SMITH & NEPHEW PLC | CIK:0000845982 |

Accounting policies

Intangible assets

Intangible assets acquired separately from a business combination (including purchased patents, know-how, trademarks, licences and distribution rights) are initially measured at cost. The cost of intangible assets acquired in a material business combination (referred to as acquisition intangibles) is the fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. All intangible assets are amortised on a straight-line basis over their estimated useful economic lives. The estimated useful economic life of an intangible asset ranges between three and 20 years depending on its nature. Internally-generated intangible assets are expensed in the income statement as incurred. Purchased computer software and certain costs of information technology projects are capitalised as intangible assets. Software that is integral to computer hardware is capitalised as plant and equipment.

Contingent consideration

Contingent consideration receivable associated with the sale of product rights and other assets outside of a business combination is recognised at the time of purchase to the extent that the future event upon which the contingent consideration is conditional is within the Group’s control, or to the extent that is it considered to be virtually certain that the contingent consideration will become due. If the contingent consideration is outside of the Group’s control or it cannot be considered virtually certain that it will become due, an asset and corresponding entry in profit and loss is recognised only once it becomes virtually certain that the contingent consideration will become due. Contingent consideration payable associated with the purchase of product rights and other assets outside of a business combination is recognised at the time of sale to the extent that the future event upon which the contingent consideration is conditional is under the control of the seller and it is considered probable that the contingent consideration will become due. Contingent consideration associated within a contingent condition that is within the Group’s control is recognised at the point when the contingent condition is met.

Impairment of intangible assets

The carrying values of intangible assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may be impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment loss. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the CGU to which it belongs. An asset’s recoverable amount is the higher of an asset’s or CGU’s fair value less costs to sell and its value-in-use. In assessing value-in-use, its 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 should arise, impairment charges may be required which would adversely impact operating results.

Customer and

Product-

distribution

Technology

related

related

Software

Total

$ million

$ million

$ million

$ million

$ million

Cost

At 1 January 2016

235

1,864

119

289

2,507

Exchange adjustment

(2)

(20)

 2

(8)

(28)

Acquisitions1

68

17

 –

 –

85

Additions

 –

24

 –

48

72

Disposals

 –

(36)

 –

 –

(36)

At 31 December 2016

301

1,849

121

329

2,600

Exchange adjustment

10

38

 1

12

61

Acquisitions1

59

 2

 –

 –

61

Additions

 –

 2

 3

63

68

Disposals

(6)

(43)

(5)

(5)

(59)

Transfers

(6)

 6

 –

 4

 4

At 31 December 2017

358

1,854

120

403

2,735

Amortisation and impairment

At 1 January 2016

21

759

69

156

1,005

Exchange adjustment

 –

(16)

 1

(4)

(19)

Charge for the year – amortisation2

15

131

10

35

191

Charge for the year – impairment

 –

48

 –

 –

48

Disposals

 –

(36)

 –

 –

(36)

At 31 December 2016

36

886

80

187

1,189

Exchange adjustment

 2

21

 1

 6

30

Charge for the year – amortisation

 6

133

15

38

192

Charge for the year – impairment

 –

10

 –

 –

10

Disposals

11

(61)

(3)

(4)

(57)

Transfers

(4)

 4

 –

 –

 –

At 31 December 2017

51

993

93

227

1,364

Net book amounts

At 31 December 2017

307

861

27

176

1,371

At 31 December 2016

265

963

41

142

1,411

1

In 2017 this relates to technology and product-related intangibles acquired with the purchase of Rotation Medical, Inc. In 2016 this relates to technology and product related intangibles acquired with the purchase of Blue Belt Technologies Inc. and BST-CarGel.

2

The amortisation charge between technology and product-related intangibles has been restated by $33m with no impact on the total net book value of intangible assets.

$ million

$ million

Technology

 6

48

Product-related

124

126

Customer and distribution related

10

 4

Total

140

178