they are due to be settled within the normal operating cycle of the business or within 12 months from the balance sheet date. Trade payables are recognised initially at fair value and subsequently at amortised cost using the effective interest method. The carrying amount of trade payables approximates to their fair value due to the short-term nature of the payables. The group is recognising refund liability for expected volume and other discounts arising from contracts with customers. Customer rebates include mainly volume discounts and are recognised as equal to an
amount which is most likely to be paid to the customer. The carrying amount of expected customer rebates is updated at each reporting date, using the latest forecast data available. Customer claims relating to quality complaints are accounted for as revenue related refund liability. Expected customer claims are estimated based on historical data and the amount of refund liability is updated at each reporting date. Advances received are recognised as contract liability until the performance obligation is fulfilled.
TRADE RECEIVABLES, NET OF PROVISION
TRADE RECEIVABLES, NET OF PROVISION
LOSS ALLOWANCE PROVISION
LOSS ALLOWANCE PROVISION
-4 -1 -3
-3 -1 -2
Past due up to 30 days Past due 31-90 days Past due over 90 days
59 14 26
79 13 33
5. Capital structure
Trade and other payables
UPM has a strong cash flow and industry-leading balance sheet that mitigates risks and enables value-enhancing strategic actions.
Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined by the method most appropriate to the particular nature of inventory, the first-in, first-out (FIFO) or weighted average cost. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses. If the net realisable value is lower than cost, a valuation allowance is established for inventory obsolescence. Trade receivables Trade receivables arising from selling goods and services in the normal course of business are recognised initially at transaction price and subsequently at amortised cost less loss allowance provision. No element of financing is deemed present as the sales are made with a credit term of 14–60 days, which is consistent with market practice. The group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. The group has recognised two types of provisions for trade receivables – a general provision for lifetime expected credit losses and a provision for specified individual trade receivables, both of which are charged to the income statement. The group uses a provision matrix for estimating lifetime expected credit losses where trade receivables are segregated by businesses. The provision matrix is based on historical observed default rates, adjusted by forward looking information. It takes into account trade credit insurances, payment profile of customers and the factor that as debts get older they are more likely not to be paid. Additionally, the group recognises a provision individually for outstanding trade receivables where specific debtor information is available. In these cases there must be objective evidence that the group will not be able to collect all amounts due according to the original terms of the receivables. Trade receivables are permanently written off when there is no reasonable expectation of recovery. The customer entering into bankruptcy or liquidation proceedings or finalising such proceedings, or entering into debt-restructuring are considered indicators that the trade receivables are no longer expected to be recovered. Subsequent recoveries of amounts previously written off are credited to the income statement. The carrying amount of trade receivables approximates to their fair value due to the short-term nature of the receivables. Trade and other payables Trade payables arise from purchase of inventories, fixed assets and goods and services in the ordinary course of business from UPM’s suppliers. Trade and other payables are classified as current liabilities if
Accrued expenses and deferred income Personnel expenses
Free cash flow
EUR 56 m
EUR 126 m
Customer rebates Customer claims
5.1 Capital management UPM’s objective for managing capital comprising of net debt and total equity is to ensure maintenance of flexible capital structure to enable the ability to operate in capital markets and maintain optimal returns to shareholders. The group manages its financing activities, debt portfolio and financial resources via various policies that are designed to ensure optimum financing arrangements minimising simultaneously financial expenses and refinancing risk and optimising liquidity. Borrowing activities are centralised to the parent to the extent possible and cash resources are distributed within the group by the central treasury department. UPM targets a net debt to EBITDA ratio of approximately 2 times or less.
Total accrued expenses and deferred income
Liquidity and refinancing risk Under all circumstances, UPM seeks to maintain adequate liquidity, which depends on a number of factors, such as the availability of cash flows from operations and access to additional debt and equity financing. UPM aims to ensure sufficient liquidity by means of efficient cash management and restricting financial investments to investment types that can readily be converted into cash and by keeping a sufficient amount of unused committed credit lines or cash as a reserve. UPM aims to minimise refinancing risks by ensuring a balanced loan portfolio maturing schedule and sufficiently long maturities. The average loan maturity at 31 December 2020 was 7.6 years (7.5 years).
Other current liabilities
Operational credit risk
Operational credit risk is defined as the risk where UPM is not able to collect the payments for its receivables. The group has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Outstanding trade receivables, days of sales outstanding (DSO) and overdue trade receivables are followed on monthly basis. Potential concentrations of credit risk with respect to trade and other receivables are limited due to the large number and the geographic dispersion of customers. Customer credit limits are established and monitored, and ongoing evaluations of their financial condition is performed. The group has trade credit insurances to protect accounts receivables from significant credit losses. In certain market areas, including Asia and Northern Africa, measures to reduce credit risks include letters of credit, prepayments and bank guarantees. Maximum exposure to credit risk, without taking into account any credit enhancements, is the carrying amount of trade and other receivables. UPM does not have significant concentration of customer credit risk. The ten largest customers accounted for approximately 15% (15%) of the trade receivables as at 31 December 2020 – i.e., approximately EUR 170 million (179 million). In 2020, trade receivables amounting to EUR 10 million (8 million) were subject to permanent write-off and the loss was recognised under other costs and expenses. In accordance with the group’s accounting policy, trade receivables are permanently written off when there is no reasonable expectation of recovery.
Liquidity and refinancing
Cash at bank
Equity attributable to owners of the parent company
Committed credit lines
of which used
Used uncommitted credit lines
Long-term loan repayment cash flow
Current debt Total debt
Cash and cash equivalents comprise cash in hand, deposits held at banks and with original maturities of three months or less. Bank overdrafts are included in used uncommitted credit lines and presented within current debt in the balance sheet. In 2020, no impairment and no expected credit losses were recognised in profit or loss for loan receivables or cash and cash equivalents.
Less: Interest-bearing financial assets
Gearing ratio, % 1) Net debt to EBITDA 1)
1) Refer » Other financial information on Alternative performance measures.