UPM Annual Report 2017

Accounts

In brief

Strategy

Businesses

Stakeholders

Governance

4.2 Forest assets UPM is both a major forest owner and a purchaser of wood. Wood is a renewable material and the most important raw material for UPM’s businesses. At the end of 2017, UPM owned 570,000 hectares of forest in Finland and 75,000 hectares of forest in the United States. The company additionally has 255,000 hectares of forest plantations in Uruguay. The value of forest assets, i.e. standing trees, amounted to EUR 1,600 million (1,734 million) at the end of 2017. In 2017, UPM sourced 27.4 (27.8) million cubic meters of wood from around the world.

Accounting policies

Accounting policies The group divides all its forest assets for accounting purposes into growing forests, which are recognised as forest assets at fair value less costs to sell, and land, which is stated at cost. Any changes in the fair value of the growing forests are recognised in the operating profit in the income statement. The fair value is calculated on the basis of discounted future expected cash flows as there is a lack of a liquid market. Young saplings are valued at cost. The fair value of forest assets is a level 3 measure in terms of the fair value measurement hierarchy. Fair valuation The valuation process of forest assets is complex and requires management estimates and judgment on assumptions that have a significant impact on the valuation of the group’s forest assets. Main factors used in the fair valuation of forest assets are estimates for growth and wood harvested, stumpage prices and discount rates. Stumpage price forecasts are based on the current prices adjusted by the management’s estimates for the full remaining productive lives of the trees, up to 100 years for forests in Finland and in the US and up to 10 years for plantations in Uruguay. The cash flows are adjusted by selling costs and risks related to the future growth. Felling revenues and maintenance costs are estimated on the basis of actual costs and prices, taking into account the group’s projection of future price and costs development. In addition, calculations take into account environmental restrictions. The pre-tax discount rate used to determine the fair value of the Finnish forests in 2017 was 7.0% (7.0%) and for Uruguayan plantations 9.5% (10.0%). A decrease (increase) of one percentage point in discount rate would increase (decrease) the fair value of forest assets by approximately EUR 220 million (240 million). Key estimates and judgements

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.

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.

Forest assets

EURm

2017 1,734

2016 1,738

Carrying value, at 1 January

Additions Disposals

3

26

–97 –117

–72

Wood harvested

–106

Net change in fair value

137

133

Reclassifications

–

–1 15

Translation differences

–59

Carrying value, at 31 December

1,600

1,734

ASSESSED USEFUL LIVES

NUMBER OF YEARS

Land, not subject to depreciation

–

Change in fair value, change due to harvesting and gains or losses on sale of forest assets are recognised in the income statement as a net amount totalling to EUR 103 million (88 million) in 2017.

Buildings

20–50 20–30 15–20 10–15

Power plants

Heavy machinery Light machinery

Equipment

5

4.3 Energy shareholdings UPM is both a significant purchaser and producer of energy. The majority of electrical and thermal energy is consumed at the group’s pulp and paper production. The production is mainly carried out by energy companies in which UPM has energy shareholdings. Energy shareholdings are unlisted equity investments. UPM does not have control or joint control of or significant influence in the said energy companies.

The value of energy shareholdings amounted to EUR 1,974 million (1,932 million) at the end of 2017. These energy companies supply energy or both energy and heat to their shareholders on a cost-price principle (Mankala-principle) which is widely applied in the Finnish energy industry. Under the Mankala-principle energy and/or heat is supplied to the shareholders in proportion to their ownership and each shareholder is, pursuant to the specific stipulations of the respective articles of association, severally responsible for its respective share of the production costs of the energy company concerned.

Number of shares

Group holding %

Carrying value, EURm 2017

2016

Pohjolan Voima Oy, A series Pohjolan Voima Oy, B series Pohjolan Voima Oy, B2 series

8,176,191 4,140,132 2,869,819

61.24 58.11 51.22

343

315

1,063

1,036

181 276 102

179 297

Kemijoki Oy

179,189 10,220

7.33

Länsi-Suomen Voima Oy

51.10

92 13

Other

–

–

9

Carrying value, at 31 December

1,974

1,932

CONTENTS

ACCOUNTS

132

133

UPM Annual Report 2017

UPM Annual Report 2017