UPM Annual Report 2017

Accounts

In brief

Strategy

Businesses

Stakeholders

Governance

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.

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.

Key estimates and judgements

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, expected 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.

Trade and other receivables

EURm

2017

2016

Trade receivables Undue

1,254

1,211

Operating working capital

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

147

114

32 13

17 18

EURm

2017 1,311 1,447 –1,167

2016 1,346 1,360 –994

Inventories

1,447

1,360

Trade receivables Trade payables Advances received

Prepayments and accrued income Personnel expenses

5 1

5 1

–39

–19

Interest income

Total

1,552

1,694

Energy and other excise taxes

53 64

60 69

Other items

Inventories

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

123

134

EURm

2017

2016

166

170

Raw materials and consumables

617

625

Other

47

62

Work in progress

58

54

Total other receivables

213

231

Finished products and goods

617

645

Total

1,783

1,726

Advance payments

19

23

Total

1,311

1,346

Trade and other payables

Accounting policies

EURm

2017

2016

» Refer Note 9.2 Litigation for details of legal contingencies.

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.

Accrued expenses and deferred income Personnel expenses

209

212

Interest expenses

9 4

30

Indirect taxes

5

Customer rebates and other items

197 419

205 451

Total accrued expenses and deferred income

Advances received

39

19

Trade payables

1,167

994 130

Other current liabilities

141

Total

1,765

1,594

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 19% (18%) of the trade receivables as at 31 December 2017 – i.e., approximately EUR 274 million (239 million). In 2017, trade receivables amounting to EUR 0 million (10 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 2017.

CONTENTS

ACCOUNTS

138

139

UPM Annual Report 2017

UPM Annual Report 2017