UPM Annual Report 2019

Key estimates and judgements

Energy shareholdings

Other intangible assets

Fair valuation and sensitivity Valuation of energy shareholdings requires management’s

SOFTWARE AND OTHER INTANGIBLE ASSETS

EURm

2019 2,159

2018 1,974

Carrying value, at 1 January

EURm

INTANGIBLE RIGHTS

TOTAL

assumptions and estimates of a number of factors that may differ from the actual outcome which could lead to significant adjustment to the carrying amount of the asset. Fair value is determined on a discounted cash flow basis and the main factors impacting the future cash flows include future electricity prices, price trends and discount rates. The electricity price estimate is based on a simulation of the Finnish area electricity price. A change of 5% in the electricity price used in the model would change the total value of the assets by EUR 350 million. The discount rate of 5.52% used in the valuation model is determined using the weighted average cost of capital method. A change of 0.5% in the discount rate would change the estimated fair value of the assets by approximately EUR 280 million. Other uncertainties and risk factors in the value of the assets relate to start-up schedule of the fixed price turn-key Olkiluoto 3 EPR nuclear power plant project. UPM’s indirect share of the capacity of Olkiluoto 3 EPR is approximately 31%, through its PVO B2 shares. Changes in regulatory environment or taxation could also have an impact on the value of the energy generating assets.

Disposals

-1

-1

2019 Accumulated costs

Changes in fair value recognised in other comprehensive income

485

637

1,122 -876

-13

185

Accumulated amortisation and impairments

-286

-590

2,145

2,159

Carrying value, at 31 December

199 -16 201

47

246

Carrying value, at 31 December

Reclassifications to leased assets (IFRS 16) 1 Jan 2019

-1

-17

32 23

233

Carrying value, at 1 January

Accounting policies The group has made an irrevocable election to designate its energy shareholdings as equity instruments where changes in fair value are recognised through OCI. The shareholdings are not held for trading as the group has an intention to hold the investments for the long term. Purchases of energy shareholdings are initially and subsequently measured at fair value through other comprehensive income, net of tax if applicable, with only dividend income recognised through profit and loss. Initial fair value is acquisition cost including transaction costs. Upon disposal of the investment, the accumulated fair value changes in equity are not recycled to the income statement but instead, are reclassified from the fair value reserve to retained earnings. The fair value of energy shareholdings is a level 3 measure in the fair value measurement hierarchy.

Additions

3

26

Amortisation

-5

-8

-13 246

199

47

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

80

326

Carrying value including emission rights, at 31 December

2018 Accumulated costs

518

634 -601

1,152 -902

Accumulated amortisation and impairments

-301

217 217

33 33 10 -11 33

250 250

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

Additions

4

15

Amortisation

-4

-15

217

250

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

45

295

Carrying value including emission rights, at 31 December

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 2019. 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 2019 and 2018.

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 2019 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:

4.4 Goodwill and other intangible assets

Goodwill

The group’s goodwill mainly relates to pulp operations in Finland and Uruguay belonging to UPM Biorefining business area.

EURm

2019 236

2018

Carrying value, at 1 January

231

BASIS OF VALUATION PERIOD OF FORECAST

Translation differences

2

5

CASH GENERATING UNIT

PRE-TAX DISCOUNT RATE 7.72 % (2018: 9.25 %) 8.10 % (2018: 9.87 %) 6.78 % (2018: 7.83 %) 10.14 % (2018: 10.93 %)

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

238

236

Carrying value, at 31 December

Pulp operations Finland Value in use 10 years + terminal value Pulp operations Uruguay Value in use 10 years + terminal value

UPM Raflatac UPM Plywood

Value in use 10 years + terminal value Value in use 10 years + terminal value

Product prices, cost development Product prices, cost development

Goodwill by business area

EURm

2019

2018

Key estimates and judgements

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 2019, for pulp operations Finland, a decrease of more than 16% in pulp prices would result in recognition of impairment loss against goodwill. For pulp operations Uruguay, a decrease of more than 11% in pulp prices would result in recognition of impairment loss against goodwill and a decrease of more than 13% 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.

Pulp operations Uruguay Pulp operations Finland

101 115

99

115

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

UPM Raflatac UPM Plywood Other operations

7

7

13

13

1

1

238

236

Total

172

173

UPM ANNUAL REPORT 2019

UPM ANNUAL REPORT 2019

CONTENTS

ACCOUNTS

FINANCIAL STATEMENTS

FINANCIAL STATEMENTS