UPM Annual Report 2016

Accounts

In brief

Strategy

Businesses

Stakeholders

Governance

Accounting policies

Accounting policies

Defined contribution plans For defined contribution plans, contributions are paid to pension insurance companies. Once the contributions have been paid, there are no further payment obligations. Contributions to defined contribution plans are charged to the income statement in the period to which the contributions relate. Other post-employment obligations Some group companies provide post-employment medical and other benefits to their retirees. The entitlement to healthcare benefits is usually conditional on the employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment, using an accounting methodology similar to that for defined benefit pension plans. Valuations of these obligations are carried out by independent qualified actuaries.

Defined benefit pension plans Plan benefits depend on salary and length of service. The defined benefit obligations are calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the term of the related pension liability. The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets. The cost of providing pensions is charged to the income statement as employee costs so as to spread the cost over the service lives of employees. Changes in actuarial assumptions and actuarial gains and losses arising from experience adjustments are charged or credited in other comprehensive income in the period in which they arise. Past service costs and gains or losses on settlement are recognised immediately in income when they occur. Capital employed UPM’s capital employed primarily relates to its production facilities and both forest and energy assets. UPM aims to capture growth opportunities in its existing business portfolio and invest in projects with attractive and sustainable returns. In 2016, growth investments contributed significantly to UPM’s earnings. 4.

Capitalised borrowing costs In 2016, the borrowing costs capitalised as part of non-current assets amounted to EUR 1 million (8 million). Amortisation of capitalised borrowing costs was EUR 4 million (4 million) and the average interest rate used 1.56% (4.99%), which represents the average costs to finance the projects. Capital expenditure Capital expenditure, excluding acquisitions and shares, amounted to EUR 325 million (486 million) in 2016. In 2016, UPM’s major capital expenditures related to growth investments. The expansion of the Otepää plywood mill in Estonia and modernising UPM Kaukas pulp mill in Finland were finalised in 2016. In July 2016, UPM announced it will invest EUR 98 million in UPM Kymi pulp mill in Finland to further strengthen its position as a supplier of bleached chemical pulp for growing consumer and industrial end-use segments. Completion of the investment is scheduled for the end of 2017. In October 2016, UPM announced a EUR 35 million investment in UPM Raflatac factory in Poland to meet the increasing label stock demand in Europe. Completion of the investment is scheduled for first half of 2018. In 2015 UPM’s capital expenditures related to Otepää plywood mill in Estonia, Kaukas and Kymi pulp mills in Finland, share issue from Pohjolan Voima Oy to finance the Olkiluoto 3 nuclear power plant project, increasing of labelstock coating capacity in the Asia-Pacific region, production capacity for film labelstock business in Poland and new paper machine at Changshu mill in China.

Property, plant and equipment Property, plant and equipment is stated at historical cost. Costs of assets of acquired in business combinations are determined at fair value at the acquisition date. Depreciation is calculated on a straight- line basis and the carrying value is adjusted for impairment charges, if any. The carrying value of property, plant and equipment on the balance sheet represents the cost less accumulated depreciation and any impairment charges. Borrowing costs incurred for the construction of any qualifying assets are capitalised during the period of time required to complete and prepare the asset for its intended use. Other borrowing costs are expensed. Major renovations are capitalised and depreciated over the useful lives of the related asset. Ordinary expenses for repairs and maintenance are expensed as incurred. Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying amount and are included in other operating income and other operating expenses, respectively.

ASSESSED USEFUL LIVES

NUMBER OF YEARS

Capital employed

Land, not subject to depreciation

–

Buildings

20–50 20–30 15–20 10–15

EURm

2016 4,657 1,734 1,932 1,694 –145 –746 545

2015 4,895 1,738 2,085 1,875 –154 –654 570

Power plants

Property, plant and equipment

Heavy machinery Light machinery

Forest assets

Energy shareholdings

Equipment

5

Goodwill and other intangible assets

Operating working capital

Impairment testing Carrying values of individual items included in property, plant and equipment are reviewed at each closing date to determine whether there is any indication of impairment. The carrying value is written down immediately to the asset’s recoverable amount if the carrying value exceeds the estimated recoverable amount. Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. The recoverable amount is determined as the higher of an asset’s fair value less costs to sell and its value in use. Value in use is determined by discounting future cash flows expected to be generated by the asset. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets, other than goodwill, that have suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Where an impairment loss is subsequently reversed, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but the increased carrying amount will not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. Key estimates and judgements The estimations of useful lives, residual value as well as depreciation and amortisation methods require significant management judgement and are reviewed annually. Management makes estimates on the future cash flows expected to result from the use of the asset and its eventual disposal. While management believes that estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect valuations. The long useful lives of assets, changes in estimated future sales prices of products, changes in product costs and changes in the discount rates used could lead to significant impairment charges. Estimates are also made in an acquisition when determining the fair values and remaining useful lives of acquired intangible and tangible assets.

Provisions

Major capital commitments at 31 December

Net retirement benefit assets and liabilities

EURm

2016

2015

Cash and cash equivalents Other assets and liabilities

992

626

–3

19 10

Capacity increase / Kymi pulp mill Capacity increase / Raflatac Poland Debottlenecking / Kaukas pulp mill

80 33

– –

Net deferred tax assets and liabilities Assets classified as held for sale

–11

8

–

– –

49 30

Total

10,657 11,010

Mill expansion / Otepää

4.1 Property, plant and equipment

Impairment losses In March 2016, UPM announced the closure of Madison Paper Industries paper mill in the US. Madison Paper Industries is a joint operation between UPM-Kymmene Inc. and Northern SC Paper Corp., a subsidiary of the New York Times Company. With the closure of the mill, UPM recognised impairment charges of EUR 9 million (EUR 20 million in UPM Paper ENA business area and the corresponding adjustment of EUR 11 million in eliminations and reconciliations) on property, plant and equipment. Hydropower assets located at the mill site have been classified as assets held for sale. » Refer Note 8.4 Assets held for sale, for further information. In November 2016, UPM announced the plan to close of SC paper machine 3 at UPM Steyrermühl mill in Austria and SC paper machine 2 at UPM Augsburg mill in Germany. The impairment charges recognised amounted to EUR 23 million and EUR 1 million, respectively, and affected UPM Paper ENA business area. The demand for SC papers, in line with other graphic papers, has been declining during the last years and the decline is expected to continue. In 2015, there were no impairment charges for property, plant and equipment assets.

LAND AND WATER

MACHINERY AND EQUIPMENT

OTHER TANGIBLE ASSETS

CONSTRUCTION IN PROGRESS

EURm

AREAS BUILDINGS

TOTAL

2016 Accumulated costs

836 –34 801 724

3,638 –2,506

14,326 –11,824

881

89 19,770 – –15,113

Accumulated depreciation and impairments

–748

Carrying value, at 31 December Carrying value, at 1 January

1,131 1,213

2,502 2,744

133 134

89 80

4,657 4,895

Additions Disposals

76

4

13 –8

4

222

319 –36

–17

–11 –84 –12

–1

– – –

Depreciations

– – 4

–377

–18

–478

Impairment

–21 168 –17

1

–32

Reclassifications

24 –4

13

–214

–4 –6

Translation differences

14

–

–

Carrying value, at 31 December

801

1,131

2,502

133

89

4,657

2015 Accumulated costs

758 –34 724 674

3,737 –2,524

14,740 –11,996

902

80 20,217 − –15,322

Accumulated depreciation and impairments

–768

Carrying value, at 31 December Carrying value, at 1 January

1,213 1,133

2,744 2,420

134 114

80

4,895 4,707

366 269

Additions Disposals

9

36 –1

150

7 −

471 –14

–12

–1

− −

Depreciations Reclassifications

− 7

–82

–388

–17

–487

87 40

471

26

–563

28

Translation differences

46

92

4

8

190

Carrying value, at 31 December

724

1,213

2,744

134

80

4,895

CONTENTS

ACCOUNTS

122

123

UPM Annual Report 2016

UPM Annual Report 2016