date. The types of products and services offered by each business segment in 2014 are:  
Smith & Nephews Advanced Surgical Devices (ASD) business offers the following products and technologies:  
Orthopaedic Reconstruction which includes Hip Implants, Knee Implants and ancillary products such as bone cement and mixing systems used in cemented reconstruction joint surgery  
Trauma & Extremities consisting of internal and external devices used in the stabilisation of severe fractures and deformity correction procedures  
Sports Medicine Joint Repair, which offers surgeons a broad array of instruments, technologies and implants necessary to perform minimally invasive surgery of the joints  
Arthroscopy Enabling Technologies which offer healthcare providers a variety of technologies such as fluid management equipment for surgical access, high definition cameras, digital image capture, scopes, 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  
Other ASD which includes gynaecological instrumentation and the remaining Clinical Therapies geographies which are in the process of being transferred to Bioventus.  
Smith & Nephews Advanced Wound Management (AWM) business offers a range of products:  
Advanced Wound Care includes products for the treatment of acute and chronic wounds, including leg, diabetic and pressure ulcers, burns and post-operative wounds  
Advanced Wound Devices consists of traditional and single-use Negative Pressure Wound Therapy and hydrosurgery systems  
Advanced Wound Bioactives includes biologics and other bioactive technologies that provide unique approaches to debridement and dermal repair/regeneration. Management monitors the operating results of its business segments separately for the purposes of making decisions about resource allocation and performance
assessment. Group financing (including interest receivable and payable) and income taxes are managed on a Group basis and are not allocated to business segments. The following tables present revenue, profit, asset and liability information regarding the Groups operating segments as they existed during the year.
Investments in associates and loans to associates are segmentally allocated to Advanced Surgical Devices.


2.1 Revenue by business segment and geography  ACCOUNTING POLICYRevenue comprises sales of products and services to third parties at amounts invoiced net of trade discounts
and rebates, excluding taxes on revenue. Revenue from the sale of products is recognised upon transfer to the customer of the significant risks and rewards of ownership. This is generally when goods are delivered to customers. Sales of inventory
located at customer premises and available for customers immediate use are recognised when notification is received that the product has been 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 arrangement based on estimates of the level of business
expected and adjusted at the end of the arrangement to reflect actual volumes.   2014$ million



2013$ million



2012$ millionRevenue by business segmentAdvanced Surgical Devices


3,298



3,015



3,108Advanced Wound Management


1,319



1,336



1,0294,617



4,351



4,137There are no material sales between business segments.2014$ million



2013$ million



2012$ millionRevenue by geographic marketUnited States


2,012



1,862



1,651United Kingdom


299



293



297Other Established Markets


1,629



1,633



1,706Emerging & International Markets


677



563



4834,617



4,351



4,137 Revenue has been allocated by basis of destination. No revenue from a single customer is in excess of 10% of the Groups
revenue.










118Smith & Nephew Annual report 2014



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##### Table of Contents





2.2 Trading and operating profit by business segment Trading profit is a trend measure which presents the long-term profitability of the Group excluding the impact of specific transactions that management considers
affects the Groups short-term profitability. The Group presents this measure to assist investors in their understanding of trends. The Group has identified the following items, where material, as those to be excluded from operating profit when
arriving at trading profit: acquisition and disposal related items including amortisation of acquisition intangibles and impairments; significant restructuring events; gains and losses arising from legal disputes; and significant uninsured losses.
Operating profit reconciles to trading profit as follows:  Notes



2014$ million



2013$ million



2012$ millionOperating profit






749



810



846Acquisition-related costs


3



118



31



11Restructuring and rationalisation expenses


3



61



58



65Amortisation of acquisition intangibles and impairments


9



129



88



43Legal and other


3



(2
)






Trading profit






1,055



987



965Trading profit by business segmentAdvanced Surgical Devices






810



712



728Advanced Wound Management






245



275



2371,055



987



965Operating profit by business segment reconciled to
attributable profit for the yearAdvanced Surgical Devices






626



620



632Advanced Wound Management






123



190



214Operating profit






749



810



846Net interest (payable)/receivable






(22
)


4



2Other finance costs






(11
)


(11
)


(11
)Share of results of associates






(2
)


(1
)


4Profit on disposal on net assets held for sale














251Taxation






(213
)


(246
)


(371
)Attributable profit for the year






501



556



7212.3 Assets and liabilities by business segment and geography2014$ million



2013$ million



2012$ millionBalance sheetAssets:Advanced Surgical Devices






5,368



3,684



3,518Advanced Wound Management






1,761



1,848



1,776Operating assets by business segment






7,129



5,532



5,294Unallocated corporate assets






177



287



348Total assets






7,306



5,819



5,642Liabilities:Advanced Surgical Devices






697



609



530Advanced Wound Management






315



308



256Operating liabilities by business segment






1,012



917



786Unallocated corporate liabilities






2,254



855



972Total liabilities






3,266



1,772



1,758


LOGO




Smith & Nephew Annual report
2014119









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##### Table of Contents



FINANCIAL
STATEMENTS

Notes to the Group accountscontinued





2 Business segment information continued

Unallocated corporate assets and liabilities comprise the following:



|                                                           |  |  |               |  |  |  |               |  |  |  |               | 
|---------------------------------------------------------- |  |  | ------------- |  |  |  | ------------- |  |  |  | ------------- | 
|                                                           |  |  | 2014$ million |  |  |  | 2013$ million |  |  |  | 2012$ million | 
|Deferred tax assets                                        |  |  | 77            |  |  |  | 145           |  |  |  | 164           | 
|Retirement benefit asset                                   |  |  | 7             |  |  |  | 5             |  |  |  | 6             | 
|Cash at bank                                               |  |  | 93            |  |  |  | 137           |  |  |  | 178           | 
|Unallocated corporate assets                               |  |  | 177           |  |  |  | 287           |  |  |  | 348           | 
|Long-term borrowings                                       |  |  | 1,666         |  |  |  | 347           |  |  |  | 430           | 
|Retirement benefit obligations                             |  |  | 233           |  |  |  | 230           |  |  |  | 266           | 
|Deferred tax liabilities                                   |  |  | 98            |  |  |  | 50            |  |  |  | 61            | 
|Bank overdrafts and loans due within one year              |  |  | 39            |  |  |  | 44            |  |  |  | 38            | 
|Current tax payable                                        |  |  | 218           |  |  |  | 184           |  |  |  | 177           | 
|Unallocated corporate liabilities                          |  |  | 2,254         |  |  |  | 855           |  |  |  | 972           | 
|                                                           |  |  |               |  |  |  |               |  |  |  |               | 
|                                                           |  |  | 2014$ million |  |  |  | 2013$ million |  |  |  | 2012$ million | 
|Capital expenditure (including acquisitions)               |  |  |               |  |  |  |               |  |  |  |               | 
|Advanced Surgical Devices                                  |  |  | 2,045         |  |  |  | 327           |  |  |  | 188           | 
|Advanced Wound Management                                  |  |  | 73            |  |  |  | 124           |  |  |  | 839           | 
|                                                           |  |  | 2,118         |  |  |  | 451           |  |  |  | 1,027         | 
|                                                           |  |  |              
|Capital expenditure segmentally allocated above comprises: |  |  |               |  |  |  |               |  |  |  |               | 
|                                                           |  |  | 2014$ million |  |  |  | 2013$ million |  |  |  | 2012$ million | 
|Additions to property, plant and equipment                 |  |  | 298           |  |  |  | 242           |  |  |  | 197           | 
|Additions to intangible assets                             |  |  | 77            |  |  |  | 98            |  |  |  | 68            | 
|Capital expenditure (excluding business combinations)      |  |  | 375           |  |  |  | 340           |  |  |  | 265           | 
|Trade investments                                          |  |  | 4             |  |  |  |              |  |  |  |              | 
|Acquisitions  Goodwill                                    |  |  | 844           |  |  |  | 53            |  |  |  | 73            | 
|Acquisitions  Intangible assets                           |  |  | 833           |  |  |  | 53            |  |  |  | 662           | 
|Acquisitions  Property, plant and equipment               |  |  | 62            |  |  |  | 5             |  |  |  | 27            | 
|Capital expenditure                                        |  |  | 2,118         |  |  |  | 451           |  |  |  | 1,027         | 
|                                                           |  |  |               |  |  |  |               |  |  |  |               | 
|                                                           |  |  | 2014$ million |  |  |  | 2013$ million |  |  |  | 2012$ million | 
|Depreciation, amortisation and impairment                  |  |  |               |  |  |  |               |  |  |  |               | 
|Advanced Surgical Devices                                  |  |  | 320           |  |  |  | 268           |  |  |  | 274           | 
|Advanced Wound Management                                  |  |  | 107           |  |  |  | 93            |  |  |  | 38            | 
|                                                           |  |  | 427           |  |  |  | 361           |  |  |  | 312           | 











120Smith & Nephew Annual report 2014



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Amounts comprise depreciation of property, plant and equipment, amortisation of other intangible assets, impairment
of investments and amortisation of acquisition intangibles and impairments as follows:  2014$ million



2013$ million



2012$ millionAmortisation of acquisition intangibles


129



88



43Depreciation of property, plant and equipment


222



209



212Impairment of property, plant and equipment


14







Impairment of goodwill and investments










6Amortisation of other intangible assets


62



64



51427



361



312$14m impairments were recognised within operating profit in 2014 (2013  $nil, 2012 
$6m, recognised within the administrative expenses line). In 2014, the impairment was segmentally allocated to Advanced Wound Management (2012: Advanced Surgical Devices).
Geographic2014$ million



2013$ millionAssets by geographic locationUnited States






3,104



2,086United Kingdom






379



255Other Established Markets






1,101



902Emerging & International Markets






198



170Non-current operating assets by geographic location






4,782



3,413United States






1,104



1,121United Kingdom






234



288Other Established Markets






706



486Emerging & International Markets






303



224Current operating assets by geographic location






2,347



2,119Unallocated corporate assets (see page 120)






177



287Total assets






7,306



5,8192.4 Other business segment information2014$ million



2013$ million



2012$ millionOther significant expenses recognised within operating profitAdvanced Surgical Devices


106



51



57Advanced Wound Management


71



38



19177



89



76The $177m incurred in 2014 relates to $61m restructuring and
rationalisation expenses and $118m acquisition related costs and a net $2m credit related to legal and other (2013  $58m relates to restructuring and rationalisation expenses and $31m acquisition related costs, 2012  $65m relates to
restructuring and rationalisation expenses and $11m acquisition related costs).2014numbers



2013numbers



2012numbersAverage number of employeesAdvanced Surgical Devices


9,273



7,066



7,194Advanced Wound Management


4,195



3,970



3,28313,468



11,036



10,477


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2014121









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##### Table of Contents

FINANCIAL STATEMENTS

Notes to the Group accountscontinued





3 Operating profit



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | 
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| |  | ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | 
| |  | Research and development
 Research expenditure is expensed as occurred. Internal development
expenditure is only capitalised if the recognition criteria in IAS 38 Intangible Assets have been satisfied. The Group considers that the regulatory, technical and market uncertainties inherent in the development of new products 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 if the arrangement represents consideration for the acquisition of intellectual property developed at the risk of the third party.
 Capitalised development expenditures are amortised on a straight-line
basis over their useful economic lives from product launch. 
Advertising costs 
Expenditure on advertising costs is expensed as incurred. |  | 



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |  |               |   |  |  |               |   |  |  |               |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------------- | - |  |  | ------------- | - |  |  | ------------- | -
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |  | 2014$ million |   |  |  | 2013$ million |   |  |  | 2012$ million |  
|Revenue                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |  | 4,617         |   |  |  | 4,351         |   |  |  | 4,137         |  
|Cost of goods sold (i)(ii)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |  | (1,162        | ) |  |  | (1,100        | ) |  |  | (1,070        | )
|Gross profit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |  | 3,455         |   |  |  | 3,251         |   |  |  | 3,067         |  
|Research and development expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |  | (235          | ) |  |  | (231          | ) |  |  | (171          | )
|Selling, general and administrative expenses:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  |               |   |  |  |               |   |  |  |               |  
|Marketing, selling and distribution expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |  | (1,670        | ) |  |  | (1,535        | ) |  |  | (1,440        | )
|Administrative expenses (iii) (iv) (v) (vi)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  | (801          | ) |  |  | (675          | ) |  |  | (610          | )
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |  | (2,471        | ) |  |  | (2,210        | ) |  |  | (2,050        | )
|Operating profit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |  | 749           |   |  |  | 810           |   |  |  | 846           |  
|(i)      2014 includes $12m of restructuring and rationalisation expenses (2013  $12m,
2012  $3m). (ii)     2014 includes $23m of acquisition-related costs (2013  $5m,
2012  $nil). (iii)    2014 includes $62m of amortisation of other intangible assets (2013
 $64m, 2012  $51m). (iv)    2014 includes $49m of restructuring and rationalisation
expenses and $129m of amortisation of acquisition intangibles (2013  $46m of restructuring and rationalisation expenses and $88m of amortisation of acquisition intangibles, 2012  $62m of restructuring and rationalisation expenses and
$43m of amortisation of acquisition intangibles). (v)     2014 includes $2m credit relating
to legal and other exceptionals (2013  $nil, 2012  $nil). (vi)    2014 includes $95m
of acquisition-related costs (2013  $26m, 2012  $11m).  Note that items
detailed in (i), (ii), (iv), (v) and (vi) are excluded from the calculation of trading profit. 
Operating profit is stated after charging the following items: | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |  | 2014$ million |   |  |  | 2013$ million |   |  |  | 2012$ million |  
|Amortisation of acquisition intangibles                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |  | 129           |   |  |  | 88            |   |  |  | 43            |  
|Amortisation of other intangible assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |  | 62            |   |  |  | 64            |   |  |  | 51            |  
|Impairment of goodwill and investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |              |   |  |  |              |   |  |  | 6             |  
|Depreciation of property, plant and equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  | 222           |   |  |  | 209           |   |  |  | 212           |  
|Loss on disposal of property, plant and equipment and software                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |  | 25            |   |  |  | 23            |   |  |  | 12            |  
|Minimum operating lease payments for land and buildings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |  | 38            |   |  |  | 32            |   |  |  | 29            |  
|Minimum operating lease payments for other assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |  | 18            |   |  |  | 19            |   |  |  | 21            |  
|Advertising costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |  | 96            |   |  |  | 91            |   |  |  | 74            |  











122Smith & Nephew Annual report 2014



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3.1 Staff costs Staff
costs during the year amounted to:  Notes



2014$ million



2013$ million



2012$ millionWages and salaries






1,237



998



886Social security costs






127



106



97Pension costs (including retirement healthcare)


18



17



72



72Share-based payments


23



32



28



341,413



1,204



1,089 3.2 Audit Fees  information about the nature and cost of services provided by auditors  2014$ million



2013$ million



2012$ millionAudit services: Group accounts


2



1



1Other services:Local statutory audit pursuant to legislation


1



2



2Taxation services:Compliance services


1



2



1Advisory services


1



1



1Total auditors remuneration


5



6



5Arising:In the UK


3



3



2Outside the UK


2



3



35



6



5 3.3 Acquisition related costs Acquisition related costs of $118m (2013  $31m, 2012  $11m) were incurred within operating profit in the twelve month period to 31 December 2014.
These costs relate to professional and adviser fees and integration costs in connection with the acquisitions of ArthroCare and the distributor in Brazil completed in 2014, the acquisitions in Turkey, Brazil and India during 2013 and the acquisition
of Healthpoint Biotherapeutics completed in 2012. In addition, $7m of debt-related acquisition costs were incurred in the year. 3.4 Restructuring and
rationalisation expenses Restructuring and rationalisation costs of $61m (2013  $58m, 2012  $65m) were incurred in the twelve month period to
31 December 2014. These related mainly to charges of $49m (2013  $nil, 2012  $nil) incurred in relation to the Group Optimisation programme announced in May 2014. Charges of $12m (2013  $58m, 2012  $65m) were also
incurred relating to people costs and contract termination costs associated with the structural and process changes announced in August 2011. 3.5 Legal and
other The legal and other net credit within operating profit of $2m (2013  $nil, 2012  $251m) relates to a settlement credit and past service gain
on the closure of the US Pension Plan of $46m and a gain on the disposal of a UK manufacturing facility of $9m, offset by a charge of $25m relating to the likely costs of a distribution hold on RENASYS in the US pending new regulatory approvals, and
a charge of $28m relating to the HP802 programme which was stopped in the fourth quarter. In 2012, a profit on disposal of $251m was recorded relating to the
disposal of our Clinical Therapies business.


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2014123









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##### Table of Contents

FINANCIAL STATEMENTS

Notes to the Group accountscontinued





4 Interest and other finance costs

4.1 Interest receivable/(payable)



|                                        |  |  |       |  |  |  |               |   |  |  |               |   |  |  |               |  
|--------------------------------------- |  |  | ----- |  |  |  | ------------- | - |  |  | ------------- | - |  |  | ------------- | -
|                                        |  |  |       |  |  |  | 2014$ million |   |  |  | 2013$ million |   |  |  | 2012$ million |  
|Interest receivable                     |  |  |       |  |  |  | 13            |   |  |  | 14            |   |  |  | 11            |  
|Interest payable:                       |  |  |       |  |  |  |               |   |  |  |               |   |  |  |               |  
|Bank borrowings                         |  |  |       |  |  |  | (19           | ) |  |  | (8            | ) |  |  | (7            | )
|Private placement notes                 |  |  |       |  |  |  | (14           | ) |  |  |              |   |  |  |              |  
|Other                                   |  |  |       |  |  |  | (2            | ) |  |  | (2            | ) |  |  | (2            | )
|                                        |  |  |       |  |  |  | (35           | ) |  |  | (10           | ) |  |  | (9            | )
|Net interest (payable)/receivable       |  |  |       |  |  |  | (22           | ) |  |  | 4             |   |  |  | 2             |  
|                                        |  |  |       | 
|4.2 Other finance costs                 |  |  |       |  |  |  |               |   |  |  |               |   |  |  |               |  
|                                        |  |  | Notes |  |  |  | 2014$ million |   |  |  | 2013$ million |   |  |  | 2012$ million |  
|Retirement benefit net interest expense |  |  | 18    |  |  |  | (10           | ) |  |  | (11           | ) |  |  | (11           | )
|Other                                   |  |  |       |  |  |  | (1            | ) |  |  |              |   |  |  |              |  
|Other finance costs                     |  |  |       |  |  |  | (11           | ) |  |  | (11           | ) |  |  | (11           | )

Foreign exchange gains or losses recognised in the income statement arose primarily on the translation of intercompany and third
party borrowings and amounted to a net $21m gain in 2014 (2013  net $1m gain, 2012  net $5m loss). These amounts were fully matched in the income statement by the fair value gains or losses on currency swaps (carried at fair value
through profit and loss) held to manage this 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 tax authorities as
promptly as possible, at any time the Group has un-agreed years outstanding and is involved in disputes and tax audits. Significant issues 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.  Deferred tax is recognised in respect
of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. 
Deferred tax is not recognised for: temporary differences related to investments in subsidiaries and associates where the Group is able to
control the 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 non-deductible 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 transaction, does not affect the accounting or taxable profit. 
Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which they can be
used. Deferred 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. |  | 













124Smith & Nephew Annual report 2014



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5.1 Taxation charge attributable to the Group  2014$ million



2013$ million



2012$ millionCurrent taxation:UK corporation tax at 21.5% (2013  23.3%, 2012  24.5%)


39



50



53Overseas tax


235



229



248Current income tax charge


274



279



301Adjustments in respect of prior periods


(6
)


(5
)


(17
)Total current taxation


268



274



284Deferred taxation:Origination and reversal of temporary differences


(52
)


(23
)


88Changes in tax rates






(4
)


(3
)Adjustments to estimated amounts arising in prior periods


(3
)


(1
)


2Total deferred taxation


(55
)


(28
)


87Total taxation as per the income statement


213



246



371Deferred taxation in other comprehensive income


(19
)


16



(20
)Deferred taxation in equity






(3
)


Taxation attributable to the Group


194



259



351 The tax charge was reduced by $71m as a consequence of restructuring and rationalisation expenses, amortisation of acquisition
intangibles and acquisition related costs and legal and other. In 2013, the tax charge was reduced by $40m as a consequence of restructuring and rationalisation expenses, amortisation of acquisition intangibles and acquisition related costs. In
2012, the tax charge was increased by $82m as a consequence of restructuring and rationalisation expenses, amortisation of acquisition intangibles and legal provision. The applicable tax for the year is based on the UK standard rate of corporation tax of 21.5% (2013  23.3%, 2012  24.5%). Overseas taxation is
calculated at the rates prevailing in the respective jurisdictions. The average effective tax rate differs from the applicable rate as follows:  2014%



2013%



2012%UK standard rate


21.5



23.3



24.5Non-deductible/non-taxable items


0.5



(1.0
)


0.4Prior year items


(1.2
)


(0.5
)


(1.3
)Tax losses incurred not relieved


1.6



0.9



0.8Overseas income taxed at other than UK standard rate


7.5



7.8



9.3Total effective tax rate


29.9



30.5



33.7 The enacted UK tax rate applicable from 1 April 2014 is 21%. The UK Government have enacted legislation to reduce the tax rate
to 20% from 1 April 2015.


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2014125









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##### Table of Contents

FINANCIAL STATEMENTS

Notes to the Group accountscontinued



5 Taxation continued



5.2 Deferred taxation

Movements in the main components of deferred tax assets and liabilities were as follows:



|                                            |  |  |                                    |   |  |  |                      |   |  |  |                                      |   |  |  |                       |  |  |  |                                                   |   |  |  |                |  
|------------------------------------------- |  |  | ---------------------------------- | - |  |  | -------------------- | - |  |  | ------------------------------------ | - |  |  | --------------------- |  |  |  | ------------------------------------------------- | - |  |  | -------------- | -
|                                            |  |  | Acceleratedtaxdeprecation$ million |   |  |  | Intangibles$ million |   |  |  | Retirementbenefitobligation$ million |   |  |  | Macrotexture$ million |  |  |  | Inventory,provisionsand otherdifferences$
million |   |  |  | Total$ million |  
|At 1 January 2013                           |  |  | (90                                | ) |  |  | (28                  | ) |  |  | 87                                   |   |  |  | 52                    |  |  |  | 82                                                |   |  |  | 103            |  
|Exchange adjustment                         |  |  |                                   |   |  |  | 1                    |   |  |  |                                     |   |  |  |                      |  |  |  | (5                                                | ) |  |  | (4             | )
|Movement in income statement  current year |  |  | (3                                 | ) |  |  | 5                    |   |  |  | (3                                   | ) |  |  |                      |  |  |  | 28                                                |   |  |  | 27             |  
|Movement in income statement  prior years  |  |  | 2                                  |   |  |  | (1                   | ) |  |  |                                     |   |  |  |                      |  |  |  |                                                  |   |  |  | 1              |  
|Movement in other comprehensive income      |  |  |                                   |   |  |  |                     |   |  |  | (16                                  | ) |  |  |                      |  |  |  |                                                  |   |  |  | (16            | )
|Charge to equity                            |  |  |                                   |   |  |  |                     |   |  |  |                                     |   |  |  |                      |  |  |  | 3                                                 |   |  |  | 3              |  
|Acquisition                                 |  |  |                                   |   |  |  |                     |   |  |  |                                     |   |  |  |                      |  |  |  | (19                                               | ) |  |  | (19            | )
|Transfers                                   |  |  |                                   |   |  |  | 1                    |   |  |  |                                     |   |  |  |                      |  |  |  | (1                                                | ) |  |  |               |  
|At 31 December 2013                         |  |  | (91                                | ) |  |  | (22                  | ) |  |  | 68                                   |   |  |  | 52                    |  |  |  | 88                                                |   |  |  | 95             |  
|Exchange adjustment                         |  |  | 2                                  |   |  |  | 1                    |   |  |  | (2                                   | ) |  |  |                      |  |  |  | (10                                               | ) |  |  | (9             | )
|Movement in income statement  current year |  |  | 18                                 |   |  |  | 16                   |   |  |  | (18                                  | ) |  |  |                      |  |  |  | 36                                                |   |  |  | 52             |  
|Movement in income statement  prior years  |  |  | 1                                  |   |  |  | (1                   | ) |  |  |                                     |   |  |  |                      |  |  |  | 3                                                 |   |  |  | 3              |  
|Movement in other comprehensive income      |  |  |                                   |   |  |  |                     |   |  |  | 22                                   |   |  |  |                      |  |  |  | (3                                                | ) |  |  | 19             |  
|Acquisition                                 |  |  |                                   |   |  |  | (220                 | ) |  |  |                                     |   |  |  |                      |  |  |  | 39                                                |   |  |  | (181           | )
|At 31 December 2014                         |  |  | (70                                | ) |  |  | (226                 | ) |  |  | 70                                   |   |  |  | 52                    |  |  |  | 153                                               |   |  |  | (21            | )
|                                            |  |  |                                    |   |  | 
|Represented by:                             |  |  |                                    |   |  |  |                      |   |  |  |                                      |   |  |  |                       |  |  |  |                                                   |   |  |  |                |  



|                            |  |  |               |   |  |  |               |  
|--------------------------- |  |  | ------------- | - |  |  | ------------- | -
|                            |  |  | 2014$ million |   |  |  | 2013$ million |  
|Deferred tax assets         |  |  | 77            |   |  |  | 145           |  
|Deferred tax liabilities    |  |  | (98           | ) |  |  | (50           | )
|Net position at 31 December |  |  | (21           | ) |  |  | 95            |  

The Group has unused tax losses of $92m (2013  $31m) available for offset against future profits. A deferred tax asset has
been recognised in respect of $47m (2013  $3m) of these losses. No deferred tax asset has 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 recognised is approximately $449m (2013  $nil).















126Smith & Nephew Annual report 2014



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6 Earnings per ordinary share  ACCOUNTING POLICIESEarnings per share 
Basic earnings per share is calculated by dividing the profit attributable to equity holders by the weighted average number of Ordinary
shares in issue during the year, excluding shares held by the Company in the Employees Share Trust or as treasury shares. 
Adjusted earnings per share 
Adjusted earnings per share is a trend measure, which presents the long-term profitability of the Group excluding the impact of specific
transactions that management considers affects 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. The
Group has identified the following items as those to be excluded when arriving at adjusted attributable profit: acquisition and disposal related items including amortisation of acquisition intangible assets and impairments; significant restructuring
events; significant gains and losses arising from legal disputes and significant uninsured losses; and taxation thereon. The calculations of the basic, diluted and adjusted earnings per ordinary share are based on the following attributable profit and
numbers of shares:  2014$ million



2013$ million



2012$ millionEarningsAttributable profit for the year






501



556



721Adjusted attributable profit (see below)






743



693



671Attributable profit is reconciled to adjusted attributable
profit as follows:Notes



2014$ million



2013$ million



2012$ millionAttributable profit for the year






501



556



721Acquisition-related costs


3



125



31



11Restructuring and rationalisation expenses


3



61



58



65Amortisation of acquisition intangibles and impairments


9



129



88



43Profit on disposal of net assets held for sale


3











(251
)Legal and other


3



(2
)






Taxation on excluded items


5



(71
)


(40
)


82Adjusted attributable profit






743



693



671The numerators used for basic and diluted earnings per ordinary
share are the same. The denominators used for all categories of earnings for basic and diluted earnings per ordinary share are as follows:2014



2013



2012Number of shares (millions)Basic weighted number of shares






893



901



897Dilutive impact of share options outstanding






6



5



4Diluted weighted average number of shares






899



906



901Earnings per ordinary shareBasic






56.1¢



61.7¢



80.4¢Diluted






55.7¢



61.4¢



80.0¢Adjusted: Basic






83.2¢



76.9¢



74.8¢Adjusted: Diluted






82.6¢



76.5¢



74.5¢ There were no share options which were not included in the diluted EPS calculation because they were non-dilutive in the period
(2013  0.5m, 2012  8.2m).


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FINANCIAL STATEMENTS

Notes to the Group accountscontinued





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 method over their estimated useful lives, and is generally recognised in profit
or loss. Leased assets are depreciated over the shorter of the lease term 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 complete are capitalised based on the Group weighted average borrowing costs. All other finance costs are
expensed as incurred.  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 cash-generating 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 value-in-use, its estimated future cash flow is discounted to its present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the
asset. |  | 









128Smith & Nephew Annual report 2014



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Land and buildings





Plant and equipment



Assets inFreehold$ million



Leasehold$ million





Instruments$ million



Other$ million



course ofconstruction$ million



Total$ millionCostAt 1 January 2013


143



52





1,042



919



73



2,229Exchange adjustment


1



(1
)




(16
)


6







(10
)Acquisitions (see Note 21)






1





2



2







5Additions


2



1





139



23



77



242Disposals


(3
)








(102
)


(80
)


(2
)


(187
)Transfers
















68



(68
)


At 31 December 2013


143



53





1,065



938



80



2,279Exchange adjustment


(4
)


(1
)




(68
)


(35
)


(2
)


(110
)Acquisitions (see Note 21)


11



4





9



17



21



62Additions












158



57



83



298Disposal of business
















(12
)






(12
)Disposals


(2
)


(3
)




(108
)


(40
)


(4
)


(157
)Transfers


1



1





4



38



(44
)


At 31 December 2014


149



54





1,060



963



134



2,360Depreciation and impairmentAt 1 January 2013


46



29





738



623







1,436Exchange adjustment


(1
)


(1
)




(10
)


5







(7
)Charge for the year


1



3





135



70







209Disposals


(3
)








(99
)


(73
)






(175
)At 31 December 2013


43



31





764



625







1,463Exchange adjustment


(2
)








(50
)


(24
)






(76
)Charge for the year


5



4





137



76







222Impairment
















3



11



14Disposal of business
















(7
)






(7
)Disposals


(1
)


(3
)




(107
)


(36
)






(147
)At 31 December 2014


45



32





744



637



11



1,469Net book amountsAt 31 December 2014


104



22





316



326



123



891At 31 December 2013


100



22





301



313



80



816 Land and buildings includes land with a cost of $20m (2013  $15m) that is not subject to depreciation. Assets held under
finance leases with a net book amount of $8m (2013  $10m) are included within land and buildings. The impairment charge in the year relates to certain
assets which related to the production of HP802, which the Group has decided not to continue. Historically, capital expenditure represents the Groups
expected annual investment in property, plant and equipment and other intangible assets. This varies between 6% and 8% (2013  6% and 8%) of annual revenue. Group capital expenditure relating to property, plant and equipment contracted but not provided for amounted to $27m (2013  $20m). The amount of borrowing costs capitalised in 2014 and 2013 was minimal.


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FINANCIAL STATEMENTS

Notes to the Group accountscontinued





8 Goodwill



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  | 
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| |  | ACCOUNTING POLICY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  | 
| |  | Goodwill is not amortised but is reviewed for
impairment annually. Goodwill is allocated to the cash-generating unit (CGU) that is expected to benefit from the acquisition. The recoverable amount of CGUs to which goodwill has been allocated is tested for impairment annually. The
CGUs, monitored by management, are at the business segment level, Advanced Surgical Devices and Advanced Wound Management. 
If the recoverable amount of the cash-generating unit is less than its carrying amount then an impairment loss is determined to have
occurred. Any impairment losses that arise are recognised immediately in the income statement and are allocated first to reduce the carrying amount of goodwill and then to the carrying amounts of the other assets of the CGU.
 In carrying out impairment reviews of goodwill a number of significant
assumptions have to be made when preparing cash flow projections. These include the future rate of market growth, discount rates, the market demand for the products acquired, the future profitability of acquired businesses 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 |  |  |  | 2014$ million |   |  |  | 2013$ million | 
|Cost                                                                                                                |  |  |  |  |       |  |  |  |               |   |  |  |               | 
|At 1 January                                                                                                        |  |  |  |  |       |  |  |  | 1,256         |   |  |  | 1,186         | 
|Exchange adjustment                                                                                                 |  |  |  |  |       |  |  |  | (73           | ) |  |  | 17            | 
|Acquisitions (i)                                                                                                    |  |  |  |  | 21    |  |  |  | 844           |   |  |  | 53            | 
|At 31 December                                                                                                      |  |  |  |  |       |  |  |  | 2,027         |   |  |  | 1,256         | 
|Impairment                                                                                                          |  |  |  |  |       |  |  |  |               |   |  |  |               | 
|At 1 January and 31 December                                                                                        |  |  |  |  |       |  |  |  |              |   |  |  |              | 
|Net book amounts                                                                                                    |  |  |  |  |       |  |  |  | 2,027         |   |  |  | 1,256         | 
|                                                                                                                    | 
|(i)    2013 includes an adjustment of $16m following the finalisation of the Healthpoint acquisition
balance sheet. |  |  |  |  |      
|                                                                                                                    | 
|Each of the Groups business segments represent a CGU and include goodwill as
follows:                              |  |  |  |  |      
|                                                                                                                    |  |  |  |  |       |  |  |  | 2014$ million |   |  |  | 2013$ million | 
|                                                                                                                    |  |  |  |  |       |  |  |  |               |   |  |  |               | 
|Advanced Surgical Devices                                                                                           |  |  |  |  |       |  |  |  | 1,686         |   |  |  | 918           | 
|Advanced Wound Management                                                                                           |  |  |  |  |       |  |  |  | 341           |   |  |  | 338           | 
|                                                                                                                    |  |  |  |  |       |  |  |  | 2,027         |   |  |  | 1,256         | 

In September 2014 and 2013 impairment reviews were performed by comparing the recoverable amount of each CGU with its carrying
amount, including goodwill. These are updated during December, taking into account significant events that occurred between September and December.

For each
CGU, the recoverable amounts are based on value-in-use which is calculated from pre-tax cash flow projections for five years using data from the Groups budget and strategic planning process, the results of which are reviewed and approved by
the Board. These projections exclude any estimated future cash inflows or outflows expected to arise from future restructurings. The five-year period is in-line with the Groups strategic planning process.

The calculation of value-in-use for the identified CGUs is most sensitive to discount and growth rates as set out below:

The discount rate reflects managements assessment of risks specific to the assets of each CGU. The pre-tax discount rate used in the Advanced Surgical
Devices business is 10% (2013  10%) and for the Advanced Wound Management business it is 11% (2013  10%).

In determining the growth rate used in
the calculation of the value-in-use, the Group 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. Revenue growth rates for the five-year period for the Advanced Surgical Devices business franchises vary from 2% to 15%
(2013  1% to 20%) and for the Advanced Wound Management business franchises from 4% to 19% (2013  2% to 22%).







130Smith & Nephew Annual report 2014



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Specific considerations and strategies taken into account in determining the sales growth and trading profit margin
for each CGU are:  
Advanced Surgical Devices  Management intends to deliver growth through continuing to focus on widening access to the customer, strengthening our portfolio and global presence, innovative product development and
through continuing to make efficiency improvements  
Advanced Wound Management  Management intends to develop this CGU by focusing on widening access to the customer, the higher added value sectors of healing chronic wounds and tissue repair using bioactives, and by
continuing to improve efficiency. Following the detailed first 5 years, management has used an unchanged size of the market and Groups
share thereof in the pre-tax cash flows used to calculate the terminal value of both the Advanced Surgical Devices business (2013  increase at 3% per year) and Advanced Wound Management businesses (2013  increase at 5% per
year), which were considered to be the Groups CGUs in 2014. Management has considered the following sensitivities:  
Growth of market and market share  Management has considered the impact of a variance in market growth and market share. The value-in-use calculation shows that if the assumed long-term growth rate was reduced to
nil, the recoverable amount of all of the CGUs independently would still be greater than their carrying values  
Discount rate  Management has considered the impact of an increase in the discount rate applied to the calculation. The value-in-use calculation shows that for the recoverable amount of the CGU to be less than its
carrying value, the discount rate would have to be increased to 28% (2013  33%) for the Advanced Surgical Devices business and 17% (2013  65%) for the Advanced Wound Management business. 9 Intangible assets  ACCOUNTING POLICIESIntangible 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. 
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 cash-generating 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 value-in-use, its estimated future cash flow is discounted to its
present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the asset. 
In carrying out impairment reviews of intangible assets a number of significant assumptions have to be made when preparing cash flow
projections. These include the future rate of market growth, discount rates, the market demand for the products acquired, the future profitability of acquired businesses 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.


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2014131









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FINANCIAL STATEMENTS

Notes to the Group accountscontinued



9 Intangible assets continued

|                            |  |  |                                 |   |  |  |                   |   |  |  |                             |  |  |  |                                        |   |  |  |                |  
|--------------------------- |  |  | ------------------------------- | - |  |  | ----------------- | - |  |  | --------------------------- |  |  |  | -------------------------------------- | - |  |  | -------------- | -
|                            |  |  | Acquisitionintangibles$ million |   |  |  | Software$ million |   |  |  | Distributionrights$ million |  |  |  | Patents &Intellectualproperty$ million |   |  |  | Total$ million |  
|Cost                        |  |  |                                 |   |  |  |                   |   |  |  |                             |  |  |  |                                        |   |  |  |                |  
|At 1 January 2013           |  |  | 1,109                           |   |  |  | 205               |   |  |  | 43                          |  |  |  | 176                                    |   |  |  | 1,533          |  
|Exchange adjustment         |  |  | 3                               |   |  |  |                  |   |  |  |                            |  |  |  |                                       |   |  |  | 3              |  
|Acquisitions                |  |  | 53                              |   |  |  |                  |   |  |  |                            |  |  |  |                                       |   |  |  | 53             |  
|Additions                   |  |  |                                |   |  |  | 53                |   |  |  | 27                          |  |  |  | 18                                     |   |  |  | 98             |  
|Disposals                   |  |  |                                |   |  |  | (29               | ) |  |  |                            |  |  |  |                                       |   |  |  | (29            | )
|At 31 December 2013         |  |  | 1,165                           |   |  |  | 229               |   |  |  | 70                          |  |  |  | 194                                    |   |  |  | 1,658          |  
|Exchange adjustment         |  |  | (44                             | ) |  |  | (11               | ) |  |  |                            |  |  |  | (2                                     | ) |  |  | (57            | )
|Acquisitions (ii)           |  |  | 830                             |   |  |  | 3                 |   |  |  |                            |  |  |  |                                       |   |  |  | 833            |  
|Additions                   |  |  |                                |   |  |  | 49                |   |  |  | 5                           |  |  |  | 23                                     |   |  |  | 77             |  
|Disposals                   |  |  |                                |   |  |  | (3                | ) |  |  |                            |  |  |  |                                       |   |  |  | (3             | )
|At 31 December 2014         |  |  | 1,951                           |   |  |  | 267               |   |  |  | 75                          |  |  |  | 215                                    |   |  |  | 2,508          |  
|Amortisation and impairment |  |  |                                 |   |  |  |                   |   |  |  |                             |  |  |  |                                        |   |  |  |                |  
|At 1 January 2013           |  |  | 283                             |   |  |  | 91                |   |  |  | 27                          |  |  |  | 68                                     |   |  |  | 469            |  
|Exchange adjustment         |  |  | 1                               |   |  |  |                  |   |  |  |                            |  |  |  |                                       |   |  |  | 1              |  
|Charge for the year         |  |  | 88                              |   |  |  | 31                |   |  |  | 14                          |  |  |  | 19                                     |   |  |  | 152            |  
|Disposals                   |  |  |                                |   |  |  | (18               | ) |  |  |                            |  |  |  |                                       |   |  |  | (18            | )
|At 31 December 2013         |  |  | 372                             |   |  |  | 104               |   |  |  | 41                          |  |  |  | 87                                     |   |  |  | 604            |  
|Exchange adjustment         |  |  | (27                             | ) |  |  | (3                | ) |  |  |                            |  |  |  | (2                                     | ) |  |  | (32            | )
|Charge for the year         |  |  | 129                             |   |  |  | 31                |   |  |  | 10                          |  |  |  | 21                                     |   |  |  | 191            |  
|Disposals                   |  |  |                                |   |  |  | (2                | ) |  |  |                            |  |  |  |                                       |   |  |  | (2             | )
|At 31 December 2014         |  |  | 474                             |   |  |  | 130               |   |  |  | 51                          |  |  |  | 106                                    |   |  |  | 761            |  
|Net book amounts            |  |  |                                 |   |  |  |                   |   |  |  |                             |  |  |  |                                        |   |  |  |                |  
|At 31 December 2014         |  |  | 1,477                           |   |  |  | 137               |   |  |  | 24                          |  |  |  | 109                                    |   |  |  | 1,747          |  
|At 31 December 2013 (i)     |  |  | 793                             |   |  |  | 125               |   |  |  | 29                          |  |  |  | 107                                    |   |  |  | 1,054          |  



|(i) | The majority of this balance relates to product rights acquired with Healthpoint Biotherapeutics.
|--- | -------------------------------------------------------------------------------------------------



|(ii) | The majority of this balance relates to technology and product rights acquired with ArthroCare Corp, which are being amortised over 6-20 years. See Note 21.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

Group capital expenditure relating to software contracted but not provided for amounted to $7m (2013  $21m).

The carrying values of acquisition intangibles are reviewed for impairment and it was noted that an intangible asset relating to a distribution agreement for a
brand within our US Advanced Wound Management business had headroom which was highly sensitive to managements estimate of future related earnings growth. Changes in those assumptions of either a decrease in the medium term growth rate from 4%
to 1% or an increase in the discount rate of 1% to 11.1% would give rise to a $3 million impairment.









132Smith & Nephew Annual report 2014



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10 Investments  ACCOUNTING POLICYInvestments, other than those related to associates, are initially recorded at fair value plus any directly attributable
transaction costs on the trade date. The Group has an investment in an entity that holds mainly unquoted equity securities, which by their very nature have no fixed maturity date or coupon rate. The investment is classed as
available-for-sale and carried at fair value. The fair value of the investment is based on the underlying fair value of the equity securities: marketable securities are valued by reference to closing prices in the market; non-marketable securities are estimated considering factors including the purchase price, prices of recent significant private placements of securities of the same issuer and estimates of liquidation value. Changes
in fair value are recognised in other comprehensive income except where management considers that there is objective evidence of an impairment of the underlying equity securities. Objective evidence would include a significant or prolonged decline
in the fair value of the investment below its cost less any impairment loss previously recognised. Impairment losses are recognised by reclassifying the losses accumulated in other reserves to profit or loss.  2014$ million



2013$ millionAt 1 January


2



2Additions


4



Distribution


(1
)


At 31 December


5



2 11 Investments in associates  ACCOUNTING POLICYInvestments in associates, being those entities over which the Group has a significant influence and which is neither a
subsidiary nor a joint venture, are accounted for using the equity method, with the Group recording its share of the associates profit and loss and other comprehensive income. The Groups share of associates profit or loss is included in
one separate income statement line and is calculated after deduction of their respective taxes. At 31 December 2014 and 31 December 2013, 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 stimulation devices and is a
provider of osteoarthritis injection therapies. The loss after taxation recognised in the income statement relating to Bioventus was $2m (2013  loss after taxation $2m). The carrying amount of this investment was reviewed for impairment as at the balance sheet date. For the purposes of impairment testing the recoverable amount of
this investment was based on its fair value less cost to sell, estimated using discounted cash flows. The fair value measurement was categorised as a level 3 fair value based on the inputs and valuation technique used. In addition to its 49% ownership interest in Bioventus, the Group held a senior secured five year loan note with Bioventus. The loan note was created in May 2012
with a principal amount of $160m and an annual coupon rate of LIBOR plus 5%. In October 2014, the loan note of $160 million plus $28m of accrued interest was repaid by Bioventus following a successful external refinancing. The Group continues to
hold 49% of investor equity in Bioventus. The amount recognised in the balance sheet and income statement for associates are as follows:  2014$ million



2013$ millionBalance sheet


112



107Income statement loss


(2
)


(1
)


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Smith & Nephew Annual report
2014133









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##### Table of Contents

FINANCIAL STATEMENTS

Notes to the Group accountscontinued







11 Investments in associates continued

Summarised financial information for associates

Set out below is
the summarised financial information for Bioventus, adjusted for differences with Group accounting policies:



|                                             |  |  |               |   |  |  |               |  
|-------------------------------------------- |  |  | ------------- | - |  |  | ------------- | -
|                                             |  |  | 2014$ million |   |  |  | 2013$ million |  
|Summarised balance sheet                     |  |  |               |   |  |  |               |  
|Non-current assets                           |  |  | 339           |   |  |  | 315           |  
|Current assets                               |  |  | 90            |   |  |  | 129           |  
|Non-current liabilities                      |  |  | (220          | ) |  |  | (194          | )
|Current liabilities                          |  |  | (48           | ) |  |  | (59           | )
|Net assets                                   |  |  | 161           |   |  |  | 191           |  
|Groups share of net assets at 49%           |  |  | 79            |   |  |  | 93            |  
|                                             | 
|Group adjustments (i)                        |  |  | 26            |   |  |  | 14            |  
|Groups carrying amount of investment at 49% |  |  | 105           |   |  |  | 107           |  
|                                             |  |  |               |   |  |  |               |  
|Summarised statement of comprehensive income |  |  |               |   |  |  |               |  
|Revenue                                      |  |  | 242           |   |  |  | 231           |  
|Attributable loss for the year               |  |  | (5            | ) |  |  | (4            | )
|Total comprehensive loss                     |  |  | (5            | ) |  |  | (4            | )
|Group share of loss for the year at 49%      |  |  | (2            | ) |  |  | (2            | )
|                                             | 

(i) Group adjustments primarily relate to an adjustment to align the useful life of intangible assets with Group policy.

At December 2014, the Group holds equity investments in two other associates (2013  none) which are immaterial. The Groups aggregate carrying amount
of these investments at 31 December 2014 is $7m (2013  nil) and the Groups aggregate share of profits from these investments was $nil (2013  nil). The Groups share of loss in 2013 includes a gain of $1m from two Austrian
associates. The Group disposed of the Austrian associates during the year ended 31 December 2013.

12 Inventories



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | 
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| |  | ACCOUNTING
POLICY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | 
| |  | Finished goods and work-in-progress are valued at
factory cost, including appropriate overheads, on a first-in first-out basis. Raw materials and bought-in finished goods are valued at purchase price. All inventories are reduced to net realisable value where lower than cost. Inventory acquired as
part of a business acquisition is valued at selling price less costs of disposal and a profit allowance for selling efforts. 
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 five 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 applied on an individual product line basis and is first applied when a product group has been on the market for two years. This method of
calculation is considered appropriate based on experience but it involves management judgements on effectiveness of inventory deployment, length of product lives, phase-out of old products and efficiency of manufacturing planning
systems. |  | 



|                                    |  |  |               |  |  |  |               |  |  |  |               | 
|----------------------------------- |  |  | ------------- |  |  |  | ------------- |  |  |  | ------------- | 
|                                    |  |  | 2014$ million |  |  |  | 2013$ million |  |  |  | 2012$ million | 
|Raw materials and consumables       |  |  | 214           |  |  |  | 151           |  |  |  | 138           | 
|Work-in-progress                    |  |  | 82            |  |  |  | 72            |  |  |  | 45            | 
|Finished goods and goods for resale |  |  | 885           |  |  |  | 783           |  |  |  | 718           | 
|                                    | 
|                                    |  |  | 1,181         |  |  |  | 1,006         |  |  |  | 901           | 
|                                    | 

Reserves for excess and obsolete inventories were $317m (2013  $354m, 2012  $332m). The decrease in reserves of $37m in
the year comprised releases of $29m, inventory write-offs of $4m and foreign exchange movements of $4m.

The cost of inventories recognised as an expense and
included in cost of goods sold amounted to $1,013m (2013  $958m, 2012  $906m). In addition, $55m was recognised as an expense within cost of goods sold resulting from inventory write offs (2013  $73m, 2012  $84m).

Notwithstanding inventory acquired within acquisitions, no inventory is carried at fair value less costs to sell in any year.







134Smith & Nephew Annual report 2014



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13 Trade and other receivables  ACCOUNTING POLICYTrade and other receivables are carried at
amortised cost, less any allowances for uncollectible amounts. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets.
 The Group manages credit risk through credit limits which require
authorisation commensurate with the size of the limit and which are regularly reviewed. Credit limit decisions are made based on available financial information and the business case. Significant receivables are regularly reviewed and monitored at
Group level. The Group has no significant concentration of credit risk, with exposure spread over a large number of 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 of receivable. The Group does not hold any collateral as security.  2014$ million



2013$ million



2012$ millionTrade receivables




1,015



992



964Less: provision for bad and doubtful debts




(47
)


(57
)


(49
)Trade receivables  net (loans and receivables)




968



935



915Derivatives  forward foreign exchange contracts




49



28



12Other receivables




51



60



65Prepayments and accrued income




98



90



731,166



1,113



1,065Management considers that the carrying amount of trade and other receivables approximates to the fair value.The provision for bad and doubtful debts is based on specific assessments of risk and reference to past default experience. The bad debt credit for the year was $4m (2013 
expense $15m, 2012  expense $16m). Amounts due from insurers in respect of the macro textured claim of $143m (2013  $138m, 2012  $137m) are included within other receivables and have been provided in full.The amount of trade receivables that were past due were as follows:2014$ million



2013$ million



2012$ millionPast due not more than three months




181



206



225Past due more than three months and not more than six months




49



52



52Past due more than six months and not more than one year




51



61



52Past due more than one year




42



70



80323



389



409Neither past due nor impaired




692



603



555Provision for bad and doubtful debts




(47
)


(57
)


(49
)Trade receivables  net (loans and receivables)




968



935



915Movements in the provision for bad and doubtful debts were as
follows:At 1 January




57



49



36Exchange adjustment




(4
)


1



Net receivables (provision released)/provided for during the year




(4
)


15



16Utilisation of provision




(2
)


(8
)


(3
)At 31 December




47



57



49Trade receivables include amounts denominated in the following
major currencies:2014$ million



2013$ million



2012$ millionUS Dollar




353



293



258Sterling




92



103



100Euro




225



271



276Other




298



268



281Trade receivables  net (loans and receivables)




968



935



915


LOGO




Smith & Nephew Annual report
2014135









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##### Table of Contents

FINANCIAL STATEMENTS

Notes to the Group accountscontinued





14 Trade and other payables



|                                                                                                                                                                                                                                                                                                                |  |  |  |  |               |   |  |  |               |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  | ------------- | - |  |  | ------------- | -
|                                                                                                                                                                                                                                                                                                                |  |  |  |  | 2014$ million |   |  |  | 2013$ million |  
|Trade and other payables due within one year                                                                                                                                                                                                                                                                    |  |  |  |  |               |   |  |  |               |  
|Trade and other payables                                                                                                                                                                                                                                                                                        |  |  |  |  | 807           |   |  |  | 751           |  
|Derivatives  forward foreign exchange contracts                                                                                                                                                                                                                                                                |  |  |  |  | 21            |   |  |  | 20            |  
|Acquisition consideration                                                                                                                                                                                                                                                                                       |  |  |  |  | 10            |   |  |  | 14            |  
|                                                                                                                                                                                                                                                                                                                |  |  |  |  | 838           |   |  |  | 785           |  
|Other payables due after one year:                                                                                                                                                                                                                                                                              |  |  |  |  |               |   |  |  |               |  
|Acquisition consideration                                                                                                                                                                                                                                                                                       |  |  |  |  | 23            |   |  |  | 7             |  
|Other payables                                                                                                                                                                                                                                                                                                  |  |  |  |  | 21            |   |  |  |              |  
|                                                                                                                                                                                                                                                                                                                |  |  |  |  | 44            |   |  |  | 7             |  
|The acquisition consideration due after more than one year is
expected to be payable as follows: $5m in 2016, $8m in 2017 and $10m in 2018 (2013  $4m in 2015 and $3m in 2016). 
15 Cash and borrowings 
15.1 Net debt 
Net debt comprises borrowings and credit balances on currency swaps less cash at bank. | 
|                                                                                                                                                                                                                                                                                                                |  |  |  |  | 2014$ million |   |  |  | 2013$ million |  
|Bank overdrafts and loans due within one year                                                                                                                                                                                                                                                                   |  |  |  |  | 39            |   |  |  | 44            |  
|Long-term bank borrowings                                                                                                                                                                                                                                                                                       |  |  |  |  | 541           |   |  |  | 347           |  
|Private placement notes                                                                                                                                                                                                                                                                                         |  |  |  |  | 1,125         |   |  |  |              |  
|Borrowings                                                                                                                                                                                                                                                                                                      |  |  |  |  | 1,705         |   |  |  | 391           |  
|Cash at bank                                                                                                                                                                                                                                                                                                    |  |  |  |  | (93           | ) |  |  | (137          | )
|Credit/(debit) balance on derivatives  currency swaps                                                                                                                                                                                                                                                          |  |  |  |  | 1             |   |  |  | (1            | )
|Net debt                                                                                                                                                                                                                                                                                                        |  |  |  |  | 1,613         |   |  |  | 253           |  

Borrowings are repayable as follows:



|                          |  |  |                                     |  |  |  |                                  |  |  |  |                                    |  |  |  |                                      |  |  |  |                                    |  |  |  |                          |  |  |  |                | 
|------------------------- |  |  | ----------------------------------- |  |  |  | -------------------------------- |  |  |  | ---------------------------------- |  |  |  | ------------------------------------ |  |  |  | ---------------------------------- |  |  |  | ------------------------ |  |  |  | -------------- | 
|                          |  |  | Withinone year oron demand$ million |  |  |  | Betweenone
andtwo years$ million |  |  |  | Betweentwo
andthree years$ million |  |  |  | Betweenthree andfour years$ 
million |  |  |  | Betweenfour
andfive years$ million |  |  |  | Afterfive years$ million |  |  |  | Total$ million | 
|At 31 December 2014:      |  |  |                                     |  |  |  |                                  |  |  |  |                                    |  |  |  |                                      |  |  |  |                                    |  |  |  |                          |  |  |  |                | 
|Bank loans                |  |  | 9                                   |  |  |  | 400                              |  |  |  |                                   |  |  |  |                                     |  |  |  | 131                                |  |  |  |                         |  |  |  | 540            | 
|Bank overdrafts           |  |  | 28                                  |  |  |  |                                 |  |  |  |                                   |  |  |  |                                     |  |  |  |                                   |  |  |  |                         |  |  |  | 28             | 
|Finance lease liabilities |  |  | 2                                   |  |  |  | 2                                |  |  |  | 2                                  |  |  |  | 3                                    |  |  |  | 3                                  |  |  |  |                         |  |  |  | 12             | 
|Private placement notes   |  |  |                                    |  |  |  |                                 |  |  |  |                                   |  |  |  |                                     |  |  |  | 125                                |  |  |  | 1,000                    |  |  |  | 1,125          | 
|                          |  |  | 39                                  |  |  |  | 402                              |  |  |  | 2                                  |  |  |  | 3                                    |  |  |  | 259                                |  |  |  | 1,000                    |  |  |  | 1,705          | 
|At 31 December 2013:      |  |  |                                     |  |  |  |                                  |  |  |  |                                    |  |  |  |                                      |  |  |  |                                    |  |  |  |                          |  |  |  |                | 
|Bank loans                |  |  | 31                                  |  |  |  | 335                              |  |  |  |                                   |  |  |  |                                     |  |  |  |                                   |  |  |  |                         |  |  |  | 366            | 
|Bank overdrafts           |  |  | 11                                  |  |  |  |                                 |  |  |  |                                   |  |  |  |                                     |  |  |  |                                   |  |  |  |                         |  |  |  | 11             | 
|Finance lease liabilities |  |  | 2                                   |  |  |  | 2                                |  |  |  | 2                                  |  |  |  | 2                                    |  |  |  | 3                                  |  |  |  | 3                        |  |  |  | 14             | 
|                          |  |  | 44                                  |  |  |  | 337                              |  |  |  | 2                                  |  |  |  | 2                                    |  |  |  | 3                                  |  |  |  | 3                        |  |  |  | 391            | 





136Smith & Nephew Annual report 2014



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##### Table of Contents





15.2 Assets pledged as security Assets are pledged as security under normal market conditions. Secured borrowings and pledged assets are as follows:  2014$ million



2013$ millionFinance lease liabilities  due within one year


2



2Finance lease liabilities  due after one year


10



12Total amount of secured borrowings


12



14Total net book value of assets pledged as security:Property, plant and equipment


8



108



10 15.3 Currency swap analysis All
currency swaps are stated at fair value. Gross US Dollar equivalents of $279m (2013  $146m) receivable and $280m (2013  $145m) payable have been netted. Currency swaps comprise foreign exchange swaps and forward contracts and were
used in 2014 and 2013 to hedge intragroup loans and other monetary items. Currency swaps mature as follows:  At 31 December 2014


Amount receivable$ million



Amount payableCurrency millionWithin one year:Canadian Dollar


14



CAD 16Chinese Renminbi


16



CNY 100Euro


17



EUR 14Hong Kong Dollar


3



HKD 20Japanese Yen


8



JPY 950Swedish Krona






SEK 358At 31 December 2014


Amount receivableCurrency million



Amount payable$ millionWithin one year:Australian Dollar


AUD 78



64Swiss Franc


CHF 22



22Euro


EUR 62



76Sterling


GBP 26



40Japanese Yen


JPY 200



2New Zealand Dollar


NZD 18



14Swedish Krona


SEK 3



Singapore Dollar


SGD 5



4222


LOGO




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2014137









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FINANCIAL STATEMENTS

Notes to the Group accountscontinued

15 Cash and borrowings continued





|                    |  |  |                                   |  |  |  |                                | 
|------------------- |  |  | --------------------------------- |  |  |  | ------------------------------ | 
|At 31 December 2013 |  |  | Amount receivable$ million        |  |  |  | Amount payableCurrency million | 
|Within one year:    |  |  |                                   |  |  |  |                                | 
|Euro                |  |  | 28                                |  |  |  | EUR 20                         | 
|Japanese Yen        |  |  | 13                                |  |  |  | JPY 1,315                      | 
|Chinese Renminbi    |  |  | 17                                |  |  |  | CNY 100                        | 
|Sterling            |  |  | 11                                |  |  |  | GBP 7                          | 
|                    |  |  | 69                                |  |  |  |                                | 
|                    |  | 
|                    |  |  |                                   |  |  |  |                                | 
|At 31 December 2013 |  |  | Amount receivableCurrency million |  |  |  | Amount payable$ million        | 
|Within one year:    |  |  |                                   |  |  |  |                                | 
|New Zealand Dollar  |  |  | NZD 9                             |  |  |  | 7                              | 
|Swiss Franc         |  |  | CHF 14                            |  |  |  | 16                             | 
|Swedish Krona       |  |  | SEK 31                            |  |  |  | 5                              | 
|Australian Dollar   |  |  | AUD 41                            |  |  |  | 36                             | 
|Canadian Dollar     |  |  | CAD 3                             |  |  |  | 3                              | 
|Sterling            |  |  | GBP 6                             |  |  |  | 10                             | 
|                    |  |  |                                   |  |  |  | 77                             | 

15.4 Liquidity risk exposures

The
Board has established a set of policies to manage funding and currency risks. The Group uses derivative financial instruments only to manage the financial risks associated with underlying business activities and their financing.

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
there is sufficient funding and facilities in place to meet foreseeable borrowing requirements. The Group manages and monitors liquidity risk through 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.

The Group has available committed facilities of
$2.5bn (2013  $1.7bn). The interest payable on borrowings under committed facilities is either at fixed or floating rates. Floating rates are typically based on the LIBOR (or other reference rate) relevant to the term and currency concerned.

The Company is subject to restrictive covenants under its principal facility agreements. These financial covenants are tested at the end of each half year for
the 12 months ending on the last day of the testing period. As of 31 December 2014, 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 principal facilities are:



|                                                   |  |  |               | 
|-------------------------------------------------- |  |  | ------------- | 
|Facility                                           |  |  | Date due      | 
|$400 million syndicated, term loan facility        |  |  | February 2016 | 
|$1.0 billion syndicated, revolving credit facility |  |  | March 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  | 
|$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  | 











138Smith & Nephew Annual report 2014



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15.5 Year-end financial liabilities by contractual maturity The table below analyses the Groups year-end financial liabilities by contractual maturity date, including interest payments and excluding the impact of
netting arrangements:  Within oneyear or
ondemand$ million



Betweenone andtwo years$
million



Betweentwo andfive years$
million



Afterfive years$ million



Total$ millionAt 31 December 2014Non-derivative financial liabilities:Bank overdrafts and loans


37



400



131







568Trade and other payables


807



21











828Finance lease liabilities


3



3



9







15Private placement notes










125



1,000



1,125Acquisition consideration


10



13



10







33Derivative financial liabilities:Currency swaps/forward foreign exchange contracts  outflow


1,811















1,811Currency swaps/forward foreign exchange contracts  inflow


(1,810
)














(1,810
)858



437



275



1,000



2,570At 31 December 2013Non-derivative financial liabilities:Bank overdrafts and loans


42



335











377Trade and other payables


751















751Finance lease liabilities


3



3



9



3



18Acquisition consideration


14



4



3







21Derivative financial liabilities:Currency swaps/forward foreign exchange contracts  outflow


1,734















1,734Currency swaps/forward foreign exchange contracts  inflow


(1,733
)














(1,733
)811



342



12



3



1,168 The amounts in the tables above are undiscounted cash flows, which differ from the amounts included in the balance sheet where the
underlying cash flows have been discounted.


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2014139









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##### Table of Contents

FINANCIAL STATEMENTS

Notes to the Group accountscontinued



15 Cash and borrowings continued



15.6 Finance leases



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | 
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| |  | ACCOUNTING POLICY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | 
| |  | Leases are classified as finance leases when the
terms of the lease transfer substantially all the risks and rewards of ownership to the Group. All other leases are classified as operating leases. 
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. Assets held under finance leases are capitalised as property, plant or equipment and depreciated accordingly. Minimum lease payments are apportioned between the finance expense and the reduction in the outstanding liability. The finance
expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. |  | 

Future minimum lease payments under finance leases together with the present value of the minimum lease payments are as follows:



|                                        |  |  |               |   |  |  |               |  
|--------------------------------------- |  |  | ------------- | - |  |  | ------------- | -
|                                        |  |  | 2014$ million |   |  |  | 2013$ 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             |   |  |  | 3             |  
|After four and within five years        |  |  | 3             |   |  |  | 3             |  
|After five years                        |  |  |              |   |  |  | 3             |  
|Total minimum lease payments            |  |  | 15            |   |  |  | 18            |  
|Discounted by imputed interest          |  |  | (3            | ) |  |  | (4            | )
|Present value of minimum lease payments |  |  | 12            |   |  |  | 14            |  

Present value of minimum lease payments can be split out as: $2m (2013  $2m) due within one year, $10m (2013  $9m) due
between one to five years and $nil (2013 $3m) due after five years.

16 Financial instruments and risk management



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | 
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| |  | ACCOUNTING POLICY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | 
| |  | Derivative financial instruments
 Derivative financial instruments are initially recognised at fair value
on the date a derivative contract is entered into and are subsequently re-measured at their fair value at subsequent balance sheet dates. 
Changes in the fair value of derivative financial instruments that are designated and effective as cash flow hedges of forecast third party
and intercompany transactions are recognised in other comprehensive income until the associated asset or liability is recognised. Amounts taken to other comprehensive income are transferred to the income statement in the period in which the hedged
transaction affects profit and loss. Where the hedged item is the cost of a non-financial asset, the amounts taken to other comprehensive income are transferred to the initial carrying value of 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.  Interest rate derivatives transacted to fix interest
rates on floating rate borrowings are accounted for as cash flow hedges and changes in the fair values resulting from changes in market interest rates are recognised in other comprehensive income. Amounts taken to other comprehensive income are
transferred to the income statement when the hedged transaction affects profit and loss. 
Any ineffectiveness on hedging instruments and changes in the fair value of derivative financial instruments that do not qualify for hedge
accounting are recognised in the income statement within other finance income/(costs) as they arise. 
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge
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 to the income statement for the period. |  | 











140Smith & Nephew Annual report 2014



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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. Foreign exchange variations affect trading
results in two ways. Firstly, on translation of overseas sales and profits into US Dollars and secondly, 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 forward
foreign exchange contracts, designated as cash flow hedges, to hedge forecast third party and intercompany trading cash flows for forecast foreign currency inventory purchases for up to one year. When a commitment is entered into, forward foreign
exchange contracts are normally used to increase the hedge to 100% of the exposure. Cash flows relating to cash flow hedges are expected to occur within 12 months of inception and profits and losses on hedges are expected to enter into the
determination of profit (within cost of goods sold) within a further 12-month period. The principal currencies hedged by forward foreign exchange contracts are US Dollars, Euros and Sterling. At 31 December 2014, the Group had contracted to
exchange within one year the equivalent of $1.5bn (2013  $1.6bn). Based on the Groups net borrowings as at 31 December 2014, if the US
Dollar were to weaken against all currencies by 10%, the Groups net borrowings would decrease by $6m (2013  decrease by $2m) as the Group held a higher amount of foreign denominated cash than foreign denominated borrowings. In respect of
borrowings held in a different currency to the relevant reporting entity, if the US Dollar were to weaken by 10% against all other currencies, the Groups borrowings would increase by $1m (2013  increase by $4m). 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 2014
would have been $37m lower (2013  $34m). Similarly, if the Euro were to weaken by 10% against all other currencies, then the fair value of the forward foreign exchange contracts as at 31 December 2014 would have been $26m higher (2013
 $27m). Movements in the fair value of forward 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 2014 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 to hedge all actual foreign exchange exposures and the
Groups forward foreign exchange contracts are designated as cash flow hedges. The net impact of transaction related foreign exchange on the income statement from a movement in exchange rates on the value of forward foreign exchange contracts
is not significant. In addition, the movements in the fair value of other financial instruments used for hedging such 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 The Group is exposed to interest rate risk on cash, borrowings and certain currency swaps which are all at floating rates. When required the Group uses interest
rate derivatives to meet its objective of protecting borrowing costs within parameters set by the Board. Interest rate derivatives are accounted for as cash flow hedges and, as such, changes in fair value resulting from changes in market interest
rates are recognised in other comprehensive income and accumulated in the hedging reserve, with the fair value of the interest rate derivatives recorded in the balance sheet. The cash flows resulting from interest rate derivatives match cash flows
on the underlying borrowings so that there is no net cash flow from movements in market interest rates on the hedged items. Based on the Groups gross
borrowings as at 31 December 2014, if interest rates were to increase by 100 basis points in all currencies then the annual net interest charge would increase by $6m (2013  $4m). A decrease in interest rates by 100 basis points in all
currencies would have an equal but opposite effect to the amounts shown above. 16.3 Credit risk exposures The Group limits exposure to credit risk on counterparties used for financial instruments through a system of internal credit limits which, with certain minor
exceptions due to local market conditions, require counterparties to have a minimum A rating from one of the major ratings agencies. The financial exposure 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 non-performance 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. The maximum credit risk exposure on derivatives at 31 December 2014 was $49m (2013  $29m), being the total debit fair values on forward foreign
exchange contracts and currency swaps. The maximum credit risk exposure on cash at bank at 31 December 2014 was $93m (2013  $137m). The Groups exposure to credit risk is not material as the amounts are held in a wide number of banks
in a number of different countries. Credit risk on trade receivables is detailed in Note 13.


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FINANCIAL STATEMENTS

Notes to the Group accountscontinued

16 Financial instruments and risk management continued



16.4 Currency and interest rate profile of interest bearing liabilities and assets

Short-term debtors and creditors are excluded from the following disclosures.

Currency and Interest Rate Profile of Interest Bearing Liabilities:



|                                   |  |  |                          |  |  |  |                        |  |  |  |                           |  |  |  |                                   |  |  |  |                                |  |  |  |                              |  |  |  |                                                 | 
|---------------------------------- |  |  | ------------------------ |  |  |  | ---------------------- |  |  |  | ------------------------- |  |  |  | --------------------------------- |  |  |  | ------------------------------ |  |  |  | ---------------------------- |  |  |  | ----------------------------------------------- | 
|                                   |  |  |                          |  |  |  |                        |  |  |  |                           |  |  |  |                                   |  |  |  |                                |  |  |  | Fixed rate liabilities       | 
|                                   |  |  | Grossborrowings$ million |  |  |  | Currencyswaps$ million |  |  |  | Totalliabilities$ million |  |  |  | Floatingrate liabilities$ million |  |  |  | Fixedrate liabilities$ million |  |  |  | WeightedaverageInterestrate% |  |  |  | Weightedaverage timefor whichrate is fixedYears | 
|At 31 December 2014:               |  |  |                          |  |  |  |                        |  |  |  |                           |  |  |  |                                   |  |  |  |                                |  |  |  |                              |  |  |  |                                                 | 
|US Dollar                          |  |  | 1,685                    |  |  |  | 208                    |  |  |  | 1,893                     |  |  |  | 826                               |  |  |  | 1,067                          |  |  |  | 3.4                          |  |  |  | 8.3                                             | 
|Euro                               |  |  | 10                       |  |  |  | 35                     |  |  |  | 45                        |  |  |  | 45                                |  |  |  |                               |  |  |  |                             |  |  |  |                                                | 
|Other                              |  |  | 10                       |  |  |  | 37                     |  |  |  | 47                        |  |  |  | 47                                |  |  |  |                               |  |  |  |                             |  |  |  |                                                | 
|Total interest bearing liabilities |  |  | 1,705                    |  |  |  | 280                    |  |  |  | 1,985                     |  |  |  | 918                               |  |  |  | 1,067                          |  |  |  |                              |  |  |  |                                                 | 
|At 31 December 2013:               |  |  |                          |  |  |  |                        |  |  |  |                           |  |  |  |                                   |  |  |  |                                |  |  |  |                              |  |  |  |                                                 | 
|US Dollar                          |  |  | 297                      |  |  |  | 77                     |  |  |  | 374                       |  |  |  | 360                               |  |  |  | 14                             |  |  |  | 7.1                          |  |  |  | 4                                               | 
|Euro                               |  |  | 59                       |  |  |  | 28                     |  |  |  | 87                        |  |  |  | 87                                |  |  |  |                               |  |  |  |                             |  |  |  |                                                | 
|Other                              |  |  | 35                       |  |  |  | 40                     |  |  |  | 75                        |  |  |  | 75                                |  |  |  |                               |  |  |  |                             |  |  |  |                                                | 
|Total interest bearing liabilities |  |  | 391                      |  |  |  | 145                    |  |  |  | 536                       |  |  |  | 522                               |  |  |  | 14                             |  |  |  |                              |  |  |  |                                                 | 

At 31 December 2014, $12m (2013  $14m) of fixed rate liabilities relate to finance leases. In 2014, the Group also had
liabilities due for deferred acquisition consideration (denominated in US Dollars and Brazilian Real) totalling $33m (2013  $21m, 2012  $8m) on which no interest was payable (see Note 14). There are no other significant interest bearing
financial liabilities.

Floating rates on liabilities are typically based on the one or three-month LIBOR (or other reference rate) relevant to the currency
concerned. The weighted average interest rate on floating rate borrowings as at 31 December 2014 was 1% (2013  1%).

Currency and Interest Rate
Profile of Interest Bearing Assets:



|                              |  |  |                      |  |  |  |                        |  |  |  |                       |  |  |  |                              | 
|----------------------------- |  |  | -------------------- |  |  |  | ---------------------- |  |  |  | --------------------- |  |  |  | ---------------------------- | 
|                              |  |  | Cashat bank$ million |  |  |  | Currencyswaps$ million |  |  |  | Total assets$ million |  |  |  | Floatingrate assets$ million | 
|At 31 December 2014:          |  |  |                      |  |  |  |                        |  |  |  |                       |  |  |  |                              | 
|US Dollars                    |  |  | 13                   |  |  |  | 79                     |  |  |  | 92                    |  |  |  | 92                           | 
|Other                         |  |  | 80                   |  |  |  | 200                    |  |  |  | 280                   |  |  |  | 280                          | 
|Total interest bearing assets |  |  | 93                   |  |  |  | 279                    |  |  |  | 372                   |  |  |  | 372                          | 
|At 31 December 2013:          |  |  |                      |  |  |  |                        |  |  |  |                       |  |  |  |                              | 
|US Dollars                    |  |  | 8                    |  |  |  | 69                     |  |  |  | 77                    |  |  |  | 77                           | 
|Other                         |  |  | 129                  |  |  |  | 77                     |  |  |  | 206                   |  |  |  | 206                          | 
|Total interest bearing assets |  |  | 137                  |  |  |  | 146                    |  |  |  | 283                   |  |  |  | 283                          | 

Floating rates on assets are typically based on the short-term deposit rates relevant to the currency concerned. There were no
fixed rate assets at 31 December 2014 or 31 December 2013.













142Smith & Nephew Annual report 2014



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16.5 Fair value of financial assets and liabilities  ACCOUNTING POLICYMeasurement of fair values
 A number of the Groups accounting policies and disclosures require
the measurement of fair values, for both financial assets and liabilities and non-financial assets acquired in a business combination (see Note 21). 
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 different levels in the fair value hierarchy based on the inputs used in the valuation techniques as follows: Level 1: quoted prices (unadjusted) in 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, either directly (i.e. as prices) or indirectly (i.e. derived from prices); Level 3: inputs for the asset or liability that are not based on observable data (unobservable
inputs).  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. The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their
levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value.  Carrying amount




Fair valueDesignatedat fair
value


Fair value hedging
instruments


Loans
and receivables


Availablefor sale


Otherfinancialliabilities


Total




Level 2


Level 3


TotalAt 31 December 2014


$ million



$ million



$ million



$ million



$ million



$ million





$ million



$ million



$ millionFinancial assets measured at fair valueForward foreign exchange contracts






48















48





48







48Investments














5







5









5



5Currency swaps


1



















1





1







11



48







5







54





49



5



54Financial liabilities measured at fair valueAcquisition consideration


(33
)


















(33
)








(33
)


(33
)Forward foreign exchange contracts






(19
)














(19
)




(19
)






(19
)Currency swaps


(2
)


















(2
)




(2
)






(2
)(35
)


(19
)














(54
)




(21
)


(33
)


(54
)Financial assets not measured at fair valueTrade and other receivables










1,117











1,117Cash at bank










93











93







1,210











1,210Financial liabilities not measured at fair valueBank overdrafts


















(28
)


(28
)Bank loans


















(540
)


(540
)Private placement debt


















(1,125
)


(1,125
)




(1,144
)






(1,144
)Finance lease liabilities


















(12
)


(12
)Trade and other payables


















(828
)


(828
)















(2,533
)


(2,533
)


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##### Table of Contents

FINANCIAL STATEMENTS

Notes to the Group accountscontinued





16 Financial instruments and risk management continued



|                                                 |  |  |                                   |   |  |  |                                           |   |  |            |                                |  |  |  |                             |  |  |  |                                      |   |  |                 |  |  |  |  |  |  |                  |   |  |  |                  |   |  |  |                |  
|------------------------------------------------ |  |  | --------------------------------- | - |  |  | ----------------------------------------- | - |  | ---------- | ------------------------------ |  |  |  | --------------------------- |  |  |  | ------------------------------------ | - |  | --------------- |  |  |  |  |  |  | ---------------- | - |  |  | ---------------- | - |  |  | -------------- | -
|                                                 |  |  | Carrying amount                   |   |  |  |                                           |   |  | Fair value |                               
|At 31 December 2013                              |  |  | Designatedat
fair value $ million |   |  |  | Fair value hedging instruments
$ million |   |  |            | Loansand
receivables $ million |  |  |  | Availablefor
sale $ million |  |  |  | Otherfinancial
liabilities $ million |   |  | Total
$ million |  |  |  |  |  |  | Level 2$ million |   |  |  | Level 3$ million |   |  |  | Total$ million |  
|Financial assets measured at fair value          |  |  |                                   |   |  |  |                                           |   |  |            |                                |  |  |  |                             |  |  |  |                                      |   |  |                 |  |  |  |  |  |  |                  |   |  |  |                  |   |  |  |                |  
|Forward foreign exchange contracts               |  |  |                                  |   |  |  | 28                                        |   |  |            |                               |  |  |  |                            |  |  |  |                                     |   |  | 28              |  |  |  |  |  |  | 28               |   |  |  |                 |   |  |  | 28             |  
|Investments                                      |  |  |                                  |   |  |  |                                          |   |  |            |                               |  |  |  | 2                           |  |  |  |                                     |   |  | 2               |  |  |  |  |  |  |                 |   |  |  | 2                |   |  |  | 2              |  
|Currency swaps                                   |  |  | 1                                 |   |  |  |                                          |   |  |            |                               |  |  |  |                            |  |  |  |                                     |   |  | 1               |  |  |  |  |  |  | 1                |   |  |  |                 |   |  |  | 1              |  
|                                                 |  |  | 1                                 |   |  |  | 28                                        |   |  |            |                               |  |  |  | 2                           |  |  |  |                                     |   |  | 31              |  |  |  |  |  |  | 29               |   |  |  | 2                |   |  |  | 31             |  
|Financial liabilities measured at fair value     |  |  |                                   |   |  |  |                                           |   |  |            |                                |  |  |  |                             |  |  |  |                                      |   |  |                 |  |  |  |  |  |  |                  |   |  |  |                  |   |  |  |                |  
|Acquisition consideration                        |  |  | (21                               | ) |  |  |                                          |   |  |            |                               |  |  |  |                            |  |  |  |                                     |   |  | (21)            |  |  |  |  |  |  |                 |   |  |  | (21              | ) |  |  | (21            | )
|Forward foreign exchange contracts               |  |  |                                  |   |  |  | (20                                       | ) |  |            |                               |  |  |  |                            |  |  |  |                                     |   |  | (20)            |  |  |  |  |  |  | (20              | ) |  |  |                 |   |  |  | (20            | )
|                                                 |  |  | (21                               | ) |  |  | (20                                       | ) |  |            |                               |  |  |  |                            |  |  |  |                                     |   |  | (41)            |  |  |  |  |  |  | (20              | ) |  |  | (21              | ) |  |  | (41            | )
|Financial assets not measured at fair value      |  |  |                                   |   |  |  |                                           |   |  |            |                                |  |  |  |                             |  |  |  |                                      |   |  |                 |  |  |  |  |  |  |                  |   |  |  |                  |   |  |  |                |  
|Trade and other receivables                      |  |  |                                  |   |  |  |                                          |   |  |            | 1,085                          |  |  |  |                            |  |  |  |                                     |   |  | 1,085           |  |  |  |  |  |  |                  |   |  |  |                  |   |  |  |                |  
|Cash at bank                                     |  |  |                                  |   |  |  |                                          |   |  |            | 137                            |  |  |  |                            |  |  |  |                                     |   |  | 137             |  |  |  |  |  |  |                  |   |  |  |                  |   |  |  |                |  
|                                                 |  |  |                                  |   |  |  |                                          |   |  |            | 1,222                          |  |  |  |                            |  |  |  |                                     |   |  | 1,222           |  |  |  |  |  |  |                  |   |  |  |                  |   |  |  |                |  
|Financial liabilities not measured at fair value |  |  |                                   |   |  |  |                                           |   |  |            |                                |  |  |  |                             |  |  |  |                                      |   |  |                 |  |  |  |  |  |  |                  |   |  |  |                  |   |  |  |                |  
|Bank overdrafts                                  |  |  |                                  |   |  |  |                                          |   |  |            |                               |  |  |  |                            |  |  |  | (11                                  | ) |  | (11)            |  |  |  |  |  |  |                  |   |  |  |                  |   |  |  |                |  
|Bank loans                                       |  |  |                                  |   |  |  |                                          |   |  |            |                               |  |  |  |                            |  |  |  | (366                                 | ) |  | (366)           |  |  |  |  |  |  |                  |   |  |  |                  |   |  |  |                |  
|Finance lease liabilities                        |  |  |                                  |   |  |  |                                          |   |  |            |                               |  |  |  |                            |  |  |  | (14                                  | ) |  | (14)            |  |  |  |  |  |  |                  |   |  |  |                  |   |  |  |                |  
|Trade and other payables                         |  |  |                                  |   |  |  |                                          |   |  |            |                               |  |  |  |                            |  |  |  | (751                                 | ) |  | (751)           |  |  |  |  |  |  |                  |   |  |  |                  |   |  |  |                |  
|                                                 |  |  |                                  |   |  |  |                                          |   |  |            |                               |  |  |  |                            |  |  |  | (1,142                               | ) |  | (1,142)         |  |  |  |  |  |  |                  |   |  |  |                  |   |  |  |                |  

The Group enters into derivative financial instruments with financial institutions with investment grade credit ratings. The fair
value of forward foreign exchange contracts is calculated by reference to quoted market forward exchange rates for contracts with similar maturity profiles. The fair value of currency swaps is determined by reference to quoted market spot rates. As
a result, foreign forward exchange contracts and currency swaps are classified as Level 2 within the fair value hierarchy.

As at 31 December 2014 and
31 December 2013, the fair value of derivatives is net of a credit valuation adjustment attributable to derivative counterparty default risk. The changes in counterparty credit risk had no material effect on the hedge effectiveness for
derivatives designated in hedge relationships and other financial instruments recognised at fair value.

The fair value of contingent consideration is
estimated using a discounted cash flow model. The valuation model considers the present value of expected 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, contingent consideration is classified as Level 3 within the fair value hierarchy.

There were no transfers between level 1, 2 and 3 during 2014 and 2013.

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 prices are not available their fair values are estimated by discounting future contractual cash flows to net present values at the current market interest rates available to the
Group for similar financial instruments as at the year-end.







144Smith & Nephew Annual report 2014



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17 Provisions and contingencies  ACCOUNTING POLICYIn the normal course of business the Group is involved in various legal disputes. Provision is made for loss contingencies
when it is deemed probable that an adverse outcome will occur and the amount of the loss 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.  The recognition of provisions for
legal disputes is subject to a significant degree of estimation. In making its estimates management takes into account the advice of internal and external legal counsel. Provisions are reviewed regularly and amounts updated where necessary to
reflect developments in 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.
 A provision for onerous contracts is recognised when the expected
benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. For the purpose of calculating any onerous lease provision, the Group has taken the discounted future lease
payments, net of expected rental income. Before a provision is established, the Group recognises any impairment loss 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  Rationalisationprovisions$ million



Legal and otherprovisions$ million



Total$ millionAt 1 January 2013


25



97



122Charge to income statement


15



22



37Utilised


(22
)


(12
)


(34
)At 31 December 2013


18



107



125Acquisitions






24



24Charge to income statement


17



15



32Utilised


(22
)


(28
)


(50
)Exchange adjustment


(1
)






(1
)At 31 December 2014


12



118



130Provisions  due within one year


12



55



67Provisions  due after one year






63



63At 31 December 2014


12



118



130Provisions  due within one year


18



42



60Provisions  due after one year






65



65At 31 December 2013


18



107



125 The principal provisions within rationalisation provisions relate to the Group Optimisation programme (mainly severance) announced
in May 2014 and people costs associated with the structural and efficiency programme announced in August 2011. Included within the legal and other provisions
are:  
A provision of $10m (2013  $nil) relating to the distribution hold on RENASYS.  
A provision of $7m (2013  $nil) relating to the HP802 programme which was stopped in the fourth quarter of 2014.  
The remaining balance largely represents provisions for various patent disputes and other litigation. All
provisions are expected to be substantially utilised within three years of 31 December 2014 and none are treated as financial instruments.


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FINANCIAL STATEMENTS

Notes to the Group accountscontinued

17 Provisions and contingencies continued





17.2 Contingencies

The Company and its subsidiaries are parties to various legal proceedings, some of which include claims for substantial damages. The outcome of these proceedings
cannot readily be foreseen, but management believes none of them are likely to result in a material adverse effect on the financial position of the Group. The Group provides for outcomes that are deemed to be probable and can be reliably estimated.
There is no assurance that losses will not exceed provisions or will not have a significant impact on the Groups results of operations in the period in which they 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 almost all have been resolved. The aggregate cost at 31 December 2014 related to this matter
is approximately $215m. 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. 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 other 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 orthopaedic 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 January 2015 approximately 930 such claims were pending with the Group around the world, of which 539 had given rise to pending legal proceedings. Most of the pending
legal proceedings are in the United States. Most claims relate to the Groups Birmingham Hip Resurfacing (BHR) product and the Birmingham Hip Modular Head (BHMH) and R3 Metal Liner (R3ML) components. In 2012,
the Group restricted instructions for use of the BHMH and ceased offering the R3ML. In 2013, the Groups US subsidiary agreed with lawyers representing metal-on-metal claimants to consolidate pre-trial proceedings (such as discovery) in their
lawsuits in a state court in Memphis, Tennessee, and those lawsuits account for most of the US proceedings. These lawsuits are being vigorously defended, but outcomes are difficult to predict and defence costs can be significant. The Group takes
care to monitor the clinical evidence relating to its metal hip implant products and ensure that its product offerings and training are designed to serve patients interests.

The Group has requested indemnity from its product liability insurers for most of these metal-on-metal hip implant claims. In general, the insurers are
investigating the claims and have reserved rights under their respective policies. As noted above, there can be no assurance that insurance will be available or adequate to cover all claims.

Business practice investigations

Business practices in the
healthcare industry are subject to regulation and review by various government authorities. From time to time authorities undertake investigations of the Groups activities to verify compliance. In September 2007, the SEC notified the Group
that it was conducting an informal investigation of companies in the medical devices industry, including the Group, regarding possible violations of the Foreign Corrupt Practices Act (FCPA) in connection with the sale of products in
certain countries outside of the US. The US Department of Justice (DOJ) subsequently joined the SECs request.

On 6 February 2012,
Smith & Nephew announced that it had reached settlement with the SEC and DOJ in connection with this matter. Smith & Nephew paid slightly less than $23m in fines and profit disgorgement and committed to maintain an enhanced
compliance programme and appoint an independent monitor for at least 18 months to review and report on its compliance programme. The monitors final report was filed in late 2013, and the independent monitorship was terminated. The settlement
agreements had three-year terms. The deferred prosecution agreement with the DOJ expired on 6 February 2015 and the DOJ moved to dismiss a related court action against Smith & Nephew. The agreement with the SEC is scheduled to expire
on 3 March 2015.

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. Outcomes are rarely certain and costs are often significant.

The Group has won a jury verdict in
the US district court for Oregon against Arthrex Inc. for infringement of the Groups patents relating to suture anchors. A number of issues have been disputed and appealed since the case was first filed in 2003; Arthrexs latest appeal
was argued in January 2015. Arthrex asserted other patents against the Group in 2014 in the US district court for the Eastern District of Texas.

Other
matters

In April 2009, the Group was served with a subpoena by the US Department of Justice in Massachusetts requiring the production of documents from
1995 to 2009 associated with the marketing and sale of the Groups EXOGEN bone growth stimulator. Similar subpoenas have been served on a number of competitors in the bone growth stimulator market. Around the same time a qui tam or
whistle-blower complaint concerning the industrys sales and marketing of those products, originally filed in 2005 against the primary manufacturers of bone growth stimulation products (including Smith & Nephew), was
unsealed in federal court in Boston, Massachusetts. A motion to dismiss that complaint was denied in December 2010.









146Smith & Nephew Annual report 2014



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##### Table of Contents





The Group is subject to country of origin requirements under the US Buy American and Trade Agreements Acts with
regard to sales to certain US government customers. In 2008 the Group voluntarily disclosed to the US Veterans Administration and the US Department of Defense that a small percentage of the products sold to the US government may have originated from
countries that are not eligible for such sales except with government consent. In December 2008, three months after Smith & Nephews initial voluntary disclosure, a whistle-blower suit was filed in the US district court for the Western
District of Tennessee alleging these violations. Smith & Nephews motion to dismiss the suit was denied in November 2010, and it was settled in 2014. In January 2014, before agreeing to be acquired by the Group, ArthroCare announced a settlement of charges by the US DOJ relating to securities fraud in which
certain members of prior management were implicated. ArthroCare paid a $30m fine and signed a deferred prosecution agreement that imposes reporting, compliance and other requirements on ArthroCare for a two-year term. 18 Retirement benefit obligations  ACCOUNTING POLICYThe Groups major pension plans are of the
defined benefit type. A defined benefit pension plan defines an amount of pension benefit that an employee will receive on retirement, which is dependent on various factors such as age, years of service and final salary. The Groups obligation
is calculated separately for each plan by discounting the estimated future benefit that employees have earned in return for their service in the current and prior periods. The fair value of any plan assets is deducted to arrive at the net
liability.  The calculation of the defined benefit obligation
is performed annually by external actuaries using the projected unit credit method. Re-measurements arising from defined benefit plans comprise actuarial gains and losses and the return on the plan assets net of the costs of managing the plan
assets. The Group recognises these immediately in other comprehensive income (OCI) and all other expenses, such as service cost, net interest cost, administration costs and taxes, are recognised in the income statement.
 A number of key assumptions are made when calculating the fair value of
the Groups defined benefit pension plans. These assumptions impact the balance sheet asset and liabilities, operating profit and finance income/costs. The most critical assumptions are the discount rate, the rate of inflation and mortality
assumptions to be applied to future pension plan liabilities. The discount rate is based on the yield at the reporting date on bonds that have a credit rating of AA, denominated in the currency in which the benefits are expected to be paid and have
a maturity profile approximately the same as the Groups obligations. In determining these assumptions management take into account the advice of professional external actuaries and benchmarks its assumptions against external data.
 The Group determines the net interest expense/(income) on the net
defined benefit liability/(asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the net defined benefit liability/(asset).
 The Group also operates a number of defined contribution plans. A
defined contribution plan is a pension plan under which the Group and employees pay fixed contributions to a third party financial provider. The Group has no further payment obligations once the contributions have been paid. Contributions are
recognised as an employee benefit expense when they are due. 18.1 Retirement benefit net (assets)/obligations The Groups retirement benefit obligations comprise:  2014$ million



2013$ millionFunded plans:UK Plan


16



50US Plan


74



65Other Plans


42



28132



143Unfunded Plans:Other Plans


48



39Retirement Healthcare


46



43226



225Amount recognised on the balance sheet  liability


233



230Amount recognised on the balance sheet  asset


(7
)


(5
) The Group sponsors pension plans for its employees in 16 countries and these are established under the laws of the relevant
country. Funded plans are funded by the payment of contributions and the assets are held by separate trust funds or insurance companies. In countries where there is no Company-sponsored pension plan, state benefits are considered by management to be
adequate. Employees retirement benefits are the subject of regular management review. The Groups defined benefit plans provide employees with an entitlement to retirement benefits varying between 1.3% and 66.7% of final salary on
attainment of retirement rage. The level of entitlement is dependent on the year of service of the employee. The Groups two major defined benefit
pension plans are in the UK and US. Both these plans were closed to new employees in 2003 and defined contribution plans are offered to new joiners. The US Plan was closed to future accrual in March 2014.


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FINANCIAL STATEMENTS

Notes to the Group accountscontinued



18 Retirement benefit obligations continued



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 relevant legislation. The UK Plans assets are held by the
trust. Annual increases on benefits in payment are dependent on inflation. The main uncertainties affecting the level of benefits payable under the UK Plan are future inflation levels (including the impact of inflation on future salary increase) and
the actual longevity of the membership.

The US Plan is governed by a US Pension Committee which is composed of both plan participants and representatives of
the Group. In the US, the Pension Protection Act (2006) established both a minimum required contribution and a maximum deductible contribution. Failure to contribute at least the minimum required amount will subject the Company to significant
penalties and contributions in excess of the maximum deductible have negative tax consequences. The minimum funding requirement is intended to fully fund the present value of accrued benefits over seven years.

18.2 Reconciliation of benefit obligations and pension assets

The
movement in the Groups pension benefit obligation and pension assets is as follows:



|                                                                                            |  |  |                     |   |  |  |                |   |      |  |                |   |  |  |  |  |                     |   |  |  |                |   |  |  |                |  
|------------------------------------------------------------------------------------------- |  |  | ------------------- | - |  |  | -------------- | - | ---- |  | -------------- | - |  |  |  |  | ------------------- | - |  |  | -------------- | - |  |  | -------------- | -
|                                                                                            |  |  | 2014                |   |  |  |                |   | 2013 | 
|                                                                                            |  |  | Obligation$ million |   |  |  | Asset$ million |   |      |  | Total$ million |   |  |  |  |  | Obligation$ million |   |  |  | Asset$ million |   |  |  | Total$ million |  
|Amounts recognised on the balance sheet at beginning of the period                          |  |  | (1,581              | ) |  |  | 1,356          |   |      |  | (225           | ) |  |  |  |  | (1,487              | ) |  |  | 1,227          |   |  |  | (260           | )
|Income statement expense:                                                                   |  |  |                     |   |  |  |                |   |      |  |                |   |  |  |  |  |                     |   |  |  |                |   |  |  |                |  
|Current service cost                                                                        |  |  | (22                 | ) |  |  |               |   |      |  | (22            | ) |  |  |  |  | (29                 | ) |  |  |               |   |  |  | (29            | )
|Past service cost                                                                           |  |  | 36                  |   |  |  |               |   |      |  | 36             |   |  |  |  |  |                    |   |  |  |               |   |  |  |               |  
|Settlements                                                                                 |  |  | 71                  |   |  |  | (60            | ) |      |  | 11             |   |  |  |  |  |                    |   |  |  |               |   |  |  |               |  
|Interest (expense)/income                                                                   |  |  | (67                 | ) |  |  | 60             |   |      |  | (7             | ) |  |  |  |  | (59                 | ) |  |  | 51             |   |  |  | (8             | )
|Administration costs and taxes                                                              |  |  | (3                  | ) |  |  |               |   |      |  | (3             | ) |  |  |  |  | (3                  | ) |  |  |               |   |  |  | (3             | )
|Costs recognised in Income statement                                                        |  |  | 15                  |   |  |  |               |   |      |  | 15             |   |  |  |  |  | (91                 | ) |  |  | 51             |   |  |  | (40            | )
|Re-measurements:                                                                            |  |  |                     |   |  |  |                |   |      |  |                |   |  |  |  |  |                     |   |  |  |                |   |  |  |                |  
|Actuarial gain due to liability experience                                                  |  |  | 5                   |   |  |  |               |   |      |  | 5              |   |  |  |  |  | 1                   |   |  |  |               |   |  |  | 1              |  
|Actuarial (loss)/gain due to financial assumptions change                                   |  |  | (179                | ) |  |  |               |   |      |  | (179           | ) |  |  |  |  | 16                  |   |  |  |               |   |  |  | 16             |  
|Actuarial loss due to demographic assumptions                                               |  |  | (30                 | ) |  |  |               |   |      |  | (30            | ) |  |  |  |  | (42                 | ) |  |  |               |   |  |  | (42            | )
|Return on plan assets greater than discount rate                                            |  |  |                    |   |  |  | 110            |   |      |  | 110            |   |  |  |  |  |                    |   |  |  | 37             |   |  |  | 37             |  
|Re-measurements recognised in OCI                                                           |  |  | (204                | ) |  |  | 110            |   |      |  | (94            | ) |  |  |  |  | (25                 | ) |  |  | 37             |   |  |  | 12             |  
|Cash:                                                                                       |  |  |                     |   |  |  |                |   |      |  |                |   |  |  |  |  |                     |   |  |  |                |   |  |  |                |  
|Employer contributions                                                                      |  |  |                    |   |  |  | 65             |   |      |  | 65             |   |  |  |  |  |                    |   |  |  | 67             |   |  |  | 67             |  
|Employee contributions                                                                      |  |  | (5                  | ) |  |  | 5              |   |      |  |               |   |  |  |  |  | (4                  | ) |  |  | 4              |   |  |  |               |  
|Benefits paid directly by the Group, taxes and administration costs paid from scheme assets |  |  | 3                   |   |  |  |               |   |      |  | 3              |   |  |  |  |  | 3                   |   |  |  | (3             | ) |  |  |               |  
|Benefits paid                                                                               |  |  | 51                  |   |  |  | (54            | ) |      |  | (3             | ) |  |  |  |  | 45                  |   |  |  | (45            | ) |  |  |               |  
|Net cash                                                                                    |  |  | 49                  |   |  |  | 16             |   |      |  | 65             |   |  |  |  |  | 44                  |   |  |  | 23             |   |  |  | 67             |  
|                                                                                            |  |  |                     |   |  |  |               
|Exchange rates                                                                              |  |  | 84                  |   |  |  | (71            | ) |      |  | 13             |   |  |  |  |  | (22                 | ) |  |  | 18             |   |  |  | (4             | )
|Amount recognised on the balance sheet                                                      |  |  | (1,637              | ) |  |  | 1,411          |   |      |  | (226           | ) |  |  |  |  | (1,581              | ) |  |  | 1,356          |   |  |  | (225           | )
|Amount recognised on the balance sheet  liability                                          |  |  | (1,611              | ) |  |  | 1,378          |   |      |  | (233           | ) |  |  |  |  | (1,548              | ) |  |  | 1,318          |   |  |  | (230           | )
|Amount recognised on the balance sheet  asset                                              |  |  | (26                 | ) |  |  | 33             |   |      |  | 7              |   |  |  |  |  | (33                 | ) |  |  | 38             |   |  |  | 5              |  
|                                                                                            |  |  |                     |   |  |  |               
|Represented by:                                                                             |  |  |                     |   |  |  |                |   |      |  |                |   |  |  |  |  |                     |   |  |  |                |   |  |  |                |  
|                                                                                            |  |  | 2014                |   |  |  |                |   | 2013 | 
|                                                                                            |  |  | Obligation$ million |   |  |  | Asset$ million |   |      |  | Total$ million |   |  |  |  |  | Obligation$ million |   |  |  | Asset$ million |   |  |  | Total$ million |  
|UK Plan                                                                                     |  |  | (879                | ) |  |  | 863            |   |      |  | (16            | ) |  |  |  |  | (855                | ) |  |  | 805            |   |  |  | (50            | )
|US Plan                                                                                     |  |  | (482                | ) |  |  | 408            |   |      |  | (74            | ) |  |  |  |  | (482                | ) |  |  | 417            |   |  |  | (65            | )
|Other Plans                                                                                 |  |  | (276                | ) |  |  | 140            |   |      |  | (136           | ) |  |  |  |  | (244                | ) |  |  | 134            |   |  |  | (110           | )
|Total                                                                                       |  |  | (1,637              | ) |  |  | 1,411          |   |      |  | (226           | ) |  |  |  |  | (1,581              | ) |  |  | 1,356          |   |  |  | (225           | )

All benefits are vested at the end of each reporting period. The weighted average duration of the defined benefit obligation at the
end of the reporting period is 20 years and 14 years for the UK and US plans respectively. For 2013, this was 20 years for the UK Plan and 16 years for the US Plan.







148Smith & Nephew Annual report 2014



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##### Table of Contents





18.3 Plan assets The
market value of the US, UK and Other Plans assets are as follows:  2014$ million


2013$ million


2012$ millionUK Plan:Assets with a quoted market price:Cash and cash equivalents


6



8



11Equity securities


237



220



249Government bonds  fixed interest






61



92 index linked






109



282Liability driven investments


227







Diversified growth funds


155



159



110625



557



744Other assets:Insurance contract


238



248



Market value of assets


863



805



744US Plan:Assets with a quoted market price:Cash and cash equivalents






6



1Equity securities


167



181



242Government bonds  fixed interest


121



64



106Corporate bonds


120



151



Hedge funds






15



10Market value of assets


408



417



359Other Plans:Assets with a quoted market price:Cash and cash equivalents


6



6



5Equity securities


33



32



26Government bonds  fixed interest


7



9



7 index linked


13



11



34Corporate bonds


12



13



2Insurance contracts


31



24



Property


6



6



5Other quoted securities


3



3



11111



104



90Other assets:Equities










2Insurance contracts


29



29



31Investment property






1



1Market value of assets


140



134



124Total market value of assets


1,411



1,356



1,227 No plans invest directly in property occupied by the Group or in financial securities issued by the Group. The US and UK plan assets are invested in a diversified range of industries across a broad range of geographies. These assets include liability matching assets and
annuity policies purchased by the trustees of each plan, which aim to match the benefits to be paid to certain members from the plan and therefore remove the investment, inflation and demographic risks in relation to those liabilities. In December 2014, the low risk asset portfolio held by the UK Plan was transferred into liability driven investments (LDI) in order to maintain the same level of
hedging against interest rate and inflation risks. The UK Plan also has an insurance contract with Rothesay Life covering a subset of the UK Plan pensioner
liabilities. The terms of this policy define that the contract value exactly matches the amount and timing of the pensioner obligations covered by the contract. In accordance with IAS19R Employee Benefits, 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.


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2014149









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FINANCIAL STATEMENTS

Notes to the Group accountscontinued





18 Retirement benefit obligations continued

18.4 Expenses recognised in the income statement

The total expense relating to retirement benefits recognised for the year is $17m (2013  $72m, 2012  $72m). Of this cost recognised for the year, $32m
(2013  $32m, 2012  $32m) relates to defined contributions and $15m net income (2013  $40m expense, 2012  $40m expense) relates to defined benefit plans.

The cost charged in respect of the Groups defined contribution plans represents contributions payable to these plans by the Group at rates specified in the
rules of the plans. These were charged to operating profit in selling, general and administrative expenses. There were $nil outstanding payments as at 31 December 2014 due to be paid over to the plans (2013  $nil, 2012  $nil).

Included in the $15m net income recognised for defined benefits plans are a $35m past service cost credit which arose on the closure of the US plan to future
accrual in March 2014 and a $11m gain on settlement of benefits as a result of a member buyout in December 2014.

Defined benefit plan costs comprise service
cost which is charged to operating profit in selling, general and administrative expenses and net interest cost and administration costs and taxes which are reported as other finance costs.

The defined benefit pension costs charged for the UK and US plans are:



|                                                                                                                                                                                                     |  |  |                  |  |  |                   |  |      |  |  |                  |  |  |      |                  |  |  |  |  |  |                  |  |  |  |                  | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ---------------- |  |  | ----------------- |  | ---- |  |  | ---------------- |  |  | ---- | ---------------- |  |  |  |  |  | ---------------- |  |  |  | ---------------- | 
|                                                                                                                                                                                                     |  |  | 2014             |  |  |                   |  | 2013 |  |  |                  |  |  | 2012 |                 
|                                                                                                                                                                                                     |  |  | UK Plan$ million |  |  | US Plan
$ million |  |      |  |  | UK Plan$
million |  |  |      | US Plan$
million |  |  |  |  |  | UK Plan$
million |  |  |  | US Plan$
million | 
|Service cost                                                                                                                                                                                         |  |  | 10               |  |  | 2                 |  |      |  |  | 7                |  |  |      | 10               |  |  |  |  |  | 8                |  |  |  | 11               | 
|Past service cost                                                                                                                                                                                    |  |  |                 |  |  | (35)              |  |      |  |  |                 |  |  |      |                 |  |  |  |  |  |                 |  |  |  |                 | 
|Settlement gain                                                                                                                                                                                      |  |  |                 |  |  | (11)              |  |      |  |  |                 |  |  |      |                 |  |  |  |  |  |                 |  |  |  |                 | 
|Net interest cost, administration and taxes                                                                                                                                                          |  |  | 3                |  |  | 3                 |  |      |  |  | 1                |  |  |      | 7                |  |  |  |  |  | 1                |  |  |  | 7                | 
|                                                                                                                                                                                                     |  |  | 13               |  |  | (41)              |  |      |  |  | 8                |  |  |      | 17               |  |  |  |  |  | 9                |  |  |  | 18               | 
|18.5 Principal actuarial assumptions
 The following are the principal financial actuarial assumptions used at the reporting date to
determine the UK and US defined benefit obligations and expense. | 
|                                                                                                                                                                                                     |  |  |                  |  |  |                   |  |      |  |  |                  |  |  |      | 2014% per annum  |  |  |  |  |  | 2013% per annum  |  |  |  | 2012% per annum  | 
|UK Plan:                                                                                                                                                                                             |  |  |                  |  |  |                   |  |      |  |  |                  |  |  |      |                  |  |  |  |  |  |                  |  |  |  |                  | 
|Discount rate                                                                                                                                                                                        |  |  |                  |  |  |                   |  |      |  |  |                  |  |  |      | 3.7              |  |  |  |  |  | 4.4              |  |  |  | 4.5              | 
|Future salary increases                                                                                                                                                                              |  |  |                  |  |  |                   |  |      |  |  |                  |  |  |      | 3.5              |  |  |  |  |  | 3.9              |  |  |  | 3.5              | 
|Future pension increases                                                                                                                                                                             |  |  |                  |  |  |                   |  |      |  |  |                  |  |  |      | 3.0              |  |  |  |  |  | 3.4              |  |  |  | 3.0              | 
|Inflation (RPI)                                                                                                                                                                                      |  |  |                  |  |  |                   |  |      |  |  |                  |  |  |      | 3.0              |  |  |  |  |  | 3.4              |  |  |  | 3.0              | 
|Inflation (CPI)                                                                                                                                                                                      |  |  |                  |  |  |                   |  |      |  |  |                  |  |  |      | 2.0              |  |  |  |  |  | 2.4              |  |  |  | 2.2              | 
|US Plan:                                                                                                                                                                                             |  |  |                  |  |  |                   |  |      |  |  |                  |  |  |      |                  |  |  |  |  |  |                  |  |  |  |                  | 
|Discount rate                                                                                                                                                                                        |  |  |                  |  |  |                   |  |      |  |  |                  |  |  |      | 4.0              |  |  |  |  |  | 4.9              |  |  |  | 4.0              | 
|Future salary increases                                                                                                                                                                              |  |  |                  |  |  |                   |  |      |  |  |                  |  |  |      | n/a              |  |  |  |  |  | 3.0              |  |  |  | 3.0              | 
|Inflation                                                                                                                                                                                            |  |  |                  |  |  |                   |  |      |  |  |                  |  |  |      | n/a              |  |  |  |  |  | 2.5              |  |  |  | 2.5              | 







150Smith & Nephew Annual report 2014



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Actuarial assumptions regarding future mortality are based on mortality tables. The UK uses the S1NA with
projections in line with the CMI 2011 table and the US uses the RP2000 table with scale AA. The current longevities underlying the values of the obligations in the defined benefit plans are as follows:  2014
years

2013
years

2012
yearsLife expectancy at age 60UK Plan:Males

29.4

29.3

28.7Females

31.2

31.1

30.2US Plan:Males

26.0

23.8

22.9Females

28.5

25.5

25.0Life expectancy at age 60 in 20 years timeUK Plan:Males

32.4

32.2

31.2Females

33.3

33.2

31.9US Plan:Males

27.8

23.8

24.6Females

30.2

25.5

25.0 18.6 Sensitivity analysis The
calculation of the defined benefit obligation is sensitive to the assumptions used. The following table summarises the increase/decrease on the UK and US defined benefit obligation and pension costs as a result of reasonably possible changes in some
of the assumptions while holding all other assumptions consistent. The sensitivity to the inflation assumption change includes corresponding changes to the future salary increases and future pension increase assumptions. The analysis does not take
into account the full distribution of cash flows expected under the plan. Changes to the inflation assumption will not have any affect on the US Pension plan
as it was closed to future accrual in 2014.  Increase in pension obligation

Increase in pension cost$ million

+50bps/+1yr

-50bps/-1yr

+50bps/+1 yr

-50bps/-1yrUK Plan:Discount rate

-80

+91

-4

+4Inflation

+90

-78

+4

-4Mortality

+31

-31

+1

-1US Plan:Discount rate

-33

+36

-2

+1Inflation

n/a

n/a

n/a

n/aMortality

+12

-12






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FINANCIAL STATEMENTS

Notes to the Group accountscontinued



18 Retirement benefit obligations continued

18.7 Risk

The pension
plans expose the Group to the following risks:



|                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Interest rate risk |  | Volatility in financial markets can change the calculations of the
obligation dramatically as the calculation of the obligation is linked to yields on AA-rated corporate bonds. A decrease in the bond yield will increase the measure of plan liabilities, although this will be partially offset by increases in the
value of matching plan assets such as bonds and 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.                                   
|Inflation risk     |  | The UK Plan is linked to inflation. A high rate of inflation will lead to a higher liability. This
risk is managed by holding inflation-linked bonds and an inflation-linked insurance contract in respect of some of the obligation. In the UK, the liability matching portfolio held in conventional and index-linked gilts was transferred into liability
driven investments in order to reduce inflation risk.  The US Plan has been closed to
future accrual which eliminates the exposure to this risk.                                                                                                    
|Investment risk    |  | If the return on plan assets is below the discount rate, all else being equal, there will be an
increase in the plan deficit.  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 ten pre-determined funded status
levels and when each trigger point is reached, the plan assets are re-balanced accordingly.
|Longevity risk     |  | The present value of the plans defined benefit liability is calculated by reference to the best
estimate of the mortality of the plan participants both during and after their employment. An increase in the life expectancy of plan participants above that assumed will increase the benefit obligation.
 The UK Plan, in order to minimise longevity risk, entered into an insurance contract which
covers a portion of pensioner obligations.                                                                                                                                                               
|Salary risk        |  | The calculation of the defined benefit obligation uses the future estimated salaries of plan participants. Increases in the salary of plan
participants above that assumed will increase the benefit obligation. The exposure to salary risk in the US has been eliminated with the closure of the US Plan 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. Employees are required to contribute to the plans.

UK Plan

The most recent full actuarial valuation of the UK Plan was undertaken as at 30 September 2012. Valuations are performed every two years, however in 2014, the
Trustees have agreed that they will defer the 2014 valuation for one year and it will be performed in September 2015. Contributions to the UK Plan in 2014 were $33m (2013  $37m, 2012  $39m). This included supplementary payments of $23m
(2013  $31m, 2012  $30m).

The Group has agreed to pay the supplementary payments each year until 2017. The agreed supplementary contributions for
2015 are $37m.

US Plan

Full actuarial valuations were
performed annually for the US Plan with the last undertaken as at 20 September 2013 before the closure of the Plan to future accrual. Contributions to the US Plan were $22m (2013  $20m, 2012  $27m) which included supplementary
payments of $20m. The agreed contributions for 2015 are $22m.









152Smith & Nephew Annual report 2014



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19 Equity  ACCOUNTING POLICYIncremental 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 effects, is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the treasury share reserve. When treasury shares are sold or reissued subsequently, the amount received is
recognised as an increase in equity and the resulting surplus or deficit on the transaction is presented within share premium. 19.1 Share capital  Ordinary shares (20¢)



Deferred shares (£1.00)



TotalThousand



$ million



Thousand



$ million



$ millionAuthorisedAt 31 December 2012


1,223,591



245



50







245At 31 December 2013


1,223,591



245



50







245At 31 December 2014


1,223,591



245



50







245Allotted, issued and fully paidAt 1 January 2012


954,828



191



50







191Share options


8,752



2











2At 31 December 2012


963,580



193



50







193Share options


5,587



1











1Shares cancelled


(51,000
)


(10
)










(10
)At 31 December 2013


918,167



184



50







184Share options


4,180



1











1Shares cancelled


(4,405
)


(1
)










(1
)At 31 December 2014


917,942



184



50







184 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:  
The holder shall not be entitled to participate in the profits of the Company;  
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 further $1,000 in respect of each such share there shall be distributed to a holder of a deferred share (for each deferred share held by him) an amount
equal to the nominal value of the deferred share;  
The holder shall not be entitled to receive notice, attend, speak or vote at any general meeting of the Company; and  
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. The Groups objectives when managing capital are to ensure the Group has adequate funds to continue as a going concern and sufficient
flexibility within 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:  2014



2013



2012$ million



$ million



$ millionShare capital


184



184



193Share premium


574



535



488Capital redemption reserve


11



10



Treasury shares


(315
)


(322
)


(735
)Retained earnings and other reserves


3,586



3,640



3,9384,040



4,047



3,884


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2014153









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FINANCIAL STATEMENTS

Notes to the Group accountscontinued



19 Equity continued



19.2 Treasury shares

Treasury shares represents the holding of the Companys own shares in respect of the Smith & Nephew Employees Share Trust and shares bought
back as part of the share buy-back programme. On 2 May 2013, as part of the new Capital Allocation Framework, the Group announced the start of a new share buy-back programme to return $300m of surplus capital to its shareholders. The programme
was suspended in February 2014 following the annoucement of the ArthroCare acquisition. Shares issued in connection with the Groups share incentive plans are brought back on a quarterly basis. During 2014, a total of 4.4m ordinary shares
(0.5%) had been purchased at a cost of $72m and 4.4m ordinary shares (0.5%) had been cancelled. The maximum number of ordinary shares held in treasury during 2014 was 26.9m (2.8%) with a nominal value of $5.4m.

The Smith & Nephew 2004 Employees Share Trust (Trust) was established to hold shares relating to the long-term incentive plans referred
to in the 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 partial 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 2013                                                                      |  |  |  |  | 730                    |   |  |  | 5                              |   |  |  | 735                    |  
|Shares purchased                                                                       |  |  |  |  | 226                    |   |  |  | 5                              |   |  |  | 231                    |  
|Shares transferred from treasury                                                       |  |  |  |  | (8                     | ) |  |  | 8                              |   |  |  |                       |  
|Shares transferred to Group beneficiaries                                              |  |  |  |  | (7                     | ) |  |  | (14                            | ) |  |  | (21                    | )
|Shares cancelled                                                                       |  |  |  |  | (623                   | ) |  |  |                               |   |  |  | (623                   | )
|At 31 December 2013                                                                    |  |  |  |  | 318                    |   |  |  | 4                              |   |  |  | 322                    |  
|Shares purchased                                                                       |  |  |  |  | 72                     |   |  |  | 3                              |   |  |  | 75                     |  
|Shares transferred from treasury                                                       |  |  |  |  | (11                    | ) |  |  | 11                             |   |  |  |                       |  
|Shares transferred to Group beneficiaries                                              |  |  |  |  | (8                     | ) |  |  | (17                            | ) |  |  | (25                    | )
|Shares cancelled                                                                       |  |  |  |  | (57                    | ) |  |  |                               |   |  |  | (57                    | )
|At 31 December 2014                                                                    |  |  |  |  | 314                    |   |  |  | 1                              |   |  |  | 315                    |  
|                                                                                       |  |  |  |  |                        |   |  |  |                                |   |  |  |                        |  
|                                                                                       |  |  |  |  | Numberof sharesmillion |   |  |  | Numberof sharesmillion         |   |  |  | Numberof sharesmillion |  
|At 1 January 2013                                                                      |  |  |  |  | 59.5                   |   |  |  | 0.5                            |   |  |  | 60.0                   |  
|Shares purchased                                                                       |  |  |  |  | 18.2                   |   |  |  | 0.4                            |   |  |  | 18.6                   |  
|Shares transferred from treasury                                                       |  |  |  |  | (0.6                   | ) |  |  | 0.6                            |   |  |  |                       |  
|Shares transferred to Group beneficiaries                                              |  |  |  |  | (0.6                   | ) |  |  | (1.2                           | ) |  |  | (1.8                   | )
|Shares cancelled                                                                       |  |  |  |  | (51.0                  | ) |  |  |                               |   |  |  | (51.0                  | )
|At 31 December 2013                                                                    |  |  |  |  | 25.5                   |   |  |  | 0.3                            |   |  |  | 25.8                   |  
|Shares purchased                                                                       |  |  |  |  | 4.4                    |   |  |  | 0.2                            |   |  |  | 4.6                    |  
|Shares transferred from treasury                                                       |  |  |  |  | (0.9                   | ) |  |  | 0.9                            |   |  |  |                       |  
|Shares transferred to Group beneficiaries                                              |  |  |  |  | (0.6                   | ) |  |  | (1.3                           | ) |  |  | (1.9                   | )
|Shares cancelled                                                                       |  |  |  |  | (4.4                   | ) |  |  |                               |   |  |  | (4.4                   | )
|At 31 December 2014                                                                    |  |  |  |  | 24.0                   |   |  |  | 0.1                            |   |  |  | 24.1                   |  
|19.3
Dividends                                                                         |  |  |  |  |                        |   |  |  |                                |   |  |  |                        |  
|                                                                                       |  |  |  |  | 2014$ million          |   |  |  | 2013$ million                  |   |  |  | 2012$ million          |  
|The following dividends were declared and paid in the year:                            |  |  |  |  |                        |   |  |  |                                |   |  |  |                        |  
|Ordinary final of 17.0¢ for 2013 (2012  16.20¢, 2011  10.80¢) paid 7 May 2014        |  |  |  |  | 152                    |   |  |  | 146                            |   |  |  | 97                     |  
|Ordinary interim of 11.0¢ for 2014 (2013  10.40¢, 2012  9.90¢) paid 11 November 2014 |  |  |  |  | 98                     |   |  |  | 93                             |   |  |  | 89                     |  
|                                                                                       |  |  |  |  | 250                    |   |  |  | 239                            |   |  |  | 186                    |  

A final dividend for 2014 of 18.6 US cents per ordinary share was proposed by the Board on 4 February 2015 and will be paid,
subject to shareholder approval, on 6 May 2015 to shareholders on the Register of Members on 17 April 2015. The estimated amount of this dividend on 23 February 2015 is $166m.



154Smith & Nephew Annual report 2014



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20 Cash flow statement  ACCOUNTING POLICYIn the Group cash flow statement, cash and cash equivalents includes cash at bank, other short-term liquid investments with original maturities of three months or less and bank overdrafts. In the Group balance sheet, bank overdrafts
are shown within bank overdrafts and loans under current liabilities. Analysis of net debt  BorrowingsCash$ million



Overdrafts$ million



Due withinone year$ million



Due afterone year$ million



Net currencyswaps$ million



Total$ millionAt 1 January 2012


184



(23
)


(283
)


(16
)






(138
)Net cash flow


(10
)


12



256



(414
)


1



(155
)Exchange adjustment


4















1



5At 31 December 2012


178



(11
)


(27
)


(430
)


2



(288
)Net cash flow


(38
)






(6
)


84



1



41Exchange adjustment


(3
)










(1
)


(2
)


(6
)At 31 December 2013


137



(11
)


(33
)


(347
)


1



(253
)Net cash flow


(35
)


(19
)


22



(1,322
)


11



(1,343
)Exchange adjustment


(9
)


2







3



(13
)


(17
)At 31 December 2014


93



(28
)


(11
)


(1,666
)


(1
)


(1,613
) Reconciliation of net cash flow to movement in net debt  2014$ million



2013$ million



2012$ millionNet cash flow from cash net of overdrafts


(54
)


(38
)


2Settlement of currency swaps


11



1



1Net cash flow from borrowings


(1,300
)


78



(158
)Change in net debt from net cash flow


(1,343
)


41



(155
)Exchange adjustment


(17
)


(6
)


5Change in net debt in the year


(1,360
)


35



(150
)Opening net debt


(253
)


(288
)


(138
)Closing net debt


(1,613
)


(253
)


(288
) Cash and cash equivalents For the
purposes of the Group Cash Flow Statement cash and cash equivalents at 31 December 2014 comprise cash at bank net of bank overdrafts.  2014$ million



2013$ million



2012$ millionCash at bank


93



137



178Bank overdrafts


(28
)


(11
)


(11
)Cash and cash equivalents


65



126



167


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2014155









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FINANCIAL STATEMENTS

Notes to the Group accountscontinued





21 Acquisitions and disposals



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | 
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| |  | ACCOUNTING POLICY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 
| |  | The Group
accounts for business combinations using the acquisition method when control is transferred to the Group. The consideration transferred in the acquisition is measured at fair value, as are the identifiable net assets acquired. Any goodwill that
arises is tested annually for impairment. Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities.
 Any contingent consideration payable is measured at fair value at the
acquisition date. If the contingent consideration is classified as equity, then it is not re-measured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognised in
profit or loss. |  | 

21.1 Acquisitions

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 value
of the total consideration equalling $1,715m. The acquisition was financed through existing debt facilities and cash balances, including an existing $1 billion revolving credit facility and a new two-year $1.4 billion term loan facility, established
in February 2014.

The acquisition is deemed to be a business combination within the scope of IFRS 3 Business Combinations. The fair values shown below
are provisional. If new information is obtained within the measurement period about facts and circumstances that existed at the acquisition date, the acquisition accounting will be revised. The provisional estimate of the goodwill arising on the
acquisition is $829m. It relates to the value of the additional economic benefits expected from the transaction, 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, and the recognised amounts 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                            |  |  | 4         |  
|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     |  

The recognised amounts of assets acquired and liabilities assumed are different from those disclosed previously as adjustments to
provisional values continue to be recorded during the measurement period. None of the adjustments posted to date are material.

The Group incurred acquisition
related costs of $21m relating to professional and advisor fees. These costs have been recognised in administrative expenses in the income statement.

ArthroCares contribution to Group revenue was $207m for the year ended 31 December 2014, representing approximately seven months of sales. This gave
rise to a pre-tax profit of $28m after amortisation of acquisition intangibles. Had ArthroCare been acquired on 1 January 2014, the Groups revenues 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 assets and liabilities related to the distribution business for its sports medicine, orthopaedic reconstruction, and trauma products in Brazil. The acquisition is 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 included deferred consideration of $26m and $5m in relation to the settlement of working capital commitments. The deferred consideration was subsequently
settled during the second quarter.







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As at the acquisition date, the estimated value of the net assets acquired was $16m, which included trade and other
receivables of $12m, identifiable intangible assets of $16m, inventory of $4m, property, plant and equipment of $2m, trade payables of $1m, provisions of $5m, current tax payable of $4m and deferred tax liabilities of $8m. As a result, the
provisional estimate of goodwill arising on the acquisition was $15m. This is attributable to the additional economic benefits expected from the acquisition, including the assembled workforce, which has been transferred as part of the acquisition.
The goodwill is not expected to be deductible for tax purposes. The recognised amounts of assets acquired and liabilities assumed have been determined on a
provisional basis. If new information is obtained within the measurement period about facts and circumstances that existed at the acquisition date, the acquisition accounting will be revised. The contribution to revenue and attributable profit from this acquisition 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. Year ended 31 December 2013 Acquisition of Turkish
distributor On 30 September 2013, the Group acquired certain assets and liabilities in respect of a Turkish business, which distributes products
related to orthopaedic reconstruction, trauma, sports medicine and arthroscopic technologies. The acquisition is deemed to be a business combination
within the scope of IFRS 3. The estimated fair value of the consideration is $63m and included $12m of contingent consideration in respect of agreed
milestones and $36m through the settlement of working capital commitments. The accounting for acquisition was completed during 2014, with no change to the provisional values as at 31 December 2013. The goodwill arising on the acquisition is $12m. It is attributable to the additional economic benefits expected from the transaction, including the assembled
workforce, which has been transferred as part of the acquisition. The goodwill recognised is expected to be deductible for tax purposes. The following table
summarises the consideration transferred, and the recognised amounts of assets acquired and liabilities assumed at the acquisition date.  $ millionIdentifiable assets acquired and liabilities assumedProperty, plant and equipment


4Inventories


8Trade receivables and prepayments


24Identifiable intangible assets


17Payables and accruals


(2
)Net assets


51Goodwill


12Cost of acquisition


63 The Group incurred acquisition-related costs of $4m, primarily related to external legal fees and due diligence costs. These costs
have been recognised in administrative expenses in the Groups income statement. In 2013, the contribution to revenue and attributable profit from the
acquisition was immaterial. If the acquisition had occurred at the beginning of the year the contribution to revenue and attributable profit would have also been immaterial. Other acquisitions During the year ended 31 December 2013,
the Group acquired a Brazilian distributor of its advanced wound management products and a business based in India primarily engaged in the manufacture and distribution of trauma products. These acquisitions are deemed to be business combinations
within the scope of IFRS 3. The aggregated total fair value of the consideration was $63m and included $2m of contingent consideration and $2m through the
settlement of working capital commitments. The accounting for both acquisitions was completed during 2014, with no change to the provisional values as at 31 December 2013. As at the acquisition date, the aggregated fair value of the net assets acquired was $38 million, which included property, plant and equipment of $1m, inventory of
$4m, trade receivables and prepayments of $3m, identifiable intangible assets of $47m, payables and accruals of $3m and deferred tax liabilities of $14m. The
goodwill arising on the acquisitions is $25m. This is attributable to the additional economic benefits expected from the transactions, including the assembled workforces, which have been transferred as part of the acquisitions. The goodwill
recognised is not expected to be deductible for tax purposes. In 2013, the contribution to revenue and attributable profit from these acquisitions was
immaterial. If these acquisitions had occurred at the beginning of 2013 their contribution to revenue and attributable profit would have also been immaterial.


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2014157









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##### Table of Contents

FINANCIAL STATEMENTS

Notes to the Group accountscontinued





21 Acquisitions and disposals continued

21.2 Disposal of business

Year ended 31 December 2014

During the fourth quarter of 2014, the Group disposed of a manufacturing facility in the UK for cash consideration of $20 million, resulting in a pre-tax gain on
disposal of $9 million. The 2014 revenue and profit contribution of the disposed business was immaterial.

22 Operating leases



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | 
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
| |  | ACCOUNTING
POLICY                                                                                                                                                                                                                                                                                                                                                                                                                                    |  | 
| |  | Leases are classified as finance leases when the terms
of the lease transfer substantially all the risks and rewards of ownership to the Group. All other leases are classified as operating leases. 
Payments under operating leases are expensed in the income statement on a straight line basis over the term of the lease. Lease incentives
received are recognised as an integral part of the total lease expense, over the term of the lease. |  | 

Future minimum lease payments under non-cancellable operating leases fall due as follows:



|                                  |  |                 |  |                
|--------------------------------- |  | --------------- |  | ---------------
|                                  |  | 2014  $ million |  | 2013  $ million
|Land and buildings:               |  |                 |  |                
|Within one year                   |  | 34              |  | 30             
|After one and within two years    |  | 25              |  | 22             
|After two and within three years  |  | 18              |  | 16             
|After three and within four years |  | 12              |  | 13             
|After four and within five years  |  | 8               |  | 7              
|After five years                  |  | 8               |  | 5              
|                                  |  | 105             |  | 93             
|Other assets:                     |  |                 |  |                
|Within one year                   |  | 15              |  | 15             
|After one and within two years    |  | 9               |  | 9              
|After two and within three years  |  | 4               |  | 4              
|After three and within four years |  | 3               |  | 2              
|                                  |  | 31              |  | 30             









158Smith & Nephew Annual report 2014



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23 Other Notes to the accounts 23.1 Share-based payments  ACCOUNTING POLICYThe Group operates a number of equity-settled executive and employee share plans. For all grants of share options and
awards, the fair value at the grant date is calculated using appropriate option pricing models. The grant date fair value is recognised over the vesting period as an expense, with a corresponding increase in retained earnings. Employee plans The Smith &
Nephew Sharesave Plan (2002) (adopted by shareholders on 3 April 2002) (the Save As You Earn (SAYE) plan), the Smith & Nephew International Sharesave Plan (2002), Smith & Nephew France Sharesave Plan (2002),
Smith & Nephew Sharesave Plan (2012) (the Save As You Earn (SAYE 2012) plan) (adopted by shareholders on 12 April 2012), Smith & Nephew International Sharesave Plan (2012) (adopted by shareholders on
12 April 2012) and Smith & Nephew France Sharesave Plan (2012) (adopted by shareholders on 12 April 2012) are together termed the Employee Plans. The SAYE and SAYE 2012 plans are available to all employees in the UK employed by participating Group companies, subject to three months service. The schemes
enable employees to save up to £250 per month and give them an option to acquire shares based on the committed amount to be saved. The option price is not less than 80% of the average of middle market quotations of the ordinary shares on
the three dealing days preceding the date of invitation. The Smith & Nephew International Sharesave Plan (2002) and Smith & Nephew International Sharesave Plan (2012) are available to employees in Australia, Austria,
Belgium, Canada, China, Denmark, Finland, France, Germany, Hong Kong, India, Ireland, Italy, Japan, South Korea, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland and the United Arab
Emirates. Puerto Rico participants were eligible to receive options under the International Plans up to 2011 and were eligible to receive phantom options from 2013 onwards. The Smith & Nephew France Sharesave Plans were available to all
employees in France up to 2012. The International and French plans operate on a substantially similar basis to the SAYE plans. Employees in the US are able to
participate in the Employee Stock Purchase Plan, which gives them the opportunity to acquire shares, in the form of ADSs, at a discount of 15% (or more if the shares appreciate in value during the plans quarterly purchase period) to the market
price, through a regular savings plan. Executive plans The
Smith & Nephew 2001 UK Approved Share Option Plan, the Smith & Nephew 2001 UK Unapproved Share Option Plan, the Smith & Nephew 2001 US Share Plan (adopted by shareholders on 4 April 2001), the Smith & Nephew
2004 Executive Share Option Plan (adopted by shareholders on 6 May 2004) and the Smith & Nephew Global Share Plan 2010 (adopted by shareholders on 6 May 2010) are together termed the Executive Plans. Under the terms of the Executive Plans, the Remuneration Committee, consisting of Non-Executive Directors, may at their discretion approve the grant of options to
employees of the Group to acquire ordinary shares in the Company. Options granted under the Smith & Nephew 2001 US Share Plan (the US Plan) and the Smith & Nephew 2004 Executive Share Option Plan are to acquire ADSs or
ordinary shares. For Executive Plans adopted in 2001 and 2004, the market value is the average quoted price of an ordinary share for the three business days preceding the date of grant or the average quoted price of an ADS or ordinary share, for the
three business days preceding the date of grant or the quoted price on the date of grant if higher. For the Global Share Plan adopted in 2010 the market value is the closing price of an ordinary share or ADS on the last trading day prior to the
grant date. With the exception of options granted under the 2001 US Plan and the Global Share Plan 2010, the vesting of options granted from 2001 is subject to achievement of a performance condition. Options granted under the 2001 US Plan and the
Global Share Plan 2010 are not subject to any performance conditions. Prior to 2008, the 2001 US Plan options became cumulatively exercisable as to 10% after one year, 30% after two years, 60% after three years and the remaining balance after four
years. With effect from 2008, options granted under the 2001 US Plan became cumulatively exercisable as to 33.3% after one year, 66.7% after two years and the remaining balance after the third year. The 2001 UK Unapproved Share Option Plan was open
to certain employees outside the US and the US Plan was open to certain employees in the US, Canada, Mexico and Puerto Rico. The Global Share Plan 2010 is open to employees globally. The 2004 Plan was open to Senior Executives only. The maximum term of options granted, under all plans, is 10 years from the date of grant. All share option plans are settled in shares. From 2012 onwards Senior Executives were granted share awards instead of share options and from 2013 executives were granted conditional share awards instead of
share options. The awards vest 33.3% after one year, 66.7% after two years and the remaining balance after the third year subject to continued employment. There are no performance conditions for executives. Vesting for senior executives is subject
to personal performance levels. The market value used to calculate the number of awards is the closing price of an ordinary share on the last trading day prior to the grant date.


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FINANCIAL STATEMENTS

Notes to the Group accountscontinued





23 Other Notes to the accounts continued

23.1 Share based payments continued



At 31 December 2014 8,708,000 (2013  13,601,000, 2012  19,690,000) options were outstanding under share option plans as follows:



|                                        |  |  |  |  |                         |   |  |  |                                     |  |  |  |                                     | 
|--------------------------------------- |  |  |  |  | ----------------------- | - |  |  | ----------------------------------- |  |  |  | ----------------------------------- | 
|                                        |  |  |  |  | Number ofsharesThousand |   |  |  | Range of optionexercise pricesPence |  |  |  | Weighted averageexercise pricePence | 
|Employee Plans:                         |  |  |  |  |                         |   |  |  |                                     |  |  |  |                                     | 
|Outstanding at 1 January 2012           |  |  |  |  | 3,580                   |   |  |  | 348.0  640.0                       |  |  |  | 432.8                               | 
|Granted                                 |  |  |  |  | 947                     |   |  |  | 535.0  535.0                       |  |  |  | 535.0                               | 
|Forfeited                               |  |  |  |  | (402                    | ) |  |  | 348.0  609.0                       |  |  |  | 434.5                               | 
|Exercised                               |  |  |  |  | (925                    | ) |  |  | 348.0  609.0                       |  |  |  | 396.0                               | 
|Expired                                 |  |  |  |  | (38                     | ) |  |  | 348.0  640.0                       |  |  |  | 496.2                               | 
|Outstanding at 31 December 2012         |  |  |  |  | 3,162                   |   |  |  | 380.0  609.0                       |  |  |  | 473.1                               | 
|Granted                                 |  |  |  |  | 1,178                   |   |  |  | 625.0                               |  |  |  | 625.0                               | 
|Forfeited                               |  |  |  |  | (174                    | ) |  |  | 380.0  625.0                       |  |  |  | 488.2                               | 
|Exercised                               |  |  |  |  | (751                    | ) |  |  | 380.0  609.0                       |  |  |  | 453.8                               | 
|Expired                                 |  |  |  |  | (128                    | ) |  |  | 380.0  625.0                       |  |  |  | 490.0                               | 
|Outstanding at 31 December 2013         |  |  |  |  | 3,287                   |   |  |  | 380.0  625.0                       |  |  |  | 530.5                               | 
|Granted                                 |  |  |  |  | 799                     |   |  |  | 831.0                               |  |  |  | 831.0                               | 
|Forfeited                               |  |  |  |  | (289                    | ) |  |  | 380.0  831.0                       |  |  |  | 533.8                               | 
|Exercised                               |  |  |  |  | (743                    | ) |  |  | 380.0  625.0                       |  |  |  | 436.2                               | 
|Expired                                 |  |  |  |  | (18                     | ) |  |  | 461.0  556.0                       |  |  |  | 465.7                               | 
|Outstanding at 31 December 2014         |  |  |  |  | 3,036                   |   |  |  | 380.0  831.0                       |  |  |  | 632.7                               | 
|Options exercisable at 31 December 2014 |  |  |  |  | 94                      |   |  |  | 380.0  585.0                       |  |  |  | 439.6                               | 
|Options exercisable at 31 December 2013 |  |  |  |  | 71                      |   |  |  | 461.0  556.0                       |  |  |  | 467.8                               | 
|Options exercisable at 31 December 2012 |  |  |  |  | 152                     |   |  |  | 380.0  609.0                       |  |  |  | 400.8                               | 
|Executive Plans:                        |  |  |  |  |                         |   |  |  |                                     |  |  |  |                                     | 
|Outstanding at 1 January 2012           |  |  |  |  | 23,736                  |   |  |  | 409.5  703.0                       |  |  |  | 561.2                               | 
|Granted                                 |  |  |  |  | 3,046                   |   |  |  | 642.0  650.0                       |  |  |  | 650.0                               | 
|Forfeited                               |  |  |  |  | (954                    | ) |  |  | 479.0  703.0                       |  |  |  | 569.0                               | 
|Exercised                               |  |  |  |  | (8,740                  | ) |  |  | 434.0  651.0                       |  |  |  | 547.7                               | 
|Expired                                 |  |  |  |  | (560                    | ) |  |  | 435.5  637.8                       |  |  |  | 588.7                               | 
|Outstanding at 31 December 2012         |  |  |  |  | 16,528                  |   |  |  | 409.5  680.5                       |  |  |  | 583.3                               | 
|Forfeited                               |  |  |  |  | (118                    | ) |  |  | 514.0  650.0                       |  |  |  | 618.8                               | 
|Exercised                               |  |  |  |  | (5,540                  | ) |  |  | 435.5  671.0                       |  |  |  | 568.0                               | 
|Expired                                 |  |  |  |  | (556                    | ) |  |  | 435.5  650.0                       |  |  |  | 582.3                               | 
|Outstanding at 31 December 2013         |  |  |  |  | 10,314                  |   |  |  | 409.5  680.5                       |  |  |  | 591.1                               | 
|Forfeited                               |  |  |  |  | (115                    | ) |  |  | 599.0  650.0                       |  |  |  | 645.0                               | 
|Exercised                               |  |  |  |  | (4,114                  | ) |  |  | 454.0  671.0                       |  |  |  | 583.0                               | 
|Expired                                 |  |  |  |  | (413                    | ) |  |  | 409.5  650.0                       |  |  |  | 587.8                               | 
|Outstanding at 31 December 2014         |  |  |  |  | 5,672                   |   |  |  | 470.0  680.5                       |  |  |  | 596.2                               | 
|Options exercisable at 31 December 2014 |  |  |  |  | 4,713                   |   |  |  | 470.0  680.5                       |  |  |  | 585.3                               | 
|Options exercisable at 31 December 2013 |  |  |  |  | 6,631                   |   |  |  | 409.5  680.5                       |  |  |  | 571.1                               | 
|Options exercisable at 31 December 2012 |  |  |  |  | 8,512                   |   |  |  | 409.5  680.5                       |  |  |  | 562.7                               | 

The weighted average remaining contractual life of options outstanding at 31 December 2014 was 5.8 years (2013  6.2
years, 2012  6.6 years) for Executive Plans and 2.5 years (2013  2.5 years, 2012  2.6 years) for Employee Plans.







160Smith & Nephew Annual report 2014



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2014
pence

2013
pence

2012
penceWeighted average share price

994.4

764.7

640.5Options granted during the year were as follows:Options granted Thousand

Weighted average fair value per
option at
grant date
Pence

Weighted
average  share price at
grant date
Pence

Weighted average exercise
price Pence

Weighted
average
option life
YearsEmployee Plans

799

255.8

1069.0

831.0

3.9 The weighted average fair value of options granted under Employee Plans during 2013 was 203.9p (2012  184.0p) and those under
Executive Plans during 2013 was nil (2012  148.7p). Options granted under Employee Plans are valued using the Black-Scholes option model as management
consider that options granted under 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 reassessed for each grant. The following assumptions were used in calculating the fair value of options granted:  Employee plans



Executive plans2014

2013

2012



2014

2013

2012Dividend yield %

2.0

2.0

1.5







1.5Expected volatility % (i)

20.0

25.0

25.0







25.0Risk free interest rate % (ii)

1.3

1.3

1.3







1.2Expected life in years

3.9

3.8

3.8







10.0  (i)
Volatility is assessed on a historic basis primarily based on past share price movements over the expected life of the options. (ii)
The risk free interest rate reflects the yields available on zero coupon government bonds over the option term and currency.


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FINANCIAL STATEMENTS

Notes to the Group accountscontinued





23 Other Notes to the accounts continued

23.1 Share based payments continued

Share-based payments 
long-term incentive plans

In 2004, a share-based incentive plan was introduced for Executive Directors, 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 based on major international companies in the medical devices industry.

Under the CIP,
participants could elect to use up to a maximum of one-half of their annual bonus to purchase shares. If the 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 CIP was replaced by the Deferred Bonus Plan. This plan was designed to encourage Executives to build up and maintain a
significant shareholding in the Company. Under the plan, up to one-third of any bonus earned at target level or above by an eligible employee was compulsorily deferred into shares which vested, subject to continued employment, in equal annual
tranches over three years (ie one-third each year). No further performance conditions applied to the deferred shares.

From 2010, Performance Share awards were
granted under the Global Share Plan 2010 for all Executives other than 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 Directors, Executive Officers and the next level of Senior Executives were replaced by Equity
Incentive Awards (EIA). EIA are designed to encourage Executives to build up and maintain a significant shareholding in the Company. EIA will vest, in equal annual tranches over three years (ie one-third each year), subject to continued
employment and personal performance. No further performance conditions apply to the EIA.

The fair values of awards granted under long-term incentive plans 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 therefore factored into the award date calculations. The assumptions include the volatilities for the comparator groups. A correlation of 40% (2013  40%, 2012  35%) has also been assumed for
the companies in the medical devices sector as they are impacted by similar factors. The Performance Target for 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 performance period.

The other assumptions used are consistent with the Executive scheme assumptions disclosed
earlier in this note.

At 31 December 2014 the maximum number of shares that could be awarded under the Groups long-term incentive plans was:



|                                |  |        |  |       |  |         |  |                               |  |        
|------------------------------- |  | ------ |  | ----- |  | ------- |  | ----------------------------- |  | -------
|                                |  |        |  |       |  |         |  | Number of shares in Thousands
|                                |  | Other  |  |       |  |         |  | Deferred                      |  |        
|                                |  | Awards |  | EIA   |  | PSP     |  | Bonus Plan                    |  | Total  
|Outstanding at a January 2012   |  | 794    |  |      |  | 6,268   |  | 492                           |  | 7,554  
|Awarded                         |  | 187    |  | 1,060 |  | 2,190   |  |                              |  | 3,437  
|Vested                          |  | (263)  |  | (49)  |  | (1,785) |  | (287)                         |  | (2,384)
|Forfeited                       |  |       |  | (82)  |  | (1,431) |  | (41)                          |  | (1,554)
|Outstanding at 31 December 2012 |  | 718    |  | 929   |  | 5,242   |  | 164                           |  | 7,053  
|Awarded                         |  | 1,179  |  | 785   |  | 1,963   |  |                              |  | 3,927  
|Vested                          |  | (437)  |  | (379) |  | (411)   |  | (115)                         |  | (1,342)
|Forfeited                       |  | (11)   |  | (51)  |  | (1,597) |  | (5)                           |  | (1,664)
|Outstanding at 31 December 2013 |  | 1,449  |  | 1,284 |  | 5,197   |  | 44                            |  | 7,974  
|Awarded                         |  | 751    |  | 642   |  | 1,510   |  |                              |  | 2,903  
|Vested                          |  | (583)  |  | (751) |  |        |  | (44)                          |  | (1,378)
|Forfeited                       |  | (96)   |  | (24)  |  | (2,188) |  |                              |  | (2,308)
|Outstanding at 31 December 2014 |  | 1,521  |  | 1,151 |  | 4,519   |  |                              |  | 7,191  

Other awards mainly comprises of conditional share awards granted under the Global Share Plan 2010.

The weighted average remaining contractual life of awards outstanding at 31 December 2014 was 1.1 years (2013  1.4 years, 2012  0.8 years) for the
PSP, nil years (2013  0.2 years, 2012  0.9 years) for the Deferred Bonus Plan, 1.5 years (2013  1.8 years) for the EIA and 2.0 years (2013  2.1 years, 2012  0.9 years) for the other awards.











162Smith & Nephew Annual report 2014



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Share-based payments  charge to income statement The expense charged to the income statement for share-based payments is as follows:  2014$ million



2013$ million



2012$ millionGranted in current year


9



10



9Granted in prior years


23



18



25Total share-based payments expense for the year


32



28



34 Under the Executive Plans, PSP, EIA and CIP the number of ordinary shares over which options and share awards may be granted is
limited so that the number of ordinary shares issued or that may be issued during the 10 years preceding the date of grant shall not exceed 5% of the ordinary share capital at the date of grant. The total number of ordinary shares which may be
issuable in any 10-year period under all share plans operated by the Company may not exceed 10% of the ordinary share capital at the date of grant. 23.2
Related party transactions Trading transactions In the
course of normal operations, the Group traded with its associates detailed in Note 11. The aggregated transactions, which have not been disclosed elsewhere in the financial statements, are summarised below:  2014$ million



2013$ million



2012$ millionSales to the associates






5



14Purchases from the associates


1



2



8 All sale and purchase transactions occur on an arms length basis. Key management personnel The remuneration of executive officers
(including Non-executive Directors) during the year is summarised below:  2014$ million



2013$ million



2012$ millionShort-term employee benefits


14



15



16Share-based payments expense


8



11



10Pension and post-employment benefit entitlements


1



1



1Other benefits


3







26



27



27


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2014163









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FINANCIAL STATEMENTS

Notes to the Group accountscontinued



23 Other Notes to the accounts continued



23.3 Principal subsidiary undertakings

The information provided below is given for principal trading and manufacturing subsidiary undertakings, all of which are 100% owned, in
accordance with Section 410 of the Companies Act 2006. A full list will be appended to Smith & Nephews next annual return to Companies House:



|                                 |  |                 |  |                                       
|-------------------------------- |  | --------------- |  | --------------------------------------
|Company Name                     |  | Activity        |  | Country of operation and incorporation
|UK:                              |  |                 |  |                                       
|T. J. Smith & Nephew,
Limited    |  | Medical Devices |  | England & Wales                       
|Smith & Nephew ARTC Limited      |  | Medical Devices |  | England & Wales                       
|                                 |  |                
|Continental Europe:              |  |                 |  |                                       
|Smith & Nephew GmbH              |  | Medical Devices |  | Austria                               
|ArthroCare Belgium SPRL          |  | Medical Devices |  | Belgium                               
|Smith & Nephew SA-NV             |  | Medical Devices |  | Belgium                               
|Smith & Nephew A/S               |  | Medical Devices |  | Denmark                               
|Smith & Nephew Oy                |  | Medical Devices |  | Finland                               
|Smith & Nephew SAS               |  | Medical Devices |  | France                                
|Smith & Nephew Orthopaedics GmbH |  | Medical Devices |  | Germany                               
|Smith & Nephew GmbH              |  | Medical Devices |  | Germany                               
|Smith & Nephew Hellas SA         |  | Medical Devices |  | Greece                                
|Smith & Nephew Limited           |  | Medical Devices |  | Ireland                               
|Smith & Nephew Srl               |  | Medical Devices |  | Italy                                 
|Smith & Nephew Nederland CV      |  | Medical Devices |  | Netherlands                           
|Smith & Nephew A/S               |  | Medical Devices |  | Norway                                
|Smith & Nephew Sp Zoo            |  | Medical Devices |  | Poland                                
|Smith & Nephew Lda               |  | Medical Devices |  | Portugal                              
|Smith & Nephew SAU               |  | Medical Devices |  | Spain                                 
|Smith & Nephew AB                |  | Medical Devices |  | Sweden                                
|Smith & Nephew Manufacturing AG  |  | Medical Devices |  | Switzerland                           
|Smith & Nephew Orthopaedics AG   |  | Medical Devices |  | Switzerland                           
|Smith & Nephew Schweiz AG        |  | Medical Devices |  | Switzerland                           
|                                 |  |                
|US:                              |  |                 |  |                                       
|ArthroCare Corporation           |  | Medical Devices |  | United States                         
|ArthroCare Medical Corporation   |  | Medical Devices |  | United States                         
|Smith & Nephew Inc.              |  | Medical Devices |  | United States                         











164Smith & Nephew Annual report 2014



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Company Name

Activity

Country of operation and incorporationAfrica, Asia, Australasia and Other America:Smith & Nephew Pty Limited

Medical Devices

AustraliaSmith & Nephew Surgical Pty Limited

Medical Devices

AustraliaSmith & Nephew Comercio de Productos Medicos LTDA

Medical Devices

BrazilSmith & Nephew Inc.

Medical Devices

CanadaSmith & Nephew (Alberta) Inc.

Medical Devices

CanadaTenet Medical Engineering Inc.

Medical Devices

CanadaSmith & Nephew Medical (Shanghai) Limited

Medical Devices

ChinaSmith & Nephew Medical (Suzhou) Limited

Medical Devices

ChinaSmith & Nephew Orthopaedics (Beijing) Limited

Medical Devices

ChinaArthroCare Costa Rica SRL

Medical Devices

Costa RicaSmith & Nephew Curaçao NV

Medical Devices

CuraçaoSmith & Nephew Limited

Medical Devices

Hong KongAdler Mediequip Private Limited

Medical Devices

IndiaSmith & Nephew Healthcare Private Limited

Medical Devices

IndiaSmith & Nephew Endoscopy KK

Medical Devices

JapanSmith & Nephew Orthopaedics KK

Medical Devices

JapanSmith & Nephew Wound Management KK

Medical Devices

JapanSmith & Nephew Chusik Hoesia

Medical Devices

KoreaSmith & Nephew Healthcare Sdn Berhad

Medical Devices

MalaysiaSmith & Nephew SA de CV

Medical Devices

MexicoSmith & Nephew Limited

Medical Devices

New ZealandSmith & Nephew Surgical Limited

Medical Devices

New ZealandSmith & Nephew Inc.

Medical Devices

Puerto RicoLLC Smith & Nephew

Medical Devices

RussiaSmith & Nephew Pte Limited

Medical Devices

SingaporeSmith & Nephew (Pty) Limited

Medical Devices

South AfricaSmith & Nephew Limited

Medical Devices

ThailandSmith ve Nephew Medikal Cihazlar Ticaret Limited Sirketi

Medical Devices

TurkeySmith & Nephew FZE

Medical Devices

United Arab Emirates


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2014165









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FINANCIAL STATEMENTS

Company balance sheet





|                                                |  |  |       |  |  |  |                             |   |  |  |                             |  
|----------------------------------------------- |  |  | ----- |  |  |  | --------------------------- | - |  |  | --------------------------- | -
|                                                |  |  | Notes |  |  |  | At 31 December2014$ million |   |  |  | At 31 December2013$
million |  
|Fixed assets:                                   |  |  |       |  |  |  |                             |   |  |  |                             |  
|Investments                                     |  |  | 3     |  |  |  | 5,322                       |   |  |  | 3,597                       |  
|Current assets:                                 |  |  |       |  |  |  |                             |   |  |  |                             |  
|Debtors                                         |  |  | 4     |  |  |  | 2,143                       |   |  |  | 2,140                       |  
|Cash and bank                                   |  |  | 6     |  |  |  | 1                           |   |  |  | 6                           |  
|                                                |  |  |       |  |  |  | 2,144                       |   |  |  | 2,146                       |  
|Creditors: amounts falling due within one year: |  |  |       |  |  |  |                             |   |  |  |                             |  
|Borrowings                                      |  |  | 6     |  |  |  | (40                         | ) |  |  | (2                          | )
|Other creditors                                 |  |  | 5     |  |  |  | (1,287                      | ) |  |  | (1,590                      | )
|                                                |  |  |       |  |  |  | (1,327                      | ) |  |  | (1,592                      | )
|Net current assets                              |  |  |       |  |  |  | 817                         |   |  |  | 554                         |  
|Total assets less current liabilities           |  |  |       |  |  |  | 6,139                       |   |  |  | 4,151                       |  
|Creditors: amounts falling due after one year:  |  |  |       |  |  |  |                             |   |  |  |                             |  
|Borrowings                                      |  |  | 6     |  |  |  | (1,655                      | ) |  |  | (335                        | )
|Total assets less total liabilities             |  |  |       |  |  |  | 4,484                       |   |  |  | 3,816                       |  
|                                                |  |  |      
|Equity shareholders funds:                     |  |  |       |  |  |  |                             |   |  |  |                             |  
|Called up equity share capital                  |  |  | 7     |  |  |  | 184                         |   |  |  | 184                         |  
|Share premium account                           |  |  | 7     |  |  |  | 574                         |   |  |  | 535                         |  
|Capital redemption reserve                      |  |  | 7     |  |  |  | 11                          |   |  |  | 10                          |  
|Capital reserve                                 |  |  | 7     |  |  |  | 2,266                       |   |  |  | 2,266                       |  
|Treasury shares                                 |  |  | 7     |  |  |  | (315                        | ) |  |  | (322                        | )
|Exchange reserve                                |  |  | 7     |  |  |  | (52                         | ) |  |  | (52                         | )
|Profit and loss account                         |  |  | 7     |  |  |  | 1,816                       |   |  |  | 1,195                       |  
|Shareholders funds                             |  |  |       |  |  |  | 4,484                       |   |  |  | 3,816                       |  

The accounts were approved by the Board and authorised for issue on 25 February 2015 and signed on its behalf by:



|               |  |                         |  |                         |  |  |  |  |  | 
|-------------- |  | ----------------------- |  | ----------------------- |  |  |  |  |  | 
|Roberto Quarta |  | Olivier Bohuon          |  | Julie Brown             |  |  |  |  |  | 
|Chairman       |  | Chief Executive Officer |  | Chief Financial Officer |  |  |  |  |  | 





The Parent Company financial statements of Smith & Nephew plc on pages 166 to 169 do not form part of the Smith & Nephews

Annual Report on Form 20-F as filed with the SEC.



166Smith & Nephew Annual report 2014



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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. The accounts have been prepared under the historical cost convention,
modified to include revaluation to fair value of certain financial instruments as described below, and in accordance with applicable UK accounting standards. As consolidated financial information has been disclosed under IFRS 7 Financial
Instruments: Disclosures, the Company is exempt from FRS 29 Financial Instruments: Disclosures. The Group accounts have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union and are presented
on pages 110 to 165. The Company has taken advantage of the exemption in FRS 8 Related Party Disclosures not to present its related party disclosures as the
Group accounts contain these disclosures. In addition, the Company has taken advantage of the exemption in FRS 1 Cash Flow Statements not to present its own cash flow statement as the Group accounts contain a consolidated cash flow. 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. Foreign currencies Transactions in foreign currencies are initially recorded at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated
in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. All exchange differences are dealt with in arriving at profit before taxation. Deferred taxation Deferred taxation is recognised in respect of all
timing differences that have originated but not reversed at the balance sheet date where transactions or events have occurred at that date that will result in an obligation to pay more, or a right to pay less or to receive more, tax. Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which timing differences are expected to reverse.
These are based on tax rates and laws substantively enacted at the balance sheet date. 2 Results for the year As permitted by Section 408(4) of the Companies Act 2006, the Company has not presented its own profit and loss account. Profit for the year was $922m (2013
 $198m). 3 Investments  ACCOUNTING
POLICYInvestments in subsidiaries are stated at cost less provision for impairment.  2014$ million



2013$ millionAt 1 January


3,597



3,597Additions


1,725



At 31 December


5,322



3,597 Investments represent holdings in subsidiary undertakings. The information provided below is given for the principal direct subsidiary undertakings, all of which are 100% owned and, in accordance with Section 410 of
the Companies Act 2006, a full list will be appended to Smith & Nephews next annual return to Companies House.  Activity



Country of operationand incorporationCompany NameSmith & Nephew UK Limited


Holding Company



England & WalesSmith & Nephew (Overseas) Limited


Holding Company



England & Wales Refer to Note 23.3 of the Notes to the Group accounts for the principal trading and manufacturing subsidiary undertakings of the
Group. The Parent Company financial statements of Smith & Nephew plc on pages 166 to 169 do not form part of the Smith &
Nephews Annual Report on Form 20-F as filed with the SEC.


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FINANCIAL STATEMENTS

Notes to the Company accountscontinued





4 Debtors



|                                                               |  |  |               |  |  |  |               | 
|-------------------------------------------------------------- |  |  | ------------- |  |  |  | ------------- | 
|                                                               |  |  | 2014$ million |  |  |  | 2013$ million | 
|Amounts falling due within one year:                           |  |  |               |  |  |  |               | 
|Amounts owed by subsidiary undertakings                        |  |  | 2,074         |  |  |  | 2,091         | 
|Prepayments and accrued income                                 |  |  | 3             |  |  |  | 3             | 
|Current asset derivatives  forward foreign exchange contracts |  |  | 65            |  |  |  | 45            | 
|Current asset derivatives  currency swaps                     |  |  |              |  |  |  | 1             | 
|Current taxation                                               |  |  | 1             |  |  |  |              | 
|                                                               |  |  | 2,143         |  |  |  | 2,140         | 

5 Other creditors



|                                                                   |  |  |               |  |  |  |               | 
|------------------------------------------------------------------ |  |  | ------------- |  |  |  | ------------- | 
|                                                                   |  |  | 2014$ million |  |  |  | 2013$ million | 
|Amounts falling due within one year:                               |  |  |               |  |  |  |               | 
|Amounts owed to subsidiary undertakings                            |  |  | 1,212         |  |  |  | 1,533         | 
|Other creditors                                                    |  |  | 9             |  |  |  | 10            | 
|Current taxation                                                   |  |  |              |  |  |  | 2             | 
|Current liability derivatives  forward foreign exchange contracts |  |  | 65            |  |  |  | 45            | 
|Current liability derivatives  currency swaps                     |  |  | 1             |  |  |  |              | 
|                                                                   |  |  | 1,287         |  |  |  | 1,590         | 

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. |  | 

Changes in the fair value of derivative financial instruments are recognised in the profit and loss account as they arise.



|                                                           |  |  |               |   |  |  |               |  
|---------------------------------------------------------- |  |  | ------------- | - |  |  | ------------- | -
|                                                           |  |  | 2014$ million |   |  |  | 2013$ million |  
|Bank loans and overdrafts due within one year or on demand |  |  | 40            |   |  |  | 2             |  
|Bank loans due after one year                              |  |  | 1,655         |   |  |  | 335           |  
|Borrowings                                                 |  |  | 1,695         |   |  |  | 337           |  
|Cash and bank                                              |  |  | (1            | ) |  |  | (6            | )
|Credit/(debit) balance on derivatives  currency swaps     |  |  | 1             |   |  |  | (1            | )
|Net debt                                                   |  |  | 1,695         |   |  |  | 330           |  

All currency swaps are stated at fair value. Gross US Dollar equivalents of $261m (2013  $146m) receivable and $262m (2013
 $145m) payable have been netted. Currency swaps comprise foreign exchange swaps and were used in 2014 and 2013 to hedge intragroup loans.



The Parent Company financial statements of Smith & Nephew plc on pages 166 to 169 do not form part of the Smith & Nephews

Annual Report on Form 20-F as filed with the SEC.



168Smith & Nephew Annual report 2014



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7 Equity and reserves  2014



2013Sharecapital$ million



Sharepremium$ million



Capitalredemptionreserve$ million



Capitalreserves$ million



Treasuryshares$ million



Exchangereserves$ million



Profit andloss account$ million



Totalshareholdersfunds$ million



Totalshareholdersfunds$ millionAt 1 January


184



535



10



2,266



(322
)


(52
)


1,195



3,816



4,009Attributable profit for the year


























922



922



198Net losses on cash flow hedges


























(5
)


(5
)


Equity dividends paid in the year


























(250
)


(250
)


(239
)Share-based payments recognised


























32



32



28Cost of shares transferred to beneficiaries


















25







(21
)


4



3New shares issued on exercise of share options


1



39























40



48Cancellation of treasury shares


(1
)






1







57







(57
)






Treasury shares purchased


















(75
)










(75
)


(231
)At 31 December


184



574



11



2,266



(315
)


(52
)


1,816



4,484



3,816 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 $1,449m (2013  $821m). In accordance with the exemption permitted by Section 408 of the Companies
Act 2006, the Company has not presented its own profit and loss account. The attributable profit for the year dealt with in the accounts of the Company is $922m (2013  $198m). Fees paid to Ernst & Young LLP for audit and non-audit services to the Company itself are not disclosed in the individual accounts because Group financial
statements are prepared which are required to disclose such fees on a consolidated basis. The fees for the consolidated Group are disclosed in Note 3.2 of the Notes to the Group accounts. 8 Share-based payments The Company
operates a number of equity-settled executive and employee share plans. For all grants of share options and awards, the fair value as at the date of grant is calculated using an appropriate option pricing model and the corresponding expense is
recognised over the vesting period. Subsidiary companies are recharged for the fair value of share options that relate to their employees. The disclosure
relating to the Company is detailed in Note 23.1 of the Notes to the Group accounts. 9 Contingencies  2014$ million



2013$ millionGuarantees in respect of subsidiary undertakings


11



25 The Company has given guarantees to banks to support liabilities under foreign exchange and other contracts and cross guarantees to
support overdrafts. Such guarantees are not considered to be liabilities as all subsidiary undertakings are trading as going concerns. The Company operated
defined benefit pension plans in 2004 but at the end of 2005 its pension plan obligations were transferred to Smith & Nephew 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).  The Parent Company financial statements of Smith & Nephew plc on pages 166 to 169 do not form part of the Smith & Nephews Annual Report on Form 20-F as filed with the SEC.


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OTHER INFORMATION

Group information





Business overview and Group history

Smith & Nephews operations are organised into two primary divisions that operate globally: Advanced Surgical Devices and Advanced Wound Management.

The Group has a history dating back over 150 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 various medical devices, personal care products and traditional and advanced wound care treatments. In 1998, Smith & Nephew announced a 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.

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 in the top 100 companies
traded on the London Stock Exchange measured in terms of market capitalisation.

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)
|Group head office in London, UK                                                                |  | 20                                   
|Group research facility in York, UK                                                            |  | 84                                   
|Advanced Surgical Devices headquarters in Andover, Massachusetts, US                           |  | 144                                  
|Advanced Wound Management headquarters and manufacturing facility in Hull, UK                  |  | 473                                  
|Advanced Surgical Devices manufacturing facilities in Memphis, Tennessee, US                   |  | 971                                  
|Advanced Surgical Devices distribution facility in Memphis, Tennessee, US                      |  | 210                                  
|Advanced Surgical Devices manufacturing facility in Aarau, Switzerland                         |  | 121                                  
|Advanced Surgical Devices manufacturing facility in Beijing, China                             |  | 192                                  
|Advanced Surgical Devices manufacturing and warehouse facility in Warwick, UK                  |  | 90                                   
|Advanced Surgical Devices manufacturing and warehouse facility in Tuttlingen, Germany          |  | 64                                   
|Advanced Surgical Devices distribution facility and European headquarters in Baar, Switzerland |  | 67                                   
|Advanced Surgical Devices manufacturing facility in Mansfield, Massachusetts, US               |  | 98                                   
|Advanced Surgical Devices manufacturing facility in Oklahoma City, Oklahoma, US                |  | 155                                  
|Advanced Surgical Devices manufacturing facility in Calgary, Canada                            |  | 17                                   
|Advanced Surgical Devices manufacturing facility in Austin, Texas, US                          |  | 198                                  
|Advanced Surgical Devices manufacturing facility in La Aurora, Costa Rica                      |  | 36                                   
|Advanced Surgical Devices research facility in Irvine, California, US                          |  | 23                                   
|Advanced Surgical Devices manufacturing facility in Sangameshwar, India                        |  | 39                                   
|Advanced Wound Management manufacturing facility in Suzhou, China                              |  | 288                                  
|Advanced Wound Management manufacturing facility in Fort Saskatchewan, Canada                  |  | 76                                   
|Advanced Wound Management US headquarters in St. Petersburg, Florida, US                       |  | 44                                   
|Advanced Wound Bioactives headquarters and laboratory space in Fort Worth, Texas, US           |  | 105                                  
|Advanced Wound Bioactives 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 is individually significant to the Group. Where required, the appropriate governmental authorities have approved the facilities.

Off-balance sheet arrangements

Management
believes that the Group does not have any off-balance sheet arrangements, as defined by the SEC in item 5E of Form 20-F, that have or are reasonably likely to have a current or future effect on the Groups financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

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 Smith & Nephew over the last three financial years.



170Smith & Nephew Annual report 2014



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Risk factors There are known and unknown risks and uncertainties relating to Smith & Nephews business. The factors listed below could cause the Groups
business, financial position and results of operations to differ materially and adversely from expected and historical levels. In addition, other factors not listed here that Smith & Nephew cannot presently identify or does not believe to
be equally significant could also materially adversely affect Smith & Nephews business, financial position or results of operations. Highly
competitive markets The Groups business segments compete across a diverse range of geographic and product markets. Each market in which the business
segments operate contains a number of different competitors, including specialised and international corporations. Significant product innovations, technical advances or the intensification of price competition by competitors could adversely affect
the Groups operating results. Some of these competitors may have greater financial, marketing and other resources than Smith & Nephew. These
competitors may be able to initiate technological advances in the field, deliver products on 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 to insufficient financial resources. If any of the Groups businesses were to lose market share or achieve lower than expected revenue growth, there could be a disproportionate adverse impact on the Groups share 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, which could adversely affect Smith & Nephews results of operations and 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, each of the Groups business segments 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s business segments operate. 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 write-downs may be required. Dependence on government and other funding In most Established 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 Established 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 may have an adverse impact on revenue and operating profit. In particular, changes to the healthcare legislation in the US
have imposed significant taxes on medical device manufacturers from 2013. There may be an increased risk of adverse changes to government funding policies arising from the deterioration in macro-economic conditions in some of 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 the
US. Failure to do so could result in fines or loss of future funding. 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 influenced by world economic conditions which could place increased 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 and finances during adverse macro economic conditions. During 2014, economic conditions worldwide continued to create several challenges for the
Group, including deferrals of joint replacement procedures, heightened pricing pressure, significant declines in capital equipment expenditures at hospitals and increased uncertainty over the collectability of European government debt, particularly
those in certain parts of southern Europe. These factors tempered the overall growth of the Groups global markets and could have an increased impact on growth in the future.


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OTHER INFORMATION

Group informationcontinued





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 could prevent the Group from receiving remittances of profit from a 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 matters could adversely affect the Groups revenue and operating profit.
War, economic sanctions, terrorist activities or other conflict could also adversely impact the Group. These risks may be greater in emerging markets, which account for an increasing portion of the Groups business. Currency fluctuations 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 UK, China and Switzerland, from which finished products are exported to the Groups selling operations worldwide. Thus, the Group is exposed to fluctuations in exchange rates between the US Dollar, Sterling and Swiss Franc and
the currency of the Groups selling operations, particularly the Euro, Australian Dollar and Japanese Yen. If the US Dollar, Sterling or 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 commitments when firm purchase orders are placed. In addition, the Groups policy is for forecast transactions to be covered between 50% and 90% for up to one year. 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,
profits and earnings are also affected by exchange rate movements on the translation of results of operations in foreign subsidiaries for financial reporting purposes. See Liquidity and capital resources on page 115. Manufacturing and supply The Groups manufacturing production is
concentrated at 15 main facilities in Austin, Memphis, Mansfield and Oklahoma City in the US, Hull and Warwick in the UK, Aarau in Switzerland, Tuttlingen in Germany, Fort Saskatchewan and Calgary in Canada, Sangameshwar in India, Suzhou and Beijing
in China, La Aurora in Costa Rica and Curaçao. 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 sufficient to cover catastrophic loss. Management of orthopaedic inventory 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. Each of the business segments is reliant on certain key suppliers of raw materials,
components, finished products and packaging materials or in some cases on a single supplier.


These suppliers must provide the materials and perform the activities to the Groups standard of quality
requirements. Consequently, 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 increased prices for its finished products. In addition, some of the raw 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 negatively impact Smith & Nephews revenue and operating profit. The Group will, from time to
time, outsource the manufacture of components and finished products to third parties and will periodically relocate the manufacture of product and/or processes between existing facilities. While these are planned activities, with these transfers
there is a risk of disruption to supply. 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 upheaval, its revenue and operating profit would be adversely affected. 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
significant resources to pay damages, develop non-infringing products or obtain licences to the products which are the subject of such litigation, thereby affecting the Groups growth and profitability. Smith & Nephew attempts to
protect its intellectual property and regularly opposes third party patents and trademarks where appropriate in those areas that might conflict with the Groups business interests. If Smith & Nephew 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 financial position or results of operations in the future, or that the Group will be able to resolve such claims within insurance limits.








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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 continue to incur significant expense. See Note 17 to the Group accounts. Under certain
circumstances, if the Group were found to have violated the law, its ability to sell its products to certain customers could be restricted. International
regulation The Group operates across the world and is subject to legislation, including anti-bribery and corruption and data protection, in each country in
which we operate. Our international operations are governed by the UK Bribery Act and the US Foreign Corrupt Practices Act (FCPA) which prohibit us or our agents from making, or offering, improper payments to foreign governments and their officials
for the purpose of obtaining or maintaining business or product approvals. Enforcement of such legislation has increased in recent years with significant fines and penalties being imposed on companies and individuals. Our international operations,
particularly in the emerging 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 also review data supporting the safety and efficacy of such
products. Of 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 and other significant facilities within the Group are subject to
regular 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 product in a country, temporary closure of a manufacturing facility, fines 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 on the Groups competitive position and profitability. This could result 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 global capital may make financing less attainable or more expensive and 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 customers could be diminished and our revenue and profit
could be 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 significant disruption. Our systems have been and will continue to be the 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 Government economic, fiscal, monetary and political policies are all factors that materially affect the Groups operation or investments of shareholders.
Other factors include sales trends, currency fluctuations and innovation. Each of these factors is discussed further in the Our marketplace on pages 18 to 20, Segment performance on pages 26 to 33 and Taxation
information for shareholders on pages 190 to 191.


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OTHER INFORMATION

Other financial information





Selected financial data



|                                                        |  |  |               |   |  |  |               |   |  |  |               |   |  |  |               |   |  |  |               |  
|------------------------------------------------------- |  |  | ------------- | - |  |  | ------------- | - |  |  | ------------- | - |  |  | ------------- | - |  |  | ------------- | -
|                                                        |  |  | 2014$ million |   |  |  | 2013$ million |   |  |  | 2012$ million |   |  |  | 2011$ million |   |  |  | 2010$ million |  
|Income statement                                        |  |  |               |   |  |  |               |   |  |  |               |   |  |  |               |   |  |  |               |  
|Revenue                                                 |  |  | 4,617         |   |  |  | 4,351         |   |  |  | 4,137         |   |  |  | 4,270         |   |  |  | 3,962         |  
|Cost of goods sold                                      |  |  | (1,162        | ) |  |  | (1,100        | ) |  |  | (1,070        | ) |  |  | (1,140        | ) |  |  | (1,031        | )
|Gross Profit                                            |  |  | 3,455         |   |  |  | 3,251         |   |  |  | 3,067         |   |  |  | 3,130         |   |  |  | 2,931         |  
|Selling, general and administrative expenses            |  |  | (2,471        | ) |  |  | (2,210        | ) |  |  | (2,050        | ) |  |  | (2,101        | ) |  |  | (1,860        | )
|Research and development expenses                       |  |  | (235          | ) |  |  | (231          | ) |  |  | (171          | ) |  |  | (167          | ) |  |  | (151          | )
|Operating profit                                        |  |  | 749           |   |  |  | 810           |   |  |  | 846           |   |  |  | 862           |   |  |  | 920           |  
|Net interest (payable)/receivable                       |  |  | (22           | ) |  |  | 4             |   |  |  | 2             |   |  |  | (8            | ) |  |  | (15           | )
|Other finance (costs)/income                            |  |  | (11           | ) |  |  | (11           | ) |  |  | (11           | ) |  |  | (13           | ) |  |  | (16           | )
|Share of results of associates                          |  |  | (2            | ) |  |  | (1            | ) |  |  | 4             |   |  |  |              |   |  |  |              |  
|Profit on disposal of net assets held for sale          |  |  |              |   |  |  |              |   |  |  | 251           |   |  |  |              |   |  |  |              |  
|Profit before taxation                                  |  |  | 714           |   |  |  | 802           |   |  |  | 1,092         |   |  |  | 841           |   |  |  | 889           |  
|Taxation                                                |  |  | (213          | ) |  |  | (246          | ) |  |  | (371          | ) |  |  | (266          | ) |  |  | (280          | )
|Attributable profit for the year                        |  |  | 501           |   |  |  | 556           |   |  |  | 721           |   |  |  | 575           |   |  |  | 609           |  
|Earnings per ordinary share                             |  |  |               |   |  |  |               |   |  |  |               |   |  |  |               |   |  |  |               |  
|Basic                                                   |  |  | 56.1¢         |   |  |  | 61.7¢         |   |  |  | 80.4¢         |   |  |  | 64.5¢         |   |  |  | 68.6¢         |  
|Diluted                                                 |  |  | 55.7¢         |   |  |  | 61.4¢         |   |  |  | 80.0¢         |   |  |  | 64.2¢         |   |  |  | 68.5¢         |  
|Adjusted attributable profit                            |  |  |               |   |  |  |               |   |  |  |               |   |  |  |               |   |  |  |               |  
|Attributable profit for the year                        |  |  | 501           |   |  |  | 556           |   |  |  | 721           |   |  |  | 575           |   |  |  | 609           |  
|Acquisition-related costs                               |  |  | 125           |   |  |  | 31            |   |  |  | 11            |   |  |  |              |   |  |  |              |  
|Restructuring and rationalisation expenses              |  |  | 61            |   |  |  | 58            |   |  |  | 65            |   |  |  | 40            |   |  |  | 15            |  
|Legal and other                                         |  |  | (2            | ) |  |  |              |   |  |  |              |   |  |  | 23            |   |  |  |              |  
|Amortisation of acquisition intangibles and impairments |  |  | 129           |   |  |  | 88            |   |  |  | 43            |   |  |  | 36            |   |  |  | 34            |  
|Profit on disposal of net assets held for sale          |  |  |              |   |  |  |              |   |  |  | (251          | ) |  |  |              |   |  |  |              |  
|Taxation on excluded items                              |  |  | (71           | ) |  |  | (40           | ) |  |  | 82            |   |  |  | (17           | ) |  |  | (10           | )
|Adjusted attributable profit                            |  |  | 743           |   |  |  | 693           |   |  |  | 671           |   |  |  | 657           |   |  |  | 648           |  
|Adjusted basic earnings per ordinary share (EPSA) (i) |  |  | 83.2¢         |   |  |  | 76.9¢         |   |  |  | 74.8¢         |   |  |  | 73.7¢         |   |  |  | 73.0¢         |  
|Adjusted diluted earnings per ordinary share (ii)       |  |  | 82.6¢         |   |  |  | 76.5¢         |   |  |  | 74.5¢         |   |  |  | 73.4¢         |   |  |  | 72.9¢         |  



|(i) | Adjusted basic earnings per ordinary share is calculated by dividing adjusted attributable profit by the average number of shares.
|--- | ----------------------------------------------------------------------------------------------------------------------------------



|(ii) | Adjusted diluted earnings per ordinary share is calculated by dividing adjusted attributable profit by the diluted number of shares.
|---- | ------------------------------------------------------------------------------------------------------------------------------------







174Smith & Nephew Annual report 2014



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##### Table of Contents





2014$ million



2013$ million



2012$ million



2011$ million



2010$ millionGroup balance sheetNon-current assets


4,866



3,563



3,498



2,542



2,579Current assets


2,440



2,256



2,144



2,080



2,154Assets held for sale














125



Total assets


7,306



5,819



5,642



4,747



4,733Share capital


184



184



193



191



191Share premium


574



535



488



413



396Capital redemption reserve


11



10











Treasury shares


(315
)


(322
)


(735
)


(766
)


(778
)Retained earnings and other reserves


3,586



3,640



3,938



3,349



2,964Total equity


4,040



4,047



3,884



3,187



2,773Non-current liabilities


2,104



699



828



422



1,046Current liabilities


1,162



1,073



930



1,119



914Liabilities directly associated with assets held for sale














19



Total liabilities


3,266



1,772



1,758



1,560



1,960Total equity and liabilities


7,306



5,819



5,642



4,747



4,733Group cash flow statementCash generated from operations


961



1,138



1,184



1,135



1,111Net interest paid


(33
)


(6
)


(4
)


(8
)


(17
)Income taxes paid


(245
)


(265
)


(278
)


(285
)


(235
)Net cash inflow from operating activities


683



867



902



842



859Capital expenditure (including trade investments and net of disposals of property, plant and equipment)


(375
)


(340
)


(265
)


(321
)


(307
)Acquisitions and disposals


(1,556
)


(67
)


(782
)


(33
)


Proceeds on disposal of net assets held for sale










103







Investment in associate


(2
)






(10
)






Proceeds from associate loan redemption


188















Proceeds from own shares


4



3



6



7



8Equity dividends paid


(250
)


(239
)


(186
)


(146
)


(132
)Issue of ordinary capital and treasury shares purchased


(35
)


(183
)


77



11



10(1,343
)


41



(155
)


360



438Exchange adjustments


(17
)


(6
)


5



(6
)


13Opening (net debt)/net cash


(253
)


(288
)


(138
)


(492
)


(943
)Closing net debt


(1,613
)


(253
)


(288
)


(138
)


(492
)Selected financial ratiosGearing (closing net debt as a percentage of total equity)


40%



6%



7%



4%



18%Dividends per ordinary share (i)


29.60¢



27.40¢



26.10¢



17.40¢



15.82¢Research and development costs to Revenue


5.1%



5.3%



4.1%



3.9%



3.8%Capital expenditure (including intangibles but excluding goodwill) to revenue


8.1%



7.8%



6.4%



7.5%



7.7%  (i)
The Board has proposed a final dividend of 18.6 US cents per share which together with the first interim dividend of 11.0 US cents makes a total for 2014 of 29.6 US cents.


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2014175









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OTHER INFORMATION

Other financial informationcontinued





Non-GAAP Financial Information These Financial Statements include financial measures that are not prepared in accordance with International Financial Reporting Standards (IFRS).
These measures, which include trading profit, trading profit margin, EPSA and underlying growth, exclude the effect of certain cash and non-cash items that Group management believes are not related to the underlying performance of the Group. These
non-IFRS financial measures are also 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. Non-IFRS financial measures are presented in these Financial Statements as the Groups management believe that they provide investors with a means of
evaluating performance of the business segments 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 financial measures under IFRS. These non-IFRS measures
should not be considered in isolation from, as substitutes for, or superior to financial measures prepared in accordance with IFRS. Revenue 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 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). The Group believes that the tabular presentation and
reconciliation of reported revenue growth to underlying revenue growth assists investors in their assessment of the Groups performance in each business segment and for the Group as a whole. Underlying growth in revenue is considered by the Group to be an important measure of performance in terms of local functional currency since it excludes those
items considered to be outside the influence of local management. The Groups management uses this non-GAAP measure in its internal financial reporting, budgeting and planning to assess performance on both a business segment and a consolidated
Group basis. Revenue growth at constant currency is important in measuring business performance compared to competitors and compared to the growth of the market itself. 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. The material limitation of the underlying
growth in revenue measure is that it excludes certain factors, described above, which ultimately have a significant 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. Underlying growth in revenue reconciles to growth in revenue reported, the
most directly comparable financial measure calculated in accordance with 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 readily identifiable. Reported revenue growth, the most directly comparable
financial measure calculated in accordance with IFRS, reconciles to underlying growth in revenue as follows:  2014



2013



2012%



%



%Reported revenue growth


6



5



(3
)Constant currency exchange effect


1



1



2Acquisition/Disposals effect


(5
)


(2
)


3Underlying revenue


2



4



2 A reconciliation of reported revenue growth to underlying revenue growth, by business segment, can be found on page 35. Trading profit, trading profit margin and trading cash flow 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 affect the Groups short-term profitability and cash flows. 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 of acquisition 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 flows on a short-term
or one-off basis are excluded from operating profit and cash generated from operations when arriving at trading profit and trading cash flow, respectively.






176Smith & Nephew Annual report 2014



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Underlying growth in trading profit and trading profit margin (trading profit expressed as a percentage of revenue
and trading cash flow) are measures, which present the growth trend in the long-term profitability of the Group. Underlying growth in trading profit is used
to compare the period-on-period growth in trading profit on a like-for-like basis. This is achieved by adjusting for the impact of material business combinations and disposals and for movements in exchange rates in the same manner as underlying
revenue growth is determined, as described above. Adjusted earnings per ordinary share (EPSA) EPSA is a trend measure, which presents the long-term profitability of the Group excluding the post-tax impact of specific transactions that management considers
affects 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 from operating profit when arriving at trading profit and items that are recognised below operating profit that affect the Groups short-term profitability. The most directly comparable financial measure
calculated in accordance with IFRS is earnings per ordinary share (EPS).  For the year ended 31 December 2014


Tradingresults2014 $ million



Acquisitionrelatedcosts$ million



Restructuringandrationalisationcosts$ million



Amortisationof 
acquisitionintangibles$ million



Legalandother$ million



Capitalexpenditure$ million



Reportedresults2014$ millionRevenue


4,617























4,617Cost of goods sold


(1,127
)


(23
)


(12
)














(1,162
)Gross profit


3,490



(23
)


(12
)














3,455Selling, general and administration expenses


(2,200
)


(95
)


(49
)


(129
)


2







(2,471
)Research and development expenses


(235
)






















(235
)Trading/operating profit


1,055



(118
)


(61
)


(129
)


2







749Trading/operating profit margin


22.9%























16.2%Interest receivable


13























13Interest payable


(28
)


(7
)


















(35
)Other finance costs


(11
)






















(11
)Share of loss from associates


(2
)






















(2
)Profit before taxation


1,027



(125
)


(61
)


(129
)


2







714Taxation


(284
)


30



15



35



(9
)






(213
)Adjusted attributable/attributable profit


743



(95
)


(46
)


(94
)


(7
)






501EPSA/EPS


83.2¢



(10.6¢
)


(5.2¢
)


(10.5¢
)


(0.8¢
)






56.1¢Weighted average number of shares (m)


893























893Diluted EPSA/EPS


82.6¢



(10.5¢
)


(5.1¢
)


(10.5¢
)


(0.8¢
)






55.7¢Diluted weighted average number of shares (m)


899























899Trading cash flow/cash generated from operating activities


781



(112
)


(60
)






(23
)


375



961Trading profit to cash conversion ratio (%)


74% Acquisition related costs:For the year ended 31 December 2014, these costs primarily relate to transaction and
integration costs associated with the ArthroCare acquisition with a small portion of costs relating to the continued integration of Healthpoint and the recent acquisitions in the Emerging & International Markets. In addition, trading
results eliminate the short-term increase in cost of goods sold from recognising acquired inventory at fair value rather than standard cost. For the year ended 31 December 2013, these costs primarily relate to the integration of the Healthpoint
business. Restructuring and rationalisation costs:For the year ended 31 December 2014, these costs relate to the Group optimisation programme
that was announced in May 2014 and the structural and efficiency programme announced in August 2011. Amortisation of acquisition intangibles:This
charge relates to the amortisation of intangible assets acquired in material business combinations. Legal and other:For the year ended
31 December 2014 this net credit relates to a past service gain and a settlement credit on the closure of US Pension Plan of $46m and a gain on disposal of a UK manufacturing facility of $9m, offset by a charge of $25m relating to the likely
costs of a distribution hold on RENASYS in the US pending new regulatory approvals and a charge of $28m relating to the HP802 programme which was stopped in the fourth quarter.


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2014177









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OTHER INFORMATION

Other financial informationcontinued





|                                                           |  |         |           |   |             |  |           |                 |  |  |                |   |  |       |           |   |             |  |           |          |  |  |           |  |  |  |           |  
|---------------------------------------------------------- |  | ------- | --------- | - | ----------- |  | --------- | --------------- |  |  | -------------- | - |  | ----- | --------- | - | ----------- |  | --------- | -------- |  |  | --------- |  |  |  | --------- | -
|                                                           |  |         |           |   |             |  |           | Restructuring   |  |  |                |   |  |       |           |   |             |  |           |          | 
|                                                           |  | Trading |           |   | Acquisition |  |           | and             |  |  | Amortisation   |   |  | Legal |           |   |             |  |           | Reported | 
|                                                           |  | results |           |   | related     |  |           | rationalisation |  |  | of acquisition |   |  | and   |           |   | Capital     |  |           | results  | 
|                                                           |  | 2013    |           |   | costs       |  |           | costs           |  |  | intangibles    |   |  | other |           |   | expenditure |  |           | 2013     | 
|For the year ended 31 December 2013                        |  |         | $ million |   |             |  | $ million |                 |  |  | $ million      |   |  |       | $ million |   |             |  | $ million |          |  |  | $ million |  |  |  | $ million |  
|Revenue                                                    |  |         | 4,351     |   |             |  |          |                 |  |  |               |   |  |       |          |   |             |  |          |          |  |  |          |  |  |  | 4,351     |  
|Cost of goods sold                                         |  |         | (1,083    | ) |             |  | (5        | )               |  |  | (12            | ) |  |       |          |   |             |  |          |          |  |  |          |  |  |  | (1,100    | )
|Gross profit                                               |  |         | 3,268     |   |             |  | (5        | )               |  |  | (12            | ) |  |       |          |   |             |  |          |          |  |  |          |  |  |  | 3,251     |  
|Selling, general and administration expenses               |  |         | (2,050    | ) |             |  | (26       | )               |  |  | (46            | ) |  |       | (88       | ) |             |  |          |          |  |  |          |  |  |  | (2,210    | )
|Research and development expenses                          |  |         | (231      | ) |             |  |          |                 |  |  |               |   |  |       |          |   |             |  |          |          |  |  |          |  |  |  | (231      | )
|Trading/operating profit                                   |  |         | 987       |   |             |  | (31       | )               |  |  | (58            | ) |  |       | (88       | ) |             |  |          |          |  |  |          |  |  |  | 810       |  
|Trading/operating profit margin                            |  |         | 22.7%     |   |             |  |           |                 |  |  |                |   |  |       |           |   |             |  |           |          |  |  |          |  |  |  | 18.6%     |  
|Interest receivable                                        |  |         | 14        |   |             |  |          |                 |  |  |               |   |  |       |          |   |             |  |          |          |  |  |          |  |  |  | 14        |  
|Interest payable                                           |  |         | (10       | ) |             |  |          |                 |  |  |               |   |  |       |          |   |             |  |          |          |  |  |          |  |  |  | (10       | )
|Other finance costs                                        |  |         | (11       | ) |             |  |          |                 |  |  |               |   |  |       |          |   |             |  |          |          |  |  |          |  |  |  | (11       | )
|Share of loss from associates                              |  |         | (1        | ) |             |  |          |                 |  |  |               |   |  |       |          |   |             |  |          |          |  |  |          |  |  |  | (1        | )
|Profit before taxation                                     |  |         | 979       |   |             |  | (31       | )               |  |  | (58            | ) |  |       | (88       | ) |             |  |          |          |  |  |          |  |  |  | 802       |  
|Taxation                                                   |  |         | (286      | ) |             |  | 6         |                 |  |  | 11             |   |  |       | 23        |   |             |  |          |          |  |  |          |  |  |  | (246      | )
|Adjusted attributable/attributable profit                  |  |         | 693       |   |             |  | (25       | )               |  |  | (47            | ) |  |       | (65       | ) |             |  |          |          |  |  |          |  |  |  | 556       |  
|EPSA/EPS                                                   |  |         | 76.9¢     |   |             |  | (2.8¢     | )               |  |  | (5.2¢          | ) |  |       | (7.2¢     | ) |             |  |          |          |  |  |          |  |  |  | 61.7¢     |  
|Weighted average number of shares (m)                      |  |         | 901       |   |             |  |           |                 |  |  |                |   |  |       |           |   |             |  |           |          |  |  |           |  |  |  | 901       |  
|Diluted EPSA/EPS                                           |  |         | 76.5¢     |   |             |  | (2.8¢     | )               |  |  | (5.2¢          | ) |  |       | (7.1¢     | ) |             |  |          |          |  |  |          |  |  |  | 61.4¢     |  
|Diluted weighted average number of shares (m)              |  |         | 906       |   |             |  |           |                 |  |  |                |   |  |       |           |   |             |  |           |          |  |  |           |  |  |  | 906       |  
|Trading cash flow/cash generated from operating activities |  |         | 877       |   |             |  | (25       | )               |  |  | (54            | ) |  |       |          |   |             |  |          |          |  |  | 340       |  |  |  | 1,138     |  
|Trading profit to cash conversion ratio (%)                |  |         | 89%       |   |             |  |           |                 |  |  |                |   |  |       |           |   |             |  |           |          |  |  |           |  |  |  |           |  

Acquisition related costs:For the year ended 31 December 2013, these costs primarily relate to the integration of the
Healthpoint business.

Restructuring and rationalisation costs:For the year ended 31 December 2013 these costs primarily relate to the structural
and efficiency programme announced in August 2011.

Amortisation of acquisition intangibles:This charge relates to the amortisation of intangible
assets acquired in material business combinations.









178Smith & Nephew Annual report 2014



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##### Table of Contents





RestructuringTrading


Acquisition


and


Amortisation


Legal





Reportedresults


related


rationalisation


of acquisition


and


Capital


results2012


costs


costs


intangibles


other


expenditure


2012For the year ended 31 December 2012


$ million



$ million



$ million



$ million



$ million



$ million



$ millionRevenue


4,137























4,137Cost of goods sold


(1,067
)






(3
)














(1,070
)Gross profit


3,070







(3
)














3,067Selling, general and administration expenses


(1,934
)


(11
)


(62
)


(43
)










(2,050
)Research and development expenses


(171
)






















(171
)Trading/operating profit


965



(11
)


(65
)


(43
)










846Trading/operating profit marginInterest receivable


11























11Interest payable


(9
)






















(9
)Other finance costs


(11
)






















(11
)Share of loss from associates


4























4Profit on disposal of net asset held for sale


















251







251Profit before taxation


960



(11
)


(65
)


(43
)


251







1,092Taxation


(289
)


1



5



7



(95
)






(371
)Adjusted attributable/attributable profit


671



(10
)


(60
)


(36
)


156







721EPSA/EPS


74.8¢



(1.1
)


(6.7
)


(4.0
)


17.4







80.4¢Weighted average number of shares (m)


897























897Diluted EPSA/EPS


74.5¢



(1.1
)


(6.7
)


(4.0
)


17.3







80.0¢Diluted weighted average number of shares (m)


901























901Trading cash flow/cash generated from operating activities


999



(3
)


(55
)






(22
)


265



1,184Trading profit to cash conversion ratio (%)


104% Acquisition related costs: For the year ended 31 December 2012, these costs primarily relate to professional and
advisor fees in connection with the acquisition of Healthpoint Biotherapeutics which was completed on 21 December 2012. Restructuring and
rationalisation costs: For the year ended 31 December 2012, these costs relate mainly to people costs and contract termination costs associated with the structural and process changes announced in August 2011. Amortisation of acquisition intangibles: This charge relates to the amortisation of intangible assets acquired in material business combinations. Legal and other: This credit relates to the profit on disposal of the Clinical Therapies business.  Transactional and translational exchange The Groups principal markets outside the US are, in order of significance, Continental Europe, UK, Australia and Japan. Revenues in these markets fluctuate
when translated into US Dollars on consolidation. During the year, the average rates of exchange against the US Dollar used to translate revenues and profits arising in these markets changed compared to the previous year as follows: the Euro
remained flat at $1.33 (+0%), Sterling strengthened from $1.56 to $1.65 (+6%), the Swiss Franc strengthened from $1.08 to $1.09 (1%), the Australian Dollar weakened from $0.96 to $0.90 (-6%) and the Japanese Yen weakened from ¥97.6 to ¥105.8
(-8%). The Groups principal manufacturing locations are in the US (Advanced Surgical Devices), Switzerland (Advanced Surgical Devices), UK (Advanced
Wound Management and Advanced Surgical Devices) and China (Advanced Surgical Devices and Advanced Wound Management). The majority of the Groups selling and distribution subsidiaries around the world purchase finished products from these
locations. As a result of currency movements compared with the previous year, sales from the US became relatively more profitable to all of these countries. The Groups policy of purchasing forward a proportion of its currency requirements and
the existence of an inventory pipeline reduce the short-term impact of currency movements.
 Contractual obligations Contractual obligations at 31 December 2014 were as follows:  Payments due by periodLess than





More thanTotal



1 year



13 years



35 years



5 years$ million



$ million



$ million



$ million



$ millionDebt obligations


568



37



400



131



Finance lease obligations


12



2



4



6



Operating lease obligations


136



49



56



23



8Retirement benefit obligation


74



74











Purchase obligations


40



32



8







Capital expenditure


34



34











Other


52



29



23







916



257



491



160



8


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Smith & Nephew Annual report
2014179









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##### Table of Contents

OTHER INFORMATION

Other financial informationcontinued





Other contractual obligations represent $19m of foreign exchange contracts and $33m of acquisition consideration.
Provisions that do not relate to contractual obligations are not included in the above table. The agreed contributions for 2015 in respect of the Groups
defined benefits plans are: $46m for the UK (including $37m of supplementary payments), $22m for the US Plan and $6m for other funded defined benefit plans. The table above does 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 as bank loan agreements and Company share plans. None of these are deemed to be significant in terms of their potential impact on the business of the Group as a whole. In addition, there
are service contracts between the Company and its Executive Directors which provide for the automatic payment of a bonus following loss of office or employment occurring because of a successful takeover bid. Further details are set out on
page 100. The Company does not have contracts or other arrangements which individually are essential to the business. 2013 Financial highlights Revenue Group revenue increased by $214m (5% on a reported basis), from $4,137m in 2012 to $4,351m in 2013. The underlying increase is 4% after adjusting for the net
impact of 2% on the Healthpoint acquisition and Clinical Therapies disposal and 1% attributable to the unfavourable impact of currency movements. Cost of
goods sold Cost of goods sold increased by $30m (3% on a reported basis) from $1,070m in 2012 to $1,100m in 2013. The underlying movement is 2% after
adjusting for the net impact of 2% on the Healthpoint acquisition and Clinical Therapies disposal and 1% attributable to the favourable impact of currency movements. The movement in underlying costs of goods sold of 2% is largely attributable to the
increase in underlying trading. During 2013, $12m of restructuring and rationalisation expenses (2012  $3m) and $5m of acquisition related costs (2012
 $nil) were charged to cost of goods sold. Selling, general and administration expenses Selling, general and administrative expenses increased by $160m (8% on a reported basis) from $2,050m in 2012 to $2,210m in 2013. The underlying movement is 6%
after adjusting for the net impact of 3% on the Healthpoint acquisition and Clinical Therapies disposal and 1% attributable to the favourable impact of currency movements. The underlying increase of 6% is due to the continuing investment in Emerging & International Markets, promotion of new products in ASD and AWM and the
underlying increase in trading. In 2013, administrative expenses included $64m of amortisation of other intangible assets (2012  $51m), $46m of
restructuring and rationalisation expenses (2012  $62m), an amount of $88m relating to amortisation of acquisition intangibles (2012  $43m) and $26m of acquisition related costs (2012  $11m).


Research and development expenses Research and development expenditure as a percentage of revenue increased by 1.2% to 5.3% in 2013 (2012  4.1%). Actual expenditure was $231m in 2013 compared
to $171m in 2012. The Group continues to invest in innovative technologies and products to differentiate it from competitors. Operating profit Operating profit decreased by $36m to $810m from $846m in 2012. This comprised a decrease of $12m in Advanced Surgical Devices and a decrease of $24m in Advanced
Wound Management. The movement in Advanced Surgical Devices is attributable to the continuing pressure on margins and its investment in the
Emerging & International Markets. Advanced Wound Management has continued to invest in new products and new geographic markets throughout the year. Net interest receivable/(payable) Net interest receivable increased,
by $2m, from net $2m receivable in 2012 to a net receivable of $4m in 2013. This increase is principally a consequence of the interest receivable on the Bioventus LLC (Bioventus) loan note issued following the disposal of the Clinical
Therapies business which has been in place for a full year in 2013 compared to eight months in 2012. This loan note was repaid in full in 2014. Other
finance cost Other finance costs in 2013 remained at $11m and principally relate to costs associated with the Groups retirement benefit schemes. Taxation The taxation charge decreased, by $125m, to $246m from $371m
in 2012. The rate of tax was 30.5%, compared with 33.7% in 2012. After adjusting for specific transactions that management considers affect the Groups
short-term profitability (profit on disposal of the Clinical Therapies business, restructuring and rationalisation expenses, amortisation of acquisition intangibles and acquisition-related costs) the tax rate was 29.2% (2012  29.9%). Group balance sheet The following table sets out certain balance sheet
data as at 31 December of the years indicated:  2013$ million



2012$ millionNon-current assets


3,563



3,498Current assets


2,256



2,144Total assets


5,819



5,642Non-current liabilities


699



828Current liabilities


1,073



930Total liabilities


1,772



1,758Total equity


4,047



3,884Total equity and liabilities


5,819



5,642










180Smith & Nephew Annual report 2014



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##### Table of Contents





Non-current assets Non-current assets increased by $65m to $3,563m in 2013 from $3,498m in 2012. This is principally attributable to the following:  
Property, plant and equipment increased by $23m from $793m in 2012 to $816m in 2013. Depreciation of $209m was charged during 2013 and assets with a net book value of $12m were disposed of. These movements were offset
by $242m of additions relating primarily to instruments and other plant & machinery and $5m of additions arising on acquisitions in Turkey, Brazil and India. The balance relates to unfavourable currency movements totalling $3m  
Goodwill increased by $70m from $1,186m in 2012 to $1,256m in 2013. Of this movement, $37m arose on acquisitions in Turkey, Brazil and India. An additional $16m arose on finalisation of the Healthpoint opening balance
sheet. The remaining balance relates to favourable currency movements totalling $17m  
Intangible assets decreased by $10m from $1,064m in 2012 to $1,054m in 2013. Intangible assets totalling $64m arose on the acquisition in Turkey, Brazil and India. There was a reduction of $11m on finalisation of the
Healthpoint opening balance sheet. Amortisation of $152m was charged during the year and assets with a net book value of $11m were disposed of. A total of $98m relates to the cost of intellectual property, distribution rights and software acquired.
The balance relates to favourable currency movements totalling $2m  
Investment in associates (including a loan to an associate of $178m in 2013, up from $167m in 2012) has increased from $283m in 2012 to $285m in 2013. This movement relates to the interest of $11m arising on the
Bioventus loan note which was largely offset from the disposal of the Groups 49% interest in the Austrian entities Plus Orthopedics GmbH and Intraplant GmbH and its 20% interest in the German entity Intercus GmbH  
Deferred tax assets decreased by $19m in the year from $164m in 2012 to $145m in 2013. Current assets Current assets increased by $112m to $2,256m from $2,144m in 2012. The movement relates to the following:  
Inventories rose by $105m to $1,006m in 2013 from $901m in 2012. This movement is principally attributable to an increase of $48m in the US due to inventory build prior to the launch of JOURNEY II BCS and an increase of
$17m due to inventory build in our Hull factory prior to the transfer of part of our Wound production to China. A further increase of $12m arose on the acquisitions in Turkey, Brazil and India. The movement also includes $6m of unfavourable currency
movement  
The level of trade and other receivables increased by $48m to $1,113m in 2013 from $1,065m in 2012. The movement primarily relates to the increase in underlying revenues and includes $9m of unfavourable currency
movements  
Cash at bank has fallen by $41m to $137m from $178m in 2012.
 Non-current liabilities Non-current liabilities decreased by $129m from $828m in 2012 to $699m in 2013. This movement relates to the following items:  
Long-term borrowings have decreased from $430m in 2012 to $347m in 2013  
The Retirement benefit obligation decreased by $36m to $230m in 2013 from $266m in 2012. This was largely due to the Groups additional pension contributions, together with net actuarial gains for the year  
Deferred tax liabilities decreased by $11m in the year from $61m in 2012 to $50m in 2013. Current liabilities Current liabilities increased by $143m from $930m in 2012 to $1,073m in 2013. This movement is attributable to:  
Bank overdrafts and current borrowings have increased by $6m from $38m in 2012 to $44m in 2013  
Trade and other payables have increased by $129m to $785m in 2013 from $656m in 2012. This increase includes $50m largely driven from strong sales performance in the US in quarter four and a $23m increase in Europe
associated with promotional activities in Advanced Surgical Devices. A total of $19m of trade and other payables arose on the acquisitions in Turkey, Brazil and India and an amount of $5m is attributable to favourable currency movements.  
Current tax payable is $184m at the end of 2013 compared to $177m in 2012. Total equity Total equity increased by $163m from $3,884m in 2012 to $4,047m in 2013. The principal movements were:  Total equity$ million1 January 2013


3,884Attributable profit


556Currency translation gains


(6
)Hedging reserves


5Actuarial gains on retirement benefit obligations


12Dividends paid during the year


(239
)Purchase of own shares


(231
)Taxation benefits on Other Comprehensive Income and equity items


(16
)Net share-based transactions


8231 December 2013


4,047


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Smith & Nephew Annual report
2014181









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##### Table of Contents

OTHER INFORMATION

Other financial informationcontinued





2013 Financial performance by business segment

Revenue by market

The underlying increase
in each divisions revenues, by market, reconciles to reported growth, the most directly comparable financial measure calculated in accordance with IFRS, as follows:



|                                 |  |  |               |  |  |  |               |  |  |  |  |  |                           |   |  |  |                                 |  |  |  |                             |   |  |  |                              |  
|-------------------------------- |  |  | ------------- |  |  |  | ------------- |  |  |  |  |  | ------------------------- | - |  |  | ------------------------------- |  |  |  | --------------------------- | - |  |  | ---------------------------- | -
|                                 |  |  | 2013$ million |  |  |  | 2012$ million |  |  |  |  |  | Reportedgrowth inrevenue% |   |  |  | Constantcurrencyexchangeeffect% |  |  |  | Acquisition/Disposaleffect% |   |  |  | Underlyinggrowth inrevenue % |  
|Advanced Surgical Devices        |  |  |               |  |  |  |               |  |  |  |  |  |                           |   |  |  |                                 |  |  |  |                             |   |  |  |                              |  
|US                               |  |  | 1,391         |  |  |  | 1,449         |  |  |  |  |  | (4                        | ) |  |  |                                |  |  |  | 5                           |   |  |  | 1                            |  
|Other Established Markets        |  |  | 1,204         |  |  |  | 1,298         |  |  |  |  |  | (7                        | ) |  |  | 2                               |  |  |  | 2                           |   |  |  | (3                           | )
|Established Markets              |  |  | 2,595         |  |  |  | 2,747         |  |  |  |  |  | (6                        | ) |  |  | 1                               |  |  |  | 4                           |   |  |  | (1                           | )
|Emerging & International Markets |  |  | 420           |  |  |  | 361           |  |  |  |  |  | 16                        |   |  |  | 2                               |  |  |  |                            |   |  |  | 18                           |  
|Advanced Surgical Devices        |  |  | 3,015         |  |  |  | 3,108         |  |  |  |  |  | (3                        | ) |  |  | 1                               |  |  |  | 3                           |   |  |  | 1                            |  
|                                 |  |  |               |  |  |  |               |  |  |  |  |  |                           |   |  |  |                                 |  |  |  |                             |   |  |  |                              |  
|Advanced Wound Management        |  |  |               |  |  |  |               |  |  |  |  |  |                           |   |  |  |                                 |  |  |  |                             |   |  |  |                              |  
|US                               |  |  | 471           |  |  |  | 202           |  |  |  |  |  | 133                       |   |  |  |                                |  |  |  | (111                        | ) |  |  | 22                           |  
|Other Established Markets        |  |  | 722           |  |  |  | 705           |  |  |  |  |  | 3                         |   |  |  | 1                               |  |  |  | (1                          | ) |  |  | 3                            |  
|Established Markets              |  |  | 1,193         |  |  |  | 907           |  |  |  |  |  | 32                        |   |  |  | 1                               |  |  |  | (23                         | ) |  |  | 10                           |  
|Emerging & International Markets |  |  | 143           |  |  |  | 122           |  |  |  |  |  | 17                        |   |  |  | 3                               |  |  |  |                            |   |  |  | 20                           |  
|Advanced Wound Management        |  |  | 1,336         |  |  |  | 1,029         |  |  |  |  |  | 30                        |   |  |  | 1                               |  |  |  | (20                         | ) |  |  | 11                           |  



Advanced Surgical Devices Revenue ASD revenue decreased by $93m (-3% on a reported basis)
from $3,108m in 2012 to $3,015m in 2013. The underlying increase of 1% is after adjusting for a net 3% adverse impact from the disposal of the Clinical Therapies business in 2012 and the acquisitions completed in quarter four 2013, and a 1%
unfavourable foreign currency translation. In the US, revenue decreased by $58m to $1,391m in 2013 from $1,449m in 2012 (-4% on a reported basis). The
underlying increase of 1% is after adjusting 5% for the adverse impact of the Clinical Therapies disposal in 2012. In Other Established Markets, revenue was $1,204m in 2013, a decrease of $94m from $1,298m in 2012 (-7% on a reported basis). The
underlying decrease was 3% after adjusting for the adverse impact of 2% on the Clinical Therapies disposal in 2012, and 2% from unfavourable foreign currency translation. Our Emerging & International Markets revenue increased by $59m to
$420m in 2013 from $361m in 2012 (16% increase on a reported basis). The underlying increase was 18% after adjusting 2% for unfavourable foreign currency translation. In the global Knee Implant franchise, revenue decreased by $9m from $874m in 2012 to $865m in 2013 (-1% on a reported basis), representing flat underlying revenue
performance after 1% of unfavourable currency translation. Growth has been impacted by exposure to a weakening European market with conditions continuing to deteriorate in Germany, our largest European market, and our position in the product life
cycle versus our peers. Growth improved in the second half of the year driven by sales of the Journey II BCS Knee System and benefits from the VERILAST bearing surface TV advertising campaign in the US.


Global revenue from the Hip Implant franchise decreased by $13m from $666m in 2012 to $653m in 2013 (-2% on a
reported basis), which represented an underlying revenue decline of 1% after 1% unfavourable foreign currency translation. Continuing metal-on-metal headwinds have contributed to this decline. Trauma & Extremities revenue increased by $12m from $474m in 2012 to $486m in 2013 (3% on a reported basis). This represents underlying revenue growth of
4% after 1% of unfavourable foreign currency translation. During 2013, benefits were seen from the additional extremities US sales representatives recruited earlier in the year. Sports Medicine Joint Repair revenue increased by $22m from $474m in 2012 to $496m in 2013 (5% on reported basis), representing underlying revenue growth of 7% and
2% of unfavourable foreign currency translation. This reflects a strong contribution across all key joint types and geographies. Global revenue from
Arthroscopic Enabling technologies decreased by $17m from $458m in 2012 to $441m in 2013 (-4% on a reported basis). This decrease represents an underlying revenue decline of 2% and 2% of unfavourable foreign currency translation. The revenue in the Other ASD franchise fell by $88m from $162m in 2012 to $74m in 2013 following the disposal of the Clinical Therapies business in 2012. Excluding
the impact of this disposal, underlying revenue in the Other ASD franchise, which includes gynaecology, grew by 14% with the remaining Clinical Therapies geographies contributing $9m.










182Smith & Nephew Annual report 2014



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##### Table of Contents





Trading and operating profit Operating profit, the most directly comparable financial measure in accordance with IFRS, reconciles to trading profit as follows:  2013$ million



2012$ millionOperating profit


620



632Acquisition related costs


7



Restructuring and rationalisation costs


44



57Amortisation of acquisition intangibles and impairments


41



39Trading profit


712



728 Trading profit margin increased from 23.4% to 23.6%. Trading profit decreased by $16m to $712m from $728m in 2012. This decrease
reflects the impact of the CT disposal in May 2012, the impact of the US medical device excise tax and the cost of planned investments in the Knee Implants and Trauma franchises and Emerging & International Markets offset by benefits from
our structural efficiency programme. Operating profit decreased by $12m from $632m in 2012 to $620m in 2013. This comprises the decrease in trading profit of
$16m discussed above, an increase in acquisition related costs of $7m, an increase in amortisation of acquisition intangibles of $2m, partially offset by a decrease in restructuring and rationalisation costs of $13m. Advanced Wound Management Revenue AWM revenue increased by $307m (30% on a reported basis), from $1,029m in 2012 to $1,336m in 2013. The underlying increase of 11% is after adjusting for an
increase of 20% for the acquisitions completed in the year and a 1% unfavourable foreign currency translation. In the US, revenue increased by $269m to $471m
in 2013 from $202m in 2012 (133% on a reported basis). The underlying increase of 22% is after adjusting 111% for the impact of acquisitions. In Other Established Markets, revenue was $722m in 2013, an increase of $17m from $705m in 2012 (3% on a
reported basis). The underlying revenue increase was also 3% with the 1% impact of acquisitions offset by 1% of unfavourable foreign currency translation. Our Emerging & International Markets revenue increased by $21m in 2012 (17% on a
reported basis). The underlying increase was 20% after adjusting 3% for unfavourable foreign currency translation. Advanced Wound Care revenue decreased by
$6m (-1% on a reported basis) from $849m in 2012 to $843m in 2013. The underlying growth of 1% is after adjusting for foreign currency translation. Conditions across many European markets remain challenging but the introduction of the ALLEVYN Life
range continues to make good progress across Europe following product introductions and investment in marketing. Advance Wound Devices revenue increased from
$180m in 2012 to $213m in 2013, a reported increase of $33m and 18%. The underlying growth of 20% is after adjusting for unfavourable foreign currency translations of 2%. This growth was impacted by continued gain in market share in NPWT, and our
recent expansion into the emerging markets. Advanced Wound Bioactives revenue of $280m in 2013 (2012  $nil) relates to Healthpoint acquired in December
2012. The underlying increase, adjusted to include the results of Healthpoint for the commensurate period in 2012, was 47%.
 Trading and operating profit Operating profit, the most directly comparable financial measure in accordance with IFRS, reconciles to trading profit as follows:  2013$ million



2012$ millionOperating profit


190



214Acquisition related costs


24



11Restructuring and rationalisation costs


14



8Amortisation of acquisition intangibles and impairments


47



4Trading profit


275



237 Trading profit margin decreased from 23.1% to 20.6%. Trading profit increased by $38m to $275m from $237m in 2012. The increase in
the year is primarily attributable to the full year benefit of the Healthpoint acquisition and growth in the Emerging & International Markets, partially offset by additional investment in R&D and sales and marketing. The decrease in
trading margin reflects these same investments, combined with price and mix changes at a gross margin level. Operating profit decreased by $24m from $214m in
2012 to $190m in 2013. This comprises of the increase in trading profit of $38m discussed above, offset by an increase of $43m in amortisation of acquisition intangibles and an increase in acquisition related costs of $13m, both due to the
Healthpoint acquisition which completed in December 2012, and an increase in restructuring and rationalisation costs of $6m.


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Smith & Nephew Annual report
2014183









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##### Table of Contents

OTHER INFORMATION

Information for shareholders





Financial calendarAnnual General Meeting

9 April 2015First quarter trading report

30 April 2015Payment of 2014 final dividend

6 May 2015Half year results announced

30 July 2015 (i)Third quarter trading report

29 October 2015Payment of 2015 interim dividend

November 2015Full year results announced

February 2016 (i)Annual Report available

February/March 2016Annual General Meeting

April 2016  (i)
Dividend declaration dates. Annual General Meeting The Companys Annual General Meeting (AGM) will be held on 9 April 2015 at 2pm at No. 11 Cavendish Square, London, W1G 0AN. Registered shareholders
have been sent either a Notice of Annual General Meeting or notification of availability of the Notice of Annual General Meeting. Corporate Headquarters and
Registered Office The corporate headquarters is in the UK and the registered office address is: Smith & Nephew plc, 15 Adam Street, London, W2N 6LA,
UK. Registered in England and Wales No. 324357. Tel. +44 (0)20 7401 7646 website: www.smith-nephew.com Ordinary shareholders Registrar All general enquiries concerning shareholdings,
dividends, changes to shareholders personal details and the AGM should be addressed to: Equiniti, Aspect House, Spencer Road, Lancing,
West Sussex BN99 6DA Tel: 0871 384 2081 * Tel: +44
(0) 121 415 7072 from outside the UK Website: www.shareview.co.uk  *
Calls to this number are charged at 8p per minute plus network extras. Lines are open from 8.30am to 5.30pm Monday to Friday, excluding UK public holidays. Shareholder facilities Shareview Equinitis on-line enquiry and portfolio management service for shareholders. To view information about your shareholdings online, register at
www.shareview.co.uk. Once registered for Shareview, you will also be able to elect to receive future shareholder communications via the Companys website (www.smith-nephew.com), update your address details or dividend payment
instructions and register your proxy instructions on-line. E-communications We encourage you to elect to receive communications via e-mail as this has significant environmental and cost benefits. You may register for this service
through Equiniti, at www.shareview.co.uk. You will receive a confirmation letter from Equiniti at your registered address, containing an Activation Code for future use.


Payment of dividends direct to your bank or building society account If you who wish to avoid the risk of your dividend awards getting lost or mislaid you can arrange to have your cash dividends paid directly to a bank or
building society account. This facility is available to UK resident shareholders who receive sterling dividends. If you do not live in the UK you may be able to register for the overseas payment service. Further information is
available at www.shareview.co.uk or by contacting Equiniti (UK and overseas helpline numbers as above). Dividend reinvestment plan (DRIP) The Company offers shareholders (except those in North America) the opportunity to participate in a DRIP. This enables you to reinvest your cash dividends in
further ordinary shares of Smith & Nephew plc. These are purchased in the market at competitive dealing costs. For further details plus an application form to reinvest future dividends, contact Equiniti. Duplicate accounts If you have more than one account due to
inconsistency in account details you may avoid duplicate mailings by contacting Equiniti and requesting an amalgamation of your share accounts. Keep your
personal details up to date Please remember to tell Equiniti if you move house or change bank details or there is any other change in your account
information. You can update your information on-line via the Shareview portfolio if you are a Smith & Nephew Shareview member. If you do not have a portfolio you will need to write to Equiniti or complete a change of address form
which can be downloaded from Shareview. If you hold 2,500 shares or fewer, you can also change your address or update your bank details quickly and easily over the phone using the contact details provided. Individual savings account (ISA) Shareholders who are UK resident
may hold Smith & Nephew plc shares in an Individual Savings Account (ISA), which is administered by the Companys registrar. For information about this service please contact Equiniti. Shareholder communications We make
quarterly financial announcements which are made available 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 and ADS holders who have elected to receive shareholder documentation by post. Electronic copies of the Annual Report and Notice of Annual General Meeting are available on the Groups website at www.smith-nephew.com. Both
ordinary shareholders and ADS holders can request paper copies of the Annual Report, which the Company provides free of charge. The Company will continue to send to ordinary 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 Report and Notice of Annual General Meeting electronically you are informed by e-mail of the documents
availability on 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.








184Smith & Nephew Annual report 2014



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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 major investors, 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 price of the Companys ordinary shares on 31 March 1982 was 35.04p. Smith & Nephew share
price The Companys ordinary shares are quoted on the London Stock Exchange under the symbol SN. The Companys share price is available
on the Smith & Nephew website www.smith-nephew.com and at www.londonstockexchange.com where the live 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 consider donating them to the charity ShareGift (registered charity 1052686) which specialises in accepting such shares as donations. There are no implications for Capital
Gains Tax purposes (no gain or loss) and it may also be possible to obtain income tax relief. The relevant stock transfer form may be obtained from Equiniti at the address given on page 184. 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 unsolicited 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 eligible to receive payment under the Financial Services Compensation Scheme if things go wrong. If you
receive any unsolicited investment advice, obtain the correct name of the person and organisation and check that they are properly 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
consumer.queries@fca.org.uk. 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 LinkedIn, which are 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 on Form 20-F.  LOGO

https://twitter.com/SmithNephewPLCLOGO

www.facebook.com/SmithNephewPlcLOGO

http://www.linkedin.com/company/smith-&-nephew American Depositary Shares (ADSs) and American Depositary Receipts (ADRs) In the USA, the Companys ordinary shares are traded in the form of ADSs, evidenced by ADRs, on the New York Stock Exchange under the symbol SNN. Each
American Depositary Share represents two ordinary shares. Deutsche Bank is the authorised depositary bank for 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 6210 15th Avenue Brooklyn, New York Tel: +1 800 937-5449 (toll free from US) Tel: +1 718 921-8124
(direct dial) E-mail: DB@amstock.com Website: www.adr.db.com The Company provides Deutsche Bank, as depositary, with copies of Annual Reports containing Consolidated 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 holders 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.


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Information for shareholderscontinued





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 2014 in accordance
with the Securities and Exchange Commission rules 12.D.3 and 12.D.4 relating to Form 20-F filings by foreign private issuers. The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or
surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors, including payment 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 may collect its annual fee for depository services by deductions from cash distributions or by directly billing investors or by charging the book-entry
system accounts of participants acting for them. The depositary may 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 transfer fees                                                                                                                    |  | 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 have to pay on any ADS or share underlying an ADS, for example, stock transfer
taxes, stamp duty or withholding taxes |  | As necessary                                                                                                                                                                                                                                                                              
|Any charges incurred by the depositary or its agents for servicing the deposited securities                                                                                                |  | As necessary                                                                                                                                                                                                                                                                              

During 2014, a fee of two US cents per ADS was paid on the 2013 final dividend by The Bank of New York Mellon which totaled
$111,563.54.

On 1 October 2014 Smith & Nephew changed ADR bank to Deutsche Bank Trust Company Americas. A fee of one US cent per ADS was
deducted from the 2014 interim dividend paid in November which totaled $178,537.00. Therefore, for the period 1 January 2014 to 23 February 2015, the total reimbursed by The Bank of New York Mellon and Deutsche Bank Trust Company Americas
was $290,100.54.

On 14 October 2014 the ratio for ordinary shares per ADS changed from five ordinary shares per ADS to two ordinary shares per ADS.







186Smith & Nephew Annual report 2014



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Dividend history Smith & Nephew has paid dividends on its ordinary shares in every year since 1937. Following the capital restructuring and dividend reduction in 2000 the
Group adopted a policy of increasing its dividend cover (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 financing capability of the Group
for acquisitions and other investments. From 2000 to 2004 the dividend increased in line with inflation and, in 2004, dividend cover stood at 4.1 times. Having achieved this level of dividend cover the Board changed its policy, from that of
increasing dividends in line with inflation, to that of 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 each year. The Board intends that the interim dividend
will be set by a formula and will be equivalent to 40% of the total dividend for the previous year. Dividends will continue to be declared in US Dollars with an equivalent amount in sterling payable to those shareholders whose registered address is
in the UK, or who have validly elected to receive sterling dividends. An interim dividend in respect of each fiscal year is normally declared in August
and paid in November. A final dividend will be recommended 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: future earnings; the future financial condition of the Group; the Boards dividend policy;
and the additional factors that might affect the business of the Group set out in Special note regarding forward-looking statements and Risk Factors. Dividends per share The table below sets
out the dividends per Ordinary Share in the last five years.  Years ended 31 December2014

2013

2012

2011

2010Pence per share:Interim

7.578

7.211

6.811

4.639

4.233Final (i)

13.377

11.233

11.778

7.444

6.639Total

20.995

18.444

18.589

12.083

10.872US cents per share:Interim

12.222

11.556

11.000

7.333

6.667Final

20.667

18.889

18.000

12.000

10.911Total

32.889

30.445

29.000

19.333

17.578  (i)
Translated at the Bank of England rate on 23 February 2015. Dividends above include the associated UK tax
credit of 10%, but exclude the deduction of withholding taxes. All dividends, up to the second interim dividend for 2005, were declared in pence per ordinary share and translated into US cents per ordinary share at the Noon Buying Rate on the
payment date. Since the second interim dividend for 2005 all dividends have been declared in US cents per ordinary share. The 2014 final dividend will be
payable on 6 May 2015, subject to shareholder approval. In respect of the proposed final dividend for the year ended 31 December 2014 of 18.6 US
cents per ordinary share, the record date will be 17 April 2015 and the payment date will be 6 May 2015. The sterling equivalent per ordinary share will be set following the record date. Shareholders may elect to receive their dividend in
either sterling or US Dollars and the last day for election will be 17 April 2015. The ordinary shares will trade ex-dividend on both the London and New York Stock Exchanges from 16 April 2015. The proposed final dividend of 18.6 US cents per ordinary share, which together with the interim dividend of 11 US cents, makes a total for 2014 of 29.6 US cents.


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OTHER INFORMATION

Information for shareholderscontinued





Share prices

The table below sets out, for the periods indicated, the highest and lowest 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 |                 |  | Low |  |       |  |      | High |  |  | Low   | 
|                                        |  |      | £               |  |     |  | £     |  |      |      |  |  | US$   |  |  |  | US$   | 
|Year ended 31 December:                 |  |      |                 |  |     |  |       |  |      |      |  |  |       |  |  |  |       | 
|2010                                    |  |      | 6.97            |  |     |  | 5.38  |  |      |      |  |  | 53.94 |  |  |  | 41.29 | 
|2011                                    |  |      | 7.42            |  |     |  | 5.21  |  |      |      |  |  | 60.19 |  |  |  | 42.17 | 
|2012                                    |  |      | 6.93            |  |     |  | 5.80  |  |      |      |  |  | 56.13 |  |  |  | 45.13 | 
|2013                                    |  |      | 8.68            |  |     |  | 6.80  |  |      |      |  |  | 71.85 |  |  |  | 52.90 | 
|2014*                                   |  |      | 11.93           |  |     |  | 8.57  |  |      |      |  |  | 97.27 |  |  |  | 29.39 | 
|Quarters in the year ended 31 December: |  |      |                 |  |     |  |       |  |      |      |  |  |       |  |  |  |       | 
|2013:                                   |  |      |                 |  |     |  |       |  |      |      |  |  |       |  |  |  |       | 
|1st Quarter                             |  |      | 7.60            |  |     |  | 6.80  |  |      |      |  |  | 58.00 |  |  |  | 52.90 | 
|2nd Quarter                             |  |      | 7.95            |  |     |  | 7.18  |  |      |      |  |  | 60.17 |  |  |  | 54.83 | 
|3rd Quarter                             |  |      | 8.00            |  |     |  | 7.30  |  |      |      |  |  | 63.06 |  |  |  | 56.01 | 
|4th Quarter                             |  |      | 8.68            |  |     |  | 7.48  |  |      |      |  |  | 71.85 |  |  |  | 60.05 | 
|2014:                                   |  |      |                 |  |     |  |       |  |      |      |  |  |       |  |  |  |       | 
|1st Quarter                             |  |      | 9.60            |  |     |  | 8.57  |  |      |      |  |  | 80.18 |  |  |  | 70.84 | 
|2nd Quarter                             |  |      | 11.00           |  |     |  | 8.61  |  |      |      |  |  | 97.27 |  |  |  | 73.17 | 
|3rd Quarter                             |  |      | 10.80           |  |     |  | 9.86  |  |      |      |  |  | 90.45 |  |  |  | 82.91 | 
|4th Quarter*                            |  |      | 11.93           |  |     |  | 9.06  |  |      |      |  |  | 83.14 |  |  |  | 29.39 | 
|2015:                                   |  |      |                 |  |     |  |       |  |      |      |  |  |       |  |  |  |       | 
|1st Quarter (to 23 February 2015)       |  |      | 12.00           |  |     |  | 11.48 |  |      |      |  |  | 36.71 |  |  |  | 35.07 | 
|Last six months:                        |  |      |                 |  |     |  |       |  |      |      |  |  |       |  |  |  |       | 
|August 2014                             |  |      | 10.65           |  |     |  | 9.86  |  |      |      |  |  | 89.50 |  |  |  | 82.91 | 
|September 2014                          |  |      | 10.80           |  |     |  | 10.23 |  |      |      |  |  | 88.15 |  |  |  | 83.29 | 
|October 2014 (1 to 14 October 2014)*    |  |      | 10.32           |  |     |  | 9.74  |  |      |      |  |  | 83.14 |  |  |  | 77.36 | 
|October 2014 (15 to 31 October 2014)    |  |      | 10.57           |  |     |  | 9.06  |  |      |      |  |  | 33.83 |  |  |  | 29.39 | 
|November 2014                           |  |      | 11.38           |  |     |  | 10.45 |  |      |      |  |  | 36.12 |  |  |  | 33.21 | 
|December 2014                           |  |      | 11.93           |  |     |  | 10.19 |  |      |      |  |  | 38.52 |  |  |  | 32.06 | 
|January 2015                            |  |      | 12.00           |  |     |  | 11.48 |  |      |      |  |  | 36.40 |  |  |  | 35.07 | 
|February 2015 (to 23 February 2015)     |  |      | 11.98           |  |     |  | 11.55 |  |      |      |  |  | 36.71 |  |  |  | 35.17 | 

* On 14 October 2014 the ratio of ordinary shares per ADS changed from five ordinary shares per ADS to two ordinary shares per
ADS.







188Smith & Nephew Annual report 2014



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Share Capital The principal trading market for the ordinary shares is the London Stock Exchange. 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 2014, before 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 Directors and Executive Officers, rank pari passu with each other. On
23 January 2006 the ordinary shares of 122⁄9p were redenominated as ordinary shares of US 20 cents (following approval by shareholders at the
extraordinary general meeting in December 2005). The new US dollar ordinary shares carry the same rights as the previous ordinary shares. The share price continues to be quoted in sterling. In 2006 the Company issued £50,000 of shares in
sterling in order to comply with English law. These were issued as deferred shares, which are not listed on any stock exchange. They have extremely limited rights and therefore effectively have no value. These shares were allotted to the Chief
Executive Officer, although the Board reserves the right to transfer them to another member of the Board should it so wish. As at 23 February 2015, to
the knowledge of the Group, there were 17,824 registered holders of ordinary shares, of whom 90 had registered addresses in the USA and held a total of 168,578 ordinary shares (less than 0.02% of the total issued). Because certain ordinary
shares are registered in the names of nominees, the number of shareholders with registered addresses in the USA is not representative of the number of beneficial owners of ordinary shares resident in the USA. Shareholdings As at 23 February 2015, 26,707,860 ADSs equivalent
to 53,415,720 ordinary shares or approximately 5.97% of the total ordinary shares in issue, were outstanding and were held by 92 registered ADS holders. Major shareholders As far as is known to Smith & Nephew, the
Group is not directly or indirectly owned or controlled by another corporation or by any government and the Group has not entered into arrangements, the operation of which may at a subsequent date result in a change in control of the Group. As at 23 February 2015, no persons are known to Smith & Nephew to have any interest (as defined in the Disclosure and Transparency Rules of
the FCA) in 3% or more of the ordinary shares, other than as shown below. The following tables show changes over the last three years in the percentage and numbers of the issued share capital owned by shareholders holding 3% or more of ordinary
shares, as notified to the Company under the Disclosure and Transparency Rules:  As at 31 December23 February 2015



2014



2013



2012%



%



%



%BlackRock, Inc.


5.5



5.5



4.7



5.0Invesco


5.0



5.3



12.1



11.9Legal & General Group plc














3.0Newton Investment Management Limited














4.9As at 31 December23 February 2015



2014



2013



2012000



000



000



000BlackRock, Inc.


49,206



49,008



41,870



44,811Invesco


44,918



47,508



107,823



107,823Legal & General Group plc














26,906Newton Investment Management Limited














8,432 The Company is not aware of any person who has a significant direct or indirect holding of securities in the Company, and is not
aware of any persons holding securities which may control the Company. There are no securities in issue which have special rights as to the control of the Company.


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OTHER INFORMATION

Information for shareholderscontinued





Purchase of ordinary shares on behalf of the Company

At the AGM, the Company will be seeking a renewal of its current permission from shareholders to purchase up to 10% of its own 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 by the Company. From 1 January 2014 to 23 February 2015, in the months listed below, the
Company has purchased 5,455,000 ordinary shares at a cost of US$91,595,439.



|                    |  |  |                            |   |  |  |                                |   |  |  |                                                       | 
|------------------- |  |  | -------------------------- | - |  |  | ------------------------------ | - |  |  | ----------------------------------------------------- | 
|                    |  |  | Total sharespurchased(000s | ) |  |  | Average pricepaid per 
share(p | ) |  |  | Approximate US$value of sharespurchased
underthe plan | 
|12-22 May 2014      |  |  | 1,825                      |   |  |  | 926.1138                       |   |  |  | 28,687,538                                            | 
|6-19 August 2014    |  |  | 1,380                      |   |  |  | 1,026.3662                     |   |  |  | 23,833,629                                            | 
|4-14 November 2014  |  |  | 1,200                      |   |  |  | 1,056.5981                     |   |  |  | 20,198,882                                            | 
|13-18 February 2015 |  |  | 1,050                      |   |  |  | 1,168.3047                     |   |  |  | 18,875,390                                            | 

The shares were purchased in the open market by UBS Limited and JP Morgan Cazenove Limited on behalf of the Company.



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 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 which 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, 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 whose functional currency for US federal income tax purposes is other than the US dollar and US Holders liable for alternative minimum tax. 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, 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 2014. 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.






190Smith & Nephew Annual report 2014



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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. 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, 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 A US Holder may be
subject to US information reporting and backup withholding on dividends paid on or the proceeds of sales of ADSs or ordinary shares made within the USA or through certain US-related financial intermediaries, unless the 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 (and under proposed Treasury regulations, certain entities) 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 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 1⁄2% 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
1⁄2% (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
11⁄2% 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.


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OTHER INFORMATION

Information for shareholderscontinued





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 2014. 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.










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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.


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OTHER INFORMATION

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                                       
|Item 1  |  | Identity of Directors, Senior Management and Advisers       |  | n/a                                        
|Item 2  |  | Offer Statistics and Expected Timetable                     |  | n/a                                        
|Item 3  |  | Key Information                                             |  |                                            
|        |  | A  Selected Financial Data                                 |  | 174175                                    
|        |  | B  Capitalization and Indebtedness                         |  | n/a                                        
|        |  | C  Reason for the Offer and Use of Proceeds                |  | n/a                                        
|        |  | D  Risk Factors                                            |  | 171173                                    
|Item 4  |  | Information on the
Company                                  |  |                                            
|        |  | A  History and Development of the Company                  |  | 170                                        
|        |  | B  Business Overview                                       |  | 34, 815, 1839, 118121, 171173, 180183
|        |  | C  Organizational Structure                                |  | 1011, 133134, 164165                    
|        |  | D  Property, Plant and equipment                           |  | 128129, 170, 172                          
|Item 4A |  | Unresolved Staff Comments                                   |  | None                                       
|Item 5  |  | Operating and Financial Review
and Prospects                |  |                                            
|        |  | A  Operating results                                       |  | 815, 26, 30, 3436, 111, 113, 115, 180183
|        |  | B  Liquidity and Capital Resources                         |  | 115, 136140, 155                          
|        |  | C  Research and Development, patents and licences, etc.    |  | 14, 2122                                  
|        |  | D  Trend information                                       |  | 1820, 104, 171173                        
|        |  | E  Off Balance Sheet Arrangements                          |  | 170                                        
|        |  | F  Tabular Disclosure of Contractual Obligations           |  | 179180                                    
|        |  | G  Safe Harbor                                             |  | 199                                        
|Item 6  |  | Directors, Senior Management and
Employees                  |  |                                            
|        |  | A  Directors and Senior Management                         |  | 5459, 63                                  
|        |  | B  Compensation                                            |  | 81102                                     
|        |  | C  Board Practices                                         |  | 5459, 6280                               
|        |  | D  Employees                                               |  | 1011, 25, 121                             
|        |  | E  Share Ownership                                         |  | 90, 159162                                
|Item 7  |  | Major shareholders and Related
Party Transactions           |  |                                            
|        |  | A  Major shareholders                                      |  | 189                                        
|        |  |  Host Country shareholders                                 |  | 189                                        
|        |  | B  Related Party Transactions                              |  | 163, 170                                   
|        |  | C  Interests of experts and counsel                        |  | n/a                                        
|Item 8  |  | Financial information                                       |  |                                            
|        |  | A  Consolidated Statements and Other Financial Information |  | 103165                                    
|        |  |  Legal Proceedings                                         |  | 145147                                    
|        |  |  Dividends                                                 |  | 187                                        
|        |  | B  Significant Changes                                     |  | None                                       
|Item 9  |  | The Offer and Listing                                       |  |                                            
|        |  | A  Offer and Listing Details                               |  | 188189                                    
|        |  | B  Plan of Distribution                                    |  | n/a                                        
|        |  | C  Markets                                                 |  | 189                                        
|        |  | D  Selling shareholders                                    |  | n/a                                        
|        |  | E  Dilution                                                |  | n/a                                        
|        |  | F  Expenses of the Issue                                   |  | n/a                                        







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PageItem 10

Additional InformationA  Share capital

n/aB  Memorandum and Articles of Association

192193C  Material Contracts

115, 156157D  Exchange Controls

190E  Taxation

190191F  Dividends and Paying Agents

n/aG  Statement by Experts

n/aH  Documents on Display

199I  Subsidiary Information

164165Item 11

Quantitative and Qualitative Disclosure about Market Risk

140144, 171173Item 12

Description of Securities Other than Equity SecuritiesA  Debt securities

n/aB  Warrants and rights

n/aC  Other securities

n/aD  American Depository shares

185186Part IIItem 13

Defaults, Dividend Arrearages and Delinquencies

NoneItem 14

Material Modifications to the Rights of Security Holders and Use of Proceeds

NoneItem 15

Controls and Procedures

75  80, 105Item 16

(Reserved)

n/aItem 16A

Audit Committee Financial Expert

75Item 16B

Code of Ethics

80Item 16C

Principal Accountant Fees and Services

7879, 123Item 16D

Exemptions from the Listing Standards for Audit Committees

n/aItem 16E

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

154, 190Item 16F

Change in Registrants Certifying Accountant

78Item 16G

Corporate Governance

60, 82Item 16H

Mine Safety Disclosure

n/aPart IIIItem 17

Financial Statements

n/aItem 18

Financial Statements

103165Item 19

Exhibits


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OTHER INFORMATION

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 Depository 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 products 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 division.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|AWM                       |  | Advanced Wound Management division.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|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-tax impact of specific transactions that
management considers affects 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 from operating profit when arriving at trading profit and items that are recognised below operating profit that affect 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 information, facilitating the flow of information
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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|FTSE 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                        





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Term

MeaningIFRIC

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 Africa, 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 scaffold 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 hardness, 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 CommissionTrading 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 affect the Groups short-term profitability and cash flows. 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 of acquisition 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 flows on a short-term
or one-off basis are excluded from operating profit and cash generated from operations when arriving at trading profit and trading cash flow, respectivelyUK

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 and the inclusion of the comparative impact of acquisitions and exclusion of
disposals.US

United States of America.US Dollars, US $ or cents

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.


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Smith & Nephew Annual report
2014197









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OTHER INFORMATION

Index





2013 Financial highlights

1802014 Financial highlights

4Accounting Policies

117Accounts Presentation

199Acquisitions

156Acquisition related costs

123Advanced Surgical Devices  Business segment review

26Advanced Wound Management 
Business segment review

30American Depository Shares

185Articles of Association

192Audit fees

123Board

54Business overview

12Business segment information

26Cash and borrowings

136Chairmans statement

5Chief Executive Officers review

6Company Balance Sheet

166Company Notes to the Accounts

167Contingencies

146Contractual obligations

179Corporate Governance Statement

62Critical accounting policies

104Cross Reference to Form 20-F

194Currency fluctuations

172Currency translation

117Deferred taxation

126Directors Remuneration Report

81Directors responsibilities for the accounts

103Directors responsibility statement

103Dividends

154, 187Earnings per share

127Employees/People

25, 121Employees Share Trust

154Ethics and compliance

22Executive officers

58Factors affecting results of operations

173Financial instruments

140Financial position, liquidity and capital resources

115Glossary of terms

196Goodwill

130Group Balance Sheet

112Group Cash Flow Statement

114Group history

170, 200Group Income Statement

110Group Notes to the Accounts

117Group overview

12


Group Statement of Changes in Equity

116Group Statement of Comprehensive Income

110Independent Auditors Reports

105Information for shareholders

184Intangible assets

131Intellectual property

22Interest

124Inventories

134Investments

133Investment in associates

133Key Performance Indicators

14Leases

140, 158Legal and other

123Legal proceedings

146Manufacturing

23Marketplace

18Medical education

24New accounting standards

117Off-Balance Sheet arrangements

170Operating profit

122Other finance (costs)/income

124Outlook and trend information

17, 18Parent Company accounts

166Payables

136People/Employees

25Principal subsidiary undertakings

164Provisions

145Property, plant and equipment

128Receivables

135Regulation

18, 22, 29, 33Related party transactions

163Research and development

21Restructuring and rationalisation expenses

123Retirement benefit obligation

147Risk factors

171Risk management

36, 79Sales and marketing

24Selected financial data

174Share based payments

159Share capital

189Shareholder return

91Strategy

13Sustainability

40Taxation

124Taxation information for shareholders

190Treasury shares

154








198Smith & Nephew Annual report 2014



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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 $4.6 billion in 2014. 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 2014. 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. In the more established countries by revenue, the
Groups business operations are organised by divisions. In the majority of the remaining markets, operations are managed by country managers who are responsible for sales and distribution of the Groups entire product range. These comprise
the Emerging Markets & International Markets. 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 196 to 197. The product
names referred to in this document are identified by use of capital letters and the à symbol (on first occurence) 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 23 February 2015, the Bank of England rate was US$1.5449 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 171 to 173 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. Division data Division data and division 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 web site 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.


LOGO




Smith & Nephew Annual report
2014199









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LOGO



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LOGO





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Smith & Nephew plc 15 Adam Street London WC2N 6LA United Kingdom T +44 (0) 20 7401 7646 F +44 (0) 20 7960 2356 www.smith-nephew.com




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SIGNATURE

The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and has duly caused and authorized the undersigned to sign this
Annual Report on its behalf.



Smith & Nephew plc
(Registrant)By:

/s/ Susan SwabeySusan Swabey Company Secretary


London, England

March 5, 2015



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##### Table of Contents

EXHIBIT INDEX



|            |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |                                                                                              |  |  
|----------- |  | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | -
|Exhibit No. |  | Description of Document |  | Incorporated Herein by Reference To                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | FiledHerewith                                                                               
|            |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|1           |  |                         |  | Articles of Association                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | Form 20-F for the year ended December 31, 2011 filed on March 1, 2012 (File No. 1-14978)     |  |  
|            |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|2           |  |                         |  | Smith & Nephew plc is not party to any single instrument relating to long-term debt pursuant to which a total amount of securities exceeding 10% of Smith & Nephew plcs total assets (on a consolidated basis) is
authorized to be issued. Smith & Nephew plc hereby agrees to furnish to the SEC, upon its request, a copy of any instrument defining the rights of holders of its long-term debt or the rights of holders of the long-term debt of any of its
subsidiaries for which consolidated or unconsolidated financial statements are required to be filed with the SEC. |  |                                                                                              |  |  
|            |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|4           |  | (a) (i)                 |  | Material contract: Agreement and Appendices dated 3 February 2014 by and among Smith & Nephew plc, Barclays Bank Plc, The Financial Institutions in Schedule 1, Barclays Bank Plc and J.P. Morgan Chase Bank, N.A. and J.P. Morgan
Europe Limited.                                                                                                                                                                                                                                                                                                                                 |  | Form 20-F for the year ended December 31, 2013 filed on March 6, 2014 (File No.1-14978)      |  |  
|            |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |  | (ii)                    |  | Material contract: Agreement and Plan Merger dated 2 February 2014 by and among Arthrocare Corporation Smith & Nephew, Inc. and Smith & Nephew plc.                                                                                                                                                                                                                                                                                                                                                                                                                                |  | Form 20-F for the year ended December 31, 2013 filed on March 6, 2014 (File No.1-14978)      |  |  
|            |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |  | (iii)                   |  | Material contract: Agreement and Appendices dated 24 March 2014 by and among Smith & Nephew plc, Barclays Bank Plc; J.P. Morgan Limited; Bank Of America Merrill Lynch International Limited; Bank Of China Limited, London Branch;
The Bank Of Tokyo-Mitsubishi Ufj, Ltd.; HSBC Bank Plc; Mizuho Bank, Ltd.; National Australia Bank Limited; The Royal Bank Of Scotland Plc; Societe Generale; Sumitomo Mitsui Banking Corporation; Wells Fargo Bank International and Deutsche Bank Ag,
London Branch                                                                           |  |                                                                                              |  | X
|            |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |  | (iv)                    |  | Material contract: Agreement and Appendices dated 19 November 2014 by and among Smith & Nephew plc and the purchasers listed in Schedule A.                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |                                                                                              |  | X
|            |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|4           |  | (c) (i)                 |  | Service Agreement of Olivier Bohuon                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | Form 20-F for the year ended December 31, 2010 filed on March 3, 2011 (File No. 1-14978)     |  |  
|            |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |  | (ii)                    |  | Retirement provisions for David J Illingworth                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | Form 20-F for the year ended December 31, 2010 filed on March 3, 2011 (File No. 1-14978)     |  |  
|            |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |  | (iii)                   |  | Service Agreement of Julie Brown                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | Form 20-F for the year ended December 31, 2012 filed on February 28, 2013 (File No. 1-14978) |  |  
|            |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |  | (iv)                    |  | Side Letter to the Service Agreement of Julie Brown                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | Form 20-F for the year ended December 31, 2012 filed on February 28, 2013 (File No. 1-14978) |  |  
|            |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |  | (v)                     |  | Letter of Appointment of Ian Barlow                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | Form 20-F for the year ended December 31, 2009 filed on March 26, 2010 (File No. 1-14978)    |  |  
|            |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |  | (vi)                    |  | Letter of Appointment of The Rt. Hon Baroness Virginia Bottomley                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | Form 20-F for the year ended December 31, 2012 filed on February 28, 2013 (File No.1-14978)  |  |  
|            |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |  | (vii)                   |  | Letter of Appointment of Michael Friedman                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  | Form 20-F for the year ended December 31, 2012 filed on February 28, 2013 (File No.1-14978)  |  |  



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|            |  |                         |  |                                                                        |  |                                                                                                 |  |  
|----------- |  | ----------------------- |  | ---------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | -
|Exhibit No. |  | Description of Document |  | Incorporated Herein by Reference To                                    |  | FiledHerewith                                                                                  
|            |  |                         |  |                                                                       
|4           |  | (c) (viii)              |  | Letter of Appointment of Ajay Piramal                                  |  | Form 20-F for the year ended December 31, 2011 filed on March 1, 2012 (File No. 1-14978)        |  |  
|            |  |                         |  |                                                                       
|            |  | (ix)                    |  | Letter of Re-Appointment of Rolf Stomberg                              |  | Form 20-F for the year ended December 31, 2012 filed on February 28, 2013 (File No.1-14978)     |  |  
|            |  |                         |  |                                                                       
|            |  | (x)                     |  | Letter of Re-Appointment of Richard De Schutter                        |  | Form 20-F for the year ended December 31, 2013 filed on March 6, 2014 (File No.1-14978)         |  |  
|            |  |                         |  |                                                                       
|            |  | (xi)                    |  | Letter of Re-Appointment of Pamela Kirby                               |  | Form 20-F for the year ended December 31, 2013 filed on March 6, 2014 (File No.1-14978)         |  |  
|            |  |                         |  |                                                                       
|            |  | (xii)                   |  | Letter of Re-Appointment of Brian Larcombe                             |  | Form 20-F for the year ended December 31, 2013 filed on March 6, 2014 (File No.1-14978)         |  |  
|            |  |                         |  |                                                                       
|            |  | (xiii)                  |  | Letter of Re-Appointment of Joseph Papa                                |  | Form 20-F for the year ended December 31, 2013 filed on March 6, 2014 (File No.1-14978)         |  |  
|            |  |                         |  |                                                                       
|            |  | (xiv)                   |  | Letter of Appointment of Roberto Quarta                                |  | Form 20-F for the year ended December 31, 2013 filed on March 6, 2014 (File No.1-14978)         |  |  
|            |  |                         |  |                                                                       
|            |  | (xv)                    |  | Letter of Appointment of Vinita Bali                                   |  |                                                                                                 |  | X
|            |  |                         |  |                                                                       
|            |  | (xvi)                   |  | Letter of Appointment of Erik Engstrom                                 |  |                                                                                                 |  | X
|            |  |                         |  |                                                                       
|            |  | (xvii)                  |  | Letter of Re-Appointment of Brian Larcombe                             |  |                                                                                                 |  | X
|            |  |                         |  |                                                                       
|            |  | (xviii)                 |  | Letter of Re-Appointment of The Rt. Hon Baroness Virginia Bottomley DL |  |                                                                                                 |  | X
|            |  |                         |  |                                                                       
|            |  | (xix)                   |  | The Smith & Nephew 2001 UK Approved Share Option Plan                  |  | Form 20-F for the year ended December 31, 2004 filed on March 16, 2005 (File No. 1-14978)       |  |  
|            |  |                         |  |                                                                       
|            |  | (xx)                    |  | The Smith & Nephew 2001 UK Unapproved Share Option Plan                |  | Form 20-F for the year ended December 31, 2004 filed on March 16, 2005 (File No. 1-14978)       |  |  
|            |  |                         |  |                                                                       
|            |  | (xxi)                   |  | The Smith & Nephew 2001 US Share Plan                                  |  | Registration Statement on Form S-8 No. 333-13694 filed on July 9, 2001 (File No. 1-14978)       |  |  
|            |  |                         |  |                                                                       
|            |  | (xxii)                  |  | The Smith & Nephew Sharesave Plan (2002)                               |  | Form 20-F for the year ended December 31, 2002 filed on April 25, 2003 (File No. 1-14978)       |  |  
|            |  |                         |  |                                                                       
|            |  | (xxiii)                 |  | The Smith & Nephew International Sharesave Plan (2002)                 |  | Form 20-F for the year ended December 31, 2004 filed on March 16, 2005 (File No. 1-14978)       |  |  
|            |  |                         |  |                                                                       
|            |  | (xxiv)                  |  | The Smith & Nephew Italian Sharesave Plan (2002)                       |  | Form 20-F for the year ended December 31, 2002 filed on April 25, 2003 (File No. 1-14978)       |  |  
|            |  |                         |  |                                                                       
|            |  | (xxv)                   |  | The Smith & Nephew Dutch Sharesave Plan (2002)                         |  | Form 20-F for the year ended December 31, 2002 filed in April 25, 2003 (File No. 1-14978)       |  |  
|            |  |                         |  |                                                                       
|            |  | (xxvi)                  |  | The Smith & Nephew Belgian Sharesave Plan (2002)                       |  | Form 20-F for the year ended December 31, 2002 filed on April 25, 2003 (File No. 1-14978)       |  |  
|            |  |                         |  |                                                                       
|            |  | (xxvii)                 |  | The Smith & Nephew French Sharesave Plan (2002)                        |  | Form 20-F for the year ended December 31, 2002 filed on April 25, 2003 (File No. 1-14978)       |  |  
|            |  |                         |  |                                                                       
|            |  | (xxviii)                |  | Smith & Nephew Irish Employee Share Option Scheme                      |  | Form 20-F for the year ended December 31, 2003 filed on March 26, 2004 (File No. 1-14978)       |  |  
|            |  |                         |  |                                                                       
|            |  | (xxix)                  |  | Smith & Nephew 2004 Executive Share Option Scheme                      |  | Registration statement on Form S-8 No. 333-122801 filed on February 14, 2005 (File No. 1-14978) |  |  
|            |  |                         |  |                                                                       
|            |  | (xxx)                   |  | Smith & Nephew 2004 Performance Share Plan                             |  | Registration statement on Form S-8 No. 333-122801 filed on February 14, 2005 (File No. 1-14978) |  |  
|            |  |                         |  |                                                                       
|            |  | (xxxi)                  |  | Smith & Nephew 2004 Co-investment Plan                                 |  | Registration statement on Form S-8 No. 333-122801 filed on February 14, 2005 (File No. 1-14978) |  |  



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|            |  |                         |  |                                                                                                      |  |                                                                                                |  |  
|----------- |  | ----------------------- |  | ---------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | -
|Exhibit No. |  | Description of Document |  | Incorporated Herein by Reference To                                                                  |  | FiledHerewith                                                                                 
|            |  |                         |  |                                                                                                     
|4           |  | (c) (xxxii)             |  | Smith & Nephew U.S. Employee Stock Purchase Plan                                                     |  | Registration statement on Form S-8 No. 333-12052 filed on May 30, 2000 (File No. 1-14978)      |  |  
|            |  |                         |  |                                                                                                     
|            |  | (xxxiii)                |  | Smith & Nephew Long Service Award Scheme                                                             |  | Registration Statement on Form S-8 No. 33-39814 filed on April 5, 1991 (File No. 1-14978)      |  |  
|            |  |                         |  |                                                                                                     
|            |  | (xxxiv)                 |  | Smith & Nephew 2004 Performance Share Plan                                                           |  | Registration statement on Form S-8 No. 333-155172 filed on November 7, 2008 (File No. 1-14978) |  |  
|            |  |                         |  |                                                                                                     
|            |  | (xxxv)                  |  | Smith & Nephew 2001 US Share Plan                                                                    |  | Registration statement on Form S-8 No. 333-155173 filed on November 7, 2008 (File No. 1-14978) |  |  
|            |  |                         |  |                                                                                                     
|            |  | (xxxvi)                 |  | Smith & Nephew plc Deferred Bonus Plan                                                               |  | Registration statement on Form S-8 No. 333-158239 filed on March 27, 2009 (File No. 1-14978)   |  |  
|            |  |                         |  |                                                                                                     
|            |  | (xxxvii)                |  | Smith & Nephew plc Global Share Plan 2010                                                            |  | Registration statement on Form S-8 No. 333-168544 filed on August 5, 2010 (File No. 1-14978)   |  |  
|            |  |                         |  |                                                                                                     
|            |  | (xxxviii)               |  | Smith & Nephew ShareSave Plan (2012)                                                                 |  | Form 20-F for the year ended December 31, 2012 filed on February 28, 2013 (File No. 1-14978)   |  |  
|            |  |                         |  |                                                                                                     
|            |  | (xxxix)                 |  | Smith & Nephew International ShareSave Plan (2012)                                                   |  | Form 20-F for the year ended December 31, 2012 filed on February 28, 2013 (File No. 1-14978)   |  |  
|            |  |                         |  |                                                                                                     
|8           |  |                         |  | Principal Subsidiaries                                                                               |  |                                                                                                |  | X
|            |  |                         |  |                                                                                                     
|12          |  | (a)                     |  | Certification of Olivier Bohuon, filed pursuant to Exchange Act Rule 13a -14(a)                      |  |                                                                                                |  | X
|            |  |                         |  |                                                                                                     
|            |  | (b)                     |  | Certification of Julie Brown filed pursuant to Exchange Act Rule 13a -14(a)                          |  |                                                                                                |  | X
|            |  |                         |  |                                                                                                     
|13          |  | (a)                     |  | Certification of Olivier Bohuon and Julie Brown furnished pursuant to Exchange Act Rule 13a   14(b) |  |                                                                                                |  | X
|            |  |                         |  |                                                                                                     
|15.1        |  |                         |  | Consent of Independent Registered Public Accounting Firm                                             |  |                                                                                                |  | X