UPM Annual Report 2019

7.2 Deferred tax

Accounting policies Deferred tax is calculated based on temporary differences between the carrying amounts and the taxable values of assets and liabilities and for tax loss carry-forwards to the extent that it is probable that these can be utilised against future taxable profits. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. 8. Group structure 8.1 Business acquisitions and disposals In 2019, UPM made a minor sale of its joint venture, EURO WASTE a.s. In 2018 no business disposals were made. In 2019, no business acquisitions were made. In 2018, UPM made a minor business acquisition by acquiring the assets of Converters Express in the United States. Transactions with non-controlling interests In September 2019, the new shareholders' agreements of Tile Forestal S.A., CUECAR S.A., Tebetur S.A. and Blanvira S.A. were signed reducing UPM's continuing interest in these companies to 91%. The proceeds of EUR 3 million were received from non-controlling interest in cash being the proportionate share of the carrying amount of the net assets of these subsidiaries. In addition, the terms and conditions of UPM S.A. shareholders’ agreement were amended resulting in recognition of 9% non- controlling interest amounting to EUR 63 million and derecognition of financial liability amounting to EUR 56 million. The difference amounting to EUR 7 million was recognised in equity as transactions with non-controlling interest. Prior to the amendment of the agreement the group accounted the portion belonging to non-controlling interests at the present value of the redemption amount within financial liability due to put option over non-controlling interests. The assets, liabilities, income and expenses of subsidiaries with non-controlling interests are consolidated line by line into the UPM consolidated financial statements. The proportion of the profit for the period, as well as the accumulated share of total equity belonging to non-controlling interests are presented separately in the consolidated income statement and consolidated balance sheet.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference is controlled by the group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets and liabilities are recognised net where there is a legal right to set-off and an intention to settle on a net basis.

EURm

2019

2018

2017

Deferred tax assets Intangible assets and property, plant and equipment

77

76

90

Inventories

45

62

41

Retirement benefit liabilities and provisions Other temporary differences Tax losses and tax credits carried forward

148

121

135

Movements in deferred tax assets and liabilities

103

24

19

EURm

2019 -138

2018

180

198

222

-36 -99

Carrying value, at 1 January Charged to income statement

Offset against liabilities

-157 395

-83 397

-84 423

-53

Total

Charged to other comprehensive income

38

-2 -1

Exchange rate adjustments

—

Deferred tax liabilities Intangible assets and property, plant and equipment

Net deferred tax assets (liabilities)

-153

-138

-249 -181 -186

Forest assets

-364 -329 -244

Retirement benefit assets Other temporary differences

-7

-7

-16 -95

-86 -101

Offset against assets

157

83

84

Accounting policies UPM consolidates acquired entities at the acquisition date which is when it gains control using the acquisition method. Consideration transferred is determined as the fair value of the assets transferred, the liabilities incurred and equity instruments issued including the fair value of a contingent consideration. Acquisition related transaction costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed are measured initially at their fair values at the acquisition date. The group measures any non-controlling interest in the acquiree either at fair value or at the non- controlling interest’s proportionate share of the acquiree’s net assets. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets of the subsidiary acquired is recorded as goodwill.

-549 -535 -458

Total

-153 -138

-36

Net deferred tax assets (liabilities)

Tax charge to other comprehensive income

Before tax

Tax

After tax

Before tax

Tax

After tax

EURm

2019

2018

Actuarial gains and losses on defined benefit plans

-81 -13

24

-58 -13

-1

— -3 — -3

—

Energy shareholdings Translation differences

— —

186

183

67

67

62 16

62 13

Cash flow hedges

-63

12

-50

Net investment hedges

-8

2

-6

-17

3

-14

-97

38

-58

246

-2

243

Total

Key estimates and judgements

Recognised deferred tax assets The recognition of deferred tax assets requires management judgement as to whether it is probable that such balances will be utilised and/or reversed in the foreseeable future. At 31 December 2019, net operating loss carry-forwards for which the group has recognised a deferred tax asset amounted to EUR 616 million (672 million), of which EUR 502 million (567 million) was attributable to German subsidiaries. In Germany net operating loss carry-forwards do not expire. In other countries net operating loss carry-forwards expire at various dates and in varying amounts. Based on profit forecasts, it is probable that there will be sufficient future taxable profits available against which the tax losses can be utilised. The assumptions regarding future realisation of tax benefits, and therefore the recognition of deferred tax assets, may change due to future operating performance of the group, as well as other factors, some of which are outside of the control of the group.

Unrecognised deferred tax assets and liabilities The net operating loss carry-forwards for which no deferred tax is recognised due to uncertainty of their utilisation amounted to EUR 819 million (804 million) in 2019. These net operating loss carry-forwards are mainly attributable to certain German and French subsidiaries and do not expire. In addition, the group has not recognised deferred tax assets on loss carry-forwards amounting to EUR 439 (410 million) which relate to closed Miramichi paper mill in Canada. These loss carry-forwards expire at different times by the end of 2029. The group has not recognised deferred tax liability in respect of undistributed earnings of non-Finnish subsidiaries to the extent that it is probable that the temporary differences will not reverse in the foreseeable future. In addition, the group has not recognised deferred tax liability for the undistributed earnings of Finnish subsidiaries and associates as such earnings can be distributed without any tax consequences.

196

197

UPM ANNUAL REPORT 2019

UPM ANNUAL REPORT 2019

CONTENTS

ACCOUNTS

FINANCIAL STATEMENTS

FINANCIAL STATEMENTS