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Translation reserve

The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations where their functional currency is different to the presentation currency of the reporting entity, as well as from the translation of liabilities that hedge the Company’s net investment in a foreign subsidiary.

Equity reserve

The equity reserve relates to share-based payment transactions measured at fair value. Hedging reserve

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

Dividends

During the current year the Company recognised dividends of $2.573 million paid on 15 December 2008. The dividend was in respect of earnings for the year ended 31 August 2008, and was at the rate of 1.00 cent per share, fully franked.

On 21 October 2009 a final dividend of 2.00 cents per share, fully franked to be paid on 11 December 2009, amounting to $5.146 million was declared.

Dividend Franking Account

The Company In thousands of AUD 31 August 2009 31 August 2008 30 per cent franking credits available to shareholders of the Company for subsequent financial

years 17,049 5,112

The above available amounts are based on the balance of the dividend franking account at year-end adjusted for: (a) Franking credits that will arise from the payment of the current tax liabilities;

(b) Franking debits that will arise from the payment of dividends recognised as a liability at the year end;

(c) Franking credits that will arise from the receipt of dividends recognised as receivables by the tax consolidated group at the year end;

(d) Franking credits that the entity may be prevented from distributing in subsequent years; and (e) Franking debits that will arise from receipt of the current income tax receivable.

The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends. The future reduction in the dividend franking account of dividends proposed after the balance sheet date but not recognised as a liability at year end is $2,025,828 (31 August 2008: $1,102,000).

Annual Financial Report

For the Year Ended 31 August 2009 Notes to the Consolidated Financial Statements

Australian Pharmaceutical Industries Limited Page: 60

and its Controlled Entities ABN 57 000 004 320

21

FINANCIAL INSTRUMENTS

Financial Risk Management Overview

The consolidated entity has exposure to the following risks from its use of financial instruments: • Credit risk

• Liquidity risk • Market risk

The Board of Directors has overall responsibility for the establishment and oversight of the consolidated entity’s risk management framework. The Board has established an Audit and Risk Committee, which is responsible for developing and monitoring the consolidated entity’s risk management policies. The Committee reports regularly to the Board of Directors on its activities.

The consolidated entity’s risk management policies are established to identify and analyse the risks faced by the consolidated entity, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the consolidated entity’s activities.

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

Credit risk

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

Trade and other receivables

The consolidated entity’s exposure to credit risk is mainly influenced by the individual characteristics of each customer. The consolidated entity has established a credit policy under which new customers are analysed individually for credit worthiness including using external ratings, where available. Purchase limits are established for each customer, which represents the maximum open amount available and limits are reviewed on a needs-basis. Customers that fail to meet the benchmark credit worthiness may transact with the consolidated entity only on a prepayment basis.

In monitoring customer credit risk, customers are grouped by state and reviewed monthly. “High risk” customers are placed on “credit hold”, with orders manually released as appropriate.

Goods sold under some customer arrangements are subject to retention of title clauses, so that in the event of non-payment the consolidated entity may have a secured claim.

The consolidated entity establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables and investments. The main component of this allowance is a specific loss component that relates to individually significant exposures (after consideration of any collateral held).

Guarantees

In prior years, the consolidated entity provided financial guarantees to pharmacy customers and franchises. These guarantees were subject to strict controls over their approval, including obtaining security. Generally, the Board has established a practice of not approving any new guarantees. Only one new guarantee has been made during the two years ended 31 August 2009. The guarantees outstanding are further described in the contingencies note 23.

Liquidity risk

Liquidity risk is the risk that the consolidated entity will not be able to meet its financial obligations as they fall due. The consolidated entity’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions.

The Company and consolidated entity have varying borrowing levels based on seasonal requirements of the business. Any obligations can be met by the unused facilities.

Annual Financial Report

For the Year Ended 31 August 2009 Notes to the Consolidated Financial Statements