UPM Annual Report 2019

Timing of nominal amounts of derivatives 2019

Effect of IBOR reform and significant assumptions

The Group’s risk exposure that is directly affected by the IBOR reform is fair value hedge accounting of long-term fixed-rate debt for changes in fair value attributable to USD LIBOR which is the current benchmark interest rate. Group currently has only few contracts which reference USD LIBOR and extend beyond 2021. Group Treasury

oversees the Group’s IBOR transition and follows changes to ISDA and other market guidelines on effects of these changes to UPM’s contracts. In fair value hedging relationships, fair value for both the hedged item and hedging instrument is calculated with identical rate. Therefore no ineffectiveness is expected.

Between 1–5 years

Later than 5 years

Within 1 year

Total

EURm

2019

Foreign exchange risk Forward foreign exchange contracts Cash flow hedges

1,459

— —

— — —

1,459

Net investment hedge Non-qualifying hedges Currency options Non-qualifying hedges Cross currency swaps Non-qualifying hedges

298 724

298 734

10

24

—

—

24

7. Income tax 7.1 Tax on profit for the year

—

—

172

172

Interest rate risk Interest rate swaps Fair value hedges

— —

— —

334

334

Non-qualifying hedges Cross currency swaps Fair value hedges Interest rate futures Non-qualifying hedges

—

—

Accounting policies The group’s income tax expense comprises current tax and deferred tax. Current tax is calculated on the taxable result for the period based on the tax rules prevailing in the countries where the group operates and includes tax adjustments for previous periods and withholding taxes deducted at source on intra-group transactions. Tax expense is recognised in the income statement, unless it relates to items that have been recognised in equity or as part of other comprehensive income. In these instances, the related tax expense is also recognised in equity or other comprehensive income, respectively. Key estimates and judgements The group is subject to income taxes in numerous jurisdictions and the calculation of the group’s tax expense and income tax liabilities involves a degree of estimation and judgement. Tax balances reflect a current understanding and interpretation of existing tax laws. Management periodically evaluates positions taken in tax returns with respect of situations in which applicable tax regulation is subject to interpretation and adjusts income tax liabilities where appropriate.

—

—

172

172

Income tax In 2019, tax on profit for the year amounted to EUR 234 million (342 million). The effective tax rate was 17.9% (18.6%). In 2019 and 2018, the effective tax rate was affected by the income not subject to tax from subsidiaries operating in tax free zone. In addition, effective tax rate was affected by German tax rate that is higher than in Finland. In 2019, accrued and paid withholding taxes relating to dividend payments of subsidiaries amounted to EUR 2 million (EUR 1 million). Change in recoverability of deferred tax assets includes EUR 15 million tax income related to reassessment of deferred tax assets in Germany.

1,729

—

—

1,729

Commodity risk Electricity sales

Cash flow hedges

217

174

— —

390

Non-qualifying hedges

—

35

35

Electricity purchase Cash flow hedges

210

227

—

437

Other commodities Non-qualifying hedges

48

—

—

48

Timing of nominal amounts of derivatives 2018

Income tax

Between 1–5 years

Later than 5 years

EURm

2019

2018 243

Within 1 year

Total

Current tax expense

181

EURm

2018

Change in deferred taxes

53

99

Foreign exchange risk Forward foreign exchange contracts Cash flow hedges

234

342

Total

1,249

— —

— — —

1,249

Tax rate reconciliation

Net investment hedge Non-qualifying hedges Currency options Non-qualifying hedges Cross currency swaps Non-qualifying hedges

443 810

443 832

22

EURm

2019

2018

52

—

—

52

1,307

1,839

Profit before tax

Computed tax at Finnish statutory rate of 20% Difference between Finnish and foreign rates

261

368

—

—

167

167

16

30

Interest rate risk Interest rate swaps Fair value hedges

Tax-exempt income

-34

-63

Non-deductible expenses

9 2 3

8 1 6

—

— —

328

328 425

Withholding taxes

Non-qualifying hedges Cross currency swaps Fair value hedges Interest rate futures Non-qualifying hedges

425

—

Tax loss with no tax benefit

Results of associates

—

-1

—

—

167

167

Change in tax legislation

1

4

Change in recoverability of deferred tax assets Utilisation of previously unrecognised tax losses

-12 -10

-3 -8 —

1,129

—

—

1,129

Commodity risk Electricity sales

Other items

-1

234

342

Total income taxes Effective tax rate, %

Cash flow hedges Electricity purchase Cash flow hedges

286

157

—

443

17.9% 18.6%

294

368

—

662

Other commodities Non-qualifying hedges

84

—

—

84

The nominals of cross currency swaps are included in both foreign exchange risk and interest rate risk.

194

195

UPM ANNUAL REPORT 2019

UPM ANNUAL REPORT 2019

CONTENTS

ACCOUNTS

FINANCIAL STATEMENTS

FINANCIAL STATEMENTS