UPM Annual Report 2016

Accounts

In brief

Strategy

Businesses

Stakeholders

Governance

5.4 Financial income and expenses

Share capital

values are estimated using the expected contractual future payments discounted at market interest rates and are categorised within level 2 of the fair value hierarchy. » Refer Note 5.2 Net debt, for further information on net debt and bonds.

The carrying amounts of financial assets and financial liabilities except for non-current loans approximate their fair value. The fair value of non-current loans amounted to EUR 1,804 million (2,755 million) at the end of 2016. For quoted bonds, the fair values are based on the quoted market value as of 31 December. At the end of 2016, all bonds were quoted. For other non-current borrowings fair

2016

2015

EURm

2016

2015

Number of shares (1,000)

533,736 533,736

Share capital, EURm

890

890

Exchange rate and fair value gains and losses Derivatives, non-qualifying hedges Fair value gains and losses on derivatives designated as fair value hedges Fair value adjustment of debt attributable to interest rate risk Fair value adjustment of firm commitments attributable to foreign exchange rate risk Exchange gains and losses on financial liabilities measured at amortised costs Exchange gains and losses on loans and receivables Other exchange rate and fair value gains and losses

–47

85

Treasury shares At 31 December 2016, the company held 230,737 (230,737) of its own shares, 0.04% (0.04%) of the total number of shares.

Fair value measurement hierarchy for financial assets and liabilities

–64

–13

EURm

2016

2015

55

5

Level 1 Level 2 Level 3

Total

Level 1 Level 2 Level 3

Total

Reserves

–

3

Financial assets Derivatives, non-qualifying hedges

2

63

– –

65

6

63

– –

69

EURm

2016

2015

13

–105

Derivatives used for hedging

32

241

273

88

283

371

Fair value reserve Hedging reserves

1,438

1,582 –104

Energy shareholdings

–

–

1,932 1,932

1,932 2,270

–

–

2,085 2,085

2,085 2,525

–31

36

13

Total

34

304

94

346

Share-based payments reserve

9

8

Total other reserves

1,416 1,273

1,486 1,273

–

13

Financial liabilities Derivatives, non-qualifying hedges

Reserve for invested non-restricted equity

–7

1

19 42 61

93 94

– – –

112 136 248

59

62 89

– – –

121 198 319

Translation reserve

433

449

Interest and other finance costs, net Interest expense on financial liabilities measured at amortised cost

Derivatives used for hedging

109 168

Total reserves

3,122

3,208

Total

187

151

–111

–122

There have been no transfers between levels in 2016 and 2015.

Interest income on derivatives

60

75

Interest income on loans and receivables Dividend income from energy shareholdings Losses on sale of associates and joint ventures

4 2

5 – –

Reserve for invested non-restricted equity Reserve for invested non-restricted equity includes, under the Companies’ Act, the exercise value of shareholders’ investments in the company unless otherwise decided by the company. Translation reserve This reserve includes the foreign currency differences arising from the translation of foreign operations, and the effective result of transactions that hedge the group’s net investments in foreign operations. Hedging reserve This reserve comprises the cumulative net change in the fair value of the effective portion of cash flow hedging instruments related to hedged transactions that have not yet occurred. Amounts are recognised in profit or loss when the associated hedged transactions affect profit or loss or as part of the acquisition cost of property, plant and equipment. Fair value reserve This reserve represents the cumulative net change in the fair value of investments in equity securities comprising mainly of the fair value change of the energy shareholdings. Amounts are recognised in profit or loss if the asset is sold or impaired. Share-based payments reserve The share-based payments reserve is used to recognise the fair value of the share incentive plans, Performance Share Plan and Deferred Bonus Plan, over their vesting period. Accounting policies Transaction costs directly relating to the issue of new shares are recognised, net of tax, in equity as a reduction in the proceeds. Where any group company purchases the parent company’s shares (treasury shares), the consideration paid, including any directly attributable incremental costs (net of tax), is deducted from equity attributable to the owners of the parent company until the shares are cancelled or reissued. Where such shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the owners of the parent company.

–4

Accounting policies

Other financial expenses, net

–

–26 –68 –67

–49 –56

Fair value through profit or loss This category includes derivatives that don’t qualify hedge accounting. They are measured at fair value and any gains or losses from subsequent measurement are recognised in the income statement. Available-for-sale financial assets This category includes mainly UPM’s energy shareholdings. These assets are measured at fair value through other comprehensive income. Loans and receivables This category comprises loan receivables with fixed or determinable payments that are not quoted in an active market, as well as trade and other receivables. They are included in non-current assets unless they mature within 12 months of the balance sheet date. Loan receivables that have a fixed maturity are measured at amortised cost using the effective interest method. Loan receivables without fixed maturity date are measured at amortised cost. Loan receivables are impaired if the carrying amount is greater than the estimated recoverable amount. Derivatives used for hedging All derivatives are initially and continuously recognised at fair value in the balance sheet. Gains and losses on remeasurement of derivatives used for hedging purposes are recognised in accordance with the accounting principles described in » Note 6.2 Derivatives and hedge accounting. Financial liabilities measured at amortised cost This category includes debt, trade payables and other financial liabilities. » Refer Note 5.2 Net debt, for further information. The different levels of fair value hierarchy used in fair value estimation are defined as follows: Fair values under level 1 Quoted prices (unadjusted) traded in active markets for identical assets or liabilities. Derivatives include futures and commodity forwards traded in exchange.

Fair values under level 2 Observable inputs are used as basis for fair value calculations either directly (prices) or indirectly (derived from prices). If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. Derivatives, level 2 include OTC derivatives like forward foreign exchange contracts, foreign currency options, interest and currency swaps and commodity swaps. Specific valuation techniques used to value financial instruments at level 2 include the following methods: Interest forward rate agreements (FRA) are fair valued based on quoted market rates on the balance sheet date. Forward foreign exchange contracts are fair valued based on the contract forward rates at the balance sheet date. Foreign currency options are fair valued based on quoted market rates and market volatility rates on the balance sheet date by using the Black&Scholes option valuation model. Interest and currency swap instruments are fair valued as present value of the estimated future cash flows based on observable yield curves. Commodity swaps are fair valued based on forward curve quotations received from service providers. An embedded derivative that is by nature a foreign currency forward contract is valuated at market forward exchange rates and is included in level 2. Embedded derivatives are monitored by the group and the fair value changes are reported in other operating income in the income statement. Fair values under level 3 Financial assets or liabilities of which fair values are not based on observable market data (that is, unobservable inputs) are classified under level 3. This category include UPM’s energy shareholdings and forest assets. Fair valuations are performed at least quarterly by respective business areas or functions. Fair valuations are reviewed by the group finance management and overseen by the Audit Committee. » Refer Note 4.3 Energy shareholdings and Note 4.2 Forest assets.

Total

Net gains and losses on derivatives included in the operating profit

EURm

2016

2015

Cash flow hedges reclassified from hedging reserve Cash flow hedges recognised directly in operating profit

–38

–107

–4 28

6

Non-qualifying hedges

–78

Total

–14

–179

Foreign exchange gains and losses in the income statement excluding non-qualifying hedges

EURm Sales

2016

2015 –100

9 6 3

Other operating income

18

Financial income and expenses

6

Total

17

–76

5.5 Share capital and reserves The company has one series of shares and each share carries one vote. There are no specific terms related to the shares except for the redemption clause as discussed under » Shares section in the Report of the Board of Directors. At 31 December 2016, the number of the company’s shares was 533,735,699. The shares do not have any nominal counter value. The shares are included within the book entry system for securities.

CONTENTS

ACCOUNTS

136

137

UPM Annual Report 2016

UPM Annual Report 2016