UPM Annual Report 2019

Auditor’s report (Translation of the Finnish Original)

MATERIALITY Overall group materiality

EUR 60 million (previous year EUR 60 million)

How we determined it

Approximately 5% of the average of the profit before tax for the last three years.

Rationale for the materiality benchmark applied

We chose profit before taxes as the benchmark because, in our view, it is the benchmark against which the performance of the Group is commonly measured by users, and is a generally accepted benchmark. We chose approximately 5%, which is within the range of acceptable quantitative materiality thresholds in auditing standards.

To the Annual General Meeting of UPM-Kymmene Corporation

Report on the Audit of the Financial Statements

Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. How we tailored our group audit scope We tailored the scope of our audit, taking into account the structure of the UPM-Kymmene Group, the accounting processes and controls, and the industry in which the group operates. We determined the type of work that needed to be performed at group companies by us, as the group engagement team, or by auditors from other PwC network firms operating under our Valuation of forest assets » Refer Note 4.2 in the consolidated financial statements for the related disclosures. The group owns and leases total of 991 thousand hectares of forests and plantations in Finland, the United States and Uruguay valued at EUR 2 097 million at 31 December 2019. Forest assets are measured at fair value less cost to sell. The fair value is calculated on the basis of discounted future expected cash flows as there is a lack of a liquid market. Young saplings and land are valued at cost. Main factors used in the valuation are estimates for growth and wood harvested, stumpage prices and discount rates. We focused on this area as the amounts are material, the valuation process is complex and judgmental and is based on assumptions that are affected by expected future market or economic conditions. Valuation of energy shareholdings » Refer Note 4.3 in the consolidated financial statements for the related disclosures. The energy shareholdings amounted to EUR 2 145 million at 31 December 2019. The energy shareholdings are unlisted equity investments in energy companies and are valued at fair value through other comprehensive income, net of tax if applicable. The fair value is determined on a discounted cash flow basis. The main factors impacting the future cash flows include future electricity prices, price trends, discount rates and the start-up schedule of the nuclear power plant unit Olkiluoto 3. We focused on this area as the amounts are material, the valuation process is complex and judgmental and is based on assumptions that are affected by expected future market or economic conditions. Recoverability of deferred tax assets » Refer Note 7.2 in the consolidated financial statements for the related disclosures. The Group has recognised deferred tax assets of EUR 182 million on net operating loss carry-forwards, of which most relates to German subsidiaries. In Germany the net operating loss carry-forwards do not expire. We focused on this area because the recognition of deferred tax assets relies on the significant application of judgement by the Management in respect of assessing the probability and sufficiency of future taxable profits. KEY AUDIT MATTER IN THE AUDIT OF THE GROUP

instruction. Audits were performed in group companies which were considered significant either because of their individual financial significance or due to their specific nature, covering the majority of revenue, assets and liabilities of the group. Selected specified procedures as well as analytical procedures were performed to cover the remaining group companies.

Opinion

Basis for opinion We conducted our audit in accordance with good auditing practice in Finland. Our responsibilities under good auditing practice are further described in the » Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the parent company and of the group companies in accordance with the ethical requirements that are applicable in Finland and are relevant to our audit, and we have fulfilled our other ethical responsibilities in accordance with these requirements. To the best of our knowledge and belief, the non-audit services that we have provided to the parent company and to the group companies are in accordance with the applicable law and regulations in Finland and we have not provided non-audit services that are prohibited under Article 5(1) of Regulation (EU) No 537/2014.

In our opinion, • the consolidated financial statements give a true and fair view of the group’s financial position and financial performance and cash flows in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU • the financial statements give a true and fair view of the parent company’s financial performance and financial position in accordance with the laws and regulations governing the preparation of the financial statements in Finland and comply with statutory requirements. What we have audited We have audited the financial statements of UPM-Kymmene Corporation (business identity code: 1041090-0) for the year ended 31 December 2019. The financial statements comprise: • the consolidated balance sheet, income statement, statement of comprehensive income, statement of changes in equity, statement of cash flows and notes, including a summary of significant accounting policies • the parent company’s balance sheet, income statement, statement of cash flows and notes. Our opinion is consistent with the additional report to the Audit Committee.

As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.

HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER

In testing the valuation of forest assets, in conjunction with our valuation specialists we:

• Assessed the methodologies adopted by management for the valuation; • Tested the mathematical accuracy of the model used for valuation;

• Assessed the discount rates applied in the valuation; • Assessed the other key valuation assumptions; and,

• Validated key inputs and data used in valuation model such as stumpage price, trend price forecast, tree growth assumptions, consumer price index and inflation.

Our audit approach OVERVIEW Materiality

In testing the valuation of the energy shareholdings, in conjunction with our valuation specialists we:

Overall group materiality: EUR 60 million, which represents approximately 5% of the average of the profit before tax for the last three years. The group audit scope encompassed all significant group companies, as well as a number of smaller group companies in Europe, Asia, North America and South America covering the vast majority of revenue, assets and liabilities.

• Assessed the methodology adopted by management for the valuation; • Tested the mathematical accuracy of the model used for valuation; • Assessed the future electricity prices and price trends; • Assessed the discount rate applied in the valuation; • Validated the Olkiluoto 3 nuclear power plant unit start-up schedule against the most recent available information; • Validated key inputs and data used in valuation model such as production costs and volumes, UPM’s ownership percentages, inflation, tax rate and net debt.

Group scoping

Key audit matters

Valuation of forest assets Valuation of energy shareholdings Recoverability of deferred tax assets

Materiality The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall group materiality for the consolidated financial statements as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial statements as a whole.

As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we considered where management made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain.

We assessed whether historical profitability in German subsidiaries support the recognition of the deferred tax asset. Despite recent history of profits for the German tax group we also assessed whether the Management’s forecasts of future profitability support the recoverability of deferred tax assets.

We have no key audit matters to report with respect to our audit of the parent company financial statements. There are no significant risks of material misstatement referred to in Article 10(2c) of Regulation (EU) No 537/2014 with respect to the consolidated financial statements or the parent company financial statements.

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UPM ANNUAL REPORT 2019

UPM ANNUAL REPORT 2019

CONTENTS

ACCOUNTS

AUDITOR'S REPORT

AUDITOR'S REPORT