UPM Annual Report 2016

Accounts

In brief

Strategy

Businesses

Stakeholders

Governance

Key estimates and judgements

Trade and other receivables

Trade and other payables

UPM has undergone several restructurings in recent years including mill closures and profit improvement programs. Restructuring provisions recognised include various restructuring activities including dismantling costs. Termination provisions include severance payments, unemployment compensations or other arrangements for employees leaving the company. In Finland termination provisions include also unemployment arrangements and disability pensions. Unemployment provisions in Finland are recognised 2–3 years before the granting and settlement of the compensation. At 31 December 2016, restructuring provisions and termination provisions relate mainly to capacity closures in UPM Paper ENA business area. In 2016, UPM has closed Madison paper mill in the US. Paper machine 3 at UPM Steyrermühl mill in Austria and paper machine 2 at UPM Augsburg mill in Germany closures are planned to take place in 2017. Total provisions made relating to these closures amounted to EUR 53 million in 2016. At 31 December 2015, restructuring provisions and termination provisions related mainly to mill closures of prior years and operational restructuring in Finland and France. The group recognises provisions for normal environmental remediation costs expected to be incurred in a future period upon a removal of non-current assets and restoring industrial landfills where a legal or constructive obligation exists. Other provisions are mainly attributable to onerous contracts and will be incurred over a period longer than one year. Provisions for emissions include liability to cover the obligation to return emission rights. The group possesses emission rights amounting to EUR 45 million (52 million) as intangible assets. » Refer Note 2.3 Operating expenses and other operating income, for further information on emission rights. Accounting policies A provision is recognised when a present legal or constructive obligation exists as a result of a past event and it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are split between amounts expected to be settled within 12 months of the balance sheet date (current) and amounts expected to be settled later (non-current). Restructuring and termination provisions A restructuring provisions is recognised when a detailed plan for the implementation of the measures is complete and when the plan has been communicated to those who are affected. Employee termination provisions are recognised when the group has communicated the plan to the employees. Environmental provisions Environmental expenditures that relate to an existing condition caused by past operations that do not contribute to future earnings are expensed. The recognition of environmental provisions is based on current interpretations of environmental laws and regulations. Such provisions are recognised when the group has an obligation to dismantle and remove a facility or an item of plant and to restore the site on which it is located. The amount recognised is the present value of the estimated future expenditure determined in accordance with local conditions and requirements. A corresponding item of property, plant and equipment of an amount equivalent to the provision is also recognised and subsequently depreciated as part of the asset. Provisions do not include any third-party recoveries. Emission provisions Emission obligations are recognised in provisions based on realised emissions. The provision is measured at the carrying amounts of the corresponding emission rights held, which are recognised as intangible assets. In case of deficit in emission rights, the shortage is valued at the market value at the balance sheet date.

Environmental provisions The estimates used in determining the provisions are based on the expenses incurred for similar activities in the current reporting period taking into account the effect of inflation, cost-base development and discounting. Because actual outflows can differ from estimates due to changes in laws, regulations, public expectations, technology, prices and conditions, and can take place many years in the future, the carrying amounts of provisions are regularly reviewed and adjusted to take into account of any such changes. The discount rate applied is reviewed annually. The group aims to operate in compliance with regulations related to the treatment of waste water, air emissions and landfill sites. However, unexpected events during production processes and waste treatment could cause material losses and additional costs in the group’s operations. Legal contingencies Management judgement is required in measurement and recognition of provisions related to pending litigation. Provisions are recorded when the group has a present legal or constructive obligation as a result of past event, an unfavourable outcome is probable and the amount of loss can be reasonably estimated. Due to inherent uncertain nature of litigation, the actual losses may differ significantly from the originally estimated provision. » Refer Note 9.2 Litigation for details of legal contingencies. 4.6 Working capital The group defines operating working capital as inventories, trade receivables and trade payables which are presented separately below. UPM is focusing on working capital efficiency and targeting a sustainable and permanent reduction in operating working capital.

EURm

2016

2015

EURm

2016

2015

Accrued expenses and deferred income Personnel expenses

Trade receivables Undue

212

203

1,211

1,193

Interest expenses

30

35

Past due up to 30 days Past due 31–90 days Past due over 90 days Total trade receivables

114

159

Indirect taxes

5

4

17 18

45 39

Customer rebates and other items

205 451

188 430

Total accrued expenses and deferred income

1,360

1,436

Advances received

19

20

Prepayments and accrued income Personnel expenses

Trade payables

994 130

917

5 1

9 3

Other current liabilities

96

Interest income

Total

1,594

1,463

Energy and other excise taxes

60 69

66 56

Other items

Total prepayments and accrued income Other receivables VAT and other indirect taxes receivable

134

134

Accounting policies

170

131

Other

62

42

Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined by the method most appropriate to the particular nature of inventory, the first-in, first-out (FIFO) or weighted average cost. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses. If the net realisable value is lower than cost, a valuation allowance is established for inventory obsolescence. Trade receivables Trade receivables arising from selling goods and services in the normal course of business are recognised initially at fair value and subsequently measured at amortised cost, less a provision for impairment. Provision for impairment is charged to the income statement when there is objective evidence that the group will not be able to collect all amounts due according to the original terms of receivables. In determining the recoverability of trade receivables the group considers any change to the credit quality of trade receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy, or default or delinquency in payments more than 90 days overdue are considered indicators that the trade receivable may be irrecoverable. Subsequent recoveries of amounts previously written off are credited to the income statement. The carrying amount of trade receivables approximates to their fair value due to the short-term nature of the receivables. Trade payables Trade payables arise from purchase of inventories, fixed assets and goods and services in the ordinary course of business from UPM’s suppliers. Trade and other payables are classified as current liabilities if they are due to be settled within the normal operating cycle of the business or within 12 months from the balance sheet date. Trade payables are recognised initially at fair value and subsequently at amortised cost using the effective interest method. The carrying amount of trade payables approximates to their fair value due to the short-term nature of the payables.

Total other receivables

231

173

Total

1,726

1,743

Operational credit risk Operational credit risk is defined as the risk where UPM is not able to collect the payments for its receivables. The group has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Outstanding trade receivables, days of sales outstanding (DSO) and overdue trade receivables are followed on monthly basis. Potential concentrations of credit risk with respect to trade and other receivables are limited due to the large number and the geographic dispersion of customers. Customer credit limits are established and monitored, and ongoing evaluations of their financial condition is performed. Most of the receivables are covered by trade credit insurances. In certain market areas, including Asia and Northern Africa, measures to reduce credit risks include letters of credit, prepayments and bank guarantees. Maximum exposure to credit risk, without taking into account any credit enhancements, is the carrying amount of trade and other receivables. UPM does not have significant concentration of customer credit risk. The ten largest customers accounted for approximately 18% (20%) of the trade receivables as at 31 December 2016 – i.e., approximately EUR 239 million (285 million). In 2016, trade receivables amounting to EUR 10 million (18 million) were impaired and the loss was recorded under other costs and expenses. Impairment is recognised when there is objective evidence that the group is not able to collect the amounts due. There are no indications that the debtors will not meet their payment obligations with regard to trade receivables that are not overdue or impaired at 31 December 2016.

Operating working capital

EURm

2016 1,346 1,360 –994

2015 1,376 1,436

Inventories

Trade receivables Trade payables Advances received

–917

–19

–20

Total

1,694

1,875

Inventories

EURm

2016

2015

Raw materials and consumables

625

646

Work in progress

54

54

Finished products and goods

645

642

Advance payments

23

34

Total

1,346

1,376

CONTENTS

ACCOUNTS

128

129

UPM Annual Report 2016

UPM Annual Report 2016