UPM Annual Report 2019

Free cash flow Free cash flow is primarily a liquidity measure. It is an important indicator of UPM’s overall operational performance as it reflects the cash generated from operations after investing activities.

Leased assets 2018 included in property, plant and equipment and intangible assets

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. 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. The leased asset is subject to testing for impairment if there is an indicator for impairment, as for own assets. 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. Leased assets are presented in the balance sheet as a separate financial statement line item. Lease liabilities are presented as part of non-current debt and current debt line items in the balance sheet. Lease liabilities are part of net debt calculation of the group. Short- term lease payments are reported as rents and lease expenses. Variable lease payments are recognised within the operating costs and expenses based on the nature of the payment. The interest expense on the lease liability is recognised as a component of finance costs in income statement. In cash flow statement, payments for the principal portion of the lease liability are recognised as financing cash flow while payments for interest portion of lease liability, short-term leases, and variable amounts not included in the measurement of the lease liability, are classified within operating cash-flow. 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. Leases 2018 Leases of property, plant and equipment where the group, as a lessee, has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are recognised as assets and liabilities in the balance sheet at the commencement of lease term at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each finance lease payment is allocated between the liability and finance charges. The corresponding rental obligations, net of finance charges, are included in other non-current debt. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Property, plant and equipment acquired under finance leases are depreciated over the shorter of the asset’s useful life and the lease term. Leases where the lessor retains substantially all the risks and rewards of ownership are classified as operating leases. Payments made as a lessee under operating leases are charged to the income statement on a straight-line basis over the period of the lease.

EURm

2018

Accumulated costs

153 -66

EURm

2019

2018

Accumulated depreciation

Operating cash flow Investing cash flow

1,847

1,330 -199 1,131 -613

Carrying value, at 31 December

88

-415

Free cash flow Dividends paid

1,432 -693

Future minimum lease payments 2018

Contributions by non-controlling interests

21

—

Other financing cash flow

-39

-19

Finance leases

Operating leases

Change in other financial assets in operating cash flow Change in other financial assets in investing cash flow

EURm

2018

2018

-6

-7

Within 1 year

8

90

-5

3

Between 1 and 5 years

66 28

226 238 554

Change in net debt, cash Change in net debt, non-cash Impact of adoption of IFRS 16

-711

-495

Later than 5 years

78

10

102

Total

491

—

Of which interests

-5

—

Change in net debt

-142

-485

Present value of future minimum lease payments

98

—

Opening net debt Closing net debt

-311

174 -311

-453

Accounting policies

Bonds

Leases 2019 In 2019, the group has changed its accounting policy for leases where the group is the lessee. The new and old accounting policy are described below and the impact of the change is described in » Note 1.5 Changes in accounting policies. The group as a lessee UPM assesses whether a contract is or contains a lease at inception of the contract. This assessment involves the exercise of judgment about whether it depends on a specified asset, whether UPM obtains substantially all the economic benefits from the use of that asset, and whether UPM has the right to direct the use of the asset. The group recognises a leased asset and a lease liability at the lease commencement date, except for short-term leases. UPM applies this to all asset classes. Short-term leases are leases that, at the commencement date, have a lease term of 12 months or less. A lease that contains a purchase option is not a short-term lease. UPM recognises lease payments of short-term leases as an expense on a straight-line basis over the lease term. The lease term is determined as the non- cancellable period of the lease 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 economic penalties and termination cash payments, the contract is considered to be a short-term. 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 term-based reference rate and specific credit spread as well as other specific terms and conditions of a lease. 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

NOMINAL VALUE ISSUED, MILLION

CARRYING VALUE 2019 EURm

CARRYING VALUE 2018 EURm

FIXED RATE PERIOD

INTEREST RATE, % CURRENCY

1997–2027

7.450

USD

375

431 431

405 405

Value, at 31 December

Current portion

—

—

Non-current portion

431

405

Leases UPM has adopted IFRS 16 Leases standard on 1 of January 2019 without restating prior years. 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. Approximately 30 % of leased assets recognised on the balance sheet consists of land areas in Uruguay. The group uses the leased land areas for eucalyptus plantations. Approximately 32 % of the leased assets on the balance sheet consist of five power plants. UPM uses the energy generated by these plants for its own production. In addition, the group has leased one waste water treatment plant as well as several warehouses, terminals, offices, railcars and vessels. UPM also leases

some production machinery and equipment like forklifts and vehicles that are insignificant to the total leased assets portfolio. In 2019, the total cash outflow for leased assets was EUR 82 million. The expenses related to short-term leases recognised in the income statement in 2019 amounted to EUR 9 million. The group had no significant variable lease payments in 2019. The lease commitments for leases not commenced at year-end totals approximately EUR 100 million and these relate to long-term charter agreements. In 2018, UPM had three power plant lease agreements classified as finance leases as well as one finance lease arrangement over the usage of a waste water treatment plant. In addition, the group had certain production assets and buildings under long term finance lease arrangements.

Changes in leased assets 2019

MACHINERY AND EQUIPMENT

OTHER LEASED ASSETS

LAND AREAS

BUILDINGS

TOTAL

174

283

108

16

581

Carrying value, at 1 January

New contracts and subsequent additions

44

11 —

17 —

3

75

Reassessments and disposals

1

— -7 — 12

1

Depreciations

-10

-32

-22

-72

Translation differences

3

1

1

5

212

262

104

590

Carrying value, at 31 December

182

183

UPM ANNUAL REPORT 2019

UPM ANNUAL REPORT 2019

CONTENTS

ACCOUNTS

FINANCIAL STATEMENTS

FINANCIAL STATEMENTS