UPM Annual Report 2016

Accounts

In brief

Strategy

Businesses

Stakeholders

Governance

Notes to the consolidated financial statements The notes to the consolidated financial statements are grouped into sections based on their nature. The notes contain the relevant financial information as well as a description of accounting policy and key estimates and judgements applied for the topics of the individual notes. All amounts are shown in millions of euros unless otherwise stated.

Financial risks UPM is exposed to a variety of financial risks as a result of its business activities including currency risk, interest rate risk, commodity price risk, credit risk, capital risk and liquidity risk. Risk management related to financial activities is carried out by UPM’s central treasury

department, Treasury and Risk Management, under policies approved by the Board of Directors. Financial risks are described in the relevant notes as described below.

FINANCIAL RISK

NOTE

Credit risk

4.6 Working capital

Liquidity and refinancing risk

5.1 Capital management

Items marked with this symbol describe the accounting principle applied by UPM to the specific financial statement area .

Items marked with this symbol indicate that the accounting area involves estimates and

Risks related disclosures, whether they are financial, actuarial, credit or counterparty in nature, can be found in sections marked with this symbol.

Interest rate risk

6.1 Financial risk management 6.1 Financial risk management 6.1 Financial risk management

Foreign exchange risk Electricity price risk

judgement which are described separately.

Financial counterparty risk

6.2 Derivatives and hedge accounting

1.3 Consolidation principles Subsidiaries UPM’s consolidated financial statements include the financial statements of the parent company, UPM-Kymmene Corporation, and subsidiaries controlled by UPM. All group entities apply consistently UPM’s accounting policies. All intercompany transactions, receivables, liabilities and unrealised profits, as well as intragroup profit distributions, are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Joint operations UPM’s share in joint operations is recognised in the consolidated balance sheet through recognition of the group’s own assets and liabilities and revenues and expenses in the arrangement together with UPM’s proportionate share in the joint assets, liabilities and joint income and expenses. The proportionate share of realised and unrealised gains and losses arising from intragroup transactions between UPM and its joint operations is eliminated. Associates and joint ventures Associates are entities over which the group has significant influence. Joint ventures are joint arrangements where the group has joint control with other parties and the parties have rights to the arrangement’s net assets. Interests in associates and joint ventures are accounted for using the equity method of accounting and are initially recognised at cost. Associates and joint ventures follow the group accounting policies for consolidation purpose. Non-controlling interests The profit or loss attributable to owners of the parent company and non-controlling interests is presented on the face of the income statement. Non-controlling interests are presented in the consolidated balance sheet within equity, separately from equity attributable to owners of the parent company. Transactions with non-controlling interests are treated as transactions with equity owners of the group. For purchases from non-controlling interests, the difference between consideration paid and the acquired share of the carrying value of the subsidiary’s net assets is recorded in equity. Gains or losses of disposals to non- controlling interests are also recorded in equity, net of transaction costs.

1.4 Foreign currency translation

Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when recognised in other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges. UPM records foreign exchange differences relating to ordinary business operations within the appropriate line items above operating profit and those relating to financial items are presented separately as a net amount in finance costs. Income and expenses of subsidiaries that have a functional currency different from euro are translated into euros at quarterly average exchange rates. Assets and liabilities of subsidiaries are translated at the closing rate at the balance sheet date. All resulting translation differences are recognised as a separate component in other comprehensive income. On consolidation, exchange differences arising from the translation of net investment in foreign operations and other currency instruments designated as hedges of such investments, are recognised in other comprehensive income. When a foreign entity is partially disposed of, sold or liquidated, translation differences accrued in equity are recognised in the income statement as part of the gain or loss on sale/liquidation.

1. Basis for reporting 1.1 Corporate information

The consolidated financial statements are presented in millions of euros, which is the functional and presentation currency of the parent company. Items included in the financial statements of each group subsidiary are measured using the currency of the primary economic environment in which the subsidiary operates (“the functional currency”). The amounts within parentheses refer to the preceding year, 2015. Figures presented in these financial statements are rounded and therefore the sum of individual figures might deviate from the presented total figure. Accounting policies The accounting policies applied to the consolidated financial statements as a whole are described in this section, while the remaining accounting policies are described in the notes to which they relate as UPM aims to provide enhanced understanding of each financial statement area. Further, to provide a better understanding, the accounting choices made within the framework of the prevailing IFRS are described together with the policy. Key estimates and judgements In the process of applying the group’s accounting policies, management has made a number of judgements and applied estimates of future events that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Although these estimates are based on management’s best knowledge, actual results and timing may ultimately differ from previously made estimates. Key estimates and judgement which are material to the reported results and financial position are presented in the following notes:

UPM-Kymmene Corporation (“the parent company” or “the company”) together with its consolidated subsidiaries (“UPM” or “thegroup”) is a global forest industry group. UPM large product range covers pulp, graphic and specialty papers, self-adhesive labels, wood-based renewable diesel, electricity as well as plywood and timber products. UPM-Kymmene Corporation is a Finnish limited liability company, domiciled in Helsinki in the Republic of Finland. The address of the company’s registered office is Alvar Aallon katu 1, 00100 Helsinki, where a copy of the consolidated financial statements can be obtained. The parent company’s shares are publicly traded on the Nasdaq Helsinki Main Market. These group consolidated financial statements were authorised for issue by the Board of Directors on 31 January 2017. According to the Finnish Companies Act, the General Meeting of Shareholders is entitled to decide on the adoption of the company’s financial statements. 1.2 Basis of preparation UPM’s consolidated financial statements are prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS as adopted by the EU) and IFRIC Interpretations. The consolidated financial statements have been prepared under the historical cost convention, except for forest assets, energy shareholdings and certain other financial assets and financial liabilities, defined benefit plan assets and obligations and share- based payment arrangements which are measured at fair value.

KEY ESTIMATES AND JUDGEMENTS

NOTE

Valuation of forest assets

4.2 Forest assets

Fair value determination of energy shareholdings Impairment of property, plant and equipment Impairment of goodwill and other intangible assets Pension and other post-employment benefits

4.3 Energy shareholdings

4.1 Property, plant and equipment 4.4 Goodwill and other intangible assets

3.4 Retirement benefit obligations

Income taxes

7. Income tax 4.5 Provisions 9.2 Litigation

Environmental provisions

Legal contingencies

CONTENTS

ACCOUNTS

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109

UPM Annual Report 2016

UPM Annual Report 2016