UPM Annual Report 2019

6. Risk management 6.1 Financial risk management The objective of financial risk management is to protect the group from unfavourable changes in financial markets and thus help to secure profitability. The objectives and limits for financing activities are defined in the Group Treasury Policy approved by the Board of Directors. In financial risk management various financial instruments are used within the limits specified in the Group Treasury Policy. Only such instruments which market value and risk profile can be continuously and reliably monitored are used for this purpose. Financing services are provided to the group entities and financial risk management carried out by the central treasury department, Treasury and Risk Management. The group is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to USD, GBP and JPY. Foreign exchange risk arises from contracted and expected commercial future payment flows (transaction exposure), from changes in value of recognised assets and liabilities denominated in foreign currency and from changes in the value of assets and liabilities in foreign subsidiaries (translation exposure). The objective of foreign exchange risk management is to limit the uncertainty created by changes in foreign exchange rates on the future value of cash flows earnings and in the group’s balance sheet. Changing exchange rates can also have indirect effects, such as change in relative competitiveness between currency regions. Transaction exposure The group hedges transaction exposure related to highly probable future commercial foreign currency cash flows on a rolling basis over the next 12-month period based on forecasts by the respective business areas. Transaction risk arises from the changes in currency rates of highly probable transactions, which are expected to take place in currencies other than the functional currency of the entity. The group’s policy is to hedge an average of 50% of its estimated net risk currency cash flow. Some highly probable cash flows have been hedged for longer than 12 months ahead while deviating from the risk neutral hedging level at the same time. At 31 December 2019, 51% (52%) of the forecast 12-month currency flow was hedged. The group enters into external forward contracts, which are designated at group level as hedges of foreign exchange risk of specific future foreign currency flows. Cash flow hedge accounting is applied when possible. If hedge accounting is not possible, fair value changes of the hedging instrument are recognised through profit and loss immediately. At the end of 2019, UPM’s estimated net risk currency flow for the next 12 months was EUR 1,673 million (1,999 million). Foreign exchange risk

5.5 Share capital and reserves The company has one series of shares and each share carries one vote. There are no specific terms related to the shares. At 31 December 2019, the number of the company’s shares was 533,735,699. The shares do not have any nominal counter value. The shares are included within the book entry system for securities.

hedged transactions that have not yet occurred and the cost of hedging when recognised in OCI. Amounts are recognised in profit or loss when the associated hedged transactions affect profit or loss or as part of the acquisition cost of property, plant and equipment. There were no reclassifications from the cash flow hedge reserve to profit or loss during the period resulting from inefficiency. Share-based payments reserve The share-based payments reserve is used to recognise the fair value of the share incentive plans, Performance Share Plan and Deferred Bonus Plan, over their vesting period. Reserve for invested non-restricted equity Reserve for invested non-restricted equity includes, under the Companies’ Act, the exercise value of shareholders’ investments in the company unless otherwise decided by the company. Translation reserve This reserve includes the foreign currency differences arising from the translation of foreign operations, and the effective result of transactions that hedge the group’s net investments in foreign operations. There were no reclassifications from the translation reserve to profit or loss during the period resulting from inefficiency of net investment hedges. Transaction costs directly relating to the issue of new shares or share options are recognised, net of tax, in equity as a reduction in the proceeds. Where any group company purchases the parent company’s shares (treasury shares), the consideration paid, including any directly attributable incremental costs (net of tax), is deducted from equity attributable to the owners of the parent company until the shares are cancelled or reissued. Where such shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the owners of the parent company. Accounting policies

Share capital

2019

2018

Number of shares (1,000)

533,736 533,736

Share capital, EURm

890

890

Treasury shares At 31 December 2019, the company held 411,653 (411,653) of its own shares, 0.08% (0.08%) of the total number of shares.

The average weighted hedging rate by currency against EUR were USD 1.15, GBP 0.89 and JPY 122.5.

Reserves

Translation exposure The group has several currency denominated assets and liabilities on its balance sheet such as foreign currency bonds, loans and deposits, group internal loans and cash in other currencies than functional currencies. The aim is to fully hedge this balance sheet exposure. The group might, however, within the limits set in the group Treasury Policy have unhedged balance sheet exposures. At 31 December 2019 the unhedged balance sheet exposures in net of interest-bearing assets and liabilities amounted to EUR 14 million (21 million). Hedge accounting is not applied and all fair value changes of hedging instruments are recognised through profit and loss immediately. The group has also accounts receivable and payable balances denominated in foreign currencies. The aim is to fully hedge the net exposure in main currencies. The nominal values of the hedging instruments in net of accounts payable and receivable hedging were EUR 433 million (530 million). Hedge accounting is not applied and all fair value changes of hedging instruments are recognised through profit and loss immediately. The group has net investments in foreign subsidiaries that are subject to foreign currency translation differences. The exchange rate differences arising from translation of foreign subsidiaries are accumulated as a separate component of equity in the translation reserve relate mainly to USD, CNY and GBP. Currency exposure arising from the net investment in foreign subsidiaries is generally not hedged. However, at 31 December 2019, part of the foreign exchange risk associated with the net investments in Uruguay, China and Singapore were hedged and net investment hedge accounting has been applied. The average weighted hedging rate of these hedges against EUR were Uruguay USD 1.13, China CNY 8.04 and Singapore USD 1.13 Derivatives used for hedging translation risks are external forward contracts, cross currency swaps and currency options.

EURm

2019

2018

Fair value reserve Hedging reserve

1,632

1,646

55 24

104

Share-based payments reserve

28

1,711 1,273

1,778 1,273

Total other reserves

Reserve for invested non-restricted equity

Translation reserve

278

232

3,263

3,282

Total reserves

Fair value reserve This reserve represents the cumulative net change in the fair value of investments in equity securities comprising mainly of the fair value change of the energy shareholdings. Amounts are recycled only within equity upon the disposal of the asset. Hedging reserve This reserve comprises the cumulative net change in the fair value of the effective portion of cash flow hedging instruments related to

Hedging reserve

ELECTRICITY PURCHASE AND SALES HEDGES

CURRENCY CASH FLOW HEDGES

COST OF HEDGING

EURm

TAX

TOTAL

2019 Hedging reserve, at 1 January

-19 38 -24

154 -46 -30

-5 13

-26

104

Amounts reclassified to profit and loss

-1 14

5

Change in fair value of hedging instruments recognised in OCI

-14

-54

-4

78

-6

-14

55

Hedging reserve, at 31 December

12 months net risk currency flow

ELECTRICITY PURCHASE AND SALES HEDGES

CURRENCY CASH FLOW HEDGES

COST OF HEDGING

EURm

2019

2018

EURm

TAX

TOTAL

USD

1,089

1,045

2018 Hedging reserve, at 1 January

JPY

221 195 168

170 342 442

38

76

—

-23

91

GBP

Amounts reclassified to profit and loss

-23 -34 -19

3

4

3

-13

Others

Change in fair value of hedging instruments recognised in OCI

75

-9 -5

-6

25

1,673

1,999

Total

154

-26

104

Hedging reserve, at 31 December

188

189

UPM ANNUAL REPORT 2019

UPM ANNUAL REPORT 2019

CONTENTS

ACCOUNTS

FINANCIAL STATEMENTS

FINANCIAL STATEMENTS