UPM Annual Report 2019

Effect of a 10% change in prices on operating profit for the year

Other operating income EURm Gains on sale of non-current assets

group gives the customers the right for purchase price refund in case the products do not meet the quality as specified in the agreement. The amount of variable consideration is recognised as a refund liability when some of the amount received is expected to be refunded to the customer. Customer rebates payable to customers in relation to sales made until the end of the reporting period and expected quality claims are estimated using the expected value method, and revenue is only recognised to the extent that it is highly probable that a significant reversal will not occur. A refund liability is included in trade and other payables. Receivables are recognised when the goods are delivered, and the consideration is unconditional except for the passage of time. For most of UPM’s customer contracts the period between the transfer of goods or services to customers and the receipt of payment is less than 12 months. For these contracts the group has elected to use the practical expedient not to adjust revenue for the effect of financing components. Advance payments received from customers are recognised as contract liability. UPM does not have any contract assets arising from contracts with customers.

2019

2018

4

49 14 34 -11 -10

EURm

2019

2018 458

Rental income

13 62

Papers in UPM Communication Papers Fine and specialty papers in UPM Specialty Papers

441

Emission rights received

Derivatives, non-qualifying hedges Exchange rate gains and losses

1 3

119 155

120 149

Label materials in UPM Raflatac

Other Total

13 97

12

Plywood

41 36 63

45 33 57

87 In 2018, gains on sale relating to sale of non-current assets includes EUR 30 million income relating to sale of hydropower facilities in Germany and EUR 17 million income relating to sale of land areas in Finland. Emission rights The group has recognised EUR 62 million (34 million) of income in Other operating income and EUR 8 million of expense (7 million income) under Other operating costs and expenses relating to CO 2 emissions. The liability to cover the obligation to return emission rights amounted to EUR 18 million (14 million) and is recognised in provisions. The emission rights recognised in intangible assets are specified below:

Sawn timber

Chemical pulp (net effect)

The biggest factor affecting UPM’s financial results is the sales price of paper. A change in the volume delivered has less than half of the effect of the same percentage change in sale prices.

Accounting policies

» Refer Note 4.6 Working capital for information on contract liabilities and refund liabilities.

Sales of goods UPM’s performance obligation in the contracts with customers consists of providing the goods specified in the contracts. Revenue from UPM’s product sales is recognised when performance obligation is satisfied, which takes place at point in time when control of the good has been transferred to the customer. In UPM’s customer contracts the transfer of control and thus timing of revenue recognition is largely dependent on delivery terms. Group terms of delivery are based on Incoterms 2010, the official rules for interpretation of trade terms issued by the International Chamber of Commerce. Major part of the sales contracts is on delivery terms basis, whereby delivery is not a promised service to the customer, as the control of a good does not transfer to the customer before shipment. Revenue and the corresponding receivable are recorded at the point in time when the product is delivered to the destination point for terms designated Delivered Duty Paid (“DDP”) or Delivered at Place (“DAP”). For sales transactions designated free of carriage (FCA), revenue is recorded at the time of shipment. For sales transactions designated as Carriage paid to (CPT) or Carriage and Insurance Paid to (CIP), the portion of revenue relating to goods is recorded at the time of loading and the portion of revenue relating to delivery services over time when the service has been performed. UPM sells energy to NordPool electricity market. Revenue is recognised when electricity is transmissed over time. Sales of services UPM provides forest expertise and contracting services to woodland and forestry owners and freight services (free space on group’s vessels sold as freight services). Revenues from services are recorded over time when the service has been performed. Sales of services is very limited and thus the group does not report it separately. Revenue recognition The group recognises revenue as an amount equal to the price specified in the customer contract net of any sales taxes, cash flow hedging results of sales in foreign currency, hedges of energy sales and variable consideration, when applicable. Variable consideration is defined as any variability that may occur between the sales price and the amount UPM expects to receive. The variable consideration includes mainly cash discounts and volume rebates that encourage the customer to take specific volumes in a given timescale. In addition, the

EURm

2019

2018

2.3 Operating expenses and other operating income

45 67

44 33 -31

Carrying value, at 1 January

Emission rights received and purchased

Deliveries and disposals

-33

Impairment

—

—

80 81

45 47

Carrying value, at 31 December

Operating expenses Operating expenses excluding forest assets fair value change, wood harvested and share of results of associates and joint ventures are presented below.

Accumulated costs

Accumulated impairments

-1

-1

80

45

Carrying value, at 31 December

Auditor’s fees EURm

EURm

2019

2018

2019

2018

Accounting policies

Costs and expenses Raw materials, consumables and goods

5,515 1,214

5,682 1,194

Audit fee

3.1 0.2 0.5 0.2 4.0

2.4

Employee costs 1)

Audit related services

—

Research and development costs Research and development costs are expensed as incurred, except for certain development costs, which are capitalised as they generate future economic benefits, and UPM can the measure the cost reliably. Capitalised development costs are amortised on a systematic basis over their expected useful lives, usually not exceeding five years. Government grants Government grants are recognised at fair value where there is a reasonable assurance that the grant will be received and the group will comply with the attached conditions. Government grants relating to the purchase of property, plant and equipment are deducted from the acquisition cost of the asset and accordingly directly reduce the annual depreciation of the underlying asset. Other government grants are recognised in the income statement in the period necessary to match them with the costs they are intended to compensate.

Other operating costs and expenses 2) Delivery costs and other external charges

918 884

899 891

Tax services Other services

0.3 0.5

8,531

8,665

Total

Total 3.2 In 2019, auditor's fees include EUR 0.1 (0.0) million related to audit services, EUR 0.2 (0.3) million related tax services and EUR 0.2 (0.5) million related to other services paid to PwC Oy. Research and development costs The research and development costs included in operating expenses were EUR 53 million (52 million) in 2019. The focus was on new technologies and developing businesses. Government grants In 2019, government grants recognised as deduction of operating expenses totalled to EUR 4 million (5 million) of which EUR 2 million (4 million) relates to Finland. In addition, the group received emission rights from governments amounting to EUR 62 million (34 million) of which EUR 33 million (20 million) relates to Finland, EUR 19 million (10 million) to Germany, EUR 3 million (1 million) to Austria and EUR 0 million (1 million) to UK.

1) » Refer Note 3 Employee rewards , for further information.

2) Distribution of other operating costs and expense EURm 2019

2018

Rents and lease expenses 1)

16

44

Emission expenses 2)

8 3

-7

Losses on sale of non-current assets

2 9

Credit losses

12

Maintenance and other operating expenses 3)

879 918

850

Total 899 1) Rents and lease expenses have decreased in 2019 due to adoption of IFRS 16 Leases standard. » Refer Note 5.2. Net Debt, for further information 2) Emission expenses include gains on sales of emission rights EUR 14 (22) million. 3) Other operating expenses include, among others, energy as well as expenses related to services and group’s administration.

160

161

UPM ANNUAL REPORT 2019

UPM ANNUAL REPORT 2019

CONTENTS

ACCOUNTS

FINANCIAL STATEMENTS

FINANCIAL STATEMENTS