UPM Annual Report 2018

UPM AT A GLANCE

STRATEGY

BUSINESSES

SOCIETY AND ENVIRONMENT

GOVERNANCE AND COMPLIANCE

REPORT OF THE BOARD OF DIRECTORS

FINANCIAL STATEMENTS

AUDITOR’S REPORT

OTHER FINANCIAL INFORMATION

Other intangible assets

Key estimates and judgements

Accounting policies

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 impairment 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.

SOFTWARE AND OTHER INTANGIBLE ASSETS

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

INTANGIBLE RIGHTS

TOTAL

2018 Accumulated costs

518

634

1,152 –902

Accumulated amortisation and impairments

–301

–601

Carrying value, at 31 December Carrying value, at 1 January

217 217

33 33 10

250 250

Additions

4

15

Amortisation

–4

–11

–15 250

Carrying value, at 31 December Emission rights, carrying value 1)

217

33

45

Carrying value including emission rights, at 31 December

295

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

Amortisation

–4

–14

–18

Reclassifications

1

– –

1

Translation differences

–1

–1

Carrying value, at 31 December Emission rights, carrying value 1)

217

33

250

44

Carrying value including emission rights, at 31 December

294

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

Impairment testing Impairment tests for goodwill and water rights with indefinite life were carried out in the fourth quarter 2018. 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 2018 and 2017.

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 2018 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:

CASH GENERATING UNIT BASIS OF VALUATION PERIOD OF FORECAST

PRE-TAX DISCOUNT RATE 9.25% (2017: 8.57%) 9.87% (2017: 9.36%) 7.83% (2017: 8.19%) 10.93% (2017: 10.85%)

KEY ASSUMPTIONS Pulp price, wood costs Pulp price, wood costs

Pulp operations Finland Pulp operations Uruguay

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

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 2018, for pulp operations Finland, a decrease of more than 28% in pulp prices would result in recognition of

impairment loss against goodwill. For pulp operations Uruguay, a decrease of more than 13% in pulp prices would result in recognition of impairment loss against goodwill and a decrease of more than 15% in pulp prices would result in a write-down of the entire goodwill. The group believes that no reasonable change in wood cost would cause the aggregate carrying amount to exceed the recoverable amount.

148

149

CONTENTS

ACCOUNTS

UPM ANNUAL REPORT 2018

UPM ANNUAL REPORT 2018