UPM Annual Report 2019

Emission provisions Emission obligations are recognised in provisions based on realised emissions. The provision is measured at the carrying amounts of the corresponding emission rights held, which are recognised as intangible assets. In case of deficit in emission rights, the shortage is valued at the market value at the balance sheet date.

Trade and other payables

Trade receivables Trade receivables arising from selling goods and services in the normal course of business are recognised initially at transaction price and subsequently at amortised cost less loss allowance provision. No element of financing is deemed present as the sales are made with a credit term of 14–60 days, which is consistent with market practice. The group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. The group has recognised two types of provisions for trade receivables – a general provision for lifetime expected credit losses and a provision for specified individual trade receivables, both of which are charged to the income statement. The group uses a provision matrix for estimating lifetime expected credit losses where trade receivables are segregated by businesses. The provision matrix is based on historical observed default rates, adjusted by forward looking information. It takes into account trade credit insurances, payment profile of customers and the factor that as debts get older they are more likely not to be paid. Additionally, the group recognises a provision individually for outstanding trade receivables where specific debtor information is available. In these cases there must be objective evidence that the group will not be able to collect all amounts due according to the original terms of the receivables. Trade receivables are permanently written off when there is no reasonable expectation of recovery. The customer entering into bankruptcy or liquidation proceedings or finalising such proceedings, or entering into debt-restructuring are considered indicators that the trade receivables are no longer expected to be recovered. Subsequent recoveries of amounts previously written off are credited to the income statement. The carrying amount of trade receivables approximates to their fair value due to the short-term nature of the receivables. Trade and other payables Trade payables arise from purchase of inventories, fixed assets and goods and services in the ordinary course of business from UPM’s suppliers. Trade and other payables are classified as current liabilities if they are due to be settled within the normal operating cycle of the business or within 12 months from the balance sheet date. Trade payables are recognised initially at fair value and subsequently at amortised cost using the effective interest method. The carrying amount of trade payables approximates to their fair value due to the short- term nature of the payables. The group is recognising refund liability for expected volume and other discounts arising from contracts with customers. Customer rebates include mainly volume discounts and are recognised as equal to an amount which is most likely to be paid to the customer. The carrying amount of expected customer rebates is updated at each reporting date, using the latest forecast data available. Customer claims relating to quality complaints are accounted for as revenue related refund liability. Expected customer claims are estimated based on historical data and the amount of refund liability is updated at each reporting date. Advances received are recognised as contract liability until the performance obligation is fulfilled.

The group aims to operate in compliance with regulations related to the treatment of waste water, air emissions and landfill sites. However, expected events during production processes and waste treatment could cause material losses and additional costs in the group’s operations. Legal contingencies Management judgement is required in measurement and recognition of provisions related to pending litigation. Provisions are recorded when the group has a present legal or constructive obligation as a result of past event, an unfavourable outcome is probable and the amount of loss can be reasonably estimated. Due to inherent uncertain nature of litigation, the actual losses may differ significantly from the originally estimated provision.

EURm

2019

2018

Accrued expenses and deferred income Personnel expenses

188

196

Interest expenses

7 4

6 4

Indirect taxes

Customer rebates Customer claims

124

129

Key estimates and judgements

7

7

Other items

88

82

4.6 Working capital The group defines operating working capital as inventories, trade receivables, trade payables and advances received which are presented separately below. The performance obligations related to advances received are typically fulfilled within 12 months of receipt of the advance. UPM is focusing on working capital efficiency and targeting a sustainable and permanent reduction in operating working capital. Environmental provisions The estimates used in determining the provisions are based on the expenses incurred for similar activities in the current reporting period taking into account the effect of inflation, cost-base development and discounting. Because actual outflows can differ from estimates due to changes in laws, regulations, public expectations, technology, prices and conditions, and can take place many years in the future, the carrying amounts of provisions are regularly reviewed and adjusted to take into account of any such changes. The discount rate applied is reviewed annually.

417

425

Total accrued expenses and deferred income

Advances received

8

7

Trade payables

1,130

1,310

Other current liabilities

98

139

1,654

1,881

Total

» Refer Note 9.2 Litigation for details of legal contingencies.

Accounting policies Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined by the method most appropriate to the particular nature of inventory, the first-in, first-out (FIFO) or weighted average cost. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses. If the net realisable value is lower than cost, a valuation allowance is established for inventory obsolescence. Operational credit risk Operational credit risk is defined as the risk where UPM is not able to collect the payments for its receivables. The group has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Outstanding trade receivables, days of sales outstanding (DSO) and overdue trade receivables are followed on monthly basis. Potential concentrations of credit risk with respect to trade and other receivables are limited due to the large number and the geographic dispersion of customers. Customer credit limits are established and monitored, and ongoing evaluations of their financial condition is performed. The group has trade credit insurances to protect accounts receivables from significant credit losses. In certain market areas, including Asia and Northern Africa, measures to reduce credit risks include letters of credit, prepayments and bank guarantees. Maximum exposure to credit risk, without taking into account any credit enhancements, is the carrying amount of trade and other receivables. UPM does not have significant concentration of customer credit risk. The ten largest customers accounted for approximately 15% (18%) of the trade receivables as at 31 December 2019 – i.e., approximately EUR 179 million (269 million). In 2019, trade receivables amounting to EUR 8 million (7 million) were subject to permanent write-off and the loss was recognised under other costs and expenses. In accordance with the group’s accounting policy, trade receivables are permanently written off when there is no reasonable expectation of recovery.

Operating working capital

Trade and other receivables

EURm

2019

2018

EURm

2019

2018

Inventories

1,367 1,222

1,642 1,476

Trade receivables Trade receivables

Trade receivables Trade payables Advances received

1,253

1,502

-1,130 -1,310

Loss allowance provision Total trade receivables

-31

-26

-8

-7

1,222

1,476

1,451

1,800

Total

Prepayments and accrued income Personnel expenses

2

4 1

Interest income

—

Inventories

Energy and other excise taxes

52

54 77

Other items

106 159

EURm

2019 682

2018 822

135

Total prepayments and accrued income Other receivables VAT and other indirect taxes receivable

Raw materials and consumables

Work in progress

9

10

144

181

Finished products and goods

658

777

Other receivables

51

41

Advance payments

18

33

195

222

Total other receivables

1,367

1,642

1,576

1,833

Total

Total

2019

2018

TRADE RECEIVABLES, NET OF PROVISION

TRADE RECEIVABLES, NET OF PROVISION

LOSS ALLOWANCE PROVISION

LOSS ALLOWANCE PROVISION

TRADE RECEIVABLES

TRADE RECEIVABLES

EURm Undue

1,128

-3 -1 -2

1,125

1,325

-5 -1 -1

1,320

Past due up to 30 days Past due 31–90 days Past due over 90 days

79 13 33

79 11

116

115

32 30

30 10

-26 -31

8

-20 -26

1,253

1,222

1,502

1,476

Total

176

177

UPM ANNUAL REPORT 2019

UPM ANNUAL REPORT 2019

CONTENTS

ACCOUNTS

FINANCIAL STATEMENTS

FINANCIAL STATEMENTS