UPM Annual Report 2021

ACCOUNTS FOR 2021

UPM

BEYOND FOSSILS

STRATEGY

BUSINESSES

RESPONSIBILITY

GOVERNANCE

Impairment testing Impairment tests for goodwill and water rights with indefinite life were carried out in the fourth quarter 2021. Water rights of hydropower plants belonging to UPM Energy and reported in intangible rights amounted EUR 189 million at the end of 2021 and 2020. The values of water rights were tested based on expected future cash flows of each separate hydro power plant.

Impairment testing Goodwill and other intangible assets that are deemed to have an indefinite life are tested at least annually for impairment. For goodwill impairment testing purposes the group identifies its cash-generating units (CGUs), which is the smallest identifiable group of assets that generate cash inflows largely independent of the cash inflows of other assets or other groups of assets. Each CGU is no larger than a business area. The carrying amount for the CGU includes goodwill, non-current assets and working capital. If the balance sheet carrying amount of the CGU unit

exceeds its recoverable amount, an impairment loss is recognised. Impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to other assets of the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. Other intangible assets with indefinite useful lives are impaired if the recoverable amount of the asset is less than the carrying amount. The carrying amount of the asset is then reduced to the recoverable amount which is the higher of the asset’s net selling price and its value in use.

Goodwill impairment tests were carried out for pulp operations in Finland and Uruguay, belonging to UPM Biorefining business area, UPM Raflatac business area and UPM Plywood business area. The 2021 impairment tests did not result in a recognition of any impairment.

The basis for valuation and key assumptions used in goodwill impairment testing are summarised in below table:

4.5 Provisions

BASIS OF VALUATION Value in use Value in use Value in use Value in use

CASH GENERATING UNIT

PERIOD OF FORECAST PRE-TAX DISCOUNT RATE

KEY ASSUMPTIONS Pulp price, wood costs Pulp price, wood costs

Pulp operations Finland Pulp operations Uruguay

10 years + terminal value 10 years + terminal value 10 years + terminal value 10 years + terminal value

9.41 % (2020: 7.84 %) 7.50 % (2020: 7.84 %) 8.22 % (2020: 7.60 %) 13.01 % (2020: 13.04 %)

ENVIRON MENTAL

EURm

RESTRUCTURING TERMINATION

EMISSIONS

OTHER

TOTAL

UPM Raflatac UPM Plywood

Product prices, cost development Product prices, cost development

2021 Provisions at 1 January

52

91

29

21 41 -21

28 11 -10

222

Provisions made during the year Provisions utilised during the year Unused provisions reversed Provisions at 31 December

5

6

2

64

Sensitivity analyses The sensitivity analyses of goodwill impairment tests indicate that no reasonable change in key assumptions would result in recognition of impairment loss against goodwill. In pulp operations the recoverable amount is most sensitive to pulp sales prices and the cost of wood raw material.

Discount rate The discount rate is estimated using the weighted average cost of capital (WACC) on the calculation date adjusted for risks specific to the business in question. The adjusted after-tax discount rate is translated to a pre-tax rate for each cash generating unit (CGU) based on the specific tax rate applicable to where the CGU operates.

-22 -11 24

-53

-1 -1

-107

-8

-2

-2

-25

36

30

39

26

155

Non-current

68 88

Current

Total

155

2020 Provisions at 1 January

Key estimates and judgements

Accounting policies

30 43 -11

36 96 -33

20

18 23 -19

41

144 173

Provisions made during the year Provisions utilised during the year

7

3

The group’s assessment of the carrying value of goodwill and indefinite life assets requires significant judgement. While management believes that estimates of future cash flows are reasonable, different assumptions are subject to change as a result of changing economic and operational conditions. Actual cash flows could therefore vary from estimated discounted future cash flows and could result in changes in the recognition of impairment charges in future periods. Future cash flows The review of recoverable amount for goodwill and indefinite life assets is based on a calculation of value in use, using management projections of future cash flows. The most important assessments and assumptions needed in calculations are forecasts for future growth rates for the business in question, product prices, cost development and the discount rates applied. The group is using ten-year forecasts in calculations as the nature of the group’s business is long-term, due to its capital intensity, and is exposed to cyclical changes. In estimates of product prices and cost development, forecasts prepared by management for the next three years and estimates made for the following seven years are taken into consideration. In addition, consideration is given to the investment decisions made by the group as well as the profitability programmes that the group has implemented and the views of knowledgeable industry experts on the long-term development of demand and prices. In the projection of cash flows UPM uses EBITDA adjusted with cash flows not captured within EBITDA, including working capital movements and capital expenditures.

-1

-9 -7

-73 -21

Goodwill Goodwill arises in connection with business combinations where the consideration transferred exceeds the fair value of the acquired net assets. Goodwill is recognised at cost less accumulated impairment and is an intangible asset with an indefinite useful life. Goodwill is allocated to the cash generating units that are expected to benefit from the synergies from the business combination. Intangible rights Intangible rights include water rights of hydropower plants, patents, licences, intellectual property and similar rights. Water rights are deemed to have an indefinite useful life as the company has a contractual right to exploit water resources in the energy production of power plants. The values of water rights are tested annually for impairment based on expected future cash flows of each separate hydropower plant. Other intangible rights are recognised at cost less accumulated amortisation and impairment. Amortisation is calculated using the straight-line method over their estimated useful lives ranging from 5 to 10 years. Software and other intangible assets Research expenditure is recognised as an expense as incurred. Costs incurred in acquiring software that will contribute to future period financial benefit are capitalised to software and systems. Other intangible assets are recognised at cost less accumulated amortisation and impairment. Amortisation is calculated using the straight-line method over their estimated useful lives ranging from 3 to 5 years.

Unused provisions reversed

-6 -4

-7

—

-1

Reclassifications

—

4

—

—

—

Provisions at 31 December

52

91

29

21

28

222 100 122 222

Non-current

Current

Total

UPM has undergone several restructuring in recent years including mill closures and profit improvement programs. Restructuring provisions recognised include various restructuring activities including dismantling costs. Termination provisions include severance payments, unemployment compensations or other arrangements for employees leaving the company. In Finland termination provisions include also unemployment arrangements and disability pensions. Unemployment provisions in Finland are recognised 2–3 years before the granting and settlement of the compensation. At 31 December 2021 and 2020, restructuring and termination provisions relate mainly to capacity closures and optimisation of operations in UPM Communication Papers business area. In 2021, there were no significant additions to restructuring and termination provisions. In 2020, additions to restructuring and termination provisions of EUR 106 million related to closure of UPM Chapelle paper mill and UPM Kaipola paper mill. In addition, termination provision made in 2020 related to restructuring of business functions of UPM Communication Papers and UPM Raflatac amounting to EUR 14 million. In UPM Plywood business Jyväskylä plywood mill was closed in 2020 and EUR 12 million restructuring and termination provision recognised. The group recognises provisions for normal environmental remediation costs expected to be incurred in a future period upon a

removal of non-current assets and restoring industrial landfills where a legal or constructive obligation exists. Other provisions are mainly attributable to onerous contracts and will be incurred over a period longer than one year. Provisions for emissions include liability to cover the obligation to return emission rights. The group possesses emission rights amounting to EUR 104 million (95 million) as intangible assets. » Refer Note 2.3 Operating expenses and other operating income, for further information on emission rights.

180

UPM FINANCIAL REPORT 2021 181 UPM ANNUAL REPORT 2021 181

UPM ANNUAL REPORT 2021

UPM FINANCIAL REPORT 2021 180