UPM Annual Report 2017
Accounts
In brief
Strategy
Businesses
Stakeholders
Governance
Other intangible assets
SOFTWARE AND OTHER INTANGIBLE ASSETS
PVO’s share capital is divided into different series of shares. The B and B2 series relate to PVO’s shareholdings in Teollisuuden Voima Oyj (TVO). UPM has no direct shareholdings in TVO. TVO operates two nuclear power plants (Olkiluoto 1 and Olkiluoto 2) and constructs one new nuclear power plant in Olkiluoto (Olkiluoto 3), Finland. The operation of a nuclear power plant is governed by international, European Union and local nuclear regulatory regimes. Pursuant to the Finnish Nuclear Liability Act, the operator of a nuclear facility has a strict third-party liability in relation to nuclear accidents. Shareholders of power companies that own and operate nuclear power plants are not subject to the liability under the Nuclear Liability Act. In Finland, the future costs of conditioning, storage and final disposal of spent fuel, management of low and intermediate level radioactive waste as well as nuclear power plant decommissioning are provided for by a state established fund (the Finnish State Nuclear Waste Management Fund). The contributions to the Fund are intended to be sufficient to cover estimated future costs. These contributions have been taken into consideration in the fair value of the related energy shareholdings.
accumulated fair value adjustments in equity are recognised through the income statement. Significant or prolonged decline in the fair value of the security below its cost is considered when determining whether the investments are impaired. Any impairment losses recognised for these investments are not subsequently reversed. The fair value of energy shareholdings is a level 3 measure in terms of the fair value measurement hierarchy.
EURm
INTANGIBLE RIGHTS
TOTAL
2017 Accumulated costs
516
622
1,137 –887
Accumulated amortisation and impairments
–299
–588
Carrying value, at 31 December Carrying value, at 1 January
217 218
33 38
250 256
Additions
4
9
13
Key estimates and judgements
Amortisation
–4
–14
–18
Reclassifications
1
– –
1
Translation differences
–1
–1
Fair valuation and sensitivity Valuation of energy shareholdings requires management’s assumptions and estimates of a number of factors that may differ from the actual outcome which could lead to significant adjustment to the carrying amount of the asset. Fair value is determined on a discounted cash flow basis and the main factors impacting the future cash flows include future electricity prices, price trends and discount rates. The electricity price estimate is based on a simulation of the Finnish area electricity price. A change of 5% in the electricity price used in the model would change the total value of the assets by EUR 340 million. The discount rate of 5.59% used in the valuation model is determined using the weighted average cost of capital method. A change of 0.5% in the discount rate would change the estimated fair value of the assets by approximately EUR 300 million. Other uncertainties and risk factors relate to start-up schedule of the fixed price turn-key Olkiluoto 3 EPR nuclear power plant project and the on-going arbitration proceedings between the plant supplier AREVA-Siemens Consortium and the plant owner Teollisuuden Voima Oyj (TVO). UPM’s indirect share of the capacity of Olkiluoto 3 EPR is approximately 31%, through its PVO B2 shares. The possible outcome of the arbitration proceedings has not been taken into account in the valuation. Changes in regulatory environment or taxation could also have an impact on the energy shareholdings’ value.
Carrying value, at 31 December Emission rights, carrying value 1)
217
33
250
44
Carrying value including emission rights, at 31 December
294
2016 Accumulated costs
523
665
1,189 –933
Accumulated amortisation and impairments
–306
–628
Carrying value, at 31 December Carrying value, at 1 January
218 224
38 53
256 277
Energy shareholdings
Additions Disposals
5 –
7
12 –1
EURm
2017 1,932
2016 2,085
–1
Carrying value, at 1 January
Amortisation Impairment
–6
–19
–25
Additions
25 –3
– 1
–
–2
–2 –3 –1
Impairment charges
Reclassifications
–4 –1
– –
Disposals
–
–6
Translation differences
Changes in fair value recognised in other comprehensive income
Carrying value, at 31 December Emission rights, carrying value 1)
218
38
256
20
–148 1,932
45
Carrying value, at 31 December
1,974
Carrying value including emission rights, at 31 December
301
1) » Refer Note 2.3 Operating expenses and other operating income, for further information on emission rights.
Accounting policies Purchases of energy shareholdings are recognised on the settlement date initially at cost, including transaction costs, and subsequently measured at fair value through other comprehensive income, net of tax if applicable. When the investments are sold or impaired, the
Impairment testing Impairment tests for goodwill and water rights with indefinite life were carried out in the fourth quarter 2017. The values of water rights were tested based on expected future cash flows of each separate hydro power plant. Water rights of hydropower plants belonging to UPM Energy and reported in intangible rights amounted EUR 189 million at the end of 2017 and 2016.
Goodwill impairment tests were carried out for pulp operations in Finland and Uruguay, belonging to UPM Biorefining business area, UPM Raflatac business area and UPM Plywood business area. The 2017 impairment tests did not result in a recognition of any impairment. The basis for valuation and key assumptions used in goodwill impairment testing are summarised in below table.
» Refer Note 9.2 Litigation, for further information.
CASH GENERATING UNIT Pulp operations Finland Pulp operations Uruguay
BASIS OF VALUATION PERIOD OF FORECAST
PRE-TAX DISCOUNT RATE 8.57% (2016: 10.92%) 9.36% (2016: 10.38%) 8.19% (2016: 9.94%) 10.85% (2016: 10.35%)
KEY ASSUMPTIONS Pulp price, wood costs Pulp price, wood costs
4.4 Goodwill and other intangible assets
Value in use Value in use Value in use Value in use
10 years + terminal value 10 years + terminal value 10 years + terminal value 10 years + terminal value
UPM Raflatac UPM Plywood
Product prices, cost development Product prices, cost development
The group’s goodwill mainly relates to pulp operations in Finland and Uruguay belonging to UPM Biorefining business area.
Goodwill by business area
Sensitivity analyses The sensitivity analyses of goodwill impairment tests indicate that no reasonable change in key assumptions would result in recognition of impairment loss against goodwill. In pulp operations the recoverable amount is most sensitive to pulp sales prices and the cost of wood raw material. As at 31 December 2017, for pulp operations Finland, a decrease of more than 19.6% in pulp prices would result in recognition of impairment loss against goodwill. The group believes that no reasonable change in wood cost would cause the aggregate carrying amount to exceed the recoverable amount. For pulp operations Uruguay, a decrease of more than 6.4% in pulp prices or an increase of more than 18.5% in wood cost would result in recognition of impairment loss against goodwill. A decrease of more than 8.1% in pulp prices or an increase of more than 23.7% inwood cost would result in a write-down of the entire goodwill.
EURm
2017
2016
UPM Biorefining UPM Raflatac UPM Plywood Other operations
210
223
7
7
Goodwill by business area 2017
13
13
1
1
UPM Plywood 6%
Total
231
245
UPM Raflatac 3%
Goodwill
EURm
2017
2016
Carrying value, at 1 January
245 –13 231
241
Translation differences
3
UPM Biorefining 91%
Carrying value, at 31 December
245
CONTENTS
ACCOUNTS
134
135
UPM Annual Report 2017
UPM Annual Report 2017
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