UPM Annual Report 2022

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ACCOUNTS FOR 2022

UPM

BEYOND FOSSILS

BUSINESSES

RESPONSIBILITY

GOVERNANCE

4.2 Forest assets UPM is both a major forest owner and a purchaser of wood. The value of forest assets, i.e. standing trees, amounted to EUR 2,442 million (2,328 million) at the end of 2022.

Major capital commitments at 31 December

Impairment testing Carrying values of individual items included in property, plant and equipment are reviewed at each closing date to determine whether there is any indication of impairment. The carrying value is written down immediately to the asset’s recoverable amount if the carrying value exceeds the estimated recoverable amount. Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. The recoverable amount is determined as the higher of an asset’s fair value less costs to sell and its value in use. Value in use is determined by discounting future cash flows expected to be generated by the asset. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets, other than goodwill, that have suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Where an impairment loss is subsequently reversed, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but the increased carrying amount will not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. Key estimates and judgements The estimations of useful lives, residual value as well as depreciation and amortisation methods require significant management judgement and are reviewed annually. Management makes estimates on the future cash flows expected to result from the use of the asset and its eventual disposal. While management believes that estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect valuations. The long useful lives of assets, changes in estimated future sales prices of products, changes in product costs and changes in the discount rates used could lead to significant impairment charges. Estimates are also made in an acquisition when determining the fair values and remaining useful lives of acquired intangible and tangible assets.

Any changes in the fair value of the growing forests are recognised in the operating profit in the income statement. The fair value is calculated on the basis of discounted future expected cash flows considering existing, sustainable harvesting plans and assessments regarding growth, timber prices, harvesting and silviculture costs and selling expenses. The fair value of forest assets is a level 3 measure in terms of the fair value measurement hierarchy.

EURm

2022 2021

New biorefinery / Germany New pulp mill / Uruguay

257 493

315

1,406

Renovation and modernisation / Kuusankoski hydro power plant

EURm

2022 2,328

2021 2,077

Carrying value, at 1 January

Mill development / Plywood Joensuu

Key estimates and judgements

Additions Disposals

79 -16

104

-6

Impairment losses In 2022, impairment charges relate to property, plant and equipment impacted by Russia´s war in Ukraine. Due to the significant uncertainties related to operations in Russia and Ukraine, UPM recognised a write off of all property, plant and equipment as well as operating assets and uninsured receivables locating or relating to operations in these countries. In December 2021, UPM conducted an impairment test of UPM Communication Papers fixed assets. The costs of pulp, recycled fibre, logistics and energy increased significantly in 2021 and high production costs continue to challenge the operations in the foreseeable future. Fair value less cost to sell method was used in the calculation with an inflation rate of 2.0%, negative sales growth rate of 5.4% in real terms, and a post-tax discount rate of 6.7%. As a result of the test calculation, UPM recognised impairment charges of EUR 50 million related to newsprint property, plant and equipment. Property, plant and equipment Property, plant and equipment is stated at historical cost. Costs of assets of acquired in business combinations are determined at fair value at the acquisition date. Depreciation is calculated on a straightline basis and the carrying value is adjusted for impairment charges, if any. The carrying value of property, plant and equipment on the balance sheet represents the cost less accumulated depreciation and any impairment charges. Borrowing costs incurred for the construction of any qualifying assets are capitalised during the period of time required to complete and prepare the asset for its intended use. Other borrowing costs are expensed. Major renovations are capitalised and depreciated over the useful lives of the related asset. Ordinary expenses for repairs and maintenance are expensed as incurred. Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying amount and are included in other operating income and other operating expenses, respectively. Accounting policies

Wood harvested

-143 153

-98

Fair valuation The valuation process of forest assets is complex and requires management estimates and judgement on assumptions that have a significant impact on the valuation of the group’s forest assets. Main factors used in the fair valuation of forest assets are estimates for growth and wood harvested, stumpage prices and discount rates. Stumpage price forecasts are based on the current prices adjusted by the management’s estimates for the full remaining productive lives of the trees, up to 100 years for forests in Finland and in the US and up to 10 years for plantations in Uruguay. The cash flows are adjusted by selling costs and costs related to future risks. Felling revenues and maintenance costs are estimated on the basis of actual costs and prices, taking into account the group’s projection of future price and costs development. In addition, calculations take into account future forest growth and environmental restrictions. The pre-tax discount rate used to determine the fair value of the Finnish forests in 2022 was 8.0% (7.0%) and for Uruguayan plantations 11.0% (9.9%). A decrease (increase) of one percentage point in discount rate would increase (decrease) the fair value of forest assets by approximately EUR 257 million (270 million). 4.3 Energy shareholdings UPM is both a significant purchaser and producer of energy. The majority of electrical and thermal energy is consumed at the group’s pulp and paper production. The production is mainly carried out by energy companies in which UPM has energy shareholdings. Energy shareholdings are unlisted equity investments. UPM does not have control or joint control of or significant influence in the said energy companies. The value of energy shareholdings amounted to EUR 3,652 million (2,579 million) at the end of 2022. These energy companies supply energy or both energy and heat to their shareholders on a cost-price principle (Mankala-principle) which is widely applied in the Finnish energy industry. Under the Mankala-principle energy and/or heat is supplied to the shareholders in proportion to their ownership and each shareholder is, pursuant to the specific stipulations of the respective articles of association, severally responsible for its respective share of the production costs of the energy company concerned. In 2020, UPM issued a shareholder loan of EUR 47 million without a maturity date to PVO. Embedded into the loan terms is a right to issue new shares in the PVO B2 series against the remaining, unpaid nominal of the loan starting from 2021. The loan is valued at fair value and is taken into account as a part of the total fair valuation of the PVO B2 series valuation. In addition, in 2020 UPM issued a similar loan commitment of EUR 123 million to PVO, where also a right to issue new PVO B2 shares is embedded starting from 2023. The commitment matures at the end of 2023.

Net change in fair value Translation differences

206

Carrying value, at 31 December

2,442

2,328

Change in fair value, change due to harvesting and gains or losses on sale of forest assets are recognised in the income statement as a net amount amounting to EUR 12 million (111 million) in 2022. In 2021, the increase in fair value was impacted by increased forest growth and higher stumpage price estimates used in valuation. Forest assets

EURm

2022 1,702

2021 1,678

Forest assets in Finland Forest assets in Uruguay Forest assets in United States

724

633

Carrying value, at 31 December

2,442

2,328

Forest land Forest land is included in land and water areas within property, plant and equipment. » Refer Note 4.1 Property, Plant and equipment. At the end of 2022, carrying value of own forest land amounted to EUR 736 million (EUR 694 million) and leased forest land EUR 243 million (EUR 219 million). UPM's own and leased forest land areas are summarised in below table.

PRO DUCTIVE FOREST LAND

FOREST LAND

FORESTED LAND

1,000 ha

Finland Uruguay

522 305 167

430 182 136

422 176 130

Uruguay, leased land

United States

Total

1,070

802

783

ASSESSED USEFUL LIVES Land, not subject to depreciation

NUMBER OF YEARS

Buildings

20-50 20-30 15-20 10-15

Power plants

Accounting policies The group divides all its forest assets for accounting purposes into growing forests, which are recognised as forest assets at fair value less costs to sell, and land. Own land is stated at cost whereas leased land is valued at cost less accumulated depreciation.