UPM Annual Report 2019

1.4 Foreign currency translation Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when recognised in other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges. UPM records foreign exchange differences relating to ordinary business operations within the appropriate line items above operating profit and those relating to financial items are presented separately as a net amount in finance costs. Income and expenses of subsidiaries that have a functional currency different from euro are translated into euros at quarterly average exchange rates. Assets and liabilities of subsidiaries are translated at the closing rate at the balance sheet date. All resulting translation differences are recognised as a separate component in other comprehensive income. On consolidation, exchange differences arising from the translation of net investment in foreign operations and other currency instruments designated as hedges of such investments, are recognised in other comprehensive income. When a foreign entity is partially disposed of, sold or liquidated, translation differences accrued in equity are recognised in the income statement as part of the gain or loss on sale/liquidation. On 1 January 2019, UPM has changed its accounting policy regarding recognition, measurement, presentation and disclosure of leases. As a result, UPM as a lessee has recognised most of leases on the balance sheet and there is no distinction between operating and finance leases anymore. Leases of property, plant and equipment where UPM, as a lessee, obtains substantially all of the economic benefits from the use of the identified asset and where UPM has the right to direct the use of the identified asset, are classified as leases. The group recognises a leased asset and a lease liability at the lease commencement date, except for short-term leases. Short-term leases are leases where the duration of the lease term is 12 months or less. In case the contract includes a purchase option, it is not a short- term lease. UPM recognises lease payments of short-term leases as an expense on straight-line basis over the lease term. The lease term of the different contracts is determined as the non- cancellable period taking into consideration the options to extend and terminate if it is reasonably certain that the group will exercise the extension option or will not exercise the termination option. If the contract is for an indefinite period of time and the group and the lessor both have a right to terminate the contract within a short notice period (12 months or less) without a significant penalty, the contract is considered to be a short-term and the lease payments are expensed in the income statement on a straight-line basis over the lease term. Leased asset comprises the initial lease liability, initial direct costs and the obligations to refurbish the asset, less any incentives granted by the lessors. The leased asset is subsequently valued at cost less accumulated depreciation and impairment losses. Remeasurement takes place in case lease liability is remeasured and change in cash flows is based on contract terms that have been included in the original contract. The leased asset is depreciated over the shorter of the asset’s useful life and the lease term. 1.5 Changes in accounting policies IFRS 16 Leases The group as a lessee

Financial risks UPM is exposed to a variety of financial risks as a result of its business activities including currency risk, interest rate risk, commodity price risk, credit risk, capital risk and liquidity risk. Risk management related to financial activities is carried out by UPM’s central treasury department, Treasury and Risk Management, under policies approved by the Board of Directors. Financial risks are described in the relevant notes as described below.

The lease liability is recognised at the commencement date and measured at the present value of the lease payments to be paid during the lease term. The group uses, as a basis, discount rate implicit in the lease and if that rate cannot be readily determined, UPM uses incremental borrowing rate which comprises of currency and lease period based reference rate and specific credit spread. Lease payments can include fixed payments, variable payments that depend on an index or rate and extension option payments or purchase options if it is reasonably certain that the group will exercise them. The lease liability is subsequently measured at amortised cost using the effective interest rate method and remeasured (with corresponding adjustment to the related leased asset) when there is a change in future lease payments due to renegotiation, changes of an index or rate or reassessment of options. The group has elected to separate non-lease components such as service components and other variable components and account them for as expenses, if they can be separated from the leased asset. However, the group does not separate non-lease components from the lease contracts of company cars. The group does not apply portfolio approach of leases with similar characteristics. The group as a lessor At inception of a lease contract, the group makes an assessment whether the lease is a finance lease or an operating lease. If the lease transfers substantially all of the risks and rewards incidental to ownership of the asset, it is considered to be a finance lease; if not, the lease is considered to be an operating lease. The group has only a minor amount of operating lease contracts, whereby the lease payments are recognised on a straight-line basis over the term of the lease. Implementation of IFRS 16 The group has adopted the IFRS 16 standard using the modified retrospective application method without restatement of comparatives. Under IFRS 16, a right-of-use asset (i.e. leased assets), representing the right to use the underlying asset, and a lease liability, representing the obligation to make lease payments, is recognised on the balance sheet. As part of the transition, leased assets of EUR 493 million and lease liabilities of EUR 491 million were recognised at the date of initial application on 1 January 2019. The most significant lease contracts recognised on the balance sheet consists of land areas, power plants and real estate. Leased assets are not included in the measure of Capital expenditure. UPM estimated the remaining lease term as of 1 January 2019 and measured its lease liability at the present value of the remaining lease payments discounted using incremental borrowing rate at the date of application 1 January 2019. Lease payments relating to an optional renewal period in the lease liability were included only if it was reasonably certain that the group will exercise that option. The group applied IAS 36 Impairment of Assets to assess the leased assets for impairment at the date of initial application and consequently recognised an adjustment, net of tax, to the opening balance of retained earnings. UPM applied short-term leases exemption consistently upon transition and subsequently for all asset classes. For transition purposes UPM did not reassess previous decisions about existing contracts whether they are or contain a lease. Additionally, the group did not identify initial direct costs of leases previously classified as operating leases. At the date of initial application, the group did not apply practical exemption to account leases with the remaining term less than 12 months as short-term leases.

The Group has elected to separate lease and non-lease components for all asset classes except for company cars. Upon transition, UPM did not make any adjustments to existing finance lease balances which have been accounted for in accordance with IAS 17. Subsequently, the group accounts for the leased asset and lease liability in accordance with the general requirements of IFRS 16. The change in lease accounting has resulted in a reduction in operating costs (and therefore an increase in EBITDA), higher depreciation expenses and positive impact on operating profit. In addition, interest expenses have increased slightly. Cash generation was not impacted by the adoption of the standard. However, operating cash flow is positively impacted by it, given that a large part of the payments in relation to leases is now reported as financing cash flow (lease liability repayments). The impact of the initial application of IFRS 16 by each balance sheet line item is described below. The balance sheet impact includes also the reclassification of finance leases recognised in accordance with IAS 17 at 31 December 2018 to leased assets and lease liability. In addition, certain long-term land use contracts were reclassified from intangible rights to leased assets. The corresponding lease liabilities have been settled in previous periods. Operating lease prepayments reported in trade and other receivables at 31.12.2018 were reclassified to leased assets.

FINANCIAL RISK

NOTE

Credit risk

4.6 Working capital

Liquidity and refinancing risk

5.1 Capital management

Interest rate risk

6.1 Financial risk management 6.1 Financial risk management 6.1 Financial risk management

Foreign exchange risk Electricity price risk

Financial counterparty risk

6.2 Derivatives and hedge accounting

1.3 Consolidation principles Subsidiaries UPM’s consolidated financial statements include the financial statements of the parent company, UPM-Kymmene Corporation, and subsidiaries controlled by UPM. All group entities apply consistently UPM’s accounting policies. All intercompany transactions, receivables, liabilities and unrealised profits, as well as intragroup profit distributions, are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Joint operations UPM’s share in joint operations is recognised in the consolidated balance sheet through recognition of the group’s own assets and liabilities and revenues and expenses in the arrangement together with UPM’s proportionate share in the joint assets, liabilities and joint income and expenses. The proportionate share of realised and unrealised gains and losses arising from intragroup transactions between UPM and its joint operations is eliminated. Associates and joint ventures Associates are entities over which the group has significant influence. Joint ventures are joint arrangements where the group has joint control with other parties and the parties have rights to the arrangement’s net assets. Interests in associates and joint ventures are accounted for using the equity method of accounting and are initially recognised at cost. Associates and joint ventures follow the group accounting policies for consolidation purpose. Non-controlling interests The profit or loss attributable to owners of the parent company and non-controlling interests is presented on the face of the income statement. Non-controlling interests are presented in the consolidated balance sheet within equity, separately from equity attributable to owners of the parent company. Transactions with non-controlling interests are treated as transactions with equity owners of the group. For purchases from non- controlling interests, the difference between consideration paid and the acquired share of the carrying value of the subsidiary’s net assets is recorded in equity. Gains or losses of disposals to non-controlling interests are also recorded in equity, net of transaction costs.

150

151

UPM ANNUAL REPORT 2019

UPM ANNUAL REPORT 2019

CONTENTS

ACCOUNTS

FINANCIAL STATEMENTS

FINANCIAL STATEMENTS