UPM Annual Report 2019

Accounting policies The group divides all its forest assets for accounting purposes into growing forests, which are recognised as forest assets at fair value less costs to sell, and land. Own land is stated at cost whereas leased land is valued at cost less accumulated depreciation. Any changes in the fair value of the growing forests are recognised in the operating profit in the income statement. The fair value is calculated on the basis of discounted future expected cash flows as there is a lack of a liquid market. The fair value of forest assets is a level 3 measure in terms of the fair value measurement hierarchy. On 1 January 2019, UPM has changed its accounting policy relating to forest assets by capitalising forestry renewal costs on the balance sheet during the growth cycle and reclassifying forest assets-related cash flows from operating cash flow to investing cash flow. Before the change UPM has recognised forestry renewal costs in income statement and reported forest assets-related cash flows, including forest renewal costs, forest asset purchases and sales, in operating cash flow.

Key estimates and judgements

Impairment losses In June 2019, UPM announced the decision to permanently close paper machine 10 at UPM Plattling, Germany, reducing the annual capacity of coated mechanical paper in Europe by approximately 155,000 tonnes. With the closure of the paper machine, UPM recognised impairment charges of EUR 1 million in Communication Business area. In September 2019, UPM announced that it plans to permanently close SC paper machine 2 in Rauma, Finland, reducing the annual capacity of SC paper by 265,000 tonnes. EUR 12 million impairment charges were recognised related to the closure of paper machine at UPM Rauma mill in Communication Papers business area. In 2018, no impairment charges were recognised. Property, plant and equipment Property, plant and equipment is stated at historical cost. Costs of assets of acquired in business combinations are determined at fair value at the acquisition date. Depreciation is calculated on a straightline basis and the carrying value is adjusted for impairment charges, if any. The carrying value of property, plant and equipment on the balance sheet represents the cost less accumulated depreciation and any impairment charges. Borrowing costs incurred for the construction of any qualifying assets are capitalised during the period of time required to complete and prepare the asset for its intended use. Other borrowing costs are expensed. Major renovations are capitalised and depreciated over the useful lives of the related asset. Ordinary expenses for repairs and maintenance are expensed as incurred. Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying amount and are included in other operating income and other operating expenses, respectively. Accounting policies

estimate of its recoverable amount, but the increased carrying amount will not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years.

Fair valuation The valuation process of forest assets is complex and requires management estimates and judgement on assumptions that have a significant impact on the valuation of the group’s forest assets. Main factors used in the fair valuation of forest assets are estimates for growth and wood harvested, stumpage prices and discount rates. Stumpage price forecasts are based on the current prices adjusted by the management’s estimates for the full remaining productive lives of the trees, up to 100 years for forests in Finland and in the US and up to 10 years for plantations in Uruguay. The cash flows are adjusted by selling costs and costs related to future risks. Felling revenues and maintenance costs are estimated on the basis of actual costs and prices, taking into account the group’s projection of future price and costs development. In addition, calculations take into account future forest growth and environmental restrictions. The pre-tax discount rate used to determine the fair value of the Finnish forests in 2019 was 7.0% (7.0%) and for Uruguayan plantations 9.9% (9.9%). A decrease (increase) of one percentage point in discount rate would increase (decrease) the fair value of forest assets by approximately EUR 260 million (260 million).

4.2 Forest assets UPM is both a major forest owner and a purchaser of wood. The value of forest assets, i.e. standing trees, amounted to EUR 2,097 million (1,945 million) at the end of 2019. UPM's own and leased forest land areas are summarised in below table. The long useful lives of assets, changes in estimated future sales prices of products, changes in product costs and changes in the discount rates used could lead to significant impairment charges. Estimates are also made in an acquisition when determining the fair values and remaining useful lives of acquired intangible and tangible assets. Key estimates and judgements The estimations of useful lives, residual value as well as depreciation and amortisation methods require significant management judgement and are reviewed annually. Management makes estimates on the future cash flows expected to result from the use of the asset and its eventual disposal. While management believes that estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect valuations.

» Refer Note 1.5 Changes in accounting policies, for further information.

4.3 Energy shareholdings UPM is both a significant purchaser and producer of energy. The majority of electrical and thermal energy is consumed at the group’s pulp and paper production. The production is mainly carried out by energy companies in which UPM has energy shareholdings. Energy shareholdings are unlisted equity investments. UPM does not have control or joint control of or significant influence in the said energy companies.

The value of energy shareholdings amounted to EUR 2,145 million (2,159 million) at the end of 2019. These energy companies supply energy or both energy and heat to their shareholders on a cost-price principle (Mankala-principle) which is widely applied in the Finnish energy industry. Under the Mankala-principle energy and/or heat is supplied to the shareholders in proportion to their ownership and each shareholder is, pursuant to the specific stipulations of the respective articles of association, severally responsible for its respective share of the production costs of the energy company concerned.

PRODUCTIVE FOREST LAND

FORESTED LAND

1,000 ha Finland Uruguay

FOREST LAND

510 263 142

430 158

426 150 105

Uruguay, leased land

112

United States

76

56

56

Total

991

756

737

ASSESSED USEFUL LIVES

NUMBER OF YEARS

At the end of 2019, carrying value of own forest land amounted to EUR 591 million (EUR 569 million) and leased forest land EUR 176 million (EUR 0 million). The change in lease accounting in 2019 has resulted in recognition of leased forest land in the balance sheet. Own land is stated at cost whereas leased land is valued at cost less accumulated depreciation.

Land, not subject to depreciation

-

Buildings

20–50 20–30 15–20 10–15

Power plants

Heavy machinery Light machinery

Number of shares

Group holding %

Carrying value, EURm 2019

2018 340 1,185

Equipment

5

Pohjolan Voima Oyj, A series Pohjolan Voima Oyj, B series Pohjolan Voima Oyj, B2 series

8,176,191 4,140,132 2,869,819

61.24 58.11 51.22 7.33 51.10

360

1,191

Forest assets EURm

Impairment testing Carrying values of individual items included in property, plant and equipment are reviewed at each closing date to determine whether there is any indication of impairment. The carrying value is written down immediately to the asset’s recoverable amount if the carrying value exceeds the estimated recoverable amount. Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. The recoverable amount is determined as the higher of an asset’s fair value less costs to sell and its value in use. Value in use is determined by discounting future cash flows expected to be generated by the asset. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets, other than goodwill, that have suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Where an impairment loss is subsequently reversed, the carrying amount of the asset is increased to the revised

188 290

226 290 110

Kemijoki Oy

179,189 10,220

2019 1,945

2018

Länsi-Suomen Voima Oy

111

1,600

Carrying value, at 1 January

Other

—

—

7

7

Additions Disposals

119

51

2,145

2,159

Carrying value, at 31 December

-1

-59

Wood harvested

-101

-101 433

Net change in fair value Translation differences

125

PVO’s share capital is divided into different series of shares. The B and B2 series relate to PVO’s shareholdings in Teollisuuden Voima Oyj (TVO). UPM has no direct shareholdings in TVO. TVO operates two nuclear power plants (Olkiluoto 1 and Olkiluoto 2) and is constructing one new nuclear power plant in Olkiluoto (Olkiluoto 3), Finland. The operation of a nuclear power plant is governed by international, European Union and local nuclear regulatory regimes. Pursuant to the Finnish Nuclear Liability Act, the operator of a nuclear facility has a strict third-party liability in relation to nuclear accidents. Shareholders

of power companies that own and operate nuclear power plants are not subject to the liability under the Nuclear Liability Act. In Finland, the future costs of conditioning, storage and final disposal of spent fuel, management of low and intermediate level radioactive waste as well as nuclear power plant decommissioning are provided for by a state established fund (the Finnish State Nuclear Waste Management Fund). The contributions to the Fund are intended to be sufficient to cover estimated future costs. These contributions have been taken into consideration in the fair value of the related energy shareholdings.

10

21

2,097

1,945

Carrying value, at 31 December

Change in fair value, change due to harvesting and gains or losses on sale of forest assets are recognised in the income statement as a net amount amounting to EUR 26 million (407 million) in 2019. In 2018, the fair value of forest assets in Finland was increased by EUR 345 million mainly due to higher forest growth estimates. In addition, the company adjusted its long-term wood price estimates slightly.

170

171

UPM ANNUAL REPORT 2019

UPM ANNUAL REPORT 2019

CONTENTS

ACCOUNTS

FINANCIAL STATEMENTS

FINANCIAL STATEMENTS