UPM Annual Report 2017

Accounts

In brief

Strategy

Businesses

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Governance

6.2 Derivatives and hedge accounting The group uses financial derivatives to manage currency, interest rate and commodity price risks.

Net fair values of derivatives

Positive fair values

Negative fair values

Net fair values

Positive fair values

Negative fair values

Net fair values

EURm

2017

2016

Foreign exchange risk Forward foreign exchange contracts Cash flow hedges

» Refer Note 6.1 Financial risk management.

39 11

–6 –2 –7

33

35

–41 –19 –14

–6

Net investment hedge Non-qualifying hedges Currency options Non-qualifying hedges Cross currency swaps Non-qualifying hedges

9

4

–15

Accounting policies All derivatives are initially and continuously recognised at fair value in the balance sheet. The fair value gain or loss is recognised through the income statement or other comprehensive income depending on whether the derivative is designated as a hedging instrument, and on the nature of the item being hedged. Certain derivatives are designated at inception either hedges of the fair value of a recognised assets or liabilities or a firm commitment (fair value hedge), hedges of highly probable forecasted transactions or cash flow variability in functional currency (cash flow hedge), or hedges of net investments in foreign subsidiaries with other than the EUR as their functional currency (net investment hedge). Derivative fair values on the balance sheet are classified as non-current when the remaining maturity is more than 12 months and as current when the remaining maturity is less than 12 months. For hedge accounting purposes, UPM documents the relationship between the hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions at the inception date. This process includes linking all derivatives designated as hedges to specific assets and liabilities or to specific firm commitments or forecast transactions. The group also documents its assessment, both at the hedge inception and on an on-going basis, as to whether the hedge is highly effective in offsetting changes in fair values or cash flows of the hedged items. Certain derivatives, while considered to be economical hedges for UPM’s financial risk management purposes, do not qualify for hedge accounting. Such derivatives are recognised at fair value through the income statement in other operating income or under financial items. Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. Amounts deferred in equity are transferred to the income statement and classified as income or expense in the same period as that in which the hedged item affects the income statement (for example, when the forecast external sale to the group that is hedged takes place). The period when the hedging reserve is released to sales after each derivative has matured is approximately one month. The gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognised in the income statement within finance costs. When the forecasted transaction that is hedged results in the recognition of a fixed asset, gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the acquisition cost and depreciated over the useful lives of the assets. When a hedging instrument expires or is sold, or when a hedge no longer meets hedge accounting criteria, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the committed or forecasted transaction is ultimately recognised in the income statement. However, if a forecasted transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately recognised to the income statement.

6

–1

10

–4

Hedges of net investments in foreign subsidiaries The fair value changes of forward exchange contracts used in hedging net investments that reflect the change in spot exchange rates are recognised in other comprehensive income within translation reserve. Any gain or loss relating to the interest portion of forward exchange contracts is recognised immediately in the income statement under financial items. Gains and losses accumulated in equity are included in the income statement when the foreign operation is partially disposed of or sold. Fair value hedges The group applies fair value hedge accounting for hedging fixed interest risk on debt. Changes in the fair value of derivatives that are designated and qualify as fair value hedges and that are highly effective both prospectively and retrospectively are recorded in the income statement under financial items, along with any changes in the fair value of the hedged asset or liabilities that are attributable to the hedged risk. The carrying amounts of hedged items and the fair values of hedging instruments are included in interest-bearing assets or liabilities. Derivatives that are designated and qualify as fair value hedges mature at the same time as hedged items. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to profit or loss over the expected period to maturity.

–

–

–

–

–

–

6

–10 –24

–4 37

23 72

–77

–54 –79

Derivatives hedging foreign exchange risk

62

–151

Interest rate risk Interest rate swaps Cash flow hedges Fair value hedges

–

– –

–

–

–34

–34 138

101

101

138

–

Non-qualifying hedges

7

–1

5

27

–2

25

Cross currency swaps Cash flow hedges

–

– – –

–

–

– – –

–

Fair value hedges

47

47

64

64

Non-qualifying hedges

–

–

1

1

Derivatives hedging interest risk

155

–1

154

230

–36

194

Commodity risk Commodity contracts Cash flow hedges

42

–12 –18 –30 –56

30

32

–42 –19 –61

–10 –14 –24

Non-qualifying hedges

4

–14

5

Derivatives hedging commodity risk

46

16

37

Total

263

207

339

–248

91

No derivatives are subject to offsetting in the group’s financial statements. All derivatives are under ISDA or similar master netting agreement.

Financial counterparty risk

Net fair values of derivatives calculated by counterparty

Notional amounts of derivatives

POSITIVE FAIR VALUES

NEGATIVE FAIR VALUES

NET FAIR VALUES

EURm

2017

2016

The financial instruments the group has agreed with banks and financial institutions contain an element of risk of the counterparties being unability to meet their obligations. According to the Group Treasury Policy derivative instruments and investments of cash funds may be made only with counterparties meeting certain creditworthiness criteria. The group minimises counterparty risk also by using a number of major banks and financial institutions. Creditworthiness of counterparties is constantly monitored by Treasury and Risk Management.

EURm 2017 2016

Interest rate forward contracts

1,223 1,056 2,298

1,480 2,019 2,645

210 238

–3

207

Interest rate swaps

–148

90

Forward foreign exchange contracts

Currency options

48

36

Cross currency swaps Commodity contracts

239 436

557 429

Cash collaterals pledged for derivative contracts totalled EUR 21 million of which EUR 20 million relate to commodity contracts and EUR 1 million to interest rate forward contracts.

CONTENTS

ACCOUNTS

150

151

UPM Annual Report 2017

UPM Annual Report 2017