UPM Annual Report 2020

Effect of a 10% change in prices on operating profit for the year

Other operating income

consideration is recognised as a refund liability when some of the amount received is expected to be refunded to the customer. Customer rebates payable to customers in relation to sales made until the end of the reporting period and expected quality claims are estimated using the expected value method, and revenue is only recognised to the extent that it is highly probable that a significant reversal will not occur. A refund liability is included in trade and other payables. Receivables are recognised when the goods are delivered, and the consideration is unconditional except for the passage of time. For most of UPM’s customer contracts the period between the transfer of goods or services to customers and the receipt of payment is less than 12 months. For these contracts the group has elected to use the practical expedient not to adjust revenue for the effect of financing components. Advance payments received from customers are recognised as contract liability. UPM does not have any contract assets arising from contracts with customers. » Refer Note 4.6 Working capital for information on contract liabilities and refund liabilities.

Cost structure 2020 EUR 7,371 million

EURm

2020

2019

EURm

2020 2019

318

441

Papers in UPM Communication Papers Fine and specialty papers in UPM Specialty Papers

Gains on sale of non-current assets

25 13 57 24 -30 26

4

Delivery of own products 11%

Rental income

13 62

Other fixed costs 12%

114 156

119 155

Emission rights received

Label materials in UPM Raflatac

Derivatives, non-qualifying hedges Exchange rate gains and losses

1 3

37 31 56

41 36 63

Plywood

Employee costs 16%

Sawn timber

Wood and fibre 24%

Other Total

13

Chemical pulp (net effect)

116 97 In 2020, gains on sale of non-current assets include an EUR 12 million gain from the disposal of UPM's 50 % share in the joint operation Kainuun Voima Oy. Emission rights The group has recognised EUR 57 million (62 million) of income in Other operating income and EUR 10 million of expense (8 million) under Other operating costs and expenses relating to CO 2 emissions. The liability to cover the obligation to return emission rights amounted to EUR 21 million (18 million) and is recognised in provisions. The emission rights recognised in intangible assets are specified below:

The biggest factor affecting UPM’s financial results is the sales price of paper. A change in the volume delivered has less than half of the effect of the same percentage change in sale prices.

Energy 7% Fillers, coating and chemicals 10%

Other variable costs 20%

Accounting policies

Cost structure 2019 EUR 8,531 million

Sales of goods UPM’s performance obligation in the contracts with customers consists of providing the goods specified in the contracts. Revenue from UPM’s product sales is recognised when performance obligation is satisfied, which takes place at point in time when control of the good has been transferred to the customer. In UPM’s customer contracts the transfer of control and thus timing of revenue recognition is largely dependent on delivery terms. Group terms of delivery are based on Incoterms 2020, the official rules for interpretation of trade terms issued by the International Chamber of Commerce. Major part of the sales contracts is on delivery terms basis, whereby delivery is not a promised service to the customer, as the control of a good does not transfer to the customer before shipment. Revenue and the corresponding receivable are recorded at the point in time when the product is delivered to the destination point for terms designated Delivered Duty Paid (“DDP”) or Delivered at Place (“DAP”). For sales transactions designated free of carriage (FCA), revenue is recorded at the time of shipment. For sales transactions designated as Carriage paid to (CPT) or Carriage and Insurance Paid to (CIP), the portion of revenue relating to goods is recorded at the time of loading and the portion of revenue relating to delivery services over time when the service has been performed. UPM sells energy to NordPool electricity market. Revenue is recognised when electricity is transmissed over time. Sales of services UPM provides forest expertise and contracting services to woodland and forestry owners and freight services (free space on group’s vessels sold as freight services). Revenues from services are recorded over time when the service has been performed. Sales of services is very limited and thus the group does not report it separately. Revenue recognition The group recognises revenue as an amount equal to the price specified in the customer contract net of any sales taxes, cash flow hedging results of sales in foreign currency, hedges of energy sales and variable consideration, when applicable. Variable consideration is defined as any variability that may occur between the sales price and the amount UPM expects to receive. The variable consideration includes mainly cash discounts and volume rebates that encourage the customer to take specific volumes in a given timescale. In addition, the group gives the customers the right for purchase price refund in case the products do not meet the quality as specified in the agreement. The amount of variable

2.3 Operating expenses and other operating income Operating expenses

Delivery of own products 10%

Other fixed costs 12%

EURm

2020 2019

Employee costs 14%

Carrying value, at 1 January

Operating expenses excluding forest assets fair value change, wood harvested and share of results of associates and joint ventures are presented below.

80 57 -42

45 67 -33

Emission rights received and purchased

Wood and fibre 30%

Deliveries and disposals

Impairment

—

—

Other variable costs 17%

EURm

2020 2019

Carrying value, at 31 December

95 96

80 81

Costs and expenses Raw materials, consumables and goods

Energy 6%

Accumulated costs

Fillers, coating and chemicals 11%

4,551 1,188

5,515 1,214

Accumulated impairments

-1

-1

Employee costs 1)

Carrying value, at 31 December

95

80

Other operating costs and expenses 2) Delivery costs and other external charges

852 781

918 884

Auditor’s fees

Total

7,371

8,531

Accounting policies

EURm

2020 2019

1) » Refer Note 3 Employee rewards, for further information. 2) Distribution of other operating costs and expense

Audit fee

3.8 0.1 0.4 0.2 4.5

3.1 0.2 0.5 0.2

Research and development costs Research and development costs are expensed as incurred, except for certain development costs, which are capitalised as they generate future economic benefits, and UPM can the measure the cost reliably. Capitalised development costs are amortised on a systematic basis over their expected useful lives, usually not exceeding five years. Government grants Government grants are recognised at fair value where there is a reasonable assurance that the grant will be received and the group will comply with the attached conditions. Government grants relating to the purchase of property, plant and equipment are deducted from the acquisition cost of the asset and accordingly directly reduce the annual depreciation of the underlying asset. Other government grants are recognised in the income statement in the period necessary to match them with the costs they are intended to compensate.

Audit related services

Tax services Other services

EURm

2020 2019

Total

4.0 In 2020, auditor's fees include EUR 0.1 (0.1) million related to audit services, EUR 0.0 (0.2) million related tax services and EUR 0.2 (0.2) million related to other services paid to PwC Oy. Research and development costs The research and development costs included in operating expenses were EUR 41 million (53 million) in 2020. The focus was on new technologies and developing businesses. Government grants In 2020, government grants recognised as deduction of operating expenses totalled to EUR 7 million (4 million) of which EUR 4 million (2 million) relates to Finland. In addition, the group received emission rights from governments amounting to EUR 57 million (62 million) of which EUR 21 million (33 million) relates to Finland, EUR 25 million (19 million) to Germany, EUR 3 million (3 million) to Austria and EUR 5 million (0 million) to UK.

Rents and lease expenses

15 10

16

Emission expenses 1)

8 3

Losses on sale of non-current assets

0 9

Credit losses

12

Maintenance and other operating expenses 2)

818 852

879

Total

918 1) Emission expenses include gains on sales of emission rights EUR 13 (14) million. 2) Other operating expenses include, among others, energy as well as expenses related to services and group’s administration.

160

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UPM ANNUAL REPORT 2020

UPM FINANCIAL REPORT 2020 44