Cochlear
Annual Report 2021

Plain-text annual report

Inspired by you for 40 years Cochlear Limited Annual Report 2021 Cochlear has been the global leader in implantable hearing solutions for 40 years, providing a range of implantable hearing solutions and sound processor upgrades that deliver a lifetime of hearing outcomes. Our goal is to deliver value by helping more people to hear, which contributes to building a healthier and more productive society. Contents Overview How we create value FY21 highlights Letter to shareholders Our company About Cochlear Investment proposition Financial history Strategy Our growth opportunity Our strategy Business risks 2 4 6 16 18 19 20 24 36 Performance Operational review Financial review Governance Overview Board of directors Executive team Directors’ report Remuneration report Directors’ report 38 40 46 48 52 56 74 Financial report Shareholder information 79 128 2021 shareholder reports Available at the Investor section of the website www.cochlear.com. Inspired by you for 40 years Inspired by you for 40 years Inspired by you for 40 years Cochlear Limited Corporate Governance Statement 2021 Cochlear Limited Sustainability Report 2021 Cochlear Limited Tax Contribution Report 2021 Inspired by you for 40 years Cochlear Limited Annual Report 2021 Cochlear Limited Annual Report 2021 Our story Graeme Clark wanted to fix ears From a young age, Professor Graeme Clark knew what he wanted to do: “I want to fix ears.” He had watched his father, a pharmacist, struggle with hearing loss, and wanted to save others from the same hardship. Then he spotted a shell Professor Clark had a concept – and the ambition to see it through – but the challenges of the time made it difficult to turn his idea into action. It was an encounter on a beach that was the final step Graeme needed. In a shell and a blade of grass – rigid at its roots but malleable at the tip – Graeme saw the structure that would allow an electrode array to adapt to any curve. It was here that the opportunity to connect hundreds of thousands of people to a life of hearing first came to light. It helped to establish a company to bring that vision to life Professor Clark partnered with Australian entrepreneur Paul Trainor – and his Nucleus Group – and the University of Melbourne to commercialise the cochlear implant. With funding from the Australian government, they developed the Cochlear™ Nucleus® 22 Implant, the first multi-channel cochlear implant, and Cochlear, the company, was formed. Our work is far from over Professor Clark changed the world when he and his team developed a new way of treating hearing loss. The history of our organisation has always been about transforming lives – giving people the opportunity to enjoy a life of hearing. Professor Clark was inspired to ‘fix ears’ – and so too was Dr Anders Tjellström, who performed the world’s first bone conduction hearing implant surgery in Gothenburg in 1977. The work of these pioneering researchers – and their brave first recipients – laid the foundation for our company. This drive has always been a part of our DNA – we gain our inspiration from the people we serve and support. That’s what inspires our journey forward. Celebrating 40 years Cochlear marks an important milestone in 2021, celebrating 40 years since Professor Graeme Clark’s dream to help people hear was realised. From the realisation of one man’s dream four decades ago, hundreds of thousands of people have experienced life’s opportunities through hearing. And they form a global community of millions, through their families, friends, colleagues, teachers and more. In 1982, Graham Carrick from Australia became the first recipient of the commercial Cochlear™ Nucleus® 22 Implant. Today, we continue Professor Clark’s dream, connecting hearing implant recipients everywhere. And they’re not just connected to their own communities — each shares a link with each other and to Professor Clark’s childhood desire to help people hear. 1 Cochlear Limited Annual Report 2021How we create value Our goal is to deliver value by helping more people to hear, which contributes to building a healthier and more productive society. Our mission We have a responsibility to be here to support a lifetime of hearing for the children, and adults, being implanted with our devices, which means we need to deliver sustainable financial growth, benefiting all our stakeholders. We achieve this through market-leading innovation capabilities in conjunction with a global network of experts and collaborators; the strong and trusted relationships we build with our candidates, recipients, professional customers and payers; and our employees who are central to how we deliver our strategy and create value. The passion that drives the organisation and focuses the strategy We help people hear and be heard We empower people to connect with others and live a full life We transform the way people understand and treat hearing loss We innovate and bring to market a range of implantable hearing solutions that deliver a lifetime of hearing outcomes The factors driving industry growth • Hearing loss is prevalent and under-treated • Cochlear implants are a cost-effective solution for all age groups • Product indications are broadening and funding is expanding • Cochlear implants can deliver superior outcomes to hearing aids for indicated patients • Good hearing is essential for healthy ageing • Opportunity to drive deeper penetration of the bone conduction segment Our growth opportunity How we focus our resources Our strategic priorities are focused on improving awareness of and access to implantable hearing solutions for people indicated for our products. Our strategy Retain market leadership Grow the hearing implant market Deliver consistent revenue and earnings growth Key business activities What we do Cochlear has been the global leader in implantable hearing solutions for 40 years, providing a range of implantable hearing solutions and sound processor upgrades that deliver a lifetime of hearing outcomes. 2 Cochlear Limited Annual Report 2021The key inputs to creating value The value we create, driving success now and into the future Customers & communities Our capacity to create value depends on the strong and trusted relationships we build with our candidates, recipients, professional customers and payers. Innovation capability We are pioneers and global leaders in the development, manufacture and commercialisation of implantable hearing solutions, collaborating with a global network of research partners. People & capabilities Our people’s knowledge and expertise are central to how we deliver our strategy. Financial & environmental Prudent management of financial capital and responsible production and consumption underpins the delivery of consistent returns over time. A healthier & more productive society Transforming the way people understand and treat hearing loss by improving awareness and access. Societal benefits: healthy ageing, education and productivity opportunities, standard treatment pathway for children and adults, appropriate funding for a cost-effective intervention Empowered customers Improving the wellbeing of recipients and providing convenience and confidence to our professional customers. Customer benefits: positive customer experience, improving quality of life A lifetime of hearing solutions Innovating to build a market-leading portfolio of products and services that provides a lifetime of hearing solutions for recipients. Innovation delivers: quality and reliability, improving hearing outcomes, connected care solutions, easy to use products, expanding product indications Thriving people An engaged, capable and high-performing workforce that delivers on our strategy and supports the creation of sustained value. People outcomes: employee engagement, inclusion and diversity, health and safety Sustained value Maximising spending to grow the market and maintain our competitive position. Agile, efficient and environmentally responsible business processes to support our growth ambitions. Financial outcomes: consistent financial and environmental performance, disciplined capital management, strong corporate governance, operational improvement, reduced climate impact Value created Resources & relationships 3 Cochlear Limited Annual Report 2021FY21 highlights Record sales revenue was delivered as surgeries recovered following COVID shutdowns. We continued to invest in research and development (R&D) and awareness and access activities with solid progress made across the key value drivers. FY21 value creation A healthier & more productive society Transforming the way people understand and treat hearing loss by improving awareness and access. Empowered customers Improving the wellbeing of recipients and providing convenience and confidence to our professional customers. Demand generation programs continue to strengthen • Growing referrals from direct-to-consumer (DTC) marketing activities and hearing aid channel referral programs. Improving outcomes through skills training • Cochlear™ CoPilot app launched Advocacy & awareness building activities • Publication of the World Health Organization’s (WHO) first ‘World Report on Hearing’ calling on governments and societies to prioritise hearing health, with the report recognising the effectiveness of cochlear implants. • Publication of a global consensus on a minimum standard of care for treating adult hearing loss with a cochlear implant in JAMA Otolaryngology. • Amplification of the consumer advocacy voice with the launch of the Cochlear Implant International Community of Action (CIICA), the first global cochlear implant advocacy network. Publication of global consensus statement Cost effectiveness studies • Studies in Sweden and the Netherlands demonstrating the cost-effectiveness of cochlear implants in adults with the Netherlands study detailing the significant cost, health and societal benefits from cochlear implantation across all groups. Benefits from expanded product indications • Growing demand for our products in Belgium and France following expanded reimbursement. Cochlear implant v hearing aid trial • Entered into a contract to conduct an independent, randomised control trial to compare communication and quality of life outcomes of cochlear implants for adults compared to hearing aids. to help adult recipients improve hearing outcomes through skills training. Growing connectivity and engagement with recipients • Cochlear Family membership increases 19% to >217,000. Greater convenience and confidence for professional customers • Remote Check rollout commences in the US and Europe. • Great feedback on new professional customer tools, the Nucleus® SmartNav System and Custom Sound® Pro Fitting Software. Remote Check rollout in the US and Europe 4 Cochlear Limited Annual Report 2021A lifetime of hearing solutions Innovating to build a market-leading portfolio of products and services that provides a lifetime of hearing solutions for recipients. Thriving people An engaged, capable and high-performing workforce that delivers on our strategy and supports the creation of sustained value. Market-leading technology underpins growing global market share • Eight new products and services achieve FDA approval over the past 18 months. • Accelerated connected care development. Pioneering new implant categories • Cochlear™ Osia® 2 System driving category shift in the US and achieving CE Mark accreditation. Targeting gender equality • 38% women in senior and executive management roles, up from 36%. • 30% women on the board of directors, with the transition in August 2021 to our first female Chair. Growing employee engagement • Increased focus on organisational culture. • Employee engagement up 1% to 80%. Cochlear™ Osia® 2 System driving category shift in the US Employee engagement up 1% to 80% Providing the latest technology to our existing customers • Cochlear™ Nucleus® Kanso® 2 Sound Processor driving demand for sound processor upgrades. • Cochlear™ Nucleus® 7 Sound Processor for Nucleus® 22 implant recipients providing the latest technology to our first commercial implant recipients. Broadening incentives to benefit more employees • New short-term incentive (STI) plan and employee equity plan to broaden STIs and employee ownership of Cochlear. * Constant currency. ** Excluding one-off and non-recurring items. Sustained value Maximising spending to grow the market and maintain our competitive position. Agile, efficient and environmentally responsible business processes to support our growth ambitions. Investing to grow • Delivered record sales revenue of $1,493m, up 19% in CC. • R&D investment of $195m on target @ ~12% of sales revenue. • Increased investment in growth activities with COVID-related savings in travel and conferences. Record sales revenue up 19% to $1,493m in CC* Operational improvement • Commenced a major process transformation and IT systems upgrade to improve agility and provide an even better customer experience. Strong financial position • Underlying net profit** of $237m, up 54% on FY20 and within the guidance range. • Strong cash flow generation drives $108m increase in net cash position. • Dividend re-introduced at H1 with the full year payout in line with the 70% target payout. Emission reduction targets • Commitment to reduce business travel related carbon emissions by at least 50% by FY25, contributing to a 25% reduction in total emissions. 5 Cochlear Limited Annual Report 2021Letter to shareholders 2021 marks Cochlear’s 40th anniversary and four decades serving as the global leader in implantable hearing solutions. In such an important year, we are pleased to report growing momentum in our operations with surgery rates and profitability improving following COVID shutdowns. Our clear growth opportunity, the progress made on key strategic priorities and strong balance sheet mean we are well placed to create value for our stakeholders now, and over the long term. Operational and financial review We experienced improving momentum across the year as surgeries recovered following COVID shutdowns. While hospitals and clinics have adapted to operating during the pandemic, surgery rates continue to be variable across many countries as infection waves continue. Record sales revenue of $1,493 million, up 10% (19% in constant currency (CC)*), was driven by a combination of market share gains, market growth and rescheduled surgeries. The US, Japan, Korea and China delivered strong growth in sales revenue on last year, as well as on FY19, the last financial year unaffected by COVID. Western Europe saw improving momentum, with many emerging markets experiencing a slower recovery. Underlying net profit** of $237 million increased 54% on last year’s result, with an underlying net profit margin of 16%, a big improvement on FY20 and a little below our 18% longer-term target. We increased our investment in market growth initiatives, benefitting from lower travel-related expenses as a result of COVID restrictions. Statutory net profit of $327 million benefited from $90 million in one-off gains. Sales revenue ↑ 19% in CC* Underlying net profit** ↑ 54% 6 * Constant currency (CC) removes the impact of foreign exchange (FX) rate movements to facilitate comparability of operational performance.** Excluding one-off and non-recurring items. Cochlear Limited Annual Report 2021Creating long-term value Our goal is to deliver value by helping more people to hear, which contributes to building a healthier and more productive society. To outline how we aim to achieve this, we have introduced a value creation model that demonstrates how our business creates value over the long term. For us, this means describing the outcomes of our activities in broader terms than just the progress against our strategic priorities and the financial returns we generate. Genuine value creation describes the impact we have on all our key stakeholders – our customers, our people, our shareholders as well as society more broadly. The following pages describe how the key inputs into our business – our customers and communities, our innovation capability, our people and financial capital – create value. For us, success will be defined by building a healthier and more productive society, having empowered customers, providing a lifetime of hearing solutions for our recipients and having thriving employees. Doing these things well should enable us to achieve sustainable financial returns over time. A healthier & more productive society We are focused on building a healthier and more productive society. We do this by transforming the way people understand and treat hearing loss through awareness and access activities. Over the past few years, we have been expanding our programs for driving growth of the adults and seniors segment through direct-to-consumer marketing activities and building referrals from hearing aid and ENT (ear, nose and throat) clinics. An important long-term goal for us is to contribute to the development of a consistent treatment pathway to a cochlear implant for adults with severe or higher hearing loss. There were a number of important developments made this year with the World Health Organization (WHO) calling on governments and societies to prioritise hearing health, the publication of a global consensus on a minimum standard of care for treating adult hearing loss with a cochlear implant, the release of new adult cost-effectiveness studies and funding finalised to support an independent cochlear implant versus hearing aid head-to-head trial. WHO calls on governments and societies to prioritise hearing health In March, we joined people with hearing loss, hearing care experts and advocates in welcoming the WHO’s landmark ‘World Report on Hearing. Hearing Care for All. Screen. Rehabilitate. Communicate’, which calls on governments and societies to prioritise hearing health. The report affirms the effectiveness and cost effectiveness of cochlear implants and highlights the benefits for both children and adults. It calls upon member states of the WHO to integrate ear and hearing care into primary health care programs. Launched on World Hearing Day (March 3), the WHO’s first ever World Report on Hearing contains a roadmap for governments to adopt hearing screening, treatment and rehabilitation into primary health care systems to help curtail a worldwide rise in hearing loss. It comes as new WHO figures reveal that globally, 1.5 billion people live with some degree of hearing loss. This includes around 60 million people who live with severe or higher hearing loss.1 In response to the rapidly rising prevalence of hearing loss, the report sets out hearing care actions for all societies and age groups, including babies, children and adults. It follows a 2017 World Health Assembly resolution that reinforced hearing loss as a significant public health issue, requiring all governments to make it a higher priority and develop national action plans. World Report on Hearing front cover. Geneva: World Health Organization; 2021. Licence: CCBY-NC-SA 3.0 IGO. The number of people living with disabling hearing loss is continuing to rise year-on-year. This landmark report shows how hearing care leaders and policy makers can step up now to tackle this significant global public health challenge. This report should place hearing loss on the agenda of policy makers so that governments and communities can improve hearing care over the coming years through action. 7 Cochlear Limited Annual Report 2021Letter to shareholders It is significant that the WHO have affirmed that age should not be a barrier to cochlear implant treatment, highlighting the importance for policymakers to take a ‘life-course’ approach to ear and hearing care. The WHO points out that age-related hearing loss poses the greatest societal and economic burden from hearing loss across the life course and is expected to increase with the current demographic shifts. We are an active member of the WHO’s World Hearing Forum, a global network promoting ear and hearing care worldwide. Global consensus statement publication In August 2020 we saw the publication of a global consensus2 on a minimum standard of care for treating adult hearing loss with a cochlear implant in the international peer-reviewed medical journal, JAMA Otolaryngology. The publication is an important step forward, providing the foundation for the development of formal clinical practice guidelines in the coming years. It is anticipated that these guidelines for hearing health professionals will be important in building a clear and consistent referral path for adults from hearing aids to cochlear implants. Data suggests that fewer than one in 20 adults who could benefit from a cochlear implant have one, which could mean missing out on social connections and participating in everyday life. While cochlear implant technology has improved remarkably over the past few decades, awareness continues to be low and access needs to improve. The consensus paper will help professionals know when the time is right to refer for a cochlear implant assessment. We look forward to collaborating with experts across the world to help improve hearing for more adults living with hearing loss. Growing recognition of cost effectiveness of cochlear implants for adults There are a growing number of cost-effectiveness studies highlighting the economic and societal benefits of adult implantation. These studies play an important role in educating payers and providers of the economic benefits to society achievable in addition to the quality of life benefits to recipients. In April, a study3 demonstrated the cost-effectiveness of cochlear implants in Sweden. The study, a collaboration between Macquarie University Centre for Health Economics and Cochlear, demonstrates the cost-effectiveness of unilateral cochlear implantation in adults when compared to hearing aids, and highlights the inequality of access and low uptake of cochlear implants when compared to other common interventions. In May, a study4 in the Netherlands detailed the significant cost, health and societal benefits from cochlear implantation across all groups. In particular, it found that for seniors, people over the age of 70, cochlear implantation was highly cost effective with net health benefits to society of EUR 76,000. Benefits from expanded product indications Market access activities have been focused on expanding indications and reimbursement for our products, contributing to growth in many markets. Belgium experienced a lift in demand following the expansion of reimbursement criteria for cochlear implants to include adult candidates with a severe hearing loss while expanded reimbursement for the Baha brand of bone conduction sound processors boosted acoustics upgrade revenue in France. Cochlear implant versus hearing aid head-to-head trial A challenge for professionals and consumers is understanding the potential improvement in hearing outcomes that can be attained from a cochlear implant. There is a growing body of evidence of the superior outcomes of cochlear implants over hearing aids for many people with a severe or higher hearing loss (>70dB). In 2018, a Cochlear study of recipient experiences5 found that the number of participants reporting satisfaction with their hearing performance increased significantly after receiving a cochlear implant, rising from 9% when using hearing aids only to 95% after receiving a cochlear implant. To build on the evidence, we have provided funding to the University of Nottingham for an independent, randomised control trial to compare communication and quality of life outcomes of cochlear implants for adults compared to hearing aids that will commence shortly in the UK. The trial aims to provide gold standard clinical evidence of the relative efficacy of cochlear implants for this patient group with results expected in the next several years. These studies are important in helping to educate hearing aid professionals and cochlear implant candidates on the benefits of cochlear implants when compared to hearing aids. 8 Cochlear Limited Annual Report 2021Empowered customers We aim to improve the wellbeing of our recipients by providing them with the latest sound processor technology as well as easy-to-use after-care to support a lifetime of hearing outcomes. And we invest in education and clinical support tools to ensure our professional customers have convenience and confidence in caring for implant candidates and recipients. Improving adult cochlear implant outcomes through skills training Many adults with cochlear implants don’t actively seek appropriate hearing rehabilitation because of a common belief that the hearing technology alone is enough.6 While a cochlear implant provides access to sound, research shows that rehabilitation that involves knowledge building and hearing skills training will help recipients improve listening and communication in real-world everyday situations.7,8 In May, we launched Cochlear™ CoPilot, a new mobile app designed to improve hearing techniques. The iPhone app provides cochlear implant recipients with information, personalised support and practical tips for hearing, listening and communication. It features articles by clinical experts and cochlear implant recipients with tips on a range of topics, from listening in noise and managing listening fatigue to reconnecting to music and communicating in the workplace. Developed using the latest clinical evidence and proven rehabilitation practices, Cochlear CoPilot also features interactive skill builders designed to help improve listening and communication skills. Increasing connectivity and engagement with recipients We invest to provide our recipients with a world-class customer experience with increased connectivity and engagement. Cochlear Family, the recipient membership program, provides us with the opportunity to connect directly with recipients to provide service and support. Membership continues to grow rapidly, increasing by 19% over the last 12 months, to now exceed 217,000 members with a 60% join rate for new Cochlear™ Nucleus® implant recipients. An acceleration in recruitment in recent years has been driven by a combination of direct outreach programs and improvements in customer onboarding. Over the last 12 months we have provided special edition newsletters and webinar virtual events about COVID safety, with special considerations for those living with a hearing device. Cochlear™ CoPilot Ethan, Cochlear Family member 9 Cochlear Limited Annual Report 2021Letter to shareholders Providing greater convenience and confidence to professional customers Over the past year we have strengthened our product and service offering to our professional customers through the rollout of a number of new products all progressing to plan, with positive engagement and feedback from customers. Remote Check is the first telehealth patient assessment tool for cochlear implant recipients. It is designed to be a convenient, at-home testing tool that allows people with a Cochlear™ Nucleus® 7 or Kanso® 2 Sound Processor to complete a series of hearing checks from their compatible iOS device using the Nucleus Smart App. Results are then sent remotely to the recipient’s clinic for review by their clinician. Remote Check can provide significant cost savings by offering a convenient, time-saving option for care that does not require travel to a clinic. It enables clinicians to provide a more convenient care option, redirect in-clinic time to manage patients with the greatest need and free up time to manage the anticipated growth in the number of people needing cochlear implants. Remote care is a core pillar of our long-term innovation strategy, with access to care crucial to people who rely on a cochlear implant. The Nucleus® SmartNav System is a new tool to support surgeons in optimising electrode placement during cochlear implant surgery. It delivers wireless, actionable intraoperative insights to support electrode insertion with real-time navigation, providing surgeons with added assurance of a successful surgical outcome for their patients. Custom Sound® Pro Fitting Software supports clinicians in fitting our cochlear implant sound processors. A lifetime of hearing solutions We innovate to build a market-leading portfolio of products and services that supports a lifetime of hearing outcomes for recipients. We have achieved this through a multi- decade philosophy of investing to grow and an unwavering commitment to innovation. In FY21 we invested $195 million in R&D, representing 13% of sales revenue, with eight new products and services achieving FDA approval over the past 18 months across all parts of the portfolio. Pioneering new implant categories Our new implantable product offering, the Cochlear™ Osia® 2 System, represents a significant improvement in performance, aesthetics and quality of life for bone conduction patients and has received an enthusiastic response from surgeons and patients in the US since launch in February 2020. It has quickly been established as the primary implant for clinics that have started implanting it, representing around 70% of acoustic implants in those clinics. We are excited about the potential for the Osia 2 System with the opportunity for both increased penetration of bone conduction implants as well as geographic expansion in the coming years. We received regulatory approval in Europe during the second half with the rollout commencing in a few Western European countries by June. Providing the latest technology to our existing customers The Cochlear™ Nucleus® Kanso® 2 Sound Processor commenced its rollout in the US and Europe during the first half, bringing the features of the Cochlear™ Nucleus® 7 Sound Processor into an off-the-ear form factor. The rollout is progressing well, with the Kanso 2 Sound Processor contributing to growth since its launch. Cochlear™ Remote Check Cochlear™ Osia® 2 System Cochlear™ Nucleus® Kanso® 2 Sound Processor 10 Cochlear Limited Annual Report 2021We received FDA clearance and CE Mark certification for the Cochlear™ Baha® 6 Max Sound Processor with the launch in the US and Europe during the second half. The launch is progressing well with strong demand experienced for the new sound processor. The Baha 6 Max Sound Processor provides a fitting range of up to 55 dB sensorineural hearing loss in the same small size as current 45 dB devices, with longer battery life and direct streaming from both Android and Apple devices. Thriving people Our people are our most valuable asset and are an engaged, capable and high- performing team that delivers on our strategy and supports the creation of sustained value. We have a diverse workforce with over 4,000 people across the globe. Their knowledge, expertise, passion and focus on delivering excellence is key to achieving future success. Shaping our culture We have an inclusive organisation and a healthy corporate culture that is strongly connected to our mission and puts the customer at the centre of everything we do. As our workforce continues to expand, we work hard to intentionally shape the culture that will enable us to grow and deliver for our customers in the future. Work continued this year to build on the organisational culture we want to support our business strategy and long-term growth goals. Our executive team focused on ‘leading by example’ in recognition of the critical role they play, and the example they each set for the rest of the organisation. We introduced culture champions, a group of 100 people focused on actively shaping our culture through communications, training and education. We implemented inclusive leadership and unconscious bias training, support in understanding and living our HEAR behaviours and better aligned our remuneration and reward structures to our cultural objectives. We are pleased to report that overall employee engagement continues to remain strong at 80%, growing 1% on last year, with 93% of employees reporting that they feel proud to tell people they work at Cochlear. Broadening incentives to benefit more employees Our total reward framework is an important part of building a strong and cohesive culture. From FY22, we are introducing changes to our reward offering to achieve greater alignment and consistency of how we reward employees across the business. The key highlights include aligning employees to the Global Short Term Incentive (STI) plan, ensuring more of our employees have some form of performance-based reward, and introducing a new global employee share plan. These changes support our cultural priorities, improve our market competitiveness to ensure we are able to attract and retain talent across all the markets in which we operate, and provide an opportunity for our employees to own shares in the company and be part of our future success. Focus on gender equality Achieving gender equality is one important element of our ‘Diversity and Inclusion’ strategy. We strive for a gender balance of 40:40:20, which means that 40-60% of either gender is represented (40% women, 40% men, 20% open). We have a target to achieve at least 40% female representation amongst our senior leaders by June 2023, with 38% today. And at Board level, we are targeting at least 30% female representation, a target which we achieved during the year with 30% today. Cochlear™ Baha® 6 Max Sound Processor 80% Employee engagement 11 Cochlear Limited Annual Report 2021Letter to shareholders Achievement of this target is being supported by focused activities in the areas of talent and succession planning and talent acquisition, with the aim of increasing our pipeline of female talent. A range of additional activities and policies recognised as key enablers to gender equality continue to be implemented to support improved access to work for all employees. These include a focus on continuing to embed flexible working for employees globally, further deployment of our inclusive leadership programs with a focus on unconscious bias education for all leaders, and continuing work to ensure gender pay equity across our global workforce. Support and flexibility We are committed to ensuring the safety and wellbeing of our people. With many of our employees continuing to work remotely due to COVID, we have provided additional support with a focus on staying connected to colleagues. We have increased communications and provided additional education and resources to support both physical and mental health. As employees return to the workplace, we are seeing a greater uptake of flexible working arrangements, which is working well, supported by the rapid evolution of our IT infrastructure to enable efficient and inclusive remote working capabilities. We continue to educate and support our employees working in a hybrid work environment to ensure we maintain our culture of inclusiveness. Appointment of Alison Deans as Cochlear Chair Alison Deans has been appointed as Chair of Cochlear from 21 August 2021 following the retirement of Rick Holliday-Smith. Alison is a highly respected company director with extensive business experience across a broad range of industries and organisations. She has been a non-executive director on Cochlear’s board since January 2015. Alison’s deep understanding of the company, breadth of experience as a non-executive director and extensive experience leading technology-enabled businesses means she will be an excellent and well-qualified Chair. Commenting on her appointment, Alison said, “Rick has instilled a relentless focus on our Mission and the importance of investment to drive long-term sustainable growth. Under his stewardship, the corporate culture has thrived and ongoing investment in innovation and market development has strengthened our market position and growth outlook. “Our goal is to ensure that we can support a lifetime of hearing to the children, and adults, being implanted with our devices today while also delivering leading hearing solutions for our future recipients. It is an honour to be appointed Chair of such a remarkable company, and I look forward to working with the Board and the management team to continue to build on these strengths.” Alison Deans, Chair Rick Holliday-Smith has been a member of the Board since 2005 and has served as Chairman since mid-2010. Commenting on his decision to retire from the Board, Mr Holliday-Smith said, “I have greatly enjoyed my time on the Board and especially as Chairman for the past 11 years. It has been a privilege to work with an exceptional Board and management team. “Cochlear is an incredible company that has stayed true to its Mission to help more people hear, marking a major milestone this year in celebrating its 40th birthday. We have provided more than 650,000 implant devices to people globally and continue to be the global market leader in implantable hearing solutions.” 12 Cochlear Limited Annual Report 2021Sustained value To deliver consistent revenue and earnings growth over time, we balance maximising spending to grow the market with investment to maintain our competitive position while ensuring we have agile, efficient and environmentally responsible business processes to support our growth ambitions. Underlying net profit increases 54% to $237 million For FY21, underlying net profit increased 54% to $237 million, within the guidance range of $225-245 million. The underlying net profit margin of 16% was well above last year and a little below our longer-term target of 18%. There were a number of factors contributing to the underlying net profit result. The recovery in trading was solid with the business delivering record sales revenue of $1,493 million, an increase of 19% in CC, driven by a combination of market share gains, market growth and rescheduled surgeries from FY20. Sales revenue was 6% ahead of FY19 in CC, the last financial year unaffected by COVID. Gross margin declined from 75% to 73% with around half of the decline currency related, the result of the strengthening of the Australian dollar. Operating expenses were maintained in line with last year (up 5% in CC). Continued investment was made in R&D, market growth activities, standard of care and market access initiatives. The increase in growth investment and re-establishment of the short-term incentive provision was partially offset by COVID-related savings including travel and conference expenses. Statutory net profit of $327m benefits from $90m in one- off gains We recorded $59 million in patent litigation-related tax and other benefits after- tax primarily relating to the receipt of a private ruling from the Australian Tax Office in December 2020 which clarified the deductibility of elements of the patent litigation expense treated as non-deductible as of 30 June 2020. Over the past few years, the innovation fund has made several small investments in companies with novel technologies that may, over the longer term, enhance or leverage our intellectual property. The innovation fund includes investments in Saluda, Nyxoah, EpiMinder and Seer Medical, with $31 million in non-cash net gains after-tax realised from investments including Nyxoah and EpiMinder. Nyxoah listed in September with a $24 million after-tax gain realised based on the value of our shareholding in Nyxoah at listing. We invested a further €5 million (A$8 million) in the initial public offering and a further US$23 million (A$30 million) in the July 2021 capital raising. The $13 million after-tax gain in EpiMinder represents the increase in value of our shareholding following a financing round which saw Cochlear invest a further $3 million. Strong financial position The balance sheet remains strong with operating cash flows sufficient to fund investing activities and capital expenditure whilst delivering dividends to shareholders. 13 * Constant currency. ** Excluding one-off and non-recurring items.Cochlear Limited Annual Report 2021Letter to shareholders Net cash increased $108 million to $565 million, driven by strong free cash flow generation, with operating cash flows increasing by $429 million to $271 million and free cash flow of $180 million. The dividend was re-introduced at the half as a result of improved trading conditions and cash flow generation. A final dividend of $1.40 per share has been determined, with full year dividends declared of $2.55, an increase of 59% on last year and representing a payout of 71% of underlying net profit. The dividend is unfranked with the franking balance depleted as a result of the losses incurred by the business in FY20. Taking action on carbon emissions We have a relatively low level of carbon emissions as a business, with around 50% of total FY19 reported carbon emissions generated from Scope 3 – or indirect – emissions. For Cochlear, business travel is our single biggest source of carbon emissions. COVID has driven changes in the way our customers and our people operate. The rapid adoption of technology to enable effective remote collaboration has been an important contributor to continuing to work with customers and an enabler to continued investment in R&D and market growth activities. Many of the new ways of doing business remotely, both internally and with our customers, have been incredibly successful and will continue to be a part of how we do business going forward and this will enable us to reduce the amount of business travel. As a result, we are committing to a 50% absolute reduction in business flight- related carbon emissions by FY25, equivalent to around 25% in overall reported carbon emissions compared to our FY19 baseline. We will achieve this through a combination of reductions in business flights, with a targeted 20% reduction in business flights per full-time employee, and investment in carbon offsets. This initiative forms part of the development of a more comprehensive approach to understanding, reporting and reducing our carbon emissions and environmental impact. Decision to return FY21 COVID government assistance We note our decision to repay $25 million in pre-tax COVID government assistance received in FY21 as a result of improved trading conditions. Most of the assistance, $23 million, was received from the Australian Federal Government’s JobKeeper program, with JobKeeper repaid in February. We met the eligibility requirements to participate in these programs, which were designed to support jobs during the first wave of COVID infections, providing an important safety net at a time of great disruption and uncertainty. Trading conditions since July have improved, and while there is still uncertainty ahead, we consider returning the COVID government assistance payments the appropriate thing to do. Australian government announces patent box tax concession We welcome the Australian Government’s announcement of a tax incentive to encourage companies to commercialise home grown medical and health ideas in Australia. Subject to the final design and successful passage of legislation through parliament, the patent box tax regime for medical technology and biotechnology should encourage the development of innovation in Australia by taxing corporate income derived from patents at a concessional effective corporate tax rate of 17%, with the concession applying from income years starting on or after 1 July 2022. A globally competitive Australian patent box regime will support local manufacturing of medical products and help reverse the trend of Australian research being commercialised offshore. It should result in more highly skilled, well-paid jobs and more investment in the commercialisation of Australia’s world-leading medical research. It also enables Australia to compete with other advanced economies for investment in critical medical product research and manufacturing capability. We are actively involved in current consultations on the detailed design of the patent box to ensure it delivers on the stated policy objectives of government – encouraging companies to base their medical and biotechnology R&D operations, and commercialise innovation, in Australia; and to retain ownership of eligible patented inventions in Australia. 14 Cochlear Limited Annual Report 2021To achieve these objectives the Australian patent box must: • be competitive with similar incentives offered in peer nations; • strike an appropriate balance between administrative integrity and being workable and practical for those using the regime; and • reflect the nature of the sector that it is seeking to target and attract. Subject to the final design of the patent box, we would expect to benefit from a reduced tax rate in the medium term. FY22 outlook As we look to the future, we remain confident of the opportunity to grow our markets. There remains a significant, unmet and addressable clinical need for cochlear and acoustic implants that is expected to continue to underpin the long-term sustainable growth of the business. Our clear growth opportunity and strategy, combined with a strong balance sheet, mean we are well placed to create value for our stakeholders now, and over the long term. For FY22, we expect to deliver net profit of $265-285 million, a 12-20% increase on underlying net profit for FY21, based on a 74 cent AUD/USD. Sales revenue is expected to benefit from market growth, with a continuing recovery in surgery rates across many countries more affected by COVID. We will continue our investment in market growth activities, with the net profit margin expected to remain a little below our longer-term target of 18%. Developed markets are expected to continue to grow in FY22. While hospitals and clinics have adapted to operating during the pandemic, surgery rates continue to be variable across many countries. The US has adapted quickly to COVID with the market growing well. Western Europe and parts of Asia Pacific have not recovered to the same extent due to impact from more recent COVID disruptions. We expect the rate of recovery to be protracted in a few markets as a result of waiting lists affecting all elective surgery procedures, potentially restricting the pace of growth. The rate of recovery in emerging markets has varied and we expect continued improvement but at a slower rate than developed markets, with some countries still well down on FY19 levels and not likely to recover fully in FY22. Guidance factors in some continuing near-term COVID impact. A more material disruption from COVID that significantly impacts sales or the supply chain remains a risk factor that does not form part of guidance. We are confident of the resilience of our hearing implant business given the improvements in surgery rates experienced across FY21. While we did see a moderation in demand at times of high hospitalisation rates for COVID patients, the deployment of COVID vaccines and the recovery of surgeries that followed COVID surges gives us some confidence that any further surgery deferrals could also recover quickly. Our investment priorities continue to be focused on market growth activities and strengthening our competitive position. Operating expenses are expected to increase with the acceleration of a number of growth projects and some uplift in travel and conference expenses following constrained spending as a result of COVID. The commissioning of our China manufacturing facility will have a small negative gross margin impact over the coming years as we commission and then scale up production. Capital expenditure is expected to be around $70-90 million for FY22 and includes around $20 million related to a major process transformation and IT systems upgrade, a program that is expected to be a $100-120 million investment over the next four to five years. It is not yet clear how much of this investment will be capitalised versus expensed as a result of a change in the accounting interpretation for cloud computing investment. We have not factored any expensing resulting from this accounting change into the net profit guidance. We expect to finalise the quantum of the impact by December 2021 and adopt the change in the HY22 result. The effective tax rate is expected to decline to around 25% as a result of the introduction of changes to the R&D tax concession by the Australian government, with legislated changes to take effect from 1 July 2021. The changes include an increase in the $100 million R&D expenditure threshold and an increase in the deduction rate. The Board is committed to maintaining the dividend policy which targets a 70% payout of underlying net profit. Rick Holliday-Smith Chairman Dig Howitt CEO & President 15 Cochlear Limited Annual Report 2021 Our company About Cochlear For 40 years, Cochlear has been the global leader in implantable hearing solutions. Cochlear commenced operations in 1981 as part of the Nucleus group and in 1995 listed on the Australian Securities Exchange. Today, it is a Top 50 listed Australian company with a market capitalisation of over $15 billion. We aim to improve awareness of and access to implantable hearing solutions for people indicated for our products. We have provided more than 650,000 implant devices to people who benefit from one – or two – of our implantable solutions. Whether these hearing solutions were implanted today or many years ago, we continue to bring innovative new products to market as well as sound processor upgrades for prior generations of recipients. We invest more than $190 million each year in R&D and participate in over 100 collaborative research programs worldwide. Our global headquarters are on the campus of Macquarie University in Sydney, with regional offices in Asia Pacific, Europe and the Americas. We have a deep geographical reach, selling in over 180 countries, with a direct presence in over 30 countries and a global workforce of over 4,000 employees. For 40 years, Cochlear has been the global leader in implantable hearing solutions We have a deep geographical reach, selling in over 180 countries Our mission We help people hear and be heard. We empower people to connect with others and live a full life. We transform the way people understand and treat hearing loss. We innovate and bring to market a range of implantable hearing solutions that deliver a lifetime of hearing outcomes. 16 Cochlear Limited Annual Report 2021Cochlear at a glance Business segments Cochlear implant systems 61% Cochlear implants* 29% Services* Sound processor upgrades, accessories & other 10% Acoustics* Bone conduction systems and sound processor upgrades Cochlear™ Nucleus® Profile™ Plus with Slim Modiolar Electrode (CI632) Cochlear™ Nucleus® 7 Sound Processor Cochlear™ Nucleus® Kanso® 2 Sound Processor Cochlear™ Osia® 2 System Cochlear™ Baha® 6 Max Sound Processor Global sales ~$1.5b in sales revenue ~80% Developed markets* ~20% Emerging markets* 48% Americas* 35% 17% EMEA* Asia Pacific* Market leader $190m+ in annual R&D >60% global market share** 650,000+ implants sold*** Growing scale 4,000+ employees 30+ countries with direct operations 100+ collaborative research programs 6 key manufacturing sites 17 * Based on sales revenue. ** Based on Cochlear estimates for cochlear implants. *** Includes cochlear and acoustic implants.Cochlear Limited Annual Report 2021Our company Investment proposition Cochlear provides shareholders with an opportunity to invest in the global leader in implantable hearing solutions, in an industry that has the potential to grow over the long term. Global leader in implantable hearing solutions for 40 years with over 60% global market share and more than 650,000 devices sold Long-term market growth opportunity with a significant, unmet and addressable clinical need for implantable hearing solutions and less than 5% market penetration Unrivalled commitment to product innovation, bringing innovative new products to market as well as sound processor upgrades for prior generations of our recipient base Growing annuity income stream from servicing of the expanding recipient base Strong free cash flow generation provides funding for market growth 18 * Cash flow generation and dividends disrupted in FY20 by the impact of COVID and cost of an adverse litigation outcome.Cochlear Limited Annual Report 2021Financial history Cochlear has a long track record of delivering growing sales revenue, profits* and dividends, disrupted in FY20 by the impact of COVID. 19 * Excluding one-off and non-recurring items. ** Constant currency.Cochlear Limited Annual Report 2021Our growth opportunity 1.3.5 ESTIMATES OF HEARING LOSS9 Growing awareness of the cost-effectiveness and quality of life benefits of our products has the potential to underpin long-term industry growth. Hearing loss currently affects more than 1.5 billion people or 20% of the global population; the majority of these (1.16 billion) have mild hearing loss. However, a substantial portion, or 430 million10 people (i.e. 5.5% of the global population) experience moderate or higher levels of hearing loss which, if unaddressed, will most likely impact their daily activities and quality of life. More detailed information about the severity and distribution of hearing loss is presented in the following data. Opportunity Description HEARING LOSS ACCORDING TO SEVERITY How we are responding Hearing loss is prevalent and under-treated The World Health Organization estimates that there are over 60 million people worldwide who experience severe or higher hearing loss.1 A challenge for hearing care providers is that less than 5% of the people that could benefit from an implantable hearing solution have received one.9 Cochlear implants are a cost-effective solution for all age groups Cochlear implants provide life changing outcomes for recipients, empowering them to connect with others and live a full life. Besides the 1.16 billion people worldwide with mild hearing loss, about 400 million live with hearing loss that ranges from moderate to severe; nearly 30 million have profound or complete hearing loss in both ears (Figure 1.5). Figure 1.5 Number of people and percentage prevalence according to grades of hearing loss >60m people with severe or higher hearing loss Figure 1.5 Number of people and percentage prevalence according to grades of hearing loss 1153 million 266 million 103 million 30.7 million 17.2 million 12.6 million 14.9% 3.4% 1.3% 0.4% 0.2% 0.2% by segment. Mild Moderate Moderately severe Severe Profound Complete Globally 1.5 billion people live with hearing loss Source: World Health Organization; 2021 9 GBD 2019 Hearing Loss Collaborators. Hearing loss prevalence and years lived with disability, 1990–2019: findings from the Global Burden of Disease Study 2019. The Lancet. (2021). doi: 10.1016/S0140-6736(21)00516-X. 10 Refers to number of people with hearing threshold higher than 35 dB in the better hearing ear. The estimated lifetime societal costs for a pre-lingual deaf child in developed markets exceeds US$1.5 million.10-12 40 WORLD REPORT ON HEARING They also provide a cost- effective solution for all age groups, delivering significant returns on the investment made by the healthcare system. The effective use of implants is cost-effective in adults and seniors with an estimated return on investment of 10:1. Cochlear implants can deliver superior outcomes to hearing aids for indicated patients Cochlear implants can provide a significant improvement in hearing outcomes and quality of life when compared to hearing aids for many people with a severe or higher hearing loss (>70dB). We are the market leader in cochlear implants but a small player in the severe or higher hearing loss segment where hearing aids dominate >60% global market share ~4% global market share Cochlear implant market share Hearing devices treating the severe or higher hearing loss segment 20 We are focused on transforming the way people understand and treat hearing loss through awareness and access activities aimed at improving the penetration of implantable hearing solutions. Three key market segments have been prioritised comprising adults and seniors in developed markets, children in developed markets and children in emerging markets, with strategies to improve awareness and access that vary We collaborate closely with governments, academic and research institutions, hearing care providers, consumer and professional representative NGO’s and significant health setting bodies such as the WHO to build awareness of the importance of properly treating hearing loss. And our investment in R&D continues to focus on improving outcomes for recipients which broadens the population of candidates that can benefit from our hearing solutions. The cost-effectiveness of health interventions is becoming a more important consideration in the allocation of healthcare spending with payers increasingly demanding cost-effectiveness data to support funding for health interventions. We believe we are well positioned with many studies demonstrating the cost-effectiveness of cochlear implants for both children and adults with severe or higher hearing loss. For a pre-lingual deaf child, the return to society is more than 13 times every dollar spent on a cochlear implant solution based on the cost savings in education and improved productivity as an adult.10-12 Dementia and other cognitive decline diseases are some of the costliest conditions to treat in the world13, at an estimated US$1 trillion in 2018 and estimated to double by 2030.14 Unfortunately, individuals with severe hearing loss are almost five times more likely to develop dementia than people without hearing loss. The effective use of hearing aids and implants is cost-effective and has been proven in adults and seniors with an estimated return on investment of 10:1.15a A challenge for professionals and consumers is understanding the potential improvement in hearing outcomes that can be attained from a cochlear implant. There is a growing body of evidence of the superior outcomes of cochlear implants over hearing aids for many people with a severe or higher hearing loss (>70dB).16 In 2018, a Cochlear study of recipient experiences5 found that the number of participants reporting satisfaction with their hearing performance increased significantly after receiving a cochlear implant, rising from 9% when using hearing aids only to 95% after receiving a cochlear implant. In 2021, an independent, randomised control trial to compare communication and quality of life outcomes of cochlear implants for adults compared to hearing aids will commence in the UK. Cochlear has provided funding to the University of Nottingham for the trial which will aim to provide gold standard clinical evidence of the relative efficacy of cochlear implants for this patient group with results expected in the next several years. These studies are important in helping to educate hearing aid professionals and cochlear implant candidates on the benefits of cochlear implants when compared to hearing aids. Cochlear Limited Annual Report 2021Our growth opportunity Growing awareness of the cost-effectiveness and quality of life benefits of our products has the potential to underpin long-term industry growth. Opportunity Description How we are responding Hearing loss is prevalent and under-treated The World Health Organization estimates that there are over 60 million people worldwide who experience severe or higher hearing loss.1 A challenge for hearing care providers is that less than 5% of the people that could benefit from an implantable hearing solution have received one.9 Cochlear implants are a cost-effective solution for all age groups Cochlear implants provide life changing outcomes for recipients, empowering them to connect with others and live a full life. They also provide a cost- effective solution for all age groups, delivering significant returns on the investment made by the healthcare system. Cochlear implants can deliver superior outcomes to hearing aids for indicated patients Cochlear implants can provide a significant improvement in hearing outcomes and quality of life when compared to hearing aids for many people with a severe or higher hearing loss (>70dB). We are focused on transforming the way people understand and treat hearing loss through awareness and access activities aimed at improving the penetration of implantable hearing solutions. Three key market segments have been prioritised comprising adults and seniors in developed markets, children in developed markets and children in emerging markets, with strategies to improve awareness and access that vary by segment. We collaborate closely with governments, academic and research institutions, hearing care providers, consumer and professional representative NGO’s and significant health setting bodies such as the WHO to build awareness of the importance of properly treating hearing loss. And our investment in R&D continues to focus on improving outcomes for recipients which broadens the population of candidates that can benefit from our hearing solutions. The cost-effectiveness of health interventions is becoming a more important consideration in the allocation of healthcare spending with payers increasingly demanding cost-effectiveness data to support funding for health interventions. We believe we are well positioned with many studies demonstrating the cost-effectiveness of cochlear implants for both children and adults with severe or higher hearing loss. For a pre-lingual deaf child, the return to society is more than 13 times every dollar spent on a cochlear implant solution based on the cost savings in education and improved productivity as an adult.10-12 Dementia and other cognitive decline diseases are some of the costliest conditions to treat in the world13, at an estimated US$1 trillion in 2018 and estimated to double by 2030.14 Unfortunately, individuals with severe hearing loss are almost five times more likely to develop dementia than people without hearing loss. The effective use of hearing aids and implants is cost-effective and has been proven in adults and seniors with an estimated return on investment of 10:1.15a A challenge for professionals and consumers is understanding the potential improvement in hearing outcomes that can be attained from a cochlear implant. There is a growing body of evidence of the superior outcomes of cochlear implants over hearing aids for many people with a severe or higher hearing loss (>70dB).16 In 2018, a Cochlear study of recipient experiences5 found that the number of participants reporting satisfaction with their hearing performance increased significantly after receiving a cochlear implant, rising from 9% when using hearing aids only to 95% after receiving a cochlear implant. In 2021, an independent, randomised control trial to compare communication and quality of life outcomes of cochlear implants for adults compared to hearing aids will commence in the UK. Cochlear has provided funding to the University of Nottingham for the trial which will aim to provide gold standard clinical evidence of the relative efficacy of cochlear implants for this patient group with results expected in the next several years. These studies are important in helping to educate hearing aid professionals and cochlear implant candidates on the benefits of cochlear implants when compared to hearing aids. 21 Cochlear Limited Annual Report 2021Our growth opportunity Opportunity Description How we are responding Product indications are broadening and funding is expanding Product indications and funding are expanding as payers increasingly recognise the improved outcomes and cost-effectiveness of our implantable solutions. US: lowered the age of cochlear implantation from 12 to 9 months for Cochlear’s Nucleus implant Japan, UK and Belgium: expansion of reimbursement criteria for cochlear implants to include severe hearing loss New Zealand: cochlear implant funding to reduce the adult waiting list Czech Republic: funding for cochlear implants for adults France: reimbursement approved for Baha sound processors Good hearing is essential for healthy ageing Hearing loss is particularly prevalent in people over the age of 60, with one in four suffering moderate or higher hearing loss.17 There is a growing understanding of the importance of properly treating hearing loss in this age group. It affects communication and is associated with social isolation, anxiety, depression and cognitive decline.18 Growing understanding of the link between good hearing and healthy ageing Cognitive decline Hearing loss associated with accelerated cognitive decline and dementia in older adults.20 Depression Significant association between hearing impairment and moderate to severe depression.21-23 Falls Higher risk of dizziness causing falling.22 Opportunity to drive deeper penetration of the bone conduction segment The bone conduction market is under-penetrated and currently has limited geographic reach. We have developed a product that we believe provides the opportunity to drive deeper category penetration. Social isolation Hearing loss linked to withdrawal from social interactions, which can have a significant impact on psychological well-being and physical health.24-25 Ability to work Hearing loss can affect sufferers’ ability to work or stay in the workforce.25-28 Loss of independence Seniors with hearing loss less likely to be able to self-care.23 Pre-market trials have demonstrated significant improvements in outcomes for patients using the Cochlear™ Osia® 2 System29 over traditional bone conduction hearing solutions 22 Cochlear implants started as a solution for people with a profound hearing loss, equivalent to a hearing loss of greater than 90 decibels (dB). Advancements in the technology have driven significant improvements in hearing outcomes for patients with our products today able to provide life-changing outcomes for people with a severe or higher hearing loss (>70dB). At the same time, there is a better understanding of the importance of properly treating hearing loss as we age and a growing body of evidence supporting the cost-effectiveness of cochlear implants. These factors have driven an expansion of indications and/or funding in many markets over the past few years, including the UK, US, Japan, France and Belgium. Our job is to continue to work with governments and payers to recognise the benefits of treating hearing loss so we can continue to increase access to our products. Cochlear implantation for seniors is an important trend, with hearing loss ranked as the leading cause of global years lived with disability for people over the age of 70.19 We have been increasing our public advocacy engagement, our investment in health economics, our market access capability and the collaborations we have with the medical research community to build on the clinical evidence that demonstrates the effectiveness of our products, particularly for seniors. In 2018, we pledged to gift US$10 million over 10 years to the Johns Hopkins Bloomberg School of Public Health to establish the ‘Cochlear Center for Hearing and Public Health’. The Center is the first of its kind at any academic institution focused on addressing hearing loss as a global public health priority. The Cochlear™ Osia® 2 System expands the Acoustics portfolio into the next generation of bone conduction hearing solutions, providing a significant improvement in performance and aesthetics for bone conduction patients. Pre-market trials have demonstrated significant improvements in outcomes for patients29 over traditional bone conduction hearing solutions, and we are already experiencing high demand for the new implant in the US. We believe the Osia 2 System has the opportunity to become the gold standard acoustics implant in our current markets, more effectively competing with reconstructive surgery and is the right product to pursue geographic expansion, with our Acoustics business today generating the majority of revenue from the US and UK. Cochlear Limited Annual Report 2021Our growth opportunity Product indications are broadening and funding is expanding Product indications and funding are expanding as payers increasingly recognise the improved outcomes and cost-effectiveness of our implantable solutions. Good hearing is essential for healthy ageing Hearing loss is particularly prevalent in people over the age of 60, with one in four suffering moderate or higher hearing loss.17 There is a growing understanding of the importance of properly treating hearing loss in this age group. It affects communication and is associated with social isolation, anxiety, depression and cognitive decline.18 Opportunity to drive The bone conduction deeper penetration of the bone conduction segment market is under-penetrated and currently has limited geographic reach. We have developed a product that we believe provides the opportunity to drive deeper category penetration. Opportunity Description How we are responding Cochlear implants started as a solution for people with a profound hearing loss, equivalent to a hearing loss of greater than 90 decibels (dB). Advancements in the technology have driven significant improvements in hearing outcomes for patients with our products today able to provide life-changing outcomes for people with a severe or higher hearing loss (>70dB). At the same time, there is a better understanding of the importance of properly treating hearing loss as we age and a growing body of evidence supporting the cost-effectiveness of cochlear implants. These factors have driven an expansion of indications and/or funding in many markets over the past few years, including the UK, US, Japan, France and Belgium. Our job is to continue to work with governments and payers to recognise the benefits of treating hearing loss so we can continue to increase access to our products. Cochlear implantation for seniors is an important trend, with hearing loss ranked as the leading cause of global years lived with disability for people over the age of 70.19 We have been increasing our public advocacy engagement, our investment in health economics, our market access capability and the collaborations we have with the medical research community to build on the clinical evidence that demonstrates the effectiveness of our products, particularly for seniors. In 2018, we pledged to gift US$10 million over 10 years to the Johns Hopkins Bloomberg School of Public Health to establish the ‘Cochlear Center for Hearing and Public Health’. The Center is the first of its kind at any academic institution focused on addressing hearing loss as a global public health priority. The Cochlear™ Osia® 2 System expands the Acoustics portfolio into the next generation of bone conduction hearing solutions, providing a significant improvement in performance and aesthetics for bone conduction patients. Pre-market trials have demonstrated significant improvements in outcomes for patients29 over traditional bone conduction hearing solutions, and we are already experiencing high demand for the new implant in the US. We believe the Osia 2 System has the opportunity to become the gold standard acoustics implant in our current markets, more effectively competing with reconstructive surgery and is the right product to pursue geographic expansion, with our Acoustics business today generating the majority of revenue from the US and UK. 23 Cochlear Limited Annual Report 2021Our strategy Our strategy is focused on improving awareness of and access to implantable hearing solutions for people indicated for our products. We are committed to maintaining our technology leadership position in the industry by investing in R&D to improve hearing outcomes and expand reimbursement and indications for our implantable solutions. We aim to grow the hearing implant market by growing awareness and access for implant candidates. And with a growing recipient base, we are actively strengthening our servicing capability to provide products, programs and services to support our lifetime relationship with recipients. In achieving our goals, we will be disciplined in our investment, aiming to deliver consistent revenue and earnings growth over time. Strategic priorities Retain market leadership Market-leading technology I World-class customer experience Grow the hearing implant market Awareness I Market access I Clinical evidence Deliver consistent revenue & earnings growth Invest to grow I Operational improvement I Strong financial position In developing our strategy, we have factored in the shifting demographics of our recipient base. Over the last 10 years, there has been a greater uptake of cochlear implantation by older adults, particularly seniors, as awareness of the intervention has grown, and the body of evidence builds connecting good hearing with healthy ageing. At the same time, funding has expanded in emerging markets as awareness of cochlear implants grows and wealth increases, driving implantation of children across the emerging world. s r e v i r d h t w o r g t n a l p m i l r a e h c o C Growth is shifting to under-penetrated segments Adults and seniors in developed markets Greater uptake by adults and seniors as awareness grows and evidence builds connecting hearing with healthy ageing. Children in emerging markets Funding expands in emerging markets as awareness of cochlear implants grows and wealth increases. Children in developed markets The intervention grows with the introduction of neonatal screening, growing reimbursement and improved outcomes which leads to the expansion of indications across many markets. 1980 1990 2000 2010 2020 24 Cochlear Limited Annual Report 2021 25 Cochlear Limited Annual Report 2021Retain market leadership We innovate to bring to market a range of implantable hearing solutions that deliver a lifetime of hearing outcomes. Cochlear has been the global leader in implantable hearing solutions for 40 years. The investment in R&D aims to strengthen our leadership position through the development of market-leading technology. We invest around 12% of sales revenue each year in R&D, with over $2 billion invested since listing. We have a global innovation network with over 350 R&D employees across the globe. Primary R&D is co-located with the Australian Hearing Hub in Sydney, with the ‘Cochlear Technology Centre’ in Belgium focused on advanced innovation. We have over 100 research partners in over 20 countries and a global network of design consultants and suppliers. Our market-leading product & services portfolio Innovations that make a difference to the moments that matter over time. Cochlear implants Acoustic implants Benchmark in size, implant reliability and neural interface, with proven perimodiolar advantage Benchmark in performance and aesthetics Cochlear™ Nucleus® Profile™ Plus implant Slim Modiolar electrode Cochlear™ Osia® 2 System Sound processors Benchmark in size, smartphone connectivity and hearing performance Cochlear™ Nucleus® 7 Sound Processor Cochlear™ Nucleus® Kanso® 2 Sound Processor Cochlear™ Baha® 6 Max Sound Processor 26 Cochlear Limited Annual Report 2021Convenience & confidence Apps and rehabilitation tools aimed at improving ease of use and quality of life for recipients Nucleus, Baha & Osia Smart Apps Cochlear™ CoPilot Clinical & surgical support Streamlining customer care for surgeons and clinicians Custom Sound® Pro Fitting Software Nucleus® SmartNav System Telehealth solutions Convenient, at-home testing for routine cochlear implant checks outside the hearing clinic Responsive & convenient service Cloud-based service reducing time spent ‘off air’ when recipients need a replacement processor Remote Check solution for cochlear implants Cochlear™ Link 27 Not all products are available in all countries.Cochlear Limited Annual Report 2021Grow the hearing implant market We grow the market by transforming the way people understand and treat hearing loss through awareness and access activities. Three key market segments have been prioritised with strategies to improve awareness and access, which vary by segment. Segment Description What are we doing Children in developed markets Cochlear implantation has been established as the standard of care for newborns across many developed markets, with bilateral implants indicated across most markets as evidence supports the benefit of binaural hearing. Addressable market* ~130,000 people Current penetration* >80% under 3-year-old children Adults and seniors in developed markets Adults and seniors in the developed markets provide the biggest opportunity for us to address the unmet need for hearing implants given the large, and growing, market size as the population ages and the low levels of penetration. Addressable market* >6m people Current penetration* ~3% Children in emerging markets Cochlear’s emerging markets business has been growing rapidly as awareness of cochlear implants increases and wealth grows across many emerging economies. Addressable market* >1.3m people Current penetration* <10% 28 Cochlear implants started as a solution for children with a profound hearing loss. Over the last 30 years, neonatal screening has been successfully established across the developed world leading to high penetration levels. The key priority for this segment is to maintain our leadership position while aiming to deepen our penetration in a few markets where rates of implantation for newborns with severe or higher hearing loss, and uptake of bilateral implantation, are below average. There is also an opportunity to strengthen the treatment pathway for acquired or progressive hearing loss in older children. Lack of screening for children who have progressive hearing loss in childhood means that hearing loss often remains unidentified and without care. The WHO’s World Report on Hearing notes the importance of hearing in education and says that the inclusion of ear and hearing care in school health services is essential. It highlights pre-school and school children as a group ‘at risk’ and proposes that screening and early intervention programs be put in place for this group as part of the holistic package of ear and hearing care interventions it proposes all countries adopt. According to the WHO, hearing loss is particularly prevalent in people over the age of 60, with 65% experiencing hearing loss and one in four people suffering moderate or higher hearing loss. It affects communication and is associated with social isolation, anxiety, depression and cognitive decline.14 The segment is however challenging to penetrate as most candidates suffer from a progressive hearing loss and, together with their care providers, either do not know about cochlear and acoustic implants or do not understand the indications for them. While penetration rates are currently very low, at around 3%, the seniors segment has been the fastest growing segment for us over the past few years as awareness begins to improve. We have three programs for driving growth of the adults and seniors segment which include: • Direct-to-consumer (DTC) marketing – building awareness directly with candidates motivated to find a • Hearing aid channel referrals – building a referral path from hearing aid and ENT clinics to cochlear and • Standard of care initiatives – supporting initiatives to deliver a consistent treatment pathway for all adults better solution for their hearing loss; acoustic implants; and with severe or higher hearing loss. China has become a leading market for cochlear implants driven by a commitment from the government to fund implants for children which has driven the development of clinical infrastructure. Most other markets however remain under-penetrated. Our priorities for this segment are focused around market expansion with activities targeted at: • Building awareness – public education campaigns, direct-to-consumer marketing and hearing screening; • Expanding funding – driven by the compelling health economics of implantation in children; • Expanding our presence – distributor relationships combined with an expanding direct presence; • Developing professional capability – surgeon training and audiology education; and • Maximising penetration through a tiered product offering. * Cochlear estimates of segment prevalence of severe or higher hearing loss.Cochlear Limited Annual Report 2021Grow the hearing implant market We grow the market by transforming the way people understand and treat hearing loss through awareness and access activities. Three key market segments have been prioritised with strategies to improve awareness and access, which vary by segment. Segment Description What are we doing Children in developed markets Cochlear implantation has been established as the standard of care for newborns across many developed markets, with bilateral implants indicated across most markets as evidence supports the benefit of binaural hearing. Adults and seniors in Adults and seniors in the developed markets developed markets provide the biggest opportunity for us to address the unmet need for hearing implants given the large, and growing, market size as the population ages and the low levels of penetration. Children in emerging markets Cochlear’s emerging markets business has been growing rapidly as awareness of cochlear implants increases and wealth grows across many emerging economies. Cochlear implants started as a solution for children with a profound hearing loss. Over the last 30 years, neonatal screening has been successfully established across the developed world leading to high penetration levels. The key priority for this segment is to maintain our leadership position while aiming to deepen our penetration in a few markets where rates of implantation for newborns with severe or higher hearing loss, and uptake of bilateral implantation, are below average. There is also an opportunity to strengthen the treatment pathway for acquired or progressive hearing loss in older children. Lack of screening for children who have progressive hearing loss in childhood means that hearing loss often remains unidentified and without care. The WHO’s World Report on Hearing notes the importance of hearing in education and says that the inclusion of ear and hearing care in school health services is essential. It highlights pre-school and school children as a group ‘at risk’ and proposes that screening and early intervention programs be put in place for this group as part of the holistic package of ear and hearing care interventions it proposes all countries adopt. According to the WHO, hearing loss is particularly prevalent in people over the age of 60, with 65% experiencing hearing loss and one in four people suffering moderate or higher hearing loss. It affects communication and is associated with social isolation, anxiety, depression and cognitive decline.14 The segment is however challenging to penetrate as most candidates suffer from a progressive hearing loss and, together with their care providers, either do not know about cochlear and acoustic implants or do not understand the indications for them. While penetration rates are currently very low, at around 3%, the seniors segment has been the fastest growing segment for us over the past few years as awareness begins to improve. We have three programs for driving growth of the adults and seniors segment which include: • Direct-to-consumer (DTC) marketing – building awareness directly with candidates motivated to find a better solution for their hearing loss; • Hearing aid channel referrals – building a referral path from hearing aid and ENT clinics to cochlear and acoustic implants; and • Standard of care initiatives – supporting initiatives to deliver a consistent treatment pathway for all adults with severe or higher hearing loss. China has become a leading market for cochlear implants driven by a commitment from the government to fund implants for children which has driven the development of clinical infrastructure. Most other markets however remain under-penetrated. Our priorities for this segment are focused around market expansion with activities targeted at: • Building awareness – public education campaigns, direct-to-consumer marketing and hearing screening; • Expanding funding – driven by the compelling health economics of implantation in children; • Expanding our presence – distributor relationships combined with an expanding direct presence; • Developing professional capability – surgeon training and audiology education; and • Maximising penetration through a tiered product offering. 29 Cochlear Limited Annual Report 2021Grow the hearing implant market Developing a treatment pathway for adults Standard of care initiatives aim to establish a consistent process for diagnosing and referring adult cochlear implant candidates by all healthcare professionals. Adults and seniors in the developed markets provide the biggest opportunity for us given the large, and growing, market size as the population ages and the low levels of penetration. One of our challenges is that there is no consistent treatment pathway to a cochlear implant for adults with severe or higher hearing loss. In addition, there is low awareness of cochlear implant indications amongst key hearing health professionals – ear, nose and throat (ENT) surgeons and hearing aid audiologists. The development of a standard treatment pathway for care has many aspects and requires a co-ordinated effort between industry, hearing health professionals and public policy makers. It’s a familiar journey for us, with the development of cochlear implants as the standard of care for children being the driver of growth for us during the 1990s and early 2000s. The key elements of that journey are highlighted in the chart below. Development of cochlear implants as the standard of care for children in the US Clinical evidence supporting the benefits of bilateral implantation. By 2010, 50% of children under 3 receive two implants (70% by 2019) Expanded reimbursement for public patients and broadened indications Development of health economic data supporting cost-effectiveness of cochlear implants for children 3 r e d n u n e r d l i h c r o f Research demonstrating the cost savings (eg: attendance at mainstream schools) and quality of life benefits from implantation s e i r e g r u s S U s ' r a e h c o C l Adoption of universal newborn hearing screening from mid 1990s – mid 2000s FDA approval for implantation in children from 12 months of age (Cochlear's Nucleus 24) - Nov00 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 First implant Second implant 30 Cochlear Limited Annual Report 2021 The evidence is building to support the establishment of a clinical pathway for adults with growing recognition that good hearing is an essential part of healthy ageing. We are also rapidly understanding that treating age- related hearing loss is cost-effective. In 2020 a global consensus on a minimum standard of care for treating adult hearing loss with a cochlear implant was published in the leading journal JAMA Otolaryngology, the Journal of the American Medical Association. The publication is an important step forward, providing the foundation for the development of formal clinical practice guidelines in the coming years. It is anticipated that these guidelines for hearing loss professionals will be important in building a clear and consistent referral path for adults from hearing aids to cochlear implants. In the coming years, we will continue to support hearing health professionals in the development of formal clinical practice guidelines. We are making investments in long-term initiatives to develop a standard clinical pathway for adults that aims to establish a more sustained referral model. These investments are geared to: • Develop consistent guidelines to enable early identification and referral; • Build a body of clinical and economic evidence that compels early adult referral and coverage; and • Drive awareness and advocacy through hearing professionals. The table below illustrates what good standard of care for adults would look like. What standard of care looks like for adults Links between good hearing and healthy ageing established Links to cognitive decline and dementia are understood by all medical professionals Primary care providers routinely assess hearing loss in older patients Professionals know when to refer for a cochlear implant assessment The hearing aid channel is educated and the referral process is simple for a cochlear implant After-care is simple 31 Cochlear Limited Annual Report 2021Deliver consistent revenue and earnings growth To deliver consistent revenue and earnings growth over time, we balance maximising spending to grow the market with investment to maintain our competitive position while ensuring we have agile, efficient and environmentally responsible business processes to support our growth ambitions. Investment priorities Invest to grow Building awareness and access requires multi-year investment in sales, marketing and R&D activities. Aim: invest to grow, maintaining the net profit margin Operational improvement Optimising cost of production strengthens our competitive position. Aim: reinvest efficiency gains from growing scale into market growth activities Strong financial position Strong cash flow generation funds investment in growth. Aim: maintain the strong balance sheet position and target a dividend payout of around 70% of underlying net profit Investment priority Invest to grow We take a long- term approach to investing and have invested in growing the market for implantable solutions since listing in 1995. Consistent investment in sales and marketing Growing R&D capability Delivering stable net profit margins Our investment in sales and marketing activities is building awareness of and access to implantable solutions and driving market growth. The increase in investment in selling, marketing & general expenses (SG&A) over many years has supported sales force expansion and investment in awareness building activities, particularly direct-to-consumer marketing initiatives, across a growing number of markets. The investment in R&D continues to strengthen our We will continue to invest operating cash flows leadership position through the development of into market growth activities with the objective of market-leading technology. delivering consistent revenue and earnings growth We have a wide range of fully featured products and over the long term. a broad patent portfolio that protects our intellectual Through disciplined investment, we are targeting property. Over $2 billion has been invested in R&D to maintain the net profit margin, reinvesting any since listing with 13% of sales revenue invested in efficiency gains, currency or tax benefits into market R&D in FY21. growth activities. 32 Cochlear Limited Annual Report 2021Revenue drivers Cochlear implants • Growing awareness and uptake by adults and seniors • Emerging market expansion • New products driving market growth and market share Services • Growing recipient base • Greater connectivity and engagement with recipients • Next generation sound processor upgrades Acoustics • New products • Market expansion led by Cochlear™ Osia® 2 System Investment priority Invest to grow We take a long- term approach to investing and have invested in growing the market for implantable solutions since listing in 1995. Consistent investment in sales and marketing Growing R&D capability Delivering stable net profit margins Our investment in sales and marketing activities is building awareness of and access to implantable solutions and driving market growth. The increase in investment in selling, marketing & general expenses (SG&A) over many years has supported sales force expansion and investment in awareness building activities, particularly direct-to-consumer marketing initiatives, across a growing number of markets. The investment in R&D continues to strengthen our leadership position through the development of market-leading technology. We have a wide range of fully featured products and a broad patent portfolio that protects our intellectual property. Over $2 billion has been invested in R&D since listing with 13% of sales revenue invested in R&D in FY21. We will continue to invest operating cash flows into market growth activities with the objective of delivering consistent revenue and earnings growth over the long term. Through disciplined investment, we are targeting to maintain the net profit margin, reinvesting any efficiency gains, currency or tax benefits into market growth activities. 33 * Excluding one-off and non-recurring items.Cochlear Limited Annual Report 2021Deliver consistent revenue and earnings growth Disciplined use of capital Stable gross margin Capital employed Operating cash flows have been primarily used to fund dividends, capital expenditure and acquisitions. The dividend policy has been to payout 70% of net profit as dividends to shareholders since FY00.* Since listing, we have cumulatively paid out around 70% of operating cash flows as dividends. Key acquisitions have been focused on building the core implant business and include: • Sycle – hearing aid practice management software business (FY17) • Otologics – implantable microphone technology (FY10) • Brisbane manufacturing facility (FY07) • Entific – bone conduction implant business (FY05) The innovation fund has invested around $80 million in companies with novel technologies that may, over the longer term, enhance or leverage our core technology. The innovation fund includes investments in Saluda, Nyxoah, EpiMinder, Seer Medical and Sensorion. The gross margin has been relatively stable since listing. Capital employed is comprised of three broad We use our scale to generate efficiency gains to reinvest back into market growth activities. categories: Working capital (24%), which is primarily inventory; Property, plant & equipment (21%) and Intangibles & other (55%). Property, plant & equipment includes our key manufacturing equipment in Australia, Sweden, Malaysia and China. Intangibles & other includes goodwill from acquisitions and innovation fund investments. High return on capital employed (ROCE) Quality operating cash flows Conservative gearing levels ROCE measures the cash return for each dollar invested in the business. We generate a high ROCE reflecting our competitive position in the market and the high barriers to entry to the cochlear implant industry which have proven to be robust over many decades. The high ROCE is also a function of the relatively low level of tangible assets employed by the business. Our competitive advantage is driven by our strong product and patent portfolio, a result of investment in R&D over many years. As R&D investment is expensed through the income statement, no value for this important asset is captured on the balance sheet. One of the highlights of our financial history has been We have a strong balance sheet. We are a growth the conversion of reported profits to cash. There has company that has, until FY20, been able to fund investing been a strong and consistent correlation between activities, dividends, capital expenditure and acquisitions reported net profit and the operating cash flows whilst maintaining conservative gearing levels. generated by the business.* A capital raising in FY20 was made to enhance liquidity in response to the significant impact of an adverse litigation judgement combined with the impact of COVID on sales revenue. Investment priority Operational improvement Disciplined capital investment and optimising cost of production strengthens our competitive position. Investment priority Strong financial position Strong free cash flow generation provides funding for market growth activities and R&D as well as the ability to reward shareholders with a growing dividend stream. 34 Cochlear Limited Annual Report 2021Disciplined use of capital Stable gross margin Capital employed Operating cash flows have been primarily used to fund dividends, capital expenditure and acquisitions. The dividend policy has been to payout 70% of net profit as dividends to shareholders since FY00.* Since listing, we have cumulatively paid out around 70% of operating cash flows as dividends. Key acquisitions have been focused on building the core implant business and include: • Sycle – hearing aid practice management software business (FY17) • Otologics – implantable microphone technology (FY10) • Brisbane manufacturing facility (FY07) • Entific – bone conduction implant business (FY05) The innovation fund has invested around $80 million in companies with novel technologies that may, over the longer term, enhance or leverage our core technology. The innovation fund includes investments in Saluda, Nyxoah, EpiMinder, Seer Medical and Sensorion. The gross margin has been relatively stable since listing. We use our scale to generate efficiency gains to reinvest back into market growth activities. Capital employed is comprised of three broad categories: Working capital (24%), which is primarily inventory; Property, plant & equipment (21%) and Intangibles & other (55%). Property, plant & equipment includes our key manufacturing equipment in Australia, Sweden, Malaysia and China. Intangibles & other includes goodwill from acquisitions and innovation fund investments. High return on capital employed (ROCE) Quality operating cash flows Conservative gearing levels ROCE measures the cash return for each dollar invested in the business. We generate a high ROCE reflecting our competitive position in the market and the high barriers to entry to the cochlear implant industry which have proven to be robust over many decades. The high ROCE is also a function of the relatively low level of tangible assets employed by the business. Our competitive advantage is driven by our strong product and patent portfolio, a result of investment in R&D over many years. As R&D investment is expensed through the income statement, no value for this important asset is captured on the balance sheet. One of the highlights of our financial history has been the conversion of reported profits to cash. There has been a strong and consistent correlation between reported net profit and the operating cash flows generated by the business.* We have a strong balance sheet. We are a growth company that has, until FY20, been able to fund investing activities, dividends, capital expenditure and acquisitions whilst maintaining conservative gearing levels. A capital raising in FY20 was made to enhance liquidity in response to the significant impact of an adverse litigation judgement combined with the impact of COVID on sales revenue. Investment priority Operational improvement Disciplined capital investment and optimising cost of production strengthens our competitive position. Investment priority Strong financial position Strong free cash flow generation provides funding for market growth activities and R&D as well as the ability to reward shareholders with a growing dividend stream. 35 * Disrupted in FY20 by the impact of an adverse litigation outcome and COVID. Dividends were suspended in March 2020 until trading conditions improve.Operating cash flow in FY20-21 excludes the cash impact of patent litigation expenses. Cochlear Limited Annual Report 2021Business risks Cochlear has a sound and robust risk management framework to identify, assess and appropriately manage risks. Our principal business risks are outlined below. These are risks that may materially adversely affect the business strategy, financial position or future performance. It is not possible to identify every risk that could affect the business and the actions taken to mitigate these risks cannot provide absolute assurance that a risk will not materialise. Details of Cochlear’s risk management framework can be found in the Corporate Governance Statement, available on the website. Risk Pandemics Description and potential consequences As COVID has demonstrated, pandemics have the potential to impact our markets as elective surgeries may be deferred to reduce the strain on healthcare systems. Travel restrictions, government mandated shutdowns and potential supply chain impacts could also have business impacts. Strategies used to mitigate the risk In addition to developed business continuity and crisis management plans, our geographic spread of customers may mitigate the impact of a pandemic on our business. Product innovation and competition Increased competition exposes us to the risk of losing market share and lower average selling prices. This risk may be exacerbated by failure to produce innovative products and services. We are also exposed to the risk that our products are superseded by medical, biological and/ or technological advancements resulting in alternative products or treatments being commercialised which may impact new business. Our active and continuous assessment of markets (new and existing) informs our strategy, operating plans and innovation programs. The creation and protection of intellectual property is a key focus for us. In FY21, we invested 13% of sales revenue in R&D, aimed at retaining our market leadership position and growing the hearing implant market. Misappropriation of Cochlear’s know-how and intellectual property infringement We are exposed to the risk that our proprietary know-how may be misappropriated through hacking of its systems, or by employees, consultants or third parties who may have access to systems. Our market share is at risk of competitors accessing and using this information. We are also exposed to allegations of infringement by third parties including competitors which could result in us paying damages and/or receiving injunctions preventing us from selling our products and/or paying royalties to continue selling. Confidentiality agreements are in place with staff and third parties with access to our know-how. We limit access to key systems by business need and monitor access by individuals. We have an increasing and evolving patent portfolio across our technologies to assert against competitors, and internal and external legal resources to manage litigation, and our internal product development processes include ‘freedom to operate’ checks. Medical device regulations Product quality We operate in a highly regulated industry. Medical devices and the information they produce are strictly regulated in countries where our products are sold. Failure to meet regulations may result in product sanction or recall resulting in loss of sales and reputational harm. Regulatory uncertainty is assessed as part of product development. We actively monitor the regulatory environment with regulators and incorporate requirements and changes into our product quality assurance system. Delivery of high quality and safe outcomes for our customers is central to our ongoing development of innovative product. As the developer, manufacturer, marketer and distributor, any failure in product quality might lead to injury, litigation, liability, recall and reputational harm. Our focus on quality throughout the design, testing, manufacture and post-market monitoring of our products ensures high standards of product safety and efficacy. Effective collaboration with customers aligns clinical processes and technology with evidence-based practices. We also maintain product liability insurance. 36 Cochlear Limited Annual Report 2021Risk Market access Description and potential consequences The majority of our developed market customers rely on a level of reimbursement from insurers and government health authorities to fund their purchases. Pressure on healthcare budgets globally may lead to pressure on reimbursement levels. Healthcare-related taxes by government agencies could also impact candidates’ ability to access our products. Credit and currency We provide credit to a limited number of governments, government-supported universities and clinics or major hospital chains. The extension of credit creates a risk that borrowers fail to pay resulting in interrupted cash flow and lower earnings. Over 90% of our revenues and over 50% of costs are denominated in currencies other than Australian dollars. We bear exchange rate risk from AUD fluctuation against primarily US dollars, Euros, Japanese yen, Sterling, Swedish kroner and Swiss francs. Long term permanent changes in market rates may impact earnings. Strategies used to mitigate the risk We continue to work with reimbursement and government agencies throughout the world to emphasise the health and economic benefits of cochlear and acoustic implants. Credit risk is not significantly concentrated and varies by location and customer type. Credit and receivables management (including identifying high risk customers and potential restrictions on future trading) is executed at a regional level, subject to country limits set by the Chief Financial Officer and overseen by the Audit & Risk Committee. Monthly credit balances and ageing are monitored by the Board. Financial instruments are used to manage foreign exchange risk in accordance with the Board approved policy. Interruption to product supply Our reliance on suppliers for key materials and services carries inherent risk of delay and disruption. This risk is distinct from that where alternative materials/sources and regulatory requirements make substitution costly, time- consuming or commercially unviable. While products are manufactured across six sites globally, supply may be disrupted by a site becoming inoperative. New manufacturing facilities require regulatory approval for products to be saleable. Such approval could take many months or years. We work closely with our suppliers to mitigate potential interruption or delay to supplies. In addition, purchase quantities of inventory are managed to avoid short term impacts. Where appropriate, lifetime buys, strategic raw materials purchases, alternate sources and other supply chain interventions are undertaken to mitigate production impacts. We also review the business continuity plans for manufacturing and maintains business interruption insurance. Privacy and Information security We handle and store personal information, including health information, for our customers and employees. With expanding information privacy and security regulations, we recognise its security as a key element of our relationship with our customers. We regularly assess our privacy governance and information security controls to ensure that when customer information is held it is secure. Whilst we maintain cyber insurance as part of our overall risk mitigation strategy, our pro-active approach aims to ensure that controls of these risks are prevalent. Talent management We operate in a competitive environment in relation to attracting and retaining scientific, technology and engineering talent. The absence of this talent may cause key positions to be unfilled, impacting our ability to innovate and grow. Talent management programs are in place, both within Australia and in our key international markets. These programs develop the longer-term capabilities required for us to achieve our strategic goals. 37 Cochlear Limited Annual Report 2021Operational review Business segment performance $m 2021 2020 Cochlear implants (units) 36,456 31,662 Change % (reported) Ç 15% Change % (CC)* Sales mix Sales revenue Cochlear implants Services (sound processor upgrades and other) Acoustics Total sales revenue 898.6 438.5 156.2 817. 9 395.5 138.9 1,493.3 1,352.3 Ç 10% Ç 11% Ç 12% Ç 10% Ç 19% Ç 19% Ç 22% Ç 19% 61% 29% 10% 100% During FY21, we have been focused on ensuring we emerge from the pandemic in a stronger competitive position, with our strategic priorities continuing to guide our investments. Over the past 12 months, we have maintained our people and market presence, ensuring the health and safety of our employees while providing ongoing support to our recipients, clinics and professional customers. Our focus on long-term growth has continued with increasing levels of investment across R&D projects and market growth activities. Despite the challenging trading conditions, new products have been successfully launched across all product categories, with market share gains realised in many markets. Cochlear implants Cochlear implant units increased 15% to 36,456 units and sales revenue increased 19% in CC to $898.6 million, driven by a combination of market share gains, market growth and rescheduled surgeries from COVID shutdowns. Compared to FY19, the last financial year unaffected by COVID, units increased by 7% with sales revenue up 9% in CC. While hospitals and clinics have adapted to operating during the pandemic, we experienced variability in surgery rates across countries as infection waves continued. For developed markets, the pace of recovery varied across countries with strong growth in the US, Japan and Korea and improving momentum in Western Europe. Overall developed market unit volumes grew around 20%, an increase of around 10% on FY19. While there had been some concern that candidates would hesitate in progressing to surgery during the pandemic, we have been pleased to see surgeries progress across all age groups, with the mix of seniors’ surgeries back to pre-COVID levels across most countries. The majority of clinics have re-opened, and the new candidate pipeline has rebuilt quickly supported by our direct-to-consumer activities. The US, Japan and Korea delivered strong growth in sales revenue on last year, as well as on FY19. Growth was driven by the combination of market share, market growth and rescheduled surgeries from the March/April 2020 shutdowns. Strong momentum follows successful new product launches and the introduction of a range of connected care services, providing greater convenience and confidence to both professional customers and recipients. The US in particular is benefitting from the successful integration of a comprehensive suite of products and services for customers over the last few years, from the leading implant portfolio to clinical support tools like Cochlear Link and Remote Check, supported by the sales team. The investment has strengthened our capability, broadened our reach and is reducing workloads for clinics. 38 * Constant currency (CC) removes the impact of exchange rate movements and foreign exchange (FX) contract gains/(losses) to facilitate comparability. See Notes on page 45 for further detail.Cochlear Limited Annual Report 2021 Our market position in Western Europe remains strong but surgery rates have recovered more slowly than the US. Cochlear implant units grew on FY20 but remained below FY19 levels, with periods of disruption caused by COVID waves affecting both surgery rates and the candidate assessments across many Western European countries. For the emerging markets, unit volumes overall increased around 10% on FY20 and were just above FY19 levels. Emerging markets experienced an improving rate of surgeries albeit at a slower pace than the developed markets. Surgeries in China are growing quickly due to strong private pay demand. In other markets, parts of Eastern Europe and the Middle East are recovering well, with volumes still materially lower in several markets including India and Brazil. Services (sound processor upgrades and other) Services revenue increased 19% in CC to $438.5 million, up 5% in CC on FY19, with improving momentum across the year. First and third quarter revenue was impacted by lower clinical capacity for sound processor upgrades, with new patients prioritised as COVID concerns limited clinic capacity. The Cochlear™ Nucleus® Kanso® 2 Sound Processor was launched in October across the US and Europe, driving demand for upgrades, representing around 30% of the sound processor mix in the US by June. We invest to provide our recipients with a world-class customer experience with increased connectivity and engagement. Cochlear Family, the recipient membership program, provides us with the opportunity to connect directly with recipients to provide service and support. Over the last 12 months we have provided special edition newsletters and webinar virtual events about COVID safety, with special considerations for those living with a hearing device. Membership continues to grow rapidly, increasing by 19% over the last 12 months, to now exceed 217,000 members with a 60% join rate for new Cochlear™ Nucleus® implant recipients. An acceleration in recruitment in recent years has been driven by a combination of direct outreach programs and improvements in customer onboarding. Acoustics Acoustics revenue increased by 22% in CC to $156.2 million. Acoustics revenue is largely generated from the US and the UK with the US recovering quickly from COVID while the UK return to surgeries has been slower. As a result, sales revenue continues to be below FY19 levels, down 8% in CC, with improving momentum in the second half as new products were launched. Surgery volumes in the US have recovered quickly with strong demand for the Cochlear™ Osia® 2 System. The Cochlear™ Baha® 6 Max Sound Processor was launched in the fourth quarter and is driving strong demand for sound processor upgrades. Acoustic implant surgeries recommenced in the UK during the first quarter with a slower rate of recovery as a result of COVID, with disruption again during the third quarter as a result of rising COVID-related hospitalisations. The Osia 2 System achieved CE Mark accreditation during the second half, with the rollout commencing in a few Western European countries by June. 39 Cochlear Limited Annual Report 2021Financial review Profit and loss $m Sales revenue Cost of sales % gross margin Selling, marketing and general expenses Research and development expenses % of sales revenue Administration expenses Operating expenses Other income / (expenses) FX contract gains / (losses) EBIT (underlying)* % EBIT margin* Net finance expense Income tax expense* % effective tax rate Underlying net profit* % underlying net profit margin* One-off and non-recurring items (after-tax): Patent litigation-related tax & other Innovation fund gains Statutory net profit Change % (reported) Change % (CC)** 19% 25% (1) pt 1% 6% (2) pts 21% 5% 57% 10% 19% (2) pts (6%) 5% (1) pt 20% 0% 60% (6%) 93% 54% 51% 2021 2020 1,493.3 1,352.3 410.2 73% 444.1 195.0 13% 112.2 751.3 (5.9) 4.3 330.2 22% 8.4 85.1 26% 236.7 16% 59.0 30.8 326.5 344.4 75% 470.0 185.1 14% 93.8 748.9 (20.4) (31.7) 206.9 15% 8.9 44.2 22% 153.8 11% (416.3) 24.2 (238.3) Sales revenue increased 10% (19% in CC) to $1,493.3 million and underlying net profit increased 54% to $236.7 million. The underlying net profit margin of 16% was well above last year and a little below the longer-term target of 18%. Statutory net profit of $326.5 million includes $59.0 million in patent litigation-related tax and other benefits and $30.8 million in innovation fund gains after-tax. Key points of note: • Cost of sales increased 19% (25% in CC) to $410.2 million with the gross margin declining by two percentage points to 73% with around half of the decline currency related, the result of the strengthening of the Australian dollar; • Selling, marketing and general expenses declined 6% (up 1% in CC) to $444.1 million with continued investment made in market growth activities, standard of care and market access initiatives. The re- establishment of the short-term incentive provision was largely offset by COVID-related savings including travel and conference expenses; • Investment in R&D increased 5% (6% in CC) to $195.0 million with continued investment made in key R&D projects and development of the pipeline; • Administration expenses increased 20% (21% in CC) to $112.2 million and includes the re-establishment of the short-term incentive provision, significant increases in insurance costs and increased depreciation and IT expenses; 40 * Excluding one-off and non-recurring items ** Constant currency (CC) removes the impact of exchange rate movements and FX contract gains/(losses) to facilitate comparability. See Notes on page 45 for further detail.Cochlear Limited Annual Report 2021 • Net finance expenses declined 6% to $8.4 million and includes $6.6 million in expenses relating to leasing accounting standard AASB16. Net finance expense (excluding the lease-related expense) declined 36% to $1.8 million with the business benefitting from lower debt, lower interest rates on debt and interest income on cash deposits from the March 2020 capital raising; and • The effective tax rate for underlying net profit was 26%. One-off and non-recurring items $m Pre-tax Tax impact Post-tax Patent litigation-related tax & other benefits: ATO ruling on tax deductibility of litigation expenses Withholding tax associated with ATO ruling FX gains associated with balance sheet items Patent litigation-related tax & other benefits (total) Innovation fund gains Total $89.8 million in one-off gains after-tax includes: - (29.6) 23.2 (6.4) 50.3 43.9 63.5 8.9 (7.0) 65.4 (19.5) 45.9 63.5 (20.7) 16.2 59.0 30.8 89.8 • $59.0 million in patent litigation-related tax & other benefits after-tax which includes a $63.5 million tax benefit following the receipt of a private ruling from the Australian Tax Office (ATO) in December 2020 which clarified the deductibility of elements of the patent litigation expense treated as non-deductible at 30 June 2020; $20.7 million in withholding tax payable as a consequence of the ATO ruling; and $16.2 million in FX gains on balance sheet items related to the patent litigation since 30 June 2020; and • Innovation fund gains after-tax includes a $23.5 million gain from the revaluation of Nyxoah following its listing in September, and a $12.9 million gain from the revaluation of the EpiMinder shareholding following a financing round and $1.2 million in equity accounted losses relating to Nyxoah. 41 Cochlear Limited Annual Report 2021 Financial review Cash flow $m EBIT (underlying) Depreciation and amortisation Changes in working capital and other Cash impact of patent litigation expense Net interest paid Income taxes paid Operating cash flow Capital expenditure Other net investments Free cash flow Proceeds from issue of shares Dividends paid Other Change in net cash – increase / (decrease) Free cash flow increased $482.8 million to $180.3 million. Key points of note: 2021 330.2 79.5 (11.2) (104.4) (8.4) (14.4) 271.3 (72.6) (18.4) 180.3 2.4 (75.6) 0.5 107.6 2020 206.9 77.5 66.9 (420.1) (8.9) (80.1) (157.8) (130.5) (14.2) (302.5) 1,081.9 (193.7) (25.7) 560.0 Change 123.3 2.0 (78.1) 315.7 0.5 65.7 429.1 57.9 (4.2) 482.8 (1,079.5) 118.1 26.2 (452.4) • Improved trading conditions following COVID shutdowns resulted in a $123.3 million improvement in underlying EBIT; • The $104.4 million cash outflow is the US$75 million in prejudgment interest and attorneys’ fees resulting from the AMF judgment; • Income taxes paid of $14.4 million includes the benefit of a $55.0 million tax refund resulting from an overpayment of tax instalments paid in FY20; and • Capital expenditure (capex) decreased by $57.9 million to $72.6 million, reflecting stay-in-business capex. The decline in capex also reflects the completion of major projects in FY20 including the development of the new China manufacturing facility and fit out of the new Denver office. 42 Cochlear Limited Annual Report 2021Capital employed $m Trade receivables Inventories Less: Trade payables Working capital Working capital / sales revenue Property, plant and equipment Intangible assets Investments & other financial assets Other net liabilities Capital employed 2021 262.1 216.1 (202.9) 275.3 18% 239.5 402.8 226.8 (7.3) 1,137.1 2020 211.4 223.8 (155.3) 279.9 21% 230.5 410.3 99.9 (76.1) 944.5 Change 50.7 (7.7) (47.6) (4.6) 9.0 (7.5) 126.9 68.8 192.6 Capital employed increased by $192.6 million to $1,137.1 million since June 2020 reflecting an increase in investments and reduction in other net liabilities. Key points of note: • The $126.9 million increase in investments reflects the $18.4 million increase in investment in the innovation fund as well as the $101.8 million increase in the fair value of EpiMinder and Nyxoah; and • Other net liabilities decreased $68.8 million reflecting movements across a number of other assets and liabilities. The $107.0 million reduction in provisions reflects the payment of US$75 million in prejudgment interest and attorneys’ fees provided for in FY20 and paid in the first half. Net tax liabilities increased by $42.7 million reflecting deferred tax liabilities of gains made in innovation fund investments. 43 Cochlear Limited Annual Report 2021 Financial review Net cash $m Cash, cash equivalents and term deposits Less: Loans and borrowings Current Non-current Total loans and borrowings Net cash Net cash increased by $107.6 million to $564.6 million. Dividends $m Interim ordinary dividend (per share) Final ordinary dividend (per share) Total ordinary dividends (per share) % payout ratio (based on underlying net profit) % franking 2021 609.6 - (45.0) (45.0) 564.6 2021 $1.15 $1.40 $2.55 71% 0% Change (320.4) 393.1 34.9 428.0 107.6 Change % (28%) 59% 2020 930.0 (393.1) (79.9) (473.0) 457.0 2020 $1.60 - $1.60 60% 100% A final dividend of $1.40 per share has been determined, taking full year dividends to $2.55, an increase of 59% and representing a payout of 71% of underlying net profit. The interim and full year dividends are unfranked. The franking balance was depleted due to losses incurred by the business in FY20. The ex-dividend date is 23 September 2021. The record date for calculating dividend entitlements is 24 September 2021 with the final dividend expected to be paid on 18 October 2021. 44 Cochlear Limited Annual Report 2021 Notes Forward-looking statements Cochlear advises that this document contains forward-looking statements which may be subject to significant uncertainties outside of Cochlear’s control. No representation is made as to the accuracy or reliability of forward-looking statements or the assumptions on which they are based. Actual future events may vary from these forward-looking statements and it is cautioned that undue reliance is not placed on any forward-looking statements. Non-International Financial Reporting Standards (IFRS) financial measures Cochlear uses non-IFRS financial measures to assist readers in better understanding Cochlear’s financial performance. Cochlear uses three non-IFRS measures in this document: Sales revenue, Underlying net profit and Constant currency. The Directors believe the presentation of these non-IFRS financial measures are useful for the users of this document as it reflects the underlying financial performance of the business. Each of these measures is described below in further detail including reasons why Cochlear believes these measures are of benefit to the reader. These non-IFRS financial measures have not been subject to review or audit. However, Cochlear’s external auditor has separately undertaken a set of procedures to agree the non-IFRS financial measures disclosed to the books and records of the Group. Sales revenue Sales revenue is the primary revenue reporting measure used by Cochlear for the purpose of assessing revenue performance of the Consolidated Entity. It represents total revenue excluding foreign exchange contract gains/ losses on hedged sales. Underlying net profit Underlying net profit allows for comparability of the underlying financial performance by removing one-off and non-recurring items. The determination of items that are considered one-off or non-recurring is made after consideration of their nature and materiality and is applied consistently from period to period. Underlying net profit is used as the basis on which the dividend payout policy is applied. The Financial Review section includes a reconciliation of Underlying net profit (non-IFRS) to Statutory net profit (IFRS) which details each item excluded from Underlying net profit. Constant currency Constant currency removes the impact of foreign exchange rate movements to facilitate comparability of operational performance for Cochlear. This is done by converting the prior comparable period net profit of entities in the Group that use currencies other than Australian dollars at the rates that were applicable to the current period (translation currency effect) and by adjusting for current year foreign currency gains and losses (foreign currency effect). The sum of the translation currency effect and foreign currency effect is the amount by which EBIT and net profit is adjusted to calculate the result at constant currency. Reconciliation of constant currency net profit to reported net profit $m Underlying net profit FX contract movement Spot exchange rate effect to sales revenue and expenses* Balance sheet revaluation* Underlying net profit (CC) One-off net gains / (losses) Statutory net profit / (loss) (CC) 2021 236.7 236.7 89.8 326.5 2020 Change % 153.8 36.0 (23.8) (9.0) 157.0 (392.1) (235.1) 54% 51% 45 * FY21 actual v FY20 at FY21 rates.Cochlear Limited Annual Report 2021 Governance Cochlear’s Board and executive team are committed to high standards of corporate governance and transparency, with a focus on preserving and enhancing our reputation and long-term sustainability. The Board is responsible for overall corporate governance including adopting appropriate policies and procedures designed to ensure that Cochlear is properly managed to create, protect and enhance shareholder value. The Board and its committees regularly review governance arrangements and practices to maintain compliance with regulatory requirements and industry practice, and to ensure that they continue to support business objectives. Directors, senior executives and employees are expected to act ethically, lawfully and responsibly at all times. Since the outbreak of COVID, we have been guided by our Mission in establishing the following principles to manage the business: • ensure the health and safety of our employees; • provide ongoing support to our recipients, clinics and professional customers; and • maintain the financial health of the Company. The Board considers that Cochlear’s corporate governance practices have been consistent with the recommendations contained in the 4th edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations released on 27 February 2019 (ASX Principles and Recommendations) throughout the reporting period from 1 July 2020 to 30 June 2021. Further details are set out in the Corporate Governance Statement, which outlines key aspects of our corporate governance framework and practices, which is available at the ‘Investors’ or ‘Investor Centre’ section of our website www.cochlear.com. Structure and composition of the Board The Board is committed to ensuring its composition continues to include directors who bring an appropriate mix of skills, experience, knowledge, expertise and diversity, including gender diversity, required to discharge the Board’s duties. The tenure profile, represented by the length of service of each director on the Board, is appropriately balanced such that Board succession and renewal planning is managed over the medium to longer term. The directors possess an appropriate mix of skills, experience, knowledge, expertise and diversity to enable the Board to discharge its responsibilities, including overseeing the delivery of the Company’s strategic priorities. Roles and responsibilities of the Board and management The role of the Board is to set Cochlear’s strategic direction for the creation, maintenance and enhancement of long-term sustainable value, to guide and monitor the management of the Company and its implementation of the strategy and to oversee good governance practice. The Board aims to protect and enhance the interests of Cochlear’s shareholders, while taking into account the interests of other stakeholders, including employees, customers, suppliers and the wider community. In performing its role, the Board is committed to a high standard of corporate governance practice and to fostering a culture of compliance which values ethical, lawful and responsible behaviour, personal and corporate integrity, accountability, transparency and respect for others. The Board has a charter which clearly sets out its role and responsibilities and describes those matters expressly reserved for the Board’s determination. The Board Charter is available on our website. The CEO & President has responsibility for the implementation of Cochlear’s strategic objectives, operating within the risk appetite set by the Board and for the day-to-day management of Cochlear. The CEO & President is supported in this function by the executive team. 46 Cochlear Limited Annual Report 2021Board’s key responsibilities Strategy Financial oversight Set strategic direction, provide input into management’s development of corporate strategy and oversee management’s implementation of strategy. Approve and monitor the progress of major capital expenditure, capital management, operational budgets, acquisitions and divestments and dividend policy. Financial and other reporting Approve Cochlear’s interim and annual financial statements and oversee the integrity of Cochlear’s accounting and corporate reporting systems. Corporate governance Review, ratify and monitor the effectiveness of Cochlear’s systems of governance, risk management and internal compliance and control, legal compliance, codes of conduct and other corporate governance policies and practices. Risk management framework Satisfy itself that Cochlear has in place an appropriate risk management framework. Set the risk appetite within which the Board expects the CEO & President and the Executive team to operate. Board performance and composition Leadership selection Succession and remuneration planning Sustainability Undertake regular external and independent evaluation of Board performance. Review annually the composition of the Board. Evaluate the performance, and selection, of the CEO & President. Plan for Board, CEO & President and Executive succession and remuneration and set non-executive director remuneration. Consider the social, ethical and environmental impact of Cochlear’s activities and operations. Set standards and monitor compliance with Cochlear’s sustainability responsibilities and practices. Material transactions Approve any unbudgeted expenditure and capital transactions, outside the authority delegated to management. Board and Board committee membership as at 30 June 2021 Chair Member Board Audit and Risk Committee Medical Science Committee People & Culture Committee Technology and Innovation Committee Nomination Committee Director Rick Holliday-Smith Dig Howitt Yasmin Allen Andrew Denver Glen Boreham, AM Alison Deans Prof Bruce Robinson, AC Abbas Hussain Sir Michael Daniell, KNZM Christine McLoughlin, AM 47 Cochlear Limited Annual Report 2021 Governance Board of directors Board composition As at 30 June 2021 Board gender diversity Board gender diversity 30% 70% Male Female Board tenure Board tenure 33% 33% 11% 22% 0-3 years 6-9 years 3-6 years 9+ years Rick Holliday-Smith Chairman Appointed to the Board 1 March 2005 and retiring on 20 August 2021 Chairman of the Nomination Committee. Member of the Audit & Risk and People & Culture Committees. Background Global executive and leadership experience in capital markets and derivatives, and a background in venture capital activities. Former President of NationsBank-CRT, Chicago and Managing Director of Hong Kong Bank Limited, London. Other boards Non-executive Chairman, QBiotics and member of the Macquarie University Faculty of Business and Economics Advisory Board. Former directorships Chairman, ASX Limited, Snowy Hydro Limited and SFE Corporation Limited. Director, Servcorp Limited, St George Bank Limited, Exco Resources NL, DCA Group Limited and MIA Group Limited. Qualifications BA (Hons), FAICD, CA Dig Howitt CEO & President and Managing Director Appointed to the Board 14 November 2017 and as CEO & President 3 January 2018 Member of the Medical Science and Technology & Innovation Committees. Background Joined Cochlear in 2000 and has a wealth of experience across the Company in roles including Chief Operating Officer, SVP, Manufacturing and Logistics and President, Asia Pacific. Prior to joining Cochlear, worked for Boral and Boston Consulting Group. Dig is a member of the Champions of Change STEM group. Appointed as President of Cochlear on 31 July 2017 and became CEO & President on 3 January 2018. Other boards Director, QPBT Pty Ltd. Qualifications BE (Hons), MBA 48 Board tenure chart excludes Managing Director.Cochlear Limited Annual Report 2021Yasmin Allen Non-executive Director Andrew Denver Non-executive Director Glen Boreham, AM Non-executive Director Appointed to the Board 1 February 2007 Member of the Audit & Risk, Medical Science, Technology & Innovation and Nomination Committees. Background Extensive experience in the life sciences industry. Former Managing Director of Memtec Limited and President Asia for Pall Corporation. Other boards Chairman, SpeeDx and Director, Vaxxas and QBiotics. Former directorships Executive Chairman, Universal Biosensors. Qualifications BSc (Hons), MBA, FAICD Appointed to the Board 1 January 2015 Chair of the People & Culture Committee. Member of the Audit & Risk, Nomination and Technology & Innovation Committees. Background Led organisations in information technology, new media and the creative industries through periods of rapid change and innovation. Former Managing Director of IBM Australia and New Zealand. Other boards Director, Southern Cross Media Group and Link Group. Strategic Advisor, IXUP. Former directorships Data#3. Chairman of Screen Australia, Advance (Global Australian Network), Business School and Industry Advisory Board for the University of Technology, Sydney and Advisory Board IXUP. Qualifications BEc, FAICD Appointed to the Board 2 August 2010 Chair of the Audit & Risk Committee. Member of the People & Culture, Nomination and Technology & Innovation Committees. Background Extensive career in investment banking with senior roles in strategic analysis and corporate advice. Former Vice President of Deutsche Bank AG, Director of ANZ Investment Bank and Associate Director of HSBC London. Other boards Chair of Australian Federal Government Steering Group for Digital Skills Organisation. Director, Santos Limited, ASX Limited and National Portrait Gallery. Member of the George Institute for Global Health Board. Chairman, Advance (Global Australian Network), Acting President, Australian Government Takeovers Panel and Chairman, Faethm.org. Former directorships Insurance Australia Group Limited. National director of the Australian Institute of Company Directors. Member of The Salvation Army Advisory Board. Chair of Macquarie Specialised Asset Management. Qualifications BCom, FAICD 49 Cochlear Limited Annual Report 2021Governance Board of directors Alison Deans Non-executive Director Prof Bruce Robinson, AC Non-executive Director Abbas Hussain Non-executive Director Appointed to the Board 1 January 2015 and appointed as Chair effective 21 August 2021 Chair Technology & Innovation Committee until 19 August 2021. Member of the Audit & Risk, Nomination and People & Culture Committees. Background Extensive experience leading technology-enabled businesses across e-commerce, media and financial services. Former Chief Executive Officer of netus, Hoyts Cinemas, ecorp and eBay Australia and New Zealand. Other boards Director, Ramsay Health Care Limited and Deputy Group Pty Ltd. Senior Advisor to McKinsey & Company. Member of Investment Committee, CSIRO Innovation fund (MainSequence Ventures) and member of AICD Corporate Governance Committee. Director of SCEGGS Darlinghurst Limited and The Observership Program. Former directorships Westpac Banking Corporation, Insurance Australia Group Limited and Social Ventures Australia. Qualifications BA, MBA, GAICD Appointed to the Board 13 December 2016 Chair of Medical Science Committee. Member of the Nomination, People & Culture and Technology & Innovation Committees. Background Over 20 years’ leadership experience as an academic physician/scientist across research, healthcare and medicine, and tertiary education. Former Dean, The University of Sydney’s Sydney Medical School, Head of Medicine at Sydney’s Royal North Shore Hospital and Head of the Cancer Genetics Laboratory at the Kolling Institute for Medical Research. Other boards Chairman, National Health and Medical Research Council. Director, MaynePharma, QBiotocs and Ecofibre. Director, Woolcock Institute of Medical Research and Senior Advisor to McKinsey & Company and MinterEllison. Former directorships Chairman, Medical Benefits Schedule Review Taskforce. Director, Lorica Health Pty Limited, Firefly and Digital Health Agency CRC. Qualifications MD, MSc, FRACP, FAAHMS, FAICD Appointed to the Board 1 December 2018 and retired on 20 July 2021 Member of the Nomination, Medical Science and Technology & Innovation Committees. Background Over 30 years’ global experience in the pharmaceutical industry with significant experience in building relationships with professionals within the healthcare industry. Former Global President, Pharmaceuticals at GlaxoSmithKline. Other boards Director, Teva Pharmaceuticals and TARGTEX. Senior Advisor, CellResearch Corp and C-Bridge Group, Hikma PLC and Advisor to Indegene Inc. Former directorships CSL Limited and Immunocore Limited Qualifications BSc (Hons) 50 Cochlear Limited Annual Report 2021Sir Michael Daniell, KNZM Non-executive Director Christine McLoughlin, AM Non-executive Director Donal O’Dwyer Non-executive Director Appointed to the Board 1 January 2020 Chair of Technology & Innovation Committee effective 20 August 2021. Member of the Nomination, Medical Science and Technology & Innovation Committees. Background Over 40 years’ experience in the medical device industry with extensive executive leadership experience. Former Managing Director and CEO of Fisher & Paykel Healthcare Corporation Limited responsible for the global business and operations including the design, manufacture and marketing of innovative products and systems for use in respiratory care, acute care and treatment of obstructive sleep apnea. In June 2021, Sir Michael was made a Knight Companion of the New Zealand Order of Merit for his services to business, healthcare and governance. Other boards Director, Fisher & Paykel Healthcare Corporation Ltd, Council member, The University of Auckland, Director, Tait International Limited, Chair, New Zealand Medical Technology Centre of Research Excellence, Director, Medical Research Commercialisation Fund. Qualifications BE (Hons), Electrical, CMInstD (NZ) Appointed to the Board 1 November 2020 Member of the Audit & Risk, People & Culture and Nomination Committees. Background Ms McLoughlin has served on the boards of a number of ASX50 companies and is a highly respected company director with domestic and international experience. She has had wide ranging experience covering health, insurance, resources, infrastructure and financial services. In June 2021, Ms McLoughlin was awarded a Member of the Order of Australia in the Queen’s Birthday Honours for her services to business, the not-for-profit sector and women. Other boards Chairman of the Suncorp Group Limited, Chancellor of the University of Wollongong. Chairman, Destination NSW. Australian Private Sector Representative, G20 EMPOWER Council. Former directorships NIB Holding, the McGrath Foundation and Venues NSW. Qualifications BA, LLB (Hons), FAICD Appointed to the Board 1 August 2005 and retired on 20 October 2020 Member of the Audit & Risk, Medical Science, Nomination and Technology & Innovation Committees. Background Executive experience in global general management of healthcare products and medical devices. Former worldwide President of Cordis Cardiology (a Johnson & Johnson company) and President of Baxter’s Cardiovascular Group, Europe. Other boards Director, Mesoblast Limited, Fisher & Paykel Healthcare and NIB Holdings Ltd. Chairman of Endoluminal Sciences and Director Cordis Asset Management Pty Ltd. Former directorships Chairman, CardieX (formerly Atcor Medical). Qualifications BE Civil, MBA 51 Cochlear Limited Annual Report 2021Governance Executive team Executive team & senior leader composition As at 30 June 2021 Executive team gender diversity 9% 91% Senior leaders gender diversity 38% 62% Dig Howitt CEO & President Stu Sayers Chief Financial Officer Dig joined Cochlear in 2000 and has a wealth of experience across the Company in roles including Chief Operating Officer, President, Asia Pacific and SVP, Manufacturing and Logistics. Prior to joining Cochlear, Dig worked at Boston Consulting Group and held a General Management role at Boral. Dig is a member of the Champions of Change Coalition, STEM group. He was appointed President of Cochlear on 31 July 2017 and became CEO & President on 3 January 2018. Stu was appointed as Chief Financial Officer in February 2021. Stu joined Cochlear in July 2016 as inaugural President, Services. Stu has a strong financial background and a wealth of experience in establishing and building customer focused technology and online businesses. Stu ran Amazon’s subsidiary Audible in Asia Pacific, as well as E*TRADE and Yahoo!7 in Australia and New Zealand. He previously held senior roles with ANZ and McKinsey. Stu has a Bachelor of Economics (Honours in Accounting) from the University of Sydney and an MBA from Wharton. Qualifications BEc (Hons), MBA 52 Male Female Executive team tenure Qualifications BE (Hons), MBA 36% 18% 27% 18% 0-5 years 11-15 years 6-10 years 15+ years Cochlear Limited Annual Report 2021Jan Janssen Chief Technology Officer Tony Manna President, Americas Region Richard Brook President, EMEA Tony is responsible for the development and execution of the strategic direction for our North America operations. Tony joined Cochlear in 2005 and has over 30 years’ medical device experience, including senior commercial management roles at BEI Medical and Gyrus Medical. Prior roles in Cochlear include VP, Sales USA, General Manager, Cochlear Bone Anchored Solutions, USA and President, Cochlear Bone Anchored Solutions, Sweden. Qualifications BS EET Richard is responsible for the development and execution of the strategic direction for all our operations in Europe, the Middle East and Africa (EMEA). Before joining Cochlear in 2003, Richard held senior roles in Guidant Corporation and Alaris Medical Systems. He has over 30 years’ experience in the medical device industry. Qualifications BSc Management, MBA Jan joined Cochlear in 2000 and was appointed Senior Vice President Research & Development in 2005. Jan leads a team of over 450 highly qualified engineers and scientists who implement the R&D strategy with responsibility for identifying and developing cutting‐edge technology and bringing these innovations through to commercialisation. In 2017 Jan was appointed Chief Technology Officer and took on the additional accountability for Business Development. Since 2019 he has also been accountable for Quality and Regulatory Affairs. Jan holds 10 granted patents in the field of implantable hearing technology. Qualifications MScEE 53 Cochlear Limited Annual Report 2021 Governance Executive team Anthony Bishop President, Asia Pacific & Latin American Regions Dean Phizacklea Senior Vice President, Global Strategic Marketing David Hackshall Chief Information Officer Anthony was appointed President, Asia Pacific in July 2016 and took on responsibility for Latin America in June 2021. Anthony is responsible for the development and execution of the strategic direction for all our operations in Australia, Asia, the South Pacific and Latin America. Prior to Cochlear, Anthony spent 21 years at Johnson & Johnson Medical in various roles including marketing, sales and general management around the world including Managing Director, Johnson & Johnson Medical, Australia/New Zealand. Qualifications BBus (Hons), MManagement, GAICD Dean joined Cochlear in June 2016. Dean has responsibility for product marketing and commercialisation, consumer marketing, innovation, market access, market insights and corporate communications. Dean has more than 20 years’ experience in medical devices and pharmaceuticals, covering a range of senior commercial roles in the US, Japan, Europe and Australia. Prior to joining Cochlear, Dean led Global Strategic Marketing for Abbott Diabetes Care. Other roles include General Manager for Abbott’s pharmaceutical and diabetes care businesses in Australia/New Zealand and commercial roles in Asia with AstraZeneca. Qualifications BSc Microbiology, MBA David joined Cochlear in July 2015 as Cochlear’s first Chief Information Officer and has global responsibility for the Company’s information technology strategy and management. David’s focus is to ensure Cochlear has the platforms in place to deliver and drive growth. This capability is critical in connecting Cochlear with both professionals and recipients and evolving Cochlear into both a business- to-business as well as business-to- customer organisation. Prior to Cochlear, David was Chief Information Officer at Wesfarmers Insurance Ltd and brings over 15 years of executive experience across the communications, logistics and finance sectors. Qualifications DipFN, MIT, MBA 54 Cochlear Limited Annual Report 2021 Greg Bodkin Senior Vice President, Supply Chain & Operational Excellence Jennifer Hornery Senior Vice President, People & Culture Brian Kaplan Senior Vice President, Clinical Strategy and Innovation Greg has functional responsibility for new product industrialisation, sourcing & procurement, global manufacturing, and logistics. These functions enable the technologies developed in design and development to be supplied as commercial products in Cochlear’s global markets. In addition, he leads the management of Cochlear’s Global Property, facilities and corporate procurement functions. Greg joined Cochlear in 2007 as Head of Supply with 20 years’ prior experience in supply chain management and operations consulting positions, including appointments at Taylor Ceramic Engineering, Warman International Ltd, Weir Minerals PLC and National Australia Bank. Qualifications BE (Hons), MComm (UNSW) Jennifer joined Cochlear in 2008 working in senior HR business partnering roles until her appointment as SVP People & Culture in 2017. Her focus is to ensure the right strategic capabilities, organisation and culture are in place to support Cochlear’s performance and growth aspirations. Prior to Cochlear, Jennifer worked in commercial, finance, strategy and HR leadership roles across a number of industries in Australia and the US, including senior positions at Campbell Arnott’s and Booz & Company. Qualifications BComm, MBA, GAICD Brian joined Cochlear in 2016 and manages clinical strategy and innovation for Cochlear. He is responsible for the clinical data to support present and future products and services. Brian dedicates two- thirds of his time to his role at Cochlear, while continuing to direct a cochlear implant surgical practice at the Greater Baltimore Medical Center. Brian’s past research interests have included hearing loss, balance disorders, and hair cell regeneration. His current practice focuses on adult and paediatric otology, with an emphasis on hearing restoration. Brian is board-certified in otolaryngology and is a Fellow of the American College of Surgeons. Qualifications BNeuroSci, BA, MD, FACS 55 Cochlear Limited Annual Report 2021 Remuneration report  Letter from the Chair of the People & Culture  Committee (P&CC)  Dear Shareholders  On behalf of the Cochlear Board, I am pleased to present the FY21 Remuneration report where we outline our remuneration  strategy,  summarise  the  performance  outcomes  for  FY21  and  detail  the  associated  remuneration  outcomes  for  key  management personnel.  In response to the global pandemic, several measures were taken by the Board at the end of FY20 to adjust the short‐term  incentive (STI) plan measures for FY21 to reflect higher levels of financial uncertainty. This change included refocusing the STI  performance measures to have a greater weighting on the achievement of strategic measures – to ensure that in a year where  there was still a significant level of volatility with setting clear financial targets, executives were able to focus on:   strengthening our competitive position;   investing for long‐term growth; and   managing costs to ensure reasonable recovery and stability into the future.  The change was for FY21 only, with the FY22 STI plan reverting to its original measures and weightings which have a greater  focus on financial targets. Our earnings guidance for FY22 factors in some near‐term COVID impact. We recognise however  that a more material disruption from COVID remains a risk factor that does not form part of guidance. Should COVID impact  performance more materially, the Board may need to again exercise appropriate discretion around executive performance  measures and outcomes for FY22.  FY21 performance and reward outcomes  The  Board  is  satisfied  that  the  reward  outcomes  under  the  STI  and  long‐term  incentive  (LTI)  plans  for  FY21  reflect  the  Company’s performance as it continues to recover from the impacts of the global pandemic.  Overall sales revenue grew by 10%, exceeding revenue targets for the financial year as well as reported revenue for FY19 and  FY20.  We  also  achieved  significant  progress  across  a  number  of  key  strategic  priorities:  increasing  our  market  share  and  strengthening  our  market  position  across  the  globe;  growing  the  hearing  implant  market;  and  building  an  even  stronger  organisation as we grow. Relative total shareholder return against the ASX 100 was at the 54th percentile and basic earnings  per share (EPS) represented a (5.6%) compound annual growth rate over the last three years. Solid performance has resulted  in the awarding of incentives to the CEO & President and executives under the FY21 STI and the FY19‐21 LTI plans. Further  detail on this year’s remuneration outcomes is provided in this report.  Our executive remuneration framework  In FY21, we restructured the executive team to create a smaller, more experienced team to ensure that we can continue to  grow and retain our market leadership in hearing solutions. The Board is committed to ensuring our executive remuneration  framework  and  the  associated  reward  outcomes  align  with  our  business  objectives,  performance  and  shareholder  expectations. Given our sustained business growth in recent years, the Board has conducted a deeper review of executive  remuneration with the outcome of this review highlighting gaps in our LTI structure and in fixed pay for select executives. The  Board believes that the proposed changes to be implemented from FY22 will align executives more effectively with the long‐ term  growth  objectives  of  the  organisation  and  will  ensure  executive  remuneration  continues  to  be  balanced,  fair  and  equitable, and deeply aligned with the interests of our shareholders.    Glen Boreham, AM  Chair, People & Culture Committee  Cochlear Limited Annual Report 2021  56                 Contents  This report covers:  1. Key management personnel;  2. Executive KMP remuneration received in FY21 (unaudited);  3. Our remuneration strategy and framework;  4. Executive KMP remuneration and link to performance;  5. Executive KMP statutory remuneration disclosure;  6. Executive service agreements;  7. Remuneration governance;  8. Executive KMP equity disclosures; and  9. Non‐executive director fees.  The information provided in this Remuneration report (except for section 2 and section 8.3) has been audited as required by  section 308(3C) of the Corporations Act 2001.  1. Key management personnel  This report covers key management personnel (KMP) who have authority for planning, directing and controlling the activities  of Cochlear and comprise non‐executive directors (NEDs) and executive KMP as outlined in the table below.  Name   Position  Non‐Executive Directors  Rick Holliday‐Smith  Chairman  Yasmin Allen  Non‐Executive Director  Glen Boreham, AM  Non‐ Executive Director  Sir Michael Daniell, KNZM  Non‐ Executive Director  Alison Deans  Andrew Denver  Abbas Hussain  Non‐Executive Director  Non‐Executive Director  Non‐Executive Director  Christine McLoughlin, AM  Non‐Executive Director  Prof. Bruce Robinson, AC  Non‐Executive Director  Former Non‐Executive Directors  Term   Full year  Full year  Full year  Full year  Full year  Full year  Full year  Part year appointed 1 November 2020  Full year  Non‐Executive Director  Part year retired 20 October 2020  Donal O’Dwyer  Executive KMP  Dig Howitt  CEO & President (CEO&P)  Anthony Bishop  President, Asia Pacific Region  Richard Brook  President, EMEA & Latin American Region  Jan Janssen  Tony Manna  Stu Sayers  Former Executive KMP  Chief Technology Officer  President, Americas Region  Chief Financial Officer  Full year  Full year  Full year  Full year  Full year  Part year appointed 1 January 2021  Brent Cubis  Chief Financial Officer  Part year until 30 September 2020  On 13 July 2020, B Cubis’ resignation was announced and he concluded his KMP responsibilities related to the role of the Chief  Financial Officer (CFO) on 30 September 2020. During the period between 1 October 2020 and 31 December 2020, the CEO&P  performed the KMP responsibilities typically held by the CFO.    Cochlear Limited Annual Report 2021  57                            There were no changes to KMP after the reporting date and before the date the Directors’ report was authorised for issue. The  information provided in this Remuneration report has been audited as required by section 308(3C) of the Corporations Act  2001.  2. Executive KMP remuneration received in FY21  (unaudited)  The  table  below  presents  the  remuneration  paid  to,  received  by  or  vested  to  each  executive  KMP  during  the  year.  Fixed  remuneration and cash STI relate to amounts earned during the year and vested deferred STI and vested LTI represent equity  vesting from prior years.  The figures presented below are different to the statutory disclosures in section 5 which are prepared in accordance with the  accounting standards and therefore include the accounting value for all unvested deferred STI and LTI awards expensed in the  year. The table below has been provided voluntarily to ensure shareholders are able to clearly understand the remuneration  outcomes and actual ‘take‐home pay’ of executive KMP for FY21.   Amounts $  Executive KMP  D Howitt  A Bishop  R Brook  J Janssen  T Manna  S Sayers5  Former Executive KMP B Cubis6  Year Fixed  remuneration1  Cash STI2  Vested  deferred STI3  Vested LTI4  End of  service  Total  FY21 FY20 FY21 FY20 FY21 FY20 FY21 FY20 FY21 FY20 FY21 FY21 FY20 1,851,043  1,744,153  580,655  561,171  947,798  1,045,039  885,655  851,002  836,301  923,513  406,325  164,827  633,651  1,730,148  –  395,175  –  519,413  –  635,708  –  619,509  –  220,630  –  –  355,828  206,683  92,532  129,803  139,850  205,594  140,270  188,824  135,644  216,701  –  115,034  52,923  1,447,993  864,687  110,355  272,124  318,182  682,358  354,151  706,925  264,735  686,174  –  228,929  –  –  –  –  –  –  –  –  –  –  –  –  5,385,012  2,815,523  1,178,717  963,097  1,925,243  1,932,991  2,015,784  1,746,751  1,856,189  1,826,388  626,955  327,132  –  835,922  686,574  1. Fixed remuneration earned in the year (base salary, superannuation and non‐monetary benefits which may include insurances and car  allowances). During the temporary pay reduction from mid‐April 2020 until 12 July 2020, D Howitt took a 30% pay reduction in base  salary and other executives took a 20% pay reduction in base salary. R Brook’s fixed remuneration for FY21 and FY20 excludes employer  contributions for social security, accident and sickness and reflects actual ‘take‐home pay’. These amounts are included with the non‐ monetary benefits in the statutory table in section 5.  2. Cash STI earned and relating to performance during the financial year. For example, FY21 is reported as STI payments which are accrued  at year end, and received in August 2021, after the reporting year end.  3. Vested deferred STI is the value of the deferred STI from prior years that vested in August of the reported financial year (calculated as  the number of rights that vested multiplied by the share price on the vesting date). For example, FY21 is reported as the FY18 deferred  STI grant which vested in August 2020.  4. Vested LTI is the value of performance rights and options that vested in August of the reported financial year (rights are calculated as  the number of rights that vested multiplied by the share price on the vesting date and options are calculated as the number of options  multiplied by the share price on the date of vesting/exercise less the exercise price). For example, FY21 is reported as the FY18 LTI grant  which vested in August 2020 (46.4% of awards vested due to performance).  5. Remuneration for S Sayers only relates to the period that he was a KMP from 1 January 2021.  6. B Cubis concluded to be a KMP as at 30 September 2020 and remained with Cochlear until 1 January 2021. The amounts in the table  above reflect remuneration he received as a KMP until 30 September 2020. He continued to receive fixed remuneration of $183,310  from 1 October 2020 to 1 January 2021 and received an end of service payment of $327,132 that relates to statutory entitlements and  contractual benefits agreed. Refer to section 6.1 for further detail.  Cochlear Limited Annual Report 2021  58                                                  3. Our remuneration strategy and framework   Cochlear’s executive remuneration strategy is designed to attract, motivate and retain a highly qualified and experienced group  of  executives employed  across  diverse  geographies.  The  following  diagram  links  each  of  the  executive  team  remuneration  components to Cochlear’s mission and strategy.  Cochlear’s mission and strategy  To help people hear and be heard  We deliver this through our corporate strategy and organisational capability …  Retain  market  leadership  Grow the  hearing  implant  market  Deliver  consistent  revenue and  earnings  growth  Build a  stronger  organisation  … which are reflected in performance measures across Cochlear’s incentive plans …  Net profit after tax (NPAT)  Sales revenue  Achievement of business priorities   and growth initiatives  Relative total shareholder return (TSR)  Compound annual growth rate in basic  earnings per share (EPS)  … with actual outcomes directly driving executive remuneration.  Fixed remuneration  Short‐term incentive  Long‐term incentive  Total  remuneration  3.1   Remuneration mix  The remuneration mix for executive KMP is weighted towards at‐risk performance based remuneration to ensure a strong  focus on short, medium and long‐term performance. A portion of executive remuneration is paid in equity (44% for the CEO&P  and 33% for other executive KMP) to align our executives with shareholder interests.   1   33% 34% 11% 22% 22% 11% 22% 45% CEO&P  Other Executive KMP  Cochlear Limited Annual Report 2021  59                            3.2   Fixed remuneration  Fixed remuneration comprises base salary, superannuation and non‐monetary benefits which may include insurances and car  allowances.  It  is  set  at  a  level  to  attract  and  retain  executive  talent  with  the  appropriate  capabilities  to  deliver  Cochlear’s  objectives.   Fixed remuneration is generally positioned at the median of the relevant market and is reviewed annually to ensure alignment  with local market benchmarks, and it is reflective of the executive’s expertise and performance in the role. Market benchmarks  are typically set with reference to market capitalisation and include organisations within Cochlear’s industry sector and/or  similar in global operations and complexity as determined by the P&CC each year.   3.3   Short‐term incentive  Purpose  To align and reward executives for the achievement of Cochlear group and regional (for regional executives) performance  targets set by the Board at the beginning of the performance period.  Performance  measures  Description  STI is dependent on meeting financial and strategic performance measures:  Performance  measure and  weighting  Performance  Gateway  Sales revenue  (40%)     Group Performance Gateway (minimum NPAT threshold) to drive global alignment.  Sales revenue growth is critical to short and longer‐term shareholder returns.  Financial targets are set by the Board, having regard to prior year performance, global market  conditions, competitive environment, future prospects and Board approved budgets. The targets  incorporate a significant amount of stretch to ensure executives are engaged and incentivised to  appropriately  deliver  results.  The  specific  targets  are  not  disclosed  to  the  market  due  to  their  commercial sensitivity.   For FY21, the Board approved a shift in the weighting for the sales revenue performance measure  from  60%  to  40%  to  reflect  the  uncertainty  that  Cochlear  faced  at  the  start  of  the  FY21  performance year.  Strategic measures recognise that in addition to short‐term financial results, a number of strategic  initiatives are required to enable sustained growth over time.   For FY21, the Board approved a shift in the weighting for the strategic performance measure from  40% to 60% to ensure executives continued to focus on delivering critical strategic programs that  will enable Cochlear to recover and grow beyond FY21. Each executive’s contribution against performance objectives is assessed at an individual level at  the end of the performance period. This assessment determines the level at which awards are  made.      Strategic  measures (60%)  Individual  contribution  Validation of performance against the measures set for:    the CEO&P involves a review by the Board based on financial inputs from the CFO, and approved by the P&CC and  Board each year; and   other executive KMP involves a review by the CEO&P based on inputs from the CFO and approved by the P&CC.   Any anomalies or discretionary elements are validated and approved by the Board.   Refer to section 4 for further detail on measures for FY21.  Opportunity  CEO&P: target opportunity is 100% of base salary, and maximum is up to 180% of base salary.  Delivery  Cessation of  employment  Other executive KMP: target opportunity is 75% of base salary, and maximum is up to 135% of base salary.  Two‐thirds of the award is paid in cash annually, with one‐third deferred into service rights for a period of two years (subject  to a service condition) to reinforce alignment to longer‐term shareholder interests and for retention purposes. No dividends  are attached to service rights.  The number of rights to be allocated is calculated using the ‘gross contract value’, which refers to a Black‐Scholes‐Merton  pricing model without discounting for service or performance hurdles. The model uses Cochlear’s share price following the  announcement of full year results in August each year.  Prior to STI payment date: if an executive ceases employment with Cochlear prior to any cash being paid, or service rights  being granted, the executive will forfeit any awards to be paid for the performance period, unless the Board determines  otherwise.  Cochlear Limited Annual Report 2021  60       Post STI payment date: if an executive is dismissed for serious misconduct or resigns from their position after service rights  have been granted, but prior to the relevant vesting date, any unvested rights will generally be forfeited, unless the Board  determines otherwise.  3.4   Long‐term incentive  Purpose  Award vehicle  Opportunity  Allocation  method  Performance  period  Performance  measures and  hurdles  To align the remuneration opportunity for the executive team with shareholder value and provide a stimulus for the  retention of executives within the Company.  LTI is delivered as 50% options and 50% performance rights.  CEO&P: maximum opportunity is 100% of base salary.  Other executive KMP: maximum opportunity is 50% of base salary.  The LTI opportunity is calculated using the ‘gross contract value’, which refers to a Black‐Scholes‐Merton pricing model  without discounting for service or performance hurdles.  Gross contract value discounts for dividends not paid, share price volatility and the risk free rate of return. There is no  discount for the likelihood of service or performance conditions. The model uses Cochlear’s five‐day volume‐weighted  average share price following the announcement of full year results in August each year.  Performance is measured over a four‐year performance period.  Post vesting, options expire seven months after the vesting date if they have not been exercised. There is no retesting  of performance hurdles under the LTI plan.  Awards are subject to:   50% weighting on relative TSR against the constituents of the ASX 100 index as at the start of the performance  period; and  50% weighting on compound annual growth rate (CAGR) in basic EPS.   The proportion of awards that vest for performance are:  Relative TSR  Basic EPS  Performance   % of instruments that  vest  Performance (CAGR)  % of instruments that  vest  Less than 50th percentile  At the 50th percentile  50th percentile to 75th  percentile  Above 75th percentile  0%  40%  Less than 7.5%  7.5%  0%  50%  40% to 100% (pro‐rata)  7.5% to 12.5%  50% to 100% (pro‐rata)  100%  Above 12.5%  100%  Dividends  Cessation of  employment   These  measures  have  been  selected  to  incentivise  the  executive  team  towards  long‐term  sustainable  growth  of  the  business and are generally accepted proxies for the creation of shareholder value.  No dividends are attached to options or performance rights.  If an executive ceases employment with Cochlear before the end of the performance period, unvested LTI awards will  generally  be  forfeited.  In  exceptional  circumstances  (including,  but  not  limited  to,  redundancy  and  retirement),  the  Board may, in its discretion, determine that all or a portion of the award will vest in line with the original performance  criteria and vesting date.   Cochlear Limited Annual Report 2021  61                             4. Executive KMP remuneration and link to  performance  4.1   FY21 STI outcomes   The STI plan for FY21 was adjusted by the P&CC at the start of the year to enable the Board to exercise discretion to moderate  any  unintended  STI  outcomes  resulting  from  the  global  pandemic  effects  on  Cochlear’s  performance.  The  adjustment  to  weightings for the FY21 STI performance measures (as outlined in 3.3 Short‐term incentive) factored in the significant level of  volatility and uncertainty with setting clear financial targets, which allowed executives to focus on:    strengthening our competitive position;  investing for long‐term growth; and   managing costs to ensure reasonable recovery and stability into the future.  For FY21, STI was based on meeting a Group Performance Gateway of Underlying NPAT, and performance against financial  measures (40%) and strategic measures (60%).  Final allocations to executive KMP were also based on individual performance  as assessed by the Board (for the CEO&P) and CEO&P (for other executives).  The STI plan will revert to its original measures and weightings (with a greater focus on financial targets) from FY22.  When  reviewing  financial  performance,  the  Board  excludes  revaluation  gains  and  losses  from  non‐core  investments  (the  innovation fund) from the calculation of STI. For FY21, Underlying NPAT was $236.7 million and sales revenue grew 10%.  In addition to financial measures, the Board also considered progress against strategic measures which are critical to the  achievement of Cochlear’s longer‐term goals.   Validation of performance against the measures set for:   the CEO&P involves an independent review and endorsement by the CFO, reviewed and approved by the P&CC and Board;  and    other executive KMP involves a review by the CEO&P based on inputs from the CFO with a final review undertaken by the  P&CC.   Any anomalies or discretionary elements are validated and approved by the Board.  The table below provides a summary, and achievement against each, of the financial measures and strategic measures of the  STI plan. Measures are agreed with the P&CC at the commencement of each financial year and are aligned to the delivery of  initiatives that support Cochlear’s strategic priorities.  Business priority  Commentary on performance  Achievement  s e r u s a e m c i g e t a r t S ) % 0 6 ( Retain  market  leadership   Ensure technology Leadership    Accelerate  Connected  Care  roll  out   Grow market share   Increase upgrade penetration  Grow the  hearing  implant   market   Increase access and funding   Expand  and  enhance  direct‐to‐ consumer capability   Build  referrals  from  the  Hearing  Aid and ENT channel   Engage with more recipients   Strengthened  competitive  position  across  the  globe  through  the  launch  of  new  products  including: Osia, Baha 6, Kanso 2, Custom Sound  Pro, Remote Check and Remote Programming.   Achieved  significant  progress  the  commercial roll out of Connected Care solutions.   through   Significant  progress  achieved  in  driving  growth,  despite  COVID,  with  direct‐to‐consumer  leads  and surgeries exceeding target and good work on  developing  referrals  from  the  hearing  aid  channel.   The Standard of Care work has progressed with  the  publication  of  the  consensus  paper  and  detailed  country  plans  developed  and  being  executed.    Cochlear Limited Annual Report 2021  62                             Build a  stronger  organisation   Build  an  Achievement  and  One  Team Culture   Develop  organisational  talent  and capability   Drive commercial excellence   Implement the digital strategy   Increased  focus  on  two  cultural  priorities  to  improve  how  we  work  together  across  the  organisation  and  how  we  deliver  better  results  by  resolving  conflicts  in  responsibilities  and  priorities.   Progressed initiatives to support succession and  ) % 0 4 ( Deliver  consistent  revenue  and  earnings  growth    Improve  quality,  efficiency  and  agility   Achieve  revenue  to  pre‐COVID  levels  and  positive  operating  cashflow   Develop  alliances  partnerships  and  executive development.    Successfully  delivered  a  new  Customer  Data  Architecture  for  Cochlear  across  the  globe  to  ensure  ongoing  alignment  of  major  business  processes.   Continued to deliver on the digital strategy, with  a majority of sites launched through FY21.   Integrated  the  Services  and  Acoustics  functions  into other functions across the organisation with  a view to simplify and improve efficiency.   Delivered  record  revenue  for  FY21,  exceeding  revenue targets for the financial year as well as  reported revenue for FY19 and FY20 in constant  currency.    Continued  to  manage  costs  in  FY21  to  ensure  recover and stability beyond this financial year.   s e r u s a e m l a i c n a n F i = Below expectations  = Met expectations  = Exceeded expectations  Key performance targets were exceeded for FY21 resulting in an average actual STI of 144% of target for executive KMP. The  following STI payments were made as outlined in the table below.  STI target as a   % of base salary  STI maximum as a  % of base salary  Actual STI as a  % of target  Actual STI as a  % of maximum  STI forfeited as a  % of maximum  Actual STI ($)  Executive KMP  D Howitt  A Bishop  R Brook  J Janssen  T Manna  S Sayers  Former Executive KMP  B Cubis  100%  75%  75%  75%  75%  75%  75%  180%  135%  135%  135%  135%  135%  135%  144%  144%  137%  144%  160%  137%  0%  80%  80%  76%  80%  89%  76%  0%  20%  20%  24%  20%  11%  24%  2,595,222  592,763  779,120  953,562  929,264  330,945  100%  0  Two‐thirds of the actual STI will be delivered in cash in August 2021, and one‐third will be deferred into service  rights (and subject to service conditions) until August 2023.  Cochlear Limited Annual Report 2021  63                                         4.2   FY19‐21 LTI vesting outcomes   LTI is based on performance against relative TSR (50%) and basic EPS growth (50%) over a three‐year performance period. The  graphs below illustrate Cochlear’s relative TSR and basic EPS performance over the past five years.   For  FY21,  Cochlear’s  TSR  performance  was  26.1%,  which  was  ranked at the 54th percentile of the ASX 100 comparator group.  This  resulted  in  performance  around  target,  and  as  a  result,  50.08% of the TSR portion of the LTI vested.  Cochlear’s  basic  EPS1  in  FY21  was  360  cents,  which  is  a  (5.6%)  CAGR  over  the  three‐year  performance  period.  This  resulted  in  performance below target and as a result, 0% of the EPS portion  of the LTI vested.  R S T r a e y ‐ 3 200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% Cochlear TSR performance against targets Cochlear EPS performance against targets 174.0% 157.0% 40% 30% 33.3% 76.3% 30.6% 26.1% FY17 FY18 FY19 FY20 FY21 Cochlear TSR performance Median TSR (target) 75th percentile TSR (stretch) R G A C S P E 20% 10% 18.6% 11.7% r a e y ‐ 3 ‐ (10%) (20%) FY17 FY18 FY19 FY20 FY21 (5.6%) (12.9%) Cochlear EPS performance Target Stretch For the FY19‐21 LTI, 25.04% vests based on performance over the three‐year period   from 1 July 2018 to 30 June 2021.  1.  For the purposes of LTI, basic EPS is determined based on underlying NPAT which excludes innovation fund gains and patent litigation‐ related tax and other benefits.  4.3   Financial performance history (FY17 to FY21)  Sales revenue ($million)1  Earnings/(loss) before interest and tax (EBIT) ($million)  EBIT (excluding innovation fund gains and patent litigation  expense) ($million)  Net profit/(loss) after tax (NPAT) ($million)  NPAT (excluding innovation fund gains and patent litigation  expense) ($million)  Basic earnings/(loss) per share (EPS) (cents) – reported  Basic EPS (excluding innovation fund gains and patent  litigation expense) (cents)  EPS growth (3‐year CAGR)  EPS growth (excluding innovation fund gains and patent  litigation expense) (3‐year CAGR)  Total dividend per share ($)  Share price as at 30 June ($)  FY17  FY18  FY19  FY20  FY21  1,239.7  315.6  n/a  1,351.4  348.4  350.6  223.6  n/a  389.7  n/a  33.3%  n/a  245.8  248.0  427.3  431.1  18.6%  n/a  1,446.1  370.1  359.3  276.7  265.9  460.9  460.9  1,352.3  (262.2)  206.9  (238.3)  153.8  (399.6)  257.9  13.2%  11.7%  (200.8%)  (12.9%)  1,493.3  374.1  330.2  326.5  236.7  496.7  360.0  5.1%  (5.6%)  Relative total shareholder return (TSR) (3 years)  TSR percentile ranking2  1. Excludes foreign exchange gain/(loss) on hedged sales.  2. TSR percentile ranking is shown over three financial years to 30 June. For LTI, performance is compared to the TSR of the constituents  2.70  155.45  174.0%  96th  3.00  200.17  157.0%  97th  3.30  206.84  76.3%  81st  1.60  188.93  30.6%  72nd  2.55  251.67  26.1%  54th  of the ASX 100 as at the start of the relevant performance period.   For further explanation of details on Cochlear performance, see the Operating and financial review section on pages 16 to 45  of this Annual Report.  Cochlear Limited Annual Report 2021  64                                              5. Executive KMP statutory remuneration  disclosure  The table below presents the total remuneration for executive KMP in accordance with the accounting standards.  Amounts $  Year  Short‐term benefits  Post‐  employment  Salary Cash STI Non‐ monetary  benefits1  Super‐ annuation  contributions  Other long‐term benefits Long service leave Share‐based payments  End of  service  Total  Deferred  STI2 LTI  performance  rights3 LTI  options3 % of  performance  related  remuneration  Executive KMP   D Howitt  FY21  1,827,811  1,730,148   1,538  21,694  (3,577)  472,519  293,673  518,191  FY20  1,721,612  –  1,538  21,003  41,051  298,081  151,890  463,205  A Bishop  FY21  558,038  395,175   FY20  539,245  –  923  923  21,694  5,605  106,554  57,734  64,375  21,003  6,549  70,316  38,756  36,625  R Brook  FY21  755,888  519,413   146,392  123,202  FY20  767,993  –  235,341  152,924  –  –  146,558  104,762  80,754  105,122  53,498  79,027  J Janssen  FY21  862,423  635,708   1,538  21,694  (18,030)  176,357  90,036  117,930  FY20  828,461  –  1,538  21,003  4,869  115,315  60,412  88,868  T Manna  FY21  764,830  619,509   52,057  FY20  816,517  –  85,755  19,414  21,241  –  –  162,052  102,227  75,093  126,835  36,386  111,795  FY21  S Sayers4  Former Executive KMP   395,020  220,630   458  10,847  9,133  56,846  18,348  24,128  –  –  –  –  –  –  –  –  –  –  –  4,861,997  2,698,380  1,210,098  713,417  1,877,329  1,393,545  1,887,656  1,120,466  1,819,790  1,173,921  735,410  B Cubis5  FY21  158,486  FY20  611,725  –  –  233  923  6,108  746  47,473  21,611  32,030  327,132  593,819  21,003  4,397  84,302  52,062  59,666  –  834,078  Total   FY21  5,322,496  4,120,583  203,139  224,653  (6,123)  1,168,359  637,249  988,611  327,132  12,986,099  FY20  5,285,553  –  326,018  258,177  56,866  775,003  393,004  839,186  –  7,933,807  62.00%  33.84%  51.55%  20.42%  45.38%  17.03%  54.04%  23.61%  54.04%  21.33%  43.51%  17.03%  23.50%  53.25%  25.30%  1. Non‐monetary benefits include insurances for all KMP and car and housing allowances for overseas‐based KMP which are market‐based  payments. During the temporary pay reduction from mid‐April 2020 until 12 July 2020, D Howitt took a 30% pay reduction in base salary  and  other  executives  took  a  20%  pay  reduction  in  base  salary.  For  R  Brook,  the  amount  also  includes  compulsory  social  security  contributions of approximately $78,000.  3. 2. Deferred STI is granted in service rights and deferred for a further two years. The cost of the plan is expensed across three years. The  FY21 amount represents the portion of the FY19 and FY21 deferred STI expensed in FY21. The FY20 amount represents the portion of  the FY18 and FY19 deferred STI expensed in FY20. There was no expense for FY20 deferred STI as no awards were made in the year.  LTI  granted  in  performance  rights  and  options  are  expensed  evenly  over  the  period  from  grant  date  to  vesting  date.  The  value  is  calculated  at  the  date  of  grant  using  the  Black‐Scholes‐Merton  pricing  model  discounted  for  vesting  probabilities  of  non‐market  performance criteria. The amount expensed each reporting period includes adjustments to the life‐to‐date expense of grants based on  the  reassessed  estimate  of  achieving  non‐market  performance  criteria  and  final  vesting  amounts  for  the  non‐market  performance  criteria of performance rights and options. The value disclosed above is the portion of the value of the performance rights and options  recognised as an expense in the financial year. The ability to exercise the performance rights and options is conditional on Cochlear  achieving certain performance hurdles. Further details of performance rights and options granted during the financial year are set out  in this report.   4. Remuneration for S Sayers only relates to the period that he was a KMP from 1 January 2021.  5. B Cubis concluded to be a KMP as at 30 September 2020 and remained with Cochlear until 1 January 2021. The amounts in the table  above reflect remuneration he received as a KMP until 30 September 2020. He continued to receive fixed remuneration of $183,310  from 1 October 2020 to 1 January 2021 and received an end of service payment of $327,132 that relates to statutory entitlements and  contractual benefits agreed. The share‐based payment values presented includes an expense of $8,198 for LTI performance rights and  $11,992 for LTI options that would normally have been amortised over future years for awards that remain subject to vesting hurdles  and timeframes, and LTI may not be paid out if conditions are not met. Refer to section 6.1 for further detail.  Cochlear Limited Annual Report 2021  65                                              6. Executive service agreements   Cochlear does not enter into (limited) service contracts for executive KMP. The terms of employment for executive KMP meet  local employment law requirements.  Key provisions are similar but do, on occasion, vary to suit different needs.   The following sets out details of the employment agreements relating to executive KMP.  Length of contract  Permanent contract until notice is given by either party.  Notice periods  Post‐employment  restraints  Other arrangements  CEO&P: 12 months’ written notice by either party.  Other executive KMP: between 60 days to six months’ written notice by either party (exact period  specified in each contract).   All executive KMP are subject to post‐employment restraints for up to 12 months.  Richard Brook will receive a maximum of CHF 30,000 for repatriation costs in the case of  termination or resignation.  6.1 End of service for former executives  Brent Cubis announced his resignation from Cochlear on 13 July 2020. He concluded to be a KMP on 30 September 2020 and  remained employed with Cochlear until 1 January 2021. From 1 October 2021 to 1 January 2021, he continued to provide  services as required and continued in his role as director of subsidiaries of Cochlear. Through this period, he received a fixed  remuneration of $183,310. At the end of his service, he received:   payment of $327,132 as part of a contractual agreement;   payment of accrued but unused annual leave; and   payment of any unpaid base salary.  The Board applied its discretion to allow some prior equity grants to remain on‐foot subject to the original terms of those  awards (both time and performance hurdles). The awards are detailed in section 8 and are eligible for vesting in August 2021  and August 2022.  Cochlear Limited Annual Report 2021  66               7. Remuneration governance  7.1   Governance framework for remuneration at Cochlear  The Board is responsible for all areas of Cochlear’s strategy and policy related to its people. Consistent with this responsibility,  the Board has established the P&CC which comprises solely of independent NEDs.   Management   People & Culture Committee  Board  • Makes recommendations to the  P&CC with respect to individual  remuneration arrangements for  executive KMP  • Implements policies and  practices relating to talent  management, remuneration,  organisational culture, diversity  and inclusion, work, health and  safety and leadership  development  • The P&CC is empowered to source any internal  resources and obtain external independent  professional advice it considers necessary to  enable it to review management proposals and  make decisions on behalf of the Board on:  − Remuneration policy, composition, quantum  and performance targets for executive KMP  − Remuneration policy in respect of NEDs  − Organisational culture, diversity and inclusion,  talent management and leadership  development strategies and practices  − Work, health and safety metrics and initiatives  − Design features of employee and executive  short‐term and long‐term incentive plan  awards  • Reviews, applies judgement  and, as appropriate,  approves recommendations  from the P&CC  7.2   Advice from external advisors  To  inform  decisions,  the  P&CC  sought  advice  and  (at  times)  recommendations  from  the  CEO&P  and  other  management  throughout the year. During FY21, the P&CC engaged Godfrey Remuneration Group (GRG) and received market practice advice  and information in relation to the remuneration of NEDs, executives and senior leaders. GRG was paid $107,200 (excluding  GST) for these services.   The P&CC is satisfied that the advice received from GRG is free from undue influence of the KMP to whom the remuneration  recommendations relate as GRG confirmed in writing that the remuneration recommendations were made free from undue  influence by management, in accordance with the Corporations Act 2001.  7.3   Share ownership requirements  Executive KMP are required to retain vested equity until they hold and maintain a holding of Cochlear shares equivalent to  their  annual  salary  in  the  previous  year.  The  Board  considers  the  minimum  shareholding  guidelines  to  be  best  practice  to  strengthen the alignment of executives’ interests to those of shareholders. The table in section 8.2 details the current holdings  of executive KMP.    7.4   Clawback Policy and discretion  All participants of the deferred STI and LTI plans are subject to the Clawback Policy, available in the ‘Investor Centre’ section of  the Company’s website. The policy enables the Board to claw back remuneration outcomes in the event of a material non‐ compliance with any financial reporting requirement, misconduct, or following inappropriate behaviour post‐employment in  cases where the Board has exercised its discretion to allow retention of equity following termination of employment. The policy  is  designed  to further  align  the  interests  of  participants with  the  long‐term  interests  of  Cochlear  and  shareholders,  and  to  ensure that excessive risk taking is not rewarded.   The Board retains discretion to adjust remuneration outcomes upwards or downwards to ensure incentives are not provided  where it would be inappropriate or would provide unintended outcomes. The exercise of appropriate discretion may be used  where a formulaic outcome does not align with the overall shareholder experience, or reflect overall business performance  and intended outcomes; or leads to retention risk for key talent. The Board balances judgement on remuneration outcomes  with consideration to all stakeholders.  Cochlear Limited Annual Report 2021  67         8. Executive KMP equity disclosures  Executive KMP participate in the deferred STI and LTI plan which offers equity under the Cochlear Executive Incentive Plan  (CEIP). The purpose of the CEIP is to encourage executives to hold Cochlear shares and to align their interests to shareholders’  interests.  Under  the  LTI  plan,  vesting  of  options  or  performance  rights  only  occurs  if  Cochlear  achieves  challenging  and  market  competitive hurdles related to basic EPS growth and relative TSR. Under the deferred STI plan, grants are based on performance  in the first year, and are then deferred for a further two years.    8.1   Equity granted as remuneration  The table below presents the number of options and performance rights granted to executive KMP as well as the number of  instruments that vested or were forfeited during the year.   Equity granted in FY21 under the CEIP has been approved by shareholders for the CEO&P in accordance with ASX Listing Rule  10.14.  No options or rights vest if the conditions are not satisfied; hence the minimum value is nil. The maximum value of the grants  has been determined as the fair value of awards at grant date that is yet to be expensed.  Plan  Grant date  Options  Performance rights  Number  Maximum  value to be  expensed ($)1  Number  Maximum value   to be expensed  ($)1  Vesting  date  Vested  Forfeited  Executive KMP  D Howitt  A Bishop  R Brook  J Janssen  T Manna  FY18 LTI  FY18 deferred STI  FY19 LTI  FY19 deferred STI  FY20 LTI  FY21 LTI  Total  FY18 LTI  FY18 deferred STI  FY19 LTI  FY19 deferred STI  FY20 LTI  FY20 LTI  FY21 LTI  Total  FY18 LTI  FY18 deferred STI  FY19 LTI  FY19 deferred STI  FY20 LTI  FY20 LTI  FY21 LTI  Total  FY18 LTI  FY18 deferred STI  FY19 LTI  FY19 deferred STI  FY20 LTI  FY20 LTI  FY21 LTI  Total  FY18 LTI  FY18 deferred STI  FY19 LTI  FY19 deferred STI  FY20 LTI  FY20 LTI  FY21 LTI  Total  –  FY18 LTI  FY18 deferred STI  FY19 LTI  FY19 deferred STI  FY20 LTI  FY20 LTI  Total  18‐Oct‐17  24‐Aug‐18  17‐Oct‐18  17‐Sep‐19  23‐Oct‐19  21‐Oct‐20  18‐Oct‐17    24‐Aug‐18  17‐Oct‐18  17‐Sep‐19  23‐Oct‐19  23‐Oct‐19  21‐Oct‐20  18‐Oct‐17  24‐Aug‐18  17‐Oct‐18  17‐Sep‐19  23‐Oct‐19  23‐Oct‐19  21‐Oct‐20  18‐Oct‐17  24‐Aug‐18  17‐Oct‐18  17‐Sep‐19  23‐Oct‐19  23‐Oct‐19  21‐Oct‐20  18‐Oct‐17  24‐Aug‐18  17‐Oct‐18  17‐Sep‐19  23‐Oct‐19  23‐Oct‐19  21‐Oct‐20  –  18‐Oct‐17  24‐Aug‐18  17‐Oct‐18  17‐Sep‐19  23‐Oct‐19  23‐Oct‐19  46,842  –  35,907  –  24,041  21,217  128,007  1,778  –  1,598  –  2,014  2,745  3,230  11,365  6,965  –  4,565  –  2,679  3,652  4,911  22,772  7,060  –  5,223  –  3,237  4,413  5,197  25,130  10,385  –  7,530  –  3,055  4,165  5,045  30,180  –  3,622  –  4,050  –  2,287  3,117  13,076  –  –  –  –  214,818  647,959  862,777  –  –  –  –  10,561  24,528  98,643  133,732  –  –  –  –  14,048  32,632  149,980  196,660  –  –  –  –  16,974  39,432  158,714  215,120  –  –  –  –  16,019  37,216  154,072  207,307  –  –  –  –  –  –  –  –  3,372  1,692  1,685  2,634  4,432  4,782  18,597  697  440  700  582  332  506  728  3,985  1,170  665  857  858  442  673  1,106  5,771  1,186  667  981  1,007  534  813  1,171  6,359  436  645  353  841  504  767  1,137  4,683  –  1,420  547  760  679  377  574  4,357  –  –  –  –  147,370  561,807  709,177  –  –  –  –  7,220  16,825  85,528  109,573  –  –  –  –  9,612  22,378  129,937  161,927  –  –  –  –  11,612  27,033  137,573  176,218  –  –  –  –  10,960  25,504  133,579  170,043  –  46.4%  100.0%  53.6%  0.0%  46.4%  100.0%  53.6%  0.0%  46.4%  100.0%  53.6%  0.0%  46.4%  100.0%  53.6%  0.0%  46.4%  100.0%  53.6%  0.0%  19‐Aug‐20  19‐Aug‐20  23‐Aug‐21  23‐Aug‐21  16‐Aug‐23  21‐Aug‐24  19‐Aug‐20  19‐Aug‐20  23‐Aug‐21  23‐Aug‐21  17‐Aug‐22  16‐Aug‐23  21‐Aug‐24  19‐Aug‐20  19‐Aug‐20  23‐Aug‐21  23‐Aug‐21  17‐Aug‐22  16‐Aug‐23  21‐Aug‐24  19‐Aug‐20  19‐Aug‐20  23‐Aug‐21  23‐Aug‐21  17‐Aug‐22  16‐Aug‐23  21‐Aug‐24  19‐Aug‐20  19‐Aug‐20  23‐Aug‐21  23‐Aug‐21  17‐Aug‐22  16‐Aug‐23  21‐Aug‐24  –  –  –  19‐Aug‐20  19‐Aug‐20  23‐Aug‐21  23‐Aug‐21  17‐Aug‐22  16‐Aug‐23  –  –  –  –  –  –  –  46.4%  100.0%  53.6%  0.0%  0.0%  100.0%  68 S Sayers2  Former Executive KMP  B Cubis  Cochlear Limited Annual Report 2021                                                                                                                                                                                                                                                                                             1. The options granted in FY21 have an exercise price of $206.06, and an expiry date of 21 March 2025. Fair values (IFRS‐2) of FY21 options  and performance rights under the LTI plan as at the date of grant are as follows: options (basic EPS growth: $42.56; relative TSR: $38.88)  and performance rights (basic EPS growth: $188.83; relative TSR: $124.47). This valuation is for accounting purposes only and forms the  basis of the expense in future years. Further detail on the allocation methodology is provided in section 3.4.  In FY21, S Sayers did not receive any equity grants as a KMP.  2. 8.2   Executive KMP equity holdings and minimum shareholding  This section details the movement in equity holdings during the financial year.   Shares held during the year  During the year the FY18 deferred STI plan and FY18 LTI plan vested in August 2020, and executives’ options/rights converted  into shares under these plans.  Executive KMP  D Howitt  A Bishop  R Brook  J Janssen  T Manna  S Sayers  Former Executive KMP  B Cubis  Balance  1 July 2020  Received on exercise of  options/rights1  Purchases and sales  Balance  30 June 2021  42,475  2,499  5,000  6,786  4,128  1,108  343  24,990  1,587  4,438  4,492  5,665  2,327  2,885  (21,734)  (1,587)  (72)  (4,492)  (5,064)  (860)  45,731  2,499  9,366  6,786  4,729  2,575  (2,015)  N/A  1. For options exercised, the amount paid per option was the exercise price of $154.73.  Rights held during the year  Rights are acquired by executive KMP under the deferred STI and LTI plan. During the year:   Granted: FY21 LTI awards were granted in October 2020; and   Vested: 100% of the FY18 deferred STI award and 46.4% of the FY18 LTI award vested in August 2020.    Executive KMP  D Howitt  A Bishop  R Brook  J Janssen  T Manna  S Sayers  Former Executive KMP  B Cubis  Balance  1 July 2020  13,815  3,257  4,665  5,188  3,546  2,585  4,357  Options held during the year  Deferred STI service rights  Granted  Vested  Forfeited  –  –  –  –  –  –  –  (1,692)  (440)  (665)  (667)  (645)  (449)  (547)  –  –  –  –  –  –  –  LTI performance rights  Vested  Granted  Forfeited  4,782  (1,564)  (1,808)  728  1,106  1,171  1,137  472  (323)  (542)  (550)  (202)  (270)  (374)  (628)  (636)  (234)  (312)  Balance  30 June 2021  13,533  2,848  3,936  4,506  3,602  2,026  –  (658)  (1,336)  N/A  Options over ordinary shares are acquired by executive KMP under the LTI plan. During the year, FY21 LTI awards were granted  in October 2020 and 46.4% of the FY18 LTI award vested in August 2020.    All options held at the end of the year are unvested.   Cochlear Limited Annual Report 2021  69                                                     Balance  1 July 2020  106,790  8,135  17,861  19,933  25,135  8,859  LTI options  Granted  Vested and exercised1  Forfeited  Balance  30 June 2021  21,217  3,230  4,911  5,197  5,045  2,097  (21,734)  (25,108)  (824)  (3,231)  (3,275)  (4,818)  (1,608)  (954)  (3,734)  (3,785)  (5,567)  (1,859)  81,165  9,587  15,807  18,070  19,795  7,489  Executive KMP  D Howitt  A Bishop  R Brook  J Janssen  T Manna  S Sayers  Former Executive KMP  B Cubis  1. The value of exercised options at the date of vesting is $55.57 (closing share price at the vesting date 19 August 2020 of $210.30 less  (1,680)  (5,059)  13,076  N/A  –  the exercise price of $154.73).   Executive minimum shareholding  As at 30 June 2021, the Board is satisfied that the executive KMP are compliant with the Share Ownership Policy. The table  below presents a summary of executive KMP holdings and compliance with minimum shareholding requirements.   Executive KMP  D Howitt  A Bishop  R Brook  J Janssen  T Manna  S Sayers  Ordinary shares held  Policy value of Cochlear shares at year  end ($)1  % of base salary2                              45,731                                 2,499                                 9,366                                 6,786                                 4,729                          9,587,961                             523,940                          1,963,676                          1,422,753                             991,482                                        2,575                                   539,875   531%  95%  258%  167%  128%  65%  1. In line with the Share Ownership Policy, the value has been calculated as the average daily share price over the previous 12 months  ($209.66), as at closing on the ASX up to 30 June 2021, times the number of shares.  2. The % of base salary is calculated as the value of shares divided by the contractual base salary as at 30 June 2021.   8.3   Potential dilution if options vest and ordinary shares issued  (unaudited)  The  Board  encourages  employee  ownership  of  Cochlear  shares.  To  restrict  dilution  of  shareholders’  interests,  the  total  employee interests in unvested equity cannot exceed 5% of share capital.  At the date of this report, the number of ordinary shares that would be issued if all options were vested (having met the service  and performance conditions) and exercised and assuming ordinary shares were issued, is as follows.  Grant date  17‐Oct‐18  23‐Oct‐19  23‐Oct‐19  21‐Oct‐20  FY19 LTI  FY20 LTI  FY20 LTI  FY21 LTI  Total  Number of options  Forfeited/  lapsed1  4,486  Issued   80,231   At report  date   75,745   Exercise  price per  share ($)  Exercise period  Current net value of  outstanding options as at  30 June 2021 ($)2   202.84   Aug‐21 to Mar‐22   24,231    57,074    55,729   217,265  –  4,448  –  8,934   24,231    217.28   Aug‐22 to Mar‐23  52,626   217.28   Aug‐23 to Mar‐24   55,729    206.06   Aug‐24 to Mar‐25  208,331   3,698,628    833,304    1,809,808    2,541,800   8,883,540  Forfeited/lapsed options from unvested grants relate to plan participants who have departed Cochlear.   1. 2. Closing share price as at 30 June 2021 was $251.67.  Cochlear Limited Annual Report 2021  70                                    Total unvested equity currently accounts for approximately 0.43% of the total number of issued shares, as set out below.  Number of equivalent shares at 30 June 2021  Instrument  Unvested LTI options  Unvested LTI rights  Unvested deferred STI rights  Service rights under the APAC Employee Equity Plan1  Total  As % of total issued shares  208,331  35,528  30,687  7,581  282,127  0.43%  65,744,078  Number of issued shares  1. Refer to Note 4.3 to the financial statements for further information on the APAC Employee Equity Plan.    8.4   Transactions and loans with KMP  No transactions or loans involving directors or executive KMP, their close family members or entities they control or have  significant influence over, were made during the year.  Cochlear Limited Annual Report 2021  71         9. Non‐executive director fees  NEDs are paid from an aggregate annual fee pool for FY21 of $3,000,000 (approved at the 2017 Annual General Meeting). Total  remuneration paid during the year was $2,553,578 which is within the fee pool limit (represented 85.1% of fee pool). NEDs do  not  receive  any  performance‐related  remuneration,  options  or  performance  rights.  NEDs  receive  reimbursement  for  costs  directly related to Cochlear business.  9.1   Fee policy and changes during the year   Board fees must recognise the effort required to fulfil the responsibilities of a director. There were no fee increases for the  Board for FY21.  The table below outlines the policy base and committee fees for FY20 and FY21.  Amounts $1  Cochlear Board  Committees2  Audit & Risk  People & Culture  Technology & Innovation  Medical Science  Nomination  FY20  FY21  Chair  518,547  50,000  40,000  40,000  30,000  No fee  Member  169,923  25,000  20,000  20,000  15,000  No fee  Chair  518,547  50,000  40,000  40,000  30,000  No fee  Member  169,923  25,000  20,000  20,000  15,000  No fee  1. Superannuation contributions have been made in accordance with Australian superannuation legislation at a rate of 9.5% up to the  Australian Government’s prescribed maximum contributions limit. Fees are presented exclusive of superannuation.  2. Committee fees are not paid to the Chairman of the Board.  9.2   NED statutory remuneration  The table below presents the total remuneration for NEDs.  Amounts $  Year Short‐term benefits  Post‐employment benefits  Total  Fees  Superannuation1  Non‐Executive Director   R Holliday‐Smith  Y Allen  G Boreham  M Daniell2  A Deans3  A Denver  A Hussain  C McLoughlin4  B Robinson  FY21  FY20  FY21  FY20  FY21  FY20  FY21  FY20  FY21  FY20  FY21  FY20  FY21  FY20  FY21  FY21  FY20  515,755  488,387  258,523  244,848  253,550  240,136  203,819  85,122  253,551  249,022  228,685  218,194  203,819  193,021  137,641  238,631  226,002  21,694  21,003  21,694  21,003  21,694  21,003  20,216  9,210  21,694  10,501  21,694  20,492  20,216  19,280  13,076  21,694  20,921  537,449  509,390  280,217  265,851  275,244  261,139  224,035  94,332  275,245  259,523  250,379  238,686  224,035  212,301  150,717  260,325  246,923  Cochlear Limited Annual Report 2021  72                                                         Amounts $  Year Short‐term benefits  Post‐employment benefits  Total  Fees  Superannuation1  Former Non‐executive Director  D O’Dwyer5  Total  FY21  FY20  FY21  FY20  68,623  216,578  2,362,597  2,161,310  7,309  20,492  190,981  163,905  75,932  237,070  2,553,578  2,325,215  1. During the temporary fee reduction period from mid‐April 2020 until 12 July 2020, superannuation was maintained on full fees, and  continued to be capped at the maximum superannuation contribution limit.    2. M Daniell was appointed to the Board on 1 January 2020.  3. Effective 1 January 2020 to 30 June 2020, A Deans has opted out of receiving superannuation guarantee payments in accordance with  the Superannuation Guarantee (Administration) Act 1992. An equivalent amount of $10,501 was paid over the period from 1 January  2020 to 30 June 2020 as fees.  4. C McLoughlin was appointed to the Board on 1 November 2020. Effective 1 November 2020, C McLoughlin has opted out of receiving  super  guarantee  payments  in  accordance  with  the  Superannuation  Guarantee  (Administration)  Act  1992.  An  equivalent  amount  of  $8,411 was paid over the period from 1 November 2020 to 9 April 2021 as fees.  5. D O’Dwyer retired from the Board on 20 October 2020.  9.3   Minimum shareholding requirement for NEDs  NEDs are requested to hold shares equivalent to the fees (including both Board and committee fees) received in the previous  12 months. The share ownership requirement must be satisfied within three years of appointment to the Board.   As  at  30  June  2021,  all  NEDs  are  compliant  with  the  Share  Ownership  Policy  which  allows  three  years  to  build  their  shareholdings. The table below presents Cochlear Limited shareholdings for each NED.   Balance    1 July 2020  Purchases  Sales  Balance    30 June 2021  10,214  3,714  3,014  1,214  3,214  4,214  226  0  933  –  –  –  –  786  –  1,000  1,000  150  –  –  –  –  –  –  –  –  –  10,214  3,714  3,014  1,214  4,000  4,214  1,226  1,000  1,083  Policy value of  shares as at   30 June 2021 ($)1  2,141,467  778,677  631,915  254,527  838,640  883,507  257,043  209,660  227,062  % of fees  413%  300%  248%  124%  329%  384%  125%  98%  95%  R Holliday‐Smith  Y Allen  G Boreham  M Daniell  A Deans  A Denver  A Hussain  C McLoughlin2  B Robinson3  1. In  line  with  the  Share  Ownership  Policy,  available  in  the  ‘Investor  Centre’  section  of  the  Company’s  website,  the  value  of  Cochlear  Limited ordinary shares is calculated using the average daily share price over the previous 12 months ($209.66), as at closing on the ASX  up to 30 June 2021, times the number of shares.  2. C McLoughlin was appointed to the Board on 1 November 2020 and in accordance with the policy has until 1 November 2023 to build  her shareholding.  3. B  Robinson  temporarily  fell  below  the  minimum  shareholding  requirement  and  is  actively  working  towards  meeting  the  policy  requirement by December 2021.  Cochlear Limited Annual Report 2021  73                                Directors’ report  The directors present their report, together with the Consolidated Financial report of the Consolidated Entity (Cochlear), being  Cochlear Limited (the Company) and its controlled entities, for the year ended 30 June 2021, and the Auditor’s report thereon.  Directors  The  directors of  the  Company  at  any time  during  or  since  the  end  of the  financial  year  were R Holliday‐Smith (Chairman),   YA Allen, G Boreham, AM, Sir M Daniell, KNZM, A Deans, A Denver, D Howitt, A Hussain, C McLoughlin, AM, DP O’Dwyer and   Prof B Robinson, AC.  Information on the current directors is presented in the Annual Report. This information includes the qualifications, experience  and special responsibilities of each director. It also gives details of the directors’ other directorships.   Company Secretary  The Company Secretarial function is responsible for ensuring that the Company complies with its statutory duties and maintains  proper documentation, registers and records. It also provides advice to directors and officers about corporate governance and  gives practical effect to any decisions made by the Board.  Mr R Jarman was the Company Secretary during and since the end of the financial year. He has qualifications in law and science  from The University of New South Wales and is an admitted solicitor in New South Wales. Mr Jarman joined Cochlear in 2008  as the inaugural Group General Counsel. He has over 35 years’ experience in corporate and commercial law, litigation and  dispute  resolution,  legal  compliance  and  corporate  governance  across  medical  device,  steel,  mining  and  consumer  goods  industries.   Directors’ meetings  The number of directors’ meetings (including meetings of committees of directors) and number of meetings attended by each  of the directors of the Company during the financial year were:  Board of  Directors  Audit & Risk  Committee  People & Culture  Committee  Medical Science  Committee  Nomination   Committee  Technology &  Innovation  Committee  Held  Attended  Held  Attended  Held  Attended  Held  Attended  Held Attended  Held  Attended  R Holliday‐Smith  YA Allen  G Boreham, AM  Sir M Daniell, KNZM  A Deans  A Denver  D Howitt  A Hussain1  C McLoughlin, AM2  DP O’Dwyer3  10  10  10  10  10  10  10  10  8  4  10  10  10  10  10  10  10  10  7  4  4  4  4  –  4  4  –  –  3  1  4  4  4  –  4  4  –  –  3  1  –  5  5  5  –  5  –  –  –  4  –  5  5  5  5  –  5  –  –  –  4  –  5  –  –  –  2  –  2  2  2  –  1  2  –  –  –  2  –  2  2  2  –  1  2  2  2  2  2  2  2  –  2  1  1  2  1  2  2  2  2  2  –  2  1  1  2  –  2  2  2  2  2  2  2  –  1  2  –  2  2  2  2  2  2  2  –  1  2  Prof B Robinson, AC  10  1. A Hussain retired from the Board on 20 July 2021.   2. D O’Dwyer retired from the Board on 20 October 2020.   3. C McLoughlin was appointed to the Board on 1 November 2020.  10  –  Cochlear Limited Annual Report 2021                 74                   Principal activities  Information on the principal activities, operations and financial position of Cochlear Limited and its business strategies and  prospects is set out in the Operating and financial review on pages 16 to 45 of this Annual Report.  Dividends  Dividends declared and paid by the Company to members since the end of the previous financial year were:  Dollars per share  Total amount  $m  Franked/  unfranked  Date of payment  Dividends recognised in the current financial year by the Company are:  Interim 2021 ordinary  Total amount  1.15  1.15  75.6  75.6  0% Franked  20 April 2021  Since the end of the financial year, the directors declared the following dividend:  Final 2021 ordinary  Total amount  1.40  1.40  92.0  92.0  0% Franked  18 October 2021  The financial effect of the 2021 final dividend will be recognised in the subsequent financial year as it was declared after 30  June 2021.  Environmental regulations  Cochlear’s  operations  are  subject  to  environmental  regulations  under  the  Commonwealth  of  Australia  and  State/Territory  legislation. The Board believes that Cochlear has adequate systems in place to manage its environmental obligations and is not  aware of any breach of those environmental requirements as they apply to Cochlear.  Non‐audit services  During the year, KPMG, the Company’s auditor, performed certain other services in addition to its statutory duties. The Board  has considered the non‐audit services provided during the year by the auditor, and in accordance with written advice provided  by resolution of the Audit & Risk Committee, is satisfied that the provision of those non‐audit services during the year by the  auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for  the following reasons:    all  non‐audit  services  were  subject  to  the  corporate  governance  procedures  adopted  by  the  Company  and  have  been  reviewed by the Audit & Risk Committee to ensure that they do not impact the integrity and objectivity of the auditor; and  the non‐audit services provided do not undermine the general principles relating to auditor independence as set out in  APES 110 Code of Ethics for Professional Accountants, as they did not involve reviewing or auditing the auditor’s own work,  acting in a management or decision‐making capacity for the Company, acting as an advocate for the Company or jointly  sharing risks and rewards.  Cochlear Limited Annual Report 2021                 75                                Details of the amounts paid to the auditor of the Company, KPMG, and its related practices for audit and non‐audit services  during the year are set out below:  Audit services  Audit and review of financial reports  Total audit services  Non‐audit services  Other assurance services  Taxation compliance and advisory services  Other  Total non‐audit services  State of affairs                               Consolidated  2021  $  2020  $  2,030,461  2,030,461  2,170,767  2,170,767  –  35,666  1,370,782  1,547,505  52,942  9,185  1,423,724  1,592,356  There were no significant changes to the state of affairs of Cochlear during the financial year other than that referred to in the  financial statements or notes thereto.  Remuneration report   Information  on  Cochlear’s  remuneration  framework  and  the  outcomes  for  the  financial  year  ended  30  June  2021  for  the  Cochlear Limited Board, the CEO & President and other key management personnel, and changes for the financial year ending  30 June 2022, is included in the Remuneration report on pages 56 to 73 of this Annual Report.  Indemnification of officers   Under the terms of Article 10 of the Company’s Constitution, and to the extent permitted by law, the Company has indemnified  the  directors  of  the  Company  named  in  this  Directors’  report,  the  Company  Secretary,  Mr  R  Jarman,  and  other  persons  concerned in or taking part in the management of the Consolidated Entity. The indemnity applies when persons are acting in  their capacity as officers of the Company in respect of:    liability to third parties (other than the Company or related bodies corporate), if the relevant officer has acted in good  faith; and  costs and expenses of successfully defending legal proceedings in which relief under the Corporations Act 2001 is granted  to the relevant officer.  Insurance premiums  During the financial year, the Company paid a premium for a Directors’ and Officers’ Liability Insurance policy. The insurance  provides cover for the directors named in this Directors’ report, the Company Secretary, and officers and former directors and  officers of the Company. The insurance also provides cover for present and former directors and officers of other companies  in the Consolidated Entity. The directors have not included in this report details of the nature of the liabilities covered and the  amount of the premium paid in respect of the Directors’ and Officers’ Liability and Supplementary Legal Expenses Insurance  policies, as such disclosure is prohibited under the terms of the contract.  Cochlear Limited Annual Report 2021                 76                            Events subsequent to the reporting date  Other  than  the  matter  noted  below,  there  has  not  arisen  in  the  interval  between  the  reporting  date  and  the  date  of  this  Financial report, any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the  Company, to significantly affect the operations of Cochlear, the results of those operations, or the state of affairs of Cochlear  in future financial years:  Dividends  For dividends declared after 30 June 2021, refer above.  Lead auditor’s independence declaration  The lead auditor’s independence declaration is set out on page 78 and forms part of the Directors’ report for the financial year  ended 30 June 2021.  Rounding off  The  Company  is  of  a  kind  referred  to  in  Australian  Securities  and  Investments  Commission  (ASIC)  (Rounding  in  Financial/Directors’ Reports) Instrument 2016/191 dated 24 March 2016 and in accordance with that Instrument, amounts in  the Directors’ report and Financial report have been rounded off to the nearest one hundred thousand dollars unless otherwise  stated.  Dated at Sydney this 20th day of August 2021.  Signed in accordance with a resolution of the directors:  Director   Director  Cochlear Limited Annual Report 2021                 77                                        Auditor’s independence declaration  Lead auditor’s independence declaration under section 307C of the Corporations Act 2001  To: the directors of Cochlear Limited   I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 30 June 2021 there  have been:  (i) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the  audit; and  (ii) no contraventions of any applicable code of professional conduct in relation to the audit.  KPMG  Julian McPherson, Partner  Sydney, 20 August 2021  KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International  Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the  independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation.  Cochlear Limited Annual Report 2021                                                                                                                                                                  78                                                                                                                            Income statement  Revenue  Cost of sales  Gross profit  Selling, marketing and general expenses  Research and development expenses  Administration expenses  Other income  Other expenses  Patent litigation expense  Share of losses on equity accounted investments  Results from operating activities  Finance income – interest  Finance expense – interest  Net finance expense  Profit/(loss) before income tax  Income tax (expense)/benefit  Net profit/(loss)  Basic earnings/(loss) per share (cents)  Diluted earnings/(loss) per share (cents)  Note  2.2  2.3  2.4  2.3  2.3  5.4  3.1  2.5  2.5  2021  $m  1,497.6  (410.2)  1,087.4  (444.1)  (195.0)  (112.2)  86.5  (40.4)  (6.4)  (1.7)  374.1  3.6  (12.0)  (8.4)  365.7  (39.2)  326.5  496.7  496.7  2020  $m  1,320.6  (344.4)  976.2  (470.0)  (185.1)  (93.8)  78.1  (62.7)  (503.7)  (1.2)  (262.2)  1.6  (10.5)  (8.9)  (271.1)  32.8  (238.3)  (399.6)  (399.6)  The notes on pages 84 to 120 are an integral part of these consolidated financial statements.  Cochlear Limited Annual Report 2021                                                                                                                                                                  79                                                                                                                           Statement of comprehensive  income  Net profit/(loss)  Other comprehensive income/(loss)  Items that will not be reclassified subsequently to the income statement:  Defined benefit plan actuarial (loss)/gain  Financial investments measured at fair value through other comprehensive   income, net of tax  Total items that will not be reclassified subsequently to the income statement  Items that are or may be reclassified subsequently to the income statement:  Foreign currency translation differences  Effective portion of changes in fair value of cash flow hedges, net of tax  Net change in fair value of discontinued cash flow hedges transferred to income  statement, net of tax  Net change in fair value of cash flow hedges transferred to the income statement, net   of tax  Total items that are or may be reclassified subsequently to the income statement  Total other comprehensive income, net of tax  Total comprehensive income/(loss)  The notes on pages 84 to 120 are an integral part of these consolidated financial statements.  2021  $m  326.5  (0.1)  40.7  40.6  (14.1)  11.2  –  (3.0)  (5.9)  34.7  361.2  2020  $m  (238.3)  1.6  (1.8)  (0.2)  3.9  (22.6)  18.3  22.2  21.8  21.6  (216.7)  Cochlear Limited Annual Report 2021                  80                                                                    Balance sheet  Assets  Cash and cash equivalents  Term deposits  Trade and other receivables  Forward exchange contracts  Inventories  Current tax assets  Prepayments  Total current assets   Forward exchange contracts  Property, plant and equipment   Intangible assets   Investments  Equity‐accounted investments  Other financial assets  Deferred tax assets   Right of use asset  Total non‐current assets   Total assets   Liabilities  Trade and other payables  Forward exchange contracts  Loans and borrowings   Current tax liabilities   Employee benefit liabilities  Provisions   Deferred revenue  Lease liability  Total current liabilities   Trade and other payables  Forward exchange contracts  Loans and borrowings   Employee benefit liabilities  Provisions   Deferred tax liabilities  Deferred revenue  Lease liability   Total non‐current liabilities   Total liabilities   Net assets   Equity  Share capital   Reserves   Retained earnings   Total equity   Note  6.3  6.4(b)  5.1  3.2  5.2  5.3  5.4  5.4  5.4  3.2  5.7  6.3  3.2  4.2  5.5  5.7  6.3  4.2  5.5  3.2  5.7  2021  $m  609.6  –  296.3  17.6  216.1  69.2  21.2  1,230.0  3.3  239.5  402.8  199.5  –  27.3  146.8  189.0  1,208.2  2,438.2  202.9  4.7  –  12.9  87.9  19.4  42.8  31.9  402.5  0.7  3.2  45.0  12.1  31.0  50.6  4.0  187.4  334.0  736.5  1,701.7  1,276.6  57.9  367.2  1,701.7  2020  $m  565.0  365.0  235.5  1.2  223.8  69.4  17.6  1,477.5  2.1  230.5  410.3  25.9  69.0  5.0  147.1  208.3  1,098.2  2,575.7  159.3  0.3  393.1  7.2  54.4  130.2  47.0  26.0  817.5  13.6  1.7  79.9  12.4  27.2  14.1  2.3  205.5  356.7  1,174.2  1,401.5  1,272.4  12.7  116.4  1,401.5  The notes on pages 84 to 120 are an integral part of these consolidated financial statements.  Cochlear Limited Annual Report 2021                 81                                                                                                                                                                                                                                                                                            Statement of changes in equity  $m  2020  Balance at 1 July 2019  Total comprehensive (loss)/income  Net loss  Other comprehensive income/(loss)  Defined benefit plan actuarial gains  Financial investments measured at fair value through  other comprehensive income, net of tax  Foreign currency translation differences  Effective portion of changes in fair value of cash flow  hedges, net of tax  Net change in fair value of discontinued cash flow hedges  transferred to the income statement, net of tax  Net change in fair value of cash flow hedges transferred  to the income statement, net of tax  Total other comprehensive income/(loss)  Total comprehensive income/(loss)  Transactions with owners, recorded directly in equity  Share options exercised  Performance rights vested  Shares issued through institutional placement, net of  related costs  Shares issued through share purchase plan, net of related  costs  Share‐based payment transactions  Deferred tax recognised in equity  Dividends to shareholders  Balance at 30 June 2020  2021  Balance at 1 July 2020   Total comprehensive income/(loss)  Net profit  Other comprehensive income/(loss)  Defined benefit plan actuarial losses  Financial investments measured at fair value through  other comprehensive income, net of tax  Foreign currency translation differences  Effective portion of changes in fair value of cash flow  hedges, net of tax  Net change in fair value of cash flow hedges transferred  to the income statement, net of tax  Total other comprehensive income/(loss)  Total comprehensive income/(loss)  Transactions with owners, recorded directly in equity  Share options exercised  Performance rights vested  Share‐based payment transactions  Deferred tax recognised in equity  Dividends to shareholders  Balance at 30 June 2021  Issued  capital  Translation reserve Hedging  reserve  Fair  value  reserve  Share‐based  payment  reserve  Retained  earnings  Total  equity  182.3  (47.2)  (17.0)  (1.1)  50.0  546.8  713.8  –  –  –  –  –  –  –  –  –  7.4  –  856.2  219.4  –  7.1  –  1,272.4  –  –  –  3.9  –  –  –  3.9  3.9  –  –  –  –  –  –  –  (43.3)  –  –  –  –  (22.6)  18.3  22.2  17.9  17.9  –  –  –  –  –  –  –  0.9  –  –  (1.8)  –  –  –  –  (1.8)  (1.8)  –  –  –  –  –  –  –  (2.9)  –  –  –  –  –  –  –  –  –  (0.5)  (0.6)  –  –  7.0  2.1  –  58.0  (238.3)  (238.3)  1.6  1.6  –  –  –  –  (1.8)  3.9  (22.6)  18.3  –  1.6  (236.7)  22.2  21.6  (216.7)  –  –  –  6.9  (0.6)  856.2  –  –  –  (193.7)  116.4  219.4  7.0  9.2  (193.7)  1,401.5  1,272.4  (43.3)  0.9  (2.9)  58.0  116.4  1,401.5  –  –  –  –  –  –  –  –  –  4.2  –  –  –  –  1,276.6  –  –  –  (14.1)  –  –  –  –  –  –  40.7  –  –  11.2  –  –  (14.1)  (14.1)  –  –  –  –  –  (57.4)  (3.0)  8.2  8.2  –      40.7  40.7  –  –  –  –  –  9.1  –  –  –  –  –  37.8  –  –  –  –  –  –  –  –  (1.2)  (0.7)  8.1  4.2  –  68.4  326.5  326.5  (0.1)  (0.1)  –  –  –  –  (0.1)  326.4  –  –  –  –  (75.6)  367.2  40.7  (14.1)  11.2  (3.0)  34.7  361.2  3.0  (0.7)  8.1  4.2  (75.6)  1,701.7  The notes on pages 84 to 120 are an integral part of these consolidated financial statements.  Cochlear Limited Annual Report 2021                                                                                                                                                                                82                                                                                                               Statement of cash flows  Cash flows from operating activities  Cash receipts from customers  Cash paid to suppliers and employees  Grant and other income received  Government assistance in respect of COVID received  Government assistance in respect of COVID repaid  Interest received  Interest paid  Income taxes paid  Net cash provided by/(used in) operating activities  Cash flows from investing activities  Acquisition of leasehold improvements and plant and equipment  Acquisition of IT system costs  Acquisition of other intangible assets  Acquisition of investments  Proceeds from term deposits  Acquisition of term deposits  Net cash used in investing activities  Cash flows from financing activities  Repayments of borrowings   Proceeds from borrowings   Payments of lease liability  Net proceeds from exercise of share options and performance rights  Net proceeds from shares issued through institutional placement  Net proceeds from share purchase plan  Dividends paid   Net cash (used in)/provided by financing activities  Net increase in cash and cash equivalents  Cash and cash equivalents, net of overdrafts at 1 July  Effect of exchange rate fluctuations on cash held  Cash and cash equivalents, net of overdrafts at 30 June  Note  2021  $m  2020  $m  1,436.0  1,403.7  (1,150.2)  (1,501.6)  2.4  2.4  2.3  3.1  2.7(b)  5.2  5.3  5.3  5.4  2.6  8.3  24.6  (24.6)  3.6  (12.0)  (14.4)  271.3  (41.2)  (5.9)  (25.5)  (18.4)  365.0  –  274.0  5.5  23.6  –  1.6  (10.5)  (80.1)  (157.8)  (92.9)  (18.5)  (19.1)  (14.2)  –  (365.0)  (509.7)  (403.1)  (130.0)  1.7  (20.5)  2.4  –  –  (75.6)  (495.1)  50.2  565.0  (5.6)  609.6  420.9  (24.6)  6.3  856.2  219.4  (193.7)  1,154.5  487.0  78.6  (0.6)  565.0  The notes on pages 84 to 120 are an integral part of these consolidated financial statements.  Cochlear Limited Annual Report 2021                 83                                                                                     Notes to the financial  statements  1. Basis of preparation   This section sets out the Company’s accounting policies that relate to the financial statements as a whole. Where an accounting  policy is specific to one note, the policy is described in the note to which it relates.   1.1   Reporting entity  Cochlear Limited (the Company) is a company domiciled in Australia. The consolidated financial statements of the Company as  at and for the year ended 30 June 2021 comprise the Company and its controlled entities (together referred to as Cochlear or  the Consolidated Entity). Cochlear is a for‐profit entity and operates in the implantable hearing device industry.  1.2   Basis of preparation  (a) Statement of compliance  The Financial report is a general purpose financial report which has been prepared in accordance with Australian Accounting  Standards (AASBs) adopted by the Australian Accounting Standards Board and the Corporations Act 2001. The consolidated  financial  statements  comply  with  International  Financial  Reporting  Standards  (IFRS)  and  Interpretations  adopted  by  the  International Accounting Standards Board.   The Board approved the consolidated financial statements on 20 August 2021.  (b) Basis of measurement  The  consolidated  financial  statements  have  been  prepared  on  the  historical  cost  basis  except  for  derivative  financial  instruments and financial investments measured at fair value. The fair value measurement method of derivative instruments  and financial investments measured at fair value through other comprehensive income is discussed further in Note 6.4(d).   (c) Functional and presentation currency  These consolidated financial statements are presented in Australian dollars (AUD), which is the Company’s functional currency.   The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191  dated 24 March 2016 and, in accordance with that Instrument, all financial information presented in AUD has been rounded  to the nearest one hundred thousand dollars unless otherwise stated.  (d) Foreign currency  Foreign currency transactions  Transactions in foreign currencies are translated to the respective functional currencies of entities at the foreign exchange rate  ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date  are translated to the functional currency at the foreign exchange rate ruling at that date. Non‐monetary assets and liabilities  denominated in foreign currencies that are stated at historical cost are translated using the exchange rate at the date of the  transaction. Non‐monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated  to the functional currency at the foreign exchange rates ruling at the date the fair value was determined.  Foreign exchange differences arising on translation are recognised in the income statement within other income and other  expenses.  Cochlear Limited Annual Report 2021               84                            Financial statements of foreign operations  The assets and liabilities of foreign operations are translated to the Company’s functional currency at foreign exchange rates  ruling  at  the  reporting  date.  The  revenues  and  expenses  of  foreign  operations  are  translated  to  the  Company’s  functional  currency at rates approximating the foreign exchange rates ruling at the dates of transactions.  Foreign currency differences arising from translation of controlled entities are recognised in the foreign currency translation  reserve (translation reserve) in equity. When a foreign operation is disposed of, in part or in full, the relevant amount of its  translation reserve is transferred to the income statement and reported as part of the gain or loss on disposal.   Foreign  exchange  gains  and  losses  arising  from  a  monetary  item  receivable  from  or  payable  to  a  foreign  operation,  the  settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in  a foreign operation and are recognised in other comprehensive income, and presented in the translation reserve.  (e) Use of judgements and estimates  The preparation of financial statements in conformity with AASB requires management to make judgements, estimates and  assumptions  that  affect  the  application  of  accounting  policies  and  the  reported  amounts  of  assets,  liabilities,  income  and  expenses. Actual results may differ from these estimates.   Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in  the financial year in which the estimate is revised and in any future years affected.  Management  discussed  with  the  Audit  &  Risk  Committee  the  development,  selection  and  disclosure  of  Cochlear’s  critical  accounting policies and estimates and the application of these policies and estimates.  Information about critical judgements in applying accounting policies that have the most significant effect on the amounts  recognised in the consolidated financial statements is included in the following notes:  Note 4.2 – Employee benefit liabilities  Note 4.3 – Share‐based payments  Note 5.3 – Intangible assets  Note 5.5 – Provisions  Note 5.6 – Contingent liabilities  Note 5.7 – Leases  Note 6.4 – Financial risk management.  (f) Basis of consolidation  Controlled entities  The Consolidated Entity 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. The financial statements of controlled  entities are included in the consolidated financial statements from the date that control commences until the date that control  ceases.   Transactions eliminated on consolidation  Intra‐group  balances  and  transactions,  and  any  unrealised  income  and  expenses  arising  from  intra‐group  transactions,  are  eliminated in preparing the consolidated financial statements.  Special purpose entities  Cochlear has established special purpose entities (SPEs) for investment purposes. A SPE is consolidated if Cochlear concludes  that it controls the SPE. SPEs controlled by Cochlear were established under terms that impose strict limitations on decision‐ making powers of the SPE’s management.  Cochlear Limited Annual Report 2021               85                            (g) Goods and services tax (GST)  Revenues, expenses and assets are recognised net of the amount of GST. Where the amount of GST incurred is not recoverable  from the taxation authority, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense.  Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to,  the relevant taxation authority is included as a current asset or liability in the balance sheet.  Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing  and financing activities which are recoverable from, or payable to, the relevant taxation authority are classified as operating  cash flows.  (h) Comparability  Comparative information is reclassified where appropriate to enhance comparability.  2. Performance for the year  2.1   Operating segments  Cochlear’s  three  reportable  segments,  determined  on  a  geographical  basis,  are  the  strategic  business  units  of  Cochlear.  Segment results, assets and liabilities include items directly attributable to a segment, as well as those that can be allocated  on a reasonable basis. Unallocated items comprise corporate and other net expenses and corporate and manufacturing assets  and liabilities.  Performance  is  measured  based  on  segment  earnings  before  interest  and  income  tax  (EBIT)  as  included  in  the  internal  management reports that are reviewed by Cochlear’s CEO&P, who is also the chief operating decision maker.   Information about reportable segments        Americas          EMEA1         Asia Pacific        Total  2021  $m  724.8  383.8  301.9  151.8  11.2  0.8  0.9  2020  $m  650.3  335.0  353.7  148.7  10.8  2.0  29.7  2021  $m  517.7  227.6  275.8  91.9  6.5  1.8  2.9  2020  $m  479.6  191.7  247.6  67.6  5.6  1.5  1.9  2021  $m  2020  $m  2021  $m  2020  $m  250.8  222.4  1,493.3  1,352.3  74.2  59.0  138.1  148.2  42.9  37.6  5.4  0.7  0.9  5.6  0.8  1.4  685.6  715.8  286.6  23.1  3.3  4.7  585.7  749.5  253.9  22.0  4.3  33.0  Reportable segment revenue  Reportable segment EBIT  Reportable segment assets  Reportable segment liabilities  Other material items  Depreciation and amortisation  Write‐down in value of inventories   Acquisition of non‐current assets  Europe, Middle East and Africa.  1. Reconciliations of reportable segment revenues, profit or loss, assets and liabilities and other material items  Revenues  Cochlear  implants  2021  2020  $m  898.6  817.9  Services  (sound  processor  upgrades and  other)  $m  438.5  395.5  Total  Cochlear  implants  $m  1,337.1  1,213.4  Acoustics  Reportable  segment  revenue  Foreign  exchange  gain/(loss) on  hedged sales  Consolidated  revenue  $m  156.2  138.9  $m  1,493.3  1,352.3  $m  4.3  (31.7)  $m  1,497.6  1,320.6  Cochlear Limited Annual Report 2021               86                                                      Profit or loss  2021  2020  Assets and liabilities  2021  2020  Reportable  segment EBIT  Corporate  and other  net expenses  Foreign  exchange  gain/(loss) on  hedged sales  Net finance  expense  Consolidated  profit/(loss)  before  income tax  $m  685.6  585.7  $m  (315.8)  (816.2)  $m  4.3  (31.7)  $m  (8.4)  (8.9)  $m  365.7  (271.1)  Reportable  segment  assets  $m  715.8  749.5  Corporate and  manufacturing  assets  $m  1,722.4  1,826.2  Consolidated  total assets  $m  2,438.2  2,575.7  Reportable  segment  liabilities  $m  286.6  253.9  Corporate and  manufacturing  liabilities  $m  449.9  920.3  Consolidated  total  liabilities  $m  736.5  1,174.2  Other material items  Reportable segment total  Corporate and   manufacturing total  Consolidated total  2021  $m  23.1  3.3  4.7  –  –  –  2020  $m  22.0  4.3  33.0  –  –  –  2021  $m  56.4  8.2  75.4  –  6.4  1.7  2020  $m  55.5  15.4  97.0  16.7  503.7  1.2  2021  $m  79.5  11.5  80.1  –  6.4  1.7  2020  $m  77.5  19.7  130.0  16.7  503.7  1.2  Depreciation and  amortisation  Write‐down in value of  inventories  Acquisition of non‐current  assets  Impairment of intangible  assets  Patent litigation expense   Equity accounted losses  2.2   Revenue   Revenue from the sale of cochlear and acoustic implants and associated sound processors and accessories to customers is  based on the contracted sales price. Revenue is recognised at the point in time when control passes to the customer with the  exact timing dependent on the agreed sales terms for each contract. Revenue from product sales is also deferred based on the  historical rates of product returns.  Revenues from the rendering of services, including ongoing customer support and software licensing are provided to customers  over  time. Where  payments  are  received  in  advance,  the  agreed  transaction  price  is  initially  deferred  and  progressively  recognised over the life of the agreement as the service is provided. The value of unfulfilled performance obligations under  these contracts is reflected in the Consolidated Entity’s deferred revenue balance.  Customers include implant recipients, medical practitioners and governments. Contracts are short‐term with the exemption of  software licences which are recognised over multiple years. The accounting policy for foreign exchange gains/losses arising  from hedges of forecast sales transactions is set out in Note 6.4(a).  Sale of goods before hedging  Foreign exchange gain/(loss) on hedged sales  Revenue from sale of goods  Rendering of services   Total revenue  Cochlear Limited Annual Report 2021     2021  $m  1,462.7  4.3  1,467.0  30.6  1,497.6  2020  $m  1,320.3  (31.7)  1,288.6  32.0  1,320.6            87                                                                         2.3   Expenses  (a) Cost of sales  Carrying amount of inventories recognised as an expense  Write‐down in value of inventories1  Other  Total cost of sales   (b) Other expenses  Repayment of Government assistance in respect of COVID2  Net foreign exchange loss  Ineffective forward exchange contracts  Impairment expense1  Total other expenses  2021  $m  391.4  11.5  7.3  410.2  24.6  15.8  –  –  40.4  2020  $m  329.7  8.2  6.5  344.4  –  6.8  26.1  29.8  62.7  (c) Patent litigation expense  Withholding tax expense  Foreign exchange (gain)  Patent litigation costs  Total patent litigation expense  1. –  –  503.7  503.7  Total  inventory  write‐down  of  $11.5  million  (2020:  $19.7  million)  comprises  $11.5  million  (2020:  $8.2  million)  write‐down  of  inventories in cost of sales and nil (2020: $11.5 million) write‐down of inventories in other expenses.  29.6  (23.2)  –  6.4  2. Voluntary repayment of government grants. Refer to Note 2.4 for further details.  Patent litigation expense  The patent litigation expense relates to the long‐running patent dispute with Alfred E. Mann Foundation for Scientific Research  and Advanced Bionics LLC (collectively referred to as AMF and AB).   In the prior year, the US Court of Appeals affirmed the US District Court’s decision against Cochlear Limited and its US subsidiary  Cochlear  Americas  (the  Defendants)  resulting  in the  Defendants paying USD  268  million  in  relation  to  patent  infringement  damages and a further USD 12 million in post judgment interest. The Defendants also agreed to a settlement with AMF and AB  of pre‐judgment interest and attorneys’ fees totalling USD 75 million.   In the current year, $29.6 million has been recognised for withholding tax payable on the settlement amounts. This follows  receipt of a private ruling from the ATO in December 2020 discussed in Note 3. The foreign exchange gain of $23.2 million  represents the revaluation of balance sheet items related to the patent litigation. This includes the USD 268 million loan facility  for patent litigation at 30 June 2020. As this matter has now been resolved, there are no provisions remaining in relation to  this dispute.  Cochlear Limited Annual Report 2021               88                                                                     2.4   Other income  Other income, including government grants, is recognised on a systematic basis over the years necessary to match it with the  related costs for which it is intended to compensate. If the costs have already been incurred, the amount is recognised in the  year the entitlement is confirmed. Foreign exchange gains/losses are recognised in accordance with the accounting policy at  Note 1.2(d).  Grant received or due and receivable  Release of contingent consideration  Government assistance in respect of COVID  Fair value change in investments measured at fair value through profit or loss  Other income  Total other income  2021  $m  2.1  1.6  24.6  52.0  6.2  86.5  2020  $m  1.4  13.2  23.6  35.8  4.1  78.1  Due to the impact of COVID, Cochlear received AUD 24.6 million (2020: AUD 23.6 million) in government assistance through  Australia’s JobKeeper Program and other government programs. Cochlear met the eligibility criteria to participate in these  programs which were designed to support jobs during COVID. As trading conditions have improved, Cochlear has voluntarily  repaid the assistance received in the current financial year from these programs. As the payment is voluntary, the repayment  has been included as an expense in Note 2.3(b).  Changes to the contingent consideration value recognised for the Sycle, LLC business acquisition were considered at 30 June  2021. Based on performance hurdles expected to be met, $1.6 million (2020: $13.2 million) has been released to the Income  Statement and $3.0 million remains as contingent consideration (2020: $6.2 million).   2.5   Earnings per share  Cochlear presents basic and diluted earnings per share (EPS) for its ordinary shares.   Basic earnings per share  The calculation of basic EPS has been based on the following net profit attributable to equity holders of the parent entity and  weighted average number of ordinary shares of the Company:  Net profit/(loss) attributable to equity holders of the parent entity  $326,500,000  ($238,285,000)  Weighted average number of ordinary shares (basic):  Issued ordinary shares at 1 July (number)  65,687,402  57,715,821  2021  2020  Effect of options, performance shares and performance rights exercised (number)  45,869  Effect of shares issued under Employee Share Plan (number)  Effect of shares issued under institutional placement (number) 1  Effect of shares issued under share purchase plan (number) 2  Weighted average number of ordinary shares (basic) at 30 June  Basic earnings/(loss) per share (cents)  1. 2. Institutional placement of 6,285,715 shares 31 March 2020, weighted as per days held for the purpose of the EPS calculation.  Share purchase plan of 1,571,567 shares 30 April 2020, weighted as per days held for the purpose of the EPS calculation.  88,382  5,629  1,562,842  261,928  –  –  –  65,733,271  59,634,602  496.7  (399.6)  Cochlear Limited Annual Report 2021               89                                             Diluted earnings per share  The calculation of diluted EPS has been based on the following net (loss)/profit attributable to equity holders of the parent  entity and weighted average number of shares outstanding after adjustments for the effects of all dilutive potential ordinary  shares:  Net profit/(loss) attributable to equity holders of the parent entity  $326,500,000  ($238,285,000)  Weighted average number of ordinary shares (diluted):  Weighted average number of shares (basic) (number)  65,733,271  59,634,602  Effect of options, performance shares and performance rights unvested (number)  1,071  –  Weighted average number of ordinary shares (diluted) at 30 June  Diluted earnings/(loss) per share (cents)  65,734,342  59,634,602  496.7  (399.6)  2021  2020  2.6   Dividends  A liability for dividends payable is recognised in the financial year in which the dividends are declared.  Dollars per share  Total amount $m  Franked/unfranked  Date of payment Dividends recognised in the current financial year by the Company are:  2021  Interim 2021 ordinary  Total amount  2020  Interim 2020 ordinary  Final 2019 ordinary  Total amount  1.60  1.75  3.35  1.15  1.15  75.6  75.6  92.5  101.2  193.7  0% Franked  20 April 2021 100% Franked  100% Franked  17 April 2020 14 October 2019 Dollars per share  Total amount $m  Franked/unfranked  Date of payment  Subsequent event  Since the end of the financial year, the directors declared the following dividend:  Final 2021 ordinary  Total amount  1.40  1.40  92.0  92.0  0% Franked  18 October 2021 The financial effect of the 2021 final dividend will be recognised in the subsequent financial year as it was declared after 30  June 2021.  Dividend franking account   Franked dividends paid during the prior year were franked at the tax rate of 30%. There are no further tax consequences as a  result of paying dividends other than a reduction in the franking account.   The dividend franking account at year end is normally adjusted for:     franking credits that will arise from the payment of the current tax liability;  franking debits that will arise from the payment of dividends recognised as a liability at the year end; and  franking credits that the Company may be prevented from distributing in subsequent financial years.  At 30 June 2021, there are no franking credits (2020: no franking credits) available to shareholders of Cochlear Limited for  subsequent financial years. As there are no franking credits available for subsequent years, there is no impact on the dividend  franking account after the balance sheet date.  Cochlear Limited Annual Report 2021               90                                                                     2.7   Notes to the statement of cash flows  (a)  Cash and cash equivalents  Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less. Bank  overdrafts  that  are  repayable  on  demand  and  form  an  integral  part  of  Cochlear’s  cash  management  are  included  as  a  component of cash and cash equivalents for the purpose of the statement of cash flows.  The operating cash account received an average interest rate of 0.58% (2020: 1.09%) per annum.   (b)  Reconciliation of net profit/(loss) to net cash provided by/(used in) operating activities  Net profit/(loss)  Add item classified as investing activities:  Loss on disposal of property, plant and equipment  Add/(less) non‐cash items:  Depreciation and amortisation   Impairment of intangible assets  Release of contingent consideration  Change in fair value measurement of investments through profit or loss  Equity settled share‐based payment transactions  Share of losses on equity accounted investments  Net cash provided by/(used in) operating activities before changes in assets and  liabilities  Changes in assets and liabilities:  Change in trade and other receivables  Change in inventories  Change in prepayments  Change in deferred tax assets/liabilities   Change in trade and other payables  Change in current tax assets/liabilities  Change in employee benefit liabilities  Change in provisions   Change in deferred revenue  Effect of movements in foreign exchange  Net cash provided by/(used in) operating activities  2021  $m  326.5  0.2  79.5  –  (1.6)  (52.0)  8.1  1.7  362.4  (60.8)  7.7  (3.6)  36.8  30.7  5.9  33.2  (107.0)  (2.5)  (31.5)  271.3  2020  $m  (238.3)  0.4  77.5  16.7  (13.2)  (35.8)  7.0  1.2  (184.5)  82.5  (28.4)  9.3  (38.4)  (30.3)  (84.8)  (15.8)  85.9  3.7  43.0  (157.8)  Cochlear Limited Annual Report 2021               91                                                     3. Income taxes  The Company and its wholly owned Australian resident entities are part of a tax consolidated group. As a consequence, all  members  of  the  tax  consolidated  group  are  taxed  as  a  single  entity.  The  head  entity  within  the  tax  consolidated  group  is  Cochlear Limited.  3.1   Income tax expense/(benefit)  Income  tax  expense/(benefit)  includes  current  and  deferred  tax.  Current  and  deferred  tax  is  recognised  in  the  income  statement except to the extent that it relates to items recognised directly in other comprehensive income or equity.  Current tax is the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to tax  payable in respect of previous years. It is measured using tax rates enacted or substantively enacted at the reporting date.  Income tax expense/(benefit) recognised in the income statement  Current income tax expense/(benefit)  Current year  Adjustment for prior years  Total current income tax expense/(benefit)  Deferred income tax expense/(benefit)  Origination and reversal of temporary differences  Net benefit of tax losses  Current year deferred income tax expense/(benefit)  Adjustment for prior years  Total deferred income tax expense/(benefit)  Total income tax expense/(benefit) recognised in the income statement  2021  $m  84.6  (61.3)  23.3  49.4  (34.4)  15.0  0.9  15.9  39.2  2020  $m  5.9  (6.5)  (0.6)  (9.2)  (26.8)  (36.0)  3.8  (32.2)  (32.8)  Consolidated Entity – Numerical reconciliation between income tax expense/(benefit) and profit/(loss) before  income tax  Profit/(loss) before income tax  Tax at the Australian tax rate of 30% (2020: 30%)  Add/(less) adjustments for:  Patent litigation  Research and development allowances  Net non‐deductible/(non‐assessable) items  Effect of tax rates in foreign jurisdictions  Patent litigation adjustment for prior year1  Other adjustment for prior years  Income tax expense/(benefit) on profit/(loss) before income tax  2021  $m  365.7  109.7  –  (10.1)  3.2  (3.2)  99.6  (63.5)  3.1  39.2  2020  $m  (271.1)  (81.3)  63.7  (9.4)  (3.3)  0.2  (30.1)  –  (2.7)  (32.8)  1. Cochlear Limited prior year adjustment relating to patent litigation following the receipt of a private ruling from the ATO in December  2020 which clarified the deductibility of elements of the patent litigation expense treated as non‐deductible at 30 June 2020.  Cochlear Limited Annual Report 2021               92                                                  Income tax recognised in Statement of Changes in Equity  Income tax on:  Fair value gains on investments  Cash flow hedges  Share‐based payments  Capital raising  Total income tax recognised in Statement of Changes in Equity  Note  3.2  3.2  3.2  3.2  2021  $m  17.4  3.5  (4.2)  –  16.7  2020  $m  –  7.7  (2.1)  (7.1)  (1.5)  Consolidated Entity – Numerical reconciliation between income tax expense/(benefit) and cash taxes paid  Income tax expense/(benefit) on profit/(loss) before income tax  Timing differences recognised in deferred tax  Current year tax instalments receivable/(payable) next year  Prior year tax instalments (received)/paid this year  Cash taxes paid per statement of cash flows  2021  $m  39.2  (15.0)  43.3  (53.1)  14.4  Cochlear Limited’s Australian tax consolidated group – Numerical reconciliation between income tax  expense/(benefit) and profit/(loss) before income tax  Profit/(loss) before income tax (excluding dividends from wholly owned foreign subsidiaries)  Add: Dividends from wholly owned foreign subsidiaries  Profit/(loss) before income tax  Tax at the Australian tax rate of 30% (2020: 30%)  Add/(less) adjustments for:  Patent litigation  Research and development allowances  Net non‐deductible/(non‐assessable) items  Controlled foreign company income  Exempt foreign sourced dividends from wholly owned subsidiaries  Patent litigation prior year adjustment1  Adjustment for prior years  Income tax expense/(benefit) on profit/(loss) before income tax  2021  $m  257.6  45.8  303.4  91.0  –  (8.5)  4.4  2.8  (13.7)  76.0  (63.5)  5.1  17.6  2020  $m  (32.8)  33.8  53.1  26.0  80.1  2020  $m  (306.4)  116.0  (190.4)  (57.1)  63.7  (8.5)  (1.7)  1.6  (34.8)  (36.8)  –  (0.3)  (37.1)  1. Cochlear Limited prior year adjustment relating to patent litigation following the receipt of a private ruling from the ATO in December  2020 which clarified the deductibility of elements of the patent litigation expense treated as non‐deductible at 30 June 2020.  Cochlear Limited Annual Report 2021               93                                                          3.2   Current and deferred tax assets and liabilities  Deferred tax is recognised on all temporary differences between the carrying amounts of assets and liabilities for financial  reporting and taxation purposes.    The measurement of deferred tax mirrors the tax consequences that the Consolidated Entity expects to recover or settle from  the carrying amount of its assets and liabilities.  Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse.  A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which it  can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced if it is no longer probable that the  related tax benefit will be realised.  Recognised deferred tax assets and liabilities  Deferred tax assets  Deferred tax liabilities  Deferred tax assets/(liabilities)  Reconciliation of deferred tax assets and liabilities  2021  $m  146.8  (50.6)  96.2  2020  $m  147.1  (14.1)  133.0  Opening  balance  Recognised  in the income  statement  Recognised in  other  comprehensive  income  Recognised  in equity  Closing  balance  (1.2)  (1.4)  46.9  59.7  4.0  (0.4)  26.8  (1.4)  133.0  1.9  (0.2)  (7.9)  (30.9)  0.8  –  34.4  (13.1)  (15.0)  –  –  –  –  –  (3.5)  –  (17.4)  (20.9)  –  –  –  –  –  –  –  (0.9)  (0.9)  0.7  (1.6)  39.0  28.8  4.8  (3.9)  61.2  (32.8)  96.2  Property, plant and equipment  Intangible assets  Inventories  Provisions  Deferred revenue  Forward exchange contracts  Tax losses and offsets carried forward  Other  Deferred tax assets/(liabilities)  Unrecognised deferred tax liabilities  At 30 June 2021, a deferred tax liability of $48.1 million (2020: $22.8 million) relating to investments in subsidiaries has not  been recognised because the Company controls whether the asset will be recovered or the liability will be incurred and it is  satisfied that it will not be incurred in the foreseeable future.  Carried forward tax losses  Total tax losses brought forward  Total losses recognised   Total losses utilised against current taxable income  Total losses carried forward to be utilised in future years  Cochlear Limited Annual Report 2021     2021  $m  26.8  63.9  (29.5)  61.2  2020  $m  –  26.8  –  26.8            94                                                                          Current tax assets and liabilities  The current tax assets for the Consolidated Entity of $69.2 million (2020: $69.4 million) represent the amount of income taxes  recoverable in respect of current and prior years and arise from the payment of tax in excess of the amounts due to the relevant  taxation authority. The current tax liabilities for the Consolidated Entity of $12.9 million (2020: $7.2 million) represent the  amount of income taxes payable in respect of current and prior financial years.   4. Employee benefits  4.1   Employee expenses   Wages and salaries  Contributions to superannuation plans  Increase in leave liabilities  Equity settled share‐based payment transactions  Total employee expenses  4.2   Employee benefit liabilities  Wages, salaries and annual leave  2021  $m  410.6  30.5  (0.4)  8.1  448.8  2020  $m  415.6  31.3  6.4  7.0  460.3  Liabilities for employee benefits for wages, salaries and annual leave are recognised in other payables and provisions if Cochlear  has a present obligation to pay an amount as a result of past services provided by the employee. The liability is calculated on  remuneration rates as at the reporting date including related on‐costs, such as workers’ compensation insurance and payroll  tax.  Long service leave  The provision for long service leave is the present value of the estimated future cash outflows as a result of services provided  by the employee up to the reporting date.  The provision is calculated using expected future increases in remuneration rates, including related on‐costs, and expected  settlement dates based on turnover history, and is discounted using the corporate bond rates which most closely match the  terms to maturity of the related liabilities.   Defined benefit plans  The  Consolidated  Entity  has  defined  benefit  plans  that  cover,  in  aggregate,  84  employees  in  two  countries  (2020:  84  employees). Cochlear contributed cash of $1.4 million (2020: $1.5 million) to defined benefit plans in the year ended 30 June  2021 and expects to contribute $1.3 million in the year ending 30 June 2022.  The  defined  benefit  obligations  are  calculated  annually  by  a  qualified  actuary  using  the  projected  unit  credit  method.  Remeasurements of the net defined benefit liability (excluding interest) are recognised immediately in other comprehensive  income.   The  Company  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 period to the opening net  defined benefit liability/(asset), adjusted for any changes in the net defined benefit liability/(asset) during the period resulting  from contributions and benefit payments. Net interest expense related to defined benefit plans is recognised in the income  statement.  Cochlear Limited Annual Report 2021               95                                  Current  Provision for long service leave  Provision for annual leave  Provision for short‐term incentives and sales commissions  Total current employee benefit liabilities  Non‐current  Provision for long service leave  Defined benefit plan  Total non‐current employee benefit liabilities  Total employee benefit liabilities  4.3   Share‐based payments  2021  $m  13.5  36.6  37.8  87.9  6.1  6.0  12.1  100.0  2020  $m  13.4  36.3  4.7  54.4  6.9  5.5  12.4  66.8  From 1 July 2013, the Company grants options and performance rights to certain employees under the Cochlear Executive  Incentive Plan (CEIP).   The fair value of options and performance rights granted is recognised as an employee expense, with a corresponding increase  in equity. The expense is adjusted by the actual number of options, and rights, that are expected to vest except where forfeiture  is due to market‐related conditions.  The fair value is measured using the Black‐Scholes‐Merton pricing model at the date the options, or performance rights are  granted, taking into account market‐based criteria and the terms and conditions attached to the instruments. The options, or  performance rights, are expensed over the vesting period after which the employees become unconditionally entitled to them.   When the Company grants options over its shares to employees of controlled entities, the fair value at grant date is recognised  as an increase in the investment in subsidiaries, with a corresponding increase in equity over the vesting period of the grant in  the Company’s accounts. At 30 June 2021, the unissued ordinary shares of the Company under option and rights and the terms  and conditions of the grants and issues are as follows:  Grant date  Exercise price of  options  Number of  options  Number of  performance rights  Contractual life  –  N/A  9,280  30,687  75,745  24,231  4 years  $217.28  $202.84  $217.28  October 20181  August 20192  October 20191,3  October 20191,3  September 20204  October 20201,3  Total  1. Options and performance rights offered under long‐term incentives.   Performance rights offered under deferred short‐term incentives.  2. From FY20, LTI Award is subject to a four‐year performance period and as a transition for the FY20 LTI plan, two grants were offered  3. including three‐year and four‐year performance period. No transitional arrangements were provided to the CEO&P. The CEO&P’s FY20  LTI grant had a four‐year performance period only.  Services rights offered under CEIP.  208,331  $206.06  5 years  5 years  2 years  4 years  2 years  71,211  55,729  12,557  52,626  4,996  9,697  3,994  N/A  –  4. Grants are split between deferred short‐term incentives (STI) and long‐term incentives (LTI).   Under the CEIP, certain employees receive a portion of their STI achievement in the form of performance rights. The number  of performance rights under the deferred STI grants is calculated at the end of each year and then held for two years until  vesting. As a result of COVID, no deferred STI were offered in FY21.  Cochlear Limited Annual Report 2021               96                                          Grants under LTI are in two equal tranches assigned to compound annual growth in EPS and ranking of total shareholder return  (TSR) against the ASX 100 index. The conditions for minimum vesting are four years of service and:    50% weighting on compound annual growth in EPS with a minimum CAGR in EPS of 7.5% assigned to 50% of grant; or  50% weighting on relative TSR with the Consolidated Entity’s TSR at the 50th percentile against the ASX 100 over four years  assigned to 40% of grant.   The grant date fair value of options and performance rights was measured based on the Black‐Scholes‐Merton pricing model.  Gross contract value discounts for dividends not paid, share price volatility and the risk free rate of return. There is no discount  for the likelihood of service or performance conditions. The model uses Cochlear’s five‐day volume‐weighted average price  following the announcement of full year results in August each year. The inputs used in the measurement of the fair values at  the grant date are the following:  21 October 2020   (4yr)  TSR based  conditions  EPS  performance  based  conditions  18  September  2020  Rights  service  based  conditions  23 October 2019   (3yr)  23 October 2019   (4yr)  TSR based  conditions  EPS  performance  based  conditions  TSR based  conditions  EPS  performance  based  conditions  17  September  2019  Deferred  STI service  based  conditions  $38.88  $42.56  N/A  $31.46  $34.13  $35.74  $37.56  N/A  $124.47  $188.83  $195.20  $130.48  $206.70  $133.01  $203.72  $209.75  $201.75  $206.06  30.77%  4 ‐ 5  1.66%  $201.75  $201.75  $215.89  $215.89  $215.89  $215.89  $215.89  $206.06  N/A  $217.28  $217.28  $217.28  $217.28  N/A  30.77%  39.13%  4 ‐ 5  1.66%  2  1.66%  24.1%  3 ‐ 4  1.46%  0.71%  24.1%  23.96%  23.96%  24.42%  3 ‐ 4  1.46%  0.71%  4 ‐ 5  1.46%  0.71%  4 ‐ 5  1.46%  0.71%  2  1.46%  0.71%  Fair value of options  at grant date  Fair value of  performance rights at  grant date  Share price at  valuation date  Option exercise price  Expected volatility1   Option life (years)  Expected dividend  Risk free interest rate2  1. Measure captures the characteristics of fluctuations in the share price.   2. Based on government bonds.  0.30%  0.30%  0.30%  The numbers and weighted average exercise prices of options are as follows:  Outstanding at 1 July  Forfeited   Exercised   Granted   Outstanding at 30 June  Exercisable at 30 June  Weighted  average exercise  price  2021  $188.12  $159.34  $154.73  $206.06  $209.03  $202.84  Number of  options  2021  261,426  (60,401)  (48,423)  55,729  208,331  75,745  Weighted  average exercise  price  2020  $163.71  $150.26  $135.84  $217.28  $188.12  $154.73  Number of  options  2020  263,613  (20,846)  (62,646)  81,305  261,426  104,376  48,423 options were exercised in 2021 (2020: 62,646 options were exercised). The weighted average market share price on  the Australian Securities Exchange (ASX) at date of exercise was $207.72 (2020: $215.30). The weighted average remaining  contractual life of options outstanding at the end of the year is two years (2020: two years).  Cochlear Limited Annual Report 2021               97                                      Employee Share Plan  Cochlear’s Employee Share Plan (Plan) was approved by special resolution at the Annual General Meeting held on 19 October  1999. Under the Plan, the directors can, at their discretion, allocate at nil consideration up to a maximum of $2,000 worth of  shares per eligible employee in any one year. In practice, the directors issue shares worth up to the tax concessional limit,  currently approximately $1,000 per eligible employee each year. The fair value of shares issued during the financial year is the  market price of the Company’s shares on the ASX as at the start of trading on the issue date.   Shares under the Plan vest with the employee immediately but are non‐transferable for a period of up to three years.   In the current year, the Employee Share Plan was suspended due to COVID impacts. Refer to Note 6.2 for further details.  APAC Employee Equity Plan  The APAC Employee Equity Plan, established in 2016, aligns with the Cochlear Employee Share Plan and provides approximately  $1,000 of service rights annually per eligible employee in selected Asian countries. Upon vesting, each service right converts to  one share. For the year ended 30 June 2021, the Company issued 1,068 shares under the plan (2020: 826 shares).  4.4   Key management personnel   The following were key management personnel (KMP) of Cochlear at any time during the financial year and unless otherwise  indicated were KMP for the entire financial year:  Non‐executive directors  R  Holliday‐Smith  (Chairman),  YA  Allen,  G  Boreham,  AM,  Sir  M  Daniell,  KNZM,  A  Deans,  A  Denver,  A  Hussain1,   C McLoughlin2, AM, DP O’Dwyer3 and Prof B Robinson, AC.  Executive KMP  D Howitt, A Bishop, R Brook, J Janssen, T Manna and S Sayers4  Former Executive KMP  B Cubis5  1. Retired on 20 July 2021.  2. Appointed on 1 November 2020.  3. Retired on 20 October 2020.  4. 5. Commenced as a KMP on 1 January 2021.  Ceased as a KMP on 30 September 2020.  Key management personnel disclosures  The KMP compensation is included in employee expenses as follows:  Short‐term  employee benefits  $  12,008,815  Post‐employment  benefits  $  415,634  Other long‐term  benefits  $  (6,123)  Share‐based  payments  $  2,794,219  7,772,881  422,082  56,866  2,007,193  End of service  payment  $  327,132  –  Total  $  15,539,677  10,259,022  2021  2020  Information regarding individual KMP remuneration and some equity instruments disclosures as permitted by section 300A of  the Corporations Act 2001 is provided in the Remuneration Report of this Annual Report on pages 56 to 73.  The KMP have not received any loans from Cochlear and there have been no other related party transactions with any of  Cochlear’s KMP.  Cochlear Limited Annual Report 2021               98                                      5. Operating assets and liabilities  5.1    Inventories   Inventories are measured at the lower of cost and net realisable value.   Cost is based on the first‐in‐first‐out principle including expenditure incurred in acquiring the inventories and bringing them to  their existing condition and location. In the case of manufactured inventories and work in progress, cost includes an appropriate  share of production overheads based on normal operating capacity.   Net realisable value is the estimated selling price in the ordinary course of business less estimated costs of completion and  selling, marketing and distribution expenses.  Raw   materials  $m  87.4  82.6  Work in  progress  $m  32.9  32.5  Finished   goods  $m  95.8  108.7  Total   inventories  $m  216.1  223.8  2021  2020  5.2   Property, plant and equipment  Owned assets  The  value  of  property,  plant  and  equipment  is  measured  as  the  cost  of  the  asset,  minus  accumulated  depreciation  and  impairment losses (see Note 5.3). The cost of the asset is the consideration provided plus incidental costs directly attributable  to the acquisition.  The  value  of  internally‐constructed  assets  includes  the  cost  of  material  and  direct  labour  and  any  other  costs  directly  attributable to bringing the asset to a working condition for its intended use.  Subsequent costs in relation to replacing a part of property, plant and equipment are capitalised in the carrying amount of the  item if it is probable that future economic benefits will flow to Cochlear and its cost can be measured reliably. All other costs  are recognised in the income statement as incurred.  Depreciation  Depreciation is calculated to expense the cost of items of property, plant and equipment less their estimated residual values  on a straight‐line basis over their estimated useful lives. The estimated useful lives in the current and comparative years are as  follows: leasehold improvements between one to 15 years, plant and equipment between three to 14 years and buildings  between 10 to 30 years.  Depreciation is recognised in the income statement from the date of acquisition or, in respect of internally‐constructed assets,  from the time an asset is completed and held ready for use.   Depreciation rates and methods, useful lives and residual values are reviewed at each balance sheet date. When changes are  made, adjustments are reflected prospectively in current and future financial years only.   Cochlear Limited Annual Report 2021               99                                        Leasehold  improvements  Plant and equipment  Land and  buildings  Total  At cost  Accumulated  depreciation  Net book value  2021  $m  66.1  (32.1)  34.0  2020  $m  67.6  2021  $m  308.3  2020  $m  295.7  (28.7)  38.9  (174.8)  (171.2)  133.5  124.5  Reconciliations of the carrying amounts are:  Opening balance  Additions  Disposals  Depreciation  Effect of movements in  foreign exchange  Net book value  38.9  2.5  –  (5.4)  (2.0)  34.0  13.8  30.0  –  (4.4)  (0.5)  38.9  124.5  33.9  (0.2)  (23.2)  (1.5)  133.5  5.3   Intangible assets  Goodwill  2021  $m  73.1  (1.1)  72.0  67.1  4.8  –  123.1  25.2  (0.4)  (22.0)  (0.8)  (1.4)  124.5  0.9  72.0  2020  $m  67.7  (0.6)  67.1  29.6  37.7  –  (0.2)  –  67.1  2021  $m  447.5  2020  $m  431.0  (208.0)  (200.5)  239.5  230.5  230.5  41.2  (0.2)  (29.4)  (2.6)  239.5  166.5  92.9  (0.4)  (26.6)  (1.9)  230.5  All business combinations are accounted for by applying the acquisition method. Goodwill represents the difference between  the cost of the acquisition and the fair value of the net identifiable assets acquired.  Goodwill is stated at cost less any accumulated impairment losses. Goodwill is tested annually for impairment.  IT system costs   IT system costs are recognised as an intangible asset where Cochlear controls future economic benefits as a result of the costs  incurred, and are stated at cost less accumulated amortisation. Costs include expenditure directly related to the development  and implementation (hardware and software costs) of IT systems including direct labour.   Other intangible assets  Other  intangible  assets,  comprising  acquired  technology,  patents  and  licences,  customer  relationships,  capitalised  development expenditure and intellectual property, are acquired individually or through business combinations and are stated  at cost less accumulated amortisation and impairment losses (see below).   Amortisation  Amortisation is calculated to expense the cost of intangible assets less their estimated residual values on a straight‐line basis  over their estimated useful lives. The estimated useful lives for the current and comparative years are as follows: IT system  costs between two to seven years, acquired technology, patents and licences between four to 15 years, customer relationships  up to 31 years and capitalised development expenditure between four to 10 years.  Amortisation  is  recognised  in  the  income  statement  from  the  date  the  assets  are  available  for  use  unless  their  lives  are  indefinite.   Goodwill and intangible assets with an indefinite useful life are systematically tested for impairment annually.  Cochlear Limited Annual Report 2021               100                                       Intangible assets with indefinite useful life Intangible assets with finite useful life  Goodwill  IT system  costs  $m  $m  267.3  132.8  –  267.3  270.9  –  –  (3.6)  267.3  270.9  –  270.9  268.8  –  –  –  2.1  270.9  (79.5)  53.3  58.1  5.9  (10.7)  –  53.3  127.4  (69.3)  58.1  50.4  18.5  (10.8)  –  –  58.1  Acquired  technology,  patents and  licences  $m  140.3  (81.8)  58.5  53.6  13.0  (8.1)  –  58.5  127.4  (73.8)  53.6  72.5  4.4  (6.6)  (16.7)  –  53.6  Other  intangible  assets  $m  53.8  (30.1)  23.7  27.7  1.6  (3.8)  (1.8)  23.7  55.4  (27.7)  27.7  32.7  –  (5.1)  –  0.1  27.7  2021  At cost  Accumulated amortisation and  impairment losses  Net book value  Reconciliations of the carrying amounts are:  Opening balance  Additions  Amortisation  Effect of movements in foreign  exchange  Net book value   2020  At cost  Accumulated amortisation  Net book value  Reconciliations of the carrying amounts are:  Opening balance  Additions  Amortisation  Impairment  Effect of movements in foreign  exchange  Net book value   Impairment   Intangible   assets  Total  $m  594.2  (191.4)  402.8  410.3  20.5  (22.6)  (5.4)  402.8  581.1  (170.8)  410.3  424.4  22.9  (22.5)  (16.7)  2.2  410.3  Cochlear  annually  tests  goodwill  and  other  intangible  assets  with  indefinite  useful  life  for  impairment.  Other  non‐financial  assets, other than inventories (see Note 5.1) and deferred tax assets (see Note 3.2), are tested if there is any indication of  impairment or if there is any indication that an impairment loss recognised in a prior period may no longer exist or may have  decreased.  Assets are impaired if their carrying value exceeds their recoverable amount. The asset’s recoverable amount is estimated  based on its value in use.  An  asset  that  does  not  generate  independent  cash  flows  and  its  individual  value  in  use  cannot  be  estimated  is  tested  for  impairment as part of a cash‐generating unit (CGU).   An impairment loss is recognised in the income statement when the carrying amount of an asset or CGU exceeds its recoverable  amount. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount.  An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that  would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. An impairment  loss in respect of goodwill is not reversed.  Cochlear Limited Annual Report 2021               101                                                     Impairment tests for CGUs   Cochlear allocates goodwill and other intangible assets to CGUs based on the expected benefits that each CGU will receive  from use of those assets.   The aggregate carrying amounts of goodwill allocated to each CGU are:  2021  2020  Americas  EMEA  Asia Pacific  $m  183.4  185.2  $m  73.9  75.5  $m  10.0  10.2  Total  $m  267.3  270.9  The  recoverable  amount  of  each  CGU  is  based  on  value‐in‐use  calculations.  Those  calculations  use  five‐year  cash  flow  projections based on actual operating results and an EBIT growth rate, considered modest compared to historical growth rates  in the CGUs.   Cash  flows  for  year  six  onwards  are  extrapolated  using  a  terminal  growth  rate  of  3.0%  (2020:  3.0%)  per  annum  which  is  consistent with long‐term growth rates. The pre‐tax discount rate for each CGU is as follows: Americas 6.8% (2020: 9.6%),  EMEA 6.9% (2020: 9.8%) and Asia Pacific 7.4% (2020: 10.3%).  The key assumptions and the approach to determining their value in the current year are:  Assumption      Discount rate  EBIT growth rate    Approach  Based on weighted average cost of capital reflecting current market assessments of the   time value of money and risks specific to the CGU.  Based on a five‐year cash flow projection taking into account historical growth rates and  product lifecycle.  Terminal value growth rate  Based on long‐term growth rates.  The recoverable amount of each CGU including unallocated corporate assets is in excess of the carrying amount and therefore  no impairment expense was recognised. The above represents the best estimate of the directors. Sensitivity analysis has been  undertaken to stress test cash flow forecasts, discount rates and terminal value growth rate assumptions. Based on the range  and depth of sensitivities applied no reasonable change in assumptions would result in an impairment.  5.4   Investments, equity‐accounted investments and other financial assets  Cochlear has a number of strategic investments that may, over the longer term, enhance or leverage our intellectual property.  These include investments in Nyxoah S.A., Saluda Medical and EpiMinder. As Cochlear holds these investments for strategic  purposes it elects to fair value investments through other comprehensive income when possible in accordance with accounting  standards.   Cochlear’s investments are valued individually using quoted prices or unobservable market inputs. Unobservable inputs are  those not readily available in an active market. These inputs are generally derived from other observable inputs that match the  risk profile of the financial instruments and validated against current market assumptions and historical transactions where  available. Refer to Note 6.4(d) for further details on the valuation of financial assets.  Equity investments at fair value through other comprehensive income are ordinary shares. Investments measured at fair value  through profit or loss are interests in entities that do not meet the definition of equity, such as instruments convertible into  ordinary shares.   Cochlear Limited Annual Report 2021               102                                                                               Balance at 1 July 2020  Additions  Share of equity‐accounted losses  Fair value gain in investments measured at fair   value through profit or loss  Transferred from equity‐accounted investments  Fair value gain through other comprehensive   income (before tax)  Balance at 30 June 2021  Investments  Equity‐Accounted  Investments  $m  69.0  8.1  (1.7)  $m  25.9  6.4  –  Other Financial  Assets  $m  5.0  3.9  –  –  109.0  58.2  199.5  33.6  (109.0)  –  –  18.4  –  –  27.3  At 30 June 2021, $50.0 million of investments is measured at fair valued through profit or loss with the remaining $176.8 million  measured at fair valued through other comprehensive income.  Investment in Nyxoah S.A.  In  February  2020,  Cochlear  executed  an  agreement  to  invest  an  additional  EUR  8.0  million  in  Nyxoah  S.A.  The  additional  investment resulted in Cochlear’s ownership interest exceeding 20% and the investee has been reclassified as an associate  from February 2020.   Associates are accounted for using the equity method with Cochlear recognising its share of the associate’s profit or loss and  other comprehensive income. Transactions with associates are eliminated to the extent of Cochlear’s interest in the associate  until  such  time  as  they  are  realised  by  the  investee  on  consumption  or  sale.  Investments  in  associates  are  assessed  for  impairment when indicators of impairment are present and, if required, written down to the recoverable amount.   If Cochlear’s share of losses exceeds its interest in the associate, the carrying amount is reduced to nil and recognition of further  losses is discontinued except to the extent that Cochlear has incurred legal or constructive obligations or made payments on  behalf of the associate.  In  September  2020,  Nyxoah  S.A.,  completed  an  Initial  Public  Offering  (‘IPO’).  Cochlear  invested  a  further  EUR  5.0  million   ($8.1 million) in the IPO, however, the IPO resulted in Cochlear ownership interest falling to 17.9% and Cochlear’s right to  appoint a director to the Nyxoah board terminated at completion of the IPO. This change in ownership interest resulted in the  investee being reclassified from an investment that is equity accounted to an investment that is fair valued through other  comprehensive income.  As required by accounting standards, on ceasing equity‐accounting of Nyxoah S.A. a $33.6 million gain was recognised in profit  or loss, being the difference between the fair value and the equity‐accounted carrying value at completion of the IPO. At 30  June 2021, the fair value of this investment is $158.8 million based on the listed share price, resulting in a gain of $49.8 million  through other comprehensive income.  5.5   Provisions  A provision is recognised in the balance sheet when:   Cochlear has a present obligation (legal or constructive) as a result of a past event;    a reliable estimate can be made of the amount of the obligation; and  it is probable that an outflow of economic benefits will be required to settle the obligation.   Provisions  are  determined  by  discounting  the  expected  future  cash  flows  at  a  pre‐tax  rate  that  reflects  current  market  assessments of the time value of money and the risk specific to the liability.  Cochlear Limited Annual Report 2021               103                                  2021  Opening balance  Provision made  Provision used  Effect of movements in foreign exchange  Total provisions  Represented by:  Current  Non‐current   Total provisions  Warranties  Warranties  Legal and  insurance  Product  recall  Make good  lease costs  $m  31.6  16.3  (11.4)  (2.2)  34.3  13.2  21.1  34.3  $m  115.2  31.5  (136.8)  (4.9)  5.0  4.9  0.1  5.0  $m  9.0  –  (1.0)  –  8.0  1.3  6.7  8.0  $m  1.6  1.5  –  –  3.1  –  3.1  3.1  Total  $m  157.4  49.3  (149.2)  (7.1)  50.4  19.4  31.0  50.4  A provision for warranty claims is recognised in relation to sales made prior to the reporting date, based on historical claim  rates and respective product populations. Warranty periods on hardware products extend for three to 10 years.  Legal and insurance  Cochlear is involved in litigation in the ordinary course of business, including claims made by Cochlear and against Cochlear for  patent  infringement.  Where  Cochlear  is  able  to  make  a  reliable  estimate  of  the  estimated  future  costs  related  to  these  proceedings, including legal fees, a provision is recognised.   The legal and insurance provision also included amounts provided in relation to the long‐running patent dispute with Alfred E.  Mann Foundation for Scientific Research and Advanced Bionics LLC (collectively referred to as AMF and AB). As at 30 June 2021,  the provision has been fully utilised. Refer to Note 2.3 for further details.   Cochlear self‐insures certain risks associated with operating in its line of business. Claims are recognised when an incident  occurs that may give rise to a claim. They are measured at the cost that Cochlear expects to incur in defending or settling the  claims, discounted using a rate that reflects current market assessments of the time value of money and the risks specific to  the liability.  Product recall  On 11 September 2011, the Company initiated a worldwide voluntary recall of its unimplanted Nucleus CI500 cochlear implant  range. Management has made judgements, estimates and assumptions related to probable costs arising from the recall which  affect the reported amounts of assets, liabilities, income and expenses. Actual outcomes may differ from these estimates as  further information is identified.  No additional provisions have been made or released to the income statement for the year ended 30 June 2021.  Make good lease costs  Cochlear has several operating leases over its offices that require the premises to be returned to the lessor in their original  condition. The operating lease payments do not include an element for the repairs and overhauls.  5.6   Contingent liabilities   The details of contingent liabilities are set out below. The directors are of the opinion that provisions are either adequate or  are not required in respect of these matters, as it is either not probable that a future sacrifice of economic benefits will be  required, or the amount is not capable of reliable measurement.  Product liability claims   Cochlear is currently, and/or is likely from time to time to be, involved in claims and lawsuits incidental to the ordinary course  of business, including claims for damages relating to its products and services.   In addition, Cochlear has received legal claims and lawsuits in various countries including the United States by recipients who  have had Cochlear implant CI500 series devices stop functioning for the reason that led to the September 2011 voluntary recall  of unimplanted CI500 series devices.   Cochlear Limited Annual Report 2021               104                                  Cochlear carries product liability insurance and has made claims under the policies. The insurers have agreed to indemnify  Cochlear in accordance with the terms and conditions of the policies including deductibles and exclusions. In the opinion of  the directors, the details of the product liability insurance policies are commercially sensitive and any disclosure of these details  may be prejudicial to the interests of Cochlear.  Regulatory actions  Cochlear operates in multiple overseas jurisdictions and, from time to time, is subject to tax, customs and regulatory reviews,  audits and investigations. Known reviews, audits and investigations are not expected to result in a significant adverse outcome  for Cochlear. Outcomes are uncertain because investigations are ongoing.   Patent infringement claims  Cochlear operates in an industry that has substantial intellectual property and patents protecting that intellectual property.   From  time  to  time,  Cochlear  is  involved  in  confidential  discussions  with  patent  owners  including  competitors  regarding  threatened litigation for alleged infringement of patent rights. Current discussions are not expected to result in a significant  adverse outcome for Cochlear.   5.7   Leases  Cochlear  leases  a  number  of  assets  including  land  and  buildings,  office  equipment  and  motor  vehicles.  Cochlear’s  lease  agreements often include a standard lease term with an extension option at the end. Lease agreements may include annual  rent increases based on either a fixed percentage or benchmarked against an inflation index. Land and building leases may also  include periodic market rent reviews which resets the rent to the market rent at the time of the review.  At inception of a contract, Cochlear assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the  contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.  Where  the  contract  contains  a  lease,  a  lease  liability  is  recognised  at  lease  commencement  date.  The  liability  is  initially  measured at the present value of future lease payments, discounted using Cochlear’s incremental borrowing rate.   The lease liability is subsequently remeasured when there is a modification in future lease payments arising from a change in  an index or rate, a change in the estimate of the amount expected to be payable under a residual value guarantee, or changes  in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option is  reasonably certain not to be exercised. The right of use asset is initially measured at cost and subsequently adjusted for certain  remeasurements of the lease liability.  Over the life of the lease, the lease liability will be increased by interest costs and will be reduced as lease payments are made.  The right of use asset is amortised on a straight‐line basis over its useful life.   Cochlear  has  applied  judgement  to  determine  the  lease  term  for  some  lease  contracts  in  which  it  is  a  lessee  that  include  renewal options. The assessment of whether Cochlear is reasonably certain to exercise such options impacts the lease term,  which significantly affects the amount of lease liabilities and right of use assets recognised.   Cochlear has elected not to recognise a right of use asset and a corresponding lease liability for leases with a term of less than  12 months or for leases of low‐value assets. Cochlear recognises the lease payments associated with these leases as an expense  on a straight‐line basis over the lease term.   The  right  of  use  asset  depreciation  is  recognised  in  cost  of  sales,  selling,  marketing  and  general  expenses,  research  and  development  expenses  and  administration  expenses  in  the  income  statement  depending  on  the  function  of  associated  activities;  while  interest  expense  incurred  on  the  lease  liability  is  recognised  in  finance  expense  –  interest  in  the  income  statement. For the purpose of presentation of the statement of cash flows, the lease payments are separated into principal  payments (financing activities) and interest payments (operating activities).  Cochlear Limited Annual Report 2021               105                         The following table shows movements in the right of use assets during the year:  Balance at 1 July 2020  Additions  Remeasurement  Depreciation expense  Effect of movements in foreign exchange  Balance at 30 June 2021  Land and  buildings  Other  assets  $m  202.0  2.5  0.9  (23.4)  (4.2)  177.8  $m  6.3  8.4  –  (4.1)  0.6  11.2  Total  $m  208.3  10.9  0.9  (27.5)  (3.6)  189.0  6. Capital and financial structure  6.1   Capital management  Cochlear’s  capital  management  objectives  are  to  safeguard  its  ability  to  continue  as  a  going  concern,  provide  returns  to  shareholders, provide benefits to other stakeholders and maintain an optimal capital structure to reduce the cost of capital.  The  Board  aims  to  maintain  and  develop  a  capital  base  appropriate  to  Cochlear’s  objectives  and  monitors  a  number  of  qualitative metrics as follows:      gearing ratio – defined as total borrowings as a proportion of total equity;  dividend payout ratio – defined as dividends as a proportion of net profit after tax excluding one‐off and non‐recurring  items (‘underlying net profit’) for a given period;  growth in EPS – defined as the compound annual growth percentage in EPS over a three‐year period; and  TSR – defined as the percentage growth in share price over a three‐year period plus the cumulative three‐year dividend  return calculated against the opening share price in the same three‐year period.  Senior management tracks, manages and reports against these capital management metrics periodically as part of broader  corporate governance responsibilities. The Board undertakes periodic reviews to assess whether the metrics continue to be  appropriate and whether the capital management structure is appropriate to meet Cochlear’s medium and long‐term strategic  requirements.  In order to maintain or adjust the capital structure, Cochlear may adjust the amount of dividends paid to shareholders, return  capital to shareholders, issue new shares or sell assets to reduce debt. Neither the Company nor any of its subsidiaries is subject  to externally imposed capital requirements.  In the financial year ended 30 June 2020, Cochlear increased its liquidity by undertaking a capital raising of AUD 1,075.6 million  (net  of  related  costs)  and  additionally  increased  Cochlear’s  overall  available  debt  by  obtaining  additional  working  capital  facilities from existing lenders and an additional facility for the patent litigation. During the financial year ended 30 June 2021,  those additional working capital facilities were terminated, the additional facility for the patent litigation was fully repaid and  existing net debt levels were reduced.    Cochlear’s priority for the use of cash from the capital raising was to reduce existing debt levels, which was achieved during  the  financial  year  ended  30  June  2021,  and  to  maintain  a  strengthened  balance  sheet  to  support  the  business  during  any  continuing impacts of COVID while continuing to invest in core strategic business priorities, research and development and the  resumption of dividends to shareholders.     Cochlear Limited Annual Report 2021               106                                  6.2   Capital and reserves   Share capital  The Company does not have authorised capital or par value in respect of its issued shares.  On issue 1 July – fully paid   Issued for nil consideration under Employee Share Plan  Issued from exercise of APAC Equity Plan  Issued from the exercise of options  Issued from the exercise of performance rights  Issued from capital raising – institutional placement  Issued from capital raising – share purchase plan  On issue 30 June – fully paid                                     Total number of issued shares  2021  2020  65,687,402  57,715,821  –  1,068  26,689  28,919  –  –  65,744,078  7,955  826  54,419  51,099  6,285,715  1,571,567  65,687,402  During the 2021 financial year, Cochlear purchased 24,990 shares (2020: 10,394 shares) on‐market to satisfy exercise of options  and performance rights and did not issue shares to employees under the Employee Share Plan (2020: 7,955 shares). Refer to  Note 4.3 for further details.   Ordinary shares are classified as equity and incremental costs directly attributable to the issue of ordinary shares and share  options are recognised as a deduction from equity, net of any income tax benefit.   The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per  share at shareholders’ meetings.   In the prior year, Cochlear completed a capital raising of AUD 1,075.6 million, net of related costs, in response to the combined  effects of COVID and the patent litigation. The capital raising was to ensure Cochlear remained strongly capitalised during the  market uncertainties of COVID, to enhance Cochlear’s balance sheet and to strengthen liquidity in order to position Cochlear  for the future. From the capital raise, 6,285,715 shares were issued from the institutional placement on 31 March 2020 and  1,571,567 shares were issued from the share purchase plan on 30 April 2020.  Translation reserve  The  translation  reserve  records  the  foreign currency differences  arising  from  the  translation of the  financial  statements  of  foreign operations as well as from the translation of liabilities that hedge the Company’s net investment in a foreign subsidiary,  where their functional currency is different to the presentation currency of the reporting entity. See Note 1.2(d) for further  details.  Hedging reserve  The  hedging  reserve  comprises  the  effective  portion  of  the  cumulative  net  change  in  the  fair  value  of  cash  flow  hedging  instruments related to underlying transactions that have not yet occurred.  Fair value reserve  The  fair  value  reserve  comprises  the  cumulative  net  change  in  the  fair  value  of  investments  revalued  through  other  comprehensive income until the assets are derecognised or impaired.   Share‐based payment reserve  The share‐based payment reserve comprises the cost of shares, options, performance shares and performance rights granted  to eligible executives under the CEIP, as detailed in Note 4.3 less any payments made to meet Cochlear’s obligations through  the acquisition of shares on‐market, together with any deferred tax asset/liability on such payments.  Cochlear Limited Annual Report 2021               107                             6.3   Total borrowings, net cash and finance costs  Loans  and  borrowings  are  recognised  initially  at  fair  value  less  attributable  transaction  costs.  Subsequently,  loans  and  borrowings are stated at amortised cost, with any difference between amortised cost and redemption value being recognised  in the income statement over the period of the borrowings on an effective interest rate basis.    Debt establishment costs are capitalised and recognised as a reduction in loans and borrowings. They are recorded initially at  cost and are amortised over the period of the loan. Included within borrowings is an amount of $0.7 million (2020: $0.9 million)  in relation to unamortised loan establishment fees.  As a result of the capital raising, Cochlear continues to be in a net cash position for the year ended 30 June 2021.  Cash at bank  Cash and cash equivalents  Term deposits1  Total Cash  Less: Total borrowings  Current   Non‐current   Total borrowings  Net Cash  2021  $m  609.6  –  609.6   –    (45.0)   (45.0)   564.6   2020  $m  565.0  365.0  930.0  (393.1)  (79.9)  (473.0)   457.0   1. Term deposits are bank deposits with a fixed term maturity of longer than three months from inception. Bank deposits with a fixed term  of less than three months are classified as cash and cash equivalents. All term deposits have matured and therefore no term deposits  were held as at 30 June 2021 (2020: AUD 365.0 million).   Gearing ratio  Total borrowings  Total equity   Gearing ratio1   1. Gearing ratio = Total borrowings/Total equity.   2021  $m  45.0  1,701.7  2.6%  2020  $m  473.0  1,401.5  33.7%  Cochlear Limited Annual Report 2021               108                                                                            Financing arrangements  2021  Utilised at reporting date1  Not utilised at reporting date  Total facilities  2020  Utilised at reporting date1  Not utilised at reporting date  Total facilities  Multi‐option bank facilities  Unsecured  bank loan  Bank  guarantees2  Other credit facilities  Unsecured  bank loan  Bank  guarantees2  Unsecured  bank  overdrafts  $m  45.7  300.0  345.7  470.5  527.2  997.7  $m  5.5  9.5  15.0  8.0  7.0  15.0  $m  –  2.7  2.7  –  2.9  2.9  $m  –  5.4  5.4  3.4  2.7  6.1  $m  6.2  3.4  9.6  5.4  4.2  9.6  Excludes the amount of $0.7 million (2020: $0.9 million) in relation to unamortised loan establishment fees.  1. 2. Bank guarantees include standby letters of credit.  Multi‐option bank facilities – Unsecured bank loan   During the year ended 30 June 2021, Cochlear restructured its bank loan facilities as follows:  Facility type  <1 year term  $m  1 ‐ 2 year term  $m  2 ‐ 3 year term  $m  3 ‐ 4 year term  $m  5 ‐ 6 year term  $m  Total facilities  $m  Committed debt   including guarantees  –  145.7  115.0  –  100.0  360.7  All facilities are unsecured and have interlocking guarantees provided by certain controlled entities. Interest on the facilities is  variable and charged at prevailing market rates.  Other credit facilities  Unsecured bank overdrafts  Certain  unsecured  bank  overdrafts  are  payable  on  demand  and  are  subject  to  annual  review.  Interest  on  unsecured  bank  overdrafts is variable and is charged at prevailing market rates.  Unsecured bank loan  Cochlear has a Japanese yen (JPY) 450.0 million loan facility and a Swedish kroner (SEK) 300.0 million loan facility. The facilities  are unsecured bank loans. Interest on unsecured bank loans is variable and is charged at prevailing market rates.   Bank guarantees/Standby letters of credit  As  at 30  June 2021,  Cochlear  had  additional  contingent  liability  facilities  denominated  in  USD, Euros  (EUR),  Sterling (GBP),  Indian rupees and New Zealand dollars totalling AUD 9.6 million (2020: AUD 9.6 million).  Finance costs  Interest income is recognised as it accrues in the income statement. Borrowing costs are recognised as they accrue in the  income statement as a finance expense.   Cochlear Limited Annual Report 2021               109                                                         6.4   Financial risk management  The activities of Cochlear are exposed to a variety of risks, including market risk (comprising currency and interest rate risk),  credit risk and liquidity risk. Cochlear’s overall risk management program considers the unpredictability of financial markets  and seeks to appropriately manage the potential adverse effects on financial performance.   The Board has overall responsibility for the establishment and oversight of the Risk Management Framework. Under instruction  of the Board, management has established a Risk Management Committee which is responsible for identifying, assessing and  appropriately managing risk throughout Cochlear. Key risks are reported to the Audit & Risk Committee on a regular basis.   The Audit & Risk Committee oversees how management monitors compliance with Cochlear’s Risk Management Framework,  policies and procedures and is assisted by Group Risk and Assurance which undertakes reviews of key management controls  and procedures.  (a) Market risk  Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices, will affect  Cochlear’s net profit or the value of its holdings of financial instruments.  The  objective  of  market  risk  management  is  to  manage  and  control  market  risk  exposures  by  buying  and  selling  forward  exchange  contracts  and  incurring  financial  liabilities,  within  acceptable  parameters,  while  optimising  the  return,  all  in  accordance with the treasury risk policy.   Currency risk  Cochlear is exposed to currencies other than the respective functional currencies of the controlled entities, primarily AUD,  Swiss francs (CHF), CNY, EUR, GBP, JPY, SEK and USD.   Over 90% of Cochlear’s revenues and over 50% of costs are denominated in currencies other than AUD. Currency risk is hedged  in accordance with the treasury risk policy. Risk resulting from the translation of assets and liabilities of foreign operations into  Cochlear’s reporting currency is not hedged.  Cochlear’s exposure to foreign currency risk in relation to non‐derivative financial instruments at 30 June 2021 was as follows,  based upon notional amounts:  Amounts local currency/millions  CHF  CNY  EUR  GBP  JPY  SEK  USD  2021  Trade receivables  Unsecured bank loan  Trade payables  Balance sheet exposure  2020  Trade receivables  Unsecured bank loan  Trade payables  0.3  –  (1.4)  (1.1)  6.4  –  (47.4)  (41.0)  0.6  –  6.0  (165.4)  45.1  –  (17.3)  27.8  36.5  –  (0.1)  (26.3)  (10.6)  Balance sheet exposure  0.5  (185.7)  25.9  2.2  –  (4.5)  (2.3)  922.2  5.5  –  (300.0)  97.0  –  (54.2)  (46.6)  (23.4)  868.0  (341.1)  73.6  (0.9)  771.8  1.7  66.4  –  (250.0)  (300.0)  (268.0)  (3.0)  (3.9)  (74.4)  (39.9)  (23.8)  447.4  (338.2)  (225.4)  Cochlear Limited Annual Report 2021               110                                                       Derivative assets and liabilities   In  order  to  reduce  the  impact  of  short‐term  fluctuations  on  Cochlear’s  earnings,  Cochlear  enters  into  forward  exchange  contracts to hedge anticipated sales and purchases in CHF, EUR, GBP, JPY, SEK and USD. The amounts of forward cover taken  are in accordance with approved policy and internal forecasts.   In the year ended 30 June 2021, Cochlear designated the majority of forward exchange contracts as cash flow hedges. These  are hedges of forecast future transactions to manage the currency risk arising from exchange rate fluctuations. The hedged  items were highly probable foreign currency transactions.   At the start of a hedge relationship, Cochlear designates and documents the relationship between the hedging instrument and  hedged item. This includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk  being hedged and how Cochlear will assess the effectiveness of the hedging relationship. Cochlear regularly assesses whether  the hedging instruments are expected to be highly effective in offsetting the changes in the cash flows of the respective hedged  items.  Forward exchange contracts are recognised initially at fair value. Subsequently, forward exchange contracts are measured at  fair value. Changes in the fair value are recognised directly in equity to the extent that the hedge is effective. The ineffective  part of any hedging instrument is recognised immediately in the income statement.  If the forward exchange contract no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised,  then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in equity remains there  until the forecast transaction occurs or until cash flows arising from the transaction are received.  For cash flow hedges, the associated cumulative gain or loss is removed from equity and recognised in the income statement  in the same period the hedged forecast transaction affects the income statement and on the same line item as that hedged  forecast transaction.   In the year ended 30 June 2021, all cash flow hedges were effective at the reporting date.   The  following  table  sets  out  the  gross  value  to  be  received  or  paid  under  remaining  forward  exchange  contracts  and  the  weighted average contracted exchange rates of outstanding contracts:  Weighted  average rate  < 1 year   $m  1 ‐ 2 years   $m  2 ‐ 5 years   $m  2021  Buy CHF  Sell EUR  Sell GBP  Sell JPY  Buy SEK  Sell USD  Total  2020  Buy CHF  Sell EUR  Sell GBP  Sell JPY  Buy SEK  Sell USD  Total  0.678  0.617  0.544  76.901  6.414  0.741  0.659  0.595  0.522  72.979  6.492  0.691  (18.6)  146.3  21.3  18.2  (32.7)  264.5  399.0  (12.0)  –  –  19.8  (27.7)  –  (19.9)  –  95.9  9.0  9.2  ‐  171.4  285.5  –  63.1  9.6  11.1  –  122.8  206.6  –  –  –  –  –  –  –  –  –  –  –  –  26.3  26.3  Cochlear Limited Annual Report 2021               111                                                 Currency risk – Sensitivity analysis  An analysis based on a 10% strengthening of foreign currencies would have increased Cochlear’s profit for the year ended 30  June 2021 after tax by approximately AUD 0.9 million (2020: increased loss by AUD 1.7 million) and increased Cochlear’s equity  by AUD 49.9 million (2020: increase by AUD 13.6 million). A 10% weakening of the foreign currencies would have a neutral  impact  on  Cochlear’s  profit  after  tax  (2020:  decreased  loss  by  AUD  2.4  million)  and  decreased  equity  by  AUD  40.4  million   (2020: decrease by AUD 13.0 million).  This  analysis  assumes  that  all  other  variables  remain  constant  and  ignores  any  impact  from  the  translation  of  foreign  operations.  The following significant exchange rates applied to Cochlear during the year:  AUD 1 =  CHF  CNY  EUR  GBP  JPY  SEK  USD  Interest rate risk  Average rate  Reporting date spot rate  2021  0.679  4.940  0.625  0.553  79.464  6.421  0.745  2020  0.656  4.725  0.606  0.533  72.549  6.457  0.672  2021  0.692  4.856  0.631  0.542  83.025  6.561  0.752  2020  0.654  4.869  0.611  0.558  73.985  6.413  0.688  Cochlear is exposed to interest rate risks in Australia, Japan and Sweden. See Note 6.4(c) for effective interest rates, repayment  and repricing analysis of outstanding debt.  At  the  reporting  date,  the  interest  rate  profile  of  Cochlear’s  interest‐bearing  financial  instruments  is  financial  assets  of   $609.6 million (2020: $930.0 million) and financial liabilities of $45.0 million (2020: $473.0 million).  Interest rate risk – Sensitivity analysis   For the year ended 30 June 2021, it is estimated that a general increase of one percent in interest rates would have reduced  Cochlear’s profit after income tax and equity by approximately $0.3 million (2020: increased loss by $3.3 million). A one percent  general decrease in interest rates would have had the equal but opposite effect on Cochlear’s loss and equity.  (b) Credit risk  Credit  risk  is  the  risk  of  financial  loss  to  Cochlear  if  a  customer  or  counterparty  to  a  financial  instrument  fails  to  meet  its  contractual  obligations.  Cochlear  is  exposed  to  credit  risk  from  its  operating  activities  (primarily  from  trade  and  other  receivables) and from financing activities, including deposits with financial institutions and foreign exchange contracts. The  carrying amounts of these financial assets at year‐end represent Cochlear’s maximum exposure to credit risk.   Credit risk management – Trade and other receivables  Customer credit risk is managed at a regional level, subject to Board approved policies and procedures. The ageing profile of  total receivables balances, individually significant debtors by geographic region, high risk customers and collection activities  are  reported  to  management  and  the  Board  on  a  monthly  basis.  Where  high  risk  customers  are  identified,  regional  management is responsible for placing restrictions on future trading, including suspending future shipments and administering  dispatches on a prepayment basis.   Cochlear’s exposure to credit risk is influenced mainly by the political and geographical location and characteristics of individual  customers. Cochlear does not have a significant concentration of credit risk with a single customer.  Cochlear Limited Annual Report 2021               112                             The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was:  2021  2020  Americas  EMEA  Asia Pacific  $m  88.4  74.7  $m  125.9  92.1  $m  47.8  44.6  Total  $m  262.1  211.4  Depending on the region, Cochlear’s credit terms are generally 30 days; however, there are certain jurisdictions where it is  customary practice for customers to make payment beyond 270 days. Although Cochlear discloses the balance as overdue, it  is  not  indicative  of  a  higher  than  normal  credit  risk  as  payments  are  typically  received  by  Cochlear  within  the  extended  timeframes.  Cochlear has established an allowance for impairment that represents its estimate of the expected credit losses in respect of  trade receivables. The expected credit losses are assessed by reference to historical collection trends and timing of recoveries  of each customer type within a region.   In  response  to  COVID,  Cochlear  undertook  reviews  of  its  outstanding  trade  debtors.  The  reviews  considered  the  macroeconomic  conditions  and  outlook  in  the  country  that  the  customer  is  located  as  well  as  any  specific  collection  risk  identified by either Cochlear or the customer. As a result of these reviews, the trade debtors provision has been adjusted to  reflect the increased level of risk caused by COVID in the current and prior year. While these model inputs including forward‐ looking information were revised, the expected credit loss model remains consistent with the prior year.  Trade and other receivables are stated at amortised cost less impairment losses. The ageing of Cochlear’s trade receivables at  the reporting date was:  Trade receivables  Not past due  Past due 1 ‐ 60 days  Past due 61 ‐ 180 days  Past due 181 ‐ 360 days    Past due 361 days and over  Allowance for impairment losses  Trade receivables net of allowance for impairment losses  Other receivables – current   Trade and other receivables  2021  $m  220.7  29.9  14.0  6.3  9.0  279.9  (17.8)  262.1  34.2  296.3  2020  $m  163.5  31.6  19.8  11.6  8.8  235.3  (23.9)  211.4  24.1  235.5  Credit risk management – Cash deposits, term deposits and forward exchange contracts  The majority of Cochlear’s cash deposits, term deposits and all forward exchange contracts are only executed with leading  financial institutions whose credit rating is at least ‘A’ on the Standard & Poor’s rating index.   (c) Liquidity risk  Liquidity risk is the risk that Cochlear will not be able to meet its financial obligations as they fall due. Cochlear manages liquidity  risk by ensuring, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due. The capital raising  increased Cochlear’s liquidity such that Cochlear continues to be in a net cash position for the year ended 30 June 2021 (refer  to Note 6.1). This has ensured that Cochlear has a strengthened balance sheet and is well positioned to meet all liabilities when  due.   Cochlear Limited Annual Report 2021               113                                            Non‐derivative liabilities   Contractual maturities of non‐derivative financial liabilities, including estimated interest payments and excluding the impact  of netting agreements, are as follows:  Effective  interest rate  Carrying  amount  Contractual  cash flows  2021  SEK floating rate loan  Trade and other payables  Lease liability  Total  2020  USD floating rate loan  CNY floating rate loan  JPY floating rate loan  SEK floating rate loan  Trade and other payables  Lease liability  Total  Per annum  $m  0.66%  –  –  1.17%  2.60%  0.55%  0.91%  –  –  45.7  203.6  219.3  468.6  389.8  34.0  3.3  45.9  172.9  231.5  877.4  $m  46.2  203.6  260.3  510.1  394.3  37.6  3.4  47.8  172.9  282.6  938.6  < 1   year  $m  0.3  202.9  31.9  235.1  394.3  0.9  3.4  0.2  159.3  26.0  584.1  1 ‐ 2   years  2 ‐ 5   years  More than  5 years  $m  $m  $m  45.9  0.7  29.1  75.7  –  0.9  –  0.4  12.4  28.2  41.9  –  –  72.6  72.6  –  35.8  –  47.2  1.2  77.7  161.9  –  –  126.7  126.7  –  –  –  –  –  150.7  150.7  It  is  not  expected  that  the  cash  flows  included  in  the  maturity  analysis  could  occur  significantly  earlier  or  at  significantly  different amounts.  Derivative assets and liabilities   The following table indicates the periods in which the cash flows associated with Cochlear’s derivatives are expected to occur:    2021  Assets  Liabilities  Total  2020  Assets  Liabilities  Total  Carrying  amount  $m  Contractual  cash flows  $m  20.9  (7.9)  13.0  3.3  (2.0)  1.3  20.9  (7.9)  13.0  3.3  (2.0)  1.3  < 1 year  $m  17.6  (4.7)  12.9  1.2  (0.3)  0.9  1 ‐ 2   years  $m  3.3  (3.2)  0.1  2.0  (1.6)  0.4  2 ‐ 5   years  $m  –  –  –  0.1  (0.1)  –  The expected impact on the income statement is not considered to be significantly different to the cash flow impact noted  above.   (d) Fair value  The carrying amounts and estimated fair values of Cochlear’s financial assets and liabilities are materially the same.   The fair value of forward exchange contracts is based upon the listed market price, if available. If a listed market price is not  available,  the fair  value  is  estimated  by  discounting the  difference between  the contractual  forward  price  and  the  current  forward  price  for  the  residual  maturity  of  the  contract  using  benchmark  bill  futures  and  swap  rates.  These  fair  values  are  provided by independent third parties.  Cochlear Limited Annual Report 2021               114                                                                                        Valuation of financial assets and liabilities  For  financial  assets  and  liabilities  measured  and  carried  at  fair  value,  Cochlear  uses  the  following  levels  to  categorise  the  valuation methods used:     Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;  Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly  (i.e. as prices) or indirectly (i.e. derived from prices); and   Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).  All of Cochlear’s forward exchange contracts were valued using observable market inputs (Level 2) and there were no transfers  between levels during the year.  7. Other notes  7.1   Auditors’ remuneration  Audit services  Auditors of the Company – KPMG:  – audit and review of financial reports  Total audit services  Non‐audit services  Auditors of the Company – KPMG:  – other assurance services  – taxation compliance and advisory services  – other   Total non‐audit services  7.2   Commitments  Capital expenditure commitments  2021  $  2020  $  2,030,461  2,030,461  2,170,767  2,170,767  –  35,666  1,370,782  1,547,505  52,942  9,185  1,423,724  1,592,356  As  at  30  June  2021,  Cochlear  entered  into  contracts  to  purchase  property,  plant  and  equipment  for  $20.4  million  (2020:   $24.0 million).   7.3   Controlled entities  Subsidiaries conduct business transactions with various controlled entities. Such transactions include purchases and sales of  certain products, dividends, interest and loans.  Company  Cochlear Limited  Controlled entities  Cochlear AG  Cochlear Americas  Cochlear Austria GmbH  Cochlear Benelux NV  Cochlear Bone Anchored Solutions AB  Cochlear Boulder LLC  Cochlear Canada Inc  Cochlear Clinical Services LLC  Interest held  2020  2021  %  %  Country of   incorporation/  formation  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  Australia  Switzerland  USA  Austria  Belgium  Sweden  USA  Canada  USA  Cochlear Limited Annual Report 2021               115                                                                                           Cochlear Colombia SAS  Cochlear Deutschland GmbH & Co KG   Cochlear Employee Share Trust  Cochlear Europe Finance GmbH  Cochlear Europe Limited  Cochlear Finance Pty Limited  Cochlear France SAS  Cochlear German Holdings Pty Limited  Cochlear Incentive Plan Pty Ltd  Cochlear Investments Pty Ltd  Cochlear Investments (No. 2) Pty Ltd  Cochlear Italia SRL  Cochlear Korea Limited   Cochlear Labs Pty Limited  Cochlear Latinoamerica S.A.  Cochlear Malaysia Sdn. Bhd.  Cochlear Manufacturing Corporation  Cochlear Medical Device (Beijing) Co., Ltd  Cochlear Medical Device (Chengdu) Co Ltd                                    Cochlear Medical Device Company India Private Limited  Cochlear Mexico SA de CV  Cochlear Middle East FZ‐LLC  Cochlear Nordic AB  Cochlear Norway AS  Cochlear NZ Limited  Cochlear Research and Development Limited  Cochlear Shared Services S.A.  Cochlear Sweden Holdings AB  Cochlear Taiwan Limited  Cochlear (Thailand) Limited  Cochlear Tibbi Cihazlar ve Saglik Hizmetleri Limited Sirketi  Cochlear Verwaltungs GmbH  Cochlear (HK) Limited  Cochlear (UK) Limited  Medical Insurance Pte Limited  Nihon Cochlear Co Limited  Sichuan Keli ShuangChuang Technology Co Ltd                         Sycle, LLC  Sycle.Net Technologies (Canada) Ltd  (i) Dormant.  (i)  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  51  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  100  51  100  100  Colombia  Germany  Australia  Germany  UK  Australia  France  Australia  Australia  Australia  Australia  Italy  Korea  Australia  Panama  Malaysia  USA  China  China  India  Mexico  UAE  Sweden  Norway  New Zealand  UK  Panama  Sweden  Taiwan  Thailand  Turkey  Germany  Hong Kong  UK  Singapore  Japan  China  USA  Canada  Cochlear Limited Annual Report 2021               116                                                                                         7.4   Parent entity disclosure   At, and throughout the financial year ended, 30 June 2021, the parent company of Cochlear was Cochlear Limited.  Result of the parent entity  Net profit/(loss)  Other comprehensive income  Total comprehensive income/(loss)   Financial position of the parent entity at year end  Current assets  Total assets  Current liabilities  Total liabilities  Total equity of the parent entity comprising:  Share capital  Hedging reserve  Share‐based payment reserve  Profit reserve  Accumulated losses  Total equity  2021  $m  248.5  8.3  256.8  1,192.6  1,903.2  282.8  474.7  2020  $m  (191.4)  17.9  (173.5)  1,441.8  2,154.8  689.0  922.0  1,276.6  1,272.4  9.1  68.4  172.9  (98.5)  1,428.5  0.9  58.0  –  (98.5)  1,232.8  Dividends will be paid from the profit reserve of Cochlear Limited, as the parent of the Consolidated Entity.  Dividend income from subsidiaries is recognised by the parent entity when the dividends are declared by the subsidiary.  Parent entity contingencies  The details of all contingent liabilities in respect of Cochlear Limited are disclosed in Note 5.6.   Parent entity capital commitments for acquisition of plant and equipment  As  at  30  June  2021,  the  parent  entity  entered  into  contracts  to  purchase  plant  and  equipment  for  $16.0  million  (2020:   $10.1 million).  7.5   Deed of Cross Guarantee  Cochlear Limited (the holding entity) together with wholly owned subsidiaries set out below (together referred to as the ‘Closed  Group’)  have  entered  a  Deed  of Cross  Guarantee  on  17  April  2019  in  accordance  with  ASIC  Corporations  (Wholly‐owned  Companies)  Instrument  2016/785  and  are  relieved  from  the  Corporations  Act  2001  requirement  to  prepare  and  lodge  an  audited  financial  report  and  directors’  report.  The  effect  of  the  deed  is  that  Cochlear  Limited  has  guaranteed  to  pay  any  outstanding liabilities upon the winding up of any wholly owned subsidiary that is party to the Deed. Wholly owned subsidiaries  that are party to the Deed have also been given a similar guarantee in the event that Cochlear Limited or another party to the  Deed is wound up.   The subsidiaries party to the deed are:  Cochlear Finance Pty Limited;   Cochlear German Holdings Pty Limited;   Cochlear Investments Pty Ltd;   Cochlear Investments (No. 2) Pty Ltd; and  Cochlear Labs Pty Limited.   Cochlear Limited Annual Report 2021               117                                         Set  out  below  is  the  income  statement,  statement  of  comprehensive  income,  a summary  of  movements  in  (accumulated  losses)/retained earnings and balance sheet of the entities party to the Deed of Cross Guarantee for the year ended 30 June  2021 and 30 June 2020:  Income statement  Revenue  Cost of sales  Gross profit  Selling, marketing and general expenses  Research and development expenses  Administration expenses  Other income  Other expenses  Patent litigation expense  Share of losses on equity accounted investments  Results from operating activities  Finance income – interest  Finance expense – interest  Net finance expense  Profit/(Loss) before income tax  Income tax benefit/(expense)  Net profit/(loss)  Statement of comprehensive income  Financial investments measured at fair value through other comprehensive  income, net of tax  Foreign currency translation differences  Effective portion of changes in fair value of cash flow hedges, net of tax  Net change in fair value of discontinued cash flow hedges transferred to the  income statement, net of tax  Net change in fair value of cash flow hedges transferred to the income statement,  net of tax  Total comprehensive income/(loss)  Retained earnings at beginning of year  Net profit/(loss)  Dividends recognised   Retained earnings/(Accumulated losses) at end of year  2021  $m  959.7  (351.1)  608.6  (65.3)  (129.8)  (106.6)  105.5  (95.0)  (6.4)  (1.7)  309.3  4.3  (10.1)  (5.8)  303.5  (17.6)  285.9  40.7  (0.1)  11.2  –  (3.0)  334.7  (82.0)  285.9  (75.6)  128.3  2020  $m  851.1  (307.2)  543.9  (63.3)  (141.8)  (88.3)  178.8  (107.7)  (503.7)  (1.2)  (183.3)  3.0  (10.0)  (7.0)  (190.3)  37.1  (153.2)  (1.8)  (2.2)  (22.6)  18.3  22.3  (139.2)  264.9  (153.2)  (193.7)  (82.0)  Cochlear Limited Annual Report 2021               118                                                     Balance sheet  Assets  Cash and cash equivalents  Term deposits  Trade and other receivables  Forward exchange contracts  Inventories  Current tax assets  Prepayments  Total current assets  Forward exchange contracts  Loans and borrowings – internal  Investments in subsidiaries   Investments  Equity accounted investments  Other financial assets  Property, plant and equipment  Intangible assets  Deferred tax assets  Right of use asset  Total non‐current assets  Total assets  Liabilities  Trade and other payables  Forward exchange contracts  Loans and borrowings – external  Loans and borrowings – internal  Current tax liabilities  Employee benefit liabilities  Provisions  Deferred revenue  Lease liability  Total current liabilities  Trade and other payables  Forward exchange contracts  Loans and borrowings – external  Loans and borrowings – internal  Employee benefit liabilities  Provisions  Deferred tax liabilities  Deferred revenue  Lease liability  Total non‐current liabilities  Total liabilities  Net assets  Equity  Share capital  Reserves  (Accumulated losses)/retained earnings  Total equity  2021  $m  514.2  –  441.9  17.6  141.0  65.1  13.4  1,193.2  3.3  121.3  432.2  199.5  –  27.3  111.7  108.5  84.3  113.5  1,201.6  2,394.8  201.7  4.6  –  86.8  2.8  45.1  14.4  5.2  14.8  375.4  –  3.2  45.0  265.1  4.0  21.2  50.2  –  118.7  507.4  882.8  1,512.0  1,276.6  107.1  128.3  1,512.0  2020  $m  432.9  365.0  443.2  1.0  137.6  53.5  9.4  1,442.6  2.1  79.8  415.2  25.9  69.0  5.0  109.4  107.4  90.1  117.6  1,021.5  2,464.1  115.0  0.3  389.8  74.5  1.7  32.6  139.6  2.6  13.4  769.5  51.3  1.7  45.9  208.4  4.7  5.5  12.9  2.0  123.8  456.2  1,225.7  1,238.4  1,272.4  48.0  (82.0)  1,238.4  Cochlear Limited Annual Report 2021               119                                   7.6   Changes in accounting policies   There have been no changes to accounting policies materially impacting Cochlear in the current financial year.  7.7   New standards and interpretations not yet adopted  A number of new standards, amendments to standards and interpretations are effective for financial years beginning on or  after 1 July 2020, and have not been applied in preparing these consolidated financial statements. Of the new standards, only  the below are expected to have an effect on the consolidated financial statements of Cochlear.   IFRIC Agenda Decision on Configuration or customisation costs in a cloud computing arrangement  In  April  2021,  the  International  Financial  Reporting  Standards  Interpretations  Committee  (IFRIC)  issued  a  final  agenda  decision,  Configuration  or  customisation  costs  in  a  cloud  computing  arrangement.  The  decision  discusses  whether  configuration  or  customisation  expenditure  relating  to  cloud  computing  arrangements  is  able  to  be  recognised  as  an  intangible asset and if not, over what time period the expenditure is expensed.  Cochlear’s accounting policy has historically been to capitalise all configuration and customisation costs related to cloud  computing arrangements as intangible assets. These are recorded within IT system costs disclosed in Note 5.3 of these  financial statements.  The adoption of this agenda decision could result in a reclassification of a portion of these intangible assets to either a  prepaid asset in the Balance Sheet and/or recognition as an expense in the Income Statement, impacting both the current  and prior periods presented.   Cochlear has not yet applied this IFRIC agenda decision. The impact of the change is not reasonably estimable as Cochlear  has yet to complete its assessment of the impact of the IFRIC agenda decision. Cochlear expects to adopt this IFRIC agenda  decision in its interim financial statements ending on 31 December 2021.  7.8   Events subsequent to the reporting date  Other  than  the  matter  noted  below,  there  has  not  arisen  in  the  interval  between  the  reporting  date  and  the  date  of  this  Financial report, any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the  Company, to significantly affect the operations of Cochlear, the results of those operations, or the state of affairs of Cochlear  in future financial years:  Dividends  For dividends declared after 30 June 2021, see Note 2.6.  Cochlear Limited Annual Report 2021               120                     Directors’ declaration  1. In the opinion of the directors of Cochlear Limited (the Company):  a) the consolidated financial statements and notes and the Remuneration report are in accordance with the Corporations  Act 2001, including:  i) giving a true and fair view of the Consolidated Entity’s financial position as at 30 June 2021 and of its performance  for the financial year ended on that date; and  ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and  b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due  and payable; and  c) at the date of this declaration, there are reasonable grounds to believe that the Company and each of the Closed  Group entities identified in Note 7.5 will be able to meet any liabilities to which they are or may become subject to,  because  of  the  Deed  of  Cross  Guarantee  between  the  Company  and  those  group  entities  pursuant  to  ASIC  Corporations (Wholly‐owned Companies) Instrument 2016/785.  2. The directors have been given the declarations required by section 295A of the Corporations Act 2001 from the Chief  Executive Officer & President and Chief Financial Officer for the financial year ended 30 June 2021.  3. The  directors  draw  attention  to  Note  1.2(a)  to  the  consolidated  financial  statements,  which  includes  a  statement  of  compliance with International Financial Reporting Standards.   Signed in accordance with a resolution of the directors:  Dated at Sydney this 20th day of August 2021.  Director    Director  Cochlear Limited Annual Report 2021              121                                               Independent auditor’s report to the shareholders of Cochlear Limited  Report on the audit of the Financial Report Opinion  We have audited the Financial Report of Cochlear Limited  (the Company).  The Financial Report comprises:    Balance sheet as at 30 June 2021;  In our opinion, the accompanying Financial Report of the  Company  is  in  accordance  with  the  Corporations  Act  2001, including:    Income statement, Statement of comprehensive income,  Statement of changes in equity, and Statement of cash flows  for the year then ended;   giving a true and fair view of the Consolidated Entity’s  financial  position  as  at  30  June  2021  and  of  its  financial  performance  for  the  year  ended  on  that  date; and   complying with Australian Accounting Standards and  the Corporations Regulations 2001.   Notes including a summary of significant accounting policies;  and   Directors’ Declaration.  The Consolidated Entity consists of the Company and the entities  it  controlled  at  the  year‐end  or  from  time  to  time  during  the  financial year.  Basis for opinion  We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have  obtained is sufficient and appropriate to provide a basis for our opinion.  Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial  Report section of our report.   We are independent of the Consolidated Entity in accordance with the Corporations Act 2001 and the ethical requirements of  the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including  Independence Standards) (the Code) that are relevant to our audit of the Financial Report in Australia. We have fulfilled our  other ethical responsibilities in accordance with the Code.   Key Audit Matters  The key audit matters we identified are:   Recoverability of trade receivables; and   Warranty provision.  Recoverability of trade receivables $262.1 million  Refer to Note 6.4(b) Financial risk management, credit risk  The key audit matter    Recoverability  of  trade  receivables  was  considered  a  key  audit matter due to:    The varying characteristics of customers which  include  universities,  government‐supported  governments,  clinics and major hospital chains;   The  different  geographical  locations  of  customers  and  the  political  and  economic  environments  they  are  Key Audit Matters are those matters that, in our professional  judgement,  were  of  most  significance  in  our  audit  of  the  Financial Report of the current period.   These matters were addressed in the context of our audit of  the Financial Report as a whole, and in forming our opinion  thereon, and we do not provide a separate opinion on these  matters.  How the matter was addressed in our audit  Our procedures included:   With  the  assistance  of  our  IT  specialists,  testing  key  controls within the credit control process including:  ‐ management review and approval of new customer  credit limits within the Consolidated Entity’s credit  limit policies;  ‐ the system configuration of credit limits; and   KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International  Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the  independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation.  122                Cochlear Limited  Annual Report 2021            Independent auditor’s report to the shareholders of Cochlear Limited   subject  to,  which  may  affect  the  timely  recovery  of  certain receivables;  ‐ management’s  evaluation  of  trade  receivables  ageing and trade receivables past due;   Trade receivables past due at the reporting date which  have  certain  risk  characteristics  and  therefore  have  a  greater inherent risk of not being recovered;   The  potential  for  COVID‐19  to  increase  the  risk  of  receivables being delayed for a prolonged period or not  paid;   The  inherent  subjectivity  involved  in  the  Consolidated  Entity making forward‐looking judgements in relation to  the recovery of credit risk exposures; and   The Consolidated Entity’s adoption of AASB 9 Financial  Instruments requiring the use of an expected credit loss  model.  These  conditions  gave  rise  to  additional  audit  effort,  including:   Greater  involvement  by  our  senior  team  members  to  gather  evidence  across  the  various  customer  profiles  and their trade receivables; and    To challenge the forward‐looking judgements made by  the Consolidated Entity.   We  involved  IT  specialists  to  supplement  our  senior  team  members in assessing this key audit matter.  Warranty provision $34.3 million  Refer to Note 5.5 Provisions  The key audit matter    The  warranty provision  was considered  a key  audit  matter  due to:   The  estimation  uncertainty  in  the  key  assumptions  applied  by  the  Consolidated  Entity  to  determine the warranty provision;  inherent   The  Consolidated  Entity’s  evolving  product  portfolio,  through  the  introduction  of  new  generations,  where   Assessing the Consolidated Entity’s expected credit loss  the  model  requirements of the accounting standards;  geographies  significant  against  in   Challenging the Consolidated Entity’s view of credit risk  and  recoverability  in  certain  locations  by  selecting  a  sample  of  significant  overdue  customer  balances  with  indicators of credit deterioration. We:  ‐ ‐ ‐ ‐ ‐ noted  the  historical  patterns  for  long  outstanding  trade  receivables  in  those  locations  for  those  customer  types,  to  form  an  understanding  of  the  normal  pattern  of  recovery  and  compared  this  to  the age of the customer balances sampled;  assessed  cash  received  subsequent  to  year‐end  from the Consolidated Entity’s bank statements for  its effect in reducing amounts outstanding at year‐ end;  evaluated  other  evidence  correspondence;  including  customer  questioned the Consolidated Entity’s assessment of  the impact of COVID‐19 on the risk of default; and  questioned the Consolidated Entity’s knowledge of  future  conditions  which  may  impact  expected  customer  receipts  based  on  consistency  with  the  results of the procedures performed above; and   Assessing the Consolidated Entity’s disclosures of the  quantitative and qualitative considerations in relation  to trade receivables credit risk, by comparing these  disclosures to our understanding of the matter and the  requirements of the accounting standards.  How the matter was addressed in our audit  Our procedures included:   Obtaining an understanding of the evolving product  portfolio, each product’s warrantable period and  history of claim rates, and the different attributes  which impact the key assumptions used in the  Consolidated Entity’s warranty provision;    Testing the sensitivity of the warranty provision by  varying key assumptions, within a reasonably possible  range, to focus our further procedures;  KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International  Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the  independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation.  123  Cochlear Limited  Annual Report 2021        Independent auditor’s report to the shareholders of Cochlear Limited  each product’s design and quality attributes can impact  the key assumptions;   The increased use of the Global Repair Centre intended  to reduce forecast repair cost;   The inherent unpredictability of future failures resulting  in claims under warranty; and   The  calculation  is  largely  manually  developed  and  therefore is at greater risk of error.  The  key  assumptions  used  in  the  Consolidated  Entity’s  determination of the warranty provision are:   The forecast claim rates of the multiple products in the  portfolio;   The ratio of repairing to replacing failed products;   The forecast repair cost; and   The  forecast  replacement  cost  which  is  based  on  standard forecasts of manufacturing costs.  Challenging  these  key  assumptions  required  greater  involvement by our senior team members.   Challenging the Consolidated Entity’s ability to reliably  estimate the key assumptions by comparing previous  estimates to actual outcomes;   Assessing the integrity of the model for the warranty  provision. This included checking the accuracy of the  formulas within the model;   Comparing the forecast claim rates of a sample of  products to the historical warranty claims for that  product or the historical warranty claims of previous  generations of similar products;   Comparing the forecast proportion of claims that can  be repaired and associated repair costs to historical  performance of the Global Repair Centre;   Comparing the forecast replacement cost to:   ‐ ‐ the standard manufacturing cost used in board  approved budgets; and   actual manufacturing costs to identify variances  and their impact on the warranty provision;   Enquiring of management responsible for product  design and quality attributes and the Global Repair  Centre to challenge the forward‐looking assumptions  used in the model; and   Assessing the disclosures of the quantitative and  qualitative considerations in relation to the warranty  provision, by comparing these disclosures to our  understanding of the matter and the requirements of  the accounting standards.  Other Information  Other Information is financial and non‐financial information in Cochlear Limited’s annual reporting which is provided in addition  to the Financial Report and the Auditor’s Report. The Directors are responsible for the Other Information.   Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not express an audit opinion  or  any  form  of  assurance  conclusion  thereon,  with  the  exception  of  the  Remuneration  Report  and  our  related  assurance  opinion.  In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we consider  whether the Other Information is materially inconsistent with the Financial Report or our knowledge obtained in the audit, or  otherwise appears to be materially misstated.  We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the  work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing  to report.  KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International  Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the  independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation.  124                Cochlear Limited  Annual Report 2021                  Independent auditor’s report to the shareholders of Cochlear Limited   Responsibilities of the Directors for the Financial Report  The Directors are responsible for:   preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the  Corporations Act 2001; and   implementing necessary internal controls to enable the preparation of a Financial Report that gives a true and fair view  and is free from material misstatement, whether due to fraud or error; and   assessing the Consolidated Entity’s ability to continue as a going concern and whether the use of the going concern basis  of accounting is appropriate. This includes disclosing, as applicable, matters related to going concern and using the going  concern basis of accounting unless they either intend to liquidate the Consolidated Entity or to cease operations, or have  no realistic alternative but to do so.   Auditor’s responsibilities for the audit of the Financial Report  Our objective is:    to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether  due to fraud or error; and   to issue an Auditor’s Report that includes our opinion.   Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian  Auditing Standards will always detect a material misstatement when it exists.  Misstatements  can  arise  from  fraud  or  error.  They  are  considered  material  if,  individually  or  in  the  aggregate,  they  could  reasonably be expected to influence the economic decisions of users taken on the basis of the Financial Report.  A  further  description  of  our  responsibilities  for  the  audit  of  the  Financial  Report  is  located  at  the  Auditing  and  Assurance  Standards Board  website  at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf.  This  description  forms  part  of  our  Auditor’s Report.  Report on the Remuneration Report  Opinion  In our opinion, the Remuneration Report of Cochlear Limited for the year ended 30 June 2021, complies with Section 300A of  the Corporations Act 2001.  Directors’ responsibilities  The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance  with Section 300A of the Corporations Act 2001.  Our responsibilities  We have audited the Remuneration Report included in pages 56 to 73 of the Directors’ report for the year ended 30 June 2021.   Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with  Australian Auditing Standards.  KPMG                                                                                                                 Julian McPherson, Partner  Sydney, 20 August 2021  KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International  Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the  independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation.  125  Cochlear Limited  Annual Report 2021                              References  Letter to shareholders  1. 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Nachtegaal J, Kuik D, Anema J, Goverts S, Festen J, Kramer S. Hearing status, need for recovery after work, and  psychosocial work characteristics: Results from an internet‐based national survey on hearing. International Journal Of  Audiology [serial on the Internet]. (2009, Oct), [cited July 3, 2018]; 48(10): 684‐691.  29. ClinicalTrials.gov [Internet]. Bethesda (MD): National Library of Medicine (US); 2017 March 22. Identifier NCT03086135.  Clinical Performance of a New Implant System for Bone Conduction Hearing; 2019 January 31 [cited 2019 June 20]; [4  screens]. Available from: https://clinicaltrials.gov/ct2/show/NCT03086135.  Cochlear Limited Annual Report 2021               127              Shareholder information  Additional information required by Australian Securities Exchange Listing Rules and not disclosed elsewhere in this report – the  information presented is as at 30 June 2021.  Substantial shareholders  Investor  BlackRock Inc  ABP (Algemen Burgerlijk PSF)  Baillie Gifford & Co  State Street Corporation  Total  Distribution of shareholders  Number of shares held  Number of ordinary shares  4,160,651  3,621,994  3,471,533  3,345,897  14,600,075  %  6.3  5.5  5.3  5.1  22.2  Number of ordinary shareholders  % shares  1 ‐ 1,000  1,001 ‐ 5,000  5,001 ‐ 10,000  10,001 ‐ 100,000  100,001 and over  Total  Non‐marketable parcels – 174 shareholders held less than a marketable parcel of ordinary shares.  41,634  2,669  128  71  15  44,517  Twenty largest shareholders  Shareholder  HSBC Custody Nominees (Australia) Limited  J P Morgan Nominees Australia Pty Limited  Citicorp Nominees Pty Limited  National Nominees Limited  BNP Paribas Noms Pty Ltd   BNP Paribas Nominees Pty Ltd   HSBC Custody Nominees (Australia) Limited‐GSCO ECA  BNP Paribas Nominees Pty Ltd Six Sis Ltd   HSBC Custody Nominees (Australia) Limited   Australian Foundation Investment Company Limited  Netwealth Investments Limited   Citicorp Nominees Pty Limited    Mr Christopher Graham Roberts  BNP Paribas Nominees Pty Ltd Hub24 Custodial Serv Ltd   Custodial Services Limited   HSBC Custody Nominees (Australia) Limited ‐ A/C 2  AMP Life Limited  BNP Paribas Nominees Pty Ltd ACF Clearstream  National Nominees Limited   BNP Paribas Nominees Pty Ltd   Total  The 20 largest shareholders held 77.93% of the ordinary shares of the Company.  On market buy‐back   There is no current on market buy‐back.   Number of ordinary shares  30,209,511  9,708,153  3,911,642  1,606,824  1,570,432  1,166,640  645,315  486,754  373,306  324,174  258,114  222,299  172,387  120,873  117,587  94,699  80,692  65,891  57,163  55,055  51,247,511  10.9  7.8  1.3  2.7  77.3  100.0  %  45.95  14.77  5.95  2.44  2.39  1.77  0.98  0.74  0.57  0.49  0.39  0.34  0.26  0.18  0.18  0.14  0.12  0.10  0.09  0.08  77.93  Cochlear Limited Annual Report 2021               128                      Contact information  Cochlear headquarters  1 University Avenue  Macquarie University NSW 2109  Australia   Telephone: +612 9428 6555  Fax: +612 9428 6353  Website: www.cochlear.com  Shareholder enquiries  Access to shareholding information is available to investors through Computershare.  Computershare Investor Services Pty Limited  GPO Box 2975  Melbourne VIC 3001  Australia  Telephone: 1300 850 505   Email: web.queries@computershare.com.au  Website: www.computershare.com.au  Calendar of events  20 August 2021  FY21 results announced  19 October 2021    Annual general meeting  22 February 2022   HY22 results announced*  19 August 2022  FY22 results announced*  * Indicative dates only.  Annual general meeting  The annual general meeting (AGM) of Cochlear Limited will be held on 19 October 2021 at 10.00am. Further details will be  provided in the Notice of Meeting, which will be provided to shareholders in mid‐September 2021. The Notice of Meeting will  also be available on the ASX Company Announcements Platform and Cochlear’s website at www.cochlear.com.  Cochlear Limited Annual Report 2021                 129                                                  Hear now. And always As the global leader in implantable hearing solutions, Cochlear is dedicated to helping people with moderate to profound hearing loss experience a life full of hearing. We have provided more than 650,000 implantable devices, helping people of all ages to hear and connect with life’s opportunities. We aim to give people the best lifelong hearing experience and access to innovative future technologies. We have the industry’s best clinical, research and support networks. That’s why more people choose Cochlear than any other hearing implant company. Cochlear Ltd (ABN 96 002 618 073) 1 University Avenue, Macquarie University, NSW 2109, Australia T: +61 2 9428 6555 F: +61 2 9428 6352 www.cochlear.com Please seek advice from your health professional about treatments for hearing loss. Outcomes may vary, and your health professional will advise you about the factors which could affect your outcome. Always read the instructions for use. Not all products are available in all countries. Please contact your local Cochlear representative for product information. Views expressed are those of the individual. Consult your health professional to determine if you are a candidate for Cochlear technology. The Cochlear Nucleus Smart App is available on App Store and Google Play. The Cochlear Nucleus 7 Sound Processor is compatible with Apple and Android devices, for compatibility information visit www.cochlear.com/compatibility. ACE, Advance Off-Stylet, AOS, AutoNRT, Autosensitivity, Beam, Bring Back the Beat, Button, Carina, Cochlear, Codacs, Contour, MP3000, myCochlear, mySmartSound, NRT, Nucleus, Osia, Outcome Focused Fitting, Off-Stylet, Profile, Slimline, SmartSound, Softip, SPrint, True Wireless, the elliptical logo, and Whisper are either trademarks or registered trademarks of Cochlear Limited. Ardium, Baha, Baha SoftWear, BCDrive, DermaLock, EveryWear, Human Design, Piezo Power, SoundArc, Vistafix, and WindShield are either trademarks or registered trademarks of Cochlear Bone Anchored Solutions AB. , Contour Advance, Custom Sound, ESPrit, Freedom, Hear now. And always, Hugfit, Hybrid, Invisible Hearing, Kanso, MET, MicroDrive, , , 코클리어 コクレア , Cochlear SoftWear, コントゥア 科利耳 Android, Google Play and the Google Play logo are trademarks of Google LLC. Apple, the Apple logo, FaceTime, Made for iPad logo, Made for iPhone logo, Made for iPod logo, iPhone, iPad Pro, iPad Air, iPad mini, iPad and iPod touch are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc., registered in the U.S. and other countries. ReSound is a trademark of GN Hearing A/S. © Cochlear Limited 2021. D1896723 V1 2021-08 

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