UPM Annual Report 2019

5.4 Financial income and expenses

Accounting policies Fair value through profit or loss

The different levels of fair value hierarchy used in fair value estimation are defined as follows: Fair values under level 1 Quoted prices (unadjusted) traded in active markets for identical assets or liabilities. Derivatives include futures and commodity forwards traded in exchange. Fair values under level 2 Observable inputs are used as basis for fair value calculations either directly (prices) or indirectly (derived from prices). If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. Derivatives, level 2 include OTC derivatives like forward foreign exchange contracts, foreign currency options, interest and currency swaps and commodity swaps. Specific valuation techniques used to value financial instruments at level 2 include the following methods: Interest forward rate agreements (FRA) are fair valued based on quoted market rates on the balance sheet date. Forward foreign exchange contracts are fair valued based on the contract forward rates at the balance sheet date. Foreign currency options are fair valued based on quoted market rates and market volatility rates on the balance sheet date by using the Black&Scholes option valuation model. Interest and currency swap instruments are fair valued as present value of the estimated future cash flows based on observable yield curves. Commodity swaps are fair valued based on forward curve quotations received from service providers. An embedded derivative that is by nature a foreign currency forward contract is valuated at market forward exchange rates and is included in level 2. Embedded derivatives are monitored by the group and the fair value changes are reported in other operating income in the income statement. Fair values under level 3 Financial assets or liabilities of which fair values are not based on observable market data (that is, unobservable inputs) are classified under level 3. This category include UPM’s energy shareholdings and forest assets. Fair valuations are performed at least quarterly by respective business areas or functions. Fair valuations are reviewed by the group finance management and overseen by the Audit Committee. » Refer Note 4.3 Energy shareholdings and » Note 4.2 Forest assets.

This category includes derivatives that don’t qualify hedge accounting. They are measured at fair value and any gains or losses from subsequent measurement are recognised in the income statement. Equity instruments at fair value through other comprehensive income This category includes mainly UPM’s energy shareholdings. These assets are measured at fair value through other comprehensive income. Financial assets at amortised cost This category comprises loan receivables with fixed or determinable payments that are not quoted in an active market, as well as trade and other receivables, and cash and cash equivalents. They are included in non-current assets unless they mature within 12 months of the balance sheet date. Cash and cash equivalents are always classified as current assets. Loan receivables that have a fixed maturity are measured at amortised cost using the effective interest method. Loan receivables without fixed maturity date are measured at amortised cost. As soon as a loan receivables or cash and cash equivalents are originated or purchased, a loss allowance for 12-month expected credit losses are recognised in profit or loss. If credit risk increases significantly, full lifetime expected credit losses are recognised in profit or loss. In the comparison period, loan receivables were impaired if the carrying amount exceeded the estimated recoverable amount. The credit loss model applied to trade receivables is described in » Note 4.6 Working capital. Derivatives under hedge accounting All derivatives are initially and continuously recognised at fair value in the balance sheet. Gains and losses on remeasurement of derivatives used for hedging purposes are recognised in accordance with the accounting principles described in » Note 6.2 Derivatives and hedge accounting. Financial liabilities measured at amortised cost This category includes debt, trade payables and other financial liabilities. » Refer Note 5.2 Net debt, for further information.

EURm

2019

2018

Exchange rate gains and losses Derivatives

15

7

Exchange gains and losses on financial liabilities measured at amortised costs Exchange gains and losses on financial assets measured at amortised costs

-11

-20

-5

14

Other exchange rate gains and losses

1

1 2

-1

Fair value changes Fair value gains and losses on derivatives designated as fair value hedges

21

-15

Fair value adjustment of debt attributable to interest rate risk

-20

19 -2

Fair value adjustment of firm commitments attributable to foreign exchange risk

—

1

1 3

—

Total

Interest and other finance costs, net Interest expense on lease liabilities

-13 -32

-1

Interest expense on other financial liabilities measured at amortised cost

-43

Interest income on derivatives

16

22

Interest income on loans and receivables

2

2

Other financial expenses, net

-11 -38 -37

-40 -60 -56

Total

Net gains and losses on derivatives included in the operating profit

EURm

2019

2018

Cash flow hedges reclassified from hedging reserve

-6

16

Non-qualifying hedges

1

-11

-4

5

Total

Foreign exchange gains and losses in the operating profit excluding non-qualifying hedges

EURm Sales

2019

2018

-51

19

Other operating income

3

-10

-48

9

Total

186

187

UPM ANNUAL REPORT 2019

UPM ANNUAL REPORT 2019

CONTENTS

ACCOUNTS

FINANCIAL STATEMENTS

FINANCIAL STATEMENTS