UPM Annual Report 2017

Accounts

In brief

Strategy

Businesses

Stakeholders

Governance

4.5 Provisions

Accounting policies

Key estimates and judgements

Goodwill Goodwill arises in connection with business combinations where the consideration transferred exceeds the fair value of the acquired net assets. Goodwill is recognised at cost less accumulated impairment and is an intangible asset with an indefinite useful life. Goodwill is allocated to the cash generating units that are expected to benefit from the synergies from the business combination. Intangible rights Intangible rights include water rights of hydropower plants, patents, licences, intellectual property and similar rights. Water rights are deemed to have an indefinite useful life as the company has a contractual right to exploit water resources in the energy production of power plants. The values of water rights are tested annually for impairment based on expected future cash flows of each separate hydropower plant. Other intangible rights are recognised at cost less accumulated amortisation and impairment. Amortisation is calculated using the straight-line method over their estimated useful lives ranging from 5 to 10 years. Software and other intangible assets Research expenditure is recognised as an expense as incurred. Costs incurred in acquiring software that will contribute to future period financial benefit are capitalised to software and systems. Other intangible assets are recognised at cost less accumulated amortisation and impairment. Amortisation is calculated using the straight-line method over their estimated useful lives ranging from 3 to 5 years. Impairment testing Goodwill and other intangible assets that are deemed to have an indefinite life are tested at least annually for impairment. For goodwill impairment testing purposes the group identifies its cash-generating units (CGUs), which is the smallest identifiable group of assets that generate cash inflows largely independent of the cash inflows of other assets or other groups of assets. Each CGU is no larger than a business area. The carrying amount for the CGU includes goodwill, non-current assets and working capital. If the balance sheet carrying amount of the CGU unit exceeds its recoverable amount, an impair­ ment loss is recognised. Impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to other assets of the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. Other intangible assets with indefinite useful lives are impaired if the recoverable amount of the asset is less than the carrying amount. The carrying amount of the asset is then reduced to the recoverable amount which is the higher of the asset’s net selling price and its value in use.

The group’s assessment of the carrying value of goodwill and indefinite life assets requires significant judgement. While management believes that estimates of future cash flows are reasonable, different assumptions are subject to change as a result of changing economic and operational conditions. Actual cash flows could therefore vary from estimated discounted future cash flows and could result in changes in the recognition of impairment charges in future periods. Future cash flows The review of recoverable amount for goodwill and indefinite life assets is based on a calculation of value in use, using management projections of future cash flows. The most important assessments and assumptions needed in calculations are forecasts for future growth rates for the business in question, product prices, cost development and the discount rates applied. The group is using ten-year forecasts in calculations as the nature of the group’s business is long-term, due to its capital intensity, and is exposed to cyclical changes. In estimates of product prices and cost development, forecasts prepared by management for the next three years and estimates made for the following seven years are taken into consideration. In addition, consideration is given to the investment decisions made by the group as well as the profitability programmes that the group has implemented and the views of knowledgeable industry experts on the long-term development of demand and prices. In the projection of cash flows UPM uses EBITDA adjusted with cash flows not captured within EBITDA, including working capital movements and capital expenditures. Discount rate The discount rate is estimated using the weighted average cost of capital (WACC) on the calculation date adjusted for risks specific to the business in question. The adjusted after-tax discount rate is translated to a pre-tax rate for each cash generating unit (CGU) based on the specific tax rate applicable to where the CGU operates.

EURm

RESTRUCTURING TERMINATION ENVIRONMENTAL EMISSIONS OTHER TOTAL

2017 Provisions at 1 January

45

54 42

21

9 8

16 42 –1 –3

145

Provisions made during the year Provisions utilised during the year

5

2

99

–7 –1

–35

–1 –1

–8 –1

–53 –14

Unused provisions reversed

–8 –1

Reclassifications

1 –

– –

– – 9

– –

–

Translation differences

–

–1

Provisions at 31 December

42

52

20

53

177 117

Non-current

Current

60

Total

177

2016 Provisions at 1 January

47 16

51 36

24

14

18

154

Provisions made during the year Provisions utilised during the year

5

9

4

70

–12

–30

–1 –7 21

–10

–4 –2 16

–58 –20 145

Unused provisions reversed Provisions at 31 December

–5 45

–3 54

–3

9

Non-current

90 56

Current

Total

145

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 2017 and 2016, restructuring provisions and termination provisions relate mainly to capacity closures and optimisation of operations in UPM Paper ENA business area. In 2017, UPM has closed paper machine 5 at UPM Blandin mill in the United States, optimised operations at UPM Nordland Papier and UPM NorService units in Germany and in other European countries. The total termination and restructuring provisions made amounted to EUR 40 million in 2017.

In 2016, UPM has closed Madison paper mill in the US and announced plans to close Paper machine 3 at UPM Steyrermühl mill in Austria and paper machine 2 at UPM Augsburg mill in Germany were closed in 2017. Total provisions made relating to these closures amounted to EUR 53 million in 2016. 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 44 million (45 million) as intangible assets.

» Refer Note 2.3 Operating expenses and other operating income, for further information on emission rights.

CONTENTS

ACCOUNTS

136

137

UPM Annual Report 2017

UPM Annual Report 2017