UPM Annual Report 2022

ACCOUNTS FOR 2022

UPM

BEYOND FOSSILS

BUSINESSES

RESPONSIBILITY

GOVERNANCE

Trade receivables ageing

can be reasonably estimated. Due to inherent uncertain nature of litigation, the actual losses may differ significantly from the originally estimated provision. » Refer Note 9.2 Litigation for details of legal contingencies. 4.6 Working capital The group defines operating working capital as inventories, trade receivables, trade payables and advances received which are presented separately below. The performance obligations related to advances received are typically fulfilled within 12 months of receipt of the advance. UPM is focusing on working capital efficiency and targeting a sustainable and permanent reduction in operating working capital. Operating working capital

Accounting policies

2022

2021

A provision is recognised when a present legal or constructive obligation exists as a result of a past event and it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are split between amounts expected to be settled within 12 months of the balance sheet date (current) and amounts expected to be settled later (non-current). Restructuring and termination provisions A restructuring provisions is recognised when a detailed plan for the implementation of the measures is complete and when the plan has been communicated to those who are affected. Employee termination provisions are recognised when the group has communicated the plan to the employees. Environmental provisions Environmental expenditures that relate to an existing condition caused by past operations that do not contribute to future earnings are expensed. The recognition of environmental provisions is based on current interpretations of environmental laws and regulations. Such provisions are recognised when the group has an obligation to dismantle and remove a facility or an item of plant and to restore the site on which it is located. The amount recognised is the present value of the estimated future expenditure determined in accordance with local conditions and requirements. A corresponding item of property, plant and equipment of an amount equivalent to the provision is also recognised and subsequently depreciated as part of the asset. Provisions do not include any third-party recoveries. Emission provisions Emission obligations are recognised in provisions based on realised emissions. The provision is measured at the carrying amounts of the corresponding emission rights held, which are recognised as intangible assets. In case of deficit in emission rights, the shortage is valued at the market value at the balance sheet date. Environmental provisions The estimates used in determining the provisions are based on the expenses incurred for similar activities in the current reporting period taking into account the effect of inflation, cost-base development and discounting. Because actual outflows can differ from estimates due to changes in laws, regulations, public expectations, technology, prices and conditions, and can take place many years in the future, the carrying amounts of provisions are regularly reviewed and adjusted to take into account of any such changes. The discount rate applied is reviewed annually. The group aims to operate in compliance with regulations related to the treatment of waste water, air emissions and landfill sites. However, expected events during production processes and waste treatment could cause material losses and additional costs in the group’s operations. Legal contingencies Management judgement is required in measurement and recognition of provisions related to pending litigation. Provisions are recorded when the group has a present legal or constructive obligation as a result of past event, an unfavourable outcome is probable and the amount of loss Key estimates and judgements

TRADE RECEIVABLES, NET OF PROVISION

TRADE RECEIVABLES, NET OF PROVISION

LOSS ALLOWANCE PROVISION

LOSS ALLOWANCE PROVISION

TRADE RECEIVABLES

TRADE RECEIVABLES

EURm Undue

1,471

-1 -1 -3

1,470

1,005

-5 -1 -1

1,000

Past due up to 30 days Past due 31-90 days Past due over 90 days

114

114

314

313

19 42

16 14

6

5 2

-28 -32

20

-19 -25

Total

1,647

1,614

1,345

1,320

Trade and other payables

receivables, and impaired inventories and other receivables. As at 31 December 2022, the credit loss provision related to operations in Russia was EUR 8 million, impairment related to inventories EUR 10 million and impairment related to other receivables EUR 5 million.

EURm

2022 2021

Accrued expenses and deferred income Personnel expenses

EURm

2022 2021

184

191

Inventories

2,289 1,614 -1,855

1,594 1,320 -1,697

Accounting policies

Interest expenses

21 17

9

Trade receivables Trade payables Advances received

Indirect taxes

13

Customer rebates Customer claims

130

119

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 and other 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

-23

-14

7

6

Total

2,026

1,204

Other items

169 528

111 449

Total accrued expenses and deferred income

Inventories

Advances received

23

14

Trade payables

1,855

1,697

EURm

2022 2021

Other current liabilities

314

94

Raw materials and consumables

1,128

794

Total

2,720

2,254

Work in progress

11

6

Finished products and goods

1,116

769

Operational credit risk

Advance payments

34

25

Total

2,289

1,594

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 17% (15%) of the trade receivables as at 31 December 2022 – i.e., approximately EUR 269 million (200 million). In 2022, trade receivables amounting to EUR 2 million (5 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. In addition, due to the significant uncertainties related to operations in Russia and Ukraine, the group increased the general provision for expected credit losses on trade

Trade and other receivables

EURm

2022 2021

Trade receivables Trade receivables

1,647

1,345

Loss allowance provision Total trade receivables

-32

-25

1,614

1,320

Prepayments and accrued income Personnel expenses

2 1

5 0

Interest income

Energy and other excise taxes

15

20

Other items

158 176

175 200

Total prepayments and accrued income Other receivables VAT and other indirect taxes receivable

326 500

166 292

Cash collaterals Other receivables

80

47

Total other receivables

906

504

Total

2,696

2,024

190

191

UPM ANNUAL REPORT 2022

UPM ANNUAL REPORT 2022

UPM FINANCIAL REPORT 2022

190

UPM FINANCIAL REPORT 2022

191